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Dedicated to
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LAW STATED
Legal position as amended up to November 20, 2019 is given.
Practical income-tax problems are solved as per law applicable for the
assessment year 2020-21. GST problems are solved as per
law amended up to November 20, 2019
UNSOLVED EXERCISES
Unsolved exercises given in this book can be easily attempted on
the basis of similar solved problems given in another priced
publication entitled “STUDENTS’ GUIDE TO INCOME-TAX - PROBLEMS &
SOLUTIONS” which includes many more solved problems focusing
on contemporary issues.
RECOMMENDATIONS BY PROFESSIONAL INSTITUTIONS

The book is recommended by all major professional institutes and leading
Universities in India.
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© Dr. Vinod K. Singhania
Printing and publishing rights with the publisher
First edition : June 1982
Sixty-second edition : December 2019
Law stated in this book is as amended up to November 20, 2019
Published by :
Taxmann Publications (P.) Ltd.
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Disclaimer
Every effort has been made to avoid errors or omissions in this publication. In spite of this,
errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice
which shall be taken care of in the next edition. It is notified that neither the publisher nor the
author or seller will be responsible for any damage or loss of action to any one, of any kind, in
any manner, therefrom. It is suggested that to avoid any doubt the reader should cross-check all
the facts, law and contents of the publication with original Government publication or
notifications.
No part of this book may be reproduced or copied in any form or by any means [graphic,
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systems] or reproduced on any disc, tape, perforated media or other information storage device,
etc., without the written permission of the publishers. Breach of this condition is liable for
legal action.
All disputes are subject to Delhi jurisdiction only.
Preface
Income-tax is indeed a complex subject. It requires organized study constantly over a period of time to gain effective understanding
and grasp of this subject unlike many other fields of study. In such backdrop, a text book on income-tax for B. Com., BBA, CA
(Inter), CS (Executive) and CMA (Inter) students must necessarily be written in a simple language, explaining the provisions
of law step-by-step with the help of suitable illustrations, without resorting to paraphrasing of sections and legal jargon. The
present work conforms to the aforesaid criteria. Readers will find that each topic has been discussed with clarity, followed by point-
wise recapitulation.
The present edition of the book is designed to bridge the gap between theory and application and stands out distinctly from others
on account of the following salient features:
 The present edition is thoroughly revised with a view to making it more student-friendly. It is bifurcated into two units.
Unit 1 deals with income-tax and Unit 2 covers the provisions related to GST.
 The presentation of the subject is designed on “teach yourself ” technique which enables the students to learn faster.
 While the law relating to income-tax has been discussed thoroughly, the discussion on GST is equally comprehensive.
 Each para (with a distinct number) starts with analytical discussion supported by well-thought out original problems. A
unique style of illustrating all complex provisions has been adopted.
 With a view to developing sufficient confidence amongst students to solve practical questions in examinations, every solved
problem is followed by an unsolved exercise. Answers to unsolved exercises are given at the end of book in Appendix 4.
 The Book contains more than 500 solved problems and an equal number of unsolved exercises.
 The Book is amended up to November 20, 2019.
 All questions set for CA (Inter/IPCC) Examinations for last 5 years are given along with solutions (of theory as well as
practical questions) in accordance with the law applicable for the assessment year 2020-21 (GST questions are solved in
accordance with law as amended up to November 20, 2019).
 All paras, problems and exercises with ➠ symbol are primarily meant for students appearing in professional examinations,
though students having meritorious outlook in undergraduate university courses may also refer to the same.
Readers’ views, comments and criticism relating to the present work are most welcome.
22 Deepali, Pitampura, Delhi - 110034. VKS

Email : vks@taxmann.com
Phone : 27016686, 9810008160
v
About the Authors
Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976. His fields of
special interest include all facets of corporate legislation and corporate economics especially the
tax laws. Associated in different capacities with several professional institutes and business
houses in India and abroad, Dr. Singhania is author of many popular books and software
published by Taxmann. He has to his credit more than 300 research articles which have appeared
in leading journals. He has been a resource person in over 750 seminars in India and abroad. He
can be reached at vks@taxmann.com.
Dr. Monica Singhania is Professor, Faculty of Management Studies, University of Delhi. She is
a post-graduate from Delhi School of Economics and a Fellow Member of the Institute of
Chartered Accountants of India. She has the distinction of being placed in the merit list of the
examinations conducted by both the University as well as the Institute. She has been awarded
Ph.D. in the area of corporate taxation from the University of Delhi. She is the author of 7 books
on direct tax laws and several research papers which have been published in leading journals.
She can be reached at monica@fms.edu
vi
Contents
PAGE
Preface v
About the Authors vi
UNIT 1 : INCOME-TAX
1 Basic concepts that one must know
1. What is an assessment year 1

2. What is a previous year 1
3. Who are included in “person” 3
4. Who is regarded as assessee 4
5. How to charge tax on income 4
6. What is regarded as “income” under the Income-tax Act 5
7. What is gross total income 9
8. What is total income and how is it computed 10
9. What is agricultural income 13
10. What is difference between exemption and deduction 13
11. What are capital and revenue receipts 13
12. What is capital and revenue expenditure 14
13. How far method of accounting is relevant in computing income 14
14. What is amalgamation 15
15. What is “demerger” 15
16. Problems on basic concepts 15
2 Residential status and its effect on tax incidence
17. What is relevance of residential status 23

18. What one must know for deciding residential status 23
19. How to determine residential status of an individual 24
20. How to find out residential status of a Hindu undivided family 30
21. How to determine residential status of firm and association of persons 31
22. How to find out residential status of a company 31
23. How to determine residential status of every other person 32
24. What is the relationship between residential status and incidence of tax 32
25. Connotation of receipt of income - How is it understood 34
26. What is accrual of income 35
27. What is income deemed to accrue or arise in India 35
28. Problems on incidence of tax 38
29. Other problems 43
vii
Contents viii
PAGE
3 Income that is exempt from tax
32. What income is exempted under section 10 45

33. What are special provisions in respect of newly-established undertakings in free trade zone, etc. 54
34. What are special provisions in respect of newly established hundred per cent export-oriented
undertakings 55
35. What are the special provisions in respect of profit from export of artistic hand-made wooden articles 55
36. How to claim exemption in respect of income from property held for charity 55
37. How can a political party claim exemption 64
37A. Exemption to electoral trust 65
38. Problems on income exempt from tax 65
4 Income under the head “Salaries” and its computation
39. What do you understand by expression “salary” 67

40. What is basis of charge of salary income 68
41. Different forms of salary - How taxed 71
42. Different forms of allowances - How taxed 84
43. Perquisite - When taxable/not taxable 90
44. Perquisites - How valued for tax purposes 93
45. What are permissible deductions from salary income 116
46. What is tax treatment of provident fund 117
47. What is the tax treatment of approved superannuation fund 121
48. What is special tax treatment of salary income of non-resident technicians 121
49. What is the extent of exemption available to other foreign citizens in respect of salary income 121
50. Deduction under section 80C - How to find out 121
51. Is salaried employee entitled to relief in respect of salary in arrears, advance, etc. 127
52. What are important points which one should remember to solve practical problems under the
head “Salaries” 127
53. Problems on computation of salary income 128
54. Theoretical problems on computation of salary income 149
5 Income under the head “Income from house property” and its computation
66. What is the basis of charge 160

67. When property income is not charged to tax 164
68. What is the basis of computing income from a let out house property 164
69. How to compute taxable income from self-occupied property 171
70. What are special provisions when unrealised rent is realised subsequently 178
71. What is mode of taxation of arrears of rent 179
72. Problems on computation of property income 179
73. Theoretical problems on computation of property income 189
6 Income under the head “Profits and gains of business or profession” and its computation

78. What are the basic principles for arriving at business income 193
79. Method of accounting - How far relevant for computing business income 195
80. What is the scheme of business deductions/allowances 196
81. What are specific deductions under the Act 197
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82. What are the specific disallowances under the Act 245
83. What are the deemed profits and how they are charged to tax 260
84. How and when undisclosed income/investments are taxed 262
85. When maintenance of books of account becomes compulsory 263
86. When audit of accounts by certain persons is compulsory 263
87. What are special provisions for computation of business income 264
88. What are the special provisions for computing income on estimated basis under
sections 44AD, 44ADA and 44AE 265
89. What are permissible methods of valuation of closing stock 268
90. Problems on computation of income from business/profession 268
91. Theoretical problems on business/profession income 290
7 Income under the head “Capital gains” and its computation

93. What is included in and excluded from capital asset 293
94. What is transfer of capital asset 296
95. Capital gains - How computed 298
96. What is full value of consideration 300
97. How to find out expenditure on transfer 300
98. What is cost of acquisition 300
99. What is cost of improvement 300
100. How to convert cost of acquisition/improvement into Indexed cost of acquisition/improvement 301
101. Capital gain in special cases - How to find out 304
102. Valuation of capital asset - When can be referred to Valuation Officer 320
103. Capital gains - When and to what extent exempt from tax 320
104. How to find out tax on short-term/long-term capital gain 334
105. Problems on computation of capital gains 345
106. Theoretical problems on capital gains 353
8 Income under the head “Income from other sources” and its computation
107. What is basis of charge 359

108. Relevance of method of accountancy 361
109. What is regarded as dividend and how is it charged to tax 361
110. Winnings from lotteries, crossword puzzles, horse races and card games, etc. - How to compute 365
111. What is regarded as interest on securities 366
112. How to find out income from machinery, plant or furniture let on hire 367
113. How to find out income from composite letting of building, machinery, plant or furniture 367
114. Money/property received without consideration or for inadequate consideration 368
115. Share premium in excess of fair market value 376
116. Advance money received in course of negotiations for transfer of a capital asset - When
chargeable to tax 377
116A. How to find out interest on deep discount bonds 377
117. What deductions are permissible from income from other sources 378
118. What are other provisions 379
119. Problems on computation of income from other sources 380
Contents x
PAGE
9 Clubbing of income
120. Transfer of income without transfer of asset - When income therefrom is regarded as that of
transferor 389
121. Revocable transfer of assets - When income therefrom is regarded as that of transferor 389
122. When an individual is assessable in respect of remuneration of spouse 390
123. When an individual is assessable in respect of income from assets transferred to spouse 392
124. When an individual is assessable in respect of income from assets transferred to son’s wife 395
125. When an individual is assessable in respect of income from assets transferred to a person for
the benefit of spouse 396
126. When an individual is assessable in respect of income from assets transferred to a person for
the benefit of son’s wife 396
127. When an individual is assessable in respect of income of his minor child 397
128. What is tax implication of conversion of self-acquired property into joint family property and
subsequent partition 398
129. Other points 399
130. Problems on clubbing of income 400
10 Set off and carry forward of losses
132. What is the mode of set off and carry forward 404
133. Inter-source adjustment - How made 404
134. Inter-head adjustment - How made 405
135. Carry forward of loss - How to set off 406
136. Carry forward and set-off of business loss and depreciation - When permissible in the hands
of amalgamated and demerged company or co-operative bank 413
137. Problems on set off and carry forward of losses 414
11 Permissible deductions from gross total income
137A. What are the basic rules governing deductions under sections 80C to 80U 424
138. Deduction in respect of life insurance premia, deferred annuity, contributions to
provident fund, subscription to certain equity shares or debentures, etc. 425
139. Deduction in respect of National Savings Scheme - To what extent available 428
140. Equity Linked Savings Scheme - When deduction is available 428
141. Deduction in respect of pension fund - When available 428
142. Deduction in respect of contribution to a National Pension System (NPS) 429
142A. Deduction in respect of investment made under any equity saving scheme 430
143. Deduction in respect of medical insurance premia - When and to what extent available 431
144. Deduction in respect of maintenance including medical treatment of a dependent
being a person with disability - When and to what extent available 433
145. Deduction in respect of medical treatment, etc. - To what extent available 434
146. Deduction in respect of payment of interest on loan taken for higher education - When and to
what extent available 436
146A. Deduction in respect of interest on loan taken for residential house property 437
146B. Deduction in respect of interest on loan taken for certain house property - When available 437
146C. Deduction in respect of interest on loan taken for purchase of electric vehicle - When available 438
147. Deduction in respect of donations to certain funds, charitable institutions, etc. - How arrived at 438
148. Deduction in respect of rent paid - To whom and to what extent available 443
149. Deduction in respect of certain donations for scientific research or rural development - When
eligible 445
150. Deduction in respect of contributions given to political parties or electoral trust - To what
extent deductible 445
151. Deduction in respect of earnings in convertible foreign exchange - How to find out 446
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PAGE
152. Deduction in respect of profits and gains from industrial undertaking or enterprises engaged
in infrastructure development, etc. - How to find out 446
153. Deduction in respect of profits and gains by an undertaking or enterprise engaged in develop-
ment of Special Economic Zone 447
153A. Deduction in respect of eligible start-up 448
154. Deduction in respect of profits and gains from certain industrial undertakings other than
infrastructure development undertakings - How to avail 448
154A. Deduction in respect of profits from housing projects 450
155. Deduction in respect of profits and gains of certain undertakings in certain special category
of States - How to find out 451
156. Deduction in respect of profits and gains from business of hotel/convention centre in NCR -
How to find out 452
157. Deduction in respect of certain undertakings in North-Eastern States - How to determine 452
158. Deduction in respect of business of processing of bio-degradable waste - How to determine 452
159. Deduction in respect of Employment of new Employees 453
160. Deduction in respect of certain income of Offshore Banking Units and International Financial
Services Centre - To what extent available 454
161. Deduction in respect of income of a co-operative society - To what extent available 455
162. Deduction in respect of certain income of producer companies - To what extent available 456
163. Deduction in respect of royalty income of authors - To what extent available 456
164. Deduction in respect of royalty on patents - To what extent available 457
165. Deduction in respect of interest on deposits in savings accounts - When available 458
166. Deduction in respect of interest on deposits in case of senior citizens - To what extent available 458
167. Deduction in the case of a person with disability - To what extent available 459
168. Deductions from tax liability - How to determine 460
169. Rebate for resident individuals - How to find out 460
170. Problems on computation of total income 461
12 Meaning of agricultural income and its tax treatment
185. What is agricultural income 470

186. What are instances of income held to be agricultural/non-agricultural income 472
187. What is the tax treatment of income which is partly agricultural and partly from business 473
188. What is the scheme of partial integration of non-agricultural income with agricultural income 474
13 Individuals - Computation of taxable income
192. What is included in income of an individual 479

193. Taxable income - How computed 479
194. Tax liability - How calculated 480
195. Problems on computation of taxable income 484
14 Hindu undivided families - Computation of taxable income
201. What is understood by Hindu undivided family 505

202. What are the basic conditions for assessment of Hindu undivided family 505
203. What is the basis of computation of taxable income of HUF 506
204. What is tax implication of partition of a Hindu undivided family 506
205. Problems on computation of taxable income of HUF 506
15 Firms and associations of persons - Computation of taxable income
212. What is partnership 511

213. What is the scheme of taxation of firms 511
214. When remuneration/interest paid or payable to partners is deductible 511
Contents xii
PAGE
215. What are the conditions a firm should fulfil under section 184 512
216. What are the conditions for claiming deduction of remuneration of partners under section 40(b) 512
217. What are the conditions for claiming deduction of interest to partners under section 40(b) 516
218. Carry forward and set off of loss in the case of change in the constitution of firm 516
219. How to find out income of a firm 517
220. How to find out tax liability of firm 517
221. How to find out taxable income of partners 518
222. Problems on computation of taxable income of a firm and partners 518
223. How to find out income and tax of AOP/BOI and members 520
224. Problems on firms and partners 525
16 Return of income
244. Who has to submit his/its return of income on voluntary basis as a statutory obligation 528
245. When return of loss should be filed 531
246. Can return be filed beyond time 531
247. Can revised return be filed 531
248. What is a defective or incomplete return 532
249. What is Permanent Account Number (PAN) 532
249A. Quoting of Aadhaar number 533
249B. Scheme to facilitate submission of returns through Tax Return Preparers 533
250. Return by whom to be verified 533
251. What is self-assessment 534
252. What is inquiry before assessment under section 142 or 142A 535
253. What is summary assessment without calling the assessee 535
254. What is scrutiny assessment under section 143(3) 536
255. What is best judgment assessment 536
256. What is income escaping assessment 536
257. When can mistake be rectified 537
258. What is time-limit for completion of assessment/reassessment 538
259. Who is under an obligation to furnish statement of financial transaction 538
260. What is the requirement of submission of statement by a non-resident having liaison office
in India 539
261. Problem on return of income and assessment 539
17 Advance payment of tax
266. When a person becomes liable to pay advance tax 541

267. When advance tax payment becomes due 542
268. How advance tax is computed 542
268A. What are the consequences when advance tax is not paid 545
18 Deduction and collection of tax at source
269. What is the scheme of tax deduction at source (TDS) 546

270. When and how tax is to be deducted at source from salary 548
270A. When and how tax is to be deducted at source from withdrawal from employees provident
fund scheme 549
271. When and how tax is to be deducted at source from interest on securities 550
272. When and how tax is to be deducted at source from dividends 550
273. When and how tax is to be deducted at source from interest other than interest on securities 551
274. When and how tax is to be deducted at source from winnings from lotteries or crossword puzzles 552
275. When and how tax is to be deducted at source from winnings from horse races 552
276. When and how tax is to be deducted at source from payments to contractors or sub-contractors 552
277. When and how tax is to be deducted at source from insurance commission 554
xiii Contents
PAGE
277A. When and how tax to be deducted at source from payment of life insurance policy 555
278. When and how tax is deductible at source from payment to non-resident sportsmen or sports
associations 555
279. When and how tax is deductible from payments in respect of National Savings Scheme 556
280. When and how tax is deductible on payments on account of repurchase of units of Mutual
Funds or UTI 556
281. When tax is deductible from commission, etc., on sale of lottery tickets 556
282. When and how to deduct tax at source from commission or brokerage 557
283. When and how tax is deductible from rent 557
283A. When and how tax is deductible from payment on transfer of certain immovable properties under
section 194-IA 557
283B. When and how tax is deductible from rent by certain individuals/HUFs under section 194-IB 558
283C. When and how tax is deductible from payment under joint development agreement under section
194-IC 558
284. When tax is deductible at source on fees for professional or technical services 558
284A. When and how to deduct tax at source from payment of compensation on acquisition of certain
immovable property 560
284B. When and how tax is to be deducted at source from interest payable on infrastructure debt fund 561
284C. When and how tax is to be deducted at source from income from units of business trust 561
284D. When and how tax is deductible from income in respect of units of investment fund 561
284E. When and how tax is deductible from income in respect of investment in securitization fund 561
284F. When and how tax is to be deducted by an Indian company from interest to a non-resident/
Foreign Citizen 562
284G. When and how tax is to be deducted from interest on bonds/Government securities under section
194LD 562
284H. When and how tax is deductible on certain payments by individual/HUF 563
284-I. When and how tax is deductible on payment of certain amounts in cash 563
285. When and how tax is to be deducted at source from other sums 564
286. When and how tax is deductible from units or long-term capital gain under section 196B 565
287. When tax is deductible from income or long-term capital gain from foreign currency bonds/Global
Depository Receipts 565
288. When tax is deductible at source from income of Foreign Institutional Investors from securities 565
289. What are other points for consideration 566
290. Tax collection at source 572
19 Interest payable by assessee/Government
296. When interest becomes payable by assessee 575

297. Interest payable to assessee 585
298. Procedure to be followed in calculation of interest 586
299. Is it possible to reduce/waive interest 586
300. Is it possible for Chief Commissioner/Director General (Investigation) to reduce penal interest
in certain cases 586
301. Can Central Board of Direct Taxes make relaxation 586
302. Writ petition - Is it maintainable against levy of interest 586
UNIT 2 : GST
20 Basic concepts of GST
401. What is the difference between direct tax and indirect tax 587
402. What was pre-GST indirect tax structure in India 587
403. What are different abbreviations used in the book 588
404. What one should know before beginning study of law regulating GST 588
405. What are relevant definitions which a beginner should know 594
Contents xiv
PAGE
21 Concept of Supply
410. What is taxable event 598

411. What is “supply” 599
412. What is the significance of “consideration” 601
413. What are activities or transactions which are treated as supply under Schedule II 603
414. What are activities which are treated as supply under Schedule I even if consideration is absent 609
415. What are activities given in negative list (neither supply of goods nor supply of services) 612
416. What is the significance of expression “supply made in the course or furtherance of business” 614
417. What is relevant to attract GST - Supply by a “person” or supply by a “taxable person” 614
418. What are different types of “supply” 614
419. Problems on “supply” 617
22 Levy of GST
425. What is the basis of charge of GST 623

426. How GST is levied in the case of inter-State supply 623
427. How GST is levied in the case of intra-State supply 624
428. What are GST rates notified for supply of various goods 625
429. What are GST rates notified for supply of various services 630
23 Exemptions from GST
435. Power to grant exemption - How to exercise 639

436. What are exempted goods under exemption notification 639
437. What are services given in exemption notification 642
438. Problems on exemption notifications 656
24 Place of supply
444. Why one should find out location of supplier and place of supply 672
445. Location of supplier of goods - How to find out 672
446. Location of supplier of services - How to find out 672
447. Location of recipient of services - How to find out 673
448. How to find out place of supply of goods 673
449. How to find out place of supply of services 674
450. Problems on place of supply 683
25 Time of supply
455. Time of supply - How to determine and its significance 687

456. What are the rules for determination of time of supply of goods 688
457. What are the rules for determination of time of supply of services 692
458. How to find out time of supply in case of change in GST rate 695
26 Value of taxable supply
464. What are different methods of calculation of value of taxable supply 699
465. When value of supply shall be the transaction value 700
466. How to determine value of supply when valuation under aforesaid provisions is not possible 703
467. How to determine value of supply where the consideration is not wholly in money 703
468. How to determine value of supply between distinct persons or related person 704
469. How to determine value of supply of goods made or received through an agent 705
470. How to determine value of supply of goods/services based on cost 705
471. What is mode for determination of value of supply under rule 31 705
xv Contents
PAGE
472. How to determine value of certain supplies given under rule 32 705
473. How to determine value of supply of services in the case of pure agent 708
474. What are other modes of determination of value of taxable supply 709
475. Rate of exchange of currency - How to determine 710
476. Value of supply inclusive of GST - How to determine taxable value 710
27 Reverse charge mechanism
481. What is reverse charge mechanism 712

482. When reverse charge mechanism is applicable 712
483. When reverse charge mechanism is applicable on supply by unregistered person to registered
person 715
484. Problems on reverse charge mechanism 716
28 Input tax credit
492. What one should know before beginning study of input tax credit provisions 721
493. What are conditions for taking input tax credit 722
494. How input tax credit is allowed for payment of CGST, SGST, UTGST and IGST 730
495. Apportionment of credit - How to determine 732
496. What is the mode of computation of input tax credit pertaining to capital goods and reversal thereof 734
497. What is the mode of distribution of credit by Input Service Distributor (ISD) 735
498. What is the mode of claiming input tax credit by a banking company 735
499. What is the mode of availability of credit in special circumstances under section 18 736
500. How to take input tax credit in respect of inputs/capital goods sent for job work 740
501. Problems on input tax credit 741
29 Composition Scheme and Alternative Composition scheme
511. Is there any threshold limit for small taxpayers 752

512. What is composition levy 752
513. What are the conditions which one has to satisfy 752
514. What are specified GST rates under Composition Scheme 755
515. What are other relevant considerations which one has to keep in mind 757
516. Problems on Composition Scheme 758
517. What is Alternative Composition scheme for small service providers 761
518. What are salient features of Alternative Composition scheme 761
519. What are special features for GST payments under Alternative Composition scheme 763
30 Registration
521. What is the significance of registration 766

522. Who is liable for registration under GST 766
523. What is the procedure for registration 772
31 Tax invoice, credit and debit notes
531. What is invoice under GST 780

532. What is importance of tax invoice under GST 780
533. When tax invoice/bill of supply be issued by a registered person 780
534. What are the contents of tax invoice 781
535. What are the contents of bill of supply 784
536. What are the contents of receipt voucher 785
537. What are the contents of refund voucher 785
538. What are the contents of payment voucher 786
Contents xvi
PAGE
539. What are the contents of revised tax invoice 786
540. What are the provisions regarding tax invoice in special cases given under rule 54 787
541. What are provisions of transportation of goods without issue of invoice 788
542. What are provisions pertaining to collection of tax and its indication in invoice 789
543. What are credit and debit notes 789
544. Problems on tax invoice, credit and debit notes 790
32 Returns, tax payment and interest
551. What are the basic features of GST returns mechanism 794
552. What are different GST returns 797
553. What is matching, reversal and reclaim of input tax credit 804
554. What is electronic liability ledger 805
555. What is electronic credit ledger 805
556. What is electronic cash ledger 806
557. What are different assessments under GST 807
558. When interest and late fee are applicable under GST 808
559. When a person is liable for penalty under GST 809
560. What is the significance of national anti-profiteering authority in GST 810
561. What are the provisions regulating e-way bill in GST 812
562. What are the provisions regulating e-commerce 816
563. What is the mechanism of tax deduction at source (TDS) under GST 819
564. What are provisions regulating audit in GST 821
33 Provisions governing Real Estate Services
570. What one should know before beginning study of GST law pertaining to real estate services 823
571. What are important definitions 824
572. What are GST provisions regulating real estate projects with effect from April 1, 2019 825
573. What is GST on transfer of development rights (TDR), FSI, upfront amount in real estate transactions 832
34 Problems on GST
581. Problems on GST 835
1 APPENDIX
Tax rates 848
2 APPENDIX
Questions set for CA (Intermediate) Examinations and Answers 862
3 APPENDIX
Depreciation rates for power generating units 974
4 APPENDIX
Answers to unsolved exercises 975

UNIT 1 INCOME-TAX
CHAPTER 1 Basic concepts that one
must know
B
efore one can embark on a study of the law of income-tax, it is absolutely vital to
understand some of the expressions found under the Income-tax Act, 1961. The
purpose of this Chapter is to enable the students to comprehend the basic expres-
sions. Therefore, all such basic terms are explained and suitable illustrations are provided
to define their meaning and scope.
 WHAT IS AN ASSESSMENT YEAR [SEC. 2(9)]

1. “Assessment year” means the period starting from April 1 and ending on March 31 of the next year. Thus, the
assessment year 2020-21 commences on April 1, 2020 and ends on March 31, 2021.
Income of previous year of an assessee is taxed during the next following assessment year at the rates prescribed
by the relevant Finance Act [for tax rates, see Appendix 1].
 WHAT IS A PREVIOUS YEAR [SEC. 3]

2. Income earned in a year is taxable in the next year. The year in which income is earned is known as previous
year and the next year in which income is taxable is known as assessment year.
Provisions illustrated
Income earned by an individual during the previous year 2019-20 is taxable in the immediately following assessment year
2020-21 at the rates applicable for the assessment year 2020-21. Similarly, income earned during the previous year 2020-21
by a company will be taxable in the assessment year 2021-22 at the rates applicable for the assessment year 2021-22. This rule
is applicable in all cases [see, however, para 2.4 for exception to this rule].
2.1 Uniform previous year - All assessees are required to follow financial year (i.e., April 1 to March 31) as
previous year. This uniform previous year has to be followed for all sources of income. However, it is not
necessary that one should maintain books of account on the basis of financial year.
For the assessment year 2020-21, income earned by X Ltd. during the previous year 2019-20 (i.e., April 1, 2019 to March 31,
2020) is chargeable to tax. It is, however, not necessary that X Ltd. should maintain books of account on the basis of financial
year (i.e., April 1 to March 31). X Ltd. may maintain books of account on the basis of any other year but for the purpose
of income-tax, income of the previous year 2019-20 (i.e., April 1, 2019 to March 31, 2020) is taxable for the assessment year
2020-21. If X Ltd. maintains books of account on the calendar year basis, taxable income shall be determined as follows—
Accounting year Income as per Quarterwise break
books of account up of income
Rs. January-March (Rs.) April-December (Rs.)
2018 60,000 18,000 42,000
2019 70,000 26,000 44,000
2020 90,000 21,000 69,000
Taxable income :
Assessment year Previous year Income (Rs.)
2019-20 2018-19 68,000 (42,000 + 26,000)
2020-21 2019-20 65,000 (44,000 + 21,000)
1
Para 2.2 Basic concepts that one must know 2
2.2 Previous year in the case of newly set-up business/profession - In the case of a newly set-up business/
profession or in the case of a new source of income, the previous year is determined as follows—
 First previous year - The first previous year commences on the date of setting up of the business/profession (or,
as the case may be, the date on which the source of income newly comes into existence) and ends on the
immediately following March 31. Thus, in the case of a newly set-up business/profession or new source of
income, the first previous year is a period of 12 months or less than 12 months. It can never exceed 12 months.
 Second and subsequent previous year - The second and subsequent previous years are always financial years. The
second and subsequent previous years are always of 12 months each (i.e., April to March).
Problems
2.2-P1 X sets up a new business on March 3, 2020. What is the previous year for the assessment year 2020-21 ?
Solution : Previous year for the assessment year 2020-21 is the period commencing on March 3, 2020 and ending on March
31, 2020.
2.2-E1 X sets up a new business on April 10, 2019. What is the previous year for the assessment year 2020-21 ?
2.2-P2 X joins an Indian company on January 23, 2020. Prior to January 23, 2020, he is not in employment. He has no other source
of income. What are the previous years for the assessment years 2020-21 and 2021-22 ?
Solution : Previous years for the assessment years 2020-21 and 2021-22 will be as under :
Assessment year Previous year
2020-21 January 23, 2020 to March 31, 2020
2021-22 April 1, 2020 to March 31, 2021
2.2-E2 X joins an Indian company on April 16, 2021. Prior to April 16, 2021, he does not have any source of income. What are the
previous years for the assessment years 2020-21 to 2022-23 ?
2.2-P3 The income of X comprises of only property income up till March 10, 2019. On March 10, 2019, he starts a new business of
computer hardware. From the data given below, find out the taxable income of X for the assessment years 2018-19 to 2020-21 :
Property income : Rs. 42,000 every year.
Business income : Rs. 69,000 from March 10, 2019 to March 31, 2020 (out of which Rs.10,000 is for the period ending March 31,
2019).
Solution :
Assessment Property income Business income
year Total
Previous Income Previous Income Rs.
year Rs. year Rs.
2018-19 2017-18 42,000 — — 42,000
2019-20 2018-19 42,000 March 10, 2019 10,000 52,000
to March 31, 2019
2020-21 2019-20 42,000 2019-20 59,000 1,01,000
Note - For the assessment year 2019-20, the assessee has income from house property which can be said to be his existing
source of income during the previous year. His new source of income comes into existence in the form of business income
from March 10, 2019. Therefore, the assessee has two previous years for assessment year 2019-20. For the property income
which is his existing source, the previous year is 2018-19. For the business income, which is his new source of income, the
previous year is the period commencing from March 10, 2019 to March 31, 2019.
For computing taxable income for the assessment year 2019-20 (and subsequent years), the income from both the previous
years will be aggregated.
2.2-E3 X Ltd., an Indian company, is engaged in the business of trading goods since 1960 [income of trading business for previous
years 2018-19 and 2019-20 is Rs. 1,39,000 and Rs. 7,86,000, respectively]. On April 6, 2020, it starts a processing unit at Pune
[income of the period ending on March 31, 2021 : Rs.14,600]. Compute the income of X Ltd. chargeable to tax for the assessment years
2019-20 and 2020-21.
2.3 Previous year as defined in section 3 - Except in the case mentioned in para 2.2, previous year is the financial
year immediately preceding the assessment year. For instance, for the assessment year 2020-21, the immediately
preceding financial year (i.e., 2019-20) is the previous year.
3 Who are included in “person” Para 3
2.4 When income of previous year is not taxable in the immediately following assessment year - The rule
that the income of the previous year is assessable as the income of the immediately following assessment year
has certain exceptions. These are :
a. income of non-resident from shipping ;
b. income of persons leaving India either permanently or for a long period of time;
c. income of bodies formed for short duration;
d. income of a person trying to alienate his assets with a view to avoiding payment of tax ; and
e. income of a discontinued business.
In these cases, income of a previous year may be taxed as the income of the assessment year immediately
preceding the normal assessment year.
These exceptions have been incorporated in order to ensure smooth collection of income-tax from the aforesaid
taxpayers who may not be traceable if tax assessment procedure is postponed till the commencement of the
normal assessment.
 For detailed discussion, see problem 16-P1.
2.5 A financial year has a double role to play - It is a previous year as well as an assessment year - On the
basis of the aforesaid discussion, it can be said that a financial year plays a double role—it is a previous year as
well as an assessment year.
Examine the cases given in the table below—
Financial Previous year Assessment year
year
2019-20 2019-20 is previous year for the income 2019-20 is the assessment year for the income received or
received or accrued during April 1, accrued in the immediately preceding previous year (i.e.,
2019 to March 31, 2020 April 1, 2018 to March 31, 2019)
2020-21 2020-21 is previous year for the income 2020-21 is the assessment year for the income received or
received or accrued during April 1, accrued in the immediately preceding previous year (i.e.,
2020 to March 31, 2021 April 1, 2019 to March 31, 2020)
 WHO ARE INCLUDED IN “PERSON” [SEC. 2(31)]

3. The term “person” includes :
a. an individual;
b. a Hindu undivided family;
c. a company;
d. a firm;
e. an association of persons or a body of individuals, whether incorporated or not;
f. a local authority; and
g. every artificial juridical person not falling within any of the preceding categories.
These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and
not exhaustive. Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the
four corners of the term “person” and accordingly may be liable to tax under section 4.
Problems
3-P1 Determine the status of the following :
1. Delhi University.
2. DCM Ltd.
3. Delhi Municipal Corporation.
4. Taxmann Publications (P.) Ltd.
5. Laxmi Commercial Bank Ltd.
6. ABC Group Housing Co-operative Society.
7. XY & Co., firm of X and Y
8. A joint family of X, Mrs. X and their sons A and B.
9. X and Y who are legal heirs of Z (Z died in 1996 and X and Y carry on his business without entering into partnership).
Para 4 Basic concepts that one must know 4
Solution : (1) artificial juridical person ; (2) a company ; (3) a local authority ; (4) a company ; (5) a company ; (6) an association
of persons ; (7) a firm ; (8) a Hindu undivided family ; (9) an association of persons.
3-E1 Determine legal status of the following :
(a) X, a lecturer in the Delhi University ; (b) X, a sole proprietor of a business ; (c) X, a director in the ABC (P.) Ltd. ; (d) Calcutta
Municipal Corporation ; and (e) the Life Insurance Corporation of India.
 WHO IS REGARDED AS ASSESSEE [SEC. 2(7)]

4. “Assessee” means a person by whom income-tax or any other sum of money is payable under the Act. It
includes—
 First category - A person (i.e., an individual ; a Hindu undivided family ; a company ; a firm; an association of
persons or body of individuals, whether incorporated or not ; a local authority; and every artificial juridical
person) by whom any tax or any other sum of money (including interest and penalty) is payable under the Act
(irrespective of the fact whether any proceeding under the Act has been taken against him or not).
 Second category - A person in respect of whom any proceeding under the Act has been taken (whether or not
he is liable for any tax, interest or penalty). Proceeding may be taken—
a. either for the assessment of the amount of his income or of the loss sustained by him ; or
b. of the income (or loss) of any other person in respect of whom he is assessable ; or
c. of the amount of refund due to him or to such other person.
 Third category - Every person who is deemed to be an assessee. For instance, a representative assessee is deemed
to be an assessee by virtue of section 160(2).
 Fourth category - Every person who is deemed to be an assessee in default under any provision of the Act. For
instance, under section 201(1), any person who does not deduct tax at source, or after deducting fails to pay such
tax, is deemed to be an assessee in default. Likewise, under section 218, if a person does not pay advance tax, then
he shall be deemed to be an assessee in default.
The following examples are given to clarify the above points—
1. Income of X (age : 35 years) is Rs. 2,50,000 for the assessment year 2020-21. He does not file his return of income because
his income is not more than the amount of exempted slab. Income-tax Department does not take any action against him. He
is not an “assessee” because no tax or any other sum is due from him.
2. Income of Y (age : 38 years) is Rs. 2,55,000 for the assessment year 2020-21. He does not file his return of income. Since
he is supposed to file his return of income (income being more than exempted slab of Rs. 2,50,000), he is an “assessee”.
3. Income of Z (age : 51 years) is Rs. 75,000 for the assessment year 2020-21. He files his return of income (even if his taxable
income is less than Rs. 2,50,000). Assessment order is passed by the Assessing Officer without any adjustment. Z is an
“assessee”.
4. Income of A for the assessment year 2020-21 is (-) Rs. 60,000. He files his return of income. He is an “assessee”.
5. Income of B (age : 28 years) is less than Rs. 2,50,000 for the assessment year 2020-21. He files his return of income to claim
refund of tax deducted by X Ltd. on interest paid to him. B is an “assessee”.
6. Income of C (age : 30 years) is less than Rs. 2,50,000 for the assessment year 2020-21. He does not file his return of income.
During 2019-20, he has paid salary of Rs. 8,90,000 to an employee. Though he is supposed to deduct tax at source, yet due
to ignorance of law, no tax is deducted by him. In this case, C is an “assessee” as he has failed to deduct tax at source. This
rule is applicable even if his own taxable income is below Rs. 2,50,000.
 HOW TO CHARGE TAX ON INCOME

5. To know the procedure for charging tax on income, one should be familiar with the following :
5.1 Annual tax - Income-tax is an annual tax on income.
5.2 Tax rate of assessment year - Income of previous year is chargeable to tax in the next following assessment
year at the tax rates applicable for the assessment year. This rule is, however, subject to some exceptions [see para
2.4 or problem 16-P1].
5.3 Rates fixed by Finance Act - Tax rates are fixed by the annual Finance Act and not by the Income-tax Act.
For instance, tax rates for the assessment year 2019-20 are fixed by the Finance (No. 2) Act, 2019. If, however, on
the first day of April of the assessment year, the new Finance Bill has not been placed on the statute book, the
provisions in force in the preceding assessment year or the provisions proposed in the Finance Bill before
Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become effective.
 For further discussion, see problem 16-P4.
5 Meaning of income as generally understood Para 6.1
5.4 Tax on person - Tax is charged on every person [see para 3].
5.5 Tax on total income - Tax is levied on the “total income” [see para 8] of every assessee computed in
accordance with the provisions of the Act.
5.6 Provisions as on April 1 of the assessment year applicable for computing income for the assessment
year - Total income is calculated in accordance with the provisions of the Income-tax Act, as they stand on the
first day of April of the assessment year. For calculating taxable income for the assessment year 2020-21, the
provisions of the Income-tax Act as on April 1, 2020 are applicable. If an amendment is made with effect
from April 2, 2020, it is irrelevant for calculating income for the assessment year 2020-21. Likewise, the law
existing during the previous year 2019-20 has no relevance for determining the total income for the assessment
year 2020-21.
 The above rule is applicable only for the purpose of computing taxable income and tax liability. If, however,
an amendment is made in procedural law (not in substantive law), then it is applicable from the date of
amendment.
Consider the cases given below. Example 1 is on amendment in substantive law, Example 2, however, covers an amendment
in procedural law. Rates, dates and form numbers are imaginary (only for illustration purposes).
1. Suppose depreciation rate is reduced from 22 per cent to 18 per cent with effect from April 10, 2020. For calculating income
and income-tax liability for the assessment year 2020-21, the provisions of income-tax law on April 1, 2020 is applicable. On
April 1, 2020, depreciation rate is 22 per cent. Consequently, income for the assessment year 2020-21 shall be calculated by
taking into consideration depreciation at the rate of 22 per cent.
2. A new Form U1 is introduced with effect from July 7, 2020 (in place of old Form T3) for making application to the Assessing
Officer for waiver of income-tax penalty. This is an amendment in procedural law. It is applicable from the date of
amendment. If an application for waiver is filed on or after July 7, 2020, it should be submitted in the new Form U1 regardless
of the assessment year for which waiver is to be obtained.
 WHAT IS REGARDED AS “INCOME” UNDER THE INCOME-TAX ACT

6. The definition of the term “income” in section 2(24) is inclusive and not exhaustive. Therefore, the term
“income” not only includes those things which are included in section 2(24) but also includes such things which
the term signifies, according to its general and natural meaning. Before discussing the definition of income given
in section 2(24), it is imperative to know meaning of “income” as generally understood.
Meaning of “income” as generally understand See para 6.1
Extended meaning of “income” under section 2(24) See para 6.2
6.1 Meaning of income as generally understood - Income is a periodical monetary return with some sort of
regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth
which comes to a person during a fixed period of time.
6.1-1 BROAD PRINCIPLES WHICH CLARIFY THE CONCEPT OF INCOME - A study of the following broad principles will be
helpful for understanding the concept of income :
 Regular and definite source - The term “income” connotes a periodical monetary return coming in with some sort
of regularity or expected regularity from definite sources.

 Different forms of income - Income may be received in cash or in kind. When income is received in kind, its
valuation is to be made according to the rules prescribed in the Income-tax Rules. If, however, there is no
prescribed rule, valuation thereof is made on the basis of market value.
 Receipt vs. Accrual - Income arises either on receipt basis or on accrual basis. Income may accrue to a taxpayer
without its actual receipt. Moreover, in some cases, income is deemed to accrue or arise to a person without its
actual accrual or receipt [see, for instance, para 27].
 Illegal income - The income-tax law does not make any distinction between income accrued or arisen from a legal
source and income tainted with illegality.

 Disputed title - Income-tax assessment cannot be held up or postponed merely because of existence of a dispute
regarding the title of income.

 Relief or reimbursement of expenses not treated as income - Mere relief or reimbursement of expenses is not treated
as income. For instance, reimbursement of actual travelling expenses to an employee is not an income.
 Diversion of income by overriding title vs. Application of income - Any expenditure/investment, after income is
received, is application of income. “Income” under the Income-tax Act, which is chargeable to tax, is income
before application of income. Any expenditure/investment out of such income is deductible only if it is
permitted by a provision under the Income-tax Act or Income-tax Rules.
“Diversion of income” is where by an obligation, income is diverted to some other person. When an assessee on
behalf of some other person receives income and later on it is diverted to such person, it is known as diversion
of income and, consequently, it is not chargeable to tax.
X and Y prepare an article for publication in Taxman, a tax and corporate law weekly magazine, on the understanding that
remuneration will be shared equally. The article is published in August 3, 2019 issue of Taxman. On September 7, 2019, X
receives the entire remuneration of Rs. 9,000 (as per practice of the magazine, the remuneration is paid to the first author),
a half of which is later on paid by X to Y. The payment of Rs. 4,500 (being 50 per cent of Rs. 9,000) by X to Y is diversion of
income by overriding title. The taxable income of X will be Rs. 4,500 (payment of Rs. 4,500 to Y will not be treated as income
of X as it is diverted by an overriding title).
Any expenditure or investment by X out of his income of Rs. 4,500 will be an “application of income”.
 Surplus from mutual activity - A person cannot make taxable profit out of a transaction with himself. Income
must, therefore, come from outside. A surplus arising to a mutual concern cannot be regarded as income
chargeable to tax. A body of individuals, raising contribution to a common fund for the mutual benefit of
members, cannot be said to have earned an income when it finds that it has overcharged members and some
portion of contribution raised may safely be refunded.
X Ltd. has 50 employees. Employees have formed a tea club in the office. Each one of them contributes Rs. 80 per month to
the club. Club provides tea in tea breaks. During the financial year 2019-20, the excess of receipt over expenditure of the club
is Rs. 470. It cannot be taken as taxable income of the club as it is surplus arising to a mutual activity for the mutual benefit
of the members.
 Temporary and permanent income - For the purpose of income-tax, there is no distinction between temporary and
permanent income. Even temporary income is taxable.
 Lump sum receipt - Income, whether received in lump sum or in instalments, is liable to tax. For instance, arrears
of bonus, received in lump sum, is income and is taxable as salary.

 Tax-free income - If a person receives tax-free income on which tax is paid by the person making payment on
behalf of the recipient, it has to be grossed up for inclusion in his total income.
For instance, X pays Rs. 25,000 per month to Y as tax-free salary (tax of Rs. 3,000 per month is borne by X and directly paid
to the Government). In this case, the amount taxable in the hands of Y is Rs. 28,000 per month.
 Receipt on account of dharmada, etc. - Receipt on account of dharmada, gaushala and pathshala is not income and,
therefore, not liable to tax.

 Devaluation of currency - If any assessee receives extra money on account of devaluation of currency, it is taxable.
 Income includes loss - Income includes loss. While income, profits and gains represent “plus income”, losses
represent “minus income”.

 Appropriation of payment between capital and interest - Where interest is due on a capital sum and the creditor gets
an open payment from the debtor, the creditor is at liberty to appropriate the payment towards principal. If,
however, neither the debtor nor the creditor makes any appropriation of payment as between capital and
interest, the Income-tax Department is entitled to treat the payment as applicable to the outstanding interest and
assess it as income.
 Same income cannot be taxed twice - It is a fundamental rule of the law of taxation that, unless otherwise expressly
provided, the same income cannot be taxed twice.

 Income should be real and not fictional - Income means real income and not fictional income. A person cannot make
a profit by trading with himself or out of transfer of funds/assets from one pocket to another pocket. Similarly,
income does not arise in a transaction between head office and branch office even if goods are invoiced at a price
higher than the cost price. Likewise, income does not accrue or arise at the time of revaluation of assets.
 Source of income need not exist in the assessment year - It is not necessary that a source of income should exist in
the assessment year.

 Pin money - Pin money received by wife for her dress/personal expenses and small savings made by a woman
out of money received from her husband for meeting household expenses is not treated as her income.
7 Extended meaning of income u/s 2(24) Para 6.2
 Award received by a sportsman - In the case of a sportsman, who is a professional, the award received by him is
in the nature of a benefit in exercise of his profession and, therefore, it is chargeable to tax.
 Revenue receipt vs. Capital receipt - A revenue receipt is taxable as income unless it is expressly exempt under
the Act. On the other hand, a capital receipt is generally exempt from tax unless it is expressly taxable [for detailed
discussion, see para 11].
 Voluntary payment - In some cases, a sum of money received without consideration is chargeable to tax [see para
114].
 Prize on winning a motor rally - The prize on winning a motor rally is income.
 Burden of proof - In all cases in which a receipt is sought to be taxed as income, the burden lies upon the
Department to prove that it is within the taxing provision. Where, however, a receipt is in the nature of income,
the burden of proving that it is not taxable, because it falls within an exemption provided by the Act, lies upon
the assessee.
6.2 Extended meaning of “income” under section 2(24) - Under section 2(24), the term “income” specifically
includes the following :
6.2-1 PROFITS AND GAINS - Income includes profits and gains. For instance, profit generated by a businessman is
taxable as “income”.
6.2-2 DIVIDEND - Income includes “dividend”. However, dividend received from a domestic company is
generally exempt from tax† in the hands of shareholders. The domestic company (which distributes dividend)
is required to pay dividend distribution tax under section 115-O.
6.2-3 VOLUNTARY CONTRIBUTIONS RECEIVED BY A TRUST - In the hands of a trust, income includes voluntary
contributions received by it.
XY Trust is created for public charitable purposes. On June 10, 2019, it receives a sum of Rs.1 lakh as voluntary contribution
(not being with any specific direction) from a business house. Rs.1 lakh would be included in the income of the trust.
6.2-4 PERQUISITES IN THE HANDS OF EMPLOYEE - Any perquisite or profits in lieu of salary is treated as “income” in the
hands of an employee [for detailed discussion see paras 41.6 and 43.1].
X is employed by A Ltd. Apart from salary, he has been provided a rent-free house by the employer. The value of perquisite
in respect of rent-free house is taxable as “income” in the hands of X.
6.2-5 ANY SPECIAL ALLOWANCE OR BENEFIT - Any special allowance or benefit specifically granted to the assessee to
meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment
is treated as “income”.
X is employed by A Ltd. He gets Rs. 3,000 per month as conveyance allowance apart from salary. Rs. 3,000 per month is
treated as “income” [any amount which is spent for official purposes out of conveyance allowance is exempt under section
10(14)].
6.2-6 CITY COMPENSATORY ALLOWANCE/DEARNESS ALLOWANCE - City compensatory allowance or dearness allowance
is treated as “income”.
6.2-7 ANY BENEFIT OR PERQUISITE TO A DIRECTOR - A non-monetary benefit or perquisite is treated as “income” in the
hands of the following:
a. if it is given by a company to a director* (whole time or part time) or a relative of a director; or
b. if it is given by a company to a person who has a substantial interest in the company or a relative of such person.
Relative, for this purpose, means the husband, wife, brother or sister or any lineal ascendant or descendant of
that individual. If a person is beneficial owner of 20 per cent (or more) of equity share capital in a company, then
such person is known as a person who has substantial interest in the company.
*Director need not be a person having substantial interest.

† This exemption is not available if aggregate dividend received by a resident shareholder during the previous year from all domestic companies
exceeds Rs. 10 lakh. In such a case, the aggregate dividend [not being deemed dividend under section 2(22)(e)] (in excess of Rs. 10 lakh) is taxable
(on gross basis, no deduction is allowed) under section 115BBDA at the rate of 10 per cent [+ SC + HEC]. However, nothing is taxable under section
115BBDA if the shareholder is a domestic company or a fund/institution [referred to in section 10(23C)(iv)/(v)/(vi)/(via)], or a trust/institution
registered under section 12A/12AA.
The aforesaid rule is also applicable if any sum is paid by a company in respect of any obligation which, but for
such payment, would have been payable by the director or any other aforesaid person.
The following illustrations are given to have better understanding:
1. X is a director in a company. The company provides a domestic servant for private purposes. The perquisite value of
domestic servant is treated as “income” of X.
2. X holds 20 per cent equity share capital in A Ltd. A Ltd. repays a loan of Rs.15,000 on behalf of X. Rs.15,000 is treated as
“income” of X.
3. B is a director in C Ltd. C Ltd. pays a sum of Rs.47,000 to ITC Hotels on behalf of Mrs. B (the payment is made only because
B is director in C Ltd.). Rs.47,000 is treated as “income” of B.
6.2-8 ANY BENEFIT OR PERQUISITE TO A REPRESENTATIVE ASSESSEE - Any non-monetary benefit or perquisite to a
representative assessee (like a trustee appointed under a trust) is treated as “income”.
X is one of trustees of a charitable trust. The trust provides him a residential accommodation. The perquisite value of the
accommodation is treated as “income” of X.
6.2-9 ANY SUM CHARGEABLE UNDER SECTIONS 28, 41 AND 59 - Any sum chargeable under sections 28, 41 and 59, is taxable
as income. Some of such cases are given below –
1. X is an agent of A Ltd. He gets a compensation of Rs. 2,00,000 at the time of termination of his agency from A
Ltd. Rs. 2,00,000 is treated as “income” of X.
2. A profit of Rs. 2,50,000 is generated by A Ltd. on sale of licence granted under the Imports (Control) Order,
1955. Rs. 2,50,000 is treated as “income” of A Ltd.
3. A car owned by a partnership firm is used by one of the partners for private purposes. The perquisite value
of the case is “income” in the hands of the partner.
4. X Ltd. gets a sum of Rs. 5,00,000 from A Ltd. for not carrying out the activity of selling goods in Agra for a period
of two years from June 1, 2019. Rs. 5,00,000 is treated as “income” of X Ltd.
6.2-10 CAPITAL GAINS - Any capital gain under section 45 is treated as “income”.
6.2-11 INSURANCE PROFIT - Any insurance profit computed under section 44 is treated as “income”.
6.2-12 BANKING INCOME OF A CO-OPERATIVE SOCIETY - Profit from banking (including providing credit facilities)
carried on by a co-operative society with its members is taken as income.
6.2-13 WINNINGS FROM LOTTERY - Winnings from lottery, crossword puzzles, races (including horse races), card
games, other games (including entertainment programme on television), gambling, betting, etc., are chargeable
to tax.
6.2-14 EMPLOYEES’ CONTRIBUTION TOWARDS PROVIDENT FUND - Any sum received by an employer from his employees
as employees’ contribution to any provident fund, superannuation fund or staff welfare fund, is taxable as
income of the employer. Employer can claim deduction under section 36(1)(va), if such sum is credited by the
employer to the employees’ account in the relevant fund before the due date (under provident fund regulations).
Net profit of X Ltd. for the previous year 2019-20 is Rs. 7,86,000. It is calculated after debiting salary to employees: Rs. 5 lakh.
Out of Rs. 5 lakh, Rs. 50,000 is employees’ contribution towards provident fund. Rs. 50,000 is transferred by X Ltd. to the
provident fund account of the employees as follows — Rs. 30,000 before the due date of making such payment and Rs. 20,000
after the due date of such payment. Income of X Ltd. shall be calculated as under:
Rs.
Net profit as per profit and loss account 7,86,000
Add: Employees’ contribution towards provident fund which is treated as “income” of X Ltd. 50,000
Total 8,36,000
Less: Amount paid by X Ltd. on or before the due date of making provident fund payment [see para 81.27] 30,000
Taxable income of X Ltd. 8,06,000
6.2-15 AMOUNT RECEIVED UNDER KEYMAN INSURANCE POLICY - Any sum received under a Keyman insurance policy
(including bonus) is treated as “income” in the hands of the recipient.
6.2-16 FAIR MARKET VALUE OF INVENTORY - Fair market value for inventory (which is converted into stock-in-trade)
is treated as income of the year in which conversion takes place.
6.2-17 AMOUNT EXCEEDING RS. 50,000 BY WAY OF GIFT - Gift exceeding Rs. 50,000 received without consideration is
taxable as income in a few cases. See para 114.
9 Expenditure in respect of income not chargeable to tax Para 7.1
6.2-18 CONSIDERATION FOR ISSUE OF SHARES - Consideration received for issue of shares [as exceeds fair market value
of shares referred to in section 56(2)(viib)] is taxable as income [see para 115].
6.2-19 ADVANCE MONEY - Any sum of money received as advance money and referred to in section 56(2)(ix) is
taxable as income [see para 116].
6.2-20 COMPENSATION ON TERMINATION OF EMPLOYMENT OR MODIFICATION OF TERMS OF EMPLOYMENT - Any compensation
or other payment referred to in section 56(2)(xi) [i.e., compensation on termination of employment or modifica-
tion of terms of employment] is treated as income.
6.2-21 ASSISTANCE IN THE FORM OF A SUBSIDY/GRANT - Subsidy/grant is taxable as income if the following conditions
are satisfied –
1. Assistance is in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called).
2. It is received from the Central Government or State Government or any authority or body or agency.
3. It may be in cash or kind.
4. It is not a subsidy or grant or reimbursement which is taken into consideration for determination of “actual
cost” within the parameters of Explanation 10 to section 43(1).
5. It is not a subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution
established by the Central Government or State Government.
If the above conditions are satisfied, subsidy, grant, etc., shall be considered as “income”.
1. X Ltd. gets a subsidy on December 1, 2019 from the Orissa Government to set up a chemical fertilizer plant in a backward
area in Orissa. Subsidy is not given for assisting it in carrying out the business operations but the object of subsidy is to
encourage setting up of industries in backward area in Orissa. This subsidy is a capital receipt. However, under the aforesaid
provision it is chargeable to tax under section 2(24)(xviii).
2. Subsidy received by Y Ltd., a manufacturing company, from the Central Government to acquire plant and machinery is
not covered by the above provision [as the amount of subsidy is deducted from the “actual cost” for the purpose of claiming
depreciation/investment allowance by virtue of the Explanation 10 to section 43(1)].
3. Z Ltd. takes a loan of Rs. 100 crore from the Andhra Pradesh Development Authority to develop infrastructure to set up
an industrial corridor in Andhra Pradesh. In the previous year 2019-20, X Ltd. gets a waiver of Rs. 40 crore (out of total loan
of Rs. 100 crore) from the Andhra Pradesh Development Authority. Waiver obtained by Z Ltd. is taxable under the aforesaid
provisions of section 2(24)(xviii).
4. A Ltd. takes a loan of Rs. 5 crore from Punjab National Bank (PNB). The loan is taken to purchase land to set up an industrial
undertaking in West Bengal. In the previous year 2019-20, X Ltd. gets a waiver of Rs. 1 crore from PNB as the project becomes
financially non-viable. The waiver of Rs. 1 crore is not taxable under section 2(24)(xviii) as it is not given by Central
Government/State Government/authority/body/agency.
5. LPG subsidy received by consumers of LPG (directly in their bank account on the basis of Aadhaar Card) or any other
welfare subsidy received by individuals are not covered by the aforesaid amendment – Press Release, Government of India,
dated May 5, 2015. Consequently, scholarship or reimbursement received by a student from a university or from a charitable
organization, is not covered by the aforesaid amendment.
 WHAT IS GROSS TOTAL INCOME

7. As per section 14, income of a person is computed under the following five heads :
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
The aggregate income under these heads is termed as “gross total income”. In other words, gross total income
means total income [see para 8] computed in accordance with the provisions of the Act before making any
deduction under sections 80C to 80U [see paras 138 to 167].
7.1 Expenditure in respect of income not chargeable to tax - Section 14A provides that no deduction shall be
made in respect of expenditure incurred by an assessee in relation to income which does not form part of the total
income under the Act.
In other words, if income is not chargeable to tax, any expenditure for earning such income is not deductible. The
Assessing Officer determines expenditure pertaining to tax-free income, in accordance with the method
prescribed under rule 8D.
However, the prescribed mode given by rule 8D is applicable only if the Assessing Officer is not satisfied with
the correctness of the claim of expenditure (pertaining to exempt income) made by the assessee.
7.2 Rate of exchange for conversion of foreign income - The rate of exchange for the calculation of the value
in rupees of any income arising in foreign currency, shall be the telegraphic transfer buying rate of such currency
adopted by SBI on the dates given below—
Different cases The telegraphic transfer buying rate adopted by SBI on
the dates given below for the purpose of conversion
of foreign income into Indian currency
Case 1 - If tax is deducted at source by payer under the On the date on which tax is required to be deducted
provisions of sections 192 to 196D
Case 2 - If tax is not deducted at source—
Case 2.1 - Salary income The last day of the month immediately preceding the
month in which salary is due (or is paid in advance/
arrears)
Case 2.2 - Interest on securities The last day of the month immediately preceding the
month in which the income is due
Case 2.3 - Income from house property, business/profes- The amount actually credited by the bank in Indian
sional income and income from other sources (where currency is taken as income (the telegraphic transfer
foreign income is brought into India before the end of buying rate of SBI is irrelevant in this case)†
the previous year)
Case 2.4 - Income from house property, business/profes- On the last date of the previous year
sional income and income from other sources (where
foreign income is not brought into India before the end of
the previous year)
Case 2.5 - Income of non-resident engaged in the business The last day of the month immediately preceding the
of operation of ships month in which such income is deemed to accrue or arise
in India
Case 2.6 - Dividend from companies The last day of the month immediately preceding the
month in which such dividend is declared, distributed
or paid
Case 2.7 - Capital gains The last day of the month immediately preceding the
month in which the capital asset is transferred.
 WHAT IS TOTAL INCOME AND HOW IS IT COMPUTED

8. Total income of an assessee is gross total income as reduced by the amount permissible as deduction under
sections 80C to 80U [see paras 138 to 167]. The scheme of computation of total income and tax liability thereon
can be easily understood with the help of the following chart :
COMPUTATION OF INCOME FOR AN ASSESSMENT YEAR
Rs. Rs.
1. Income from salaries
Income from salary [see para 41] ........
Income by way of allowances [see para 42] ........
Taxable value of perquisites [see para 44] ........
Gross salary ........
Less : Deduction under section 16
Standard deduction [see para 45.1] ........
Entertainment allowance [see para 42.3] ........
Professional tax [see para 45.3] ........
Income from salaries ........
2. Income from house property
Adjusted net annual value [see paras 69 and 70] ........
Less : Deduction under section 24 [see para 71] ........
Income from house property ........
† One may refer to Income Computation and Disclosure Standard VI relating to effects of changes in foreign exchange rates.
11 Rounding off of income Para 8.1
Rs. Rs.
3. Profits and gains of business or profession
Net profit as per profit and loss account ........
Add : Amounts which are debited to P & L a/c but are not allowable as
deduction under the Act [see para 82] ........
........
Less : Expenditure which are not debited to P & L a/c but are allowable as
deduction under the Act [see para 81] ........
........
Less : Income which are credited to P & L a/c but are exempt under section
10 [see para 32] or are taxable under other heads of income ........
Add : Those income which are not credited to P & L a/c but are taxable
under the head “Profits and gains of business or profession” ........
Profits and gains of business or profession ........
4. Capital gains
Amount of capital gains [see para 95] ........
Less : Amount exempt under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA,
54GB, and 54H [see para 103] ........
Income from capital gains ........
5. Income from other sources
Gross income [see paras 107 to 114] ........
Less : Deductions under section 57 [see para 117] ........
Income from other sources ........
Total [i.e., (1) + (2) + (3) + (4) + (5)] ........
Less : Adjustment on account of set-off and carry forward of losses [see paras
132 to 136] ........
Gross total income ........
Less : Deductions under sections 80C to 80U [see paras 138 to 167] ........
Total income or net income* [rounded off - see para 8.1] ........
COMPUTATION OF TAX LIABILITY
Tax on net income [see Appendix 1, para 8.2 and problem 16-P5] ........
Less: Rebate under section 87A [in the case of a resident individual having net income not
exceeding Rs. 5 lakh] ........
Income-tax after rebate under section 87A ........
Add : Surcharge ........
Tax and surcharge ........
Add: Health and education cess [4 per cent of tax and surcharge] ........
Less : Rebate under sections 86, 89, 90, 90A and 91 ........
Tax† ........
Less : Pre-paid taxes
 Tax-paid on self-assessment [see para 251] ........
 Tax deducted or collected at source [see paras 270 to 290] ........
 Tax paid in advance ........
Tax liability [rounded off - see para 8.3] ........
8.1 Rounding off of income [Sec. 288A] - The taxable income shall be rounded off to the nearest multiple of ten
rupees and for this purpose any part of a rupee consisting of paise shall be ignored and thereafter, if such amount
is not a multiple of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the
next higher amount which is a multiple of ten and if the last figure is less than five, the amount shall be reduced
to the next lower amount which is a multiple of ten.
*This income is chargeable to tax. In the Income-tax Act it is termed as “total income”. In this book, however, “net income” is used for this purpose.
†In the case of a company, tax liability cannot be less than minimum alternate tax. In the case of a non-corporate assessee, tax liability cannot be
less than alternate minimum tax [see para 194.2].
The above provisions may be illustrated as follows—
Income before rounding off Income after rounding off
Rs. Rs.
7,80,514.99 7,80,510
7,80,515.00 7,80,520
7,80,515.99 7,80,520
7,80,519.99 7,80,520
7,80,524.99 7,80,520
8.2 Computation of tax for the assessment year 2020-21† - Tax rates applicable for the assessment year
2020-21 are given in Appendix 1. Some of the important rates for the assessment year 2020-21 are given
below –
8.2-1 INCOME-TAX - Income-tax rates are as follows –
8.2-1a INDIVIDUAL, HUF, AOP, BOI - The tax rates applicable to an individual, HUF, AOP, BOI, etc., are given
below –
1. Senior citizen - In the case of a resident individual who is at least 60 years of age at any time during the previous
year 2019-20 but less than 80 years on March 31, 2020 (i.e., born during April 2, 1940 and April 1, 1960), first Rs.
3,00,000 of net income is exempt from tax. Net income in the range of Rs. 3,00,000 to Rs. 5,00,000 is taxable at the
rate of 5 per cent. Between Rs. 5,00,000 and Rs. 10,00,000, the slab rate is 20 per cent and the income in excess of
Rs. 10,00,000 is taxable at the rate of 30 per cent. These rates are applicable only in the case of a resident (ordinarily
or otherwise) senior citizen. In the case of a non-resident senior citizen, the exemption limit is
Rs. 2,50,000 as given below.
2. Super senior citizen - In the case of a resident individual who is at least 80 years of age at any time during the
previous year 2019-20 (i.e., born before April 2, 1940), first Rs. 5,00,000 of net income is exempt from tax. Net
income in the range of Rs. 5,00,000 to Rs. 10,00,000 is taxable at the rate of 20 per cent. Net income in excess of
Rs. 10,00,000 is taxable at the rate of 30 per cent. These rates are applicable only in the case of a resident (ordinarily
or otherwise) super senior citizen. In the case of a non-resident, the exemption limit is Rs. 2,50,000 as given below.
3. Any other resident individual, any non-resident individual, any HUF, AOP, BOI - In the case of any other resident
individual (born on or after April 2, 1960), any non-resident individual, any HUF/AOP/BOI, the first
Rs. 2,50,000 of net income is exempt from tax. Net income in the range of Rs. 2,50,000 to Rs. 5,00,000 is taxable
at the rate of 5 per cent. Between Rs. 5,00,000 and Rs. 10,00,000, the slab rate is 20 per cent and the income in excess
of Rs. 10,00,000 is taxable at the rate of 30 per cent.
 Rebate under section 87A - A resident individual (whose taxable income does not exceed Rs. 5 lakh) can claim
a rebate under section 87A from income-tax. The amount of rebate is income-tax on total income or Rs. 12,500,
whichever is less.
8.2-1b FIRM - A partnership firm (including a limited liability partnership firm) is taxable at the rate of 30 per cent
(no exemption limit).
8.2-1c COMPANY - A domestic company is taxable at the rate of 30 per cent‡ and a non-domestic company is
taxable at the rate of 40 per cent. Dividend distribution is taxable at the rate of 15 per cent.
8.2-2 SURCHARGE ON INCOME-TAX - Income-tax (as computed above) shall be increased by a surcharge as
follows –
Net income range Surcharge (as % of income-tax)
Individuals/HUF/AOP/BOI/artificial juridical person 0 – Rs. 50 lakh Nil
Rs. 50 lakh – Rs. 1 crore 10%
Rs. 1 crore – Rs. 2 crore 15%
Rs. 2 crore – Rs. 5 crore 25% [see Note 1]
Above Rs. 5 crore 37% [see Note 1]
Firm/co-operative society/local authority 0 – Rs. 1 crore Nil
Above Rs. 1 crore 12%
†In the case of a company, tax liability cannot be less than minimum alternate tax. In the case of a non-corporate assessee, tax liability cannot be
less than alternate minimum tax [see para 194.2].
‡ If a few conditions are satisfied a domestic company has an option to pay tax at the rate of (a) 25 per cent under section 115BA, (b) 22 per cent
under section 115BAA or (c) 15 per cent under section 115BAB. Besides, a domestic company (whose turnover/gross receipt during the previous
year 2017-18 does not exceed Rs. 400 crore) is taxable at the rate of 25 per cent for the assessment year 2020-21.
13 What are Capital & Revenue Receipts Para 11
Net income range Surcharge (as % of income-tax)

Domestic company 0 – Rs. 1 crore Nil [see Note 2]
Foreign company 0 – Rs. 1 crore Nil
Notes –
1. Surcharge is 15% of income-tax pertaining to income which is chargeable under section 111A or 112A.
2. Surcharge is 10% if income is chargeable to tax under section 115BAA or 115BAB.
8.2-3 HEALTH AND EDUCATION CESS - Amount of income-tax and surcharge shall be increased by health and
education cess which is 4 per cent of (income-tax + surcharge).
8.3 Rounding off of tax [Sec. 288B] - The amount payable by the assessee and the amount of refund due, under
the provisions of the Act shall be rounded off to the nearest ten rupees [see the rule of rounding off and illustration
given in para 8.1].
 WHAT IS AGRICULTURAL INCOME
9. Agricultural income in India is not chargeable to tax. It is defined by section 2(1A). For detailed discussion
please refer to paras 185 to 188.
 WHAT IS DIFFERENCE BETWEEN EXEMPTION AND DEDUCTION
10. If an income is exempt from tax, it is not included in the computation of income. Exemption can never exceed
the amount of income. Deduction is generally given from income chargeable to tax. Deduction can be less than
or equal to or more than the amount of income. If the amount deductible is more than the amount of income, the
resulting amount will be taken as loss.
 WHAT ARE CAPITAL AND REVENUE RECEIPTS

11. Receipts are of two types—capital receipts and revenue receipts. The distinction between the two is vital
because capital receipts are exempt from tax unless they are expressly taxable. For instance, capital gains are
taxable under section 45 even if they are capital receipts. On the other hand, revenue receipts are taxable, unless
they are expressly exempt from tax. For instance, income exempt under section 10.
As the Act does not define the terms “capital receipts” and “revenue receipts”, one has to depend upon natural
meaning of the concepts as well as decided cases.
 Circulating capital and fixed capital - A receipt on account of circulating capital is a revenue receipt, whereas a
receipt on account of fixed capital is a capital receipt.
 Receipt in the hands of recipient is material - In order to determine whether a receipt is capital or revenue in nature,
one has to go by its nature in the hands of the recipient. The source from which the payment is made, has no
bearing on the question.
 Payer’s motive irrelevant - The motive of payer is not relevant while deciding whether a particular receipt is
revenue or capital in nature.
 Receipt in lieu of source of income - A receipt in lieu of source of income is a capital receipt. A receipt in lieu of
income is a revenue receipt. For instance, compensation for loss of employment is a capital receipt, whereas
compensation for temporary disablement is a revenue receipt.
 Lump sum payment - In order to determine whether a receipt is capital or revenue in nature, the fact that it is
a lump sum payment, large payment or periodic payment is not relevant. It is not necessary that a revenue receipt
should be recurring or a capital receipt should be a single receipt.
 Nature of receipt under company law irrelevant - Treatment of a receipt under company law is not relevant while
deciding whether a receipt is capital or revenue in nature under tax laws.
 Compensation measured by estimated profits - The mere fact that a compensation is measured by estimated annual
profits, it cannot make the receipt as revenue receipt. It is the quality of payment that is decisive of the character
of the payment and not the method of payment or its measure.
 Income of wasting assets - Profits from a capital which is exhausted or consumed during the process of realisation
is chargeable to tax. Therefore, income from mines and quarries is not realisation of capital consumed but is
chargeable to tax as revenue receipt.
Para 12 Basic concepts that one must know 14
 Disallowance to person making payment - The fact that the amount paid is not allowed as permissible deduction
in the assessment of a person making payment, cannot determine the character of receipt in the hands of the
recipient.
 Insurance receipt - A receipt under a general insurance policy may be a capital receipt, if the policy relates to
capital asset. Alternatively, it may be a revenue receipt if the policy relates to circulating asset. Taxability of the
amount paid on settlement of claim by the insurance company depends both on the nature of payment and
purpose of insurance.
Where payment is made by an insurance company to compensate for loss of use of any goods in which the
assessee does not carry on any business it would be a capital receipt (for example, compensation received for loss
of machinery due to fire). Generally, such a capital receipt is not taxable. In some cases, however, such capital
receipt is chargeable to tax.
 Changes in rate of exchange of currency - If by virtue of change in exchange rate of currency, excess amount is
realised by an assessee engaged in the business of exporting goods, the excess amount is treated as revenue
receipt. On the other hand, if foreign currency is kept as investment or to acquire a capital asset, the profit made
due to change in the rate of exchange of currency is capital receipt.
These are a few principles which one has to follow while deciding nature of a receipt. It is, however, difficult to
state any specific test for determining true nature of a receipt. Though the dividing line between a capital and
revenue receipt is real, yet sometimes it becomes difficult to draw. Therefore, a decision will have to be taken
in each case in the light of its facts and surrounding circumstances. The onus of proving that a particular receipt
is of capital or revenue nature is normally on the Income-tax Department. Where, however, the assessee in the
normal circumstances is in a position to prove his contention, the onus will be on him to produce the necessary
evidence.
 WHAT IS CAPITAL AND REVENUE EXPENDITURE

12. See para 81.40-2.
 HOW FAR METHOD OF ACCOUNTING IS RELEVANT IN COMPUTING INCOME

13. Income chargeable under the head “Profits and gains of business or profession” or “Income from other
sources” is to be computed in accordance with the method of accounting regularly employed by the assessee.
13.1 Types of accounting methods - Mainly there are two types of accounting methods — mercantile system
and cash system.
 Mercantile system - Under mercantile system, income and expenditure are recorded at the time of occurrence
during the previous year. For instance, income accrued during the previous year is recorded whether it is
received during the previous year or during a year preceding or following the previous year. Similarly,
expenditure is recorded if it becomes due during the previous year, irrespective of the fact whether it is paid
during the previous year or not. The profit calculated under mercantile system is, thus, profit actually earned
during the previous year, though not necessarily realised in cash.
 Cash system - Under cash system of accounting, revenue and expenses are recorded only when received or paid.
For instance, income received during the previous year is included in taxable income whether it is earned during
the previous year or it is earned during a year preceding or following the previous year. Similarly, expenditure
is deductible from the taxable income only if it is paid during the previous year, irrespective of the fact whether
it relates to the previous year or not. Income under cash system of accounting is, therefore, excess of receipts over
disbursements during the previous year.
13.2 Method of accounting and accounting standards for computing income - Section 145 provides the
following :
1. Income chargeable under the head “Profits and gains of business or profession” or “Income from other
sources” shall be computed only in accordance with either the cash or the mercantile system of accounting,
regularly employed by an assessee. For instance, if a trader follows mercantile system of accounting, his business
income will be taxable on “accrual” basis and business expenses will be deductible on “due” basis. If a
professional follows cash system of accounting, his professional income will be taxable on “receipt” basis and
professional expenses will be deductible on “payment” basis.
2. The Central Board of Direct Taxes has notified the Income Disclosure and Tax Accounting Standards vide
Notification No. 87/2016, dated September 29, 2016. These standards are to be followed by all assessees (other
than an individual/HUF who is not required to get his account of the previous year audited under section
44AB) following mercantile system of accounting. These standards are applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not
15 Problems on basic concepts Problem 16-P1
for the purpose of maintenance of books of account. These standards are applicable from the assessment year
2017-18.
13.3 Method of accounting not relevant in some cases - In the case of income chargeable under the heads
“Salaries”, “Income from house property” and “Capital gains”, method of accounting adopted by the assessee
is not relevant in calculating taxable income. For calculating taxable income under these heads, one has to follow
the statutory provisions of the Income-tax Act which expressly provide whether revenue (or expenditure) is
taxable (or deductible) on “accrual basis” or “cash basis”.
 WHAT IS AMALGAMATION [SEC. 2(1B)]

14. For a merger to qualify as an “amalgamation” for the purpose of the Income-tax Act, it has to satisfy the
following conditions :
Condition 1 All the properties of the amalgamating company immediately before the amalgamation should become
the property of the amalgamated company by virtue of the amalgamation
Condition 2 All liabilities of the amalgamating company immediately before the amalgamation should become the
liabilities of the amalgamated company by virtue of the amalgamation
Condition 3 Shareholders holding not less than three-fourths (in value) of the shares in the amalgamating company
(other than shares already held by the amalgamated company or by its nominee) should become
shareholders of the amalgamated company by virtue of the amalgamation.
To illustrate the aforesaid condition (3), where A Ltd. merges with X Ltd., in a scheme of amalgamation, and
immediately before the amalgamation, X Ltd. held 20 per cent of the shares in A Ltd., the abovementioned
condition will be satisfied if shareholders holding not less than 3/4 (in value) of the remaining 80 per cent of the
shares in A Ltd., i.e., 60 per cent thereof (3/4 × 80), become shareholders of X Ltd., by virtue of the amalgamation.
Where, however, the whole of the share capital of a company is held by another company, the merger of the two
companies will qualify as an amalgamation within section 2(1B), if all other conditions are fulfilled.
 WHAT IS “DEMERGER” [SEC. 2(19AA)]

15. Demerger, in relation to the companies, means transfer, pursuant to a scheme of arrangement under sections
391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to the resulting
company in the following manner—
1. All the property of the undertaking, being transferred by the demerged company, becomes the property of the
resulting company.
2. All the liabilities relatable to the undertakings being transferred by the demerged company, become the
liabilities of the resulting company.
3. The property and the liabilities of the undertaking being transferred by the demerged company are transferred
at values appearing in its books of account immediately before the demerger. For this purpose, any change in
the value of assets consequent to their revaluation shall be ignored.
4. The resulting company issues shares to the shareholders of the demerged company on a proportionate basis
as a consideration for demerger.
5. The shareholders holding not less than three-fourths in value of the shares in the demerged company (other
than the shares already held therein immediately before the demerger, or by a nominee for, the resulting
company or, its subsidiary) become shareholders of the resulting company.
6. The transfer of the undertaking is on a going concern basis.
7. The demerger is in accordance with the conditions, if any, notified under section 72A(5).
 Problems on basic concepts

➠16-P1 Income of a previous year is chargeable to tax in the immediately following assessment year. Is there any exception to this rule?
Discuss.
Solution : Generally income generated during a previous year is taxable in the immediately following assessment year. In
the five cases, given below, income is taxed in the year in which it is earned —
 Shipping business of non-residents [Sec. 172] - Section 172 is applicable if the following conditions are satisfied —
Condition 1 The assessee is a non-resident.

Condition 2 He owns a ship or ship is chartered by the non-resident.
Condition 3 The ship carries passengers, livestock, mail or goods shipped at a port in India.
Condition 4 The non-resident may (or may not) have an agent/representative in India.
Problem 16-P1 Basic concepts that one must know 16
If all the aforesaid conditions are satisfied, 7.5 per cent of amount received (or receivable) on account of such carriage
(including demurrage charge or handling charge or similar amount) by the non-resident shall be deemed to be the income
of the non-resident.
For this purpose, the master of the ship shall submit a return of income before the departure of the ship from the Indian port
(such return may be submitted within 30 days of the departure of the ship, if the Assessing Officer is satisfied that it will
be difficult to submit the return before departure and if satisfactory arrangement for payment of tax has been made). Unless
tax has been paid (or satisfactory arrangements have been made for payment thereof), a port clearance shall not be granted
by the Collector of Customs.
Under the above noted provisions of section 172, 7.5 per cent of amount of freight, fare, etc., is deemed as income of the non-
resident taxpayer and tax is payable at the rate applicable to a foreign company. Income is, thus, taxable in the same year
in which freight, fare, etc., is collected and not in the immediately following assessment year.
 Persons leaving India [Sec. 174] - Section 174 is applicable as follows—
1. It appears to the Assessing Officer that an individual may leave India during the current assessment year or shortly after
its expiry.
2. He has no present intention of returning to India.
3. The total income of such individual up to the probable date of his departure from India shall be chargeable to tax in that
assessment year.
X, a foreign citizen, is residing in India since 2003. While completing assessment for the assessment year 2018-19, on February
14, 2019, the Assessing Officer comes to know that X will leave India on April 12, 2019 with no intention of returning. In this
case, the Assessing Officer will make three assessments for the assessment year 2018-19 :
a. regular assessment for the previous year 2017-18 (i.e., income of the period April 1, 2017 to March 31, 2018) ;
b. assessment for the income of the period April 1, 2018 to March 31, 2019 ; and
c. assessment for the income of the period April 1, 2019 to April 12, 2019.
The above three income assessments shall be completed separately. For the first assessment, tax shall be chargeable at the
rates applicable for the assessment year 2018-19. For the second and third assessments, tax shall be chargeable at the rates
applicable for the assessment year 2019-20 which are given in Part I of the First Schedule to Finance (No. 2) Act, 2019.
 Associations/bodies formed for short duration [Sec. 174A] - The provisions of section 174A are given below—
1. There is an association of persons or a body of individuals or an artificial juridical person, formed or established or
incorporated for a particular event or purpose.
2. It appears to the Assessing Officer that the abovementioned association, body, etc., is likely to be dissolved in the
assessment year (i.e., April to March) in which such association of persons or body of individuals or artificial juridical person
was formed or established or incorporated or immediately after such assessment year.
3. The total income of such association or body or juridical person for the period from the expiry of the previous year for
that assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year.
X Co. is an association of two individuals X and Y. It is formed on April 10, 2017 for the purpose of completing a contract
given by a French company in India. It is likely to be dissolved on September 10, 2018. While processing the return submitted
by the association for the assessment year 2018-19, the Assessing Officer comes to know on August 6, 2018 about the probable
date of dissolution. In this case, the Assessing Officer will make two assessments for the assessment year 2018-19:
a. regular assessment for the previous year 2017-18 (i.e., income of the period April 1, 2017 to March 31, 2018); and
b. assessment for the income of the period April 1, 2018 to September 10, 2018.
The above two income assessments shall be completed separately. For the first assessment, tax shall be chargeable at the rates
applicable for the assessment year 2018-19. For the second assessment, tax shall be chargeable at the rates applicable for the
assessment year 2019-20 which are given in Part III of the First Schedule to Finance Act, 2018.
 Person likely to transfer property to avoid tax [Sec. 175] - The salient features of section 175 are given below—
1. It appears to the Assessing Officer during any assessment year that a person is likely to charge, sell, transfer, dispose of
(or otherwise part with) any of his asset.
2. Such asset may be movable or immovable.
3. The taxpayer is likely to part with asset with a view to avoiding payment of any liability under the Income-tax Act.
4. The total income of such person from the first day of the assessment year to the date when proceeding is started under
section 175 is taxable in that assessment year.
On December 19, 2018, the Assessing Officer comes to know that X Ltd. is likely to dispose of a house property during
January 2019 with a view to avoiding payment of income-tax. A notice is issued by the Assessing Officer on December 28,
2018 to X Ltd. under section 175 to submit return of income of the period commencing on April 1, 2018 to December 28, 2018.
In this case, income from April 1, 2018 to December 28, 2018 is chargeable to tax in the assessment year 2018-19 and tax will
be calculated at the rate applicable for the assessment year 2019-20 given in Part III of the First Schedule to the Finance
Act, 2018.
 Discontinued business [Sec. 176] - The salient features of section 176 are as follows —
1. A business or profession is discontinued in any assessment year.
2. Income of the business/profession from April 1 of the assessment year (in which the business/profession is discontinued)
to the date of discontinuation may be taxable in the assessment year in which the business/profession is discontinued.
3. The above income is taxable at the discretion of the Assessing Officer in the assessment year in which business is
discontinued or it may be taxed in the normal assessment year (i.e., assessment year immediately following the previous
year).
X discontinues his business on August 10, 2018. In this case, income will be taxable as follows—
a. for the assessment year 2018-19, income of the previous year 2017-18 will be taxable; and
b. income of the period commencing on April 1, 2018 and ending on August 10, 2018 may be taxed at the discretion of the
Assessing Officer in the assessment year 2018-19 at the rate applicable to the assessment year 2019-20 given in Part III
of the First Schedule to the Finance Act, 2018 [on the other hand, the Assessing Officer may wait till the commencement
of the normal assessment year and then income of the period : April 1, 2018 to August 10, 2018, shall be taxed in the
assessment year 2019-20 at the rate applicable to the assessment year 2019-20 which are given in Part I of the First Schedule
to the Finance (No. 2) Act, 2019].
It may be noted that in the first four exceptions discussed earlier (i.e., shipping business of non-residents, associations formed
for short duration, persons leaving India and transfer of property) tax shall be charged in the previous year itself (it is
mandatory on the part of the Assessing Officer). But in the case of discontinued business, it is at the discretion of the
Assessing Officer.
16-E1 Discuss in which assessment year the following income are taxable—
1. X Ltd. is a non-resident shipping company. It has a branch office in India. A ship owned by X Ltd. takes passengers from Madras
port on October 10, 2020 (fare collected being Rs. 6,48,720).
2. Y Ltd. is a non-resident shipping company not having any representative in India. One of the ships belonging to Y Ltd. leaves Cochin
port on December 5, 2020 (total fare collected from passengers being Rs. 3,66,000).
3. Z Ltd. is an Indian shipping company. One of its ships leaves Madras port on December 17, 2020 (total freight collected being
Rs. 8,43,000).
4. On April 5, 2020, the Assessing Officer comes to know that X will leave India on April 12, 2020 with no intention of returning.
Income of X during April 1, 2020 and April 12, 2020 is Rs. 3,86,000.
16-P2 Discuss the provisions of section 2(31) which defines the term “person”.
Solution : The term “person” includes —
a. an individual;
b. a Hindu undivided family;
c. a company;
d. a firm;
e. an association of persons or a body of individuals, whether incorporated or not;
f. a local authority; and
g. every artificial juridical person, not falling within any of the preceding categories.
These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive, and not exclusive.
Therefore, any person, not falling in the above-mentioned categories, may still fall in the four corners of the term “person”
and accordingly may be liable to tax under section 4.
 An individual - Under the present Act, the word “individual” means only a natural person, i.e., a human being. Deities and
statutory corporations are assessable as “juridical person”. “Individual” includes a minor or a person of unsound mind.
 Individual also includes a group of individuals.
 Trustees of a discretionary trust have to be assessed in the status of “individual” and not in the status of “association of
persons”.
 A Hindu undivided family - A Hindu undivided family consists of all persons lineally descended from a common ancestor
and includes their wives and unmarried daughters. Profits made by a joint Hindu family are chargeable to tax as income
of the Hindu undivided family as a distinct entity or unit of assessment. Once a family is assessed as a Hindu undivided
family, it will continue to be assessed as such till a finding of partition is given by the Assessing Officer under section 171.
 So long as HUF exists, individual members cannot be separately assessed in respect of HUF’s income.
 Company - Under section 2(17), the expression “company” is defined to mean the following :
a. any Indian company ; or
b. any body corporate incorporated under the laws of a foreign country ; or
c. any institution, association or a body which is assessed or was assessable/assessed as a company for any assessment year
commencing on or before April 1, 1970 ; or
d. any institution, association or a body, whether incorporated or not and whether Indian or non-Indian, which is declared
by general or special order of the Central Board of Direct Taxes to be a company.
 Firm - Section 4 of the Indian Partnership Act, 1932 defines partnership as “relationship between persons who have agreed
to share the profits of business carried on by all or any of them acting for all”. Persons who have entered into partnership
with one another are called individually partners and collectively a firm and the name under which their business is carried
on is called the firm name.
 An association of persons or a body of individuals - The word “associate” means “to join in common purpose, or to join in
action”. Therefore, “association of persons” means an association in which two or more persons join in a common purpose
or common action. An association of persons may have companies, firms, joint families as its members. A body of
individuals, on the other hand, cannot have non-individuals, as its members†.
 Local authority - Local authority is a separate unit of assessment. As per section 3(31) of the General Clauses Act, a local
authority means a municipal committee, district board, body of port commissioners, or other authority legally entitled to
or entrusted by the Government with the control and management of a municipal or local fund†.
 Every artificial juridical person - It covers not only deities but also all artificial persons with a juridical personality such as
a Bar Council. This is residuary classification and, therefore, it does not cover those falling within any of the preceding
classifications†.
16-E2 Indicate whether the following statements are true or false —
1. X is a partner of a firm. He is assessable as an “individual”.
2. Y is a managing director of A Ltd. Y is assessable as an “individual”.
3. Delhi Municipal Corporation is assessable as “artificial juridical person”.
4. Co-owners (with specific shares in a house property) transfer the property. Capital gain generated on the transaction is taxable in
the hands of the co-owners as “body of individuals”.
5. Bombay Sales Tax Bar Council is an “association of persons”.
16-P3 Discuss whether the following persons are “assessees” under section 2(7) –
1. Taxable income of X is Rs. 8,50,000 for the assessment year 2020-21. He does not file his return of income. Tax on Rs. 8,50,000 is
not paid by him. Income-tax department has not taken any action against X to recover unpaid tax.
2. Income of Y is Rs. 2,50,000. Since exemption limit is Rs. 2,50,000, no tax is due. He does not submit his return of income. However,
the Assessing Officer has issued a notice requiring Y to submit his return of income. Y has not submitted his return of income in response
to the notice.
3. Income of Z is not more than the exemption limit. He has paid salary to his employees. Tax is deductible but Z has not deducted tax
at source.
Solution :
1. Taxable income of X is more than the exemption limit. He supposed to file his return of income and pay tax thereon.
Therefore, X is an “assessee”. This rule is applicable even if X has not submitted his return of income, he has not paid any
tax and income-tax department has not taken any action against X.
2. Since income-tax department has issued a notice requiring Y to submit his return of income, Y is an “assessee”.
3. Tax is deductible by Z. He has not deducted tax at source. Z is an “assessee” as he has failed to deduct tax at source. This
rule is applicable even if his own taxable income is not more than the exemption limit.
16-E3 State whether the following statements are true or false :

1. Mrs. X, a resident (age : 35 years), is not a working woman. Her income is just Rs. 2,61,000 per annum. According to section 139(1),
she is supposed to file her return of income but she has not submitted the return. She is, therefore, not an assessee.
2. Y (age : 51 years) has deducted tax at source but he has not deposited the same. The Income-tax Department has not taken any action
against him. His total income is less than Rs. 2,50,000 and he has not submitted his return of income. He is not an “assessee”.
16-P4 “Tax rates are not given under the Income-tax Act, 1961 but by the annual Finance Act”, discuss.
Solution : Provisions for computation of taxable income are given by the Income-tax Act. Tax rates are not given by
the Income-tax Act, but by the Finance Act which is passed by Parliament along with budget for the Central Government
every year. Apart from making various amendments in the Income-tax Act (and other direct/indirect tax laws) every
Finance Act specifies (in the First Schedule) income-tax rates for the current assessment year and advance tax rates for
the next assessment year. For instance, the Finance (No. 2) Act, 2019, provides tax rates in the First Schedule (Parts I, II and
III) as follows—
Part I of the First Schedule to the Finance (No. 2) Act, 2019 - It gives income-tax rates for different assessees for the assessment
year 2019-20.
Part II of the First Schedule to the Finance (No. 2) Act, 2019 - It gives rates for deduction of tax at source applicable for the financial
year 2019-20. To put it differently, if a person is responsible for making a payment on which he is supposed to deduct tax
at source during the financial year 2019-20, then tax has to be deducted at source during 2019-20 at the rates given in Part
II of the First Schedule to the Finance (No. 2) Act, 2019. However, rate for tax deduction from salary is given by Part III.
†An association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a “person”, whether
or not, such person or body or authority or juridical person, is formed or established or incorporated with the object of deriving income, profits
or gains.
Part III of the First Schedule to the Finance (No. 2) Act, 2019 - It gives tax rates for different assessees for payment of advance
tax during the financial year 2019-20 (i.e., for the assessment year 2020-21). The same rates are applicable for the tax
deduction from salary payment during the financial year 2019-20.
Generally, Part III of the First Schedule of a Finance Act becomes Part I of the First Schedule of the subsequent Finance Act.
For instance, Part III of the First Schedule to the Finance (No. 2) Act, 2019 will become Part I of the First Schedule to the
Finance Act, 2020.
16-E4 [P1.5]* Let the depreciation rates in respect of a depreciable asset be as under—
a. 20 per cent up to June 19, 2019 ;
b. 40 per cent from June 20, 2019 to March 25, 2020 ;
c. 30 per cent from March 26, 2020 to April 10, 2020 ;
d. 45 per cent from April 11, 2020 to December 16, 2020 ; and
e. 50 per cent from December 17, 2020 onwards.
At what rate depreciation is admissible in respect of that asset for the assessment years 2019-20 and 2020-21.
16-P5 How would you calculate income-tax for the assessment year 2020-21 in the case of different assessees? What is the maximum
marginal rate of tax and the exemption limit ?
Solution : Income-tax shall be calculated according to the rates given in relevant Finance Act. For the assessment year
2020-21, tax shall be calculated at the rates which are prescribed by the Finance Act, 2020‡. In this book, these rates are briefly
given in para 8.2. Different assessees are taxable at different rates.
 Individual or Hindu undivided family - Suppose taxable income of an individual (age : 45 years) for the assessment year
2020-21 is Rs. 10,86,920. Tax shall be calculated as under—
Rate of tax Amount of tax
Rs.
First Rs. 2,50,000 Nil Nil
Next Rs. 2,50,000 5% 12,500
Next Rs. 5,00,000 20% 1,00,000
Income in excess of Rs. 10,00,000 (i.e., Rs. 10,86,920 —
Rs. 10,00,000) 30% 26,076
Tax** 1,38,576
Add : Surcharge (if net income exceeds Rs. 50 lakh) Nil
Tax and surcharge 1,38,576
Add : Health and education cess (4% of tax and surcharge) 5,543
Tax liability (rounded off) 1,44,120
 Firm - Suppose for the assessment year 2020-21, taxable income of a firm is Rs. 10,86,920, then tax shall be calculated as
under —
Rs.
Tax (30% of Rs. 10,86,920) 3,26,076
Add : Surcharge (12% of income-tax if net income exceeds Rs. 1 crore) Nil
 Company - Suppose taxable income of a company for the assessment year 2020-21 is Rs. 10,86,920, then tax liability will
be as under —
Tax rate Amount of tax Surcharge Health and Total
education (rounded
cess @ 4% off)
of tax and
surcharge
Rs. Rs. Rs. Rs.
- If it is a domestic company 30% 3,26,076 Nil† 13,043 3,39,120
- If it is a foreign company 40% 4,34,768 Nil† 17,391 4,52,160
*The number given in brackets represents a similar solved Problem No. of another book entitled “Students’ Guide to Income-tax - Problems &
Solutions”, November 2019 edition. This book includes many more solved problems focusing on contemporary issues.
**Rebate under section 87A is available in the case of a resident individual only if taxable income does not exceed Rs. 5,00,000.
†Surcharge is applicable only if taxable income exceeds Rs. 1 crore.
‡ However, calculation of tax for the assessment year 2020-21 in this edition is based upon rates prescribed by the Finance (No. 2) Act, 2019.
 Co-operative society - If for the assessment year 2020-21, income of a co-operative society is Rs. 10,86,920, tax liability shall
be determined as follows —
Rate of tax Amount of tax
Rs.
First Rs. 10,000 10% 1,000
Next Rs. 10,000 20% 2,000
Income in excess of Rs. 20,000 (i.e., Rs. 10,86,920 — Rs. 20,000) 30% 3,20,076
Tax 3,23,076
Add : Surcharge (12% of income-tax if net income exceeds Rs. 1 crore) Nil
 Rebate under section 87A - Rebate under section 87A is available in the case of a resident individual if his taxable income
is Rs. 5,00,000 or less for the assessment year 2020-21. Suppose taxable income is Rs. 5,00,000. Tax liability for the assessment
year 2020-21 for different taxpayers will be determined as follows –
Resident individual Non- Firm/

Super senior Senior Any other resident domestic
citizen (80 years citizen (60- (less than individual company
and above) 80 years) 60 years) or any HUF
Rs. Rs. Rs. Rs. Rs.
Income-tax on Rs. 5,00,000 Nil 10,000 12,500 12,500 1,50,000
Less: Rebate under section 87A in the
case of resident individual (100% of
income-tax or Rs. 12,500, whichever is
lower) Nil 10,000 12,500 Nil Nil
Income-tax Nil Nil Nil 12,500 1,50,000
Add: Surcharge Nil Nil Nil Nil Nil
Income-tax and surcharge Nil Nil Nil 12,500 1,50,000
Add: Health and education cess @ 4% Nil Nil Nil 500 6,000
Tax liability Nil Nil Nil 13,000 1,56,000
 Special tax rates - The above rates are given in the Finance (No. 2) Act, 2019 (Part III of First Schedule). Besides the above
tax rates, some income is taxable at special rates given under the Income-tax Act [these rates are given in the book in
Appendix 1, para 0.6]. For instance, long-term capital gains are taxable at the rate of 20%† [sec. 112], winnings from lotteries,
races, card games, etc., are taxable at the rate of 30%† [sec. 115BB], royalty income in hands of a foreign company is taxable
at the rate of 10%† [sec. 115A(1)(b)].
Suppose income of X, a resident, for the assessment year 2020-21 is determined as follows —
Rs. Rs.
Salary (after standard deduction) 1,12,60,000
Capital gain
- Long-term 26,000
- Short-term 90,000 1,16,000
Winnings from lottery 5,00,000
Net income 1,18,76,000
Tax on Rs. 1,18,76,000 shall be calculated as under—
Nature of income Amount of Tax rate Tax
income
Rs. Rs.
Long-term capital gain 26,000 20% 5,200
Winning from lottery 5,00,000 30% 1,50,000
Other income (i.e., Rs. 1,18,76,000 — Rs. 26,000 — Rs. 5,00,000) 1,13,50,000
†Plus surcharge and health and education cess.

Nature of income Amount of Tax rate Tax

income
Rs. Rs.
Tax on Rs. 1,13,50,000
First Rs. 2,50,000 2,50,000 Nil Nil
Next Rs. 2,50,000 2,50,000 5% 12,500
Next Rs. 5,00,000 5,00,000 20% 1,00,000
Income in excess of Rs. 10,00,000 (i.e., Rs. 1,13,50,000 — Rs. 10,00,000) 1,03,50,000 30% 31,05,000
Tax† 33,72,700
Add : Surcharge @ 15% 5,05,905
Add : Health and education cess (4% of tax and surcharge) 1,55,142
 Maximum marginal rate of tax - It is defined by section 2(29C) as the rate of income-tax (including surcharge) applicable in
relation to the highest slab of income in the case of an individual as specified by the relevant Finance Act. For instance, for
the assessment year 2020-21, the maximum marginal rate of tax is 42.744 per cent (i.e., 30 per cent + surcharge : 37 per cent
of income-tax + health and education cess : 4 per cent of income-tax and surcharge).
 Exemption limit or exempted slab - The amount of the first slab of income which is taxable at nil rate is known as exemption
limit or exempted slab [see Appendix 1]. For the assessment year 2020-21, the amount of exemption limit is as follows for
different assessees —
Individual Rs.
- Resident senior citizen (who is 60 years or more) 3,00,000
- Resident super senior citizen (who is 80 years or more) 5,00,000
- Any other individual 2,50,000
Hindu undivided family 2,50,000
Company Nil
Firm Nil
Association of persons or body of individuals 2,50,000
Local authority Nil
Artificial juridical person 2,50,000
The above limit is not applicable in a case where special tax rates are applicable‡ [these rates are given in Appendix 1, para
0.6]. For instance, if a resident individual gets a lottery prize of Rs. 45,000 and he does not have any other income, then
Rs. 45,000 is taxable (even if it is below Rs. 2,50,000) at the rate of 31.2%** (i.e., Rs. 1,040***).
16-E5 [P1.6]* Find out the tax liability in the following cases pertaining to the assessment year 2020-21—
Assessee Taxable Long-term Winnings
income capital gain from lotteries
included in included in
taxable income taxable income
Rs. Rs. Rs.
X, a resident Hindu undivided family 2,50,000 — 8,000
Y, a Hindu undivided family 2,40,000 — 2,10,000
Z, an individual (age : 42 years) 70,60,000 10,000 30,000
A, an individual (age : 62 years) 12,50,000 — —
B Ltd., an Indian company# 2,10,15,270 2,000 3,000
C Ltd., an Indian company# 35,000 — —
D Society, a co-operative society 4,000 1,000 500
E & Co., partnership firm 96,00,000 50,000 —
F, a non-resident individual (age : 24 years) 200 — 200
G, a resident individual (age : 54 years) 5,52,000 28,000 11,000
†Rebate under section 87A is not available (income being more than Rs. 5,00,000).
‡See, however, paras 104.1-2 and 104.4-2.
**Tax rate 30% + education cess 4% of tax. Surcharge not applicable.
***It is after rebate under section 87A.
# Not eligible for lower tax rate of 15% or 22% or 25%.
16-P6 Discuss the following —

1. Broad principles to clarify the concept of “income”.
2. Capital receipts vis-a-vis revenue receipts.
Solution : See paras 6.1 and 11.
16-E6 Discuss whether the following are true or false —
1. On rendering some service to a manufacturing garments unit, X is paid remuneration in kind (i.e., a silk tie). Since he has not
received anything in cash, it is not an “income”.
2. On sale of goods illegally imported from a foreign country, X generates a surplus of Rs. 9,00,000. As the income is derived from
an illegal activity, it is not chargeable to tax.
3. A birthday gift received by Z from his father is not taxable as income of Z.
4. Out of Rs. 45,000 per month received by Mrs. A from her husband for household expenses, she saves approximately Rs. 4,000 per
month which is deposited by her in a bank account. Rs. 4,000 per month is “income” of Mrs. A.
5. Sale proceeds of a house property is capital receipt which is, however, chargeable to tax.
6. Salary, paid to B by his employer X Ltd. out of capital reserve, is not income in the hands of B.
7. Income under the head “Income from house property” is computed on the basis of method of accounting adopted by the assessee.
CHAPTER 2
Residential status and its
effect on tax incidence
T
ax incidence on an assessee depends on his residential status. For instance, whether
an income, accrued to an individual outside India, is taxable in India depends upon the
residential status of the individual in India. Similarly, whether an income earned by a
foreign national in India (or outside India) is taxable in India, depends on the residential status
of the individual, rather than on his citizenship. Therefore, the determination of the residential
status of a person is very significant in order to find out his tax liability.
 WHAT IS RELEVANCE OF RESIDENTIAL STATUS

17. There are two types of taxpayers – resident in India and non-resident in India. Indian income is taxable in
India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is
taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India.
 WHAT ONE MUST KNOW FOR DECIDING RESIDENTIAL STATUS

18. The following norms one has to keep in mind while deciding residential status of an assessee :
 Different taxable entities - All taxable entities are divided in the following categories for the purpose of
determining residential status :

a. an individual ;
b. a Hindu undivided family ;
c. a firm or an association of persons ;
d. a joint stock company ; and
e. every other person.
 Different residential status - An assessee is either : (a) resident in India, or (b) non-resident in India. However, a
resident individual or a Hindu undivided family has to be (a) resident and ordinarily resident, or (b) resident but
not ordinarily resident. Therefore, an individual and a Hindu undivided family can either be :
a. resident and ordinarily resident in India ; or
b. resident but not ordinarily resident in India ; or
c. non-resident in India
All other assessees (viz., a firm, an association of persons, a joint stock company and every other person) can
either be :
a. resident in India ; or
b. non-resident in India.
The table given below highlights the same—
Category Individual/Hindu undivided family Firm, association of persons, joint stock
company and every other person
Ordinarily resident
▼
Category 1 Resident in India Resident in India

Not-ordinarily resident
▼
Category 2 Non-resident in India Non-resident in India
23
Para 19 Residential status and its effect on tax incidence 24
 Residential status for each previous year - Residential status of an assessee is to be determined in respect of each
previous year as it may vary from previous year to previous year.

 Different residential status for different previous years in same assessment year not possible - If a person is resident in
a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be
resident in India in the previous year(s) relevant to the same assessment year in respect of each of his other
sources of income [sec. 6(5)]. See problem 19-P10.
 Different residential status for different assessment years - An assessee may enjoy different residential status for
different assessment years. For instance, an individual who has been regularly assessed as resident and
ordinarily resident has to be treated as non-resident in a particular assessment year if he satisfies none of the
conditions of section 6(1) in that year.
 Resident in India and abroad - It is not necessary that a person who is “resident” in India, cannot become “resident”
in any other country for the same assessment year. A person may be resident in two (or more) countries at the
same time. It is, therefore, not necessary that a person who is resident in India will be non-resident in all other
countries for the same assessment year.
 HOW TO DETERMINE RESIDENTIAL STATUS OF AN INDIVIDUAL [SEC. 6]

19. An individual may be (a) resident and ordinarily resident in India, (b) resident but not ordinarily resident
in India, or (c) non-resident in India.
19.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)] - To find out whether an individual is “resident and
ordinarily resident” in India, one has to proceed as follows —
Step 1 First find out whether such individual is “resident” in India. See para 19.1-1
Step 2 If such individual is “resident” in India, then find out whether he is “ordinarily resident”
in India. However, if such individual is a “non-resident” in India, then no further
investigation is necessary. See para 19.1-2
19.1-1 BASIC CONDITIONS TO TEST AS TO WHEN AN INDIVIDUAL IS RESIDENT IN INDIA - Under section 6(1) an individual is
said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions—
Basic condition (a) He is in India in the previous year for a period of 182 days or more†
Basic condition (b) He is in India for a period of 60 days or more during the previous year and 365 days or more during
4 years immediately preceding the previous year
 Exceptions - Basic condition (b) is not taken into consideration in two special cases given below. In the two special
cases (given below) residential status of an individual shall be determined only on the basis of basic
condition (a).
Special case one - It covers an Indian citizen who leaves India during the previous year for the purpose of
employment outside India or an Indian citizen who leaves India during the previous year as a member of the
crew of an Indian ship. For this purpose, the requirement is not leaving India for taking employment outside
India but leaving India for the purposes of employment (the employment may be in India or may be outside
India). To put it differently, the individual need not be an unemployed person. He may be employed in India
and leave India during the previous year on a foreign assignment of his employer company. Alternatively, he
may be an unemployed person who goes outside India to take an employment outside India.
Special case two - It covers an Indian citizen or a person of Indian origin who comes on a visit to India during the
previous year. A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents,
was born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-
parents.
In these two special cases, an individual will be resident in India only if he is in India during the relevant previous
year for at least 182 days.
† In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of
stay in India shall, in respect of such voyage, not include the period given in rule 126. Under rule 126, the period beginning on the date entered
into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered
into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage, shall not be included
in the period of stay in India.
25 Rule of residence for an individual in brief Para 19.4
19.1-2 ADDITIONAL CONDITIONS TO TEST AS TO WHEN A RESIDENT INDIVIDUAL IS ORDINARILY RESIDENT IN INDIA - Under section
6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two
additional conditions —
Additional condition (i) He has been resident† in India in at least 2 out of 10 previous years immediately preceding the
relevant previous year.
Additional condition (ii) He has been in India for a period of 730 days or more during 7 years immediately preceding
the relevant previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least
one of the basic conditions [i.e., (a) or (b)] and the two additional conditions [i.e., (i) and (ii)].
It will be worthwhile to note the following propositions :
 It is not essential that the stay should be at the same place. It is equally not necessary that the stay should be
continuous. Similarly, the place of stay or the purpose of stay is not material.
 Where a person is in India only for a part of a day, the calculation of physical presence in India in respect of
such broken period should be made on an hourly basis. A total of 24 hours of stay spread over a number of days
is to be counted as being equivalent to the stay of one day. If, however, data is not available to calculate the period
of stay of an individual in India in terms of hours, then the day on which he enters India as well as the day on
which he leaves India shall be taken into account as stay of the individual in India.
19.2 Resident but not ordinarily resident [Sec. 6(1), (6)(a)] - An individual who satisfies at least one of the basic
conditions [i.e., condition (a) or (b) mentioned in para 19.1-1] but does not satisfy the two additional conditions
[i.e., conditions (i) and (ii) mentioned in para 19.1-2], is treated as a resident but not ordinarily resident in India.
In other words, an individual becomes resident but not ordinarily resident in India in any of the following
circumstances :
Case 1 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 19.1-1] but none of the additional
conditions [i.e., (i) and (ii) of para 19.1-2]
Case 2 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 19.1-1] and one of the two
additional conditions [i.e., (i) and (ii) of para 19.1-2]
19.3 Non-resident - An individual is a non-resident in India if he satisfies none of the basic conditions
[i.e., condition (a) or (b) of para 19.1-1]. In the case of non-resident, additional conditions [i.e., (i) and (ii) of para
19.1-2] are not relevant.
19.4 Rule of residence for an individual in brief - The tables given below summarise the rule of residence for
the assessment year 2020-21 :
RULE OF RESIDENCE AT A GLANCE
Who is resident and ordinarily He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. At the same
resident in India time, he should also satisfy the two additional conditions.
Who is resident but not ordinarily He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. He may satisfy
resident in India one or none of the additional conditions.
Who is non-resident resident in He satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a)
India and basic condition (b)*]. Additional conditions are not relevant in the case of a non-
resident.
BASIC CONDITIONS AT A GLANCE
In the case of an Indian citizen who In the case of an Indian citizen or a In the case of an individual [other than that
leaves India during the previous year person of Indian origin (who is abroad) mentioned in columns (1) and (2)]
for the purpose of employment (or as a who comes on a visit to India during
member of the crew of an Indian ship) the previous year
(1) (2) (3)
a. Presence of at least 182 days in a. Presence of at least 182 days in a. Presence of at least 182 days in India
India during the previous year India during the previous year during the previous year 2019-20
2019-20 2019-20
†According to the basic conditions.

*In the two special cases mentioned in para 19.1, basic condition (b) is not relevant.
Para 19.4 Residential status and its effect on tax incidence 26
(1) (2) (3)
b. Non-functional. b. Non-functional. b. Presence of at least 60 days in India

during the previous year 2019-20 and
365 days during 4 years immediately
preceding the relevant previous year
(i.e., during April 1, 2015 and March 31,
2019).
ADDITIONAL CONDITIONS AT A GLANCE
i. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [or must satisfy at least
one of the basic conditions*, in 2 out of 10 immediately preceding previous years (i.e., 2009-10 to 2018-19)].
ii. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e., during
April 1, 2012 and March 31, 2019).
Problems
19-P1 X left India for the first time on May 20, 2017. During the financial year 2019-20, he came to India once on May 27 for a period
of 53 days. Determine his residential status for the assessment year 2020-21.
Solution : Since X comes to India only for 53 days in the previous year 2019-20, he does not satisfy any of the basic conditions
laid down in section 6(1). He is, therefore, non-resident in India for the assessment year 2020-21.
19-E1 [P2.30]** X, a German tourist, comes to India for the first time on May 17, 2019. He leaves India on September 15, 2019.
Determine his residential status for the assessment year 2020-21. Does it make any difference if he comes to India on a business trip
or if he is an Indian citizen ?
19-P2 X comes to India, for the first time, on April 16, 2017. During his stay in India up to October 5, 2019, he stays at Delhi up to
April 10, 2019 and thereafter remains in Chennai till his departure from India. Determine his residential status for the assessment year
2020-21.
Solution : During the previous year 2019-20, X was in India for 188 days (i.e., April 2019 : 30 days ; May 2019 : 31 days; June
2019 : 30 days ; July 2019 : 31 days ; August 2019 : 31 days ; September 2019 : 30 days and October 2019 : 5 days). He is in
India for more than 182 days during the previous year and, thus, he satisfies condition (a) mentioned in para 19.1-1.
Consequently, he becomes resident in India. A resident individual is either ordinarily resident or not ordinarily resident.
To determine whether X is ordinarily resident or not, one has to test the two additional conditions as laid down by section
6(6)(a) [see conditions (i) and (ii), para 19.1-2].
Condition (i) of para 19.1-2 - This condition requires that X should be resident in India in at least 2 years out of 10 years
preceding the relevant previous year. X is resident in India for the previous years 2017-18 and 2018-19.
Condition (ii) of para 19.1-2 - This condition requires that X should be in India for at least 730 days during 7 years immediately
preceding the previous year. X is in India from April 16, 2017 to March 31, 2019 (i.e., 715 days).
X satisfies one of the basic conditions and only one of the two additional conditions. X is, therefore, resident but not
ordinarily resident in India for the assessment year 2020-21.
Note : In order to determine the residential status, it is not necessary that a person should continuously stay in India at the
same place. Therefore, the information that X is in Delhi up to April 10, 2019 is irrelevant.
19-E2 [P2.31]** X, an Italian citizen, comes to India for the first time (after 20 years) on May 28, 2019 and stays up to December
5, 2019. Determine his residential status for the assessment year 2020-21.
19-P3 X was born in Chennai in 1992. Later on he migrated to Canada in June 2013 and took the citizenship of that country with effect
from December 26, 2018. His parents were born in Bengal in 1960 and his grandparents were born in India in 1946. He comes to India
during 2019-20 for a visit of 150 days. During earlier 4 years (i.e., April 1, 2015 to March 31, 2019) he was in India for 400 days. Find
out the residential status of X for the assessment year 2020-21.
Solution : X is presently a foreign citizen. His grand parents were born in undivided India. He is a person of Indian origin.
During the previous year 2019-20, he was in India for a visit of 150 days. He is covered by Special Case 2. He cannot satisfy
basic condition (a). Basic condition (b) is not relevant in his case. Consequently, he is non-resident in India for the assessment
year 2020-21.
19-E3 [P2.32]** X, a foreign citizen, comes to India for the first time on June 20, 2019. On September 6, 2019, he leaves India for
Burma on a business trip. He comes back on January 1, 2020. He maintains a dwelling place in India from the date of his arrival in
*In the two special cases mentioned in para 19.1, basic condition (b) is not relevant.
**The number given in brackets represents a similar solved Problem No. of another book entitled “Students’ Guide to Income-tax - Problems
& Solutions”, November 2019 edition. This book includes many more solved problems focusing on contemporary issues.
India (i.e., June 20, 2019) till January 15, 2020 when he leaves for Kuwait. Determine his residential status for the assessment year
2020-21. Does it make any difference if X is a person of Indian origin ?
19-P4 X, a foreign national (not being a person of Indian origin), comes to India for the first time on April 15, 2015. During the financial
years 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20, he is in India for 130 days, 80 days, 13 days, 210 days and 75 days respectively.
Determine the residential status of X for the assessment year 2020-21.
Solution : For the assessment year 2020-21, financial year 2019-20 is the previous year. During the previous year 2019-20,
X is in India for a period of 75 days. During 4 years immediately preceding the previous year (2015-16 to 2018-19), X is in
India for a period of 433 days (i.e., 130 + 80 + 13 + 210 days). Thus, he satisfies condition (b) mentioned in para 19.1-1 (namely,
presence of at least 60 days during the previous year and 365 days during 4 years immediately preceding the relevant
previous year). He, therefore, becomes resident in India.
A resident individual may either be an ordinarily resident or not ordinarily resident. To determine whether he is ordinarily
resident or not ordinarily resident, one has to test the two additional conditions laid down by section 6(6) [i.e., conditions
(i) and (ii) mentioned in para 19.1-2]. During 10 years preceding the previous year 2019-20, X is resident in India only for
the year 2018-19 and during 7 years preceding the previous year 2019-20, he is present in India for 433 days. Thus, he does
not satisfy the two additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment
year 2020-21.
19-E4 [P2.33]* X, a foreign citizen, comes to India for the first time on June 22, 2014. From June 22, 2014 to March 31, 2021, he
is present in India for 1795 days (2014-15 : 183 days ; 2015-16 : 366 days ; 2016-17 : 365 days; 2017-18 : 365 days ; 2018-19 : 365
days ; 2019-20 : 59 days and 2020-21 : 92 days). Determine the residential status of X for the assessment year 2020-21.
19-P5 X, a foreign citizen (not being a person of Indian origin), leaves India for the first time in the last 20 years on November 20, 2017.
During the calendar year 2018, he comes to India on September 1 for a period of 30 days. During the calendar year 2019, he does not
visit India at all but comes to India on January 16, 2020. Determine the residential status of X for the assessment year 2020-21.
Solution : During the previous year 2019-20, the assessee is present in India for 76 days [i.e., January 2020 : 16 days, February
2020 : 29 days and March 2020 : 31 days] and during four years preceding the previous year, he is present in India for 995
days (2018-19 : 30 days, 2017-18 : 234 days, 2016-17 : 365 days and 2015-16 : 366 days). Thus, he satisfies one of the basic
conditions laid down in section 6(1) for being treated as resident in India. In addition, the assessee also satisfies the two
additional conditions laid down in section 6(6) as he is resident in India in 2 years out of 10 years immediately preceding
the previous year 2019-20 (during the period 2009-2019, he is resident in India in all the years except 2018-19) and during
7 years preceding the previous year 2019-20, he is present in India for 2,090 days. He will, therefore, be treated as resident
and ordinarily resident in India for the assessment year 2020-21.
19-E5 [P2.34]* X, a foreign citizen (not being a person of Indian origin), leaves India for the first time in the last 12 years, on June
15, 2017. During the calendar year 2018, he comes to India on November 20 for a period of 46 days. During the calendar year 2019,
he does not come to India at all. He finally comes back on January 31, 2020 at 10.30 p.m. Determine his residential status for the
assessment year 2020-21.
19-P6 X is a foreign citizen (not being a person of Indian origin). During the financial year 2019-20, he came to India for 70 days.
Determine his residential status for the assessment year 2020-21 on the assumption that during financial years 2005-06 to 2018-19, he
was present in India as follows :
2018-19 100 days 2011-12 181 days
2017-18 80 days 2010-11 90 days
2016-17 60 days 2009-10 71 days
2015-16 126 days 2008-09 4 days
2014-15 80 days 2007-08 8 days
2013-14 70 days 2006-07 55 days
2012-13 23 days 2005-06 298 days
Solution : X is a foreign citizen (not being a person of Indian origin). He is not covered by Special Case 1 or Special Case 2.
During the previous year 2019-20, X is in India for a period of 70 days and during four years preceding the previous year
he is in India for 366 days. Thus, he satisfies basic condition (b) and, consequently, he becomes resident in India.
A resident individual may either be an ordinarily resident or not ordinarily resident. To determine whether X is ordinarily
resident or not ordinarily resident, one has to test two additional conditions. Information in the Table given below may be
used to test the additional conditions :
Year Presence in India Resident (R) or Which of the conditions (a)/(b)

(number of days) non-resident is satisfied to become resident
(NR) or non-resident
2018-19 100 NR None
2017-18 80 NR None
2016-17 60 NR None
2015-16 126 NR None
2014-15 80 NR None
2013-14 70 R (b)
2012-13 23 NR None
2011-12 181 NR None
2010-11 90 NR None
2009-10 71 R (b)
2008-09 4
2007-08 8
2006-07 55 Not necessary to determine
2005-06 298
Additional condition (i) - This condition requires that an individual should be resident in India for at least 2 out of 10 years
preceding the relevant previous year. X in the present case, is resident in India for 2 years out of 10 years. He satisfies this
condition.
Additional condition (ii) - This condition requires that an individual should be present in India for at least 730 days during
7 years preceding the relevant previous year. X was in India for 539 days during 2012-13 to 2018-19. He cannot satisfy this
condition.
X satisfies one of the basic conditions and one of the additional conditions. He is, therefore, resident but not ordinarily
resident in India for the assessment year 2020-21.
19-E6 [P2.35]* During the previous year 2019-20, X, a foreign national (not being a person of Indian origin), visits India for 64
days. Determine his residential status for the assessment year 2020-21 on the basis of the following information :
a. During 2015-16, X is present in India for 365 days.
b. During 2013-14 and 2012-13, X is in India for 40 and 365 days respectively.
c. Mrs. X is non-resident in India for the assessment year 2020-21.
19-P7 X, an Indian citizen, who is appointed as senior taxation officer by the Government of Nigeria, leaves India, for the first time,
on September 26, 2019 for joining his duties in Nigeria. During the previous year 2020-21, he comes to India for 176 days. Determine
the residential status of X for the assessment years 2020-21 and 2021-22.
Solution : During the previous year 2019-20, X is in India for 179 days and during four years preceding the previous year
2019-20, he was in India for more than 365 days. He will be non-resident for the assessment year 2020-21 (since an Indian
citizen, leaving India for the purpose of employment, will be treated as resident in India only if he has been in India in that
year for at least 182 days).
During the previous year 2020-21 (for the assessment year 2021-22), X comes to India for 176 days. He will be treated as non-
resident in India for the assessment year 2021-22 (since an Indian citizen who comes on a visit to India during the previous
year, will be treated as resident in India only if he has been in India in that year for at least 182 days).
19-E7 [P2.36]* X, an Indian citizen, is appointed as senior taxation officer by the Government of Libya. He leaves India, for the first
time, on November 3, 2019 for joining his duties in Libya. During the previous year 2020-21, he comes to India on December 3, 2020
for 190 days. Determine the residential status of X for the assessment years 2020-21 and 2021-22.
19-P8 X, an Indian citizen, leaves India for the first time on September 20, 2017 for the purpose of employment. He comes to India for
a visit of 146 days on April 10, 2018. He finally comes back on May 16, 2019. Find out the residential status of X for the assessment
year 2020-21.
Solution : During the previous year 2019-20 (and the ten preceding years) X is in India as follows —
Previous year Presence in India Resident (R) or Presence for minimum days
(number of days) non-resident (NR) to become resident
2019-20 320 R —
2018-19 146 NR 182
2017-18 173 NR 182
2016-17 365 R —
Previous year Presence in India Resident (R) or Presence for minimum days
(number of days) non-resident (NR) to become resident
2015-16 366 R —
2014-15 365 R —
2013-14 365 R —
2012-13 365 R —
2011-12 366 R —
2010-11 365 R —
2009-10 365 R —
Since X is in India for a period of 320 days during the previous year 2019-20, he is resident in India.
Besides, he is in India for 2,146 days during 7 years prior to 2019-20 (i.e., during April 1, 2012 and March 31, 2019). Moreover,
he is resident in India for 8 years out of 10 years. He is, therefore, resident and ordinarily resident in India for the assessment
year 2020-21 (X satisfies two additional conditions).
19-E8 In problem 19-P8, assume that X finally comes back on December 16, 2019 (and not on May 16, 2019), find out the residential
status for the assessment year 2020-21.
19-P9 X is a foreign citizen (not being a person of Indian origin). Since 1981, he visits India every year in the month of April for 100
days. Find out the residential status of X for the assessment year 2020-21.
Solution : During the previous year 2019-20, X is in India for 100 days and during 4 years immediately preceding the year
2019-20 (i.e., 2015-16 to 2018-19), he is in India for 400 days. Thus, he satisfies basic condition (b) to become resident in India.
To determine, whether a resident individual is ordinarily resident or not ordinarily resident, one has to test the two
additional conditions as laid down by section 6(6)(a).
Condition (i) of para 19.1-2 - This condition requires that an individual should be resident in India for at least 2 out of 10 years
preceding the relevant previous year. Every year X satisfies basic condition (b), as he is in India for 100 days during the
relevant previous year and 400 days during 4 years immediately preceding the previous year. Therefore, he satisfies this
condition.
Condition (ii) of para 19.1-2 - This condition requires that X should be in India for 730 days during 7 years immediately prior
to the relevant previous year. X is in India for 700 days during 7 years prior to the previous year 2019-20. He does not satisfy
this condition.
X satisfies one of the basic conditions and one of the two additional conditions. He is, therefore, resident but not ordinarily
resident in India for the assessment year 2020-21.
19-E9 [P2.37]* X is a foreign citizen. Since 1981, he comes to India every year in the month of April for 105 days. Find out the
residential status of X for the assessment year 2020-21 if (a) X is not a person of Indian origin, (b) X was born in Lahore on March
8, 1945, (c) grandmother of X was born in Dhaka in 1870, or (d) X was born in Pune in 1945.
➠ 19-P10 X comes to India for the first time on September 1, 2019. On September 15, 2019, he joins a company on monthly salary of
Rs. 56,000, as a part-time production consultant (duty hours : 6.30 p.m. to 9.30 p.m.). He does not have any source of income up to
September 14, 2019. On October 9, 2019, he starts a trading business in computer hardware after obtaining the approval of his employer.
For the previous year ending March 31, 2020, he has the following income —
Salary from the part-time employment : Rs. 3,64,000 ; income earned in India from the business of trading in computer hardware : Rs.
1,86,000 ; and foreign income from the same business : $ 40,000. Find out the residential status of X for the assessment year 2020-21.
Solution : For the assessment year 2020-21, X has the following sources of income in India :
Sources of income Previous year Number of days when X was in India
Salary income September 15, 2019 to March 31, 2020 198 days
Business income October 9, 2019 to March 31, 2020 174 days
For the first source of income, X becomes resident in India by satisfying one of the basic conditions. As he comes to India
for the first time in 2019, he is unable to satisfy any of the additional conditions. Thus, he is a resident but not ordinarily
resident in India for the first previous year.
For the second previous year, X is a non-resident, as he satisfies none of the basic conditions. It may be noted that he is non-
resident in India for the business income and resident but not ordinarily resident for the salary income. In view of section
6(5), if a person is resident in India for one of the sources of income, he will be deemed to be resident in India for all other
sources of income in the same assessment year. In respect of the assessment year 2020-21, X will, therefore, be regarded as
resident but not ordinarily resident for all sources of income.
19-E10 X comes to India for the first time on October 10, 2019. On October 15, 2019, he starts a publishing business (income of
the previous year ending March 31, 2020 : Rs. 44,06,000). On November 1, 2019, he joins an Indian company as a part-time
accountant on monthly salary of Rs. 92,000. He does want to leave India before December 31, 2020. Find out the residential status
of X for the assessment year 2020-21 (assume that X does have any source of income before October 15, 2019).
 HOW TO FIND OUT RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILY [SEC. 6(2)]
20. A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident
Hindu undivided family is either ordinarily resident or not ordinarily resident.
20.1 When a Hindu undivided family is resident or non-resident - A Hindu undivided family is said to be
resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided
family is non-resident in India if control and management of its affairs is wholly situated outside India.
The table given below highlights the same proposition —
Place of control Residential status of family Ordinarily resident or not
Control and management of the affairs of a Hindu
undivided family is—
 Wholly in India Resident See para 20.2
 Wholly out of India Non-resident —
 Partly in India and partly outside India Resident See para 20.2
Note - In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta
of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered
for determining whether a resident family is “ordinarily resident” —see para 20.2.
 What is “control and management” - Control and management is situated at a place where the head, the seat and
the directing power are situated. The mere fact that the family has a house in India, where some of its members
reside or the karta is in India in the previous year, does not constitute that place as the seat of control and
management of the affairs of the family unless the decisions concerning the affairs of the family are taken at that
place.
20.2 When a resident Hindu undivided family is ordinarily resident in India - A resident Hindu undivided
family is an ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies
the following two additional conditions as laid down by section 6(6)(b) :
Additional Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition
condition (i) mentioned in para 19.1-1] immediately preceding the relevant previous year
Additional Karta has been present in India for a period of 730 days or more during 7 years immediately preceding
condition (ii) the previous year
If karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the
family is treated as resident but not ordinarily resident in India.
Problems
20-P1 X, an individual, is resident but not ordinarily resident in India for the assessment year 2020-21 (previous year 2019-20). During
the previous year 2019-20, the affairs of X (HUF), a Hindu undivided family, whose karta is X since 1960, are partly managed from Delhi
and partly from Nepal. Determine the residential status of X (HUF) for the assessment year 2020-21.
Solution : As during the previous year 2019-20, the affairs of X (HUF) are partly managed from India, the family will be
treated as resident in India. A resident family may be ordinarily resident if karta of the family satisfies the following two
additional conditions laid down in section 6(6)(b)—
a. he has been resident in India in at least 2 out of 10 years immediately preceding the relevant previous year ; and
b. he is in India for at least 730 days during 7 years immediately preceding the relevant previous year.
If karta does not satisfy these additional conditions, a resident Hindu undivided family is treated as resident but not
ordinarily resident in India. Similarly, if a resident individual does not satisfy the aforesaid additional conditions, the
individual is treated as a resident but not ordinarily resident in India. As X is resident but not ordinarily resident in India
for the assessment year 2020-21 in his individual capacity, he is unable to satisfy the aforesaid additional conditions as karta
of X (HUF). X (HUF) is, therefore, resident but not ordinarily resident in India for the assessment year 2020-21.
20-E1 The Head Office of XY, a Hindu undivided family, is situated in Hong Kong. The family is managed by Y (since 1980) who
is resident in India in 3 out of 10 years immediately preceding the previous year 2019-20 and who is present in India for more than
729 days during last 7 years. Determine the residential status of the family for the assessment year 2020-21 if affairs of the family
business are (a) wholly controlled from Hong Kong, (b) partly controlled from India.
31 Residential status of a company Para 22
 HOW TO DETERMINE RESIDENTIAL STATUS OF FIRM AND ASSOCIATION OF PERSONS

[SEC. 6(2)]
21. A partnership firm and an association of persons are said to be resident in India if control and management
of their affairs are wholly or partly situated within India during the relevant previous year. They are, however,
treated as non-resident in India if control and management of their affairs are situated wholly outside India.
The above rule may be summarised as follows—
Place of control Residential status
Control and management of the affairs of a firm/association of persons is—
 Wholly in India Resident
 Wholly outside India Non-resident
 Partly in India and partly outside India Resident
Note - A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential status of the
partners/members of the firm/association is not relevant in determining the status of the firm/association.
 What is “control and management” - While in the case of a firm, control and management is vested in partners,
in case of an association of persons it is vested in principal officer. Control and management means de facto
control and management and not merely the right to control or management. Control and management is usually
situated at a place where the head, the seat and the directing power are situated.
 HOW TO FIND OUT RESIDENTIAL STATUS OF A COMPANY [SEC. 6(3)]
22. Residential status of a company is determined as follows –
Section Company Residential status
6(3)(i) Indian company Always resident in India [Note 1]
6(3)(ii) A foreign company (whose turnover/gross It will be resident in India if its place of effective mana-
receipt in the previous year is more than Rs. 50 gement (POEM), during the relevant previous year, is in
crore) India [Note 2]
6(3)(ii) A foreign company (whose turnover/gross re- Always non-resident in India [Note 3]
ceipt in the previous year is Rs. 50 crore or less)
Notes –
1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India
(or even if shareholders of an Indian company controlling more than 51 per cent voting power are non-resident and/or
located outside India), the Indian company is resident in India. An Indian company can never be non-resident.
2. A foreign company is resident in India if its place of effective management (POEM), during the relevant previous year,
is in India. For this purpose, the place of effective management means a place where key management and commercial
decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose,
a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in Circular No. 6/2017,
dated January 24, 2017.
3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less
in a financial year – Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual
turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India.
Problems
22-P1 X Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident in India. The business of the
company is fully controlled from outside India. Find out the residential status of X Ltd. for the assessment year 2020-21.
Solution : X Ltd. is an Indian company. An Indian company is always resident in India. This rule is equally applicable
even if shareholders are foreign citizens as well as non-resident or even if business is controlled from outside India.
22-E1 Suppose in problem 22-P1, one of the shareholder in X Ltd. is the Government of Japan which holds 70 per cent equity share
capital.
22-P2 Y Ltd. is a company incorporated in Mauritius (turnover more than Rs. 50 crore). It has 10 shareholders who are Indian
citizens and resident in India. The company has active business outside India and is controlled wholly from outside India by a team of
professionals. What is the residential status of Y Ltd. for the assessment year 2020-21.
Solution : Y Ltd. is a foreign company. It is controlled wholly from outside India (POEM is outside India). It is, therefore,
non-resident in India for the assessment year 2020-21. Residential status of shareholders is irrelevant. Likewise, the
nationality of shareholders is not taken into consideration.
22-E2 Suppose in problem 22-P2, turnover of Y Ltd. is Rs. 35 crore.
22-P3 Z Ltd. is incorporated in Japan. It has 15 shareholders (10 are Indian citizens and resident in India). The company has no active
business in Japan. Gross annual turnover of the company for the previous year 2019-20 is Rs. 48 crore mainly from operations conducted
from Korea, Sri Lanka and India. The company is managed by a team of professionals from India. Find out the residential status of Z Ltd.
for the assessment year 2020-21.
Solution : Z Ltd. is a foreign company. Gross turnover of the company for the relevant previous year is Rs. 48 crore. A
foreign company (whose turnover/gross receipts is not more than Rs. 50 crore) is treated as non-resident in India.
22-E3 Suppose in problem 22-P3, one of the shareholder in Z Ltd. is the Government of State of Kerala which holds 51 per cent equity
share capital.
 HOW TO DETERMINE RESIDENTIAL STATUS OF EVERY OTHER PERSON [SEC. 6(4)]

23. Every other person is resident in India if control and management of its affairs is, wholly or partly, situated
within India during the relevant previous year. On the other hand, every other person is non-resident in India
if control and management of its affairs is wholly situated outside India.
 WHAT IS THE RELATIONSHIP BETWEEN RESIDENTIAL STATUS AND INCIDENCE OF TAX
[SEC. 5]
24. Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the place and time
of accrual or receipt of income.
24.1 Indian income and foreign income - In order to understand the relationship between residential status and
tax liability, one must understand the meaning of “Indian income” and “foreign income”.
24.1-1 “INDIAN INCOME” - Any of the following three is an Indian income—
1. If income is received (or deemed to be received) in India during the previous year and at the same time it
accrues (or arises or is deemed to accrue or arise) in India during the previous year.
2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises)
outside India during the previous year.
3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or
arise) in India during the previous year.
24.1-2 FOREIGN INCOME - If the following two conditions are satisfied, then such income is “foreign income”—
a. income is not received (or not deemed to be received) in India; and
b. income does not accrue or arise (or does not deemed to accrue or arise) in India†.
24.1-3 PROVISIONS IN BRIEF - The above provisions may be explained in brief as follows :
Whether income is received (or deemed to be Whether income accrues (or arises or is deemed to accrue Status of the income
received) in India during the relevant year or arise) in India during the relevant year
Yes Yes Indian income
Yes No Indian income
No Yes Indian income
No No Foreign income
24.2 Incidence of tax for different taxpayers - Tax incidence of different taxpayers is as follows—
Individual and Hindu undivided family
Resident and ordinarily Resident but not ordinarily resident in India Non-resident in India
resident in India
 Indian income Taxable in India Taxable in India Taxable in India
 Foreign income Taxable in India Only two types of foreign incomes (i.e., Case 1 Not taxable in India
and Case 2 given below) are taxable in India
Any other foreign income is not taxable in India
The following foreign incomes are taxable in the hands of a resident but not ordinarily resident in India—
Case 1 - If it is business income and business is controlled wholly or partly from India.
† Salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not
be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer
– Circular No. 13/2017, dated April 11, 2017.
33 Provisions illustrated Para 24.4
Case 2 - If it is income from profession which is set up in India.

No other foreign income (like salary, rent, interest, etc.) is taxable in India in the hands of a resident but not
ordinarily resident taxpayer.
Any other taxpayer (like company, firm, co-operative society, association of
persons, body of individual, etc.)
Resident in India Non-resident in India
Indian income Taxable in India Taxable in India
Foreign income Taxable in India Not taxable in India
24.3 Conclusions - The following broad conclusions can be drawn—

1. Indian income - Indian income is always taxable in India irrespective of the residential status of the taxpayer.
2. Foreign income - Foreign income is taxable in the hands of resident (in case of a firm, an association of persons,
a joint stock company and every other person) or resident and ordinarily resident (in case of an individual and
a Hindu undivided family) in India. Foreign income is not taxable in the hands of non-resident in India.
In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable only if it is (a) business
income and business is controlled wholly or partly from India, or (b) professional income from a profession which
is set up in India. In any other case, foreign income is not taxable in the hands of resident but not ordinarily
resident taxpayers.
24.4 Provisions illustrated - Different situations are covered in the table given below —
Nature of income Reasons Conclusions - Is it taxable in
India for the assessment
year 2020-21
Resident* or Resident Non-
resident and but not resident
ordinarily ordinarily
resident** resident**
1. Rental income of Rs. 36,000 is It is Indian income. Indian income is always Yes Yes Yes
received in India on May 10, 2019 taxable
(it may accrue outside India or in
India)
2. Interest income of Rs. 46,000 It is Indian income. Indian income is always Yes Yes Yes
accrues in India on March 31, 2020 taxable
(it may be received in India or out-
side India)
3. Income of Rs. 56,000 is deemed to It is Indian income. Indian income is always Yes Yes Yes
be received in India on April 20, taxable
2019 (it may accrue outside India or
in India)
4. Income of Rs. 66,000 is deemed to It is Indian income. It is always taxable Yes Yes Yes
accrue or arise in India during the
previous year 2019-20 (it may be
received in India or outside India)
5. Business income/professional in- It is foreign income. It is taxable in the case Yes No No
come of Rs. 76,000 is received and of resident and ordinarily resident taxpayer.
accrued outside India during the It is not taxable in the case of a non-resident.
previous year 2019-20 (business is Since it is business/profession income and
controlled from outside India or business is controlled from outside India or
profession is set up outside India) profession is set up outside India, it is not
taxable in the case of resident but not ordi-
narily resident taxpayer
6. In situation 5, suppose business is It is foreign income. Since it is business/ Yes Yes No
controlled from India or profession professional income and the business is con-
is set up in India trolled from India or profession is set up in
India, it is taxable in all cases except non-
resident
*In case of a firm, an association of persons, a joint stock company and every other person.
**In case of an individual and a Hindu undivided family.
Nature of income Reasons Conclusions - Is it taxable in

India for the assessment
year 2020-21
Resident* or Resident Non-
resident and but not resident
ordinarily ordinarily
resident** resident**
7. Rental income or salary income It is foreign income. It is taxable in the case Yes No No
or interest income of Rs. 86,000 is of resident and ordinarily resident taxpayer.
received outside India in the pre- It is not taxable in the case of non-resident.
vious year 2019-20 and at the same Since it is foreign income which is neither
time it accrues or arises outside business income nor professional income, it
India is not taxable in the case of resident but not
ordinarily resident
8. Gift† of Rs. 2 lakh received out- It is foreign income. It is taxable in the case Yes No No
side India by an individual on of resident and ordinarily resident taxpayer.
November 6, 2019 from a friend It is not taxable in the case of non-resident.
Since it is foreign income which is neither
business income nor professional income, is
not taxable in the case of resident but not
ordinarily resident
9. Gift† of Rs. 1 lakh received in It is Indian income. It is taxable Yes Yes Yes
Delhi by an individual on November
30, 2019 from a friend
10. Income of Rs. 96,000 earned and This income pertains to the previous year No No No
received outside India in 2015-16 2015-16. It cannot be taxed at the time of
but later on remitted to India in remittance in 2019-20
2019-20
 CONNOTATION OF RECEIPT OF INCOME - HOW IS IT UNDERSTOOD

25. Income received in India is taxable in all cases irrespective of residential status of an assessee. The following
points are worth mentioning in this respect :
25.1 Receipts vs. Remittance - The “receipt” of income refers to the first occasion when the recipient gets the
money under his control. Once an amount is received as income, any remittance or transmission of the amount
to another place does not result in “receipt” at the other place.
An assessee receives $10,000 in USA on May 16, 2019. Out of $10,000, he remits Rs. 50,000 to India on May 18, 2019. In this
case, income is “received” outside India on May 16, 2019.
 Conclusions - An assessee after receiving an income outside India cannot be said to have received the same again
when he brings or remits the same to India. The position remains the same if income is received outside India
by an agent of the assessee (maybe a bank or some other person) who later on remits the same to India. Income
after the first receipt merely moves as a remittance of money. The same income cannot be received by the same
person twice, once outside India and again within India.
25.2 Cash vs. Kind - It is not necessary that income should be received in cash. Income may be received in cash
or in kind. For instance, value of a free residential house provided to an employee is taxable as salary in the hands
of the employee though the income is not received in cash.
25.3 Receipt vs. Accrual - Receipt is not the sole test of chargeability to tax. If an income is not taxable on receipt
basis, it may be taxable on accrual basis.
25.4 Actual receipt vs. Deemed receipt - It is not necessary that an income should be actually received in India
in order to attract tax liability. An income deemed to be received in India in the previous year is also included
*In case of a firm, an association of persons, a joint stock company and every other person.
**In case of an individual and a Hindu undivided family.
†If aggregate amount of gift (a sum of money or property) received by an individual/HUF during a financial year exceeds Rs. 50,000, it is taxable
as “income”. This rule is, however, not applicable if gift is received by an individual from a relative or at the time of marriage or by will—see para
114 for detailed discussion.
35 Income from business connection Para 27.1
in the taxable income of the assessee. The Act enumerates the following as income deemed to be received in
India :
 Interest credited to recognised provident fund account of an employee in excess of 9.5 per cent.
 Excess contribution of employer in the case of recognised provident fund (i.e., the amount contributed in excess
of 12 per cent of salary).

 Transfer balance [see problem 54-P4].
 Contribution by the Central Government or any other employer to the account of an employee under a notified pension
scheme referred to in section 80CCD.
 Tax deducted at source.
 WHAT IS ACCRUAL OF INCOME

26. Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The
words “accrue” and “arise” are used in contradistinction to the word “receive”. Income is said to be received
when it reaches the assessee ; when the right to receive the income becomes vested in the assessee, it is said to
accrue or arise.
 WHAT IS INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

27. In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue
or arise outside India. Section 9 applies to all assessees irrespective of their residential status and place of
business. The categories of income which are deemed to accrue or arise in India are as under :
27.1 Income from business connection [Sec. 9(1)(i)] - The following conditions should be satisfied —
 Condition one - The taxpayer has a “business connection” in India.
 Condition two - By virtue of “business connection”† in India, income actually arises outside India.
If the above conditions are satisfied, income which arises outside India because of “business connection” in India,
is deemed to accrue or arise in India.
27.1-1 A FEW INSTANCES OF BUSINESS CONNECTION - Some illustrative instances of a non-resident having business
connection in India are —
a. maintaining a branch office in India for the purchase or sale of goods or transacting other business;
b. appointing an agent in India for the systematic and regular purchase of raw material or other commodities
or for the sale of the non-resident’s goods or for other business purposes;
c. erecting a factory in India where the raw produce purchased locally is worked into a form suitable for export
abroad;
d. forming a local subsidiary company to sell the products of the non-resident parent company;
e. having financial association between a resident and a non-resident company, etc.
27.1-2 OPERATIONS NOT TAKEN AS BUSINESS CONNECTIONS - The following operations do not amount to “business
connection” –
 Where all operations are not carried out in India - If all business operations are not carried out in India, the income
of the business deemed to accrue or arise in India shall be only such part of income as is reasonably attributable
to the operations carried out in India.
 Purchase of goods for export - In the case of non-resident, no income shall be deemed to accrue or arise in India
to him through or from operations which are confined to the purchase of goods in India for the purpose of export.
 Collection of news and views - No income arises to a non-resident from the activity of collection of news and views
in India for transmission out of India.
 Shooting of cinematograph films in India - No income arises to a non-resident from the activity of shooting of any
cinematograph film in India, if a few conditions are satisfied.
 Fund management activity - In the case of an “eligible investment fund”, the fund management activity carried
out through an “eligible fund manager” acting on behalf of such fund shall not constitute business connection
in India of the said fund [sec. 9A].
 Display of uncut and unassorted diamond in a notified special zone - In the case of a foreign company engaged in the
business of mining of diamonds, no income shall be deemed to accrue or arise in India through or from the
activities which are confined to the display of uncut and unassorted diamond (without any sorting or sale) in any
special zone notified by the Central Government.
†It includes even profession connection.
27.2 Income through or from any property, asset or source of income in India [Sec. 9(1)(i)] - Income from
any property, asset or source of income in India is deemed to accrue or arise in India.
X Ltd., a foreign company, owns a property in Mumbai. It is given on rent (rent being 2,000 US dollar per month) to B Ltd.,
another foreign company. The two companies are non-resident in India. The agreement is made outside India. Rent is
payable in foreign currency outside India. As per the agreement, rent is accrued outside India.
As the property is situated in India, rent of the property will be deemed to be earned in India.
27.3 Income through the transfer of capital asset situated in India [Sec. 9(1)(i)] - Any capital gain, within
the meaning of section 45, earned by a person by transfer of any capital asset situated in India, is deemed to accrue
or arise in India.
 An asset or a capital asset (being any share or interest in a company or entity registered or incorporated outside
India) shall be deemed to be and shall always be deemed to have been situated in India if the share or interest
derives, directly or indirectly, its value substantially from the assets located in India*.
Provision illustrated
A house property is situated in Chennai. It is transferred on April 10, 2019. Capital gain (computed under section 45) in the
hands of the transferor is Rs. 20 lakh. It is deemed to accrue or arise in India. Consequently, it is Indian income and taxable
in the hands of the transferor. This rule is applicable even if transferor or transferee is non-resident or even if agreement is
made outside India or even if sale consideration is payable outside India in foreign currency.
27.4 Income under the head “Salaries” [Sec. 9(1)(ii)] - Income of an individual which falls under the head
“Salaries” is deemed to accrue or arise in India if service is rendered in India.†
27.5 Salary payable abroad by the Government to a citizen of India [Sec. 9(1)(iii)] - Salary received by Indian
nationals from the Indian Government, out of India, is deemed to accrue or arise in India. By virtue of section
10(7), any allowance or perquisite paid abroad is, however, fully exempt from tax [for detailed discussion, refer
to para 40.1]
27.6 Dividend paid by an Indian company [Sec. 9(1)(iv)] - Dividend received by a shareholder from an Indian
company is always deemed to accrue or arise in India**.
27.7 Income by way of interest, royalty and technical fees [Sec. 9(1)(v)/(vi)/(vii)] - These are deemed to
accrue or arise in India in the following cases –
 Rule 1 - When received from Government - Interest, royalty or technical fees received from the Central
Government/any State Government, is deemed to accrue or arise in India.
 Rule 2 - When received from a person resident in India - Interest, royalty or technical fees received from a resident
person, is deemed to accrue or arise in India in the hands of recipient. However, this rule is not applicable in the
following cases –
a. if borrowed money is utilised by the payer for carrying on a business/profession outside India or for earning
any income outside India; or
b. payment of royalty/technical fees pertains to a business/profession carried on by the payer outside India or
earning any income outside India.
* “Substantially” means not less than 50 per cent – DIT v. Copal Research Ltd. [2014] 49 taxmann.com 125 (Delhi). The Finance Act, 2015 has
amended the law with effect from assessment year 2016-17. Under the amended version, the share‡ or interest of a foreign company or entity shall
be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of
Indian assets,–
a. exceeds the amount of Rs. 10 crore; and
b. represents at least 50 per cent of the value of all the assets owned by the company or entity.
If a foreign company declares dividend outside India, it cannot be deemed to accrue or arise in India even if the foreign company declaring
dividend have substantial assets (held by it directly or indirectly) located in India. This rule is applicable even if the foreign company satisfies
the conditions given above – Circular No. 4/2015, dated March 26, 2015.
†Conversely, if service is rendered outside India, salary income cannot be deemed to be earned in India. However, this rule has an exception which
is mentioned in para 27.5.
‡However, this provision is not applicable in the case of any asset or capital asset being investment held by a non-resident, directly or indirectly,
in Category-I or Category-II Foreign Portfolio Investor under the SEBI (Foreign Portfolio Investors) Regulations, 2014.
** Dividend income from a domestic company is generally exempt in the hands of recipient shareholders. However, the exemption is not available
if aggregate dividend received by a resident shareholder during the previous year from all domestic companies exceeds Rs. 10 lakh. In such a case,
the aggregate dividend [not being deemed dividend under section 2(22)(e)] (in excess of Rs. 10 lakh) is taxable (on gross basis, no deduction is
allowed) under section 115BBDA at the rate of 10 per cent [+ SC + HEC]. But nothing is taxable under section 115BBDA (or the entire dividend
income from domestic companies is exempt) –
- if the shareholder is a domestic company or a fund/institution [referred to in section 10(23C)(iv)/(v)/(vi)/(via)], or a trust/institution registered
under section 12A/12AA, or
- if dividend is deemed dividend under section 2(22)(e).
37 Deemed accrual of gift of money to a non-resident Para 27.9
 Rule 3 - When received from a non-resident - Interest, royalty or technical fees received from a non-resident, is
deemed to accrue or arise in India in the hands of recipient, in the following cases –
a. borrowed money is utilised by the payer for carrying on a business/profession in India; or
b. payment of royalty/technical fees pertains to a business/profession carried on by the payer in India or
earning any income in India.
Interest received outside India by a foreign bank from its branch in India - In the hands of recipient, income shall be
deemed to accrue or arise in India.
X is a non-resident in India. Only Indian income is taxable in the hands of X in India. During the previous year 2019-20, he
receives interest on different dates as given below. In all these cases, interest is received outside India. If in these cases,
interest accrues or arises in India, then it will be Indian income and taxable in India. Conversely, if in these cases, interest
does not deem to accrue or arise in India, it will become foreign income which will not be taxable in the hands of X, who
is non-resident—
Date Nature of interest received by X Whether Whether
deemed to taxable in
accrue or India in the
arise in India hands of X
April 10, 2019 Rs. 10,50,000 is received from the Government of India Yes Yes
May 1, 2019 Rs. 9,00,000 is received from A Ltd. (resident in India) and A Ltd. has No No
utilized the capital borrowed from X for carrying on business or profession
outside India or earning any income outside India
May 10, 2019 Rs. 2,00,000 is received from B Ltd. (resident in India) and B Ltd. has Yes Yes
utilized the capital borrowed from X for carrying on business or profession
in India or earning any income in India
June 1, 2019 Rs. 7,00,000 is received from C Ltd. (non-resident in India) and C Ltd. Yes Yes
has utilized the capital borrowed from X for carrying on business or
profession in India
June 10, 2019 Rs. 3,00,000 is received from D Ltd. (non-resident in India) and D Ltd. No No
has utilized the capital borrowed from X for carrying on business or
profession outside India or earning any income outside India or earning
income (not being business or professional income) in India
27.8 Meaning of royalty - Broadly the term “royalty” means consideration received or receivable for transfer
of all or any right in respect of certain rights, property or information. It also includes consideration for transfer
of all (or any) right for use (or right to use) a computer software (including granting of a licence) irrespective of
the medium through which such right is transferred. Further, it includes consideration in respect of any right,
property or information, whether or not—
a. the possession or control of such right, property or information is with the payer;
b. such right, property or information is used directly by the payer;
c. the location of such right, property or information is in India.
Moreover, it includes consideration for use of any patent, invention, model, secret formula or process. The
expression “process” includes transmission by satellite (including up-linking, amplification, conversion for
down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process
is secret.
27.9 Deemed accrual of gift of money to a non-resident/foreign company [Sec. 9(1)(viii)] - A gift of money
is chargeable to tax in the hands of recipient, except for certain exceptions provided in section 56(2)(x) [see para
114.1]. In a few cases, gift received by a non-resident/foreign company from a resident person, is not taxable in
India [even if it is not covered by exceptions specified in section 56(2)(x)].
Clause (viii) has been inserted in section 9(1) by the Finance (No. 2) Act, 2019, with effect from the assessment
year 2020-21. This clause is applicable if the following conditions are satisfied –
1. Payer is resident in India (or money is received from a person resident in India).
2. Recipient is non-resident/foreign company. A sum of money is received by non-resident/foreign company
on or after July 5, 2019.
If these conditions are satisfied, money received by a non-resident/foreign company, shall be deemed to accrue
or arise in India (even if it is received outside India).
27.10 Other points - Income accruing or arising outside India will not be deemed to be received in India, merely
because it has been included in a balance sheet in India. Once income is included in the total income on the accrual
basis, it cannot be included again on the receipt basis in the same or subsequent years.
 Problems on incidence of tax
28-P1 For the assessment year 2019-20 (previous year 2018-19), X is employed in India and gets Rs. 6,00,000 (after standard deduction)
as salary. His income from other sources includes :
Dividend received in London on June 3, 2019 : Rs. 1,00,000 from a foreign company ; share of profit received in London on December
15, 2019 from a business situated in Sri Lanka but controlled from India : Rs. 2,00,000 ; remittance from London on January 15, 2020
out of past untaxed profit of 2018-19 earned and received there : Rs. 3,00,000 and interest earned and received in India on May 11, 2020
: Rs. 1,92,000. Find out his gross total income, if he is (a) resident and ordinarily resident, (b) resident but not ordinarily resident, and
(c) non-resident for the assessment year 2020-21.
Solution : If X is resident and ordinarily resident, his gross total income will be Rs. 9,00,000 (i.e., Rs. 6,00,000 + Rs. 1,00,000
+ Rs. 2,00,000). If X is resident but not ordinarily resident, his gross total income will work out to be Rs. 8,00,000 (i.e.,
Rs. 6,00,000 + Rs. 2,00,000). If X is non-resident, his gross total income will come to Rs. 6,00,000.
Notes :
1. Remittance from London of Rs. 3,00,000 is not taxable for the previous year 2019-20 because it is income of the previous
year 2018-19.
2. Although interest of Rs. 1,92,000 earned and received in India is taxable, it is not included in the total income of the
assessment year 2020-21, as it is not earned or received in the previous year 2019-20. It will, therefore, be included in the
total income of X for the assessment year 2021-22.
28-E1 [P2.38]* For the assessment year 2020-21, X (whose previous year is 2019-20) receives the following income :
Royalty earned in India but received on May 3, 2019 in Nepal : Rs. 1,46,000 ; dividend from a foreign company received in Nepal
on July 16, 2019 : Rs. 2,56,000 ; share of profit of a business situated in Nepal, received in Burma on June 14, 2019 but controlled
from India : Rs. 1,42,000 ; rent of 2019-20 of a house property situated in Nepal and received there on December 31, 2019 :
Rs. 4,65,000† ; and speculation profit earned and received outside India on April 15, 2020 : Rs. 5,60,000. Determine the gross total
income of X for the assessment year 2020-21 if he is (a) non-resident, (b) resident but not ordinarily resident, and (c) resident and
ordinarily resident.
28-P2 X is resident and ordinarily resident in India for the assessment year 2020-21. He gives the following information in respect of
his income for the previous year 2019-20 :
Rs.
1. Capital gain on sale of a house situated in Pune (sale consideration is received in Nepal) 10,00,000
2. Salary received in Sri Lanka for rendering service in Tamilnadu (salary after standard deduction being
Rs. 1,60,000) 1,60,000
3. Interest received from Government of India (it is paid to him in Sri Lanka, the money is utilized by the Government
outside India) 2,56,000
4. Royalty received from A Ltd. (a foreign company which is non-resident in India) outside india (royalty is paid for a
manufacturing business situated outside India) 92,00,000
Find out the taxable income of X for the assessment year 2020-21.
Solution :
1. As the house is situated in India, capital gain on its transfer is deemed to accrue or arise in India. It is
Indian income. It is taxable in all cases 10,00,000
2. As service is rendered in India, income is deemed to be accrued in India. It is Indian income. It is taxable
in all cases 1,60,000
3. As interest is received from the Government of India, it is deemed to be accrued in India. It is Indian
income. It is taxable in all cases 2,56,000
4. It is received outside India. It is accrued outside India. It is foreign income. It is taxable in the case of
resident and ordinarily resident 92,00,000
Total 1,06,16,000
28-E2 Find out the taxable income in problem 28-P2 if X is (a) resident but not ordinarily resident in India, or (b) non-resident in
India.
28-P3 For the assessment year 2020-21, X is non-resident in India. From the information given below, find out his income chargeable
to tax for the assessment year 2020-21 :
†Computed under sections 23 and 24.

39 Problems on incidence of tax Problem 28-P4
Rs.
1. Royalty received by him outside India from the Government of India 8,17,000
2. Technical fees received from A Ltd. (an Indian company) in Germany for advise given by him in respect of a project
situated in Iran 1,17,000
3. Income from a business situated in Sri Lanka (goods are sold in Sri Lanka, sale consideration is received in Sri Lanka
but business is controlled partly in Sri Lanka and partly in India) 2,17,000
4. Income from a business connection in India (it is received outside India) 3,17,000
Solution : 1. As royalty is received from the Government of India, it is deemed to accrue or arise in India. It is
Indian income. It is always taxable 8,17,000
2. Technical fees is received in Germany. The project in respect of which it is paid is situated in Iran. It is
foreign income. It is not taxable in the case of a non-resident –
3. Income is received in Sri Lanka. As goods are sold in Sri Lanka, it arises in Sri Lanka. It is foreign income.
It is not taxable in the case of a non-resident –
4. As the business connection is situated in India, it is deemed accrue or arise in India. It is Indian income. It is
taxable 3,17,000
Total 11,34,000
28-E3 In problem 28-P3 assume that X is (a) resident but not ordinarily resident in India, or (b) resident and ordinarily resident
in India, find out the taxable income for the assessment year 2020-21.
28-P4 X furnishes the following particulars of his income earned during the previous year relevant to the assessment year 2020-21 :
Rs.
Interest on German Development Bonds (two-fifths is received in India) 60,000
Income from agriculture in Bangladesh, received there but later on Rs. 50,000 is remitted to India (agricultural activity is
controlled from Bangladesh) 1,81,000
Income from property in Canada received outside India [Rs. 76,000 is used in Canada for meeting educational expenses
of X’s daughter in USA and Rs. 10,000 is later on remitted to India] 86,000
Income earned from business in Kampala (Uganda) which is controlled from Delhi (Rs. 15,000 is received in India) 65,000
Dividend paid by a foreign company but received in India on April 10, 2019 46,500
Past untaxed profit of 2015-16 brought to India in 2019-20 10,43,000
Profits from a business in Madras and managed from outside India 27,000
Profits on sale of a building in India but received in Sri Lanka 14,80,000
Pension from a former employer in India, received in Rangoon 36,000
Gift in foreign currency from a friend received in India on January 20, 2020 80,000
Find out the gross total income of X, if he is (i) resident and ordinarily resident in India, (ii) resident but not ordinarily resident in India,
or (iii) non-resident in India for the assessment year 2020-21.
Solution : Resident and Resident but Non- Reasons
ordinarily not ordina- resident
resident rily resident
Rs. Rs. Rs.
Interest on German Development Bonds :
 Two-fifths is taxable on receipt basis 24,000 24,000 24,000 See Note 1
 Three-fifths is taxable in the case of resident and ordinarily
resident on accrual basis 36,000 — — See Note 2
Income from agriculture in Bangladesh :
 Income accrued and received outside India 1,81,000 — — See Note 3
Income from property in Canada received outside India :
 Income accruing and arising outside India 86,000 — — See Note 2
Income earned from a business in Kampala, controlled from Delhi :
 Rs. 15,000 is taxable on receipt basis 15,000 15,000 15,000 See Note 1
 Balance is not taxable in the case of non-resident 50,000 50,000 — See Note 4
Dividend paid by a foreign company :
 Income received in India 46,500 46,500 46,500 See Note 1
Past untaxed profit brought to India :
 Not an income of the previous year 2019-20 relevant for the
assessment year 2020-21, hence not taxable — — — See Note 5
Profits from a business in Madras and managed from outside India :
 Income accrued in India 27,000 27,000 27,000 See Note 6
Problem 28-P5 Residential status and its effect on tax incidence 40
Resident and Resident but Non- Reasons

ordinarily not ordina- resident
resident rily resident
Rs. Rs. Rs.
Profit on sale of a building in India but received in Sri Lanka :
 Income deemed to accrue or arise in India 14,80,000 14,80,000 14,80,000 See Note 7
Pension from an Indian former employer received in Rangoon :
 Income deemed to accrue or arise in India 36,000 36,000 36,000 See Note 8
Gift from a friend
 It is taken as an income 80,000 80,000 80,000 See Note 9
Total 20,61,500 17,58,500 17,08,500
Notes —
1. It is Indian income. It is always taxable.
2. It is received as well as accrued outside India. It is foreign income. It is not business income or income from profession.
It is taxable only in the case of resident and ordinarily resident taxpayer.
3. It is received outside India (remittance of Rs. 50,000 to India is not “receipt” of income in India). It is accrued outside India.
It is foreign income from a business, which is controlled from outside India. It is, therefore, taxable in India only in the case
of resident and ordinarily resident taxpayer.
4. It is accrued outside India. It is received outside India. It is foreign income. It is taxable in the case of resident and ordinarily
resident taxpayer. It is not taxable in the case of non-resident. Since it is business income and business is controlled from
India, it is taxable in the hands of resident but not ordinarily resident taxpayer.
5. It is income of the previous year 2015-16. It cannot be taxed at the time of remittance in 2019-20.
6. As the income is accrued in India, it is Indian income. It is, therefore, taxable in all cases.
7. As the building is situated in India, income is deemed to be accrued in India. Consequently, it is Indian income and is
chargeable to tax in all cases.
8. Service was rendered in India. Pension income is deemed to accrue in India. It is Indian income and is chargeable to tax
in all cases.
9. If the aggregate amount of gift(s) received by an individual/HUF from all persons (not being relatives) during a financial
year exceeds Rs. 50,000, it is taxable as income. For detailed discussion, see para 114.
28-E4 [P2.39]* X, a foreign national, furnishes the following particulars of his income relevant for the previous year 2019-20 :
Rs.
Profit on sale of plant at London (one-half is received in India) 1,46,000
Profit on sale of plant at Delhi (one-half is received in London) 1,02,000
Salary (after standard deduction) from an Indian company received in London (one-half is paid for rendering service
in India) 60,000
Interest on UK Development Bonds (entire amount is received in London) 40,000
Income from property in London received there 30,000
Income from agriculture in London received there, half of which is used for meeting hostel expenses of X’s son in
England and remaining amount is later on remitted to India 25,000
Dividend received in London on May 6, 2019 from a company registered in India but mainly operating in UK 17,000
Profit from a business in Delhi managed from India 49,000
Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian bank operating there 12,000
Gift in foreign currency received on September 20, 2019 from a friend (one-third of which is received in India and
remaining amount is received outside India and utilised for meeting education expenses of X’s son in USA) 3,70,000
Determine gross total income of X for the assessment year 2020-21, if he is : (a) non-resident, (b) resident but not ordinarily resident,
and (c) resident and ordinarily resident.
➠ 28-P5 X and Mrs. X are foreign citizens. They come to India on September 3, 2019 for a visit of 170 days. In the earlier previous years,
they are in India as follows :
X Mrs. X
2018-19 365 days 240 days
2017-18 20 days 340 days
2016-17 15 days Nil
2015-16 120 days 118 days
2014-15 5 days 350 days
41 Problems on incidence of tax Problem 28-P5
X Mrs. X
2013-14 8 days 190 days
2012-13 15 days 160 days
2011-12 18 days 332 days
2010-11 140 days 192 days
2009-10 10 days 221 days
During the previous year 2019-20, X and Mrs. X have the following income :
X Mrs. X
Rs. Rs.
Interest on company deposit in India 48,000 7,10,000
Income deemed to be earned in India 32,000 55,000
Income from business situated in Nepal and controlled from India (40 per cent is received in India and
60 per cent is received outside India) 64,000 38,000
Dividend declared by A Ltd., an Indian company 30,000 48,000
Salary (after standard deduction) received in India for service rendered outside India 92,000 86,000
Interest received from the Government of India (received outside India) 58,000 16,000
Interest received from a foreign company outside India (on capital which is utilised outside India) 70,000 5,000
Interest received from a foreign company outside India (on loan which is utilised for doing business in India) 38,000 92,000
Royalty received in India from the Government of India 10,000 5,000
Royalty received in India from a non-resident in respect of technology used by such person outside India 18,000 7,000
The following information is also available :
Place of birth Year of birth
X Dubai 1950
Mrs. X Bombay 1951
Father of X Muscat 1921
Mother of X Kathmandu 1924
Grandmothers of X Mexico and Dubai 1892 and 1895
Grandfathers of X Taipei and Logos 1890 and 1890
Father of Mrs. X Dubai 1925
Mother of Mrs. X Belfast 1926
Grandmothers of Mrs. X Chicago and Muscat 1901 and 1902
Grandfathers of Mrs. X Karachi and Dubai 1901 and 1900
Find out the residential status and gross total income of X and Mrs. X for the assessment year 2020-21.
Solution : X and Mrs. X are foreign citizens. While Mrs. X is a person of Indian origin [one of her grandfathers was born in
undivided India (Karachi)], X is not a person of Indian origin (X or his parents or grandparents were not born in undivided
India).
X and Mrs. X can become resident in India only if they satisfy any of the following basic conditions :
X Mrs. X
Presence of X in Presence of X in Presence of Presence of
India during India during Mrs. X in India Mrs. X in India
2019-20 April 1, 2015 and during 2019-20 during April 1,
March 31, 2019 2015 and March
31, 2019
Condition 1 182 days — 182 days —
Condition 2 60 days 365 days Non-functional
As X satisfies basic condition 2, he is a resident in India. However, he is not able to satisfy two additional conditions (he is
resident in one out of preceding 10 years). X is, therefore, resident but not ordinarily resident in India for the assessment
year 2020-21. Mrs. X is a non-resident in India, as she is not present in India for at least 182 days during the previous year
2019-20.
Net income of X and Mrs. X shall be determined as follows :
X Mrs. X
(Resident but not (Non-resident)
ordinarily resident)
Rs. Rs.
Interest on company deposits in India 48,000 7,10,000
Income deemed to be earned in India 32,000 55,000
Problem 28-P6 Residential status and its effect on tax incidence 42
X Mrs. X
(Resident but not (Non-resident)
ordinarily resident)
Rs. Rs.
Income from business in Nepal
- 40% received in India 25,600 15,200
- 60% received outside India (as business is controlled in India) 38,400 —
Dividend by an Indian company† — —
Salary from outside India 92,000 86,000
Interest from Government of India 58,000 16,000
Interest from foreign company (borrowed money is utilised outside India) — —
Interest from a foreign company (borrowed money is utilised in India) 38,000 92,000
Royalty from the Government 10,000 5,000
Royalty received in India 18,000 7,000
Gross total income 3,60,000 9,86,200
➠ 28-E5 [P2.40]* In problem 28-P5 assume that—

1. X and Mrs. X come to India on October 15, 2019 for a visit of 240 days.
2. X was born in 1949 (place of birth : Ajmer) and Mrs. X was born in 1950 (place of birth : Sydney).
Other data and information remaining the same, find out the residential status and gross total income of X and Mrs. X for the
28-P6 X (HUF) whose karta is X since 1970, owns the following three businesses —
Name of From where Income earned Income earned Income earned Income earned Total income
business business is and received and received in India but outside India of the assess-
controlled in India outside India received outside but received ment year
India in India 2020-21
Rs. Rs. Rs. Rs. Rs.
A India 10,000 7,000 20,000 9,000 46,000
B Nepal 20,000 80,000 6,000 10,000 1,16,000
C Partly from
India and
partly from
Hongkong 5,000 8,000 12,000 13,000 38,000
Total 35,000 95,000 38,000 32,000 2,00,000
X comes to India only for 60 days each year. No other income is derived by X (HUF). Personal income of X which is chargeable to tax
in India for the assessment year 2020-21 is Rs. 70,000. Find out the income of X (HUF) for the assessment year 2020-21.
Solution : Control and management of business A is situated in India. X (HUF) is, therefore, resident in India for all sources
of income for the assessment year 2020-21**. The karta of HUF is non-resident in India in 10 years immediately prior to the
previous year 2019-20. X (HUF) is, therefore, resident but not ordinarily resident in India for the assessment year 2020-21.
Income of X (HUF) will be computed as follows —
Rs.
Income of business A 46,000
Income of business B (Rs. 80,000, being earned and received outside India from a business which is controlled
from outside India is not chargeable to tax in the case of resident but not ordinarily resident taxpayer) 36,000
Income of business C 38,000
Net income 1,20,000
➠ 28-E6 Assume in problem 28-P6 that the three businesses A, B and C are owned by—
1. X in his individual capacity ; or
2. X Co., a partnership firm in which X and Mrs. X are partners (X Co. does not have any other income) ; or
† A Ltd. (which declares dividend) will have to pay dividend distribution tax under section 115-O. In the hands of a resident shareholder, dividend
income is not chargeable to tax (if the aggregate dividend from all Indian companies during the year does not exceed Rs. 10,00,000). In the hands
of a non-resident shareholder, the entire dividend income is exempt.
**If a person is resident in India for one of the sources of income, he will be deemed to be resident in India for all other sources of income by virtue
of section 6(5).
43 Other problems Problem 29-P2
3. X Ltd., an Indian company (the company does not have any other income) ; or
4. A Ltd., a foreign company (place of effective management is situated outside India).
Find out the taxable income of X, X Co., X Ltd., and A Ltd. for the assessment year 2020-21.
 Other problems
29-P1 A person settled abroad is interested in knowing the provisions regulating residential status of a taxpayer (other than an
individual) in India. Give these provisions in brief in the form of a table.
Solution :
Taxpayers other than an individual Control and management of the affairs of the taxpayer are
Wholly in India Wholly outside India Partly in India and
partly outside India
Hindu undivided family Resident Non-resident Resident
Firm Resident Non-resident Resident
Association of persons Resident Non-resident Resident
Indian company Resident Resident Resident
Non-Indian company See para 22 See para 22 See para 22
Any other person except an individual Resident Non-resident Resident
Note :
1. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident. A resident Hindu undivided
family is ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies the following
two additional conditions as laid down by section 6(6)(b) :
a. he has been resident in India in at least 2 out of 10 previous years [according to the basic conditions mentioned in para
19.1-1] immediately preceding the relevant previous year ; and
b. he has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.
If karta or manager of resident Hindu undivided family does not satisfy the two additional conditions, the family is treated
as resident but not ordinarily resident in India.
2. In order to determine the residential status of the aforesaid taxpayers, the residential status of the karta of the family
(except as stated in 1 supra), partners of the firm, members of the association, directors of the company, etc., is not relevant.
For instance, it is possible that partners of a firm are resident in India but the firm is controlled from a place outside India
and, consequently, the firm is a non-resident in India.
29-E1 Find out the residential status in the cases given below for the assessment year 2020-21—
1. X Ltd., an Indian company, has five members on its board of directors who are all non-resident in India. All the shareholders are
foreign citizen and non-resident in India. The business of the company is controlled from a place outside India.
2. Y Ltd., a foreign company, operates in India and all decisions regarding the affairs of its business are taken in India and its effective
management is situated in India. However, a few decisions are taken in Berlin where the company is registered. Turnover of Y Ltd.
is Rs. 500 crore.
3. Z and company is a partnership firm of Z and A, both of whom are foreign citizen and non-resident in India. They remain outside
India. The firm is controlled by B, a whole-time manager in India. B generally consults Z and A on all major issues regarding the
affairs of the firm.
4. C (HUF), a Hindu undivided family, whose karta C is a person of Indian origin. During the previous year 2019-20, C is non-resident
(as he is in India only for 25 days during April 2019). The family’s business is controlled by a team of professionals in India under
the guidance of C. Every year C comes to India generally for 25-100 days.
➠ 29-P2 By virtue of section 9(1) income from a “business connection” in India is deemed to accrue or arise in India. Give some
illustrative instances of a non-resident having a business connection in India. What are those operations which are not taken as “business
connection” in India ?
Solution : Some illustrative instances of a non-resident having business connection in India are — maintaining a branch
office in India for the purchase or sale of goods or transacting other business; appointing an agent in India for the systematic
and regular purchase of raw material or other commodities or for the sale of the non-resident’s goods or for other business
purposes ; erecting a factory in India where the raw produce purchased locally is worked into a form suitable for export
abroad ; forming a local subsidiary company to sell the products of the non-resident parent company; having financial
association between a resident and a non-resident company, etc.
 OPERATIONS NOT TAKEN AS BUSINESS CONNECTIONS - The following operations do not amount to business connection
by virtue of specific provisions in the Act :
1. Where all operations are not carried out in India [Explanation (a) to sec. 9(1)(i)] - If all business operations are not carried out
in India, the income of the business deemed to accrue or arise in India shall be only such part of income as is reasonably
attributable to the operations carried out in India.
Residential status and its effect on tax incidence 44
The apportionment of profits should be on a rational basis and should not be arbitrary. Where the only trading activity
operation within India was the negotiation and conclusion of the contract and the contract was performed entirely outside
India, it was held by the Madras High Court that only 10 per cent of the profits was deemed to accrue or arise in India—
Annamalais Timber Trust & Co. v. CIT [1961] 41 ITR 781. Where there was an acute shortage of goods and the assessee had
virtually the monopoly right for its import and the profit accrued as soon as the goods were procured in the taxable territory,
it was held that the assessment of 20% of profit under section 9 was not improper—Bikaner Textile Merchants Syndicate Ltd.
v. CIT (supra).
2. Purchase of goods for export [Explanation (b) to sec. 9(1)(i)] - In the case of non-resident, no income shall be deemed to accrue
or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of
export.
3. Collection of news and views [Explanation (c) to sec. 9(1)(i)] - No income shall be deemed to accrue or arise in the case of a
non-resident engaged in the business of running a news agency or of publishing newspapers, magazines or journals from
activities confined to collection of news and views in India for transmission out of India.
4. Shooting of cinematograph films in India [Explanation (d) to sec. 9(1)(i)] - In the case of a non-resident, no income shall be
deemed to accrue or arise in India through or from operations which are confined to the shooting of any cinematograph film
in India, if such non-resident is either an individual, who is not a citizen of India, or a firm which does not have any partner
who is a citizen of India or who is a resident in India, or a company which does not have any shareholder who is a citizen
of India or is resident in India.
29-E2 Discuss whether the following income are taxable or not in India —
1. A non-resident purchases goods from India and sells these goods abroad.
2. A non-resident is engaged in the business of publication of a magazine from Hawaii. Some of the news published in the magazine
are collected from India.
3. X Ltd., a non-resident foreign company, is engaged in the business of shooting a cinematograph film in India. The film after its
completion is sold to another non-resident outside India. None of shareholders of X Ltd. is an Indian citizen or resident in India.
4. A non-resident owns a commercial building in Bombay which is transferred to another non-resident outside India. The
consideration is payable in a foreign currency outside India.
5. A non-resident owns a residential house in Delhi which is given on rent to a foreign embassy. Rent is, however, payable outside
India in a foreign currency.
6. Interest on loan is paid by the Government of India to a non-resident outside India.
7. Y Ltd., a non-resident, gets royalty from Z Ltd., a non-resident, outside India. Royalty is, however, payable by Z Ltd. in relation
to a business of manufacturing carried on by it in India.
8. A Ltd., a non-resident, gets interest from B Ltd., an Indian company, outside India. The capital was borrowed by B Ltd. for the
purpose of a business carried on by it outside India.
9. C, a non-resident Indian, is presently appointed by the Government of India in its embassy at Saudi Arabia. Salary for rendering
service is paid to him in a foreign currency outside India.
10. D, a non-resident Indian, is presently appointed by an Indian company in its foreign branch at Sudan. Salary is paid to him outside
India in a foreign currency.
●
Test your knowledge

For answers, see relevant paras indicated at the end of each question.
1. What are the different categories of assessees according to their residential status ? How is this status determined ? [paras
19 to 23]
2. Assessees have been divided into three categories on the basis of their residential status. Explain how these categories
are defined and how they affect the tax liability of an assessee ? [paras 19 to 24]
3. “The incidence of income-tax depends upon the residential status of an assessee”. Discuss fully. [paras 24 to 27]
4. Discuss briefly the scope of total income of a person who is resident in India. [para 24.2]
5. Under what circumstances an assessee will be considered “non-resident” for income-tax purposes and on what income
he will be liable to be assessed ? [paras 19.3, 20 to 24]
6. In what way does the liability of tax of a “not ordinarily resident” person differ from that of a “resident” person under
the Income-tax Act? [paras 24.1 and 24.2]
7. How will you decide the question of residence of an individual and a Hindu undivided family ? Explain fully. [paras 19
and 20]
8. Write short notes on the following :
a. Income received in India [para 25]
b. Income deemed to accrue or arise in India [para 27]
c. Control and management of a business [para 22]
9. B, a not ordinarily resident individual, receives dividend from companies registered outside India but deriving its entire
income in this country. The dividend is declared and paid outside India. Discuss B’s liability to Indian income-tax on these
dividends. [para 24.2]
CHAPTER 3
Income that is exempt
from tax
S
ections 10, 10A, 10AA, 10B, 10BA, 11, 12, 13 and 13A deal with income which does
not form part of an assessee’s total income. While section 10 appends a list of income
absolutely exempt from tax, sections 10A, 10AA, 10B, 10BA, 11, 12, 13 and 13A deal
with specific exemptions available to newly established industrial undertakings in free trade
zones, charitable trust and political parties.
 WHAT INCOME IS EXEMPTED UNDER SECTION 10

32. In the following cases, income is exempt from tax, as it does not form part of total income. The burden of
proving that a particular item of income falls within this section is on the assessee.
 Agriculture income — see paras 185 to 188 10(1)
 Payments received from family income by a member of a HUF — see para 32.1 10(2)
 Share of profit from a firm — see para 219 10(2A)
 Interest received by a non-resident from prescribed securities 10(4)
 Interest received by a person who is resident outside India on amounts credited in the “Non-resident
(External) Account” 10(4)
 Interest payable to a non-resident/foreign company by an Indian company/business trust pertaining
to money borrowed from a source outside India by way of issue of rupee denominated bond during
September 17, 2018 and March 31, 2019 10(4C)
 Any income accrued or arisen to, or received by, a specified fund as a result of transfer of capital
asset [referred to in section 47(viiab)], on a recognised stock exchange located in any International
Financial Services Centre (and where the consideration for such transaction is paid or payable in
convertible foreign exchange), to the extent such income accrued or arisen to, or is received in respect of
units held by a non-resident 10(4D)
 Leave travel concession provided by an employer to his Indian citizen employee — see para 44.7 10(5)
 Remuneration received by foreign diplomats of all categories 10(6)
 Salary received by a foreign citizen as an employee of a foreign enterprise provided his stay in India does
not exceed 90 days 10(6)(vi)
 Salary received by a non-resident foreign citizen as a member of ship’s crew provided his total stay in
India does not exceed 90 days 10(6)(viii)
 Remuneration received by an employee, being a foreign national, of a foreign Government deputed in
India for training in a Government establishment or public sector undertaking 10(6)(xi)
 Tax paid on behalf of foreign companies — see para 32.2 10(6A)
 Tax paid by Government or an Indian concern in the case of a non-resident/foreign company 10(6B)
 Income arising to notified foreign companies from services provided in or outside India in project
connected with the security of India 10(6C)
 Any income arising to a non-resident/foreign company by way of royalty from (or fees for technical
services rendered in or outside India to) the National Technical Research Organisation 10(6D)
45
Para 32 Income that is exempt from tax 46
 Foreign allowance granted by the Government of India to its employees posted abroad — see para 42 10(7)
 Remuneration received from a foreign Government by an individual who is in India in connection with
any sponsored co-operative technical assistance programme with a foreign Government and the income 10(8)
of the family members of such employee and (9)
 Remuneration/fees received by non-resident consultants and their foreign employees 10(8A),
(8B) and (9)
 Death-cum-retirement gratuity — see para 41.2 10(10)
 Commuted value of pension and any payment received by way of commutation of pension by an
individual out of annuity plan of LIC or any other insurer from a fund set up by that corporation or insurer
— see para 41.3 10(10A)
 Leave salary — see para 41.1 10(10AA)
 Retrenchment compensation — see para 41 10(10B)
 Compensation received by victims of Bhopal gas leak disaster 10(10BB)
 Compensation from the Central Government or a State Government or a local authority received by an
individual or his legal heir on account of any disaster 10(10BC)
 Compensation received from a public sector company at the time of voluntary retirement or separation
— see para 41.5 10(10C)
 Tax on perquisite paid by employer — see para 82.4 10(10CC)
 Any sum (including bonus) on life insurance policy (not being a Keyman insurance policy) — see para
32.3 10(10D)
 Amount received from statutory or recognised provident fund or public provident fund — see para 10(11)/(12)
46
 Any payment from Sukanya Samriddhi Account 10(11A)
 Amount from an approved superannuation fund to legal heirs of the employee — see para 47 10(13)
 House rent allowance subject to certain limits — see para 42.1 10(13A)
 Special allowance granted to an employee — see para 42.3 10(14)
 Interest from certain exempted securities — see para 111.5 10(15)
 Payment made by an Indian company, engaged in the business of operation of an aircraft, to acquire an
aircraft on lease from a foreign Government or foreign enterprise if a few conditions are satisfied — see para
32.4 10(15A)
 Scholarship granted to meet the cost of education — see para 32.5 10(16)
 Daily allowance of a Member of Parliament or State Legislature (entire amount is exempt) and any other
allowance subject to certain conditions — see para 32.6 10(17)
 Rewards given by the Central or State Government for literary, scientific or artistic work or attainment
or for service for alleviating the distress of the poor, the weak and the ailing, or for proficiency in sports
and games or gallantry awards approved by the Government 10(17A)
 Pension and family pension of gallantry award winners 10(18)
 Family pension received by family members of armed forces 10(19)
 Notional property income of any one palace occupied by a former ruler 10(19A)
 Income of local authorities 10(20)
 Any income of housing boards constituted in India for planning, development or improvement of cities,
towns or villages 10(20A)
 Any income of an approved research association 10(21)
 Income of specified non-agencies 10(22B)
 Any income (other than interest on securities, income from property, income received for rendering any
specific services and income by way of interest or dividends) of approved professional bodies — see para
32.7 10(23A)
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 10(23AA)
 Income of funds established for the welfare of employees — see para 32.8 10(23AAA)
47 What income is exempted u/s 10 Para 32
 Any income of the pension fund set up by LIC or any other insurer approved by the Controller of
Insurance or Insurance Regulatory and Development Authority 10(23AAB)
 Any income (other than business income) of a trust or a society approved by Khadi and Village Industries
Commission 10(23B)
 Income of an authority whether known as Khadi and Village Industries Board or by any other name for
the development of Khadi and Village Industries 10(23BB)
 Income arising to any body or authority established, constituted or appointed under any enactment for
the administration of public, religious or charitable trusts or endowments or societies for religious or
charitable purposes 10(23BBA)
 Income of the European Economic Community derived in India by way of interest, dividends or capital
gains in certain cases under the European Community International Institutional Partners Scheme, 1993 10(23BBB)
 Any income of SAARC Fund for Regional Projects 10(23BBC)
 Any income of Secretariat of Asian Organisation of Supreme Audit Institutions 10(23BBD)
 Income of Insurance Regulatory Authority 10(23BBE)
 Income of the Central Electricity Regulatory Commission 10(23BBG)
 Income of Prasar Bharti (Broadcasting Corporation of India) 10(23BBH)
 Income received by any person on behalf of specified national funds, approved public charitable
institutions, educational institute/hospital, Swachh Bharat Kosh and Clean Ganga Fund — see para
32.9 10(23C)
 Income of a Mutual Fund set up by a public sector bank or public financial institution 10(23D)
 Any income of a securitisation trust from the activity of securitisation 10(23DA)
 Income of investor protection fund 10(23EA)
 Income of Credit Guarantee Funds Trust for Small Industries 10(23EB)
 Income of Investor Protection Fund by way of contributions from commodity exchange and the members
thereof 10(23EC)
 Any income of Investor Protection Fund by way of contributions received from a depository 10(23ED)
 Specified income of Core Settlement Guarantee Fund 10(23EE)
 Income by way of dividend† or long-term capital gain of venture capital fund/undertaking — see para
32.10 10(23FA)
 Income of venture capital fund/venture capital company — see para 32.11 10(23FB)
 Any income of an investment fund other than the income chargeable under the head “Profits and gains
of business or profession” 10(23FBA)
 Any income referred to in section 115UB, accruing or arising to, or received by, a unitholder of an
investment fund, being that proportion of income which is of the same nature as income chargeable under
the head “Profits and gains of business or profession” 10(23FBB)
 Any income of a business trust by way of interest received or receivable from a special purpose vehicle 10(23FC)
 Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting
out any real estate asset owned directly by such business trust. 10(23FCA)
 Any distributed income (referred to in section 115UA), received by a unit holder from the business trust,
not being that proportion of the income which is of the same nature as the income referred to in clause
(23FC)(a) or clause (23FCA) 10(23FD)
 Income by way of interest on securities, property income and income from other sources of a registered
trade union or an association of registered trade unions 10(24)
 Any income received by a person on behalf of statutory provident fund, recognised provident fund,
approved superannuation fund, approved gratuity fund and approved coal-mines provident fund 10(25)
 Income of Employees’ State Insurance Fund 10(25A)
 Income of a member of a scheduled tribe, residing in Nagaland, Manipur, Tripura, Arunachal Pradesh,
Mizoram and Ladakh from any source arising by reason of his employment therein and income by way
of dividend and interest on securities 10(26)
 Income of a Sikkimese individual which accrues or arise to him/her from any source in the State of
Sikkim or income from dividend/interest on securities from anywhere in the world (exemption not
available to a Sikkimese woman who, on or after April 1, 2008, marries a non-Sikkimese individual) 10(26AAA)
†Other than dividends referred to in section 115-O.

Para 32.1 Income that is exempt from tax 48
 Income of an agricultural produce market committee or board constituted for the purpose of regulating
the marketing of agricultural produce 10(26AAB)
 Any income of a statutory corporation or of a body/institution, financed by the Government formed for
promoting the interest of scheduled castes/tribes 10(26B)
 Income of National Minorities Development and Finance Corporation 10(26BB)
 Income of ex-serviceman corporations 10(26BBB)
 Income of a co-operative society formed for promoting interest of members of scheduled castes/tribes 10(27)
 Income of certain Commodity Boards/Authorities 10(29A)
 Subsidy from the Tea Board for replanting or replacement of tea bushes or for rejuvenation or
consolidation of areas used for cultivation of tea in India 10(30)
 Subsidy received by planters 10(31)
 Income of a minor child up to Rs. 1,500 in respect of each minor child whose income is includible under
section 64(1A) — see para 127 10(32)
 Capital gains on transfer of US 64 — see para 95.2-1 10(33)
 Dividend on or after April 1, 2003 from domestic companies — see para 32.12 10(34)
 Any income arising to a shareholder on account of buy back of unlisted shares (up to July 4, 2019) or any
share (on or after July 5, 2019) by the company as referred to in section 115QA 10(34A)
 Interest on units of a Mutual Fund on or after April 1, 2003 — see para 32.12 10(35)
 Any income by way of distributed income referred to in section 115TA received from a securitisation trust
by any person being an investor of the said trust 10(35A)
 Capital gains on transfer of listed equity shares — see para 95.2-2 10(36)
 Capital gains on compensation received on compulsory acquisition of urban agricultural land — see para
95.2-3 10(37)
 Capital gain arising to an individual/HUF under Andhra Pradesh Capital City Land Pooling
Scheme, 2015 – see para 95.2-8 10(37A)
 Long-term capital gains on transfer of securities not chargeable to tax (up to the assessment year
2018-19) in cases covered by securities transaction tax — see para 95.2-4 10(38)
 Income of an international sporting event 10(39)
 Grant received by subsidiary company from holding company 10(40)
 Capital gain in the above case 10(41)
 Income of notified non-profit body/authority 10(42)
 Any amount received by an individual as a loan (either in lump sum or instalment) in a transaction of
reverse mortgage — see para 32.13 10(43)
 Any income received by any person, or on behalf of, the New Pension System Trust 10(44)
 Perquisites/allowances to Chairman/members of UPSC — see para 32.14 10(45)
 Specified income of notified body or authority or trust or board or commission — see para 32.15 10(46)
 Income of infrastructure debt fund — see para 32.16 10(47)
 Any income received in India in Indian currency by a foreign company on account of sale of crude oil
(or any other notified goods or notified service) to any person in India 10(48)
 Any 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 10(48A)
 Any 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 referred to in section
10(48A) (or on termination of such agreement/arrangement in accordance with the terms mentioned
therein) if a few conditions (as notified by the Central Government) are satisfied 10(48B)
 Any income of the National Financial Holdings Company Ltd. 10(49)
 Any income arising from any specified service provided on or after the date on which the provisions
of Chapter VIII of the Finance Act, 2016 comes into force and chargeable to equalisation levy under
that Chapter 10(50)
32.1 Receipts by a member from a Hindu undivided family [Sec. 10(2)] - Any sum received by an individual
as a member of a Hindu undivided family either out of income of the family or out of income of estate belonging
to the family is exempt from tax. Such receipts are not chargeable to tax in the hands of an individual member
even if tax is not paid or payable by the family on its total income.
The exemption is based upon the principle of avoidance of double taxation. Income of a Hindu undivided family
is taxable in its own hand. Section 10(2), therefore, exempts income received by a member from his Hindu
49 Lease rent of aircraft Para 32.4
undivided family. Only those members of a Hindu undivided family can claim exemption under this clause who
are entitled to demand share on partition or are entitled to maintenance under the Hindu law. Some of the
receipts from a Hindu undivided family are, however, taxable vide section 64(2) [see para 128].
X, an individual, has personal income of Rs. 7,02,000 for the previous year 2019-20. He is also a member of a Hindu undivided
family which has an income of Rs. 4,08,000 for the previous year 2019-20. Out of income of the family, X gets Rs. 2,10,000,
being his share of income. Rs. 2,10,000 will be exempt in the hands of X by virtue of section 10(2). The position will remain
the same whether (or not) the family is chargeable to tax. X shall pay tax only on his income of Rs. 7,02,000.
32.2 Tax paid on behalf of foreign companies in respect of certain income [Sec. 10(6A)] - If a few conditions
are satisfied, tax liability of a foreign company (pertaining to royalty/technical fees received from Government/
Indian concern under an approved agreement made during April 1, 1976 and March 31, 2002) borne by the payer,
is not taxable in the hands of foreign company.
32.3 Amount received on life insurance policy [Sec. 10(10D)] - The table given below highlights the provisions
of section 10(10D) –
Nature of policy Whether exemption is available under section 10(10D)
1. Any sum received under section 80DD(3) Exemption not available
2. Keyman insurance policy Exemption not available
3. Any other policy (sum received on the death of a Exemption available, nothing is chargeable to tax
person)
4. Any other policy (not being the case when sum
received on the death of a person)
4.1 Policy issued before April 1, 2003 Exemption available, nothing is chargeable to tax
4.2 Policy issued on or after April 1, 2003 but Exemption available only when annual premium payable is not
before April 1, 2012 more than 20% of sum assured
4.3 Policy issued during 2012-13 Exemption available only when annual premium payable is not
more than 10% of sum assured
4.4 Policy issued on or after April 1, 2013 Exemption available only when annual premium payable is not
more than 10%/15%3 of sum assured.
Notes –
1. For the purposes of points 4.2, 4.3 and 4.4, the value of any premium agreed to be returned or bonus which is to be received
under the policy shall not be taken into account to calculate “actual capital sum assured”.
2. For the purpose of point 4.3 and 4.4, “actual capital sum assured” in relation to a life insurance policy shall mean the
minimum amount assured under the policy on happening of the insured event at any time during the term of the policy.
3. If policy is issued on or after April 1, 2013, 15 per cent is applicable in the case of a policy on the life of any person who
is,––
a. a person with disability or a person with severe disability as referred to in section 80U; or
b. suffering from disease or ailment as specified in the rules made under section 80DDB.
 Keyman insurance policy - A keyman insurance policy which has been assigned to any person during its term,
with or without consideration, shall continue to be treated as a keyman insurance policy.
32.4 Lease rent of aircraft [Sec. 10(15A)] - Payment made to a foreign Government or a non-resident foreign
enterprise under an agreement made before April 1, 1997 or during April 1, 1999 and March 31, 2007 (and
approved by the Central Government) by an Indian company, engaged in the business of operation of aircraft
is not taxable in the hands of recipient. However, the exemption is available only if payment is made to acquire
an aircraft or an aircraft engine (other than a payment for providing spares, facilities or services in connection
with operation of leased aircraft) on lease.
 The aforesaid exemption shall be available only in respect of agreement entered before April 1, 1997 or during
April 1, 1999 and March 31, 2007. If the agreement is entered during April 1, 1997 and March 31, 1999, or after
March 31, 2007 the exemption under section 10(15A) will not be available. However, if the tax is paid by the payer
of lease rent, the tax so borne by it, will not be grossed up in the hands of recipient by virtue of the exemption
given by section 10(6BB).
Under agreements approved by the Government of India, X Airways Ltd. (an Indian company) pays lease rent to Y Inc. (a
foreign enterprise) for providing aircrafts on lease. During the previous year 2019-20, the following payments are made by
X Airways Ltd.—
Date of agreement under which payment is made Lease rent Payment Amount taxable
of aircraft/air- for services in the hands
craft engine and spares of Y Inc.
Rs. Rs. Rs.
 As per agreement dated March 1, 2004*
- Payment to Y Inc. 15,40,000 2,90,000 2,90,000
- Tax borne by X Airways Ltd. — 60,000 60,000
Total 15,40,000 3,50,000 3,50,000
 As per the agreement dated April 10, 1998†
- Payment to Y Inc. 20,90,000 5,48,000 26,38,000
- Tax borne by X Airways Ltd. 9,70,000 3,10,000 3,10,000
Total 30,60,000 8,58,000 29,48,000
Note - In this case, for the assessment year 2020-21, Y Inc. can claim exemption of Rs. 15,40,000 and Rs. 9,70,000 under section
10(15A) and 10(6BB), respectively.
32.5 Educational scholarships [Sec. 10(16)] - Scholarship granted to meet the cost of education is exempt from
tax. In order to avail the exemption, it is not necessary that scholarship should be financed by the Government.
 The term “cost of education” takes within its ambit not only tuition fee but all other incidental expenses
incurred for acquiring education.

 Once it is proved that the amount received is “scholarship”, it will be fully exempt from tax irrespective of its
terms of award. The position remains so even if the scholarship is received for pursuing a course of education
not leading to a degree.
 The exemption in the hands of recipient depends on what it is meant for the person paying or disbursing the
scholarships. If it is paid only for meeting the cost of education, it is exempt from tax even if the recipient does
not spend the whole amount towards education or that he is able to save something out of it. To put it differently,
if the whole object of the payment is to meet cost of education, then no further inquiry is called for in order to
exclude the amount from taxable income under section 10(16).
32.6 Daily allowances of Members of Parliament [Sec. 10(17)] - Clause (17) of section 10 provides exemption
to Members of Parliament and State Legislature in respect of the following allowances :
Cases Nature of allowance How much is exempt
Case 1 Daily allowance Entire amount is exempt
Case 2 Any other allowance received by a Member of Parliament under the Entire amount is exempt
Members of Parliament (Constituency Allowance) Rules, 1986
Case 3 Constituency allowance received by any person by reason of his member- Entire constituency allowance
ship of any State Legislature is exempt.
32.7 Income of professional institutions [Sec. 10(23A)] - Any income (other than income from house property,
income received for rendering any specific service, or income by way of interest or dividend on investments) of
a professional institution is exempt from tax if a few conditions are satisfied.
32.8 Income of fund established for welfare of employees [Sec. 10(23AAA)] - Income of a fund established
for welfare of employees is not chargeable to tax, if a few conditions are satisfied. This exemption is available,
if the fund is established for the purpose of giving cash benefits to a member of the fund on superannuation, in
the case of illness of the member (including spouse and depending children), to meet cost of education of
dependent children or cash benefits to dependents in the event of death of a member.
32.9 Income of certain National Funds, educational institution and hospital [Sec. 10(23C)] - Exemption
given by section 10(23C ) is given below —
32.9-1 INCOME OF CERTAIN NATIONAL FUNDS - Any income received by any person on behalf of the following funds
is exempt from tax :
a. Prime Minister’s National Relief Fund [sec. 10(23C)(i)] ; or
b. Prime Minister’s Fund (Promotion of Folk Arts) [sec. 10(23C)(ii)] ; or
c. Prime Minister’s Aid to Student Fund [sec. 10(23C)(iii)] ; or
*The same rule will be applicable if the agreement is entered during April 1, 1999 and March 31, 2007.
† The same rule will be applicable if the agreement is made after March 31, 2007.
51 Income of certain National funds Para 32.9
d.National Foundation for Communal Harmony [sec. 10(23C)(iiia)] ; or

e.Swachh Bharat Kosh [sec. 10(23C)(iiiaa)]; or
f.Clean Ganga Fund [sec. 10(23C)(iiiaaa)]; or
g.Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund [sec. 10(23C)(iiiaaaa)]; or
h.any other charitable fund or institution notified by the Central Government [sec. 10(23C)(iv)]**; or
i.any trust or institution wholly for public religious purposes or wholly for public religious and charitable
purposes which is notified by the Central Government [sec. 10(23C)(v)**].
A fund or institution mentioned at (h) and (i) (supra) will have to satisfy some conditions to claim exemption.
32.9-2 INCOME OF EDUCATIONAL INSTITUTIONS - Income of the following educational institutions is exempt from tax
under section 10(23C)—
Case 1 Any university or other educational institution existing solely for educational purposes and not for purposes
of profit, and which is wholly or substantially financed by the Government [sec. 10(23C)(iiiab)]
of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount
of annual receipts as may be prescribed (i.e. Rs. 1 crore) [sec. 10(23C)(iiiad)]
of profit, other than those mentioned in Case 1 and Case 2 (supra) and which is to be approved by the prescribed
authority (i.e., the Chief Commissioner) [sec. 10(23C)(vi)].
An educational institution mentioned under Case 3 will have to satisfy some conditions to claim exemption.
32.9-3 INCOME OF HOSPITAL - If the following conditions are satisfied, the income of a hospital is exempt from tax
under section 10(23C ) —
Condition 1 Income arises to a hospital or other institution for the reception and treatment of persons —
a. suffering from illness or mental defectiveness ; or
b. during convalescence ; or
c. requiring medical attention or rehabilitation.
Condition 2 The hospital or other institution exists solely for philanthropic purposes and not for the purpose of profit.
Condition 3 The hospital or other institution is —
a. wholly or substantially financed by the Government [sec. 10(23C)(iiiac)] ; or
b. the aggregate annual receipts of such hospital or institution do not exceed the amount prescribed (i.e.,
Rs. 1 crore) [sec. 10(23C)(iiiae)] ; or
c. approved by the prescribed authority (i.e., the Chief Commissioner) [sec. 10(23C)(via)] [one has to
satisfy certain conditions for getting approval].
32.9-4 OTHER POINTS - The following points should be noted –

1. A notification relating to exemption under section 10(23C)(iv)/(v)/(vi)/(via) is one time approval and remains
valid till it is withdrawn – Circular No. 7/2010, dated October 27, 2010.
2. An entity which has been approved or notified for claiming benefit of exemption under section 10(23C)(iv)/
(v)/(vi)/(via) is not entitled to claim any benefit of exemption under other provisions of section 10 (except the
exemption in respect of agricultural income). Consequently, such entity is not entitled to claim exemption
pertaining to dividends, mutual fund interest, long-term capital gain, etc.
3. The aforesaid entity should apply its income or accumulate it for application, wholly and exclusively for the
objects for which it is established. In a case where more than 15 per cent income of fund, trust, institution,
university, hospital, etc., is accumulated, the period of accumulation (of the amount exceeding 15 per cent of the
income) shall in no case exceed 5 years. With effect from the assessment year 2019-20, for the purpose of
determining application of income under section 10(23C)(iv)/(v)/(vi)/(via), the provisions of sections 40(a)(ia)
and 40A(3)/(3A), shall, mutatis mutandis, apply as they apply in computing the income chargeable under the
head “Profits and gains of business or profession”.
4. Any anonymous donation referred to in section 115BBC shall not be exempt under section 10(23C)(iv)/(v).
5. For the purpose of section 10(23C)(iiiab)/(iiiac), any university/educational institution/hospital shall be
considered as being substantially financed by the Government for any previous year, if the Government grant
**A trust or institution (pursuing advancement of any other object of public utility) is not eligible for any exemption under section 10(23C)(iv)/
(v) for the previous year during which receipts from commercial activities exceed 20 per cent of total receipts of the relevant year.
to such university/institute/hospital exceeds 50 per cent of the total receipts (including any voluntary
contributions) of such university/institute during the relevant previous year.
6. Where any income is required to be applied (or accumulated or set apart for application), then, for such
purposes the income shall be determined without any deduction or allowance by way of depreciation (or
otherwise) in respect of any asset, acquisition of which has been claimed as an application of income under
section 10(23C) in the same or any other previous year.
7. Any donation given by an entity [which has been approved or notified for claiming benefit of exemption
under section 10(23C)(iv)/(v)/(vi)/(via)] to a trust/institution [registered under section 12AA or referred to in
section 10(23C)(iv)/(v)/(vi)/(via)] as contribution with specific direction that they shall form part of the corpus
of the recipient trust/institution, shall not be treated as application of income.
32.10 Income by way of dividend and long-term capital gains of venture capital funds and venture capital
companies [Sec. 10(23FA)] - Clause (23FA) is applicable if investment is made during 1999-2000*. For
investments made after March 31, 2000**, exemption is available under section 10(23FB).
32.11 Income of venture capital fund or venture capital company [Sec. 10(23FB)] - Any income of a venture
capital company (VCC) or venture capital fund (VCF) from investment in a venture capital undertaking (VCU)
is exempt from tax under section 10(23FB). Moreover, section 115U provides that income accruing or arising or
received by a person out of investment made in a VCC or VCF shall be taxable in the same manner as if the person
had made direct investment in the VCU.
The aforesaid benefits are available only to the funds which satisfy the investment and other conditions as are
provided in the SEBI (Alternative Investment Funds) Regulations, 2012 [hereinafter referred to as AIF
regulations].
The following points should be noted –
1. The existing VCFs and VCCs (i.e., which have been registered before May 21, 2012) and are regulated by the
VCF regulations, as they stood before repeal by AIF regulations, would continue to avail pass through status as
currently available.
2. In the context of AIF regulations, the Venture Capital Company means a company and venture capital fund
means a fund set up as a trust, which has been granted a certificate of registration as venture capital fund being
a sub-category of Category I Alternative Investment Fund and satisfies the following conditions –
a. at least two-thirds of its investible funds are invested in unlisted equity shares or equity linked instruments
of venture capital undertaking;
b. no investment has been made by such AIFs in a VCU which is an associate company;
c. units of a trust set up as AIF or shares of a company set up as AIF, are not listed on a recognised stock exchange.
3. In the context of AIF regulations, the venture capital undertaking shall be defined as it is defined in the
Alternative Investment Funds Regulations.
32.12 Dividends and interest on units [Sec. 10(34)/(35)] - The following income is not chargeable to tax –
1. Dividend from a domestic company [exemption is given by section 10(34)].
2. Income in respect of units of a mutual fund/UTI [exemption is given by section 10(35)].
 The following points should be noted –
1. Dividend distribution tax - The person paying dividends on shares or interest on units will have to pay
distribution tax on dividend/income distributed under sections 115-O and 115R.
2. Dividend income taxable in the hands of resident shareholder under section 115BBDA - Dividend income is taxable
in the hands of shareholders under section 115BBDA, if a few conditions are satisfied†.
*Section 10(23FA) is applicable from the assessment year 2000-01. A similar exemption is available under section 10(23F) if investment is made
up to March 31, 1999.
**For investment made after March 31, 2000, exemption will be available under section 10(23FB).
† Dividend income from a domestic company is generally exempt in the hands of recipient shareholders. However, the exemption is not available
53 Income of infrastructure debt fund Para 32.16
38.12A Income of a shareholder on account of buy-back of shares [Sec. 10(34A)] - Income arising to a
shareholder in respect of buy-back of shares by certain companies is exempt from tax under section 10(34A). In
such cases, additional income-tax is payable under section 115QA on distributed income by the company which
opts for buy-back of its shares. These two provisions [i.e., exemption to shareholders under section 10(34A) and
additional tax to companies under section 115QA] are applicable pertaining to different shares is as follows -
Different shares Exemptions to shareholders under Tax on distributed income under section
section 10(34A) 115QA payable by a company which
buy-backs its own shares
Buy-back of unlisted shares (on or Exemption available Tax payable by company under sec-
after June 1, 2013) tion 115QA
Buy-back of listed shares (public Exemption not available under sec- Tax on distributed income under sec-
announcement of buy-back is made tion 10(34A) tion 115QA, not applicable
before July 5, 2019)
Buy-back of listed shares (if public Exemption available Tax payable by company under section
announcement is made on or after 115QA
July 5, 2019)
32.13 Reverse mortgage scheme [Sec. 10(43)] - The periodic instalments or lump sum paid by the lender to
the borrower during his lifetime will be exempt from income-tax.
32.13-1 MEANING OF REVERSE MORTGAGE SCHEME - Under reverse mortgage, the borrower is generally a senior citizen.
He owns a house property but does not having a regular source of income. He mortgages his property with a
scheduled bank or a housing finance company (i.e., lender). The lender in return pays periodic instalments or
lump sum to the borrower during his lifetime. The borrower can continue to stay in the property during his
lifetime and as well continue to receive regular income from the lender. The borrower does not pay the principal
as well as interest to the lender during his lifetime. The lender will recover the loan along with the accumulated
interest by selling the house after the death of the borrower. However, before resorting to disposal of the
property, an option will be given to the legal heirs to repay the loan amount, along with the interest, and to get
the mortgaged property released. Any excess amount will be remitted back to the legal heirs of the borrower.
32.14 Perquisites/allowances to Chairman/Members of UPSC [Sec. 10(45)] - The following allowances and
perquisites are not chargeable to tax –
 In case of serving Chairman and members of Union Public Service Commission (UPSC) –
a. the value of rent free official residence;

b. the value of conveyance facilities including transport allowance;
c. the sumptuary allowance;
d. the value of leave travel concession provided to a serving Chairman or member of the UPSC and members
of his family.
 In case of the retired Chairman and retired members of UPSC –
a. a sum of maximum Rs. 14,000 per month for defraying the service of an orderly and for meeting expenses
incurred towards secretarial assistance on contract basis;
b. the value of a residential telephone free of cost and the number of free calls to the extent of 1,500 per month
(over and above the number of free calls per month allowed by the telephone authorities).
32.15 Exemption of specified income of notified body or authority or trust or board or commission [Sec.
10(46)] - Section 10(46) provides exemption from income-tax to any specified income of a notified body,
authority, board, trust or commission which is set-up or constituted by a Central, State or Provincial Act or
constituted by the Central Government or a State Government with the object of regulating or administering an
activity for the benefit of the general public.
32.16 Income of infrastructure debt fund [Sec. 10(47)] - Section 10(47) provides enabling power to the Central
Government to notify any infrastructure debt fund which is set-up in accordance with the prescribed guidelines.
Once notified†, the income of such a debt fund would be exempt from tax. However, such fund will have to
submit return of income under section 139.
 Other related amendments - The following provisions have been incorporated to augment long-term, low cost
funds from abroad for the infrastructure sector—
† Notified debt funds : India Infradebt Ltd., IDFC Infrastructure Finance Ltd.
Para 33 Income that is exempt from tax 54
1. Any interest received by a non-resident from the aforesaid notified infrastructure debt fund shall be taxable
at the rate of 5 per cent on the gross amount of such interest income.
2. Tax shall be deducted at the rate of 5 per cent by the aforesaid notified infrastructure debt fund on any interest
paid by it to non-resident.
 WHAT ARE SPECIAL PROVISIONS IN RESPECT OF NEWLY-ESTABLISHED UNDERTAKINGS

IN FREE TRADE ZONE, ETC. [SECS. 10A AND 10AA]
33. These provisions are given in sections 10A and 10AA, which are given below—
33.1 Provisions of section 10A - Deduction under section 10A is not available now-a-days.
33.2 Provisions of section 10AA - The provisions of section 10AA are given below—
33.2-1 CONDITIONS - The following conditions should be satisfied—
 The assessee is an entrepreneur, i.e., a person who has been granted a letter of approval by the Development
Commissioner to set a unit in a Special Economic Zone.
 The unit in Special Economic Zone begins to manufacture or produce articles or things or provide services on
or after April 1, 2005 but before April 1, 2020 (the benefit under section 10AA will not be available to units
commencing activities on or after April 1, 2020).
 It is not formed by the splitting up, or reconstruction, of a business already in existence†.
 It is not formed by the transfer to a new business, of old plant or machinery. However, it can be formed by
transfer of old plant or machinery to the extent of 20 per cent.
 The assessee has exported goods or provided services out of India from the Special Economic Zone by land,
sea, air or by any other mode, whether physical or otherwise.
 Books of account of the taxpayer should be audited (audit report in Form No. 56F shall be furnished
electronically).
 Deduction should be claimed in the return of income.
33.2-2 AMOUNT OF DEDUCTION - Deduction‡ depends upon quantum of profit derived from export of articles or
things or services (including computer software). It is calculated as under—
Profits of the business of the “undertaking” × Export turnover ÷ Total turnover of the undertaking.
 Deduction for first five assessment years - 100 per cent of the profits and gains derived from export of articles or
things or from services is deductible for a period of 5 consecutive assessment years. Deduction for the first year
is available in the assessment year relevant to the previous year in which the unit begins to manufacture or
produce articles or things or provide services.
Deduction for sixth assessment year to tenth assessment year - 50 per cent of the profits and gains derived from export
of articles or things or from services is deductible for the next 5 years.
 Deduction for eleventh assessment year to fifteenth assessment year - For the next 5 years, a further deduction would
be available to the extent of 50 per cent of the profit provided an equivalent amount is debited to the profit and
loss account of the previous year and credited to Special Economic Zone Re-investment Allowance Reserve
Account (hereinafter referred to as Special Reserve Account).
Double deduction not possible - If deduction is claimed in respect of a specified business [as referred to in section
35AD(8)(c)] under section 10AA, no deduction in respect of that business will be available under section 35AD.
† The transfer or redeployment of technical manpower from existing unit(s) to a new unit (of development of software or providing IT enabled
services) located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing
business, provided the assessee satisfies any one of the following two tests given below –
Test 1 - The number of technical manpower so transferred as at the end of the first financial year does not exceed 50 per cent of the total technical
manpower actually engaged in development of software or IT enabled products in the new unit.
Test 2 - The net addition of the new technical manpower in all units of the assessee (enterprise) is at least equal to the number that represents 50
per cent of the total technical manpower of the new SEZ unit during such previous year.
The assessee has a choice of complying with any one of the two alternative tests (i.e., Test 1 or Test 2) given above. Moreover, the above criteria
is applicable only in the case of an assessee engaged in the development of software or in providing IT Enabled Services – Circular No. 14/2014,
dated October 8, 2014.
‡ The amount of deduction under section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions
of the Act (before giving effect to the provisions of section 10AA) and the deduction under this section shall not exceed such total income of the
assessee.
55 How to claim exemption in respect of income Para 36
33.3 A few common points - There are a few common points which are applicable in the case of section 10A as
well as section 10AA—
 Export turnover - For the purpose of sections 10A and 10AA, ‘export turnover’ means the consideration in
respect of export by the undertaking of articles or things or computer software received in (or brought into) India
by the assessee in convertible foreign exchange within the prescribed period but does not include the following—
a. freight;
b. telecommunication charges;
c. insurance attributable to the delivery of the articles or things or computer software outside India;
d. expenses, if any, incurred in foreign exchange in providing the technical services outside India.
 Site development - The profits and gains derived from on site development of computer software (including
services for development of software) outside India shall be deemed to be the profits and gains derived from the
export of computer software outside India.
 Brought forward losses - Brought forward losses (incurred after April 1, 2001) cannot be deducted from profit
of the business of the undertaking. In other words, deduction under sections 10A and 10AA will be available in
respect of profit of an eligible undertaking without setting off of brought forward losses.
 Consequences of claiming deduction under sections 10A and 10AA - One should note the following consequences—
1. Unabsorbed depreciation allowances (or unabsorbed capital expenditure on scientific research or family
planning)* are not allowed to be carried forward and set off against the income of assessment years following
the period of deduction.
2. The losses under section 72(1) or 74(1) or 74(3)* are not allowed to be carried forward in assessment years
succeeding the period of deduction (this restriction shall apply only to post-tax holiday period). However, there
is no bar regarding intra-head set off under section 70 and inter-head set off under section 71.
3. The deductions under section 80-IA or 80-IB shall also not be available to such undertakings after the expiry
of tax holiday period.
4. In the assessment year following period of deduction, the depreciation will be computed on the written down
value of the asset as if the depreciation has actually been allowed in respect of each assessment year falling in
the period of exemption.
 Amalgamation/demerger - Where an undertaking is transferred to another company under a scheme of
amalgamation or demerger, the deduction under section 10A or 10AA shall be allowable in the hands of the
amalgamated or the resulting company for the unexpired period. However, no deduction shall be admissible
under these sections to the amalgamating company or the demerged company for the previous year in which
amalgamation or demerger takes place†.
 Power of Assessing Officer to recompute profit - For inter-unit transactions and transactions between the assessee
and inter-connected persons, the Assessing Officer has power to re-compute profit eligible for exemption under
sections 10A and 10AA.
 WHAT ARE SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED HUNDRED PER

CENT EXPORT-ORIENTED UNDERTAKINGS [SEC. 10B]
34. Deduction under section 10B is not available from the assessment year 2012-13.
 WHAT ARE THE SPECIAL PROVISIONS IN RESPECT OF PROFIT FROM EXPORT OF

ARTISTIC HAND-MADE WOODEN ARTICLES [SEC. 10BA]
35. Deduction under section 10BA is not available from the assessment year 2010-11.
 HOW TO CLAIM EXEMPTION IN RESPECT OF INCOME FROM PROPERTY HELD FOR

CHARITY [SEC. 11]
36. Income of a charitable trust is exempt according to the provisions of sections 11, 12 and 13. The trust should
be one established in accordance with law and its objects should fall within the definition of the term “charitable
purpose”.
*Pertaining to the assessment year 2000-01 (in the case of section 10A) or the assessment year 2005-06 (in the case of section 10AA) or earlier years.
†A similar benefit is available in the case of sections 10B, 80-IA, 80-IAB, 80-IB, 80-IC and 80-IE, if transferor and transferee companies are Indian
companies. However, under section 80-IA the benefit is available only when amalgamation/demerger takes place before April 1, 2007.
36.1 Meaning of trust - A “trust” is an obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another,
or of another and the owner.
36.2 Charitable purpose [Sec. 2(15)] - It is defined to include relief of the poor, education, yoga, medical relief,
preservation of environment (including watersheds, forests and wildlife), preservation of monuments or places
or objects of artistic or historic interest and the advancement of any other object of general public utility. “The
advancement of any other object of general public utility” shall not be a charitable purpose—
a. if it involves the carrying on of—
i. any activity in the nature of trade, commerce or business; or
ii. any activity of rendering of any service in relation to any trade, commerce or business,
for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from
such activity, or the retention of such income, by the concerned entity; and
b. if the total receipts from any such activity in the nature of trade, commerce or business, or any activity of
rendering any service in relation to any trade, commerce or business, exceed 20 per cent‡ of total receipts of
the relevant previous year of the trust undertaking such activities.
36.3 Essential conditions for exemption [Sec. 11] - The compliance of the following main conditions is essential
for claiming exemption under section 11:
 The property from which income is derived should be held under a trust or other legal obligation.
 The property should be held for charitable or religious purposes. In the case of a charitable trust created on or
after April 1, 1962, the further conditions are :
a. the trust should not be created for the benefit of any particular religious community or caste ;
b. no part of the income should enure directly or indirectly for the benefit of the settlor or other specified persons;
c. the property should be held wholly for charitable purposes.
The conditions mentioned at (b) and (c) also apply to religious trust created on or after April 1, 1962.
 The exemption is confined to only such portion of the trust’s income which is applied to charitable or religious
purposes or is accumulated for applying to such purposes within the limits of accumulation permitted under
section 11(1) and (2) [see paras 36.4 and 36.5].
 The exemption is restricted to such portion of the income as is applied to charitable or religious purposes in
India except in the cases covered by section 11(1)(c).
Trust and institution can carry out business activities if the business activities are incidental to the attainment
of its objective and separate books are maintained without losing complete exemption from income-tax.
 The trust should apply for registration (by uploading Form No. 10A for application) with the Commissioner
of Income-tax and such trust is registered under section 12AA. Unless and until an institution is registered under
section 12A, it cannot claim the benefit of section 11. There is no time-limit for making application for registration.
If a trust applies for registration, the registration shall be effective (and the benefit of exemption under section
11 is available) only from the previous year in which application is made.
A charitable trust (created on April 1, 2012) applies for registration on December 1, 2014. Registration is granted on April
10, 2015. Registration, in this case, will be applicable only from the previous year 2014-15. Exemption under section 11 will
not be available for previous years 2012-13 and 2013-14. However, on this point law has been amended with effect from
October 1, 2015. Under the amended provisions –
1. The benefit of exemption shall be available in any assessment proceeding (for an earlier assessment year) which is pending
before the Assessing Officer as on the date of registration (i.e., April 10, 2015 in this case), if there is no change in the objects
and activities of trust.
2. No action for reopening of an assessment under section 147 shall be taken by the Assessing Officer for any earlier
assessment year merely for the reason that such trust or institution has not obtained registration for the said assessment year.
3. The above benefits would not be available in case of any trust or institution which at any time had applied for registration
and the same was refused or a registration once granted was cancelled.
The order granting or refusing registration has to be passed within 6 months from the end of the month in which
the application for registration is received by the Commissioner and a copy of such order shall be sent to the
‡In respect of such receipts, exemption under section 11 is not available.

57 How to find out exemption u/s 11 Para 36.4
applicant. If the Commissioner does not respond within 6 months, registration shall be deemed to have been
granted. For instance, registration application is made on February 24, 2018 and the concerned Commissioner
does not respond till August 23, 2018. Registration shall be deemed to have been granted on August 24, 2018 –
CIT v. Society for Promn. of Edn., [2016] 238 Taxman 330 (SC).
Where a trust/institution has been granted registration under section 12A/12AA and, subsequently, it has
adopted modifications of the objects which do not conform to the conditions of registration, it shall be required
to obtain fresh registration (application for fresh registration should be submitted within a period of 30 days
from the date of such adoption).
 The accounts of the trust should be audited for such accounting year in which its income (without giving effect
to the provisions of sections 11 and 12) exceeds the exemption limit and audit report in Form No. 10B should be
submitted electronically.
 Return of income of the trust/institution should be submitted within the time allowed under section 139(1),
if the total income of the trust/institution (before giving exemption under sections 11 and 12) exceeds the
maximum amount which is not chargeable to tax.
 Voluntary contributions (not being contributions made with a specific direction that they shall form part of the
corpus of trust) shall be deemed to be income derived from property held under trust.
 Where a trust or an institution has been granted registration for purposes of availing exemption under section
11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption
under any provision of section 10 [other than that relating to exemption of agricultural income and income
exempt under section 10(23C)] for that previous year.
 Funds of the trust should be invested or deposited in any one or more of the modes or forms mentioned in
section 11(5) given below—
36.3-1 MODES OF INVESTMENT [SEC. 11(5)] - The modes of investment are as follows—
a. investment in Government savings certificates;
b. deposit in any Post Office Savings Bank Account ;
c. deposit in any account (i.e., saving account, current account, FD, etc.) with any scheduled bank or a co-
operative society engaged in carrying on banking business (including a co-operative land mortgage bank or
co-operative land development bank);
d. investment in any Central Government or State Government securities ;
e. investment in units of the Unit Trust of India;
f. investment in debentures (or bonds) of any corporate body, the principal whereof and the interest whereon
are guaranteed by the Central or a State Government ;
g. investment or deposit in any public sector company;
h. immovable property ;
i. deposit or investment in any bonds issued by a financial corporation [which is eligible for deduction under
section 36(1)(viii)] engaged in providing long-term funds for industrial development or construction/
purchase of residential houses in India;
j. deposit with IDBI;
k. deposit/investment as may be prescribed (some of the prescribed deposits – investment in mutual fund units,
deposit with housing boards, investment in equity shares of an incubatee by an incubator, investment in
equity shares of NSDC, investment in debt instruments issued by any infrastructure finance company
registered with the RBI); and
l. deposit with or investment in bonds issued by an Indian public company carrying on the business of
providing long-term finance for urban infrastructure in India.
36.4 How to find out exemption under section 11 - One has to proceed as follows—
Steps Income and exemption therefrom Remarks
Step 1 - Find out taxable income of the trust/institution One has to find out taxable income of the trust/
Income institution applying different provisions of the
Income-tax Act but before giving any exemption
under section 11*. If a depreciable asset is ac-
*It is incorrect to state that income of a trust/institution shall be calculated on commercial basis ignoring the different provisions of the Income-
tax Act. Section 11 does not provide mode of computation of income of a trust/institution. Section 11 provides the quantum of exemption in respect
of income from property held for charitable or religious purposes.
Steps Income and exemption therefrom Remarks

quired (acquisition of which has been claimed as
application of income for the purpose of section
11), then depreciation under section 32 in respect
of such asset is not available.
Step 2 -  General exemption - Fifteen per cent of “income Meaning of “income from property held for
Exemption from property held for charitable or religious pur- charitable or religious purposes” is given in
poses” is exempt for tax under section 11. It can para 36.4-1
be accumulated for future without any specific
time-frame
 Exemption based upon application of income - For the meaning of “application of income”, see
Remaining 85 per cent of the “income from para 36.4-2. There are specific provisions in the
property held for charitable or religious purposes” Act for those cases where application of income
is exempt if it is applied for charitable or religious falls short of 85 per cent because of non-receipt
purposes in India of income during the year or because of the fact
that the trust/institution wants to apply the in-
come in the next previous year
 Exemption based upon accumulation - Where 85 For availing exemption in respect of amount
per cent of the “income from property held for accumulated or set apart for future, there are
charitable or religious purposes” is not applied specific provisions under section 11(2) [see para
for charitable purposes, etc. during the previous 36.5]
year, it can be accumulated or set apart for
application in future
36.4-1 HOW TO COMPUTE INCOME FROM PROPERTY HELD FOR CHARITABLE PURPOSES - The amount deducted as tax at source
cannot be considered as “income” for this purpose. Voluntary contributions or donations are deemed to be a part
of income derived from property held under trust. But if a voluntary contribution is made with a specific
direction that it shall form a part of the corpus of the trust, it will not be deemed to be part of income of the trust.
The onus is entirely on the assessee to show that donations received were given with a direction that these shall
form part of corpus of the trust. The mere fact that in the audited accounts these were shown as part of the corpus
does not mean that the assessee had furnished requisite evidence.
 Depreciation - Where any income is required to be applied (or accumulated or set apart for application), then,
for such purposes the income shall be determined without any deduction or allowance by way of depreciation
(or otherwise) in respect of any asset, acquisition of which has been claimed as an application of income under
section 11 in the same or any other previous year.
36.4-2 HOW TO DETERMINE “APPLICATION” OF INCOME - The following points one should note in this regard:
1. Repayment of loans taken to fulfil one of the objects of trust is treated as an application of income for charitable
purposes.
2. Interest bearing loans, advanced by an educational trust, to students for higher studies amount to application
of income for charitable purposes in the year of grant of such loans, if the object of trust is advancement of
education and granting of scholarship. As and when such loan is returned to the trust, it will be treated as the
income of that year.
3. Application of the amount can be for revenue or capital purpose.
4. The expenditure incurred by way of payment of tax out of the current year’s income has to be considered as
application for charitable purposes.
5. Donation given by a charitable/religious trust to another charitable/religious trust is treated as “applica-
tion” of income for the donor trust [and eligible for exemption under section 11(1)]. However, the donor trust
will not be able to avail exemption under section 11(1) (with effect from the assessment year 2018-19), in respect
of donations given with a specific direction that they shall form part of the corpus of the donee trust.
6. Utilisation of income for meeting expenses of earlier years is an “application”.
7. For capital gain derived by a charitable trust, see problem 38-P1.
8. For the purpose of determining application of income under section 11(1), the provisions of sections 40(a)(ia)
and 40A(3)/(3A), shall, mutatis mutandis, apply as they apply in computing the income chargeable under the
head “Profits and gains of business or profession”. Consequently, for calculating “application” of income if
payment exceeding Rs. 10,000 is made in cash or by bearer cheque, such payment will be disallowed from the
59 How to find out exemption u/s 11 Para 36.4
assessment year 2019-20. Likewise, if tax is deductible but not deducted and payment is made to a resident, 30
per cent of such payment will be disallowed while calculating “application” of income for the assessment year
2019-20 (or any subsequent year).
36.4-3 WHEN APPLICATION OF INCOME FALLS SHORT OF 85 PER CENT OF INCOME - If the income applied to charitable or
religious purposes, during the previous year, falls short of 85 per cent of the income derived during the year
because of the reasons given below [column 1 of the table given below], the charitable trust or institution has been
given the option to spend such income for charitable or religious purposes in the manner given in column 2 of
the table—
Application of income falls short of 85 per cent When the income can be spent
of income because of the reasons given below—
a. Income has not been received during Either during the previous year in which income is received or during
the relevant previous year the previous year immediately following such year [see problem 36.4-P2]
b. Because of any other reason During the previous year immediately following the previous year in
which the income was derived [see problem 36.4-P1]
 How to avail the benefit of extended time - For availing of the benefit of extended time beyond the relevant previous
year, the charitable trust or institution, has to take the following steps—
1. It has to exercise an option in writing under Explanation (2) to section 11(1).
2. This option can be exercised by uploading Form No. 9A (either under digital signature or electronic
verification code) before the expiry of time allowed for submission of return of income under section 139(1) [for
time-limit, see para 244.3].
Income applied to such purposes during the extended time is deemed to have been applied to such purposes
during the previous year in which it was derived.
36.4-3a SURPLUS OF LAST YEAR - Amount of excess application of the last year can be set off against the current year’s
deficiency.
Problems
36.4-P1 The income of charitable trust for the previous year 2019-20 is Rs. 8,60,000. The trust actually spends only Rs. 3,80,000 during
the previous year 2019-20. Determine the taxable income of the trust on the assumption that:
(a) the trust has not applied for the option under clause (2) of the Explanation to section 11(1), and
(b) the trust has applied for the option and has obtained extension of time for applying the unutilised portion of income for charitable
purposes during the next previous year, i.e., 2020-21 and has actually spent Rs. 24,700 during that previous year.
Rs.
Solution : Income 8,60,000
Less : 15% set apart for the future* 1,29,000
7,31,000
Less : Amount actually spent during the previous year 3,80,000
Unutilised balance 3,51,000
On the first assumption, Rs. 3,51,000 is taxable for the assessment year 2020-21 relevant to the previous year 2019-20. On the
second assumption, Rs. 3,26,300 (i.e., Rs. 3,51,000—Rs. 24,700) will be treated as taxable income for the assessment year
2021-22 relevant to the previous year 2020-21.
36.4-E1 During the previous year 2019-20, a charitable trust gets income of Rs. 90,000 from the property held under the trust for
charitable purposes. The trust actually spends Rs. 25,000 during the previous year 2019-20. Determine the taxable income of the trust
on the assumption that :
(a) the trust has not applied for the option under clause (2) of the Explanation to section 11(1) ; and
(b) the trust has applied for option and has obtained extension of time for applying the unutilised portion of income for charitable
purposes during the next previous year, i.e., 2020-21, and has actually spent Rs. 51,000 during that previous year.
36.4-P2 During the accounting period ending March 31, 2020 a charitable trust gets (a) income from property held for charitable
purposes : Rs. 2,60,000 (Rs. 1,10,000 received in cash and the remaining balance of Rs. 1,50,000 is to be received in the year 2021-22),
(b) voluntary contributions (not being contributions made with a specific direction that they shall form part of corpus of the trust) :
Rs. 70,000.
During the previous year 2019-20, the trust spends only Rs. 60,000 for charitable purposes. Determine its taxable income, on the
assumption that the trust has obtained extension of time for applying the unrealised income of Rs. 1,50,000 in the year of receipt, i.e.,
2021-22, whereas it actually spends Rs. 80,000 in the year 2021-22 and Rs. 40,000 in the year 2022-23.
*Exemption under section 11 is 15 per cent of income derived from property held under charitable purpose (and it is not 15 per cent of amount
remaining after expending money on charitable purposes)—CIT v. Programme for Community Organisation [2001] 116 Taxman 608 (SC).
Solution : For the assessment year 2020-21 (previous year 2019-20)

Rs.
Income from property held under trust for charitable purposes 2,60,000
Voluntary contributions 70,000
Total income 3,30,000
Less : 15% set apart for future 49,500
Balance 2,80,500
Less : Amount spent during the previous year 60,000
Shortfall 2,20,500
Less : Amount not realised during the previous year [for which the trust has obtained extension of time] 1,50,000
Taxable income 70,500
For the assessment year 2023-24 (previous year 2022-23, i.e., the year next following the previous year in which the unrealised
income of the previous year 2019-20 is received) :
Rs. Rs.
Income received during the previous year 2021-22 1,50,000
Less : Amount spent
- during the previous year 2021-22 80,000
- during the previous year 2022-23 40,000 1,20,000
Amount deemed as income of the assessment year 2023-24 30,000
36.4-E2 During the previous year ending March 31, 2020, a charitable trust gets the following income :
Rs.
Voluntary contributions (without any direction) 4,80,000
Income from property held under trust :
 received during 2019-20 32,70,000
 accrued during 2019-20 (it will be received in 2021-22) 11,50,000
During the previous year 2019-20, the trust spends only Rs. 9,86,000 for charitable purposes. Determine its net income chargeable
to tax, on the assumption that the trust has obtained extension of time for applying unrealised income of Rs. 11,50,000 in the year
of receipt, i.e., 2021-22, whereas it actually spends Rs. 78,600 during 2021-22 and Rs. 8,09,200 during 2022-23.
36.5 Accumulation of income [Sec. 11(2)] - Where 85 per cent of the income is not applied to charitable or
religious purposes in the manner discussed above, the charitable trust or institution may accumulate or set apart
either the whole or part of its income for future application for such purposes.
Such income so accumulated, or set apart, is not included in the total income of the trust in the year of receipt
of income.
 For this purpose, such trust has to inform the concerned Assessing Officer the purpose and period (which in
no case can exceed 5 years*) for which the income is accumulated or set apart. This information has to be given
electronically in Form No. 10. The benefit of accumulation is not available if Form No. 10 is not uploaded before
the due date of filing return of income specified under section 139(1) for the fund or institution.
 Further, the money so set apart or accumulated should be in the modes specified in section 11(5) [see para 36.3].
 The benefit of accumulation is not available if return of income is not furnished before the due date of filing
return of income under section 139(1).

36.5-1 CONSEQUENCES OF DEFAULT - If in any year, the income which is accumulated for the specified purpose (or
purposes) of the trust, is applied to purposes other than charitable or religious purposes or ceases to be
accumulated for application for such purposes, it will become chargeable to tax as the income of that year.
 If in any year, the accumulations cease to remain invested in securities specified in section 11(5) then also the
income so accumulated will become chargeable to tax as the income of that year.
 If the accumulations are not utilised for the specified purposes during the period of accumulation or in the year
immediately following the expiry of that period, then the accumulations to the extent they are not so utilised, will
become chargeable to tax as income of the previous year immediately following the expiry of that period.
 Payment to other trusts and institutions out of income from property held under trust in the year of receipt of
such income is treated as application of income. However, any payment out of accumulated income to other
trust/institution (not being payment in the year in which trust claiming exemption is dissolved) shall not be
*In computing the period of 5 years, the period during which the income could not be applied for the purposes for which it is accumulated or
set apart, due to an order or injunction of any court, shall be excluded.
61 Forfeiture of exemption Para 36.6
treated as application of income and will be taxed in the year in which such payment or credit is made out of
accumulated income.
 Sometimes failure to apply the income so accumulated or set apart in the specified manner may arise due to
circumstances beyond the control of trustees. In such a case, the Assessing Officer may, on the receipt of an
application from the person in receipt of the income, allow such income to be applied for such other charitable/
religious purposes in India as are in conformity with the objects of the trust/institution.
Problems
36.5-P1 During the previous year 2019-20, a charitable trust gets the following income :
Rs.
a. Voluntary contributions (with specific direction that they shall form part of the corpus of the trust) 12,90,000
b. Voluntary contributions (without any specific direction) 18,30,000
c. Income from property held in trust 8,66,000
During the previous year 2019-20, the trust spends Rs. 8,90,000 for charitable purpose in India. Besides, it gives donation of Rs. 85,480
to public charitable trusts. It sets apart Rs. 14,00,000 for the purpose of construction of a charitable hospital up to March 31, 2025.
Determine the taxable income of the trust on the assumption that the trust utilises Rs. 8,70,000 up to March 31, 2026 for the purpose
of completing construction of a charitable hospital. Besides, out of the accumulated amount, the trust gives a donation of Rs. 1,00,000
to another charitable trust.
Solution : Assessment year 2020-21 (i.e., previous year 2019-20)
Rs. Rs.
Income from property held under trust 8,66,000
Add: Voluntary contributions 18,30,000
Total income 26,96,000
Less : 15% of Rs. 26,96,000 4,04,400
Balance 22,91,600
Less : Amount spent during 2019-20
Amount spent for charitable purpose 8,90,000
Donation given to other charitable institutions 85,480 9,75,480
Shortfall 13,16,120
Less : Amount set apart for charitable hospital 14,00,000
Net income Nil
Assessment year 2026-27 (previous year 2025-26, i.e., the previous year next following the previous year ending March 31, 2025)
Rs.
Amount set apart (though the amount set apart is Rs. 14 lakh, the amount allowed as deduction for the
assessment year 2020-21 is Rs. 13,16,120) 13,16,120
Less : Amount actually spent (donation given to another trust out of accumulated amount is not taken
into consideration) 8,70,000
Amount deemed as income of the assessment year 2026-27 4,46,120
36.5-E1 During the previous year 2019-20, a charitable trust derived the following income :
Rs.
Voluntary contributions (without any specific direction) 8,00,000
Income from property held under trust 3,00,000
During the previous year 2019-20, the trust spends Rs. 3,90,000 and sets apart Rs. 6,00,000 for the purpose of construction of a
charitable clinic at Delhi. The amount so set apart is to be utilised up to the end of the previous year 2023-24. Determine the taxable
income of the trust on the assumption that the trust spends, for the purpose of construction of clinic, Rs. 3,80,000 up to March 31,
2024 and Rs. 1,05,000 during the year 2024-25. Besides, it gives a donation of Rs. 45,000 (out of the accumulated amount) to a public
charitable trust which will be utilised by the donee for construction of a clinic.
36.6 Forfeiture of exemption [Sec. 13] - The following income of charitable/religious trusts/institutions do not
qualify for exemption under section 13 :
36.6-1 INCOME FOR PRIVATE RELIGIOUS PURPOSES - Any part of income from property held under a trust for private
religious purposes which does not enure for the benefit of the public, is not eligible for exemption under section
11 or 12.
36.6-2 INCOME FOR THE BENEFIT OF PARTICULAR RELIGIOUS COMMUNITY - Entire income of a charitable trust/institution
(established on or after April 1, 1962) created for the benefit of any particular religious community or caste is
disqualified for exemption under section 11 or 12. A trust or institution created or established for the benefit of
Scheduled Castes, backward classes, Scheduled Tribes or women and children shall not be deemed to be a trust
or institution created or established for the benefit of a religious community or caste for this purpose.
36.6-3 INCOME FOR THE BENEFIT OF INTERESTED PERSONS - If a religious/charitable trust/institution is created or
established after March 31, 1962 and any part of its income which enures directly or indirectly under the rules
governing the trust, for the benefit of any person specified in section 13(3), then the entire income of such trust
is not eligible for exemption under section 11 or 12.
36.6-4 FUNDS NOT INVESTED IN SECTION 11(5) SECURITIES/DEPOSITS - Income of a trust/institution is not eligible for
exemption under section 11 or 12 if its funds are invested/deposited otherwise than in the forms specified in
section 11(5)†.
36.6-5 EDUCATIONAL AND MEDICAL FACILITIES TO SPECIFIED PERSONS [SECS. 12(2) AND 13(6)] - Sections 12(2) and 13(6) provide
as follows—
1. Income of a charitable or religious trust will not be exempt if any part of such income or any property of the
trust is used or applied, directly or indirectly, for the benefit of any person such as the author of the trust, trustee
or any relative of such persons or any concerns in which such persons have a substantial interest. A charitable
or religious trust running an educational institution or a medical institution or a hospital shall not be denied the
benefit of exemption under section 11 or section 12, in relation to any income by reason only that such trust has
provided educational or medical facilities to interested persons.
2. The value of any medical or educational services made available by any charitable or religious trust running
a hospital or medical institution or an educational institution to any interested person shall be deemed to be the
income of such trust or institution derived from property held under trust wholly for charitable or religious
purposes during the previous year in which such services are so provided and shall be chargeable to income-
tax notwithstanding the provisions of section 11(1).
36.6-6 DONATION FOR PROVIDING RELIEF TO VICTIMS OF EARTHQUAKE IN GUJARAT [SEC. 12(3)] - Any amount of donation
received by a trust or institution under section 80G(5C) which has been utilised for purposes other than
providing relief to the victims of earthquake in Gujarat or which remains unutilised on March 31, 2004 and not
transferred to the Prime Minister’s National Relief Fund on or before the said date shall be deemed to be the
income of the previous year and shall accordingly be charged to tax.
36.6-7 ANONYMOUS DONATION [SECTION 13(7)] - Any anonymous donation will not be eligible for deduction under
sections 11 and 12.
36.6-7a WHAT IS ANONYMOUS DONATION [SEC. 115BBC(3)] - The expression “anonymous donation” has been defined
as follows—
1. It is a voluntary contribution.
2. The person receiving such contribution does not maintain a record of—
a. the identity indicating the name and address of the person making such contribution ; and
b. such other records as may be prescribed.
36.6-7b WHEN PROVISIONS OF SECTION 115BBC ARE APPLICABLE - “Anonymous donation” is taxable at a special rate
under section 115BBC in Case 2 and Case 3 given below—
Institution receiving anonymous donations Tax treatment
Case 1 - Wholly religious entities Section 115BBC is not applicable
Case 2 - Partly religious and partly If anonymous donation is made to an educational or medical institution
charitable entities run by such an entity, such anonymous donation is taxable under section
115BBC. Any other anonymous donation is not subject to tax under section
115BBC
Case 3 - Wholly charitable entities All anonymous donations are taxable under section 115BBC
36.6-7c SPECIAL PROVISIONS UNDER SECTION 115BBC - In the case of Case 2 and Case 3, “anonymous donation” is taxable
under the provisions of section 115BBC as follows—
1. If aggregate anonymous donation is Rs. 1 lakh or less, section 115BBC will not be applicable.
2. If aggregate anonymous donation is more than Rs. 1 lakh but it is not more than 5 per cent of the total donation
received by the assessee, section 115BBC will not be applicable.
†See para 36.3-1.

63 Forfeiture of exemption Para 36.6
3. If aggregate amount of anonymous donation is more than Rs. 1 lakh or 5 per cent of the total donation received
by the assessee, whichever is higher, the excess amount will be subject to tax at the rate of 30 per cent* under
section 115BBC. However, it will be taxable only in Case 2 and Case 3 given above.
XYZ is a wholly charitable trust. During the previous year 2019-20, it reports the following income and expenditure—
Income How much is applied for
Rs. charitable purposes
Rs.
Income from property held for charitable purposes 15,00,000 6,00,000
Voluntary contribution for corpus of the trust (names and addresses of
donors available) 80,00,000 Nil
Voluntary contribution without any direction (names and addresses of
donors available) 40,00,000 12,75,000
Voluntary contribution without any direction (names and addresses of
donors not available) 30,00,000 26,00,000
In this case, Rs. 80,00,000 (being voluntary contribution for corpus of the trust) is not chargeable to tax. Anonymous donation
is Rs. 30,00,000 (names and addresses of donors are not available). In respect of anonymous donation, exemption under
section 11 is not available. Taxable income and tax liability will be calculated as follows—
Rs.
Income from property held for charitable purposes 15,00,000
Voluntary contribution for corpus of the trust (not taxable) —
Voluntary contribution without any direction 40,00,000
Anonymous donation 30,00,000
Total 85,00,000
Less : Anonymous donation taxable under section 115BBC @ 30% (as calculated below) 26,50,000
Income subject to exemption under section 11 58,50,000
Less: Exemption under section 11 (15% of Rs. 58,50,000 + Rs. 6,00,000 + Rs. 12,75,000) 27,52,500
Balance 30,97,500
Add: Anonymous donation (taxable @ 30% under section 115BBC) 26,50,000
Taxable income 57,47,500
Computation of tax
Tax on anonymous donation (total donation is Rs. 40,00,000 + Rs. 30,00,000, i.e., Rs. 70,00,000. 5% of
total donation is Rs. 3,50,000. 5% of total donation or Rs. 1,00,000, whichever is higher, is Rs. 3,50,000.
Anonymous donation in excess of Rs. 3,50,000 is Rs. 26,50,000 which will be taxable @ 30%) 7,95,000
Tax on income other than anonymous donation (i.e., normal tax on Rs. 30,97,500) 7,41,750
Total 15,36,750
Add: Surcharge @ 10% 1,53,675
Add: Health and education cess 67,617
Tax liability 15,58,040
Note - The above calculations are applicable only if the trust is wholly charitable entity (or it is partly religious and partly
charitable and anonymous donations are received for educational/medical institution run by such entity). In other cases,
section 115BBC is not applicable and taxable income and tax liability will be calculated as under—
Rs.
Income from property held for charitable purposes 15,00,000
Voluntary contribution for corpus of the trust (not taxable) —
Voluntary contribution without any direction 40,00,000
Voluntary contribution without any direction (names and addresses of donors not available) 30,00,000
Total 85,00,000
Less: Exemption under section 11 [(15% of Rs. 85,00,000) + Rs. 6,00,000 + Rs. 12,75,000 + Rs. 26,00,000] 57,50,000
Computation of tax
Tax on income (i.e., normal tax on Rs. 27,50,000) 6,37,500
* Plus SC + HEC
36.7 Public charitable/religious trust - How chargeable to tax - Subject to rule mentioned in para 36.7-1, in
the following cases income of a charitable/religious trust which is not exempt under section 11 or 12, is
chargeable to tax as if it is the income of an association of persons :
a. income from property held under trusts wholly for charitable or religious purposes ;
b. voluntary contributions without any direction that they shall form part of corpus of trust; or
c. income of trust or institution being profits and gains of business which is incidental to the attainment of the
objectives of trust and separate books of account are maintained.
36.7-1 LEVY OF TAX AT MAXIMUM MARGINAL RATE IN CASE OF PUBLIC CHARITABLE AND RELIGIOUS TRUSTS WHICH FORFEIT TAX
EXEMPTION - Charitable or religious trusts, which may otherwise be eligible for tax exemption, are liable to forfeit
this exemption in the following circumstances, namely :
1. Where the trust is created after March 31, 1962, any part of the income of the trust enures under the terms of
the trust deed, directly or indirectly, for the benefit of specified categories of persons such as, the author of the
trust, trustee or manager of the trust, substantial contributor to the trust and any relative of such author, trustee,
etc.
2. Any part of the income or any property of the trust (whenever created) is used or applied during the relevant
year, directly or indirectly, for the benefit of specified categories of persons.
3. The trust funds (with certain exceptions) are invested in contravention of the investment pattern of such
funds.
Where a charitable or religious trust forfeits tax exemption in the circumstances mentioned at (1) to (3) above,
the trust shall be charged to tax at the maximum marginal rate†.
36.7-2 LEVY OF TAX AT THE MAXIMUM MARGINAL RATE WHERE A CHARITABLE TRUST CEASES TO EXIST OR CONVERTS INTO A NON-
CHARITABLE ENTITY [SECS. 115TD TO 115TF] - In order to ensure that the benefit conferred over the years to a charitable
trust is not misused, section 115TD has been inserted. This section provides for levy of additional income-tax in
case of conversion into, or merger with, any non-charitable form or on transfer of assets of a charitable
organisation on its dissolution to a non-charitable institution. Further, a trust or institution shall be deemed to
have been converted into any form (not eligible for registration under section 12AA), if its registration under
section 12AA has been cancelled during the previous year. Accreted income shall be amount of aggregate of total
assets as reduced by the liability as on the specified date (i.e., the date of conversion, merger or dissolution). The
accreted income shall be taxable at the maximum marginal rate†.
 HOW CAN A POLITICAL PARTY CLAIM EXEMPTION [SEC. 13A]

37. The following categories of income derived by a political party are not included in computing its total
income :
a. any income which is chargeable under the heads “Income from house property”, “Capital gains” and “Income
from other sources”; and
b. any income by way of voluntary contributions.
The term “political party” for this purpose means an association or body of individual citizens of India registered
or deemed to be registered with the Election Commission of India as a political party.
37.1 Conditions for claiming exemption under section 13A - Exemption under section 13A is available only
if the political party satisfies the following conditions –
 Books of account - The political party should keep and maintain such books of account and other documents
as would enable the Assessing Officer to properly deduce its income therefrom.
 Maintenance of record of voluntary contribution - The political party should keep and maintain a record of each
voluntary contribution in excess of Rs. 20,000 and of the names and addresses of persons who have made such
contributions. However, this rule is not applicable if voluntary contribution is received by way of electoral
bond.
 Audit of books of account - The accounts of the political party are audited by a chartered accountant.
 Submission of report to election commission - The treasurer of a political party (or any authorised person) shall
in each financial year prepare a report in respect of contribution received by the political party in excess of
† Maximum marginal rate of tax is 42.744 per cent.

65 Problems on income exempt from tax Problem 38-P1
Rs. 20,000 from any person/company in that year and submit it (before due date of submission of return of
income) to the Election Commission.
 Donation exceeding Rs. 2,000 to be received by account payee cheque/draft - No donation exceeding Rs. 2,000 is
received otherwise than by an account payee cheque/draft/use of electronic clearing system through a bank
account (or through prescribed electronic mode), or through electoral bonds.
 Submission of return of income - A political party (which wants to avail exemption under section 13A) should
furnish return of income [as required by section 139(4B)] on or before the time-limit given in section 139(1). If
return is not submitted (or if return is submitted belatedly), exemption under section 13A will not be available.
 EXEMPTION TO ELECTORAL TRUST [SEC. 13B]

37A. Voluntary contribution received by an electoral trust is treated as income under section 2(24)(iia). By virtue
of section 13B, donation received by an electoral trust will not be chargeable to tax if the following conditions
are satisfied—
1. The electoral trust is approved by the Central Board of Direct Taxes in accordance with the scheme made by
the Central Government.
2. The electoral trust will have to distribute to political parties 95 per cent of the aggregate donations received
by it during the previous year along with the surplus, if any, brought forward from any earlier previous years.
For this purpose, a political party means a political party registered under section 29A of the Representation of
the People Act, 1951.
3. The electoral trust functions in accordance with the rules made in this regard by the Central Government.
Problems on income exempt from tax

38-P1 Discuss and illustrate the tax treatment of capital gain derived by a charitable trust as specified under section 11(1A).
Solution : Where a capital asset of a charitable trust is transferred, then the tax treatment of capital gain will be as under —
1. Where the whole of such net consideration is utilised in acquiring the new capital asset (even investment for a fixed term
in a bank is treated as investment in capital asset) the entire amount of the capital gain is regarded as having been applied
to charitable or religious purposes, and the entire capital gain is not chargeable to tax.
2. Where only a part of the net consideration is utilised for acquiring the new capital asset, an amount, if any, by which the
cost of the new asset exceeds the cost of asset transferred, is regarded as amount not chargeable to tax for such purposes.
3. In a case where the asset (which is transferred) formed part of property held under trust in part only for charitable or
religious purposes, a proportionate amount of the capital gain is regarded as having been applied to charitable or religious
purposes.
 Provisions illustrated - To have better understanding of the above provisions, the following examples are given —
1. A trust holds a capital asset (being debentures of a company) income of which is fully utilised for charitable purposes. The
capital asset is transferred on March 1, 2020 and the capital gain is calculated as under —
Rs.
Sale proceeds 9,80,000
Less :
Cost (i.e., cost of acquisition and cost of improvement) 6,00,000
Expenses on transfer 20,000
Capital gain as per section 45 without giving any exemption 3,60,000
In this case, net sale consideration is Rs. 9,60,000 (i.e., Rs. 9,80,000 — Rs. 20,000). Suppose, the trust acquires another capital
asset for Rs. 9,60,000 (or more), then the entire capital gain of Rs. 3,60,000 will be exempt from tax. If, however, the amount
invested is less than Rs. 9,60,000, then the exemption will be lower than Rs. 3,60,000. The amount of exemption shall be
determined as follows —
Amount of investment in the Cost of the old asset which Amount exempt as the amount is
new capital asset is transferred applied for charitable purposes
(1) (2) [(1) - (2)]
Rs. Rs. Rs.
Case 1 9,60,000 6,00,000 3,60,000
Case 2 9,00,000 6,00,000 3,00,000
Case 3 7,00,000 6,00,000 1,00,000
Case 4 6,00,000 6,00,000 Nil
Case 5 5,00,000 6,00,000 Nil
Income that is exempt from tax 66
2. Suppose in the above case, the property is held under trust in part only for charitable purposes [suppose 70% of the income
of the trust is utilised for charitable purposes], then the amount of exemption shall be determined as follows—
70% of the amount invested in 70% of the cost of old Amount applied for charitable
the new asset (1) asset (2) purposes [i.e., excess of (1) over (2)]
Rs. Rs. Rs.
Case 1 6,72,000 4,20,000 2,52,000
Case 2 6,30,000 4,20,000 2,10,000
Case 3 4,90,000 4,20,000 70,000
Case 4 4,20,000 4,20,000 Nil
Case 5 3,50,000 4,20,000 Nil
38-E1 A capital asset (being bonds of Government of India) is transferred by a charitable trust on March 11, 2020. The following
particulars are available—
Rs.
Cost of acquisition 1,00,000
Cost of improvement 20,000
Cost of new asset purchased
- Situation 1 3,00,000
- Situation 2 1,05,000
Find out the amount of exemption if (a) the capital asset is held wholly for charitable purposes, (b) the capital asset is held in part
(80%) only for charitable purposes.
Test your knowledge

For answer, see relevant paras indicated at the end of each question.
1. “The Income-tax Act gives absolute exemptions in respect of certain income, while some income is included in the total
income for determining the rate only”. Discuss.
2. “Casual receipts” are exempt from income-tax. State the various exceptions enunciated on this general principle. [para
32.4]
3. Enumerate with reference to section 10 of the Income-tax Act, 1961, five types of income which is totally exempt from tax.
[para 32]
4. Enumerate any ten items which are exempt from charge of income-tax. [para 32]
5. Describe five items of “income receipts” totally excluded in computing total income under the Income-tax Act. [para 32]
6. Give eight instances of income completely exempt from tax giving a brief account of the conditions, if any, to be fulfilled,
in respect of each to be eligible for the exemption. [para 32].
7. Explain the provision regulating tax incidence on charitable trusts and institutions. [para 36]
8. Enumerate briefly the provisions of the Income-tax Act applicable to total income of religious trusts and institutions. [para
36]
Income under the head
CHAPTER 4 “Salaries” and its compu-
tation
S
ections 15, 16 and 17 of the Act deal with the computation of income under the head
“Salaries”. Apart from the study of these sections, one has to keep in view the
provisions of sections 7, 9, 10, 80C, 89, etc., while arriving at the tax incidence of an
employee. This Chapter deals with all such provisions of the Act as have a bearing on the
computation of the total income of an employee.
 WHAT DO YOU UNDERSTAND BY EXPRESSION “SALARY”

39. In order to understand the meaning of expression “salary”, one has to keep in mind the following norms :
39.1 Relationship between payer and payee - The relationship between payer and payee should be of an
employer and employee. In other words, the amount received by an individual shall be treated as salary only
if the relationship between payer and payee is of an employer and employee or master and servant. Employer
may be an individual, firm, association of persons, company, corporation, Central Government, State Govern-
ment, public body or a local authority. Likewise, employer may be operating in India or abroad. The employee
may be a full-time employee or part-time employee.
A Member of Parliament or of State Legislature is not treated as an employee of the Government. Salary and
allowances received by him are, therefore, not chargeable to tax under the head “Salaries” but are chargeable
to tax under section 56 under the head “Income from other sources”.
39.2 Salary and wages - Conceptually not different - Conceptually there is no difference between salary and
wages.
39.3 Salary from more than one source - If an individual receives salary from more than one employer during
the same previous year (maybe due to change of employment or due to employment with more than one
employer simultaneously), salary from each source is taxable under the head “Salaries”.
39.4 Salary from former employer, present employers or prospective employer - Remuneration received (or
due) during the previous year is chargeable to tax under the head “Salaries” irrespective of the fact whether it
is received from a former, present or prospective employer.
39.5 Foregoing of salary - Section 15 [see para 40 infra] taxes salary on “due” basis even if it is not received. If,
therefore, an employee foregoes his salary, it does not mean that salary so foregone is not taxable. Once salary
has accrued to an employee its subsequent waiver does not make it exempt from tax liability. Such voluntary
waiver or foregoing by an employee of salary due to him is merely an application of income and is nonetheless
chargeable to tax.
39.6 Salary paid tax-free - If salary is paid tax-free by the employer, the employee has to include in his taxable
income not only salary received but also amount of tax paid by the employer. It does not make any difference
whether tax is paid under terms of contract by the employer or voluntarily.
39.7 Voluntary payments - Salary, perquisite or allowance may be given as a gift to an employee, yet it would
be taxable. The Act does not make any distinction between gratuitous payment and contractual payment.
39.8 Salary under section 17(1) - Under section 17(1), salary is defined to include the following :
a. wages ;
b. any annuity or pension ;
67
Para 40 Income under the head ‘Salaries’ and its computation 68
c. any gratuity ;
d. any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages ;
e. any advance of salary ;
f. any payment received by an employee in respect of any period of leave not availed by him ;
g. the portion of the annual accretion in any previous year to the balance at the credit of an employee
participating in a recognised provident fund to the extent it is taxable ;
h. transferred balance in a recognised provident fund to the extent it is taxable; and
i. the contribution made by the Central Government or any other employer to the account of an employee under
a notified pension scheme referred to in section 80CCD.
 WHAT IS BASIS OF CHARGE OF SALARY INCOME

40. The basis of charge is explained in the following paras—
 Basis of charge as per section 15 - As per section 15, salary consists of :
a. any salary due from an employer (or a former employer) to an assessee in the previous year, whether actually
paid or not;
b. any salary paid or allowed to him in the previous year by or on behalf of an employer (or a former employer),
though not due or before it became due; and
c. any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer (or a former
employer), if not charged to income-tax for any earlier previous year.
The same is explained in the table given below—
Nature of salary Is it taxable as income of the
previous year 2019-20
Salary becomes due during the previous year 2019-20 (whether paid during the same
year or not) Yes
Salary is received during the previous year 2019-20 (whether it becomes due in a
subsequent year) Yes
Arrears of salary received during the previous year 2019-20 although it pertains to one
of the earlier years and the same were not taxed earlier on due basis Yes
Arrears of salary received during the previous year 2019-20 although it pertains to one
of the earlier years but the same were taxed earlier on due basis No
Salary is taxable on “due” or “receipt” basis whichever is earlier - Basis of charge in respect of salary income is fixed
by section 15. Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever matures earlier.
For instance, if salary of 2020-21 is received in advance in 2019-20, it is included in the total income of the previous year
2019-20 on “receipt” basis (as tax incidence matures earlier on “receipt” basis, “due” basis is not relevant in this case;
therefore, salary will not be included in total income of the previous year 2020-21). On the other hand, if salary which has
become due in 2018-19 and received in 2019-20, is included in total income of the previous year 2018-19 on “due” basis (as
incidence of tax matures earlier on “due” basis, “receipt” basis is inapplicable; salary will, therefore, not be included in total
income of the previous year 2019-20).
 Accounting method of the employee not relevant - It is worthwhile to mention that salary is chargeable to tax on
“due” or “receipt” basis (whichever matures earlier) regardless of the fact whether books of account, in respect
of salary income, are maintained by the assessee on mercantile basis or cash basis. Method of accounting cannot,
therefore, vary the basis of charge fixed by section 15.
Problems
40-P1 X joins a company on June 1, 2019 on monthly salary of Rs. 30,000 (he was not in employment prior to June 1, 2019). As per
the terms of employment, salary becomes due on the first day of the next month and is paid on the seventh day of the next month. Determine
the amount of salary chargeable to tax for the assessment year 2020-21.
Solution : The period from June 1, 2019 to March 31, 2020 is the previous year for the assessment year 2020-21. Salary of the
previous year shall be calculated as under—
Different months of the previous year Due date of salary Date of payment
June 2019 July 1, 2019 July 7, 2019
July 2019 August 1, 2019 August 7, 2019
August 2019 September 1, 2019 September 7, 2019
69 What is basis of charge of salary income Para 40
Different months of the previous year Due date of salary Date of payment
September 2019 October 1, 2019 October 7, 2019
October 2019 November 1, 2019 November 7, 2019
November 2019 December 1, 2019 December 7, 2019
December 2019 January 1, 2020 January 7, 2020
January 2020 February 1, 2020 February 7, 2020
February 2020 March 1, 2020 March 7, 2020
March 2020 April 1, 2020 April 7, 2020
Salary is taxable either on “due” basis or on “receipt” basis, whichever is earlier. As the earlier date is the “due” date of salary
in the above case, salary will be taxable on due basis. The previous year ends on March 31, 2020. Consequently, salary of
March 2020 (which becomes “due” after March 31, 2020) is not taxable as the income of the previous year ending March 31,
2020. Therefore, the salary taxable for the assessment year 2020-21 will be Rs. 2,70,000 (Rs. 30,000 per month for 9 months).
40-E1 Suppose in problem 40-P1, the salary becomes due for payment on the last day of each month, find out the taxable salary (before
standard deduction) for the assessment year 2020-21.
40-P2 X joins a company on December 1, 2016 in the pay scale of Rs. 10,000 – Rs. 1,000 – Rs. 25,000 (salary at the time of joining is
fixed at Rs. 12,000). As per the terms of employment salary becomes “due” on the first day of the next month, and it is generally paid
on the fifth day of the next month. Find out the salary (before standard deduction) taxable for the assessment year 2020-21.
Solution : In this case, X gets an annual increment of Rs. 1,000. The amount of salary for different years will be as follows —
Rs.
December 2016 to November 2017 12,000
Thus, Rs. 1,000 will be added to the salary every year till he reaches at the maximum point of Rs. 25,000. For the previous
year 2019-20, salary will be taxable as follows—
Different months Due date of salary [due or receipt date Amount
whichever is earlier] Rs.
March 2019 April 1, 2019 14,000
April 2019 May 1, 2019 14,000
May 2019 June 1, 2019 14,000
June 2019 July 1, 2019 14,000
July 2019 August 1, 2019 14,000
August 2019 September 1, 2019 14,000
September 2019 October 1, 2019 14,000
October 2019 November 1, 2019 14,000
November 2019 December 1, 2019 14,000
December 2019 January 1, 2020 15,000
January 2020 February 1, 2020 15,000
February 2020 March 1, 2020 15,000
March 2020 April 1, 2020 See Note
Total 1,71,000
Note : Salary of March 2020 is taxable on due basis on April 1, 2020. April 1, 2020 falls in the next previous year (i.e.,
2020-21), it will be taxable for the assessment year 2021-22. However, salary of March 2019 (which becomes “due” on April
1, 2019) is taxable for the previous year 2019-20 (i.e., the assessment year 2020-21).
40-E2 Assume in problem 40-P2 that salary becomes due on the last day of each month, find out the salary (before standard deduction)
chargeable to tax for the assessment year 2020-21.
40-P3 Up till June 30, 2019, X is in the employment of A Ltd. on the fixed salary of Rs. 25,000 per month which becomes “due” on the
first day of the next month. On July 1, 2019, X joins B Ltd. (salary being Rs. 30,000 per month which becomes “due” on the last day
of each month). Salary is actually paid on the seventh day of the next month in both cases. Find out the amount of salary (before standard
deduction) chargeable to tax for the assessment year 2020-21.
Para 40.1 Income under the head ‘Salaries’ and its computation 70
Solution : Computation of salary for the previous year 2019-20 :

Different months “Due” date or “receipt” date, Amount
whichever is earlier Rs.
1. March 2019 April 1, 2019 25,000
2. April 2019 May 1, 2019 25,000
3. May 2019 June 1, 2019 25,000
4. June 2019 July 1, 2019 25,000
5. July 2019 July 31, 2019 30,000
6. August 2019 August 31, 2019 30,000
7. September 2019 September 30, 2019 30,000
8. October 2019 October 31, 2019 30,000
9. November 2019 November 30, 2019 30,000
10. December 2019 December 31, 2019 30,000
11. January 2020 January 31, 2020 30,000
12. February 2020 February 28, 2020 30,000
13. March 2020 March 31, 2020 30,000
Total 3,70,000
40-E3 Assume in problem 40-P3 that salary becomes due on the last day of the month in the case of A Ltd. and on the first of the next
day of month in the case of B Ltd., find out the taxable salary (before standard deduction) for the assessment year 2020-21.
40.1 Place of accrual of salary income [Sec. 9(1)] - Income under the head “Salaries” is deemed to accrue or
arise at the place where the service (in respect of which it accrues) is rendered. Keeping in view the aforesaid
general observation, the rules are given below—
 Under section 9(1)(ii), salary in respect of service rendered in India is deemed to accrue or arise in India even
if it is paid outside India or it is paid or payable after the contract of employment in India comes to an end.
 Pension paid abroad is deemed to accrue in India, if it is paid in respect of services rendered in India.
 Likewise, leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
 Section 9(1)(iii), however, makes a departure from the aforesaid rule. By virtue of this section, salary paid by
the Indian Government to an Indian national is deemed to accrue or arise in India, even if service is rendered
outside India. Deeming provisions of section 9(1)(iii) are applicable only in respect of salary and not in respect
of allowances and perquisites paid or allowed by the Government to Indian nationals working abroad, as such
allowances and perquisites are exempt under section 10(7).
 The provisions of section 9(1)(ii)/(iii) are summarized below (it is assumed that salary is paid at the place where
service is rendered)—
Who is employee Who is employer Where service Is it taxable in India
is rendered
Salary Allowance/
perquisite
Case 1 Indian citizen (resident or non- Government Outside India Yes1 No2
resident) of India
Case 2 Non-resident (but not covered by Any Outside India No No
case 1)
Case 3 Resident and ordinarily resident (but Any Anywhere Yes Yes
other than case 1)
40.2 How to compute salary income - Salary income is calculated as under—

Rs. Rs.
Income from salary [see para 41] ..................
Income by way of allowances [see para 42] ..................
Taxable value of perquisites [see para 44] ..................
Gross salary * * * * *
1. Taxable by virtue of section 9(1)(iii)—see para 27.5.

2. Not taxable by virtue of section 10(7).
71 Different forms of salary Para 41
Rs. Rs.
Entertainment allowance [see para 42.2] ..................
Professional tax [see para 45.3] .................. * * * * *
Income from salaries * * * * *
 DIFFERENT FORMS OF SALARY - HOW TAXED

41. The term “salary” signifies a recompense or consideration given to any person for pains bestowed upon
another person’s business.
Tax treatment of different receipts is given below –
Different receipts Tax treatment
Basic salary Taxable.
Dearness allowance/pay Taxable.
Advance salary Taxable in the year of receipt.
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in service Taxable
Leave encashment at the time of Exempt in the hands of a Government employee*. In the case of a non-
retirement or at the time of leaving job. Government employee*, it is exempt in some cases [see para 41.1]
Salary in lieu of notice Taxable
Salary to partner Not chargeable under the head “Salaries” but taxable under the head
“Profits and gains of business or profession”.
Fees and commission Taxable.
Bonus Taxable on receipt basis if not taxed earlier on due basis.
Gratuity Exempt in the hands of a Government employee*. In the case of a non-
Government employee*, it is exempt in some cases [see para 41.2]
Monthly pension (i.e., uncommuted Taxable
pension)
Lump sum payment of pension (i.e., Exempt in the hands of a Government employee*. In the case of a non-
commuted pension) Government employee*, it is exempt in some cases [see para 41.3]
Pension under National Pension Scheme At the time of receipt of pension it is chargeable to tax. Tax consequences
(NPS) are discussed in para 41.4.
Annuity from employer Taxable as salary.
Annual accretion to the credit balance in 1. Excess of employer’s contribution over 12% of salary is taxable.
recognized provident fund 2. Excess of interest over notified interest is taxable (notified rate of interest
is 9.5 per cent).
Retrenchment compensation Exempt from tax to the extent of least† of the following:
a. Amount calculated** under section 25F(b) of the Industrial Disputes
Act; or
b. An amount specified by the Government (i.e., Rs. 5,00,000).
Remuneration for extra duties Fully taxable.
Compensation received under voluntary Exempt in some cases [see para 41.5]
retirement scheme (VRS)
Profits in lieu of salary Taxable [see para 41.6]
Salary from UNO Not chargeable to tax.
*See next page

**See next page
† When compensation is paid under any scheme approved by the Central Government, these limits are not applicable and the entire amount is
exempt.
*The following are treated as Government employees (Govt.) or non-Government employees (N Govt.) –
For the purpose of taxation Central/State Employees of Employees of Other
of different receipts Government employees local authorities statutory corporations employees
Leave encashment Govt. N Govt. N Govt. N Govt.
Gratuity Govt. Govt. N Govt. N Govt.
Commuted pension Govt. Govt. Govt. N Govt.
**Compensation is equivalent to 15 days’ “salary” for each year (or part thereof exceeding 6 months) of service. The mode
of computation of “salary” and length of service for this purpose and for the purpose of gratuity (covered under the Payment
of Gratuity Act) is same.
41.1 Leave salary - The provisions regarding taxability of leave salary are given below—
41.1-1 WHAT IS LEAVE SALARY - As per service rules, an employee gets different leaves. An employee has to earn leave
in the first instance and only when he has leave to his credit, he can apply for leave. If a leave (standing to his
credit) is not taken within a year, as per the service rules, it may lapse or it may be encashed or it may be
accumulated. The accumulated leaves standing to the credit of an employee may be availed by the employee
during his service time or, subject to service rules, such leaves may be encashed at the time of retirement or
leaving the job. Encashment of leave by surrendering leave standing to one’s credit is known as “leave salary”.
41.1-2 BROAD TAX TREATMENT - The broad tax treatment is given below—
Nature of leave encashment Status of employee Whether it is taxable
Leave encashment during continuity of Government/non- It is chargeable to tax. However, relief can be
employment Government employee taken under section 89
Leave encashment at the time of retire- Government employee It is fully exempt from tax under section
ment/leaving job 10(10AA)(i) [see para 41.1-3]
Leave encashment at the time of retire- Non-Government It is fully or partly exempt from tax in some
ment/leaving job employee cases under section 10(10AA)(ii) [see para 41.1-4]
41.1-3 GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT THE TIME OF RETIREMENT [SEC. 10(10AA)(i)] - In the case of a
Central/State Government employee, any amount received as cash equivalent of leave salary in respect of
period of earned leave at his credit at the time of his retirement (whether on superannuation or otherwise), is
exempt from tax.
41.1-4 NON-GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT THE TIME OF RETIREMENT [SEC. 10(10AA)(ii)] - In the case
of a non-Government employee (including an employee of a local authority or public sector undertaking), leave
salary is exempt from tax on the basis of least of the following—
1. Period of earned leave (in number of months) to the credit of the employee at the time of his retirement or leaving
the job [see Note 1] × Average monthly salary [see Note 2]
2. 10 × Average monthly salary
3. The amount specified by the Government [i.e., Rs. 3,00,000 applicable from April 1, 1998; for earlier period this
amount was different]
4. Leave encashment actually received at the time of retirement.
Notes :
1. How to find out leave standing to the credit of an employee at the time of retirement or leaving the job - It will be calculated as
follows—
Step (a) - Find out duration of service in number of years (ignore any fraction of year).
Step (b) - Find out rate of earned leave entitlement from the service rules — how many days leave is credited for each year
of service (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from
whose service he has retired). For instance, if earned leave is credited at the rate of 40 days leave for each year of service,
for Step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited
at the rate of 25 days leave for each year of service, for Step (b) calculation shall be made at the rate of 25 days leave for each
year of service.
Step (c) - Find out earned leave actually taken or encashed (in number of days) during the service time.
The computation shall be made as follows—
[Step (a) × Step (b) minus Step (c)] ÷ 30
73 Leave salary Para 41.1
2. How to find out average monthly salary - Salary, for this purpose, means basic salary and includes dearness allowance if terms
of employment so provide.* It also includes commission based upon fixed percentage of turnover achieved by an employee.
“Average salary” for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10
months immediately preceding the retirement [see problem 41.1-P3].
 When earned leave encashment is received from two or more employers - Where leave salary or leave encashment is
received by a non-Government employee from two or more employers (may be in the same year or different
years), the maximum amount of exemption under section 10(10AA)(ii) during the lifetime of the concerned
employee cannot exceed Rs. 3,00,000.
41.1-5 OTHER POINTS - The following other points should also be kept in view :
 Even if there is any voluntary retirement from service by way of resignation, the provisions of section 10(10AA)
would apply.
 Relief under section 89 would be admissible in respect of encashment of leave salary by an employee when in
service.
 Salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of
such employee at the time of his/her death is not taxable as salary.

 Sum equivalent of leave salary received by the family of a Government servant who died in harness, is not
taxable in the hands of recipient.
Problems
41.1-P1 X, an employee of the Himachal Pradesh Government, retires on January 3, 2020 and receives Rs. 11,60,000 as cash equivalent
of earned leave to his credit. Is Rs. 11,60,000 fully exempt from tax?
Solution : Since X is a Government employee, leave salary of Rs. 11,60,000 is fully exempt from tax in view of section
10(10AA).
41.1-E1 X, an employee of the Central Government, receives Rs. 8,90,000, as cash equivalent of earned leave to his credit at the time
of his retirement on August 31, 2019. He joins a private sector organisation on October 1, 2019. The Assessing Officer is of the view
that since X has joined a private sector organisation, the amount of earned leave received by him is fully taxable. Do you agree with
him?
41.1-P2 X was employed by PQR Ltd. up to March 15, 1988. At the time of leaving PQR Ltd., he was paid Rs. 3,50,000 as leave salary
out of which Rs. 57,000 was exempt from tax under section 10(10AA)(ii). Thereafter he joined ABC (P.) Ltd. and received Rs. 4,12,200
as leave salary at the time of his retirement on December 31, 2019. Determine the amount of taxable leave salary from the following
information :
Salary at the time of retirement (per month) Rs. 22,900
Average salary received during 10 months ending on December 31, 2019
- From March 1, 2019 to July 31, 2019 (per month) Rs. 22,600
- From August 1, 2019 to December 31, 2019 (per month) Rs. 22,900
Duration of service (a) 14¾ years
Leave entitlement for every year of service (b) 45 days
Leave availed while in service (c) 90 days
Leave at the credit of employee at the time of retirement [(14 × 45 – 90) ÷ 30] 18 months
Leave salary paid at the time of retirement at the rate of Rs. 22,900 per month (i.e., Rs. 22,900 × 18) Rs. 4,12,200
Solution : The amount of exemption under section 10(10AA) will be computed as under :
Step (a) - Length of service [14.75 years, rounded off] 14 years
Step (b) - Rate of leave entitlement [actual rate is 45 days for each year of service, it cannot exceed 30 days for
30 days leave for each year of service] each year
Step (c) - Leave availed while in service 90 days
Leave to the credit of the employee at the time of retirement [(14 × 30 – 90) ÷ 30] 11 months
Rs.
Average monthly salary (for 10 months ending on December 31, 2019) [i.e., (Rs. 22,600 × 5 +
Rs. 22,900 × 5) ÷ 10] 22,750
a. Period of earned leave to the credit of the employee at the time of retirement × Average monthly
salary (i.e., Rs. 22,750 per month × 11 months) 2,50,250
b. 10 months × average monthly salary (i.e., Rs. 22,750 × 10) 2,27,500
*Dearness allowance/pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension,
leave encashment, gratuity, etc.). If dearness allowance/pay is part of salary for computing only some (not all) of the retirement benefits, then
it is not taken into consideration for this purpose.
Rs.
c. Maximum amount not taxable [Rs. 3,00,000 less amount exempted earlier] 2,43,000
d. Amount received from the employer 4,12,200
Amount not taxable under section 10(10AA) [i.e., the least of (a), (b), (c) or (d)] 2,27,500
Amount taxable for the assessment year 2020-21 1,84,700
Notes :
1. While computing completed years of service, any fraction of the year shall be ignored.
2. If a non-Government employee is entitled to receive leave salary at a rate higher than 30 days’ salary for every completed
year of service, the amount shown at (a) above has to be calculated with reference to 30 days’ salary for every completed year
of service.
3. X can claim relief under section 89 in respect of Rs. 1,84,700.
41.1-E2 [P4.27]* X, a non-Government employee, receives Rs. 3,75,000 as leave salary at the time of retirement on February 20,
2020. On the basis of the following information, determine the amount of taxable leave salary: Basic pay : Rs. 15,000 per month since
2007 ; duration of service : 26 years ; leave at the credit of X at the time of retirement : 25 months ; entitlement of leave salary : 60
days’ salary for every year of service and leave availed while in service : 27 months.
➠ 41.1-P3 X retires on March 16, 2020 from a private sector company. According to the service rule, he is entitled to 24 days leave for
each year of completed service. The following information is available from the records of the employer-company —
Duration of service 32 years
Gross leave entitlement (32 yrs. × 24) 768 days
Less : Leave actually availed while in service 108 days
Balance 660 days
Less : Leave encashment taken during 1999-2000 390 days
Balance 270 days
Less : Leave encashment paid on May 10, 2018 [@ Rs. 15,000 per month] 60 days
Leave standing to the credit of X at the time of retirement 210 days
Salary and dearness allowance paid to X prior to retirement are as follows—
Basic salary Dearness allowance per month
per month [62 per cent is part of salary for
determining retirement benefits]
Rs. Rs.
January 1, 2019 to October 31, 2019 14,000 1,000
November 1, 2019 to March 16, 2020 15,000 1,250
Accordingly, he has been paid Rs. 1,13,750 (i.e., Rs. 16,250 × 210/30) at the time of retirement on March 16, 2020. Find out the amount
of leave salary chargeable to tax for the assessment year 2020-21 taking into consideration the following points raised by X —
1. “Average salary” for the purpose of section 10(10AA) should be calculated on the basis of salary drawn during 10 months immediately
preceding the retirement.
2. The word “month” has not been defined in the Act. As per section 3(35) of the General Clauses Act, 1897, “month” shall mean a month
reckoned according to the British calendar. Consequently, in this case (according to X), average salary should be calculated on the basis
of salary drawn during 10 months ending on February 28, 2020 (i.e., from May 1, 2019 to February 29, 2020).
Solution : The opinion of X, given in the problem, is not legally tenable because of the following reasons —
1. The General Clauses Act defines the word “month” as a month “reckoned” according to the British calendar.
2. The word “reckoned” according to the Shorter Oxford English Dictionary means “to count, to make calculation; to ascertain
by counting”. For instance, the period commencing on April 24, 2019 and ending on May 23, 2019 is one month according
to the British calendar. The definition of “month” as given in the General Clauses Act does not state that the word “month”
always means a period commencing on the first day of the month and ending on the last day of the month.
3. Accordingly, if a person retires on March 16, 2020, “average salary” shall be determined on the basis of salary drawn
during ten months ending on the date of retirement (i.e., May 17, 2019 to March 16, 2020).
75 Gratuity Para 41.2
Computation of exemption
Basic salary 62% of dearness allowance
Rs. Rs.
Salary from May 17, 2019 to October 31, 2019 (5 months
and 14 days) 76,534 3,389
Salary from November 1, 2019 to March 16, 2020 (4 months
and 16 days) 68,000 3,513
Total of ten months (Rs. 1,51,436) 1,44,534 6,902
Rs.
Average monthly salary (Rs. 1,51,436/10) 15,143.60
a. Leave to the credit of X on the date of retirement × Average monthly salary (i.e., Rs. 15,143.60 × 210/30) 1,06,005
b. 10 months × salary (i.e., Rs. 15,143.60 × 10) 1,51,436
c. Amount notified by the Government 3,00,000
d. Amount received 1,13,750
Rs. 1,06,005 is the amount exempt from tax under section 10(10AA) and the amount taxable for the assessment year
2020-21 is Rs. 7,745. Besides, Rs. 30,000, being the leave encashment taken on May 10, 2019, is taxable for the assessment year
2020-21. Therefore, the amount taxable for the assessment year 2020-21 is Rs. 37,745 which is subject to relief under section
89.
➠ 41.1-E3 [P4.28]* From the following information, find out the amount chargeable to tax for the assessment year 2020-21 :
Date of retirement of X from a private job November 15, 2019
Basic salary from January 1, 2019 to April 30, 2019 Rs. 10,000 per month
Basic salary from May 1, 2019 onwards Rs. 12,000 per month
Dearness allowance Nil
Commission Nil
Leave standing to the credit at the time of retirement (according to service rules) 660 days
Rate of leave entitlement according to the service rule 60 days leave for each
year of service
Duration of service 16 years
Amount of leave encashment given at the retirement (leave encashment was not given earlier)
(i.e., Rs. 12,000 × 660/30) Rs. 2,64,000
41.2 Gratuity [Sec. 10(10)] - Gratuity is a retirement benefit. It is generally payable at the time of cessation of
employment and on the basis of duration of service. Tax treatment of gratuity is given below :
Status of employee Whether gratuity is taxable
Government employee It is fully exempt from tax under section 10(10)(i)
Non-Government employee covered by the Payment It is fully or partly exempt from tax under section10(10)(ii)
of Gratuity Act, 1972 [see para 41.2-2]
Non-Government employee not covered by the Pay- It is fully or partly exempt from tax under section10(10)(iii)
ment of Gratuity Act, 1972 [see para 41.2-3]
41.2-1 IN THE CASE OF GOVERNMENT EMPLOYEES - Any death-cum-retirement gratuity received by Government
employees (i.e., Central Government employees, State Government employees, employees of local authority but
not employees of a statutory corporation) is wholly exempt from tax under section 10(10)(i).
Problems
41.2-1P1 X, an employee of the Central Government, receives Rs. 7,86,000 as gratuity at the time of his retirement on September 30,
2019. Is gratuity fully exempt from tax ?
Solution : Gratuity received by him will be fully exempt from tax under section 10(10)(i).
41.2-1E1 X, a Government employee, receives Rs. 9,10,000 as gratuity at the time of his retirement on April 30, 2019. On May 15,
2019, he joins a private sector company on monthly salary of Rs. 43,000. Is the gratuity received by him exempt from tax ?
41.2-2 IN THE CASE OF EMPLOYEES COVERED BY THE PAYMENT OF GRATUITY ACT, 1972 [SEC. 10(1)(ii)] - Any gratuity received by
an employee, covered by the Payment of Gratuity Act, 1972**, is exempt from tax on the following basis—
**The Payment of Gratuity Act, 1972, is applicable in the case of every shop/establishment (employing 10 or more persons) and every factory,
mine, oilfield, plantation, port, etc.
1. 15 days’ salary (7 days’ salary in the case of employees of a seasonal establishment) based on salary last drawn
for each year of service (i.e., 15 days’ salary × Length of service).
2. Rs. 20,00,000†.
3. Gratuity actually received.
 What is exempt from tax - The least of the above three is exempt from tax. Gratuity in excess of the aforesaid limits
is taxable in the hands of the assessee. However, the assessee can claim relief under section 89.
 How to find out length of service - If the period of service is 6 months or less than 6 months, it shall be ignored for
this purpose. Conversely, if the period of the service is more than 6 months, it shall be taken as one full year.
Consider the following cases—
The difference between date of retirement and date of joining Length of service for the
purpose of section 10(10)(ii)
Case 1 26 years, 5 months and 29 days 26 years
Case 2 26 years and 6 months 26 years
Case 3 26 years, 6 months and 1 day 27 years
 What is salary - “Salary” for the purpose of the aforesaid limits means salary last drawn by an employee and
includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages
and any other allowance.
 How to determine 15 days’ salary - Salary of 15 days is calculated by dividing salary last drawn by 26, i.e.,
maximum number of working days in a month. For instance, if monthly salary at the time of retirement is Rs.
2,500, 15 days’ salary would come to Rs. 1,442.31 [i.e., Rs. 2,500 × 15÷26].
 How to determine 15 days’ salary for each year of service in the case of a piece-rated employee - In the case of a piece-
rated employee, daily wages shall be computed on the average of the total wages received by him for a period
of three months immediately preceding the retirement. For this purpose, the wages paid for any overtime work
shall not be taken into account.
For instance, X is a piece-rated employee. He retires on June 20, 2020. During the period March 21, 2020 to June 20, 2020, he
has been paid total wages of Rs. 32,780 which includes overtime payment of Rs. 8,200. 15 days’ salary shall be determined
as follows—
Rs.
Wages of 3 months ending on the date of retirement 32,780
Less: Payment for overtime 8,200
Balance 24,580
One month’s salary (1/3 of Rs. 24,580) 8,193
15 days’ salary (15/26 of Rs. 8,193) 4,727
Problems
41.2-2P1 X, an employee of PQ Co. Ltd., receives Rs. 78,000 as gratuity. He is covered by the Payment of Gratuity Act, 1972. He retires
on December 12, 2019 after rendering service of 38 years and 8 months. At the time of retirement his monthly basic salary and dearness
allowance was Rs. 2,400 and Rs. 800, respectively. Is the entire amount of gratuity exempt from tax ?
Solution : In this case, 39 years will be taken as completed years of service. 15 days’ salary is Rs. 1,846.15 (i.e., Rs. 3,200 ×
15÷26, being the number of working days in a month).
Out of Rs. 78,000 received as gratuity, the least of the following will be exempt from tax :
a. Rs. 72,000 (being 15 days’ salary for each completed year of service, i.e., Rs. 1,846.15 × 39) ;
b. Rs. 20,00,000 ; or
c. Rs. 78,000 (being gratuity actually received).
Hence Rs. 72,000 is exempt from tax and the balance of Rs. 6,000 is taxable for the assessment year 2020-21 which is subject
to relief under section 89.
41.2-2E1 [P4.29]* X, an employee of LMN Ltd., receives Rs. 45,000 as gratuity under the Payment of Gratuity Act, 1972. He retires
on November 10, 2019 after rendering service of 30 years and 4 months. At the time of retirement, monthly salary was Rs. 2,340
(inclusive of dearness allowance of Rs. 200 per month). Calculate amount of gratuity chargeable to tax.
† Prior to March 29, 2018, this limit was Rs. 10,00,000.
41.2-3 IN THE CASE OF ANY OTHER EMPLOYEE - Any other gratuity [not covered by paras 41.2-1 and 41.2-2 above],
received by an employee on retirement, death, termination, resignation or on his becoming incapacitated prior
to the retirement, is exempt from tax on the following basis—
1. Rs. 20,00,0001
2. Half month’s average salary for each completed year of service2
3. Gratuity actually received
 What is exempt from tax - The least of the above three is exempt from tax. Gratuity in excess of the aforesaid limits
is taxable in the hands of the assessee. However, the assessee can claim relief under section 89.
41.2-3a OTHER POINTS - The following points merit consideration—
 Completed years of service - How to determine - For calculating length of service any fraction of the year shall be
ignored. Consider the following cases—

The difference between date of retirement and date of joining Length of service for the
purpose of section 10(10)(iii)
Case 2 26 years and 6 months 26 years
Case 3 26 years, 6 months and 1 day 26 years
 Average monthly salary - How to determine - Average monthly salary is calculated on the basis of average salary
for the ten months immediately preceding the month in which the employee has retired.
For instance, if a person retires on March 16, 2020, average salary will be considered on the basis of salary drawn from May
1, 2019 to February 29, 2020.
 What is salary for this purpose - Salary for this purpose means basic salary. It includes dearness allowance if the
terms of employment so provide (or if dearness allowance/pay is taken into account for computing retirement
benefits)**. It also includes commission if commission is payable at a fixed percentage of turnover achieved by
an employee.
 When gratuity is received from two or more employers - Where gratuity is received by a non-Government
employee (not covered by the Payment of Gratuity Act) from two or more employers (maybe in the same year
or different years), the maximum amount of exemption under section 10(10)(iii) during the lifetime of the
concerned employee cannot exceed the notified amount, i.e., Rs. 10,00,000. This provision is applicable only in
the case of residual category of employees mentioned in para 41.2-3.
 Gratuity paid while in service - Any gratuity paid to an employee while he continues to remain in service (whether
or not after he has put in a minimum specified period of service) is not exempt from tax, though the assessee can
claim relief under section 89.
 Gratuity received by family members after the death of the employee† - If gratuity is paid after the death of an employee
(say X is the employee), then the case may fall in one of the following situations—
Normal date of When gratuity Date of payment of Date of death of X
retirement of X becomes due gratuity
Situation 1 June 30, 2019 June 30, 2019 July 11, 2019 July 20, 2023
Situation 2 June 30, 2019 June 30, 2019 July 11, 2019 July 6, 2019
Situation 3 June 30, 2025 July 6, 2019* July 11, 2019 July 6, 2019
*After the death of X.
1. Rs. 10,00,000 is applicable from May 24, 2010 to March 28, 2018. Between September 24, 1997 and May 23, 2010, this limit was Rs. 3,50,000.
2. The words “each year of completed service” used in section 10(10)(iii) are not confined to completed years of service under one employer and
have to be interpreted to mean an employee’s total service under two different employers including employer other than one from whose service
he has retired, for purposes of calculation of period of years of his completed service, provided he was not paid gratuity by former employer—
CIT v. P.M. Mehra [1993] 201 ITR 930 (Bom.).
**Dearness allowance/pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension,
†This proposition is applicable even if gratuity is received under the Payment of Gratuity Act, 1972.
In Situation 1, the gratuity becomes due (and paid) during the lifetime of X. Therefore, it is taxable in the hands
of X. However, he can claim exemption under section 10(10).
In Situation 2, gratuity becomes due on June 30, 2019 at the time of retirement. It is taxable in the hands of X even
if it is received by his legal heirs on July 11, 2019 after his death. After claiming exemption under section
10(10)(ii)/(iii), the balance shall be included in the salary income of X. Income-tax return shall be submitted by
Mrs. X (or her children) as legal heirs of X. It is incorrect to state that in this case, income is taxable in the hands
of Mrs. X as income from other sources.
In Situation 3, X dies on July 6, 2019 while in service. Gratuity is sanctioned after his death on July 6, 2019. It cannot
be taxed in the hands of deceased employee X as it becomes due and is paid after his death. This amount is not
taxable in the hands of legal heirs also as it does not partake the character of income in their hands but is only
a part of the estate devolving upon them. It is incorrect to state that income is taxable in the hands of Mrs. X as
income from other sources.
Problems
41.2-3P1 X, who is not covered by the Payment of Gratuity Act, 1972, retires on November 20, 2019 from ABC Ltd. and receives
Rs. 1,86,000 as gratuity after service of 38 years and 10 months. His salary is Rs. 8,000 per month up to July 31, 2019 and Rs. 9,000
per month from August 1, 2019. Besides, he gets Rs. 500 per month as dearness allowance (69 per cent of which is part of salary for
computing all retirement benefits but 100 per cent of dearness allowance is considered for computing provident fund). What amount
of gratuity will be exempt from tax ?
Solution : Computation of average monthly salary Rs.
Basic salary from January 1, 2019 to October 31, 2019 (i.e., Rs. 8,000 × 7 + Rs. 9,000 × 3) 83,000
69% of dearness allowance (i.e., 69% of Rs. 500 × 10)** 3,450
Total 86,450
Average monthly salary 8,645
Out of Rs. 1,86,000 received as gratuity, the least of the following three is exempt from tax :
a. Rs. 20,00,000 ;
b. Rs. 1,64,255 (being half month’s average salary for each year of completed service, i.e., Rs. 8,645 × ½ × 38) ; or
c. Rs. 1,86,000 (being amount received as gratuity).
Rs. 1,64,255, being the least, is exempt from tax and the balance of Rs. 21,745, is taxable for the assessment year 2020-21. X
can claim relief under section 89.
41.2-3E1 [P4.30]* X, not being covered by the Payment of Gratuity Act, 1972, retires on January 6, 2020 from PQR and receives
Rs. 1,24,000 as gratuity after service of 29 years and 11 months. His average monthly salary during March 1, 2019 to December 31,
2019 is Rs. 8,500. Besides, he gets Rs. 2,000 per month as dearness allowance [but it is considered only for calculating provident fund
and not gratuity or pension]. Determine the amount of : (a) taxable gratuity, (b) gratuity exempt from tax for the assessment year
2020-21.
41.2-3P2 X, a marketing specialist of Bombay, is working with two companies, viz., A Co. and B Co. He retires from A Co. on November
30, 1988 (salary at the time of retirement : Rs. 2,600) and receives Rs. 22,000 as gratuity out of which Rs. 20,000 is exempt under section
10(10)(iii).
He also retires from B Co. on December 10, 2019 after 38 years and 8 months of service and receives Rs. 3,90,000 as death-cum-
retirement gratuity. His average basic salary drawn from B Co. for the preceding 10 months ending on November 30, 2019 is Rs. 18,200
per month. Besides, he has received Rs. 1,000 per month as dearness allowance, 80 per cent of which forms part of salary for the purpose
of computation of all retirement benefits (for provident fund 85 per cent is considered) and 6 per cent commission on turnover achieved
by him. Total turnover achieved by him during 10 months ending on November 30, 2019 is Rs. 2,00,000. Determine the amount of
gratuity exempt under section 10(10)(iii) for the assessment year 2020-21.
Solution : Salary for the purpose of computation of exempt gratuity :
Rs.
Basic salary of 10 months (Rs. 18,200 × 10) 1,82,000
Dearness allowance of 10 months (80% of Rs. 1,000 × 10) 8,000
Commission @ 6% of turnover of preceding 10 months [i.e., 6% of Rs. 2,00,000] 12,000
Total 2,02,000
Average monthly salary (Rs. 2,02,000 ÷ 10) 20,200
Amount of exempt gratuity is the least of the following :
a. Rs. 19,80,000 (i.e., Rs. 20,00,000 — Rs. 20,000, being amount of exempt gratuity received from A Co.) ;
**Only that much dearness allowance is included which is considered for all retirement benefits.
b. Rs. 3,83,800 [being half month’s salary for each completed year of service (i.e., Rs. 20,200 × ½ × 38)] ; and
c. Rs. 3,90,000 (being amount of gratuity received from B Co.).
Rs. 3,83,800, being the least, is exempt from tax. Therefore, Rs. 6,200 is chargeable to tax as salary for the assessment year
2020-21. X can, however, claim relief under section 89.
Notes :
1. Dearness allowance is included in salary for the purpose of computation of exempt gratuity, if it forms part of salary for
the purpose of all retirement benefits. In this case, 80% of the dearness allowance forms part of salary for computation of
all retirement benefits. Therefore, 80% of the dearness allowance is included in average monthly salary. (It may be noted
that the entire dearness allowance is chargeable to tax). Commission is included in salary for the purpose of calculating
exempt gratuity if it is based on a fixed percentage of turnover achieved by the employee.
2. If an employee, who has received gratuity in earlier year(s) from his former employer(s), receives gratuity from another
employer in the same year or a later year, the limit of Rs. 10,00,000 is reduced by the amount(s) of gratuity exempt from tax
under section 10(10)(iii) in earlier year(s). Therefore, Rs. 20,000, being the amount of exempt gratuity from A Co., is deducted
from Rs. 10,00,000.
41.2-3E2 [P4.31]* X, a marketing specialist of Madras, is working with two concerns, viz., P Co. and Q Co. He retires from P Co.
on June 30, 1999 (salary at the time of retirement Rs. 2,800) and receives Rs. 16,000 as gratuity out of which Rs. 4,000 is exempt
from tax under section 10(10)(iii).
He retires from Q Co. on January 10, 2020 after 8 years and 7 months’ service and receives Rs. 1,92,000 as gratuity. Basic salary
(average) drawn from Q Co. for preceding 10 months ending December 31, 2019 is Rs. 19,000. Besides, he has received Rs. 1,000
per month as dearness allowance only 20 per cent dearness allowance is considered for computing gratuity and pension. For provident
fund, the entire amount is considered. Further, X gets 3 per cent commission on turnover achieved by him. Total turnover achieved
by him during the period of 10 months ending December 31, 2019 is Rs. 2,87,500. Determine the amount of gratuity taxable for the
➠ 41.2-3P3 X is the Marketing Manager of A Ltd. He retires on November 30, 2019 after service of 22 years and 10 months. At the
time of retirement he has been paid Rs. 2,80,000 as gratuity, although A Ltd. is not covered by the Payment of Gratuity Act, 1972. Find
out the salary chargeable to tax for the assessment year 2020-21.
The following additional information is available —
1. Salary and allowances—
Basic salary at the time of retirement Rs. 8,000 per month
Month from which increment is allowed From the salary payable
for the month of July
Amount of last increment Rs. 1,000
Dearness allowance (fixed since 2015 and only 15 per cent is considered for all retirement
benefits) Rs. 2,000 per month
Commission (fixed on per month basis since 2015) Rs. 500
2. Besides, he gets 0.5 per cent commission on turnover achieved by him. Turnover for different months is as follows —
Rs.
January 2019 70,000
February 2019 80,000
March 2019 85,000
April 2019 to June 2019 2,70,000
July 2019 to October 2019 3,70,000
November 2019 95,000
3. As per service rules, salary, allowances and commission become due on first day of the next month and paid on the same day.
4. X retires on November 30, 2019 and hands over the charge on the same day at 5.30 p.m. to the Deputy Marketing Manager.
5. For the purpose of section 10(10)(iii) average monthly salary is calculated on the basis of average salary for the ten months immediately
preceding the month in which an employee is retired. Although X is not in service after 5.30 p.m. on November 30, 2019, he claims that
while calculating “average monthly salary” for the purpose of section 10(10)(iii), salary from February to November 2019 shall be
considered as he retires “effectively” from December 1, 2019.
Solution : Computation of average monthly salary for purpose of section 10(10)(iii) - X retires on November 30, 2019 and he hands
over the charge on the same day at 5.30 p.m. On November 30, 2019, after 5.30 p.m., he cannot sign any document as the
Marketing Manager of A Ltd. Therefore, it is incorrect to state that he retires with effect from December 1, 2019. The effective
date of retirement is November 30, 2019 (5.30 p.m.). Consequently, average monthly salary shall be computed on the basis
of salary of X during the period of 10 months immediately prior to the month of retirement (i.e., January 2019 to October 2019)
on the following lines—
Rs.
Basic salary from January to June 2019 (Rs. 7,000 × 6) 42,000
Basic salary from July to October 2019 (Rs. 8,000 × 4) 32,000
15 per cent of dearness allowance of January — October 2019 3,000
Fixed commission Nil
0.5% Commission on turnover achieved during January and October 2019 [0.5% of Rs. 8,75,000] 4,375
Total 81,375
Average 8,137.50
Computation of exemption under section 10(10)(iii)
Out of Rs. 2,80,000, the least of the following is exempt :
a. Rs. 20,00,000 ;
b. Rs. 89,512.50 (being ½ × Rs. 8,137.50 × 22) ; or
c. Rs. 2,80,000.
Amount chargeable to tax is Rs. 1,90,487.50.
Computation of salary
Basic Dearness Fixed Commission
salary allowance commission @ 0.5 of
turnover
Rs. Rs. Rs. Rs.
Salary of March 2019 (which becomes due on April 1, 2019
and paid on the same day) 7,000 2,000 500 425
Salary from April 2019 to June 2019 (due date and date of
payment : May 1, 2019, June 1, 2019 and July 1, 2019) 21,000 6,000 1,500 1,350
Salary from July to November 2019 (due and payment
dates : August 1, 2019, September 1, 2019, October 1, 2019,
November 1, 2019 and December 1, 2019) [Rs. 8,000 × 5] 40,000 10,000 2,500 2,325
Total (Rs. 94,600) 68,000 18,000 4,500 4,100
Taxable amount
Rs.
Basic salary, dearness allowance and commission 94,600
Gratuity 1,90,488
Salary income (before standard deduction) 2,85,088
Note : X can claim relief under section 89 in respect of Rs. 1,90,488.
➠ 41.2-3E3 Find out the amount of salary (before standard deduction) for the assessment year 2020-21 in problem 41.2-3P3 on the
assumption that salary becomes due for payment on the last day of each month.
41.3 Pension - The tax treatment of pension in different cases is given below—
Different situations Tax treatment
Case 1 Pension is received from UNO by the employee or his It is not chargeable to tax
family members
Case 2 Family pension received by the family members of armed It is exempt under section 10(19) in some cases.
forces
Case 3 Family pension received by family members (not being It is taxable in the hands of recipients under
covered by case 2) after the death of an employee section 56 under the head “Income from other
sources”. Standard deduction is available un-
der section 57 which is 1/3 of such pension or
Rs. 15,000, whichever is lower.
Case 4 Pension in the case of an employee (received by the See para 41.4.
employee after retirement but during his life time) who
has joined the Central Government on or after January 1,
2004 or any other employer (popularly known an NPS)
Case 5 Pension (received by the employee after retirement but See para 41.3-1.
during his life time) in any other case [sec. 17(1)(ii)]
81 Pension Para 41.3
41.3-1 PENSION [SEC. 17(1)(ii)] - Pension covered under Case 5 above is chargeable to tax as follows—
Pension Status of employee Is it chargeable to tax
Uncommuted pension Government/non-Government It is chargeable to tax
employee
Commuted pension Government employee It is fully exempt from tax under section 10(10A)(i)
Commuted pension Non-Government employee It is fully or partly exempt from tax under section
10(10A)(ii) [see para 41.3-1b]
41.3-1a UNCOMMUTED PENSION - It is periodical payment of pension. For instance, X gets monthly pension of
Rs. 2,000. It is taxable as salary under section 15 in the hands of a Government employee as well as non-
Government employee.
41.3-1b COMMUTED PENSION - It is a lump sum payment in lieu of periodical payment.
For instance, after his retirement, X gets Rs. 2,000 per month as monthly pension. As per service rules, he gets 25 per cent
of his pension commuted for Rs. 60,000 (after commutation he will get the remaining 75 per cent, i.e., Rs. 1,500 by way of
monthly pension). In this case, Rs. 60,000 is commuted pension which X has received in lieu of 25 per cent of his monthly
pension.
Commuted pension is taxable as under—
Status of employee Gratuity received/not Exemption in respect of commuted

received pension under section 10(10A)
Government employee (i.e., an employee Gratuity may (or may not) Entire commuted pension is exempt from
of Central Government, State Govern- be received. tax.*
ment, local authority and statutory cor-
poration)
Non-Government employee Gratuity is received. One-third of the pension which he is nor-
mally entitled to receive is exempt from tax.
Non-Government employee Gratuity is not received. One-half of the pension which he is nor-
mally entitled to receive is exempt from tax.
If payment in commutation of pension received by an employee exceeds the aforesaid limits, such excess is liable
to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can, however,
claim relief in terms of section 89.
Problems
41.3-1P1 Determine the amount of pension taxable for the assessment year 2020-21 in the following cases on the assumption that it
becomes due on the last day of each month :
1. X receives Rs. 18,250 per month as pension from the Central Government during the previous year 2019-20.
2. X receives Rs. 21,000 per month as pension from the Government of Punjab during the previous year 2019-20.
3. X receives Rs. 20,000 per month as pension from ABC Ltd., a public limited company in the private sector, during the previous year
2019-20.
4. X retires from the Central Government service on May 31, 2019. He gets pension of Rs. 15,000 per month up to November 30, 2019
(i.e., Rs. 15,000 × 6). With effect from December 1, 2019, he gets one-third of his pension commuted for Rs. 7,18,000.
5. X retires from ABC Co. on June 30, 2019. He gets pension of Rs. 20,000 per month up to January 31, 2020. With effect from February
1, 2020, he gets 60 per cent of pension commuted for Rs. 10,71,000. Does it make any difference if he also gets gratuity of Rs. 40,000
at the time of retirement ?
Solution :
1. Uncommuted pension of Rs. 2,19,000 (i.e., Rs. 18,250 × 12) is chargeable to tax as salary for the assessment year 2020-21.
2. Uncommuted pension of Rs. 2,52,000 (i.e., Rs. 21,000 × 12) is chargeable to tax as salary for the assessment year 2020-21.
3. Uncommuted pension of Rs. 2,40,000 (i.e., Rs. 20,000 × 12) is chargeable to tax for the assessment year 2020-21.
4. While uncommuted pension is chargeable to tax, commuted pension is exempt from tax in the case of Government
employees. Therefore, commuted pension of Rs. 7,18,000 is exempt from tax. The amount of uncommuted pension will be
calculated as under :
Rs.
Uncommuted pension up to November 30, 2019 (i.e., Rs. 15,000 × 6) 90,000
Uncommuted pension from December 1, 2019 to March 31, 2020 (i.e., 2/3 × Rs. 15,000 × 4) 40,000
Total uncommuted pension 1,30,000
*Judges of the Supreme Court and High Courts will also be entitled to the exemption of the commuted pension under section 10(10A)(i) of the
Act—Circular No. 623, dated January 6, 1992.
5. In the case of non-Government employee while uncommuted pension is fully chargeable to tax, commuted pension is
partly chargeable to, and partly exempt from, tax. Amount of taxable pension will be commuted as under :
UNCOMMUTED PENSION
Rs.
Uncommuted pension from June 30, 2019 to January 31, 2020 (i.e., Rs. 20,000 × 7) 1,40,000
Uncommuted pension from January 31, 2020 to March 31, 2020 (i.e., 40% of Rs. 20,000 × 2) 16,000
Total uncommuted pension chargeable to tax as salary 1,56,000
COMMUTED PENSION
Commuted value of 60% of usual pension 10,71,000
Commuted value of full pension (i.e., Rs. 10,71,000 × 100/60) 17,85,000
If X does not receive gratuity
Amount exempt [1/2 of commuted value of full pension (i.e., 1/2 × Rs. 17,85,000)] 8,92,500
Commuted pension chargeable to tax as salary (i.e., Rs. 10,71,000 — Rs. 8,92,500) 1,78,500
If X receives gratuity
Amount exempt [1/3 of commuted value of full pension (i.e., 1/3 × Rs. 17,85,000)] 5,95,000
Commuted pension chargeable to tax as salary (i.e., Rs. 10,71,000 — Rs. 5,95,000) 4,76,000
Note : X can claim relief under section 89 in respect of commuted pension chargeable to tax.
41.3-1E1 [P4.32]* Determine the amount of taxable pension for the assessment year 2020-21 in the following cases on the
assumption that pension becomes due on the last day of month :
1. X retires from the Indian Economic Service on August 31, 2019 and receives Rs. 10,000 per month as pension.
2. X retires from the Indian Administrative Service on May 31, 2018. He gets pension of Rs. 19,000 per month up to June 30, 2019.
With effect from July 1, 2019, he gets 30 per cent of his pension commuted for Rs. 3,00,000.
3. X retires from PQR (P.) Ltd. in December 2015 and receives Rs. 7,000 per month up to February 28, 2020 when he dies.
4. X retires from PQR (P.) Ltd. on March 31, 2019. PQR (P.) Ltd. pays Rs. 14,000 per month as pension but does not pay any gratuity.
On the request of X, PQR (P.) Ltd. pays Rs. 2,00,000 in lieu of commutation of 20 per cent of pension with effect from February 1,
2020.
5. What will be the amount of taxable pension if X, under the circumstances mentioned at (4), receives Rs. 71,800 as gratuity at the
time of retirement ?
41.4 National Pension System (NPS) - NPS is applicable to new entrants to Government service or any other
employer. As per the scheme, it is mandatory for persons entering the Government service on or after January
1, 2004, to contribute 10 per cent of salary every month towards NPS. A matching contribution is required to be
made by the employer to the said account. The tax treatment under the new scheme is as follows—
1. Contribution by the employer to NPS is first included under the head “Salaries” in hands of the employee.
2. Such contribution is deductible to the extent of 10 per cent of the salary of the employee under section
80CCD(2). However, this deduction has been increased to 14 per cent of salary in the case of a Central
Government employee, with effect from the assessment year 2020-21.
3. Employee’s contribution to NPS (to the extent of 10 per cent of the salary of the employee) is also deductible
under section 80CCD(1).
4. When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the recipient
[for detailed discussion, see para 142].
5. “Salary” for the purpose of points 1 and 2 (supra) includes dearness allowance, if the terms of employment so
provide**, but excludes all other allowances and perquisites. It also includes commission if commission is
payable at a fixed percentage of turnover achieved by an employee.
6. The aggregate amount of deduction under sections 80C, 80CCC and 80CCD(1) [i.e., contribution by employee
(or any other individual) towards NPS] cannot exceed Rs. 1,50,000.
7. Moreover, from the assessment year 2016-17, the employee (or any other individual who has joined NPS) can
contribute an additional amount (up to Rs. 50,000) towards NPS and claim the same as deduction under section
80CCD(1B). Contribution under section 80CCD(1B) is not covered by cumulative ceiling which is given in point
No. 6 (infra).
X is employed (since 2010) by the Punjab Central Government (or any other non-Government employer). During the
previous year 2019-20, he gets Rs. 30,000 per month as salary and Rs. 10,000 per month as dearness allowance (60 per cent
**Dearness allowance/pay shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension,
83 Profits in lieu of salary Para 41.6
is considered for retirement benefits). Employer annually contributes Rs. 45,000 towards NPS. X, however, annually con-
tributes Rs. 1,05,000. Income from other sources of X is Rs. 9,50,000. X deposits every year Rs. 90,000 in public provident
fund, which is deductible under section 80C. Further, X is eligible for a deduction of Rs. 25,000 under section 80CCC.
Income of X will be calculated as follows –
Rs. Rs.
Salary (Rs. 30,000 × 12) 3,60,000
Dearness allowance (Rs. 10,000 × 12) 1,20,000
Employer’s contribution towards NPS 45,000
Gross salary 5,25,000
Less: Standard deduction 50,000
Income under the head “Salaries” 4,75,000
Income from other sources 9,50,000
Gross total income 14,25,000
Less: Deductions –
Under section 80CCD(1B) (assessee’s contribution to NPS up to Rs. 50,000) 50,000
Under section 80CCD(2) [employer’s contribution towards NPS : Rs. 45,000 but subject
to a maximum of 10% of salary of Rs. 4,32,000 (i.e., Rs. 3,60,000 + 60% of dearness
allowance of Rs. 1,20,000] 43,200
Under section 80C (PPF contribution) 90,000
Under section 80CCC 25,000
Under section 80CCD(1) [X’s contribution towards NPS : Rs. 55,000 (i.e., Rs. 1,05,000 –
Rs. 50,000 considered under section 80CCD(1B)) but subject to a maximum of 10% of
salary of Rs. 4,32,000] 43,200
Total 1,58,200
Amount deductible under sections 80C, 80CCC and 80CCD(1) within overall limit of
Rs. 1,50,000 (the aforesaid amount of Rs. 1,58,200 is deductible to the extent of
Rs. 1,50,000) 1,50,000
Net income 11,81,800
41.5 Compensation received at the time of voluntary retirement scheme (VRS) [Sec.10(10C)] - Exemption
up to Rs. 5,00,000 is available, if a few conditions are satisfied. One of the conditions is the amount payable on
account of voluntary retirement or voluntary separation of the employees should not exceed –
a. the amount equivalent to three months’ salary for each completed year of service, or
b. salary at the time of retirement multiplied by the balance months of service left before the date of his
retirement on superannuation,
whichever is more.
 Relief under section 89 is not available.
 Where exemption has been allowed to an employee under section 10(10C) for any assessment year, no
exemption thereunder shall be allowed to him in relation to any other assessment year.
41.6 Profits in lieu of salary [Sec. 17(3)] - It includes the following :
1. The amount of any compensation due to or received by an assessee from his employer or former employer at
or in connection with the termination of his employment.
2. The amount of any compensation due to or received by an assessee from his employer or former employer at
or in connection with the modification of the terms and conditions of employment.
3. Any payment due to or received by an assessee from his employer or former employer except the following :
a. payment of gratuity exempted under section 10(10 )1 ;
b. payment of house rent allowance exempted under section 10(13A)2 ;
c. payment of commuted pension exempted under section 10(10A)3 ;
d. payment of retrenchment compensation exempted under section 10(10B)4 ;
e. payment from an approved Superannuation Fund under section 10(13) ;
f. payment from statutory provident fund or public provident fund ;
g. payment from recognised provident fund to the extent it is exempt under section 10(12)5.
1. See para 41.2.

2. See para 42.1.
3. See para 41.3.
4. See para 41.
5. See para 46.
4. Any payment from unrecognised provident fund or such other fund to the extent to which it does not consist
of contributions by the assessee or interest on such contributions.
5. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such
policy.
6. Any amount received (in lump sum or otherwise) prior to employment or after cessation of employment.
 DIFFERENT FORMS OF ALLOWANCES - HOW TAXED

42. Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition
to salary for the purpose of meeting some particular requirement connected with the services rendered by the
employee or as compensation for unusual conditions of that service. It is fixed, pre-determined and given
irrespective of actual expenditure. Under the Act, it is taxable under section 15 on “due” or “receipt” basis,
whichever comes earlier, irrespective of the fact that it is paid in addition to or in lieu of salary. Tax treatment
of different allowances is given below :
Different allowances Tax treatment
City compensatory allowance Taxable
House rent allowance Exempt in some cases [see para 42.1]
Entertainment allowance Deductible in some cases [see para 42.2]
Special allowance Notified special allowances are exempt [see para 42.3]
Foreign allowance Exempt from tax if paid outside India by the Government to an
Indian citizen for rendering service outside India
Tiffin allowance, fixed medical allowance and Taxable
servant allowance
Allowance to High Court Judges Not taxable
Allowance from United Nations Organisation Not taxable
Compensatory allowance under article 222(2) of Not taxable
the Constitution
Sumptuary allowance to serving Chairman/ Not chargeable to tax.
members of UPSC
Allowance to retired Chairman and retired An allowance (subject to a maximum of Rs. 14,000 per month)
members of UPSC for defraying the service of an orderly and for meeting expenses
incurred towards secretarial assistance on contract basis, is not
chargeable to tax.
Any other allowance Taxable
42.1 House rent allowance [Sec. 10(13A) and rule 2A] - Exemption in respect of house rent allowance is
regulated by rule 2A. It is based upon the following—
1. An amount equal to 50 per cent of salary, where residential house is situated at Bombay, Calcutta, Delhi or Madras
and an amount equal to 40 per cent of salary where residential house is situated at any other place.
2. House rent allowance received by the employee in respect of the period during which rental accommodation is
occupied by the employee during the previous year.
3. The excess of rent paid over 10 per cent of salary.
 Amount exempt from tax - The least of the above three is exempt from tax.
42.1-1 OTHER POINTS - The following other points should also be kept in view :
 What is “salary” - “Salary” for this purpose means basic salary and includes dearness allowance if terms of
employment so provide.* It also includes commission based on fixed percentage of turnover achieved by an
employee as per terms of contract of employment— But it does not include any other allowance and perquisite.
 “Salary” shall be determined on “due” basis - Basic salary, dearness allowance and commission are determined
on “due” basis in respect of the period during which rental accommodation is occupied by the employee in the
previous year [Explanation (ii) to rule 2A]. It, therefore, follows that salary of a period, other than the previous
85 House rent allowance Para 42.1
year, is not considered even though such amount is received during the previous year and is taxable on “receipt”
basis. Likewise, salary of the period during which rented accommodation is not occupied in the previous year,
is left out of the aforesaid computations.
 When exemption is not available - Exemption is denied where an employee lives in his own house, or in a house
for which he does not pay any rent or pays rent which does not exceed 10 per cent of salary.
 Mode of computation of exemption - The amount of exemption in respect of house rent allowance received by an
employee depends upon the following —

a. “salary” of the employee ;
b. house rent allowance ;
c. rent paid ; and
d. the place where house is taken on rent.
When these four are same throughout the previous year, the exemption should be calculated on “annual” basis.
When, however, there is a change in respect of any of the aforesaid factors, then the exemption shall be worked
out on “monthly” basis.
Problems
42.1-P1 X, who resides in Madras, gets Rs. 3,00,000 per annum as basic salary. He receives Rs. 50,000 per annum as house
rent allowance. Rent paid by him is Rs. 40,000 per annum. Find out the amount of taxable house rent allowance for the assessment year
2020-21.
Solution : Out of Rs. 50,000 received as house rent allowance, the least of the following will be exempt from tax :
a. Rs. 1,50,000 (being 50% of salary) ;
b. Rs. 50,000 (being the house rent allowance received) ; or
c. Rs. 10,000 (being the excess of rent paid over 10% of salary, i.e., Rs. 40,000 — Rs. 30,000).
Rs. 10,000 (being the least of the three) is exempt from tax. The balance of Rs. 40,000 (i.e., Rs. 50,000 —Rs. 10,000) will be
chargeable to tax.
42.1-E1 [P4.33]* X, who resides in Poona, gets Rs. 2,00,000 per annum as basic salary. He receives Rs. 55,000 per annum as house
rent allowance, though he pays Rs. 50,000 per annum as house rent. Determine the amount of house rent allowance chargeable to
tax for the assessment year 2020-21.
42.1-P2 X, a resident of Ajmer, receives Rs. 1,92,000 per annum as basic salary during the previous year 2019-20. In addition, he gets
Rs. 19,200 per annum as dearness allowance forming part of basic salary for computation of all retirement benefits, 7 per cent commission
on sales made by him (sale made by X during the relevant previous year is Rs. 86,000) and Rs. 24,000 per annum as house rent allowance.
He, however, pays Rs. 21,500 per annum as house rent. Determine the quantum of house rent allowance exempt from tax.
Solution : “Salary”, for the purpose of computing house rent allowance exempt from tax, works out to be Rs. 2,17,220 (i.e.,
basic salary : Rs. 1,92,000 + dearness allowance : Rs. 19,200 + commission @ 7% on Rs. 86,000 : Rs. 6,020).
Out of the house rent allowance of Rs. 24,000, the least of the following is exempt from tax:
a. Rs. 86,888 (being 40% of salary) ;
b. Rs. 24,000 (being the amount of house rent allowance) ; or
c. Nil [being the excess of rent paid (i.e., Rs. 21,500) over 10% of salary (i.e., Rs. 21,722)].
As the least of the three sums is nil, the entire house rent allowance is chargeable to tax.
42.1-E2 [P4.35]* X, a resident of Mandi, receives Rs. 3,80,000 per annum as basic salary. In addition, he gets Rs. 30,000 per annum
as dearness allowance, which forms part of basic salary for computing pension (but not gratuity), 4 per cent commission on turnover
achieved by him (turnover achieved by him during the relevant previous year 2019-20 is Rs. 60,00,000) and Rs. 60,000 per annum
as house rent allowance. He, however, pays Rs. 70,000 per annum as house rent. Determine the quantum of house rent allowance
exempt from tax.
42.1-P3 X is an employee of AB Insurance Co. Ltd. During the previous year 2019-20, he gets Rs. 80,000 per month as salary and
Rs. 10,000 per month as dearness allowance (40 per cent of dearness allowance is considered for calculating provident fund but only 30
per cent is considered for calculating gratuity). He gets Rs. 55,000 per month as house rent allowance. X resides with his joint family
up to June 30, 2019 for which no rent is paid. From July 1, 2019, he takes a house on rent (monthly rent being Rs. 10,000) at Noida.
However, he shifts to Delhi with effect from January 1, 2020 (monthly rent being Rs. 53,000). Find out the house rent allowance
Solution : “Salary” for the purpose of computing house rent allowance exemption shall be Rs. 83,000 per month
(Rs. 80,000 + 30% of dearness allowance which is considered for calculating all retirement benefits). Exemption shall be
calculated as follows –
From April 1, 2019 to June 30, 2019 - During this period, X does not pay any rent. Consequently, no exemption is available
up to June 30, 2019.
From July 1, 2019 to December 31, 2019 - During this period, he resides in a rented accommodation at Noida. House rent
allowance exemption shall be determined as follows –
a. Rs. 33,200 per month (being 40% of salary of Rs. 83,000);
b. Rs. 55,000 per month (being house rent allowance); or
c. Rs. 1,700 per month (being the excess of rent paid of Rs. 10,000 per month over 10% of Rs. 83,000),
whichever is lower is exempt. During this period, Rs. 1,700 per month will be exempt.
From January 1, 2020 to March 31, 2020 - During this period, he resides in a rented accommodation at Delhi. House rent
allowance exemption shall be determined as follows –
a. Rs. 41,500 per month (being 50% of salary of Rs. 83,000);
b. Rs. 55,000 per month (being house rent allowance); or
c. Rs. 44,700 per month (being the excess of rent paid of Rs. 53,000 per month over 10% of Rs. 83,000),
whichever is lower is exempt. During this period, Rs. 41,500 per month is exempt.
Taxable portion of house rent allowance shall be determined as follows –
Rs.
House rent allowance (Rs. 55,000 × 12) 6,60,000
Less: Exemption–
From July 1, 2019 to December 31, 2019 (Rs. 1,700 × 6) 10,200
From January 1, 2020 to March 31, 2020 (Rs. 41,500 × 3) 1,24,500
Taxable house rent allowance 5,25,300
42.1-E3 [P4.36]* X, who resides in Calcutta, receives Rs. 20,000 per month as basic salary and Rs. 12,500 per month as dearness
pay (32 per cent of it forms part of salary for computing all retirement benefits) during the previous year 2019-20. He stays in his
father’s house up to December 31, 2019 for which he does not pay any rent and thereafter in an accommodation taken on monthly
rent of Rs. 12,000. The employer, however, pays Rs. 3,000 per month as house rent allowance. He claims that the entire house rent
allowance is exempt from tax as house rent allowance received from employer (i.e., Rs. 3,000 × 12) has been paid to the landlord as
house rent (i.e., Rs. 12,000 × 3). Do you agree with him? If not, find out the amount of house rent allowance : (a) exempt from tax,
(b) chargeable to tax for the assessment year 2020-21.
➠ 42.1-P4 X is employed by A Ltd. up to November 30, 2019 on the following monthly salary (place of posting : Delhi) —
Up to From
May 31, 2019 June 1, 2019
Rs. Rs.
Basic salary 40,000 50,000
Dearness allowance @ 30 per cent of basic salary (60 per cent of dearness allowance is
part of salary for computing all retirement benefits) 12,000 15,000
Dearness pay (not part of salary for computing retirement benefits) 80,000 90,000
Commission 30,000 40,000
House rent allowance 20,000 35,000
With effect from December 1, 2019, he joins B Ltd. on monthly salary of Rs. 1,00,000 (place of posting : Amritsar). Besides, he gets
dearness allowance @ Rs. 80,000 per month (5 per cent of which is considered for provident fund contribution) and house rent allowance
@ Rs. 60,000 per month. Further, he gets a fixed commission of Rs. 45,000 per month.
Rent paid per month by X is as follows :
Delhi Amritsar
Rs. Rs.
From January 1, 2019 to July 31, 2019 5,000 —
August 1, 2019 to December 31, 2019 29,000 —
January 2020 — 10,000
February 1, 2020 to June 30, 2020 — 60,000
Determine the amount of chargeable house rent allowance for the assessment year 2020-21.
Solution : House rent allowance chargeable to tax
87 Entertainment allowance Para 42.2
April 2019 June and August to December January February

and May July 2019 November 2019 2020 and March
2019 2019 2020
Rs. Rs. Rs. Rs. Rs. Rs.
Basic salary 40,000 50,000 50,000 1,00,000 1,00,000 1,00,000
Dearness allowance (only the portion
which is considered for calculating all
retirement benefits) 7,200 9,000 9,000 4,000 4,000 4,000
Salary (per month) 47,200 59,000 59,000 1,04,000 1,04,000 1,04,000
50% of salary 23,600 29,500 29,500 52,000 — —
40% of salary — — — — 41,600 41,600
House rent allowance 20,000 35,000 35,000 60,000 60,000 60,000
Excess of rent paid over 10% of salary 280 Nil 23,100 18,600 Nil 49,600
Amount exempt from tax (per month) 280 Nil 23,100 18,600 Nil 41,600
Amount chargeable to tax (per month) 19,720 35,000 11,900 41,400 60,000 18,400
Amount taxable for the assessment year 2020-21 comes to Rs. 2,95,240.
➠42.1-E4 [P4.37]* From the following information submitted by X, in respect of monthly salary and allowances, find out the house
rent allowance chargeable to tax for the assessment year 2020-21 :
Name of employer of X A. Ltd. B. Ltd.
Period of employment Up to August From October
31, 2019 1, 2019
Place of posting Agra Bombay (from
January 1, 2020 : Goa)
Rs. Rs.
Basic salary *(increased to Rs. 18,000 from February 1, 2020) 6,000 11,000*
House rent allowance 3,000 5,600
Rent paid at Agra (from April 1, 2019 to September 30, 2019) 2,600 —
Rent paid at Bombay (from October 1, 2019 to February 28, 2020) — 7,000
Rent paid at Goa (from March 1, 2020) — 1,560
42.2 Entertainment allowance [Sec. 16(ii)] - Entertainment allowance is first included in salary income under
the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following paragraphs :
 In the case of a Government employee (i.e., a Central Government or a State Government employee), the least
of the following is deductible :

a. Rs. 5,000 ;
b. 20 per cent of basic salary ; or
c. amount of entertainment allowance granted during the previous year.
In order to determine amount of entertainment allowance deductible from salary, the following points need
consideration :
1. For this purpose “salary” excludes any allowance, benefit or other perquisites.
2. Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into
consideration.
 In the case of a non-Government employee (including employees of statutory corporation and local authority),
entertainment allowance is not deductible.
Problems
42.2-P1 X, a Government employee, gets Rs. 8,00,000 per annum as basic pay. In addition, he receives Rs. 8,500 as entertainment
allowance. His actual expenditure on entertainment for official purposes, however, exceeds Rs. 9,000. Can he claim deduction of actual
amount spent by him on entertainment?
Solution : Expenditure on entertainment is not taken into account while computing deductible entertainment allowance.
The claim of the assessee that entertainment allowance is not taxable because it is lower than expenditure on entertainment
for official purposes, is, therefore, not tenable. Out of Rs. 8,500 received as entertainment allowance, the least of the following
three sums is deductible from salary income :
a. Rs. 5,000 ;
b. Rs. 1,60,000, being 20% of salary ; or
c. Rs. 8,500, being the entertainment allowance granted during the previous year.
Therefore, in this case, Rs. 5,000 (being the least of the three sums) is deductible from salary income.
42.2-E1 [P4.38]* X, an officer of the Punjab Government, gets Rs. 40,000 per month as salary and Rs. 600 per month as
entertainment allowance. Besides, he gets dearness allowance and house rent allowance as per the Government’s rules. During the
relevant previous year, he has utilised the entire entertainment allowance for private purpose. The Assessing Officer is, therefore, of
the view that the entertainment allowance is fully taxable. Is he legally correct? If not, determine the amount of entertainment
allowance deductible from salary.
42.3 Special allowances prescribed as exempt under section 10(14) - The provisions of section 10(14) are
given below :
42.3-1 WHEN EXEMPTION DEPENDS UPON ACTUAL EXPENDITURE BY THE EMPLOYEE - The following allowances are exempt
under section 10(14) to the extent the amount is utilised for the specified purpose for which the allowance is
received. In other words, in the cases given below the amount of exemption under section 10(14) is —
a. the amount of the allowance ; or
b. the amount utilised for the specific purpose for which allowance is given,
whichever is lower.
Exemption is available on the aforesaid basis in the case of the following allowances —
Name of allowance Nature of allowance
Travelling allow- Any allowance (by whatever name called) granted to meet the cost of travel on tour or on transfer
ance/transfer (including any sum paid in connection with transfer, packing and transportation of personal
allowance effects on such transfer).
Conveyance Conveyance allowance granted to meet the expenditure on conveyance in performance of duties
allowance of an office (it may be noted that expenditure for covering the journey between office and residence
is not treated as expenditure in performance of duties of the office and, consequently, such
expenditure is not exempt from tax).
Daily allowance Any allowance whether granted on tour or for the period of journey in connection with transfer,
to meet the ordinary daily charges incurred by an employee on account of absence from his normal
place of duty.
Helper allow- Any allowance (by whatever name called) to meet the expenditure on a helper where such helper
ance is engaged for the performance of official duties.
Research allow- Any allowance (by whatever name called) granted for encouraging the academic research and
ance other professional pursuits.
Uniform Any allowance (by whatever name called) to meet the expenditure on the purchase or maintenance
allowance of uniform for wear during the performance of duties of an office.
Note : As stated earlier, the amount of exemption in the above cases is amount of allowance or the expenditure incurred for
the specific purpose for which allowance is given, whichever is lower.
During the previous year 2019-20, the following allowances are given to X by the employer company—
Nature of allowance Amount of Amount actually spent Amount
allowance for the purpose given chargeable
in column 1 to tax
Rs. Rs. Rs.
Travelling allowance for official purposes 36,000 32,000 4,000
Transfer allowance given at the time of transfer of X from
Delhi to Ajmer 40,000 41,000 Nil
Conveyance allowance for official purposes 50,000 42,000 8,000
Helper allowance for engaging helper for official purposes 68,000 64,000 4,000
Research allowance 1,00,000 90,000 10,000
Uniform allowance for official purposes 18,000 17,000 1,000
42.3-2 WHEN EXEMPTION DOES NOT DEPEND UPON EXPENDITURE - In the cases given below, the amount of exemption
does not depend upon expenditure incurred by the employee. Regardless of the amount of expenditure, the
allowances given below are exempt to the extent of —
89 Special allowances exempt u/s 10(14) Para 42.3
a. the amount of allowance ; or

b. the amount specified in rule 2BB,
whichever is lower.
On the above basis, exemption is available in the case of the following allowances. It may be noted that in these
cases, the amount of actual expenditure is not taken into consideration—
Name of Nature of allowance Exemption as specified
allowance in rule 2BB
Special It includes any special compensatory allowance in the nature of spe- Amount exempt from tax
Compensatory cial compensatory (hilly areas) allowance or high altitude allowance varies from Rs. 300 per
(Hill Areas) or uncongenial climate allowance or snow bound area allowance or month to Rs. 7,000 per
Allowance avalanche allowance. month
Border area It includes any special compensatory allowance in the nature of border The amount of exemption
allowance area allowance or remote locality allowance or difficult area allowance varies from Rs. 200 per
or disturbed area allowance. month to Rs. 1,300 per
month
Tribal areas/ Tribal areas allowance is given in (a) Madhya Pradesh; (b) Tamil Rs. 200 per month
scheduled areas Nadu; (c) Uttar Pradesh; (d) Karnataka; (e) Tripura; (f) Assam;
allowance (g) West Bengal; (h) Bihar; (i) Orissa.
Allowance It is an allowance granted to an employee working in any transport The amount of exemption
for transport system to meet his personal expenditure during his duty performed is—
employees in the course of running of such transport from one place to another a. 70 per cent of such
place provided that such employee is not in receipt of daily allowance. allowance; or
b. Rs. 10,000 per month,
whichever is lower.
Children This allowance is given for children’s education in India The amount exempt is
education limited to Rs. 100 per
allowance month per child up to a
maximum of two children.
Hostel This allowance is granted to an employee to meet the hostel expendi- It is exempt from tax to
expenditure ture in India on his child. the extent of Rs. 300 per
allowance month per child up to a
maximum of two children.
Compensatory If this exemption is taken, the same employee cannot claim any exe- Exemption is limited to
field area mption in respect of border area allowance mentioned above. Rs. 2,600 per month in
allowance some cases.
Compensatory If this exemption is taken, the same employee cannot claim any exe- Exemption is limited to
modified mption in respect of border area allowance mentioned above. Rs. 1,000 per month in
area allowance some cases.
Counter It includes any special allowance in the nature of counter-insurgency Exemption is limited to
insurgency allowance granted to the members of armed forces operating in areas Rs. 3,900 per month in
allowance away from their permanent locations. If this exemption is taken, the some cases.
same employee cannot claim any exemption in respect of border area
allowance mentioned above.
Transport Transport allowance granted to an employee to meet his expenditure
allowance for the purpose of commuting between the place of his residence and
the place of his duty –
- In the case of an employee who is blind or deaf and dumb or Rs. 3,200 per month
orthopaedically handicapped
- In the case of any other employee† Nil
Underground Underground allowance is granted to an employee who is working in Exemption is limited to
allowance uncongenial, unnatural climate in underground mines. Rs. 800 per month.
†In the case of Chairman/members of UPSC, transport allowance is not chargeable to tax (without any monetary ceiling) by virtue of section
10(45).
Name of Nature of allowance Exemption as specified

allowance in rule 2BB
High altitude It is granted to the members of armed forces operating in high alti- It is exempt from tax up to
allowance tude areas. Rs. 1,060 per month (for
altitude of 9,000 to 15,000
feet) or Rs. 1,600 per month
(for altitude above 15,000
feet).
Highly active This special allowance is granted to the members of armed forces in It is exempt from tax up to
field area the nature of special compensatory highly active field area allowance. Rs. 4,200 per month.
allowance
Island duty This special allowance is granted to the members of armed forces in It is exempt up to Rs. 3,250
allowance the nature of island (duty) allowance in Andaman and Nicobar and per month.
Lakshadweep group of island.
The following illustrations are given to have better understanding :
1. During the previous year 2019-20, the following allowances are given to X by the employer-company—
Nature of allowance Amount of Amount spent Amount of Amount
allowance exemption chargeable
to tax
Rs. Rs. Rs. Rs.
Tribal area allowance for X’s posting in Assam 1,000 Not relevant 200 p.m. 600
for two months
Child education allowance for X’s elder son 1,800 Not relevant 100 p.m. 600
Child education allowance for X’s younger son 900 Not relevant — 900
Child education allowance for X’s daughter 1,080 Not relevant 100 p.m. Nil
Hostel expenditure allowance for X’s elder son 6,600 Not relevant 300 p.m. 3,000
Transport allowance for commuting between 21,000 Not relevant Nil 21,000
office and residence
2. The following allowances are given by a transport company to its drivers to meet personal expenditure in the course of
running trucks from one place to another place (none of these drivers is in receipt of daily allowance)—
Name of Amount of For how many Amount spent Amount not chargeable Amount
drivers allowance months allowance to tax chargeable
(per month) is given to tax
Rs. Rs. Rs.
X 6,000 12 Not relevant 70% of 6,000 × 12 21,600
Y 15,000 12 Not relevant 10,000 × 12 60,000
Z* 14,000 2 Not relevant 70% of Rs. 14,000 × 2 8,400
A** 10,000 7 Not relevant 70% of 10,000 × 7 21,000
*Z is in employment only for 2 months during the previous year 2019-20.
**A is in employment only for 7 months during the previous year 2019-20.
 PERQUISITE - WHEN TAXABLE/NOT TAXABLE

43. Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition
to salary or wages. It also denotes something that benefits a man by going into his own pocket. Perquisites may be
provided in cash or in kind. However, perquisites are taxable under the head “Salaries” only if they are (a)
allowed by an employer to his employee ; (b) allowed during the continuance of employment ; (c) directly
dependent upon service ; (d) resulting in the nature of personal advantage to the employee ; and (e) derived by
virtue of employer’s authority. It is not necessary that a recurring and regular receipt alone is a perquisite. Even
a casual and non-recurring receipt can be perquisite if the aforesaid conditions are satisfied.
The following propositions should also be kept in view :
 Perquisites are included in salary income only if they are received by an employee from his employer (maybe
former, present or prospective). Perquisites, received from a person other than employer, are taxable under the
head “Profits and gains of business or profession” or “Income from other sources”.
91 Perquisites chargeable/not chargeable to tax Para 43.2
 A benefit or advantage would be taxable as perquisites only if it has a legal origin. As unauthorised advantage
taken by an employee without his employer’s authority would create a legal obligation to restore such
advantage, it would not amount to “perquisite” taxable under the Act. On the other hand, if the benefit has been
conferred unilaterally without the aid of agreement between the parties, the employee can be taxed on the
perquisites. It is not necessary that the benefit should have been received under an enforceable right.
43.1 “Perquisites” as defined in the Act - Under the Act, the term “perquisites” is defined by section 17(2) as
including the following items :
a. the value of rent-free accommodation provided to the assessee by his employer [sec. 17(2)(i)] ;
b. the value of any concession in the matter of rent respecting any accommodation provided to the assessee by
his employer [sec. 17(2)(ii)] ;
c. the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the
following cases :
i. by a company to an employee who is a director thereof ;
ii. by a company to an employee, being a person who has substantial interest in the company ;
iii. by any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not
apply and whose income under the head “Salaries” exclusive of the value of all benefits or amenities not
provided for by way of monetary benefits, exceeds Rs. 50,000 [sec. 17(2)(iii)] ;
d. any sum paid by the employer in respect of any obligation which but for such payment would have been
payable by the assessee [sec. 17(2)(iv)] ;
e. any sum payable by the employer, whether directly or through a fund other than a recognised provident fund
or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the
assessee or to effect a contract for an annuity [sec. 17(2)(v)] ;
f. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the
employer, or former employer, free of cost or at concessional rate to the assessee [sec. 17(2)(vi)];
g. the amount of any contribution to an approved superannuation fund by the employer in respect of the
assessee, to the extent it exceeds Rs. 1,50,000 [sec. 17(2)(vii)]; and
h. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)(viii)].
43.1-1 IN WHICH YEAR PERQUISITES ARE CHARGEABLE TO TAX - See problem 54-P1.
43.2 Perquisites chargeable/not chargeable to tax - The table given below gives a list of perquisites
chargeable/not chargeable to tax—
Different perquisites given under section Para No. When these perquisites are not taxable (list of
17(2) chargeable to tax (list of taxable (for detailed tax-free perquisites)
perquisites) discussion)
1. Furnished/unfurnished house without 44.1, 44.2, 44.3 1. Not chargeable to tax if provided in a “remote area”.
rent or at concessional rent 2. Hotel accommodation for 15 days (in aggregate in a
previous year) can be provided immediately after trans-
fer at the new location as a tax-free perquisite.
3. If an employee is transferred and housing facility is
provided to him at the new location (he has yet to vacate
a house given at the old location), for a period of 90 days
immediately after transfer only one house (at the option
of the employee at the old location or new location) is
chargeable to tax and the other one will be tax-free.
4. Further, rent-free house is not taxable if it is provided
to a High Court Judge, Supreme Court Judge, Union
Minister, Leader of Opposition in Parliament, an Official
in Parliament and serving Chairman and members of
UPSC.
2. Service of a sweeper, gardener, watch- 44.4 Not taxable if the employee is a non-specified employee†
man or personal attendant
3. Supply of gas, electricity or water for 44.5 Not taxable if the employee is a non-specified employee†
household purposes
4. Education facility to employee’s family 44.6 Not taxable if the employee is a non-specified employee†
members
†However, this exemption does not have much practical utility—see para 43.2-1.
5. Leave travel concession 44.7 1. Not taxable twice in a block of 4 years
2. Not taxable if the employee is a non-specified em-
ployee†
6. Amount paid by an employer in respect 44.8 Tax borne by employer on non-monetary perquisites of
of any obligation which otherwise would employee
have been payable by the employee
7. Amount payable by an employer dir- 44.9 Contribution to recognized provident fund
ectly or indirectly to effect an assurance
on the life of employee or to effect a cont-
ract of an annuity
8. Interest-free/concessional loan 44.10 1. If aggregate amount of original loan does not exceed
Rs. 20,000, the perquisite is not taxable
2. Loan for medical treatment (given in rule 3A) is not
taxable subject to a few conditions
9. Providing use of movable asset 44.11 Providing use of computer/laptop in any case
10. Transfer of movable asset 44.12
11. Medical facility 44.13 1. Medical facility provided in a hospital owned or main-
tained by the employer is not chargeable to tax.
2. Medical facility provided by an employer in a Govern-
ment hospital, approved hospital (if a few conditions are
satisfied) or a private hospital (if such private hospital is
recommended by the Government for the medical treat-
ment of Government employees) is not chargeable to tax.
3. Medical insurance premium paid or reimbursed by the
employer is not chargeable to tax.
4. Any other expenditure incurred or reimbursed by the
employer for providing medical facility in India is charge-
able to tax (exemption of Rs. 15,000 was available for such
reimbursement up to the assessment year 2018-19).
5. Expenditure on medical treatment outside India is not
chargeable to tax, if a few conditions are satisfied.
6. Further, the perquisite in respect of medical facility is
not taxable if the employee is a non-specified employee†
12. Car or any other automotive 44.14 1. Not taxable if the employee is a non-specified em-
conveyance ployee†
2. Conveyance facility between office and residence is not
taxable.
3. Conveyance facility to High Court judges, Supreme
Court judges and serving Chairman and members of
UPSC, is not chargeable to tax.
13. Transport facility by a transport 44.15 1. Not taxable if it is provided by an airline or the railways
undertaking 2. Not taxable if the employee is a non-specified em-
ployee†
14. Free food and beverage 44.16 1. Food and non-alcoholic beverages provided in work-
ing hours in remote area or in an off-shore installation are
exempt from tax
2. Tea, coffee or non-alcoholic beverages and snacks in
working hours are tax-free perquisites
3. Meals (lunch and/or dinner) in office hours is not
taxable if cost to the employer is Rs. 50 (or less) per meal
15. Travelling, touring accommodation 44.17
16. Gift or gift voucher 44.18 Gift in kind up to Rs. 5,000 is exempt
†However, this exemption does not have much practical utility—see para 43.2-1.
93 Perquisites - How valued for tax purposes Para 44
17. Credit card 44.19
18. Club 44.20
19. Tax of an employee paid by his emp- 82.4 Tax on non-monetary perquisites paid by the employer
loyer is exempt
20. Value of any specified security/sweat 44.21
equity shares allotted or transferred to
an employee or former employee
21. Employer’s contribution towards 44.22 Not chargeable to tax if employer’s contribution is Rs. 1.5
superannuation fund in excess of lakh or less per year
Rs. 1.50 lakh per year
22. Any other benefit or amenity, service, 44.23 Telephone/mobile is not chargeable to tax.
right or privilege
43.2-1 SPECIFIED/NON-SPECIFIED EMPLOYEES - An employee is either a specified employee or a non-specified

employee.
 Classification - “Specified employee” and “Non-specified employee” - Perquisites given under 2, 3, 4, 5, 11, 12, 13 are
taxable only when an employee is a specified employee. In other words, perquisites given under 2, 3, 4, 5, 11, 12,
13 are not taxable in the hands of a non-specified employee.
 Classification - Does not have much practical utility - The classification between specified and non-specified
employee is of limited application in the practical sense. This is because an employee is referred to as a non-
specified employee only when he is drawing annual salary of Rs. 50,000 or less in a financial year. Since the
exemption slab for all individuals is at least Rs. 2,50,000 (for the assessment year 2020-21), one can infer that
largely all employees (who pay income-tax) are specified employees. The statement that perquisites given under
2, 3, 4, 5, 11, 12, 13 are not taxable in the case of a non-specified employee, does not have much practical utility,
as all employees paying tax are specified employees. However, the meaning of specified/non-specified
employee is given in the following paras for theoretical purposes.
 Non-specified employee - Any employee, other than a specified employee, is a “non-specified employee”.
 Who is a specified employee - The following employees are known as specified employees—
1. A director-employee - An employee who is a director in the employer-company at any time during the previous
year, is a specified employee of the company in which he is a director.
2. An employee who has substantial interest in the employer-company - An employee who has a substantial interest
in the employer-company at any time during the previous year is a specified employee of the company in which
he has substantial interest. A person has substantial interest in the employer-company, if he is a beneficial owner
of equity shares carrying 20 per cent or more voting power in the employer-company.
3. An employee drawing in excess of Rs. 50,000 - An employee (not covered by the above two categories), whose
income chargeable under the head “Salaries” (exclusive of the value of all benefits or amenities not provided by
way of monetary payments) exceeds Rs. 50,000, is a specified employee. For computing the sum of Rs. 50,000,
the following are excluded or deducted :
a. all non-monetary benefits ;
b. monetary benefits which are not taxable under section 10 [for instance, house rent allowance to the extent
exempt under section 10(13A) is excluded]; and
c. deduction on account of entertainment allowance and deduction on account of professional tax.
Where salary is received from more than one employer, the aggregate salary from these employers will have to
be taken into account for the purpose of determining the aforesaid monetary ceiling.
 PERQUISITES - HOW VALUED FOR TAX PURPOSES

44. Those perquisites, which are taxable in the hands of employees, are valued in accordance with the provisions
laid down under the Income-tax Rules and executive instructions.
 Perquisites provided by an employer (directly or indirectly) to employee or any member of his household (by
reason of his employment) shall be chargeable to tax in the hands of the employee. “Member of household” shall
include—
a. spouse (whether dependent or not);
b. children and their spouses (whether dependent or not);
c. parents (whether dependent or not); and
d. servants and dependants.
44.1 Valuation of rent-free unfurnished accommodation [Rule 3(1)] - “Accommodation” includes a house,
flat, farm house (or part thereof), or accommodation in a hotel, motel, service apartment, guest-house, caravan,
mobile home, ship or other floating structure. For the purpose of valuation of the perquisite in respect of
unfurnished accommodation, employees are divided in the following two categories :
a. Central and State Government employees [see para 44.1-1].
b. Private sector employees or other employees [see para 44.1-2].
44.1-1 CENTRAL AND STATE GOVERNMENT EMPLOYEES - This category includes Central Government employees and
State Government employees. Besides, this category includes those Central Government employees and State
Government employees who are on deputation to a public sector undertaking but the accommodation is
provided by the Central Government or State Government.
Employees of a local authority or a foreign Government are not covered by this category (these employees are
treated as non-Government employees for this purpose).
 Basis of valuation - The value of perquisite in respect of accommodation provided to such employee is equal to
the licence fee which would have been determined by the Central or State Government in accordance with the
rules framed by the Government for allotment of houses to its officers.
 Exception - It may be mentioned that rent-free official residence provided to a Judge of a High Court or to a Judge
of the Supreme Court is exempt from tax. A similar exemption is extended to an official of Parliament, a Union
Minister, a Leader of Opposition in Parliament and serving Chairman/members of UPSC.
Problems
44.1-1P1 X, an officer of the Government of Madhya Pradesh, draws Rs. 45,000 per month as basic pay. The Government has provided
him a rent-free unfurnished flat whose market rent is Rs. 9,800 per month, though as per the Government rules licence fee of the flat
is Rs. 1,250 per month. Determine the value of the perquisite in respect of rent-free flat for the assessment year 2020-21.
Solution : As X is a Government employee, valuation of the perquisite in respect of rent-free flat would be Rs. 15,000, being
the licence fee of the flat as per Government rules (i.e., Rs. 1,250 × 12). Market rental value of the flat is not taken into account.
44.1-1E1 X is a Joint Secretary in the Ministry of Home Affairs. During the previous year ending March 31, 2020, he has been allotted
a rent-free unfurnished flat at New Delhi. Though the licence fee of the flat as per Government rule is Rs. 1,600 per month, its fair
market rent is not less than Rs. 12,000 per month. Determine the value of the perquisite in respect of rent-free unfurnished flat for
the assessment year 2020-21 on the assumption that salary of X is : (a) Rs. 96,000 per month, or (b) Rs. 1,12,000 per month.
44.1-2 PRIVATE SECTOR OR OTHER EMPLOYEES - Under this category are covered those employees who do not fall in
the first category covered by para 44.1-1. In this category, value of the perquisite in respect of rent-free
accommodation depends on salary of the employee and lease rent of the accommodation.
44.1-2a SALARY - HOW TO CALCULATE - For the purpose of valuation of perquisite in respect of rent-free accommo-
dation, salary includes :
a. basic salary ;
b. dearness allowance/pay, if terms of employment so provide* ;
c. bonus ;
d. commission ;
e. fees ;
f. all other taxable allowances (excluding amount not taxable) ; and
g. any monetary payment which is chargeable to tax (by whatever name called).
For this purpose salary does not include the following :
95 Valuation of rent-free unfurnished accommodation Para 44.1
i. dearness allowance/pay, if not taken into account while calculating retirement benefits, like provident fund,
gratuity, etc., or if term of employment does not so provide ;
ii. employer’s contribution to provident fund account of an employee ;
iii. all allowances which are exempt from tax ;
iv. value of perquisites [under section 17(2)]; and
v. lump-sum payments received at the time of termination of service or superannuation or voluntary retirement,
like gratuity, severance pay leave encashment, voluntary retrenchment benefits, commutation of pension and
similar payments.
 One should note the following points—
1. “Salary” shall be determined on “accrual” basis - While computing salary for the purpose of valuation of perquisite
in respect of rent-free accommodation, basic salary, bonus, commission, fees, allowances, etc., are included on
“accrual” basis. For instance, advance salary of a period other than the previous year is not included even if the
same is received in the previous year. Similarly, salary due in the previous year is included, even if it is received
after the end of the previous year. In other words, salary accrued for the period during which rent-free
accommodation is occupied by the employee will be considered, whether it is received during the previous year
or not.
2. Salary from two or more employers - Salary from all employers in respect of the period during which an
accommodation is provided will be taken into consideration.
3. Monetary payments v. Perquisites - A combined reading of (g) and (iv) (supra) suggests that monetary payments
which are in the nature of perquisites under section 17(2) shall not be included. Conversely, monetary payments
which are not in the nature of perquisites under section 17(2) shall be included. Consider the following monetary
payments —
- Payments of gas, electricity, water and income-tax bills [being perquisites under section 17(2)(iii)/(iv)] are not
taken into consideration.
- Overtime payment (it is not a perquisite) is taken into consideration.
44.1-2b BASIS OF VALUATION - The basis of valuation is given below—
Population of city as per 2001 Where the accommodation is owned Where the accommodation is taken
census where accommodation by the employer on lease or rent by the employer
is provided
Exceeding 25 lakh 15 per cent of salary in respect of the period
during which the accommodation is occupied
a. 15% of salary; or
by the employee
Exceeding 10 lakh but not 10 per cent of salary in respect of period during b. lease rent (paid or payable)
exceeding 25 lakh which the accommodation is occupied by the by employer,
employee whichever is less.
Any other 7.5 per cent of salary in respect of period during
which the accommodation is occupied by the
employee
Notes :
1. The above rules are not applicable to any accommodation located in a ‘remote area’ (i.e., an area located at least 40
kilometres† away from a town having a population not exceeding 20,000) provided to an employee working at a mining site
or an onshore oil exploration site, or a project execution site or a dam site or power generation site or an offshore site. A project
site for this purpose means site of project up to the stage of its commissioning—Circular No. 15/2001, dated December 12,
2001.
2. Moreover, the perquisite in respect of accommodation of temporary nature (and having plinth area of 800 sq. ft. or less)
which is located at least 8 km. away from the local limits of a municipality or cantonment board provided to an employee
working at a mining site or an onshore oil exploration site, or a project execution site or a dam site or power generation site
or an offshore site, is not chargeable to tax.
3. Where on account of the transfer of an employee from one place to another, he is provided with accommodation at the
new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with
reference to only one such accommodation which has the lower value for a period not exceeding 90 days and thereafter the
value of perquisite shall be charged for both such accommodations.
†However, off-shore sites of similar nature do not have to meet any requirement of distance.
Problems
44.1-2P1 X, an employee of ABC (P.) Ltd., posted at Ajmer (population : 18 lakh), draws Rs. 3,00,000 as basic salary, Rs. 10,000 as
dearness allowance (forming part of salary for all retirement benefits) and Rs. 5,000 as commission. Besides, the company provides a rent-
free unfurnished accommodation in Ajmer. The house is owned by the company. Fair rent of the accommodation is Rs. 50,000 per annum.
Determine the taxable value of the perquisite for the assessment year 2020-21.
Solution : Value of the perquisite in respect of rent-free accommodation owned by the employer depends upon salary of
an employee. Salary for the purpose of computation of the perquisite value works out to be Rs. 3,15,000 (i.e., Rs. 3,00,000 +
Rs. 10,000 + Rs. 5,000). Fair rent value of accommodation is not taken into consideration.
As the accommodation is situated in a city having population exceeding 10 lakh but not exceeding 25 lakh, 10% of salary,
Rs. 31,500 is taxable value of the perquisite.
44.1-2E1 [P4.39]* X, an employee of PQR Ltd., draws Rs. 2,00,000 as basic pay, Rs. 25,000 as dearness allowance (not forming
part of salary for computing gratuity but it forms part of salary for calculating pension) and Rs. 20,000 as bonus. Besides the company
provides a rent-free unfurnished house in Goa. The house is not owned by the company. Determine the taxable value of the perquisite
for the assessment year 2020-21 if lease rent of the house is : (a) Rs. 20,000 per annum, (b) Rs. 48,000 per annum, or (c) Rs. 2,600
per annum.
44.1-2P2 X gives the following information for the previous year ending March 31, 2020 –
Rs.
Basic salary 9,00,000
Dearness allowance (85 per cent is considered for calculating pension but only 70 per cent is considered for calculating
provident fund) 80,000
Dearness pay (not considered for retirement benefits) 50,000
Fixed commission and bonus 1,80,000
Advance salary (pertaining to next year) and arrears of salary (for 2013-14) (not taxed earlier) 1,23,000
Income-tax paid by employer 20,000
Fixed lunch allowance 24,000
Children education allowance (for two children) 9,600
X has been provided with a rent-free unfurnished house. Find out the taxable value of perquisite in the following situations –
Situation 1 - X is a Government employee (i.e., Central Government employee or State Government employee or a Government employee
on deputation to a public sector undertaking). He has been allotted a rent-free accommodation by the Government. License fee of the house
according to the house allotment scheme of the Government is Rs. 6,000 per annum.
Situation 2 - X is an employee of LIC of India. He has been allotted a rent-free accommodation which is owned by the employer.
Situation 3 - X is an employee of a private sector company. He has been allotted a rent-free accommodation. House is owned by the
employer.
Situation 4 - X is a non-Government employee. He has been allotted a rent-free accommodation. House is taken on rent by the employer
(rent being Rs. 2,40,000 per annum).
Situation 5 - X is a non-Government employee. He has been allotted a rent-free accommodation. House is taken on rent by the employer
(rent being Rs. 72,000 per annum).
Find out the taxable value of the perquisite in respect of rent-free accommodation on the assumption that –
a. the house is situated in Mumbai (population is more than 25 lakh); or
b. the house is situated in Pratapgarh (population as per 2001 census is 8 lakh but it is 12 lakh as per 2011 census).
Solution : “Salary” for the purpose of computation of perquisite value shall be determined as follows –
Rs.
Dearness allowance (only 70% is considered for calculating pension as well as provident fund and the
same should be considered for calculating perquisite value of rent-free house) 56,000
Dearness pay (not considered for retirement benefits) Nil
Fixed commission and bonus 1,80,000
Advance salary and arrears of salary (these are not considered being pertaining to some other financial year Nil
Income-tax paid by employer (it is a perquisite, not to be considered) Nil
Fixed lunch allowance 24,000
Children education allowance (only taxable portion to be included which is Rs. 9,600 – Rs. 2,400, being
exemption available at the rate of Rs. 100 per month per child for two children) 7,200
Salary for the purpose of calculating taxable value of perquisite in respect of rent-free house 11,67,200
97 Valuation of rent-free unfurnished accommodation Para 44.1
Taxable value of the perquisite shall be calculated as follows –

Place where house is situated
Mumbai Pratapgarh
Above 25 lakh 8 lakh
Rs. Rs.
Situation 1 - Government employee 6,0001 6,0001
Situation 2 - Employee of LIC (treated as non-Government employee) (house is owned
by employer) 1,75,0802 87,5403
Situation 3 - Company employee (house is owned by employer) 1,75,0802 87,5403
Situation 4 - Non-Government employee (rent of house : Rs. 2,40,000) 1,75,0804 1,75,0804
Situation 5 - Non-Government employee (rent of house : Rs. 72,000) 72,0005 72,0005
Notes -
1. In the case of a Government employee, taxable value of perquisite is license fee of the house as per house allotment scheme
of the Government.
2. In the case of a non-Government employee (if house is owned by the employer and population of the city is above 25 lakh),
taxable value of perquisite is 15% of “salary” [i.e., 15% of Rs. 11,67,200].
3. In the case of a non-Government employee (if house is owned by the employer and population of the city is up to 10 lakh
as per 2001 census), taxable value of perquisite is 7.5% of “salary” [i.e., 7.5% of Rs. 11,67,200].
4. In the case of a non-Government employee (if house is not owned by the employer), taxable value of perquisite is 15% of
“salary” (i.e., 15% of Rs. 11,67,200) or rent of Rs. 2,40,000, whichever is lower. Population is not taken into consideration, if
house is not owned by the employer.
5. In the case of a non-Government employee (if house is not owned by the employer), taxable value of perquisite is 15% of
“salary” (i.e., 15% of Rs. 11,67,200) or rent of Rs. 72,000, whichever is lower. Population is not taken into consideration, if
house is not owned by the employer.
44.1-2E2 [P4.40]* X, a sales manager of a paper company at Brajrajnagar (Orissa) (population 9.60 lakh as per 1991 census but 11.40
lakh as per 2001 census), draws Rs. 4,80,000 per annum as basic salary. Besides, he gets Rs. 6,000 per annum as travelling allowance
(fully utilised for official purposes), Rs. 18,000 per annum as bonus, Rs. 30,000 as special allowance. His employer provides a rent-free
unfurnished house in Brajrajnagar which is owned by the employer. Fair rent of the house is Rs. 80,000 per annum. During the previous
year 2019-20, X has also received Rs. 10,000, as arrears of bonus of the financial year 2016-17. Determine the value of the perquisite in
respect of rent-free house for the assessment year 2020-21.
44.1-2P3 X is an employee of a company situated in Chennai. During the previous year he is posted at Vaniganj (population : 20 lakh
as per 2001 census). He gets Rs. 80,000 per month as salary and a fixed lunch allowance (with effect from November 1, 2019) of Rs. 9,000
per month. His employer has provided him a rent-free unfurnished house at Vaniganj with effect from May 1, 2019. The company pays
Rs. 12,500 per month as rent (during May 1, 2019 and November 30, 2019). With effect from December 1, 2019, rent has been increased
to Rs. 14,000 per month. On January 1, 2020, the house is purchased by the employer-company from the landlord. Find out the taxable
value of perquisite in respect of rent-free house for the assessment year 2020-21.
Solution : “Salary” for the purpose of finding out taxable value of the perquisite is Rs. 80,000 per month up to October 31,
2019 and Rs. 89,000 per month with effect from November 1, 2019. Taxable value shall be calculated as follows –
Rs.
April 2019 - Nothing is taxable, as no house is provided Nil
May 2019 to October 2019 - House not owned by employer (taxable value is 15% of salary of Rs. 80,000 per
month or rent of house : Rs. 12,500 per month, whichever is lower) (15% of Rs. 80,000 × 6) 72,000
November 2019 - House not owned by employer (taxable value is 15% of salary of Rs. 89,000 per month or
rent of house : Rs. 12,500 per month, whichever is lower) (Rs. 12,500 × 1) 12,500
December 2019 - House not owned by employer (taxable value is 15% of salary of Rs. 89,000 per month or
rent of house : Rs. 14,000 per month, whichever is lower) (15% of Rs. 89,000 × 1) 13,350
January 2020 - March 2020 - House is owned by his employer and population of the city is 20 lakh (taxable
value is 10% of salary of Rs. 89,000 per month) (Rs. 8,900 × 3) 26,700
Taxable value of perquisite 1,24,550
44.1-2E3 [P4.41]* X, a non-Government employee, gets the following emoluments during the previous year 2019-20 :
Basic salary : Rs. 1,08,000 ; dearness allowance (forming part of salary) : Rs. 9,400 ; commission on sales : Rs. 10,800 ; advance salary
of April 2020 : Rs. 9,000 ; electricity bills paid by the employer on behalf of X : Rs. 5,000 ; and education allowance : Rs. 13,200 (for
two children who are school students in Delhi).
Besides, the employer provides a rent-free house in Delhi for residential purposes to X with effect from January 1, 2020. Lease rent
is Rs. 48,000 per annum. Determine the taxable value of the perquisite in respect of the rent-free house for the assessment year
2020-21 on the assumption that lease rent for the period ending March 31, 2020 is still unpaid.
44.2 Valuation of rent-free furnished accommodation - The perquisite in respect of rent-free furnished
accommodation may be provided in the following two different ways —
 A furnished accommodation (not being in a hotel, motel, service apartment or guest house) - Value of the perquisite shall
be calculated as follows —
Step 1 - Find out value of the perquisite on the assumption that the accommodation is unfurnished [see para 44.1]
Step 2 - To the value so arrived at, add value of furniture. Value of furniture for this purpose is as follows—
a. 10 per cent per annum of the original cost of furniture, if furniture is owned by the employer;
b. actual hire charges payable (whether paid or payable), if furniture is hired by the employer.
Meaning of furniture - “Furniture” here includes radio sets, television sets, refrigerators, air-conditioners and
other household appliances.
 A furnished accommodation in a hotel, motel, service apartment or guest house - The value of the perquisite is
determined on the basis of lower of the following two —

1. 24 per cent of “salary” paid or payable for the period during which such accommodation is provided in the
previous year.
2. Actual charges paid or payable by the employer to such hotel.
Exception - If an accommodation is provided in a hotel, motel, service apartment or guest house in the case of
relocation of an employee from one place to another place, nothing is chargeable to tax for 15 days (in aggregate
during the financial year).
Problems
44.2-P1 X received during the previous year ending March 31, 2020, emoluments consisting of basic pay : Rs. 1,62,000; special
allowance : Rs. 17,000 and reimbursement of medical expenditure : Rs. 3,800. His employer has also provided a rent-free furnished flat
in Bombay. Lease rent of the unfurnished flat is Rs. 50,000. Some of the household appliances provided to X (with effect from June 1,
2019) are owned by the employer (cost price of which is Rs. 36,000, date of purchase is April 1, 1960 and written down value, as on April
1, 2019 is Rs. 620). Employer pays Rs. 10,000 annually as hire charges for three air-conditioners installed throughout the previous year
in rent-free flat. Compute the value of the perquisite if : (a) X is a Secretary in the Ministry of Law and Rs. 4,000 is the licence fee of
unfurnished flat as per the Central Government rules ; (b) X is the Managing Director of ABC (P.) Ltd. Does it make any difference,
if X has been provided a hotel accommodation throughout the year (tariff being Rs. 1,20,000 per annum) ?
Solution : Valuation of unfurnished flat :
1. If X is a Secretary to the Central Government - Rs. 4,000 is the taxable value of the unfurnished flat.
2. If X is the Managing Director of ABC (P.) Ltd. - Salary for the purpose of calculating taxable value of the perquisite works
out to be Rs. 1,79,000 (i.e., Rs. 1,62,000 + Rs. 17,000)†. As lease rent of unfurnished flat (i.e., Rs. 50,000) exceeds 15% of salary,
Rs. 26,850 (being 15% of salary) is taxable value of the perquisite.
Valuation of furniture Rs.
10% per annum of cost of furniture [i.e., Rs. 36,000 × 10/100 × 10/12] 3,000
Add : Rent of air-conditioners 10,000
Valuation of furniture 13,000
Valuation of furnished flat :
Valuation of
Unfurnished flat Furniture Furnished flat
Rs. Rs. Rs.
If X is a Secretary to the Central Government 4,000 13,000 17,000
If X is a Managing Director of ABC (P.) Ltd. 26,850 13,000 39,850
Valuation of hotel accommodation - Rs. 42,960 (being 24% of salary or Rs. 1,20,000, whichever is lower) is chargeable to tax
whether X is a Government employee or non-Government employee.
44.2-E1 [P4.42]* X received the following emoluments during the previous year ending March 31, 2020 :
Basic salary : Rs. 2,56,000, dearness allowance : Rs. 25,600 (not forming part of salary), bonus : Rs. 24,000 and commission :
Rs. 2,000.
His employer provides the following perquisites :
A rent-free furnished house in Cochin : Rs.
 Lease rent of unfurnished house 37,000
† Reimbursement of medical expenditure of Rs. 3,800 is chargeable to tax as a perquisite. Value of perquisite is not included in calculating “salary”
for the purpose of rent-free house.
99 Valuation of accommodation provided at concessional rent Para 44.3
 Cost of steel furniture provided (written down value Rs. 2,000, steel furniture is provided throughout the previous Rs.
year) 10,000
 Rent of furniture provided (rent is yet to be paid by employer) 8,000
Motor car expenditure of the employee 4,000
Determine the value of the perquisite in respect of rent-free furnished house if : (a) X is an officer of the Government of West Bengal
and Rs. 12,800 is licence fee of unfurnished house as per the State Government Rules, (b) X is an officer of the Indian Airlines, and (c)
X is managing director of a private sector company.
44.3 Valuation of accommodation provided at concessional rent - If an accommodation is provided to an

employee at concessional rent, the valuation should be made as follows (these rules are applicable whether the
accommodation is furnished or unfurnished or it is provided in a hotel) —
Step 1 Find out the value of the perquisite on the assumption that no rent is charged by the employer [for this purpose
the rules given in paras 44.1 and 44.2 are applicable].
Step 2 From the value so arrived at, deduct the rent charged by the employer from the employee.
The balance amount (if it is positive) is the taxable value of the perquisite in respect of concession in rent.
Problems
44.3-P1 Continuing Problem 44.2-P1, suppose the employer, instead of providing flat or hotel accommodation free of rent, charges Rs.
16,000 per annum as rent of furnished flat. Find out the taxable value of the perquisite in respect of accommodation provided at
concessional rent.
Solution : Value of perquisite will be computed as under :
Valuation of rent-free Rent charged Valuation of
furnished flat or hotel by employer flat provided
accommodation as per at concessional
solution to 44.2-P1 rate
Rs. Rs. Rs.
(1) (2) (1) minus (2)
Flat—
- If X is a Secretary to the Central Government 17,000 16,000 1,000
- If X is a Managing Director of ABC (P.) Ltd. 39,850 16,000 23,850
Hotel accommodation 42,960 16,000 26,960
44.3-E1 [P4.43]* Continuing 44.2-E1, suppose the employer instead of providing rent-free furnished house in Cochin, charges
Rs. 25,000 as rent. Determine the taxable value of the perquisite in respect of house provided at concessional rate for the assessment
year 2020-21.
➠ 44.3-P2 X, a regular employee of A Ltd., gets the following emoluments during the previous year 2019-20 —
Basic salary : Rs. 60,000 per month (which has been increased to Rs. 70,000 per month from January 1, 2020) ; dearness allowance Rs.
4,000 per month (72 per cent of which is part of salary for computing all retirement benefits) ; education allowance : Rs. 550 per month
per child for 4 children ; medical allowance : Rs. 400 per month ; transport allowance : Rs. 1,950 per month (out of which Rs. 100 per
month is used for covering the journey between office and residence and Rs. 250 per month is used for other purposes). Besides, he gets
Rs. 20,000 per month as house rent allowance up to November 30, 2019 (rent paid at Ghaziabad : Rs. 18,000 per month). With effect
from December 1, 2019, he has been provided a furnished flat by the employer at Delhi (rent paid by employer : Rs. 26,000 per month ;
rent of furniture provided : Rs. 12,780 ; rent recovered from X : Rs. 900 per month). Find out the salary chargeable to tax for the
assessment year 2020-21 on the assumption that with effect from January 1, 2020, he joins a part-time employment with B Ltd. (salary
Rs. 18,000 per month) with the permission of A Ltd. (without leaving the job of A Ltd.).
Solution :
Rs. Rs.
Basic salary (Rs. 60,000 × 9 + Rs. 70,000 × 3) 7,50,000
Dearness allowance (Rs. 4,000 × 12) 48,000
Education allowance (Rs. 550 × 4 × 12) 26,400
Less : Exemption (Rs. 100 × 2 × 12) 2,400 24,000
Medical allowance (Rs. 400 × 12) 4,800
Transport allowance (Rs. 1,950 × 12) 23,400
Rs. Rs.
House rent allowance (Rs. 20,000 × 8) 1,60,000
Less : Exempt [see Note 1] 93,696 66,304
Furnished house [see Note 2] 62,118
Salary from B Ltd. (Rs. 18,000 × 3) 54,000
Salary 10,32,622
Income from salary 9,82,622
Notes —
1. House rent allowance exempt from tax - Salary for this purpose is Rs. 62,880 per month (i.e., basic salary : Rs. 60,000 per month
+ dearness allowance : 72% of Rs. 4,000 per month). The amount of exemption is—
a. Rs. 25,152 per month (being 40% of Rs. 62,880) ;
b. Rs. 20,000 per month (being house rent allowance) ; or
c. Rs. 11,712 per month (being excess of rent paid over 10% salary, i.e., Rs. 18,000 — Rs. 6,288),
whichever is lower.
Hence, the amount exempt from tax is Rs. 11,712 per month from April 1, 2019 to November 30, 2019 (i.e., Rs. 93,696).
2. Valuation of the perquisite in respect of furnished flat - X has been provided a furnished flat at Delhi with effect from
December 1, 2019. Salary, for this purpose, from December 1, 2019 to March 31, 2020 is as follows —
Rs.
Dearness allowance (72% of Rs. 4,000 × 4) 11,520
Education allowance [(Rs. 550 × 4 — Rs. 100 × 2) × 4] 8,000
Medical allowance (Rs. 400 × 4) 1,600
Transport allowance [Rs. 1,950 × 4] 7,800
House rent allowance (not received during December 1, 2019 to March 31, 2020) —
Salary from B Ltd. (Rs. 18,000 × 3) 54,000
Total salary 3,52,920
Lease rent of 4 months (Rs. 26,000 × 4) : Rs. 1,04,000. The perquisite shall be valued as follows —
Value of unfurnished flat (15% of Rs. 3,52,920 or Rs. 1,04,000, whichever is lower) 52,938
Add : Rent of furniture 12,780
Value of rent-free furnished flat 65,718
Less : Rent paid by X (Rs. 900 × 4) 3,600
Value of the perquisite 62,118
3. Now, exemption is not available in respect of transport allowance (for covering journey between office and residence).
➠ 44.3-E2 [P4.44]* From the data given below, find out salary income (before standard deduction) for the assessment year
2020-21 –
1. X is employed by A Co. up to May 31, 2019 and by B Co. from June 1, 2019.
2. Salary, allowances and perks (on per month basis) are as follows —
A Co. B Co.
Rs. Rs.
Basic salary 1,20,000 1,60,000
Dearness allowance (entire amount is part of salary for calculating pension and other retirement benefits) 10,000 —
Commission 35,000 40,000
House rent allowance (rent paid at Indore : Rs. 9,000 per month) — 50,000
A Co. has provided a furnished house at Ujjain which he has vacated on May 31, 2019 (lease rent of the house owned by D Co. : Rs.
18,000 per month, rent of furniture : Rs. 2,000 per month and rent recovered from X : Rs. 6,000 per month).
44.4 Valuation of perquisite in respect of free domestic servants - The actual cost to the employer shall be
taxable in the hands of employee. The actual cost in such a case shall be the total amount of salary paid or payable
by the employer (or any other person on his behalf) for such services as reduced by any amount paid by the
employee for such services.
When a house owned by employer is provided to the employee and employer incurs expenditure on maintenance of garden
in the house - The Central Board of Direct Taxes in its Circular No. 122, dated October 19, 1973 has observed that
the provision of gardener (when gardener is provided along with a house owned by the employer) cannot be
101 Valuation of perquisite in respect of free education Para 44.6
taken as a perquisite, as the employer in any case would have maintained the garden irrespective of the fact
whether building was occupied by the employee or lying vacant.
44.5 Valuation of perquisite in respect of gas, electric energy or water supply - Actual expenditure of the
employer (manufacturing cost if these supplies are made out of sources owned by employer) as reduced by any
amount recovered by the employee, is a taxable perquisite in the hands of an employee.
44.6 Valuation of perquisite in respect of free education - The basis of valuation is briefly given below –
1. Expenditure relating to providing training to employees is not taxable.
2. If education facility is provided to the family members of employee, expenditure incurred by the employer
is the taxable value of perquisite. Payment of tuition fees or reimbursement of tuition fees is chargeable to tax.
3. If education facility is provided to the children of employee in an educational institute owned or maintained
by the employer, then reasonable cost of education in a similar institute$ in or near the locality is taxable. Up to
Rs. 1,000† per month per child is not taxable, if the employer provides education facility to the children of an
employee in an educational institution owned or maintained by the employer or where such educational facility
is provided in any institute (having an arrangement with the employer) by reason of employee’s employment
with the employer. The benefit of exemption of Rs. 1,000 per month is not available, if such education facility is
provided to other family members (not being children of the employee).
4. Amount of scholarship given by an employer-company to children of its employees (solely at its discretion
without reference to terms of employment) is not assessable as perquisite in the hands of employees.
Problems
44.6-P1 Find out the taxable value of the perquisite for the assessment year 2020-21 in the following cases—
1. X is an employee in the Accounts Department of A Ltd. On November 27, 2019, he attends a seminar on “Perquisite Valuation”.
Seminar fees of Rs. 7,500 is paid by A Ltd.
2. Y’s son is a student of ninth class of DPS, Noida. Rs. 17,800 being tuition fees of Y’s son is paid/reimbursed by B Ltd. where Y is
employed. There is no arrangement between B Ltd. and DPS, Noida.
3. Star Public School, Ajmer, is owned and maintained by C Ltd., a manufacturing company. Books of account of the school and C Ltd.
are maintained separately. Z is an employee of C Ltd. The following family members of Z are students in Star Public School—
Cost of education in a similar institution Amount charged from Z
A, daughter of Z Rs. 5,500 per month Rs. 800 per month.
B, dependent brother of Z Rs. 6,000 per month Rs. 1,600 per month
4. Suppose in (3) (supra) Star Public School is not owned/maintained by C Ltd. As per arrangement of C Ltd. with the school, family
members of employees of C Ltd. can have educational facility in the school. 100 seats are reserved for this purpose for which the company
annually pays Rs. 10 lakh to the school (no separate billing by the school to the employees of C Ltd.). Family members of Z are students
of the school. Cost of education in a similar institute and amount charged from Z by C Ltd. are given in the table in (3) (supra).
Solution :
1. Expenditure on training/education of an employee is not chargeable to tax. Rs. 7,500 is, therefore, not chargeable to tax
in the hands of X.
2. Rs. 17,800, being tuition fees paid/reimbursed by B Ltd., is taxable in the hands of Y.
3. School is maintained by the employer. Amount taxable in the hands of Z is Rs. 97,200 as follows—
Rs.
A (daughter of Z) [12 × (Rs. 5,500 —Rs. 1,000 — Rs. 800)] 44,400
B (brother of Z) [12 × (Rs. 6,000 — Rs. 1,600)] 52,800
4. The taxable amount will be the same as is given in (3) (supra).
44.6-E1 Assume in problem 44.6-P1 that X, Y and Z are employed by a public sector company.
†A literal reading of the rule 3(5) indicates that if the cost of education per child exceeds Rs. 1,000 per month, the entire cost will be the value of
the perquisite. However, keeping in view the departmental instructions in respect of free meal and gift vide Circular No. 8/2013, dated October
10, 2013, where the similar language is used, only the sum in excess of Rs. 1,000 per month per child alone should be treated as perquisite. However,
the Punjab and Haryana High Court in the case of CIT v. Director, Delhi Public School [2011] 202 Taxman 318 has taken a contrary view (i.e., nothing
is taxable if cost of education in a similar institute is equal to or less than Rs. 1,000 per month and if it exceeds Rs. 1,000 per month, the entire amount
is chargeable to tax).
$
For this purpose, one cannot take cost of education (as in the case of other students) in the same institution.
44.7 Valuation of leave travel concession in India [Sec. 10(5)]* - Leave travel assistance extended by an
employer to an employee for going anywhere in India along with his family is exempt on the basis of provisions
given in the table below—
Different situations Amount of exemption (exemption is available only in respect
of fare for going anywhere in India along with family
twice in a block of four years)
 Where journey is performed by air Amount of economy class air fare of the national carrier
by the shortest route or the amount spent, whichever is
less.
 Where journey is performed by rail Amount of air-conditioned first class rail fare by the
shortest route or amount spent, whichever is less.
 Where the places of origin of journey and destination are Amount of air-conditioned first class rail fare by the
connected by rail and journey is performed by any other shortest route or the amount spent, whichever is less.
mode of transport
 Where the places of origin of journey and destination (or
part thereof) are not connected by rail
 Where a recognised public transport system exists First class or deluxe class fare by the shortest route or the
amount spent, whichever is less.
 Where no recognised public transport system exists Air-conditioned first class rail fare by the shortest route
(as if the journey had been performed by rail) or the
amount actually spent, whichever is less.
44.7-1 OTHER POINTS - One should also keep in view the following points —
 Meaning of “family” - The aforesaid exemption is available in respect of fare for going anywhere in India along
with “family”. For this purpose, “family” includes spouse and children** of the employee. It also includes
parents, brothers and sisters of the employee, who are wholly or mainly dependent upon the employee.
However, family does not include more than two surviving children of an individual born on or after October
1, 1998 (in reckoning this limit of two children, children born out of multiple births after the first child will be
treated as ‘one child only’).
 Only two journeys in a block of 4 years is exempt - Exemption on the aforesaid basis is available in respect of two
journeys performed in a block of four calendar years. The different blocks are—
a. 2010-2013 (i.e., January 1, 2010 to December 31, 2013);
b. 2014-2017 (i.e., January 1, 2014 to December 31, 2017);
c. 2018-2021 (i.e., January 1, 2018 to December 31, 2021).
 “Carry-over” concession - If an assessee has not availed travel concession or assistance during any of the specified
four-year block periods on one of the two permitted occasions (or on both occasions), exemption can be claimed
in the first calendar year of the next block (but in respect of only one journey). This is known as “carry over”
concession. In such case, the exemption so availed will not be counted for the purposes of claiming the future
exemptions allowable in respect of two journeys in the subsequent block.
For the block 2014-17, X can claim exemption in respect of leave travel concession under section 10(5) on two occasions. If
X has availed the exemption only on one occasion (or he has not availed the exemption at all) during 2014-17, then he can
take the benefit of “carry over” concession. The benefit of carry over is available only in respect of one journey provided he
avails leave travel concession exemption under section 10(5) in the first calendar year of the next block (i.e., during the
calendar year 2018). In addition, he can avail exemption on two more occasions during 2018-21.
Exemption is based upon actual expenditure - The quantum of exemption is limited to the actual expenses incurred
on the journey. In other words, without performing any journey and incurring expenses thereon, no exemption
can be claimed.
*The value of leave travel concession provided to a serving Chairman or member of the UPSC and members of his family, is not chargeable to
tax by virtue of section 10(45).
**Child includes step child and adopted child.
103 Valuation of perquisite of interest-free loan Para 44.10
 Exemption is available in respect of fare - The exemption is strictly limited to expenses on air fare, rail fare, bus fare
only. No other expenses, like scooter or taxi charges at both ends, porterage expenses during the journey and
lodging/boarding expenses are qualified for exemption.
 Exemption is available in respect of shortest route - Where the journey is performed by a circuitous route, the
exemption is limited to what is admissible by the shortest route. Likewise, where the journey is performed in a
circular form touching different places, the exemption will be limited to what is admissible for the journey from
the place of origin to the farthest point reached, by the shortest route.
 Family member travelling separately - Exemption shall not be available if the family members are travelling
separately without the employee who is not on leave – Circular No. 8/2012, dated October 5, 2012.
44.8 Employee’s obligation met by employer [Sec. 17(2)(iv)] - Amount paid by an employer in respect of any
obligation which otherwise would have been payable by the employee is taxable in all cases.
The following illustrations are given to have better understanding—
1. X is general manager in A Ltd. He engages a domestic servant on monthly salary of Rs. 2,000. The entire salary (i.e., Rs.
24,000) is paid by A Ltd. to the domestic servant (or salary is paid by X and A Ltd. reimburses the entire amount).
In this case, the perquisite (i.e., Rs. 24,000) is taxable in the hands of X under section 17(2)(iv) in all cases, as the obligation
of X to pay salary to the domestic servant, is met by his employer.
2. Y takes a loan of Rs. 1 lakh from a bank. The loan is later on paid by his employer on behalf of Y.
Since it is an obligation of Y which is met by his employer, it is a perquisite taxable in the hands of Y.
3. Z is employed by A Ltd. and presently he is finance head at Mumbai. A Ltd. takes a building on lease at Mumbai (lease
rent being Rs. 1.1 lakh per month, interest-free refundable deposit of Rs. 2 crore given to the landlord by A Ltd.). A Ltd.
spends Rs. 1.5 crore on renovation of the building to suit the requirement of Z. After renovation the building is given as rent-
free perquisite to Z for his residence. In this case, perquisite value of rent-free accommodation will be calculated under rule
3 (i.e., 15 per cent of salary). Amount spent on renovation of building of Rs. 1.5 crore cannot be taxed under section 17(2)(iv)
as an obligation of the employee met by the employer (as the lease deed nowhere imposes an obligation on Z to carry out
repairs and renovation).
44.9 Amount payable by employer to effect an assurance on the life of employee [Sec. 17(2)(v)] - Amount
payable by an employer, directly or indirectly, to effect an assurance on the life of the assessee or to effect a
contract for an annuity is taxable in the hands of all employees.
This rule is, however, not applicable if the employer makes contribution/payment towards the following—
a. recognised provident fund (up to 12 per cent of salary of the employee);
b. approved superannuation fund (up to Rs. 1,50,000);
c. group insurance schemes;
d. employees’ state insurance schemes; and
e. fidelity guarantee scheme.
44.10 Valuation of perquisite in respect of interest-free loan or loan at concessional rate of interest - If a
loan is given by an employer to the employee (or any member of his household), it is a perquisite chargeable to
tax. It is taxable on the following basis—
Step 1 Find out the “maximum outstanding monthly balance” (i.e., the aggregate outstanding balance for each loan
as on the last day of each month).
Step 2 Find out rate of interest charged by the State Bank of India (SBI) as on the first day of the relevant previous year
in respect of loan for the same purpose advanced by it [see para 44.10-1].
Step 3 Calculate interest for each month of the previous year on the outstanding amount mentioned in Step 1 at the rate
of interest given in Step 2.
Step 4 From the total interest calculated for the entire previous year under Step 3, deduct interest actually recovered,
if any, from the employee during the previous year.
Step 5 The balancing amount [i.e. Step 3 minus Step 4] is taxable value of the perquisite.
44.10-1 WHEN PERQUISITE IS NOT CHARGEABLE TO TAX - In the following cases, the perquisite is not chargeable to
tax —
Exemption 1 If a loan is made available for medical treatment in respect of diseases specified in rule 3A (the exemption
is, however, not applicable to so much of the loan as has been reimbursed to the employee under any
medical insurance scheme).
Exemption 2 Where the amount of original loan (or loans) does not exceed in the aggregate Rs. 20,000.
Example 1 - X takes a loan of Rs. 2,00,000 from his employer on May 1, 2019 for medical treatment of Mrs. X (medical treatment
is specified in rule 3A). Hospital bill is Rs. 2,00,000. The perquisite is not chargeable to tax. Suppose in this case insurance
claim of Rs. 50,000 is received on October 15, 2019 which is retained by X. In such a situation, interest on Rs. 50,000 will be
chargeable in hands of X with effect from October 15, 2019†.
Example 2 - X takes a loan of Rs. 15,000 from his employer on May 28, 2019 (no other loan is taken so far). As the amount of
loan does not exceed Rs. 20,000, nothing is chargeable to tax. Suppose in this case another loan of Rs. 5,500 is taken from the
employer on July 17, 2019. Now the aggregate amount of loan exceeds Rs. 20,000. Consequently, interest on Rs. 20,500 (i.e.,
Rs. 15,000 + Rs. 5,500) will be chargeable to tax with effect from July 17, 2019.†
Example 3 - X takes a loan of Rs. 1,70,000 from his employer on October 1, 2003. It is repayable by way of quarterly instalments.
On April 1, 2019, the outstanding amount is Rs. 20,000. The perquisite is not exempt from tax, as the amount of original loan
is more than Rs. 20,000.
44.10-2 OTHER POINTS - The following points should be noted—
1. Interest will be calculated according to the method given above. No other method (e.g., cost of capital/fund
to employer) shall be taken into consideration.
2. If a closely-held company gives a loan to an employee who holds at least 10 per cent voting power, such loan
is deemed as dividend under section 2(22)(e), if a few conditions are satisfied. Even in such a case, the perquisite
value of interest-free loan is chargeable to tax.
3. Notional interest on interest-free security deposit given by the employer for a flat belonging to the employee
taken on lease, cannot be treated as perquisite.
Problems
44.10-P1 Determine the taxable value of the perquisite in the following cases :
1. X is employed by A Ltd. On June 1, 2019, the company gives an interest-free housing loan of Rs. 14,00,000. Loan is repayable within
5 years (SBI lending rate : 8.65%).
2. Y is employed by B Ltd. On April 1, 2019, he takes car loan of Rs. 12,50,000 from B Ltd. B Ltd. recovers interest @ 2.5 per cent per
annum from Y. (SBI lending rate : 9.25 per cent).
3. C Ltd. gives the following interest-free loan to Z, an employee of the company—Rs. 15,000 for child’s education and Rs. 5,000 for
purchasing a refrigerator. No other loan is given by C Ltd.
4. A purchases a Honda City 1.6 Lxi on March 1, 2019 from a loan of Rs. 8,00,000 taken at concessional rate of 8.25 per cent per annum
from his employer XYZ Ltd. As per the agreed terms of repayment, A is supposed to repay in monthly instalments of Rs. 25,000 starting
from January 1, 2020. Compute the taxable value of perquisite in respect of concessional loan for the previous year 2019-20 (SBI lending
rate is 9.25 per cent).
5. B takes an interest-free loan of Rs. 7,00,000 from his employer PQR Ltd., on June 16, 2019 for medical treatment of his wife who is
suffering from a disease specified in rule 3A. Mrs. B is also covered under a mediclaim insurance cover. Insurance company reimburses
her of the hospitalization charges of Rs. 2,50,000 on January 1, 2020. According to terms of repayment of loan, B has to pay Rs. 12,000
per month on the seventh day of each month starting November 2019. Ascertain the taxable value of perquisite in respect of interest-free
loan for the previous year 2019-20. SBI lending rate for similar loan is 18.5 per cent. The amount paid by the insurance company is
retained by B.
Solution : For the assessment year 2020-21, the taxable value of the perquisite will be as under—
1. The lending rate of SBI on April 1, 2019 for similar loan is 8.65% per annum. Rs. 1,00,917 (being interest @ 8.65% on
Rs. 14,00,000 from June 1, 2019 to March 31, 2020) is taxable in the hands of X.
†The basis of calculation shall be the “maximum outstanding balance” on the last of each month.
105 Perquisite in respect of sale of movable assets Para 44.12
2. The SBI lending rate for a similar loan is 9.25%. Rs. 84,375 [being interest @ 6.75% (i.e., 9.25% – 2.5%) on Rs. 12,50,000 for
one year] is taxable in the hands of Y.
3. Nothing is taxable in the hands of Z as the amount of loan does not exceed Rs. 20,000.
4. The lending rate of SBI for a similar loan is 9.25%. Maximum monthly outstanding amount for the various months in the
previous year 2019-20 is as follows:
Month Maximum monthly outstanding amount on Interest
last day of the month
Rs. Rs.
April 30, 2019 8,00,000 666.67 (i.e., Rs. 8,00,000 × 1% × 1/12)
May 31, 2019 8,00,000 666.67
June 30, 2019 8,00,000 666.67
July 31, 2019 8,00,000 666.67
August 31, 2019 8,00,000 666.67
September 30, 2019 8,00,000 666.67
October 31, 2019 8,00,000 666.67
November 30, 2019 8,00,000 666.67
December 31, 2019 8,00,000 666.67
January 31, 2020 7,75,000 645.83 (i.e., Rs. 7,75,000 × 1% × 1/12)
February 29, 2020 7,50,000 625 (i.e., Rs. 7,50,000 × 1% × 1/12)
March 31, 2020 7,25,000 604.16 (i.e., Rs. 7,25,000 × 1% × 1/12)
Total 7,875
Taxable value of concessional loan is Rs. 7,875 for the previous year 2019-20.
5. The perquisite in respect of interest-free loan provided for medical treatment in respect of a disease specified in rule 3A
is not taxable. However, it will not include that amount as has been reimbursed to the employee under any medical insurance
scheme. Therefore, out of loan of Rs. 7,00,000 granted to B, Rs. 2,50,000 reimbursed by insurance company on January 1, 2020
will be taken into account for computing taxable value of perquisite. The SBI lending rate for a similar loan is 18.5% on April
1, 2019.
Month Maximum monthly outstanding Interest
amount on the last day of the month
Rs. Rs.
January 31, 2020 2,38,000 3,669 (i.e., Rs. 2,38,000 × 18.5% × 1/12)
February 29, 2020 2,26,000 3,484 (i.e., Rs. 2,26,000 × 18.5% × 1/12)
March 31, 2020 2,14,000 3,299 (i.e., Rs. 2,14,000 × 18.5% × 1/12)
Total 10,452
Taxable value of interest-free loan is Rs. 10,452 for the previous year 2019-20.
44.10-E1 Find out the taxable value of the perquisite in problem 44.10-P1 if X, Y, Z, A and B are employed by the Central
Government.
44.11 Perquisite in respect of use of movable assets - If computer/laptop is provided by an employer to his
employee, nothing is chargeable to tax in the hands of employee. If any other movable asset is provided to an
employee, the perquisite is chargeable to tax in the hands of employee. 10 per cent per annum of actual cost of
asset to the employer (or hire charges) as reduced by any amount recovered from the employee is a taxable
perquisite in the hands of an employee.
44.12 Valuation of the perquisite in respect of sale of movable assets by an employer to his employees at
a nominal price - Actual cost of the asset to the employer minus normal wear and tear minus sale consideration
paid by the employee, is taxable value of the perquisite.
 Normal wear and tear shall be calculated only if after purchasing the asset and before its transfer, the employer
has used it for his business purposes. Moreover, normal wear and tear is deductible only for completed years
(not for fraction of year).
 Normal wear and tear for each year of use shall be calculated as follows –
a. computer/electronic gadgets : 50 per cent per annum by reducing instalment method;
b. car : 20 per cent per annum by reducing instalment method; and
c. any other asset : 10 per cent per annum of actual cost).
 Electronic gadgets for the above purpose mean data storage and handling devices like computer, digital diaries
and printers. They do not include household appliance (i.e., white goods like washing machines, microwave
ovens, mixers, hot plates, ovens etc.).
Problems
44.12-P1 Find out the taxable value of the perquisite in the following cases for the assessment year 2020-21–
1. X is given a laptop by the employer-company for using it for office and private purpose (ownership is not transferred). Cost of the laptop
to the employer is Rs. 96,000.
2. On October 15, 2019, the company gives its music system to Y for domestic use. Ownership is not transferred. Cost of music system
(in 2006) to the employer is Rs. 15,000.
3. The employer company sells the following assets to the employees on January 1, 2020 —
Name of employee Z A B
Asset sold Car Computer Fridge
Cost of the asset to employer Rs. 6,96,000 Rs. 1,17,000 Rs. 40,000
Date of purchase (put to use on the same day) May 15, 2017 May 15, 2017 May 15, 2017
Sale price Rs. 2,10,000 Rs. 24,270 Rs. 1,000
Before sale on January 1, 2020, these assets were used for business purpose by the employer.
Solution :
1. X is provided use of laptop by the employer. The perquisite is not chargeable to tax.
2. Y is provided a music system by the employer. The taxable value of the perquisite is determined @ 10% per annum of cost.
Accordingly Rs. 690 (being Rs. 15,000 × 10/100 × 168 days ÷ 365 days) is chargeable to tax.
3. The taxable value of the perquisite in the hands of Z, A and B shall be determined as follows—
Car Computer Fridge
Rs. Rs. Rs.
Cost of the asset on May 15, 2017 6,96,000 1,17,000 40,000
Less : Normal wear and tear for the first year ending May 14, 2018 (20% of
Rs. 6,96,000, 50% of Rs. 1,17,000, 10% of Rs. 40,000) 1,39,200 58,500 4,000
Balance on May 15, 2018 5,56,800 58,500 36,000
Less : Normal wear and tear for the second year ending May 14, 2019 (20% of
Rs. 5,56,800, 50% of Rs. 58,500, 10% of Rs. 40,000) 1,11,360 29,250 4,000
Balance on May 15, 2019 4,45,440 29,250 32,000
Less: Normal wear and tear from May 15, 2019 to January 1, 2020 (for a part of the
year, normal wear and tear is not deductible) Nil Nil Nil
Balance as on January 1, 2020 4,45,440 29,250 32,000
Less : Sale consideration 2,10,000 24,270 1,000
Taxable value of the perquisite 2,35,440 4,980 31,000
Note - In the case of car and computer/electronic items, normal wear and tear is calculated @ 20% and 50% per annum
respectively on the basis of written down value. In the case of any other asset, normal wear and tear is calculated at the rate
of 10% per annum of cost of the asset to the employer. Normal wear and tear for a part of the year is not taken into
consideration.
44.12-E1 Find out the taxable value of the perquisite, if in problem 44.12-P1, X, Y, Z, A and B are employed by a sole proprietor.
44.13 Valuation of medical facilities - Before discussing the broad provisions, one should note down the
following points—
1. Fixed medical allowance is always chargeable to tax.
107 Valuation of medical facilities Para 44.13
2. For the purpose of valuation of the perquisite in respect of medical facilities, “family” means—
a. the spouse and children of the individual; and
b. the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the
individual.
44.13-1 MEDICAL FACILITIES IN INDIA - The provisions are given below—
1. Employer’s hospital/Government hospital/approved hospital - The perquisite in respect of medical facility provided
by an employer in the following hospitals/clinic is not chargeable to tax—
a. hospital owned/maintained by the employer,
b. hospital of Central Government/State Government/local authority,
c. private hospital if it is also recommended by the Government for the treatment of Government employees,
d. specified medical facility (given in rule 3A) in a hospital approved* by the Chief Commissioner.
2. Health insurance premium - Medical insurance premium paid or reimbursed by the employer is not chargeable
to tax.
3. Any other facility in India - Any other expenditure incurred or reimbursed by the employer for providing
medical facility in India is chargeable to tax.
44.13-2 MEDICAL FACILITIES OUTSIDE INDIA - Any expenditure incurred by the employer (or reimbursement of
expenditure incurred by the employee) on medical treatment of the employee or any member of the family of
such employee outside India, is taxable subject to the conditions given below —
Perquisite not chargeable to tax Condition to be satisfied
 Medical treatment of employee or any member of Expenditure shall be excluded from perquisite only to
family of such employee outside India the extent permitted by the Reserve Bank of India
 Cost on travel of the employee/any member of his Expenditure shall be excluded from perquisite only in the
family and one attendant who accompanies the patient in case of an employee whose gross total income, as com-
connection with treatment outside India puted before including therein the expenditure on travel-
ling, does not exceed Rs. 2,00,000
 Cost of stay abroad of the employee or any member of Expenditure shall be excluded from the perquisite only to
the family for medical treatment and cost of stay of one the extent permitted by the Reserve Bank of India
attendant who accompanies the patient in connection with
such treatment
Problems
44.13-P1 Find out the taxable value of the perquisite in respect of medical facility in the following cases —
1. X gets a fixed medical allowance of Rs. 600 per month from his employer.
2. Y, a director in the employer-company, gets medical treatment in dispensary maintained by his employer. The expenditure on medical
treatment provided to Y and his family members during the previous year 2019-20 is as follows :
Rs.
Y, Mrs. Y and minor child of Y 9,100
Major son of Y (not dependent upon Y) 2,700
Parents of Y (dependent upon Y) 3,000
Parents of Mrs. Y (dependent upon Y) 12,000
Brother of Y (dependent on Y) 6,000
Sister of Y (not dependent on Y) 17,000
Besides, Y gets reimbursement of ordinary medical expenses (amount reimbursed by the employer being Rs. 11,000 for Y and Rs. 3,000
for treatment of Mrs. Y).
*Employee should obtain a certificate from the hospital which should specify the nature of disease as well as amount of expenditure.
3. Z (salary : Rs. 2,40,000) pays “mediclaim” health insurance premium (which is later on reimbursed by his employer) as follows :
Rs.
On Z’s life 800
On Mrs. Z’s life 600
On the life of Z’s father (not dependent upon Z) 1,000
On the life of major son of Z (not dependent upon Z) 2,700
On the life of brother of Z (dependent upon Z) 400
On the life of father of Mrs. Z (dependent upon Z) 500
On the life of grandfather of Z (dependent upon Z) 1,000
4. A (salary : Rs. 3,60,000) gets the following reimbursement from his employer during the previous year 2019-20 :
Reimbursement of expenses incurred for caesarean operation of Mrs. A in a hospital approved by the Chief Commissioner 28,600
Reimbursement expenses of eye’s treatment (including surgical operation) in a hospital approved by the Chief Commissioner 2,700
Reimbursement of ordinary medical expenses paid to a private nursing home 16,200
Solution :
1. Fixed medical allowance of Rs. 600 per month (i.e., Rs. 7,200) is chargeable to tax. It is an allowance and not a perquisite.
It is always taxable irrespective of the expenditure incurred by the concerned employee.
2. The perquisite will be chargeable to tax as under :
Value of medical facility provided in a

dispensary maintained by the employer
Not taxable at all Taxable
Rs. Rs.
Y, Mrs. Y and minor child of Y 9,100 —
Major son of Y 2,700 —
Parents of Y 3,000 —
Parents of Mrs. Y — 12,000
Brother of Y 6,000 —
Sister of Y — 17,000
Total 20,800 29,000
Less : Amount not taxable 20,800 Nil
Amount taxable Nil 29,000
Amount taxable in the hands of Y is as follows – Rs.
Medical facility in the dispensary maintained by the employer (as calculated above) 29,000
Reimbursement of medical expenditure (Rs. 11,000 + Rs. 3,000) 14,000
Total 43,000
3. Reimbursement of “mediclaim” insurance premium shall be taxable as under :
Not taxable Taxable
Rs. Rs.
On Z’s life 800 —
On Mrs. Z’s life 600 —
On the life of Z’s father — 1,000
On the life of Z’s major son 2,700 —
On the life of Z’s dependent brother 400 —
On the life of Mrs. Z’s father — 500
On the life of Z’s grandfather — 1,000
Total 4,500 2,500
4. Reimbursement of expenses will be taxable as under :
Not taxable Taxable
Rs. Rs.
Operation of Mrs. A 28,600 —
Eye’s treatment 2,700 —
Private nursing home bills — 16,200
Total 31,300 16,200
109 Valuation of perquisite in respect of car/conveyance Para 44.14
Not taxable Taxable

Rs. Rs.
Less : Not taxable 31,300 Nil
Amount taxable Nil 16,200
44.13-E1 [P4.45]* Mrs. X is a tax consultant in A Ltd. (annual salary being Rs. 1,76,000 before standard deduction of Rs. 50,000).
A Ltd. makes the following expenses for medical treatment of her husband outside India during the previous year 2019-20 :
Amount incurred Out of which
by A Ltd. permitted by RBI
Rs. Rs.
Cost of medical treatment of X outside India 13,90,000 13,30,000
Cost of stay abroad of X and Mrs. X in connection with medical treatment of X 3,70,000 3,60,000
Cost of travel of X and Mrs. X in connection with medical treatment of X 6,10,000 2,03,000
Find out the taxable value of the medical facility chargeable to tax in the hand of Mrs. X for the assessment year 2020-21 on the
assumption that (a) Mrs. X does not have any other income or (b) interest income of Mrs. X from Punjab National Bank is Rs. 10,000.
44.14 Valuation of perquisite in respect of car/conveyance - Taxable value of perquisite in different situations
shall be calculated as follows –
 Situation 1 - Car is owned or hired by an employer, all expenses are incurred by employer and provided to an employee
only for official purposes - Technically it is not a “perquisite”, as the concerned employee does not get any personal
benefit at the cost of employer. Consequently, nothing is chargeable to tax. However, the Board has prescribed
two conditions [narrated in para 44.14-1] which are to be satisfied by the employer and only then nothing would
be chargeable to tax.
 Situation 2 - Car is owned or hired by employer, expenses are incurred by employer and provided to an employee wholly
for personal purposes - Entire expenditure incurred by employer (including depreciation at the rate of 10 per cent
per annum of actual cost of the car), is taxable in the hands of employee. Expenses recovered from employee are
deductible.
 Situation 3 - Car is owned or hired by employer, expenses are incurred by employer and provided to an employee for partly
official and partly personal purposes - Rs. 1,800 per month (1600 cc or less)/Rs. 2,400 per month (above 1600 cc) for
car is taxable. If driver is provided, an additional sum at the rate of Rs. 900 per month shall be taxable.
Expenditure recovered from the employee is not deductible.
 Situation 4 - Car is owned or hired by employer, provided to an employee for partly official and partly personal purposes,
and expenses for private purposes are incurred by employee - Rs. 600 per month (1600 cc or less)/Rs. 900 per month
(above 1600 cc) for car is taxable. If driver is provided, an additional sum at the rate of Rs. 900 per month shall
be taxable. Expenditure recovered from the employee is not deductible.
 Situation 5 - Car is owned by employee, expenses are incurred by employer and car is used for partly official and partly
personal purposes - Actual expenditure incurred by employer minus expenditure pertaining to official use minus
anything recovered from employee, is taxable in the hands of employee. Expenditure pertaining to official use
can be calculated as per logbook of the car (if conditions narrated in para 44.14-1 are satisfied). Alternatively,
expenditure pertaining to official use can be calculated at the rate of Rs. 1,800 per month (1600 cc or less)/Rs. 2,400
per month (above 1600 cc) for car and Rs. 900 per month for driver.
 Situation 6 - Any automotive conveyance (other than car) owned by employee and expenses are incurred by employer -
If such conveyance is used only for official purposes, nothing is chargeable to tax. However, the Board has
prescribed two conditions [narrated in para 44.14-1] which are to be satisfied by the employer and only then
nothing would be chargeable to tax. Conversely, if such conveyance is used by the employee partly for official
and partly for private purpose, then actual expenditure incurred by employer minus expenditure pertaining to
official use minus anything recovered from employee, is taxable in the hands of employee. Expenditure
pertaining to official use can be calculated as per logbook of the car (if conditions narrated in para 44.14-1 are
satisfied). Alternatively, expenditure pertaining to official use can be calculated at the rate of Rs. 900 per month.
44.14-1 CONDITIONS TO BE SATISFIED IF CAR IS USED FOR OFFICIAL PURPOSES - Where the employer or the employee claims
that the motor car is used wholly and exclusively in the performance of official duty (i.e., Situation 1), the
following two conditions should be satisfied—
Condition 1 - The employer has maintained complete details of journey undertaken for official purpose which
may include date of journey, destination, mileage, and the amount of expenditure incurred thereon.
Condition 2 - The employer gives a certificate to the effect that the expenditure was incurred wholly and
exclusively for the performance of official duties.
 The above conditions should also be satisfied in Situation 5 if the employee and/or employer claim that the
expenses for official purposes is more than Rs. 1,800 per month (or Rs. 2,400 per month if rating of car exceeds
1,600 cc).
 Meaning of month - The word “month” in the provisions given above denotes completed month according to
the English calendar and a part of the month is left out of consideration.
 When two (or more car) are allowed - If an employer provides two or more cars (which fall in Situation 3), the taxable
value in respect of only one such car (selected by the employee) shall be determined according to the rules given
for Situation 3. In respect of other remaining car or cars, the value of the perquisite shall be calculated under
Situation 2.
 Car facility between office and residence - The use of motor car by an employee for the purposes of going from his
residence to the place where the duties of employment are to be performed or from such place back to his
residence, is not chargeable to tax.
 Conveyance facility to judges - Conveyance facility provided to High Court/Supreme Court Judges is not
chargeable to tax.
 Conveyance facility to Chairman/members of UPSC - Conveyance facility (including transport allowance)
provided to serving Chairman/members of UPSC is not chargeable to tax.
Problems
44.14-P1 Find out the taxable value of the perquisite in respect of car in the following different situations for the assessment year
2020-21—
1. X is employed by a company. He has been provided a car (1200cc) owned by the employer, cost of the car is Rs. 4,26,000. The expenditure
incurred by the company on maintenance of the car are — petrol : Rs. 46,000, driver: Rs. 36,000 and maintenance: Rs. 10,000. The car
can be used by X partly for official purposes partly for private purposes. A sum of Rs. 12,000 is recovered from X.
2. Assume in Situation 1 that the car is used only for private purposes.
3. A car (1800cc) is owned by the employer (cost of the car being Rs. 4,80,000). X, an employee, can use it partly for official purposes
and partly for private purposes. Expenses for private purposes are, however, incurred by X. During the previous year 2019-20, the total
expenditure incurred by X is Rs. 50,000 on car and Rs. 20,000 on driver.
4. Assume in Situation 3 that the car can be used only for private purposes.
5. X owns a car (1400cc). He uses it partly for official purposes and partly for private purposes. During the previous year 2019-20, he
incurs a sum of Rs. 40,000 on running and maintenance of car. Besides, he has engaged a driver (salary Rs. 24,000). The employer
reimburses the entire expenditure of Rs. 64,000. Logbook of the car is not maintained.
6. Assume that in Situation 5 that the logbook of the car is maintained and 70 per cent of the expenditure is attributable towards the
official use of the car. The employer to this effect gives a certificate.
7. A car (1700cc) is owned by the employer. All expenses (Rs. 56,000) are incurred by the employer. The employer maintains logbook
of the car. X, an employee, uses the car only for official purposes. The employer gives a certificate that the car is used only for official
purposes.
Solution :
1. The employer owns the car. All expenses are met by the employer. The car is partly used for official purposes and partly
for private purposes. The perquisite will be valued as follows—
Rs.
Car (Rs. 1,800 × 12) 21,600
Driver (Rs. 900 × 12) 10,800
Total (amount recovered from X is not deductible) 32,400
2. Car can be used only for private purposes. The value of the perquisite will be determined as follows—
Depreciation (10% of Rs. 4,26,000) 42,600
Petrol 46,000
Driver 36,000
Maintenance 10,000
Total 1,34,600
111 Valuation of perquisite in respect of car/conveyance Para 44.14
Rs.
Less: Amount recovered from X 12,000
Value of the perquisite 1,22,600
3. The employer owns the car. It can be used partly for official purposes and partly for private purposes. X incurs expenses
for private purposes. The perquisite will be valued as follows—
Rs.
Car (Rs. 900 per month) 10,800
Driver (it is not provided by employer) Nil
Total 10,800
4. The employer owns the car which can be used by X only for private purposes. All expenses are incurred by X. Rs. 48,000
(being 10% of Rs. 4,80,000) is the taxable value of the perquisite.
5. X owns a car which is used by him for official and private purposes. The value of the perquisite shall be determined as
follows—
Rs.
Amount reimbursed by the employer 64,000
Less: Deduction for official use (for car : Rs. 1,800 × 12 + for driver : Rs. 900 × 12) 32,400
6. The value of the perquisite shall be determined as follows—
Amount reimbursed by the employer 64,000
Less: Amount for official purposes as certified by the employer [70% or Rs. 64,000] 44,800
7. The employer maintains complete details of the expenditure. A certificate is given by the employer that the expenditure
is incurred only for official purposes. Therefore, nothing is chargeable to tax.
44.14-E1 Find out the value of the perquisite in problem 44.14-P1 if employees are Government employees.
44.14-P2 X is employed by X Ltd. (salary being Rs. 90,000 per month). He holds 14 per cent equity share capital and 50 per cent
preference share capital in the company. Remaining shares in X Ltd. are owned by the relatives of X. X is not a director in X Ltd. He
has been provided three cars for official and personal use. These cars cannot be used by any other employee of the company. The company
incurs the following expenses in respect of these cars :
Car 1 (1800 cc) Rs. Car 2 (1200 cc) Rs. Car 3 (1600 cc) Rs.
Petrol bills 40,500 60,600 38,500
Maintenance expenses 8,100 7,800 9,200
Insurance 6,700 6,300 4,900
Salary of driver 24,000 — —
Cost of cars to the employer is : Rs. 4,89,000, Rs. 5,10,000 and Rs. 3,50,000. Find out the value of the perquisite for the assessment year
2020-21.
Solution :
Since X has been provided three cars for official and private purposes, only one car will be taxed as if it is used for both official
and private purposes and the other two will be taxed as if they are used only for private purposes. Accordingly, X has the
following 3 options—
Option 1 Option 2 Option 3
Car 1 Rs. 39,600 (Both official and private )1
Rs. 1,28,200 (Private )
2
Rs. 1,28,200 (Private2)
Car 2 1,25,700 (Private2) 21,600 (Both official and private1) 1,25,700 (Private2)
Car 3 87,600 (Private2) 87,600 (Private2) 21,600 (Both official and private1)
Total 2,52,900 2,37,400 2,75,500
1. Taxable value of the car if used for both official and private purpose—
Car 1 Car 2 Car 3
Rs. Rs. Rs.
Running and maintenance (*Rs. 2,400 × 12, **Rs. 1,800 × 12) 28,800* 21,600** 21,600**
Driver (Rs. 900 × 12) 10,800 — —
Total 39,600 21,600 21,600
2. Taxable value if these cars are used only for private purposes—
Car 1 Car 2 Car 3
Rs. Rs. Rs.
Total expenditure on petrol, maintenance and insurance 55,300 74,700 52,600
Driver 24,000 — —
Normal wear and tear (10% of cost) 48,900 51,000 35,000
Total 1,28,200 1,25,700 87,600
Conclusion : X should opt for Option 2. Taxable value of the perquisite in respect of cars should be Rs. 2,37,400.
44.14-E2 X is an employee of a foreign company operating in India. His monetary emoluments exceeds Rs. 40,00,000. He has been
provided three cars for official and personal use. These cars can also be used by the family members of X. No other employee of the
company can use these cars. The following information is available from the company’s records :
Car 1 (1300cc) Car 2 (1650cc) Car 3 (1700cc)

Rs. Rs. Rs.
Running and maintenance expenses 40,600 38,900 72,750
Salary of driver Nil 24,000 36,000
Cost of cars to employer 4,00,000 3,21,500 7,31,600
Find out the perquisite value for the assessment year 2020-21.
44.15 Valuation of perquisite in respect of free transport provided by a transport undertaking to its
employees - Taxable value of the perquisite shall be determined on the basis of value at which the employer
offers such benefit to the public as reduced by any amount recovered from the employee. Nothing is, however,
chargeable to tax in the hands of employees of railways/airlines.
44.16 Valuation of perquisite in respect of lunch/refreshment, etc. - These provisions are given below –
 Refreshment and/or non-alcoholic drink - Nothing is taxable if provided during working hours or extended
working hours.
 Food provided in remote area or in an off shore installation - Nothing is taxable if provided during working hours
or extended working hours.

 Food provided at any other place - Cost to the employer in excess of Rs. 50 per meal (as reduced by the amount
recovered from the employee) is the taxable value of perquisite in the hands of the employee. This facility can
also be provided through non-transferable paid vouchers usable only at eating joints.
The employer provides tea/coffee to X in office (employer’s expenditure being Rs. 6,000 per annum). Besides the employer
provides free lunch during office hours (cost being Rs. 120 per meal for 300 working days, amount recovered from X is Rs.
20 per meal).
In this case, nothing is taxable in respect of tea/coffee provided in office. However, Rs. 15,000 [i.e., 300 × (Rs. 120 — Rs. 50
— Rs. 20)] in respect of subsidized lunch, is chargeable to tax.
44.17 Valuation of perquisite in respect of travelling, touring, accommodation - It is taxable as perquisite.

 Basis of valuation - The basis of valuation is given below –
1. When such facility is available uniformly to all employees - It is taxable as a perquisite in the hands of an employee
on the basis of actual expenditure of the employer as reduced by any amount recovered from the employee.
2. When such facility is not available uniformly to all employees - It is taxable as a perquisite in the hands of an employee
on the basis of value at which such facilities are offered by other agencies to the public as reduced by any amount
recovered from the employee.
 Other points - Where the employee is on an official tour and the expenses are incurred in respect of any member
of his household accompanying him, the amount of expenditure so incurred shall be taxable on proportionate
basis. Where any official tour is extended as a vacation, the value of such perquisite will be limited to the expenses
incurred in relation to such extended period of stay or vacation.
113 Valuation of perquisite in respect of club expenditure Para 44.20
44.18 Valuation of perquisite in respect of gift, voucher or token - Gift may be made either to employee or
any member of his household. It is taxable as a perquisite in the hands of an employee on the basis of actual
expenditure of the employer. Gift-in-kind up to Rs. 5,000 per annum is exempt*.
The employer provides a cash gift/gift cheque of Rs. 3,000 to X. Besides, he gets a wrist watch of Rs. 18,000 as Diwali gift
from the employer.
Rs. 3,000, being cash or gift cheque, is chargeable to tax. Further, Rs. 13,000 (i.e., Rs. 18,000 — Rs. 5,000) is taxable in respect
of gift-in-kind.
44.19 Valuation of perquisite in respect of credit card - The perquisite in respect of credit card is taxable as
follows—
Step 1 - Find out expenditure incurred by the employer in respect of credit card used by the employee or any
member of his household.
Step 2 - Less : Expenditure on use for official purposes.
Step 3 - Less : Amount, if any, recovered from the employee
The balance amount (if it is positive) is the taxable value of the perquisite.
 How to find out “expenditure incurred by employer” for the purpose of Step 1 - It includes out of pocket expenditure
incurred by the employer pertaining to a credit card provided to the employee (or any member of his household)
[e.g., membership fees, annual fees, amount charged to credit card (including any add-on-card)].
 How to find out “expenditure for official use” for the purpose of Step 2 - Expenditure on use of credit card for official
purposes is deductible. To claim deduction, the following conditions should be satisfied—

1. Complete details in respect of such expenditure are maintained by the employer which may, inter alia, include
the date of expenditure and the nature of expenditure.
2. The employer gives a certificate for such expenditure to the effect that the same was incurred wholly and
exclusively for the performance of official duties.
44.20 Valuation of perquisite in respect of club expenditure - The perquisite in respect of club facility is taxable
as follows—
Step 1 - Find out expenditure incurred by the employer in respect of club facility used by the employee or any
member of his household.
Step 2 - Less : Expenditure on use for official purposes.
Step 3 - Less : Amount, if any, recovered from the employee.
The balance amount (if it is positive) is the taxable value of the perquisite.
 How to find out “expenditure incurred by employer” for the purpose of Step 1 - It includes any expenditure on club
facility used by the employee (or any member of his household) which is paid or reimbursed by the employer.
Further, it includes amount of annual or periodical fees paid or payable to a club. However, it does not include
the following –
a. expenditure pertaining to health club, sports facilities, etc., provided uniformly to all classes of employees by
the employer at employer’s premises; and
b. initial one time deposits or fees for corporate or institutional membership, where benefit does not remain with
a particular employee after cessation of employment.
 How to find out “expenditure for official use” for Step 2 - It shall be determined on the basis of two conditions
mentioned in para 44.19.

The employer provides a club facility to X and his family members. This facility is available to X for his personal use and
also for entertaining official guests. The total expenditure incurred by the employer during the previous year is Rs. 28,000
out of which Rs. 4,000, as certified by the employer, is for official dinner to a foreign delegation. Rs. 7,000 out of Rs. 28,000
is for providing health/sports club facility to X. The employer provides all employees similar health/sports club facility.
A sum of Rs. 1,200 (Rs. 700 for health/sports club facility and Rs. 500 for other club facility) is recovered from X by the
employer.
*Gifts-in-kind up to Rs. 5,000 in aggregate per annum would be exempt, beyond which it would be taxable—Circular No. 8/2012, dated October
5, 2012.
Amount taxable in the hands of X is given below—

Health club/sports Any other club
club facility facility
Rs. Rs.
Expenditure incurred by employer 7,000 21,000
Less: Expenditure incurred for official purposes as certified by employer - 4,000
Less: Amount recovered from X 700 500
Balance 6,300 16,500
Amount taxable in the hands of X Nil 16,500
44.21 Sweat equity shares or employees stock option plan (ESOP) - The perquisite in respect of “sweat equity
shares” or ESOP is chargeable to tax in the hands of employees, if such shares are allotted or transferred to the
concerned employee after March 31, 2009.
 What is “sweat equity shares” - It means shares issued by a company to its employees (including directors, former
employees) at a discount or for consideration other than cash for providing know-how or making available rights
in the nature of intellectual property rights or value additions, by whatever name called”. Such shares may be
equity shares, any other shares, scrips, debentures, derivatives or units. These may be transferred/allotted
directly or indirectly to the employee.
 What is ESOP - ESOP is an abbreviation which stands for employee stock option plans. Under the ESOP plan,
an employee (at his option) can acquire shares in the employer-company at a reduced price after completion of
a specified period of service.
 How to find out taxable value of perquisite - One has to find out “fair market value” of shares or securities according
to the prescribed method. Fair market value of shares or securities will be calculated on the date on which the
employee exercises the option. Amount actually paid or recovered from the employee in respect of such shares
or securities shall be deducted.
 In which year it is chargeable to tax - Value of perquisite on the above basis will be taxable in the hands of employee
in the previous year in which shares or securities are allotted or transferred to him. It may be noted that fair
market value shall be calculated on the date on which the employee exercises the option but perquisite will be
taxable in the year in which shares are allotted.
 How to find out fair market value on the date of exercise of option - In the case of shares listed in India, the fair market
value shall be the average of the opening stock exchange price and closing stock exchange price of the share on
the date of exercise of option. Where, however, on the date of exercise of the option, the share is listed on more
than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price
of the share on the recognised stock exchange which records the highest volume of trading in the share. Where
on the date of exercise of the option, there is no trading in the share on any recognized stock exchange in India,
the fair market value shall be the closing price of the share on any recognised stock exchange on a date closest
to the date of exercise of the option and immediately preceding such date. In the case of unquoted shares, the
fair market value shall be determined by a merchant banker.
Problems
44.21-P1 The following information is given by X—
Date of joining April 1, 1999
Date of grant of option April 1, 2014
Grant period April 1, 2014 to March 31, 2018
The period during which the option can be exercised to purchase 500 shares at a
pre-determined price of Rs. 30 per share April 1, 2018 to March 31, 2019
Date of vesting April 1, 2018
Fair market value on the date of vesting Rs. 100 per share
Date on which option is exercised by applying for 400 shares March 20, 2019
Fair market value on March 20, 2019 Rs. 700 per share
Date of allotment April 1, 2019
115 Any other benefit, amenity, etc. Para 44.23
Fair market value on the date of allotment Rs. 760 per share
Date when demat account of the employee is credited April 2, 2019
Solution : Perquisite will be taxable in the hands of X for the assessment year 2020-21 (shares allotted in the previous year
2019-20). The value of the perquisite will be Rs. 2,68,000 [i.e., 400 shares (Rs. 700, being fair market value on the date of
exercise of option — Rs. 30, being pre-determined price)]. The cost of acquisition in the hands of X for the purpose of
determining capital gain at the time of transfer of these shares will be Rs. 700 per share (i.e., the fair market value on the date
of exercise of the option).
44.21-E1 Make the following changes in problem 44.21-P1 and find out the taxable value of perquisite in the hands of X—
Suppose on March 20, 2019, X has exercised the option for purchasing 500 shares and these shares are allotted to him on April 4,
2019. Fair market value of shares on March 20, 2019 and April 4, 2019 is Rs. 700 and Rs. 670 (per share), respectively.
44.21-P2 Y joins B Ltd. on May 1, 2019 (salary being Rs. 1,20,000 per month). Y owns a building which is transferred by him to his
employer-company on December 1, 2019 for a consideration of Rs. 49,20,000. The sale consideration will be paid by B Ltd. by allotting
2,000 shares in B Ltd. to Y. These shares will be allotted at any time (at the option of Y) during January 1, 2020 and March 31, 2020
at a pre-determined price of Rs. 40 per share (market value is Rs. 2,500 per share on December 1, 2019).
Solution : Perquisite in respect of sweat equity shares is taxable under section 17(2)(vi), if these shares are allotted free of
cost or a cash consideration (which is generally lower than the market value). In case of sweat equity shares, perquisite value
is also taxable if shares are allotted to an employee or former employee for a non-monetary consideration (being providing
know-how or making available intellectual property right). In this case, shares are not allotted free of cost or for discounted
monetary consideration. Shares are allotted for transfer of a building. Consequently, it will not be taxable as a perquisite
under section 17(2)(vi). However, capital gain on transfer of building will be chargeable to tax according to the provisions
of section 45.
44.21-E2 Determine the value of perquisite in problem 44.21-P2 if market value of share in B Ltd. on December 1, 2019 is Rs. 3,750
per share (other information remains the same).
44.21-P3 Z is a scientist having special knowledge in the field of bio-technology. He was in the USA till 2005 before joining A Ltd.,
an Indian company, on January 1, 2008 (salary being Rs. 2,50,000 per month). Besides, A Ltd. has given an option to Z to get shares
in A Ltd. (as given below) in consideration for providing technical knowledge which Z has gained while working with an overseas
multinational company in the USA—
Date of granting the option January 2, 2008
Date of vesting of the option December 31, 2008
What is the option To purchase 1,000 shares in A Ltd. at pre-determined price of Re. 1 per share at any
time during December 31, 2008 and December 31, 2020
Date of exercise of option March 25, 2019 (to purchase 400 shares)
Date of allotment April 1, 2019
Fair market value on March 25, 2019 Rs. 7,500 per share
Market value of the technical knowledge
provided by Z to A Ltd. Rs. 58,00,000
Solution : The option is exercised on March 25, 2019. 400 shares are allotted to Z on April 1, 2019. The perquisite is taxable
under section 17(2)(vi) as shares are allotted for making available right in the nature of intellectual property to the employer-
company. The value of perquisite chargeable to tax for the assessment year 2020-21 is Rs. 29,99,600 [i.e., 400 shares × (Rs.
7,500 – Re. 1)]. Cost of acquisition of 400 shares in the hands of Z will be Rs. 7,500 per share.
44.21-E3 Find out the value of perquisite chargeable to tax for the assessment year 2020-21 in problem 44.21-P3, if Z further applies
for 600 shares on March 1, 2020 (shares are allotted by the employer company on March 20, 2020 and fair market value of shares
is Rs. 8,000 per share on March 1, 2020 and Rs. 6,400 per share on March 20, 2020).
44.22 Employer’s contribution towards approved superannuation fund - Employer’s contribution towards
an approved superannuation fund is chargeable to tax in the hands of employees to the extent such contribution
exceeds Rs. 1.50 lakh per assessment year. It is taxable in the year in which contribution is made.
44.23 Any other benefit, amenity, etc. - This is a residual head. It covers any other benefit or amenity, service,
right or privilege provided by any employer. However, it does not cover the following—
1. Perquisite already included in preceding paras - Any perquisite, which is included in preceding paras [i.e., paras
44.1 to 44.22], is not taxable under this head.
2. Telephone/mobile phone - The perquisite in respect of telephone/mobile phone is not taxable in the case of
any employee of any organization. Moreover, in the case of retired Chairman and retired members of UPSC,
the value of a residential telephone free of cost and the number of free calls to the extent of Rs. 1,500 per month
(over and above the number of free calls per month allowed by the telephone authorities), is not chargeable
to tax.
 Mode of valuation - The value of benefit, amenity, service, right or privilege which come under this residual head,
shall be determined on the basis of cost to the employer under an arm’s length transaction as reduced by the
employee’s contribution, if any.
Problems
44.23-P1 X is employed by A Ltd., a garment manufacturing company (salary being Rs. 30,000 per month). Besides, he has been
provided the following perquisites—
1. Fixed and mobile telephone (expenditure of the employer: Rs. 18,000 per annum approximately).
2. X can purchase every year up to 10 shirts manufactured by the company at a concessional price of Rs. 50 per shirt (manufacturing
cost to the employer: Rs. 200 per shirt, MRP: Rs. 1,100 per shirt, discount given to whole sellers: 42 per cent on MRP). During the
previous year, X has purchased 6 shirts.
3. Rent-free house owned by the employer in Mumbai.
Find out the value of perquisites chargeable to tax in the hands of X.
Solution :
Value of perquisites given in the problem will be determined as follows—
1. Telephone including mobile phone - It is not chargeable to tax.
2. Sale of garments at concessional rate - It is not covered by any of the preceding paras. Consequently, it would be taxable under
residual category (given in para 44.23) in the hands of X [value of the perquisite being Rs. 900, i.e., (Rs. 200 — Rs. 50) × 6].
3. Residential house - It will be taxable in the hands of X (value being Rs. 54,000, i.e., 15% of the salary).
44.23-E1 Find out the value of the perquisite if in the above case X is employed by a sole proprietor.
 WHAT ARE PERMISSIBLE DEDUCTIONS FROM SALARY INCOME [SEC. 16]

45. The income chargeable under the head “Salaries” is computed after making the following deductions :
a. standard deduction [see para 45.1];
b. entertainment allowance deduction [see para 45.2] ; and
c. professional tax [see para 45.3].
45.1 Standard deduction [Sec. 16(i)/(ia)] - Standard deduction is Rs. 50,000 or the amount of salary, whichever
is lower (from the assessment year 2020-21†).
45.2 Entertainment allowance [Sec. 16(ii)] - As explained earlier, entertainment allowance is first included in
salary and thereafter a deduction is allowed in accordance with the rules mentioned in para 42.2.
45.3 Professional tax or tax on employment [Sec. 16(iii)] - Professional tax or tax on employment, levied by
a State under article 276 of the Constitution, is allowed as deduction.
The following points should be kept in view —
1. Deduction is available only in the year in which professional tax is paid.
2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the
employee as a “perquisite” (since it is an obligation of the employee discharged by the employer)* and then the
same amount is allowed as deduction on account of “professional tax” from gross salary.
3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State
Government cannot impose more than Rs. 2,500 per annum as professional tax. Under the Income-tax Act,
whatever professional tax is paid during the previous year, is deductible.
Suppose X, posted in Hyderabad, is required to pay Rs. 2,000 every year as professional tax. On May 31, 2020, he pays
Rs. 4,000 on account of professional tax (i.e., Rs. 2,000 for the year 2019-20 and Rs. 2,000 for the year 2020-21). In this case,
Rs. 4,000 is deductible for the previous year 2020-21 (it is incorrect to state that in such a case only Rs. 2,500 is deductible).
*See para 44.8.

† For the assessment year 2019-20, standard deduction is Rs. 40,000 or the amount of salary, whichever is lower.
117 What is tax treatment of provident fund Para 46
Problem
45.3-P1 X is employed by A Ltd. (basic salary being Rs. 38,750 per month). Besides, he gets Rs. 3,000 per month as entertainment
allowance. He pays professional tax of Rs.1,000. Find out the salary chargeable to tax for the assessment year 2020-21. Does it make any
difference if the professional tax is paid by A Ltd.
Solution : If professional If professional
tax is paid tax is paid by
by X the employer
i.e., A Ltd.
Rs. Rs.
Basic salary (Rs. 38,750 × 12) 4,65,000 4,65,000
Entertainment allowance 36,000 36,000
Professional tax paid by the employer — 1,000
Gross salary 5,01,000 5,02,000
Less: Deductions under section 16
Standard deduction 50,000 50,000
Entertainment allowance [not allowed] — —
Professional tax 1,000 1,000
Income under the head “Salaries” 4,50,000 4,51,000
45.3-E1 [P4.46]* X is employed by a firm. During the previous year 2019-20, he gets Rs. 35,550 per month as salary and Rs. 14,600
per annum as entertainment allowance. The employer provides Maruti 800 to X for his official and personal use (expenses of the
employer including salary of driver : Rs. 1,16,000, log-book of the car is not maintained). Find out the taxable salary of X for the
assessment year 2020-21 in the following situations —
a. X pays a sum of Rs. 1,200 on March 3, 2020 on account of professional tax ;
b. Professional tax of Rs. 1,200 becomes due on March 3, 2020, X pays the same on April 2, 2020 ;
c. Professional tax of Rs. 1,200 is paid by X on March 4, 2020 which is reimbursed by his employer on the same day.
 WHAT IS TAX TREATMENT OF PROVIDENT FUND

46. Provident fund scheme is a retirement benefit scheme. Under this scheme, a stipulated sum is deducted from
the salary of the employee as his contribution towards the fund. The employer also, generally, contributes
simultaneously the same amount out of his pocket to the fund. The employee’s and employer’s contributions are
invested in gilt-edged securities. Interest earned thereon is also credited to the provident fund account of
employees. Thus, credit balance in a provident fund account of an employee consists of employee’s contribution,
interest on employee’s contribution, employer’s contribution and interest on employer’s contribution. The
accumulated sum is paid to the employee at the time of his retirement or resignation. In the case of death of an
employee, accumulated balance is paid to his legal heirs. Since the scheme encourages personal savings at micro
level and generates funds for investment at macro level, the Government provides deduction under section 80C.
X is employed by A Ltd. (salary being Rs. 90,000 per month). Besides, A Ltd. contributes 15 per cent of salary towards
provident fund. X also contributes 15 per cent of salary towards his provident fund. For the previous year 2019-20, the
expenses incurred by A Ltd. will be as given below — Rs.
Salary to X 10,80,000
A Ltd.’s contribution towards provident fund account of X 1,62,000
Total expenditure 12,42,000
The take-home pay of X will be as under —
Salary 10,80,000
Less : X’s contribution towards provident fund account 1,62,000
Take-home pay (assuming that there is no tax deduction at source) 9,18,000
The following points require consideration —
 While the expenditure incurred by A Ltd. is Rs. 12,42,000, the take-home pay of X is Rs. 9,18,000. The difference of
Rs. 3,24,000 is the contributions of A Ltd. and X towards provident fund account which will be invested in gilt-edge
securities. Interest earned on these securities is credited in the provident fund account of the employee. The accumulated
sum will be paid to X at the time of retirement.
 From the tax point of view, the following questions one has to face —
1. Whether the contribution by A Ltd. of Rs. 1,62,000 is taxable in the hands of X - The contribution made by A Ltd. is over and
above salary of X. It will be paid to X at a later stage. Since it is not paid to X during the previous year and X does not have
any control over it, it is not chargeable to tax in the year of contribution. In some cases, however, it is chargeable to tax [see
para 46.2].
2. Whether X’s contribution of Rs.1,62,000 is taxable - Contribution of Rs.1,62,000 by X towards provident fund is out of salary
of X. It is, therefore, not an income but an application of income. Moreover, X can claim deduction under section 80C in some
cases [see paras 46.2 and 50].
3. Whether interest is taxable - In the case study given above, Rs. 3,24,000 is invested in gilt-edged securities on which interest
is earned. It is neither paid to X during the previous year nor does he get any control over it. It is not income. In some cases,
however, it is chargeable to tax [see para 46.2].
4. Whether lump sum payment at the time of retirement is taxable - Lump sum which will be paid to X is exempt fully or partly
[see para 46.2].
46.1 Kinds of provident fund - Employees’ provident fund may be of the following types :
a. statutory provident fund ;
b. recognised provident fund ; or
c. unrecognised provident fund.
Besides, a person can also become member of public provident fund.
 Statutory provident fund - Statutory provident fund is set up under the provisions of the Provident Funds Act,
1925. This fund is maintained by the Government and the Semi-Government organisations, local authorities,
railways, universities and recognised educational institutions.
 Recognised provident fund - A provident fund scheme to which the Employee’s Provident Fund and Miscella-
neous Provisions Act, 1952 (hereinafter referred to as PF Act, 1952) applies is recognised provident fund. As per
PF Act, 1952 any establishment employing 20 or more persons is covered by the PF Act, 1952 (establishments
employing less than 20 persons can also join the provident fund scheme if the employer and employees want to
do so). An establishment covered by the PF Act, 1952 has the following two alternatives and may join any of the
following two schemes —
Alternative schemes available Additional formalities to get approval Status for income-tax purpose
of the Provident Fund Commissioner
1. Scheme of the Government set No Such a provident fund is recognised
up under the PF Act, 1952 provident fund
2. Own scheme of provident fund A trust has to be created by the em- If it is recognised by the Commissioner
ployer and employees to start own of Income-tax in accordance with the
provident fund scheme. Funds shall rules contained under Part A of the
be invested in accordance with the Fourth Schedule to the Income-tax Act,
rules given under PF Act, 1952. If the it becomes recognised provident fund.
scheme satisfies certain rules given
under PF Act, 1952, it will get the
approval of the PF Commissioner.
 Unrecognised provident fund - As stated in 2 supra (third column), if a provident fund is not recognised by the
Commissioner of Income-tax, it is known as unrecognised provident fund.
 Public provident fund - The Central Government has established the public provident fund for the benefits of
general public to mobilise personal savings. Any member of the public (whether a salaried employee or a self-
employed person) can participate in the fund by opening a provident fund account at the State Bank of India or
its subsidiaries or other nationalised banks. Even a salaried employee can simultaneously become member of
employees’ provident fund (whether statutory, recognised or unrecognised) and public provident fund. Any
amount (subject to minimum of Rs. 500 and maximum of Rs. 1,50,000 per annum) may be deposited under this
account. The accumulated sum is repayable after 15 years (it may be extended). This provident fund, at present,
carries compound interest at the rate of 8.7 per cent per annum. Interest is credited every year but payable only
at the time of maturity.
46.2 Tax treatment - The table given below highlights the exemption and deduction available in respect of
contribution to, and payment from, various provident funds (in the case of salaried employees) :
119 Tax treatment Para 46.2
Statutory provident Recognised provident Unrecognised provident Public provident

fund fund fund fund
1 2 3 4 5
Employer’s contri- Exempt from tax Exempt up to 12 per cent Exempt from tax Employer does
bution to provident of salary1. Excess of emplo- not contribute
fund yer’s contribution over 12
per cent of salary1 is tax-
able
Deduction under Available Available Not Available Available
section 80C on
employee’s contri-
bution [see para
50]
Interest credited to Exempt from tax Exempt from tax if rate of Exempt Exempt from tax
provident fund interest does not exceed no-
tified rate of interest ; [i.e.,
9.5 per cent] excess of inter-
est over notified rate of in-
terest is taxable
Lump sum pay- Exempt from tax Exempt from tax in some See Note 3 Exempt from tax
ment at the time of cases2; when not exempt
retirement or termi- provident fund will be
nation of service treated as an unrecognised
fund from the beginning3
Notes :
1. “Salary” here means basic salary. It includes dearness allowance and dearness pay, if terms of employment so provide*.
It also includes commission where commission is determined at a fixed percentage of turnover achieved by an employee.
2. Accumulated balance payable to an employee participating in a recognized provident fund shall be exempt in the hands
of employee in the following situations –
 If the employee has rendered continue service with his employer for a period of 5 years or more. For the purpose of
calculating 5-year time-limit, service rendered with the previous employer shall be included, if the previous employer also
maintained recognized provident fund and the provident fund balance of the employee was transferred by him to the
current employer.
 If the employee has been terminated because of certain reasons which are beyond his control (e.g., ill health of the
employee, discontinuation of business by employer, completion of project for which the employee was employed, etc.).
 If the employee has resigned before completion of 5 years but he joins another employer (who maintains recognized
provident fund and provident fund money with the current employer is transferred to the new employer).
 If the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred
to in section 80CCD and notified by the Central Government (i.e., NPS).
3. Lump sum payment received from unrecognized provident fund at the time of retirement/termination shall be taxable
as follows –
 Payment received in respect of employer’s contribution and interest thereon is taxable under the head “Salaries”.
 Payment received in respect of interest on employee’s contribution is taxable under the head “Income from other sources”.
 Payment received in respect of employee’s contribution is not chargeable to tax.
Problems
46.2-P1 For the previous year 2019-20, X submits the following information - Basic salary : Rs. 1,20,000 ; dearness allowance :
Rs. 40,000 (46 per cent of which is part of salary for retirement benefits) ; commission: Rs. 6,000 (i.e., 1 per cent of Rs. 6,00,000, being
turnover achieved by X) and children education allowance for his 2 children : Rs. 7,200. The employer contributes Rs. 20,000 towards
provident fund to which a matching contribution is made by X. Interest credited in the provident fund account on December 31, 2019
@ 11 per cent comes to Rs. 93,500. Income of X from other sources is Rs. 1,36,000. Find out the net income of X for the assessment year
2020-21 if the provident fund is (a) statutory provident fund, (b) recognised provident fund, (c) unrecognised provident fund.
*Dearness allowance/pay shall be considered only when it is part of salary for computing all retirement benefits (like pension, leave encashment,
gratuity, profit and loss account, etc.) If dearness allowance/pay is part of salary for computing only some (not all) of the retirement benefits, then
Solution : Statutory Recognised Unrecognised

provident provident provident
fund fund fund
Rs. Rs. Rs.
Basic salary 1,20,000 1,20,000 1,20,000
Dearness allowance 40,000 40,000 40,000
Commission [1% of Rs. 6,00,000] 6,000 6,000 6,000
Education allowance [Rs. 7,200 – Rs. 100 × 2 × 12] 4,800 4,800 4,800
Employer’s contribution towards recognised provident fund in excess of
12% of salary (salary for this purpose is Rs. 1,20,000 + 46% of Rs. 40,000 +
Rs. 6,000) — 2,672 —
Interest credited to recognised provident fund account in excess of 9.5%
per annum (i.e., Rs. 93,500 × 1.5/11) — 12,750 —
Gross salary 1,70,800 1,86,222 1,70,800
Less : Standard deduction 50,000 50,000 50,000
Income from salary 1,20,800 1,36,222 1,20,800
Income from other sources 1,36,000 1,36,000 1,36,000
Gross total income 2,56,800 2,72,222 2,56,800
Less : Deduction under section 80C 20,000 20,000 Nil
Net income (rounded off) 2,36,800 2,52,220 2,56,800
Note: X can claim deduction under section 80C in respect of his contribution towards statutory/recognised provident fund
[see para 50]. No deduction is, however, available in respect of X’s contribution towards unrecognised provident fund.
46.2-E1 In problem 46.2-P1 assume that (a) 61 per cent of dearness allowance is part of salary for computing retirement benefits
and (b) commission is payable at the rate of Rs. 500 per month irrespective of the turnover; find out the net income of X for the
46.2-P2 X retires on June 30, 2019. He submits the following information —

Basic salary (since January 2005) : Rs. 20,000 per month, dearness allowance : Rs. 6,000 per month (1/3 of which is part of salary for
retirement benefits), employer’s contribution towards provident fund : Rs. 3,000 per month (X makes a matching contribution) ; interest
credited at the rate of 15 per cent on April 30, 2019 : Rs. 7,500 ; pension after retirement : Rs. 10,000 per month ; and payment of provident
fund at the time of retirement : Rs. 7,60,000 (out of which employer’s contribution : Rs. 3,30,000, interest thereon : Rs. 44,000, X’s
contributions : Rs. 3,40,000, interest thereon : Rs. 46,000). Salary and pension become due on the last day of each month. X has deposited
the entire provident fund payment with a company (rate of interest : 9 per cent per annum). Income of X from other sources is Rs. 1,50,000
Find out the income of X for the assessment year 2020-21 on the assumption that the provident fund is (a) statutory provident fund,
(b) recognised provident fund, or (c) unrecognised provident fund.
fund fund fund
Rs. Rs. Rs.
Basic salary (Rs. 20,000 × 3) 60,000 60,000 60,000
Dearness allowance (Rs. 6,000 ×3) 18,000 18,000 18,000
PF by employer [Rs. 3,000 × 3 — 12% of (Rs. 60,000 + 1/3 of Rs. 18,000)] — 1,080 —
Interest credited in PF account in excess of 9.5% [Rs. 7,500 × 5.5/15] — 2,750 —
Pension (Rs. 10,000 × 9) 90,000 90,000 90,000
Payment for provident fund account
- Employer’s contribution — — 3,30,000
- Interest thereon — — 44,000
Gross salary 1,68,000 1,71,830 5,42,000
Income under the head “Salaries” 1,18,000 1,21,830 4,92,000
Income from other sources
- Interest on X’s contribution to provident fund — — 46,000
- Interest on company deposits (i.e., 9% per annum on Rs. 7,60,000 from
July 1, 2019 to March 31, 2020) 51,300 51,300 51,300
- Other income (as given in the problem) 1,50,000 1,50,000 1,50,000
121 Computation of deduction u/s 80C Para 50.2
Statutory Recognised Unrecognised

fund fund fund
Rs. Rs. Rs.
Less : Deduction under section 80C 9,000 9,000 Nil
Net income 3,10,300 3,14,130 7,39,300
Notes :
1. X can claim deduction under section 80C in respect of his contribution towards statutory/recognised provident fund.
2. In the case of recognised provident fund, it is assumed that X has retired after rendering service of 5 years.
46.2-E2 Assume in problem 46.2-P2 that (a) salary and pension become due on the first day of the next month and paid on the same
day and (b) rate of interest on company deposit is 18 per cent (and not 9 per cent), find out the net income for the assessment year
2020-21.
 WHAT IS THE TAX TREATMENT OF APPROVED SUPERANNUATION FUND

47. It means a superannuation fund which is approved by the Commissioner of Income-tax. The tax treatment
of contribution to any payment from the fund is as under :
 Employer’s contribution is exempt from tax. However, employer’s contribution towards an approved
superannuation fund will be chargeable to tax to the extent it exceeds Rs. 1.50 lakh per annum.
 Employee’s contribution qualifies for tax deduction under section 80C [see para 50].
 Interest on accumulated balance is exempt from tax.
 Payment from the fund is not chargeable to tax in the following cases –
a. refund of contribution or any payment from fund on the death of employee (e.g., payment to widow); and
b. lump sum payment by way of commutation of annuity to the employee on his retirement.
 WHAT IS SPECIAL TAX TREATMENT OF SALARY INCOME OF NON-RESIDENT TECHNI-

CIANS [SEC. 10(5B)]
48. The benefit of exemption under section 10(5B) is not available from the assessment year 2003-04.
 WHAT IS THE EXTENT OF EXEMPTION AVAILABLE TO OTHER FOREIGN CITIZENS IN

RESPECT OF SALARY INCOME
49. Remuneration received by foreign nationals as diplomatic personnel, consular personnel, trade commission-
ers, staff of a foreign mission is exempt from tax [for detailed discussion, see problem 54-P4].
 DEDUCTION UNDER SECTION 80C - HOW TO FIND OUT

50. Section 80C provides deduction in respect of specified qualifying amounts [see para 50.2] paid or deposited
by the assessee in the previous year.
50.1 Salient features of section 80C - The following are the main provisions of section 80C—
 Under section 80C, deduction would be available from gross total income.
 Deduction under section 80C is available only to an individual or a Hindu undivided family.
 Deduction is available on the basis of specified qualifying investments/contributions/deposits/payments
(hereinafter referred to as “gross qualifying amount”) made by the taxpayer during the previous year.
 The maximum amount deductible under sections 80C, 80CCC and 80CCD(1) cannot exceed Rs. 1,50,000.
50.2 Computation of deduction under section 80C - The deduction is calculated as per the following steps—
Step 1 - Gross qualifying amount [see para 50.2-1]
Step 2 - Net qualifying amount [see para 50.2-2]
Step 3 - Amount of deduction [see para 50.2-3]
50.2-1 STEP 1 - GROSS QUALIFYING AMOUNT - Gross qualifying amount is the aggregate of the following :
Nature of payment
1. Life insurance premium (including payment made by Government employees to the Central Government Employees’
insurance scheme and payment made by a person under children’s deferred endowment assurance policy) [see Note 1]
2. Payment in respect of non-commutable deferred annuity [see Note 2]
3. Any sum deducted from salary payable to a Government employee for the purpose of securing him a deferred annuity
(subject to a maximum of 20% of salary) [see Note 3]
4. Contribution (not being repayment of loan) towards statutory provident fund and recognized provident fund
5. Contribution (not being repayment of loan) towards 15-year public provident fund [see Notes 4, 6 and 9]
6. Contribution towards an approved superannuation fund
7. Subscription to National Savings Certificates, VIII Issue or IX Issue [see Note 7] and deposit in Sukanya Samriddhi
Account [see Note 10]
8. Contribution for participating in the unit-linked insurance plan (ULIP) of Unit Trust of India [see Note 5]
9. Contribution for participating in the unit-linked insurance plan (ULIP) of LIC Mutual Fund (i.e., formally known as
Dhanraksha plan of LIC Mutual Fund) [see Note 5]
10. Payment for notified annuity plan of LIC (i.e., Jeevan Dhara, Jeevan Akshay) or any other insurer (i.e., Immediate
Annuity Plan of ICICI Prudential Life Insurance Co. Ltd., Tata AIG Easy Retire Annuity Plan)
11. Subscription towards notified units of Mutual Fund or UTI
12. Contribution to notified pension fund set up by Mutual Fund or UTI
13. Any sum paid (including accrued interest) as subscription to notified Home Loan Account Scheme of the National
Housing Bank or contribution to any notified pension fund set up by the National Housing Bank
14. Any sum paid as subscription to any scheme of—
a. public sector company engaged in providing long-term finance for purchase/construction of residential houses in
India (i.e., public deposit scheme of HUDCO)
b. housing board constituted in India for the purpose of planning, development or improvement of cities/towns
15. Any sum paid as tuition fees (not including any payment towards development fees/donation/payment of similar
nature) whether at the time of admission or otherwise to any university/college/educational institution in India for full
time education of any two children of an individual [Note 8]
16. Any instalment or part payment towards the cost of purchase/construction of a residential property to a housing
board or co-operative society (or repayment of housing loan taken from Government, bank, cooperative bank, LIC,
National Housing Bank, assessee’s employer where such employer is public company/public sector company/
university/co-operative society)
17. Amount invested in approved debentures of, and equity shares in, a public company engaged in infrastructure
including power sector or units of a mutual fund proceeds of which are utilised for the developing, maintaining, etc., of
a new infrastructure facility
18. Amount deposited as term deposit for a period of 5 years or more in accordance with a scheme framed by the
Government
19. Subscription to any notified bonds of National Bank for Agriculture and Rural Development (NABARD)
20. Amount deposited under Senior Citizens Saving Scheme [Note 9]
21. Amount deposited in five year time deposit scheme in post office.
22. Amount contributed (for a fixed period of not less than 3 years) by a Central Government employee to his NPS
(Tier-II) account (applicable from the assessment year 2020-21).
Notes:
1. In the case of an individual, policy should be taken on his own life, life of the spouse or any child (child may be dependent/
independent, male/female, minor/major or married/unmarried). In the case of a Hindu undivided family, policy may be
taken on the life of any member of the family.
Insurance premium cannot exceed the maximum ceiling given below –
Policy on the life of a person Policy on the life of any
with disability or severe disability other person
or on the life of a person suffering
from disease or ailment as given
in section 80DDB
- If policy is issued before April 1, 2012 20% of sum assured* 20% of sum assured*
- If policy is issued during 2012-13 10% of sum assured** 10% of sum assured**
- If policy is issued on or after April 1, 2013 15% of sum assured** 10% of sum assured**
*Sum assured does not include any premium agreed to be returned and/or any benefit by way of bonus.
**Sum assured means minimum amount assured under the policy without including any premium agreed to be returned
and/or any benefit by way of bonus.
2. Annuity plan should be taken in the name of the individual, his wife/her husband or any child of such individual.
3. It should be for the benefit of the individual, his wife or children.
4. According to the Public Provident Fund Scheme, an individual can open public provident fund account in his own name
or in the name of minor of whom he is guardian. However, according to the Income-tax Act, to get the benefit of the deduction
under section 80C, amount deposited by an individual in his own account or in the account of his/her spouse or in the
account of any child (in the case of HUF in the account of any member of the family) is eligible for deduction.
5. In the case of an individual, ULIP should be taken on his own life, life of the spouse or any child (child may be dependent/
independent, male/female, minor/major or married/unmarried). In the case of a Hindu undivided family, ULIP may be
taken on the life of any member of the family.
6. There is no maximum ceiling under the Income-tax Act. However, under the public provident fund scheme, the maximum
contribution is Rs. 1,50,000.
7. Accrued interest (which is deemed as reinvested) is also qualified for deduction (applicable for all years except last year).
8. Full-time education includes any educational course offered by any university, college, school or other educational
institution to a student who is enrolled full-time for the said course. Full-time education includes even play-school activities,
pre-nursery and nursery classes. The amount allowable as tuition fees shall include any payment of fee to any university,
college, school or other educational institution in India except the amount representing payment in the nature of
development fees or donation or capitation fees or payment of similar nature — Circular No. 8/2012, dated October 5, 2012.
9. Date of encashment of cheque/draft is taken as date of deposit in the case of public provident fund and Senior Citizens
Savings Scheme.
10. In the case of an individual, deposit in Sukanya Samriddhi Account can be made in the name of individual†, or any girl
child of that individual or any girl child for whom such person is the legal guardian, if the scheme so specifies.
50.2-2 NET QUALIFYING AMOUNT - Gross qualifying amount is the total of all investments specified in para 50.2-1.
However, deduction under section 80C is available on the basis of net qualifying amount which is determined
as under:
- Gross qualifying amount; or
- Rs. 1,50,000,
whichever is lower.
50.2-3 AMOUNT OF DEDUCTION - Net qualifying amount is deductible.
The maximum amount deductible under section 80C is Rs. 1,50,000. Moreover, the aggregate amount of
deduction under sections 80C, 80CCC and 80CCD(1) [i.e., contribution by employee (or any other individual)
towards National Pension Scheme (NPS)] cannot exceed Rs. 1,50,000*.
Problems
50-P1 X (age 42 years) is a resident salaried employee (salary being Rs. 40,000 per month). During the previous year 2019-20, he makes
the following investment deposits or payments —
a. life insurance premium (policy taken in 2010) on the life of his married daughter : Rs. 6,000 (sum assured : Rs. 20,000);
b. life insurance premium (policy taken in 2012) on his own life : Rs. 2,700 (sum assured : Rs. 60,000);
c. life insurance premium (policy taken in 2012) on the life of his dependent sister : Rs. 10,000 ;
d. contribution towards recognised provident fund : Rs. 9,000 ;
e. contribution towards public provident fund : Rs. 1,30,000 ;
f. repayment of loan taken from LIC for purchase of residential house property : Rs. 30,000 ;
g. contribution towards notified equity - linked saving scheme of UTI (i.e., MEP 2020) : Rs. 14,000.
Find out the tax liability of X for the assessment year 2020-21 assuming that income from house property is Rs. 2,28,900.
Solution : Rs.
Salary 4,80,000
Less : Standard deduction 50,000
Income from house property 2,28,900
Less : Deduction under section 80C [see Note] 1,50,000
Net income 5,08,900
Tax on Rs. 5,08,900 14,280
*Employer’s contribution towards NPS is not considered for the purpose of monetary ceiling of Rs. 1,50,000.
† It is possible if the assessee is a girl child and investment is made in her account.
Rs.
Less: Rebate under section 87A Nil
Balance 14,280
Add : Surcharge (not applicable if net income does not exceed Rs. 50 lakh) Nil
Tax 14,280
Add : Health and education cess (4% of tax and surcharge) 571
Tax liability (rounded off) 14,850
Note : Computation of deduction under section 80C
Gross qualifying amount
Insurance premium on the life of X’s daughter (maximum 20% of sum assured) 4,000
Own life insurance premium 2,700
Insurance premium on the life of sister (not eligible for rebate) —
Recognised provident fund 9,000
Public provident fund 1,30,000
Repayment of loan taken from LIC 30,000
MEP 2020 14,000
Total (maximum deduction : Rs. 1,50,000) 1,89,700
Maximum 1,50,000
Amount of deduction 1,50,000
50-E1 In problem 50-P1, assume that X is non-resident and he gets Rs. 15,000 per month as salary (there is no other change in the
given data), find out the amount of deduction under section 80C.
50-P2 Find out the amount of tax liability in the cases of resident tax payers given below for the assessment year 2020-21 :
Mrs. X Y Z A
(age : 42 yrs.) (age : 31 yrs.) (age : 85 yrs.) (age : 63 yrs.)
Rs. Rs. Rs. Rs.
Gross total income 8,90,000 12,06,000 12,60,000 9,26,000
Investments/contributions for deduction under section 80C
Public provident fund — 70,000 1,00,000 40,000
Recognised provident fund — 40,000 16,000 6,000
Notified equity-linked saving scheme (MEP 2020) — — 15,000 15,000
Notified shares of infrastructure company 1,30,000 — 26,000 2,000
Solution :
Less : Deduction under section 80C
Public provident fund — 70,000 1,00,000 40,000
Recognised provident fund — 40,000 16,000 6,000
MEP 2020 — — 15,000 15,000
Investment in notified shares of infrastructure company 1,30,000 — 26,000 2,000
Total 1,30,000 1,10,000 1,57,000 63,000
Deduction under section 80C 1,30,000 1,10,000 1,50,000 63,000
Net income 7,60,000 10,96,000 11,10,000 8,63,000
Tax† 64,500 1,41,300 1,33,000 82,600
Add : Surcharge* Nil Nil Nil Nil
Tax (c) 64,500 1,41,300 1,33,000 82,600
Add : Health and education cess (4% of tax and surcharge) 2,580 5,652 5,320 3,304
Tax liability (rounded off) 67,080 1,46,950 1,38,320 85,900
†Rebate under section 87A is available only in the case of a resident individual if his/her taxable income is Rs. 5,00,000 or less.
*Surcharge is not applicable in case net income does not exceed Rs. 50 lakh.
50-E2 Find out the amount of deduction under section 80C in the following cases pertaining to the assessment year 2020-21—
X Mrs. Y Z
age : 26 yrs. age : 82 yrs. age : 66 yrs.
Rs. Rs. Rs.
Net income 11,20,000 11,95,000 18,00,000
Investment for the purpose of deduction under section 80C :
National Savings Certificate VIII issue Nil 1,42,000 1,65,000
Shares of a notified infrastructure company 1,68,000 Nil 14,000
50-P3 Find out the tax liability for the assessment year 2020-21 in the cases of resident individuals given below —
Name of taxpayer X Y Mrs. Z Mrs. A
Age of the taxpayer during the previous year 2019-20 62 years 59 years 68 years 81 years
Rs. Rs. Rs. Rs.
Income from business — — 40,000 —
Income from profession 90,000 6,33,000 — 10,10,000
Salary income (after standard deduction) and other income 8,00,000 5,86,000 9,20,000 2,24,000
Contribution towards National Savings Certificate VIII issue 80,000 90,000 10,000 65,000
Public Provident Fund 2,000 62,000 2,000 6,000
Investment in notified infrastructure sector — 5,000 1,000 33,000
Solution :
Computation of income and tax thereon
Less : Deduction under section 80C [see Note] 82,000 1,50,000 13,000 1,04,000
Net income 8,08,000 10,69,000 9,47,000 11,30,000
Tax on net income† (a) 71,600 1,33,200 99,400 1,39,000
Add : Surcharge (surcharge is not applicable
if net income does not exceed Rs. 50 lakh) (b) Nil Nil Nil Nil
Tax (c) 71,600 1,33,200 99,400 1,39,000
Add : Health and education cess [4% of (c)] 2,864 5,328 3,976 5,560
Tax liability (rounded off) 74,460 1,38,530 1,03,380 1,44,560
Note : Deduction under section 80C
NSC VIII issue 80,000 90,000 10,000 65,000
PPF 2,000 62,000 2,000 6,000
Investment in infrastructure sector — 5,000 1,000 33,000
Total 82,000 1,57,000 13,000 1,04,000
Net qualifying amount 82,000 1,50,000 13,000 1,04,000
50-E3 Find out the amount of tax liability in problem 50-P3 if date of birth of the taxpayers are as under :
X : April 1, 1963
Y : March 31, 1954
Mrs. Z : April 1, 1940
Mrs. A : June 10, 1948
50-P4 X receives Rs. 7,90,000 as basic pay and Rs. 1,18,000 as bonus during the previous year 2019-20. Besides, he gets Rs. 52,000
as dearness allowance (forming part of basic pay) and 4 per cent commission on turnover achieved by him. During the year, turnover
achieved by him is Rs. 90,00,000. His employer contributes Rs. 2,24,240 towards provident fund. The amount of interest credited to
provident fund on November 15, 2019 at the rate of 10 per cent comes to Rs. 40,000. His income from house property is Rs. 1,65,000.
During the year, he makes the following contributions and investments :
1. Own contribution towards provident fund : Rs. 3,36,360.
2. Insurance premium on own life : Rs. 9,000 (sum assured Rs. 80,000, policy taken in June 2016).
3. Tuition fees of daughter : Rs. 22,000.
4. Contribution towards National Savings Certificate VIII Issue : Rs. 11,000.
5. Insurance premium on the life of major son (not dependent upon X) : Rs. 4,000 (sum assured Rs. 1,00,000).
6. Insurance premium on the life of mother (age : 50 years) of X (dependent upon X) : Rs. 2,000.
7. Deposit in Sukanya Samriddhi Account : Rs. 10,000.
8. Repayment of loan taken to purchase house property : Rs. 21,000.
Determine the taxable income and tax liability of X for the assessment year 2020-21 on the assumption that provident fund is (a) a
statutory provident fund, (b) recognised provident fund, or (c) unrecognised provident fund.
fund fund fund
(1) (2) (3)
Rs. Rs. Rs.
Basic pay 7,90,000 7,90,000 7,90,000
Bonus 1,18,000 1,18,000 1,18,000
Commission on turnover (4% of Rs. 90,00,000) 3,60,000 3,60,000 3,60,000
Employer’s contribution towards provident fund in excess of 12% of salary
[i.e., Rs. 2,24,240 — 12% of (Rs. 7,90,000 + Rs. 52,000 + Rs. 3,60,000)] — 80,000 —
Interest credited to provident fund, being in excess of 9.5% per annum
(Rs. 40,000 × 0.5 ÷ 10) — 2,000 —
Gross salary 13,20,000 14,02,000 13,20,000
Income from salary 12,70,000 13,52,000 12,70,000
Income from house property 1,65,000 1,65,000 1,65,000
Less : Deduction under section 80C 1,50,000 1,50,000 76,000
Tax on net income
Income-tax† [see Appendix 1] (a) 1,98,000 2,22,600 2,20,200
Add: Surcharge (not applicable as taxable income does not exceed Rs. 50 lakh) Nil Nil Nil
Tax (c) 1,98,000 2,22,600 2,20,200
Add : Health and education cess [4% of (c)] 7,920 8,904 8,808
Tax liability (rounded off) 2,05,920 2,31,500 2,29,010
Note : Deduction under section 80C
 Provident fund contribution 3,36,360 3,36,360 Nil
 Insurance premium (subject to maximum of 10% of sum
assured) 8,000 8,000 8,000
 Tuition fees of daughter 22,000 22,000 22,000
 National Savings Certificate VIII Issue 11,000 11,000 11,000
 Insurance premium on the life of major son 4,000 4,000 4,000
 Insurance premium on the life of mother — — —
 Deposit in Sukanya Samriddhi Account 10,000 10,000 10,000
 Repayment of loan to purchase house property 21,000 21,000 21,000
Total 4,12,360 4,12,360 76,000
Net qualifying amount (but subject to maximum of Rs. 1,50,000) 1,50,000 1,50,000 76,000
Amount deductible 1,50,000 1,50,000 76,000
50-E4 [P4.47]* During the previous year 2019-20, X a citizen of India, receives Rs. 9,40,000 as basic pay ; Rs. 3,00,000 as dearness
pay (forming part of basic pay) ; Rs. 4,80,000 as bonus ; Rs. 1,60,000 as commission (fixed) ; Rs. 11,200 as education allowance for
his two children (expenditure on children’s education : Rs. 15,000) ; and medical allowance : Rs. 8,000 (expenditure : Rs. 6,000).
His employer contributes Rs. 1,68,800 towards provident fund. Interest credited on May 15, 2019 in the provident fund account at
127 Important points to solve practical problems Para 52
the rate of 10 per cent comes to Rs. 2,60,000. His income from other sources is Rs. 2,00,000. During the previous year 2019-20, X
makes the following payments/contributions :
1. Provident fund contribution : Rs. 1,80,000.
2. Insurance premium since 2004 on the life of his wife : Rs. 14,000 (sum assured : Rs. 50,000).
3. Contribution towards public provident fund : Rs. 4,000.
4. Contribution towards National Savings Certificate VIII Issue : Rs. 59,000.
5. Contribution towards Indira Vikas Patra : Rs. 3,000.
6. Insurance premium since 2008 on his own life : Rs. 10,000 (due date : March 10, 2020, date of payment : April 5, 2020).
7. Debentures of a notified infrastructure company : Rs. 32,000.
8. Insurance premium on the life of X’s father since 2015 (age: 70 years): Rs. 14,750.
Determine the taxable income and tax liability of X for the assessment year 2020-21 on the assumption that provident fund is (a) a
statutory provident fund ; (b) recognised provident fund ; and (c) unrecognised provident fund.
 IS SALARIED EMPLOYEE ENTITLED TO RELIEF IN RESPECT OF SALARY IN ARREARS,

ADVANCE, ETC.
51. If an individual receives any portion of his salary in arrears or in advance or receives profits in lieu of salary
(e.g., gratuity, commuted pension, etc.), he can claim relief in terms of section 89†. The mode of computation of
relief in the case of arrears of salary is explained with the help of an example as follows–
X is employed by A Ltd. For the previous year 2007-08 his taxable salary income is Rs. 2,30,000 (he has no other income).
On Rs. 2,30,000, X has paid income-tax of Rs. 20,6001. For the previous year 2019-20, his taxable income (after standard
deduction) is Rs. 12,00,000. Besides, on December 1, 2019, X has received arrears of bonus of Rs. 60,000 pertaining to the
previous year 2007-08. This amount was not taxed in the previous year 2007-08, as there was a dispute with the management
about calculation of bonus. In this case, Rs. 60,000 will be taxable along with Rs. 12,00,000 for the previous year 2019-20. X
can claim relief under section 89 in respect of arrears of bonus of Rs. 60,000 as follows –
Previous Previous
year 2007-08 year 2019-20
Rs. Rs.
(1) (2)
Taxable income without including arrears of bonus 2,30,000 12,00,000
Tax on above income (including education cess) (A) 20,600 1,79,400
Taxable income after including arrears of bonus 2,90,000 12,60,000
Tax on above income (including education cess) (B) 37,080 1,98,120
Difference between (B) and (A) [i.e., (B) – (A)] (C) 16,480 18,720
In this case, relief under section 89 will be Rs. 2,240 (i.e., Rs. 18,720 – Rs. 16,480). If (C)(2) is less than (C)(1), relief under section
89 is not available.
Income and tax computation for the previous year 2019-20 (assessment year 2020-21) will be as follows –
Rs.
Income 12,00,000
Arrears of bonus (it was not taxed earlier, it shall be included in the income of previous year 2019-20) 60,000
Tax on Rs. 12,60,000
Income-tax 1,90,500
Total 1,98,120
Less: Relief under section 89 (as calculated above) 2,240
Tax payable 1,95,880
 WHAT ARE IMPORTANT POINTS WHICH ONE SHOULD REMEMBER TO SOLVE PRACTICAL
PROBLEMS UNDER THE HEAD “SALARIES”
52. A few critical points one should remember about computation of salary income are narrated in this para.
1. Tax rate for the previous year 2007-08 – Up to Rs. 1,10,000 : Nil, between Rs. 1,10,000 and Rs. 1,50,000 : 10%, between Rs. 1,50,000 and Rs. 2,50,000
: 20%, above Rs. 2,50,000 : 30%; education cess : 3%.
† The department insists that the concerned employee should submit electronically Form No. 10E along with his return of income to claim relief
under section 89 (however, there is no such legal requirement under the Income-tax Act or Income-tax Rules).
52.1 Meaning of salary for different purposes - Meaning of “salary” for different calculation is given
below –
 For the purpose of calculating (a) house rent allowance, (b) gratuity (not being gratuity under the payment of Gratuity
Act), (c) leave encashment at the time of retirement, (d) NPS, and (e) employer’s contribution towards recognized provident
fund, not chargeable to tax - For these purposes, “salary” means basic salary, dearness allowance*/pay if part of
salary for computing all retirement benefits and commission (if paid as a percentage of turnover achieved by an
employee).
 For the purpose of calculating gratuity received under the Payment of Gratuity Act, 1972, not chargeable to tax - For this
purpose, “salary” means basic salary and dearness allowance whenever dearness allowance is paid.
 For the purpose of calculating perquisite value of rent-free/concessional house - For this purpose, “salary” means basic
salary, dearness allowance*/pay if part of salary for computing retirement benefits, bonus, commission, fees,
taxable allowances and any monetary benefit otherwise chargeable to tax. However, “salary” does not include
tax-free allowances, value of a perquisite, employer’s contribution towards provident fund and lump-sum
payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity,
severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar
payments.
 For the purpose of entertainment allowance, not chargeable to tax - For this purpose, “salary” means basic salary.
52.2 Meaning of “Government employee” for different purposes - The following are treated as Government
employees (Govt.) or non-Government employees (N Govt.) –
For the purpose of computation Central/State Government Employees of local Employees of statutory Other employees
of taxable amount employees authorities corporations
Leave encashment Govt. N Govt. N Govt. N Govt.
Gratuity Govt. Govt. N Govt. N Govt.
Commuted pension Govt. Govt. Govt. N Govt.
Rent-free house Govt.1 N Govt. N Govt. N Govt.
For valuation of perquisite in respect of rent-free house, a Central/State Government employee who is on deputation to a
1
public sector undertaking, is treated as a Government employee if house is allotted by the Central/State Government.
 Problems on computation of salary income

53-P1 During the previous year 2019-20, X (45 years) is employed by a pharmaceutical company situated at Kanpur. He gets the
following from the employer –
Basic salary : Rs. 34,000 per month. Dearness allowance : 30 per cent of basic salary (40 per cent is considered for calculating retirement
benefits like gratuity and pension), dearness pay : Rs. 5,000 per month (nothing is considered for retirement benefit), fixed commission :
Rs. 4,000 per month, commission (as incentive) : 5 per cent of turnover (and extra commission of 2 per cent if annual turnover exceeds
Rs. 15,00,000), house rent allowance : Rs. 15,000 per month (rent paid is Rs. 17,000 per month up to June 30, 2019 and after that he
shifts in his own house but house rent allowance is received throughout the previous year), employer’s contribution towards recognized
provident fund : Rs. 5,400 per month, interest credited in PF account : Rs. 56,000 (rate of interest 11 per cent).
X has been provided health club facility at a 4 star hotel in Kanpur by the employer-company. This facility is available to all employees
of the company. Annual expenditure for providing this facility is Rs. 7,000 per month (which is borne by the employer). The employer-
company also provides tea and light snacks to all employees during tea break (expenditure incurred by the company is approximately
Rs. 60 per day for 310 working days).
X contributes annually Rs. 5,500 per month towards recognized provident fund (an additional sum of Rs. 70,000 is contributed on March
11, 2020). Income of X from other sources is Rs. 1,25,000. Determine the net income and tax liability of X for the assessment year
2020-21 on the assumption that monthly turnover achieved by X is Rs. 1,00,000.
Solution :
Rs.
Basic salary (Rs. 34,000 × 12) 4,08,000
Dearness allowance (30% of Rs. 4,08,000) 1,22,400
Dearness pay (Rs. 5,000 × 12) 60,000
Fixed commission (Rs. 4,000 × 12) 48,000
Commission (incentive) (5% of Rs. 1,00,000 × 12) 60,000
129 Problems on computation of salary income Problem 53-P2
Rs.
House rent allowance [see Note 1] 1,41,924
Employer’s contribution towards recognized provident fund [(Rs. 5,400 × 12) – 12% of (Rs. 4,08,000 + 40% of
Rs. 1,22,400 + commission based upon turnover : Rs. 60,000)] 2,765
Credit of PF interest (Rs. 56,000 × 1.5 ÷ 11) 7,636
Health club facility [see Note 2] (Rs. 7,000 × 12) 84,000
Tea and light snacks (not taxable even if expenditure is more than Rs. 50 per day) Nil
Other incomes 1,25,000
Less: Deduction under section 80C (Rs. 5,500 × 12 + Rs. 70,000) 1,36,000
Net income (rounded off) 8,73,730
Tax on net income
Income-tax† 87,246
Notes –
1. House rent allowance - House rent allowance is received throughout the previous year, though X pays rent of Rs. 17,000 per
month up to June 30, 2019. House rent allowance exemption is not available after June 30, 2019 and from July 1, 2019, the
entire house rent allowance will be chargeable to tax. “Salary” for the purpose of house rent allowance exemption is Rs.
5,16,960 (i.e., Rs. 4,08,000 + 40% of Rs. 1,22,400 + commission based upon turnover : Rs. 60,000) for the entire year. Salary
from April 1, 2019 to June 30, 2019 will be Rs. 1,29,240 (i.e., Rs. 5,16,960 × 3 ÷ 12). Rent paid for this period is Rs. 51,000 (i.e.,
Rs. 17,000 per month for 3 months). House rent allowance exemption for 3 months ending June 30, 2019 shall be calculated
as follows –
a. Rs. 51,696 (i.e., 40% of salary of Rs. 1,29,240);
b. Rs. 45,000 (being house rent allowance of Rs. 15,000 per month for 3 months);
c. Rs. 38,076 (being the excess of rent paid of Rs. 17,000 × 3 over 10% of Rs. 1,29,240),
whichever is lower is not chargeable to tax. Consequently, Rs. 38,076 is exempt from tax out of house rent allowance of Rs.
15,000 × 12. The remaining amount of Rs. 1,41,924 is chargeable to tax.
2. Health club facility - Health club facility provided uniformly to all employees, is not chargeable to tax. However, this benefit
of exemption is available only if it is provided in the employer’s premises. In this problem, health club facility is provided
in a 4 star hotel not owned by the employer. Consequently, it is chargeable to tax.
53-E1 [P4.48]* X (age : 26 years) is an employee of a co-operative society at Varanasi. During the previous year 2019-20, he gets
Rs. 65,000 per month as basic salary, Rs. 8,000 per month as bonus and Rs. 4,500 per month as dearness allowance (32 per cent of
it forms part of salary for computation of retirement benefits) and Rs. 2,000 per month as medical allowance (medical expenses are,
however, more than Rs. 2,000 per month). He is a member of a recognised provident fund to which the employer contributes 1,19,874
(X also makes a matching contribution). X gets an interest-free loan (repayable within 8 years) of Rs. 82,330 from the employer for
purchasing a house (SBI lending rate : 10.10 per cent). Besides, he gets Rs. 11,30,760 as interest on company deposits from a private
sector undertaking. X deposits Rs. 31,000 in public provident fund. Determine the taxable income and tax liability of X for the
53-P2 Mrs. X (48 years) is a deputy manager in a Mumbai based company. She gets Rs. 54,000 per month as salary. Besides, she gets
child education allowance of Rs. 450 per month (for daughter) and Rs. 80 per month (for son). Cost of education is approximately Rs.
1,80,000 for the two children (out of which Rs. 1,36,000 is tuition fees paid by Mrs. X). She also gets hostel expenditure allowance for
her daughter at the rate of Rs. 300 per month (but the daughter is a post graduate student in Mumbai college and does not stay in any
hostel).
The employer-company provides 1800 cc car for official and private purpose and incurs the entire expenditure on running and
maintenance of the car. Personal use of the car as per log book is approximately 65 per cent. With effect from November 1, 2019 she gets
driver (to whom the company pays Rs. 6,000 per month).
The employer has provided an unfurnished flat at Andheri (East). It is owned by the company (however, company pays Rs. 900 per month
as maintenance charges to the society). The company maintains unrecognized provident fund and contributes 18 per cent of salary
towards it for each employee. Mrs. X, however, contributes Rs. 8,000 per month. Her income from other sources is Rs. 3,58,000. Find
out the net income and tax liability of Mrs. X for the assessment year 2020-21.
†As taxable income is more than Rs. 5,00,000, rebate under section 87A is not available. Surcharge is not applicable as taxable income does not
exceed Rs. 50 lakh.
Problem 53-P3 Income under the head ‘Salaries’ and its computation 130
Solution :
Rs.
Basic salary (Rs. 54,000 × 12) 6,48,000
Child education allowance for daughter [(Rs. 450 – exemption of Rs. 100) × 12] 4,200
Child education allowance for son [(Rs. 80 – exemption of Rs. 100) × 12] Nil
Hostel expenditure allowance for daughter (Rs. 300 × 12, exemption is not available as the daughter
does not stay at a hostel) 3,600
Car (Rs. 2,400 × 12) 28,800
Driver (Rs. 900 × 5) 4,500
Employer’s contribution towards unrecognized provident fund (nothing is taxable) Nil
Rent-free house [15% of salary of (Rs. 6,48,000 + Rs. 4,200 + Rs. 3,600), maintenance charges not taxable
separately] 98,370
Less: Deduction under section 80C (i.e., tuition fees of Rs. 1,36,000, contribution of Mrs. X towards
unrecognized provident fund is not deductible) 1,36,000
Net income 9,59,470
Tax on net income
Income-tax† 1,04,394
53-E2 [P4.49]* Mrs. X (age : 62 years) is a part-time lecturer in a college of the Delhi University. The details of her salary and other
income for the previous year 2019-20 are as follows :
Rs.
Dearness allowance (forming part of salary) 52,400
Special allowance 2,10,000
Education allowance for two children (expenditure being Rs. 600) 3,600
Hostel expenditure allowance for one child (expenditure being Rs. 7,000) 6,800
House rent allowance 80,800
Remuneration from the Calcutta University for acting as examiner 1,42,180
Allowance for research which is to be completed during January-April 2020 (actual expenditure incurred for
completing the research : Up to March 31, 2020 : Rs. 1,500 ; during April 2020 : Rs. 3,000) 6,000
She is a member of statutory provident fund to which she contributes 12 per cent of her salary and similar amount is contributed by
the college. Besides, the college reimburses Rs. 21,000 being expenditure incurred by Mrs. X on medical treatment of her daughter
in a private clinic.
During the year, she spent Rs. 700 on the purchase of books for her teaching purposes. She has maintained a scooter for the whole
year for office as well as private purposes. She has been living in a rented house and paying Rs. 9,000 per month as rent.
For the year 2019-20, she paid Rs. 6,500 as insurance premium on her life policy for Rs. 40,000 (date of payment : April 3, 2020).
Mrs. X deposits Rs. 80,000 in public provident fund every year. Compute the total income and tax liability for the assessment year
2020-21 in case Mrs. X is (a) a resident and ordinarily resident; or (b) a resident but not ordinarily resident.
53-P3 X (22 years) is a mechanical engineer and is employed by a power generation company as chief production manager. He gets
Rs. 84,000 per month as salary and 2 months salary as bonus. Up to October 31, 2019, he was posted at the corporate office of the company
at Chennai. He had been provided a rent-free unfurnished accommodation at Chennai up to October 31, 2019, which is owned by the
company. With effect from November 1, 2019 he has been transferred to the power generating site of the company which is situated in
a “remote area”. After October 31, 2019, he gets the following allowances/perks from the company –
Transfer allowance : Rs. 1,40,000 (amount spent on fare and other incidental expenses in connection with transfer : Rs. 1,02,000), a rent-
free furnished flat at power generating site (owned by the company), club facility at the power generating site for personal entertainment
of the employee and family members (expenditure of the company is Rs. 500 per month), Maruti car (for official and personal purposes,
but without driver, expenses of the company Rs. 40,000), education facility to the dependent brother of X in a school owned by the
exceed Rs. 50 lakh.
company in the remote area at power generating site (cost of education in a similar institute is Rs. 600 per month), meal at the generating
site (cost of meal Rs. 80 per day) and medical facility in employer’s hospital at the power generating site (expenditure incurred by company
is Rs. 16,000).
Company maintains unrecognized provident fund and contributes 14 per cent of salary towards it. X contributes Rs. 10,000 per month.
Income of X from other sources is fixed deposit bank interest of Rs. 1,67,000. Determine the net income and tax liability of X for the
assessment year 2020-21 on the assumption that X contributes Rs. 1,40,000 in public provident fund.
Solution :
Rs.
Basic salary (Rs. 84,000 × 12) 10,08,000
Bonus (Rs. 84,000 × 2) 1,68,000
Rent-free house at Chennai [15% of salary of (Rs. 10,08,000 + Rs. 1,68,000) × 7 months ÷ 12 months] 1,02,900
Transfer allowance (Rs. 1,40,000 – Rs. 1,02,000) 38,000
Rent-free house in a remote area (exempt from tax) Nil
Club facility in remote area (Rs. 500 × 5) 2,500
Car (Rs. 1,800 × 5, taxable even if provided in a remote area) 9,000
Education facility given to dependent brother (Rs. 600 × 5, taxable even if provided in a remote area) 3,000
Medical facility in employer’s hospital (tax-free whether provided in remote area or otherwise) Nil
Employer’s contribution towards unrecognized provident fund Nil
Less: Deduction under section 80C (i.e., PPF contribution of Rs. 1,40,000, contribution towards unrecog-
nized provident fund is not deductible) 1,40,000
Tax on net income
Note - Meal facility at "remote area" is not chargeable to tax.
53-E3 [P4.50]* Mrs. X (44 years) received the following income from B Ltd. during the year ending March 31, 2020 :
Rs.
Salary @ Rs. 19,000 per month 2,28,000
Leave travel concession for proceeding on leave (expenditure on air fare : Rs. 26,000) 24,000
Lunch allowance @ Rs. 2,250 per month (expenditure : Rs. 27,000) 27,000
Medical allowance (expenditure : Rs. 42,000) 49,400
Allowance for purchase and maintenance of uniform for official use (expenditure incurred by X : Rs. 8,000) 22,000
Mrs. X also enjoyed the following benefits and perquisites :
Free unfurnished flat in Bombay for which employer is paying a monthly rent of Rs. 29,500.
Free use of a Maruti car without driver for personal use and official use. Car can also be used by the family members of Mrs. X.
Free service of personnel attendant (salary : Rs. 4,400) and sweeper (salary : Rs. 4,600).
Free use of employer’s DVD player (costs to the employer : Rs. 25,000, year of purchase : 2017-18).
Mrs. X’s salary and allowances for March 2020, though due on March 31, 2020, were received by her only in April 2020.
Compute net income of Mrs. X for the assessment year 2020-21, on the assumption that her income from other sources is Rs. 1,75,760.
53-P4 X (38 years) is a cost accountant. He is posted at Kozhikode (Kerala). He gets Rs. 65,000 per month as salary and Rs. 10,000 per
month as hard duty allowance. The employer company has provided a rent-free unfurnished house at Kozhikode (population as per 2001
census is 16 lakh). The employer-company pays Rs. 16,000 per month as rent of the unfurnished house. However, the same house is
purchased by the company for Rs. 80,00,000 from the landlord on December 1, 2019 and after that no rent is paid (only expenditure of
the company is running and maintenance of the property which approximately comes to Rs. 400 per month).
The company has provided 1600 cc car at the place of posting. Car is taken on lease by the company (monthly lease rent is Rs. 19,000).
The entire expenditure of the car is met by the company up to December 31, 2019. From January 1, 2020, expenditure pertaining to
exceed Rs. 50 lakh.
personal use of the car is met by X and expenditure pertaining to official use and lease rent is paid by the employer company. Free
residential telephone is provided to X for personal use (expenditure of the employer is Rs. 20,000).
Employer and employee contribute towards recognized provident fund (contribution of each of them is 12 per cent of salary up to
December 31, 2019 and increased to 12.5 per cent from January 1, 2020). Interest is credited on January 1, 2020 (rate of interest : 9 per
cent). X pays Rs. 80,000 on March 31, 2020 to Kerala Housing Board (house is yet to be allotted) (out of Rs. 80,000, the employer company
has contributed Rs. 30,000 out of its pocket which is not recoverable from X). Interest on debentures received by X during the financial
year 2019-20 is Rs. 1,36,000. X deposits Rs. 42,000 in public provident fund. Find out the net income and tax liability for the assessment
year 2020-21.
Solution :
Rs.
Basic salary (Rs. 65,000 × 12) 7,80,000
Hard duty allowance (Rs. 10,000 × 12) 1,20,000
Rent-free house [see Note 1] 1,20,000
Car [see Note 2] 18,000
Telephone (not taxable, even if it is used for personal purposes) Nil
Employer’s contribution towards recognized provident fund (exempt up to 12% of salary, 0.5% of
Rs. 65,000 for 3 months is taxable) 975
PF interest (not taxable as it does not exceed 9.5%) Nil
Amount contributed by employer to housing board on behalf of X 30,000
Less: Deduction under section 80C (i.e., 12% of Rs. 65,000 × 9 + 12.5% of Rs. 65,000 × 3, contribution to
housing board not to be considered as house is not allotted + PPF : Rs. 42,000) 1,36,575
Tax on net income
Notes –
1. Rent-free house - “Salary” for the purpose of perquisite valuation is Rs. 9,00,000 (i.e., Rs. 7,80,000 + Rs. 1,20,000). Up to
December 1, 2019, the company provides a rented accommodation at Kozhikode. Up to December 1, 2019, the perquisite
value will be 15% of salary (i.e., Rs. 90,000, being 15% of Rs. 9,00,000 × 8 ÷ 12) or rent paid by the employer (i.e., Rs. 16,000
× 8), whichever is lower. Consequently, up to December 1, 2019, Rs. 90,000 is chargeable to tax. From December 1, 2019, the
employer-company has provided a house owned by it. As population is 16 lakh, the perquisite value will be 10% of salary
(i.e., Rs. 30,000, being 10% of Rs. 9,00,000 × 4 ÷ 12). The aggregate value of the perquisite in respect of rent-free unfurnished
house is Rs. 1,20,000 (i.e., Rs. 90,000 + Rs. 30,000).
2. Car - The employer-company provides a car (1600 cc). The entire expenditure is incurred by the employer up to December
31, 2019. Taxable value of the perquisite will be Rs. 16,200 (i.e., Rs. 1,800 × 9) up to December 31, 2019. From January 1, 2020,
personal expenditure pertaining to car running and maintenance are borne by X. Consequently, the perquisite value will
be Rs. 1,800 (i.e., Rs. 600 × 3). The aggregate amount comes to Rs. 18,000.
53-E4 [P4.51]* X (age : 41 years) gives the undernoted particulars of his income received from D Ltd. for the year ending March
31, 2020 :
Rs.
Salary after deduction of income-tax at source and own contribution to the office provident fund which is
recognised 4,05,000
Income-tax deducted at source 58,400
Own contribution to the recognised provident fund 70,000
Employer’s contribution to the provident fund 64,808
Interest credited to the provident fund calculated at the rate of 14 per cent per annum on July 31, 2019 5,000
Holiday home facility provided by the employer 12,500
House rent allowance (actual rent paid by X for the house in Delhi was Rs. 40,000) 61,800
exceed Rs. 50 lakh.
X is given free use of 1200cc car by his employer for domestic and official purposes (with effect from November 5, 2019) all the expenses
including salary of driver being met by the latter. A sum of Rs. 1,200 is, however, recovered from X.
X is also provided free service of a watchman (with effect from May 10, 2020) and a sweeper (with effect from December 1, 2019).
Salary (Rs. 3,000 per month per person) is paid by employer.
X pays life insurance premium of Rs. 17,860 on his own life since 2002 (sum assured : Rs. 2 lakh). X contributes Rs. 40,000 towards
NSC VIII issue. Income of X from other source is Rs. 2,08,000 which includes income-tax refund of Rs. 3,000 and Rs. 600, being
interest thereon.
Compute X’s total income and the tax liability (after adjusting tax deducted at source) for the assessment year 2020-21 assuming
that he had no other income.
53-P5 During the previous year 2019-20, X (39 years) is employed by a private sector company. He gets Rs. 45,000 per month as basic
salary, Rs. 15,000 per month as dearness allowance (30 per cent is considered for calculation of provident fund), tiffin allowance of
Rs. 1,000 per month, medical allowance of Rs. 1,500 per month. Besides he gets a fixed commission of Rs. 5,000 per month. The employer-
company has provided a watchman at the residence of X (company bears salary of Rs. 4,000 per month out of which Rs. 1,000 per month
is recovered from X). The company provides a car (1200 cc) for personal and official use of X (the entire expenditure on salary and driver
of approximately Rs. 76,000 is incurred by the company along with hire charges of car of Rs. 18,000, only a sum of Rs. 9,000 is recovered
for providing car from X).
The employer-company contributes 15 per cent of “salary” towards recognized provident fund. A matching contribution is made by X.
However, with effect from January 1, 2020, X makes an additional contribution of Rs. 4,000 per month. Interest of Rs. 74,000 is credited
in provident fund account at the rate of 10 per cent on October 1, 2019. Income of X from other sources is Rs. 2,24,240. Find out net
income and tax liability of X for the assessment year 2020-21.
Solution : Computation of income of X –
Rs.
Basic salary (Rs. 45,000 × 12) 5,40,000
Tiffin allowance (Rs. 1,000 × 12) 12,000
Fixed medical allowance (Rs. 1,500 × 12) (in the case of fixed medical allowance no exemption is available) 18,000
Watchman [(Rs. 4,000 – Rs. 1,000) × 12] 36,000
Car [(Rs. 1,800 + Rs. 900) × 12, amount recovered is not deductible] 32,400
Employer’s contribution towards recognized provident fund in excess of 12% of salary [3% of (Rs. 5,40,000 +
30% of Rs. 1,80,000)] 17,820
Credit of interest in provident fund (Rs. 74,000 × 0.5 ÷ 10) 3,700
Less: Deduction under section 80C [15% of (Rs. 5,40,000 + 30% of Rs. 1,80,000) + (Rs. 4,000 × 3)] 1,01,100
Net income 9,73,060
Tax on net income
53-E5 [P4.52]* X (age : 56 years) receives the following emoluments during the previous year ending March 31, 2020 :
Rs.
Basic pay 5,52,000
Commission 2,60,000
Free car facility for X and his family members only for private use (expenditure of the employer including normal
wear and tear : Rs. 1,21,000) 1,21,000
Entertainment allowance 30,000
On October 1, 2020, the employer gives a housing loan of Rs. 11,70,000 @ 4 per cent per annum (repayable in 15 years).
exceed Rs. 50 lakh.
X contributes Rs. 1,10,000 towards recognised provident fund. His income from other sources is Rs. 2,00,000. Determine the taxable
income and the amount of tax liability for the assessment year 2020-21 if :
a. X is an employee of PQR, a partnership firm.
b. X is an employee of the Punjab Government since 2003.
53-P6 Mrs. X (34 years) is in the IT department of A Ltd. She joined the company on November 1, 2017 in the pay scale of Rs. 80,000
– Rs. 5,000 – Rs. 2,00,000. At the time of joining, her salary was fixed at Rs. 84,000. Besides, she gets Rs. 10,000 per month as dearness
allowance (not forming part of salary for any retirement benefit purposes). As per service rules, she is entitled to the following –
Fixed servant allowance : Rs. 1,250 per month
Fixed meal allowance : Rs. 1,500 per month
Conveyance allowance : Rs. 3,000 per month
Garden allowance : Rs. 1,900 per month (it is allowed with effect from May 1, 2019)
These allowances are used for personal purposes. However, conveyance allowance has been discontinued with effect from January 1, 2020.
A car (1400 cc) is provided for official and private use with effect from January 1, 2020. The entire expenditure (i.e., Rs. 43,000 including
driver's salary) is paid by employer-company. Mrs. X contributes 15 per cent of her salary towards unrecognized provident fund. A
matching contribution is made by the employer. Interest of Rs. 81,000 is credited in the provident fund account at the rate of 11 per cent.
Mrs. X pays a sum of Rs. 10,000 as life insurance premium on an insurance policy (sum assured : Rs. 80,000) taken by her husband
in May 2018 on her life. Income of Mrs. X from other sources is Rs. 2,00,000.
Determine the net income and tax liability of Mrs. X for the assessment year 2020-21. Salary becomes due on the last day of each month.
Mrs. X has purchased NSC VIII issue of Rs. 1,00,000 on March 31, 2020.
Solution : Salary of Mrs. X was fixed in the grade given above since November 2017. The amount of basic salary of Mrs. X
under this grade is as follows –
From November 1, 2017 to October 31, 2018 Rs. 84,000 per month
During the previous year 2019-20, she gets salary at the rate of Rs. 89,000 per month up to October 31, 2019 and Rs. 94,000
per month from November 1, 2019 onwards. Taxable income of X shall be calculated as follows—
Rs.
Basic salary up to October 31, 2019 (Rs. 89,000 × 7) 6,23,000
Basic salary from November 1, 2019 (Rs. 94,000 × 5) 4,70,000
Dearness allowance 1,20,000
Fixed servant allowance 15,000
Meal allowance 18,000
Conveyance allowance (Rs. 3,000 × 9) 27,000
Garden allowance (Rs. 1,900 × 11) 20,900
Car and driver [(Rs. 1,800 × 3) + (Rs. 900 × 3)] 8,100
Employer’s contribution towards unrecognized provident fund (not taxable even it exceeds 12% of salary) Nil
Less: Deduction under section 80C (Rs. 10,000 or 10% of sum assured, whichever is lower + NSC : Rs. 1,00,000,
contribution to unrecognized provident fund is not deductible) 1,08,000
Tax on net income
53-E6 [P4.53]* During the previous year 2019-20, X (age : 42 years), a nationalised bank employee in Surat, receives the following
emoluments :
Basic salary : Rs. 40,000 per month, high cost of living allowance (but not forming part of salary) : Rs. 5,000 per month, overtime
allowance : Rs. 3,500 per month and house rent allowance : Rs. 7,000 per month (rent paid by him : Rs. 7,500 per month). Employer-
exceed Rs. 50 lakh.
bank contributes 17 per cent of basic salary towards recognised provident fund, X makes a contribution of Rs. 7,000 per month.
Interest credited on July 5, 2019 at the rate of 13 per cent in the provident fund account of X is Rs. 6,500. Income of X from other
sources is Rs. 2,78,300. The following perquisites are provided by the bank :
a. free holiday home facility at Kulu (expenditure of the employer : Rs. 57,900) ;
b. free gardener (who is an employee of the bank ; annual salary of the gardener being Rs. 42,000 paid directly by the bank) ;
c. free sweeper (who is employed by X, annual salary of Rs. 36,000 is paid by the bank) ;
d. subsidised telephone (expenditure of the employer : Rs. 19,000) ; and
e. ordinary medical facility in a private clinic (expenditure of the employer : Rs. 16,200).
During the previous year, X makes the following payments :
(a) Fixed deposit in bank under scheme specified for section 80C : Rs. 54,000; (b) insurance premium on the life policy of his father :
Rs. 6,000 ; (c) insurance premium on his own life policy (policy taken in 2009): Rs. 9,000 (sum assured : Rs. 40,000); (d) insurance
premium on life policy of his major child (due date : October 10, 2019, date of payment : March 25, 2020) : Rs. 4,000 (sum assured
Rs. 50,000).
Find out the amount of net income and tax payable for the assessment year 2020-21.
53-P7 X (64 years) is director HRD of A Ltd. since May 1984. He gets Rs. 1,10,000 per month as salary (up to September 30, 2019,
it was Rs. 1,00,000 per month) and Rs. 3,000 per month as incentive. He owns a car which is used by him for official and private purposes.
The entire expenditure of car and driver Rs. 1,95,000 is borne by the employer-company. As per log book of the car, 70 per cent of the
expenditure is attributable towards official use of the car.
Company reimburses Rs. 20,200 on account of personal telephone bills and Rs. 8,000 on account of personal water bills during the
financial year 2019-20. Employer-company contributes 12 per cent of salary towards recognized provident fund (X also makes a matching
contribution) and 15 per cent of salary towards approved superannuation fund.
X retires from the company on February 28, 2020 and gets gratuity of Rs. 22,00,000 (the company is covered by the Payment of Gratuity
Act). After retirement he gets a fixed pension of Rs. 10,000 per month. Salary and pension become due on last day of each month and
generally paid on the same day.
Assuming that income of X from other sources is Rs. 3,38,000, find out net income and tax liability of X for the assessment year
2020-21.
Rs.
Basic salary up to September 30, 2019 (Rs. 1,00,000 × 6) 6,00,000
Basic salary from October 1, 2019 to February 29, 2020 (Rs. 1,10,000 × 5) 5,50,000
Incentive (Rs. 3,000 × 11) 33,000
Car perquisite (Rs. 1,95,000 – expenditure attributable towards official use : 70% of Rs. 1,95,000) 58,500
Personal telephone (not chargeable to tax) Nil
Water bills paid by company 8,000
Employer’s contribution towards recognized provident fund (not taxable as it does not exceed 12% of
salary) Nil
Employer’s contribution towards superannuation fund [15% of (Rs. 6,00,000 + Rs. 5,50,000) – Rs. 1,50,000] 22,500
Gratuity [see Note 2] 2,00,000
Pension (Rs. 10,000 × 1) 10,000
Less: Deduction under section 80C [12% of (Rs. 6,00,000 + Rs. 5,50,000), subject to maximum of Rs. 1,50,000] 1,38,000
Tax on net income
Note -
1. Employer’s contribution towards approved superannuation fund in excess of Rs. 1,50,000 is taxable in the hands of
employee.
2. Gratuity of Rs. 22,00,000 is received at the time of retirement. X is covered by the Payment of Gratuity Act. Length of service
is 36 years (i.e., from May 1984 to February 2020, a fraction of more than 6 months is taken as 1 year).
exceed Rs. 50 lakh.
Salary at the time of retirement is Rs. 1,10,000 per month. 15 days’ salary come to Rs. 63,461.54. Gratuity is exempt on the
basis of least of the following –
a. Rs. 22,84,615 (Rs. 63,461.54 × 36);
b. Rs. 20,00,000; or
c. Rs. 22,00,000 (i.e., gratuity received),
whichever is lower is exempt. Consequently, Rs. 20,00,000 is exempt and Rs. 2,00,000 is chargeable to tax.
53-E7 [P4.54]* X (age : 62 years), a director of PQR Ltd., gives the following particulars of his income of the previous year ending
March 31, 2020 :
Basic salary : Rs. 1,20,000 per month.
Bonus : one month’s basic salary.
Commission : two months’ basic salary.
Entertainment allowance : Rs. 40,000 per annum.
A rent-free unfurnished house has been provided in Mumbai, lease rent of the house : Rs. 3,74,000 per annum.
Income from other sources : Rs. 1,92,786.
Employer has provided free use of a 1798cc car with driver for official and personal purposes ; expenses of the employer : Rs. 1,80,000
(20 per cent of which is attributable towards official purposes and 10 per cent is attributable towards the journey between office and
residence). The employer also provides subsidised tea and snacks (expenditure incurred : Rs. 800) and pays mobile phone bills of X
(total payment being Rs. 14,710; bill is in the name of employer and telephone is partly used for office purposes and partly for personal
purposes).
Employer’s contribution towards recognised provident fund : 17 per cent of basic salary.
X’s contribution towards provident fund Rs. 1,10,000 per annum.
Payment of insurance premium on life policy of Mrs. X since 2005 : Rs. 8,000 (sum assured : Rs. 35,000).
During the year, X has invested Rs. 8,000 in debentures of a company (notified for the purpose of section 80C) which is engaged in
operating an approved infrastructure facility and pays school fees of Rs. 18,000 of his daughter.
Determine the taxable income and tax liability of X for the assessment year 2020-21.
53-P8 X (40 years) is finance officer of a multinational company operating in India (posted at Pune). He gets Rs. 70,000 per month as
salary and Rs. 14,000 per month as dearness allowance (80 per cent of dearness allowance is considered for calculating pension, provident
fund and gratuity).
Daughter of X is a student of IIM Ahmedabad and the entire cost of her education of Rs. 2,70,000 is borne by the employer company.
On January 1, 2020, X is transferred from Pune to Mumbai. The company provides him hotel accommodation from January 1, 2020 to
January 26, 2020 and the hotel tariff of Rs. 10,000 per day is paid by the company. Besides, X gets Rs. 20,000 per month as house rent
allowance (no rent is paid by him as his family throughout the year resides in a house owned by Mrs. X at Pune).
Employer and employee each contribute Rs. 1,35,000 towards recognized provident fund. Employer also contributes Rs. 80,000 towards
approved superannuation fund. Interest is annually credited in provident fund account on November 30 (since 2008 rate of interest is
in the range of 9 to 9.5 per cent). Find out the income and tax liability of X for the assessment year 2020-21, assuming that income of
X from other sources is Rs. 2,42,55,000.
Solution :
Rs.
Salary (Rs. 70,000 × 12) 8,40,000
Education expenses of daughter 2,70,000
Hotel accommodation at Mumbai [see Note 2] 7,985
House rent allowance (Rs. 20,000 × 12) [see Note 1] 2,40,000
Employer’s contribution towards provident fund [see Note 3] 18,072
Interest in provident fund (not chargeable to tax as rate of interest does not exceed 9.5%) Nil
Employer’s contribution towards approved superannuation fund (not taxable up to Rs. 1,50,000) Nil
Salary income 14,94,057
Income from other sources 2,42,55,000
Gross total income 2,57,49,057
Less: Deduction under section 80C (Rs. 1,35,000 is deductible within the overall limit of Rs. 1,50,000) 1,35,000
Net income (rounded off) 2,56,14,060
Tax on net income
†As taxable income is more than Rs. 5,00,000, rebate under section 87A is not available.
Rs.
Add: Surcharge (surcharge is applicable only when in the case of an individual net income exceeds
Rs. 50 lakh) (25% of Rs. 74,96,716) (surcharge is 25%, if net income exceeds Rs. 2 crore but does not exceed
Rs. 5 crore) 18,74,180
Total 93,70,898
Notes –
1. House rent allowance - Exemption is not available, as rent is not paid by X.
2. Hotel accommodation - If the employer provides a hotel/guest house accommodation in the case of relocation at the new
place of posting for a period not exceeding 15 days, it is not chargeable to tax. In this case, such accommodation is provided
for 25 days. Perquisite value shall be chargeable to tax for 10 days. 24% of “salary” for 10 days is the taxable value of
perquisite. “Salary” for this purpose is Rs. 12,14,400 (i.e., Rs. 8,40,000 + 80% of dearness allowance of Rs. 1,68,000 + taxable
house rent allowance of Rs. 2,40,000). 24% of Rs. 12,14,400 for 10 days comes to Rs. 7,986 (i.e., Rs. 12,14,400 × 0.24 × 10 ÷ 365).
Hotel tariff paid by the company for 10 days is Rs. 1,00,000 (i.e., Rs. 10,000 × 10). Taxable value of perquisite is Rs. 7,985 (i.e.,
Rs. 7,985 or Rs. 1,00,000, whichever is lower).
3. Employer’s contribution - Employer’s contribution up to 12% of “salary” is not chargeable to tax. “Salary” for this purpose
is Rs. 9,74,400 (i.e., Rs. 8,40,000 + 80% of dearness allowance). 12% of Rs. 9,74,400 is Rs. 1,16,928 which is not chargeable to
tax. Contribution by the employer towards recognized provident fund is Rs. 1,35,000. Consequently, the excess amount of
Rs. 18,072 is chargeable to tax.
53-E8 [P4.55]* X (age : 63 years), a private sector employee based at Goa and covered by the Payment of Gratuity Act, 1972, retires
on October 31, 2019 after service of 30 years and 11 months. At the time of retirement, his employer pays Rs. 3,40,000 as gratuity.
He is entitled for a monthly pension of Rs. 2,500 (salary and pension fall due on the last day of each month). He gets one-third of his
pension commuted for Rs. 2,00,000 on January 1, 2020. At the time of retirement, the employer transfers an air-conditioner to X (it
was purchased in 1991 for Rs. 49,000 and since then it was used for business purposes) and gives a cheque of Rs. 1,05,000 in
appreciation of services. Determine the total income and tax liability for the assessment year 2020-21 with the following particulars :
Basic salary : Rs. 54,600 (Rs. 7,800 × 7) ; bonus Rs. 60,000 ; high cost of living allowance : Rs. 70,000 ; house rent allowance :
Rs. 14,000 (Rs. 2,000 × 7) ; rent paid: Rs. 60,000 (Rs. 5,000 × 12) ; employer’s contribution towards recognised provident fund :
12 per cent of basic salary; X’s contribution towards provident fund : Rs. 1,15,000 ; insurance premium on life insurance policy (taken
in 2010) on the life of his major son not dependent upon X : Rs. 9,000 (sum assured : Rs. 60,000) and income from other sources :
Rs. 3,18,000.
53-P9 X (30 years) is in the marketing department of A Ltd., Chennai. He gets Rs. 67,000 per month as salary. He gets a fixed commission
of Rs. 1,000 per month and turnover based commission at the rate of 20 per cent of turnover achieved by him (turnover of the company
for the year 2019-20 is Rs. 1,10,00,000, out of which Rs. 19,80,000 is contribution by X). He gets house rent allowance of Rs. 18,000
per month (rent paid by him is Rs. 20,000 per month up to June 30, 2020, after that he shifts in his own accommodation).
Personal loan of Rs. 3,00,000 is given to X by A Ltd. on April 3, 2019 out of which Rs. 2,90,000 is repaid by X on April 28, 2019 and
Rs. 10,000 is repaid on May 27, 2019. Another loan of Rs. 15,00,000 is given to X on November 2, 2019, which is repaid by him on
November 30, 2019. SBI lending rate for a similar loan is 18.5 per cent per annum on April 1, 2019 and 17.2 per cent with effect from
August 1, 2019. A sum of Rs. 20,718 is recovered from X by the employer on account of interest.
A Ltd. contributes 20 per cent of basic salary towards recognized provident fund and Rs. 1,62,560 towards an approved superannuation
fund. Contribution of X towards recognized provident fund is more than Rs. 1,50,000. Income from other sources of X is Rs. 1,60,000.
Find out the net income and tax liability of X for the assessment year 2020-21.
Solution :
Rs.
Salary (Rs. 67,000 × 12) 8,04,000
Fixed commission (Rs.1,000 × 12) 12,000
Commission on the basis of turnover (20% of Rs. 19,80,000) 3,96,000
House rent allowance [see Note 2] 96,000
Perquisite in respect of loan 2,561
Employer’s contribution towards recognized provident fund [A Ltd. contributes 20% of basic salary :
Rs. 1,60,800, amount not chargeable to tax is 12% of “salary” of Rs. 12,00,000 : Rs. 1,44,000, the excess
contribution of Rs. 16,800 is chargeable to tax] 16,800
Employer’s contribution towards approved superannuation fund [amount not chargeable to tax is
Rs. 1,50,000, the excess contribution of Rs. 12,560 is chargeable to tax] 12,560
Rs.
Less: Deduction under section 80C 1,50,000
Tax on net income
Notes –
1. “Salary” for the purpose of computation of taxable house rent allowance and recognized provident fund contribution by
employer is Rs. 12,00,000 (i.e., basic salary + commission based upon percentage of turnover). Fixed commission is not taken
into consideration.
2. House rent allowance is exempt on the basis of least of the following –
a. Rs. 6,00,000 (being 50% of salary);
b. Rs. 2,16,000 (being house rent allowance); or
c. Rs. 1,20,000 (being the excess of rent of the previous year 2019-20 of Rs. 2,40,000 over 10% of salary of Rs. 12,00,000).
Rs. 1,20,000 is exempt from tax and Rs. 96,000 is chargeable to tax.
3. Perquisite in respect of interest-free loan is chargeable to tax. Maximum outstanding balance on the last day of each month
shall be calculated. The first loan of Rs. 3,00,000 is given on April 3, 2019 and out of which Rs. 2,90,000 is repaid on April
28, 2019. Outstanding balance on April 30, 2019 is Rs. 10,000. On May 31, 2019, outstanding balance is zero. Interest on Rs.
10,000 for one month at the rate of 18.5% comes to Rs. 154. Another loan of Rs. 15,00,000 is given on November 2, 2019. This
is repaid by X on November 30, 2019. One has to find out the maximum outstanding balance on the last day of November,
i.e., on November 30, 2019. Since loan is repaid on November 30, 2019, outstanding balance on November 30, 2019 in the
morning is Rs. 15,00,000 and in the evening it is zero. The maximum outstanding balance on November 30, 2019 is
Rs. 15,00,000. One month’s interest on Rs. 15,00,000 at the rate of 18.5 per cent per annum comes to Rs. 23,125. The aggregate
interest comes to Rs. 23,279 (i.e., Rs. 154 for the first loan and Rs. 23,125 for the second loan). Interest of Rs. 20,718 is recovered
from X shall be deducted. The balance of Rs. 2,561 is chargeable to tax as perquisite.
53-E9 [P4.56]* X (age : 55 years), a director of LMN (P.) Ltd., receives the following emoluments during the previous year relevant
for the assessment year 2020-21 :
Basic salary : Rs. 1,80,000, dearness allowance : Rs. 24,000 (not forming part of basic pay), commission @ 1 per cent of turnover
(turnover achieved by X during the previous year 2019-20 : Rs. 10,00,000), arrears of bonus of the previous year 2015-16 : Rs. 6,000
(not taxed earlier), employer’s contribution towards recognised provident fund : Rs. 30,000 ; interest credited in provident fund
account @ 13.5 per cent on April 3, 2019 : Rs. 900 ; conveyance allowance : Rs. 1,200 (60 per cent of which is utilised for official
purposes), education allowance for X’s three sons @ Rs. 183.33 per month per child : Rs. 6,600, rent-free furnished house in Calcutta
(lease rent of unfurnished house paid by the employer : Rs. 90,000, rent of furniture : Rs. 12,000), free services of gardener, cook and
watchman (salary : Rs. 3,000, Rs. 4,000 and Rs. 5,000 respectively). On March 10, 2020, LMN (P.) Ltd. sells imported furniture
to X for Rs. 20,000 (the furniture was purchased by the company on June 30, 2014 for Rs. 6,10,000 and since then it was used for
business purposes).
He runs a business. During the previous year, income from the business is Rs. 6,80,000.
He makes the following payments during the previous year :
a. Own contribution towards recognised provident fund : Rs. 32,000.
b. Deposit in Home Loan Account of the National Housing Bank : Rs. 4,000 (including advance deposit of Rs. 1,000).
c. Contribution towards National Savings Certificate VIII Issue : Rs. 1,14,000.
Determine the net income and tax liability for the assessment year 2020-21.
53-P10 X (50 years) is employed by P Ltd. and Q Ltd. on part time basis. During the previous year 2019-20, he gets basic salary :
Rs. 20,000 per month and house rent allowance : Rs. 6,000 per month from P. Ltd. Besides, P Ltd. provides a car (1500 cc) for official
and private use. The entire expenditure of maintenance (Rs. 48,000), repairs (Rs. 6,000), insurance (Rs. 9,000) and driver’s salary
(Rs. 72,000) is borne by the company. X does not pay any rent (he resides with his family in the house provided by Q Ltd.).
From Q Ltd. X gets basic salary : Rs. 36,000 per month and transport allowance (for commuting between office and residence) : Rs. 1,800
per month. Besides, Q Ltd. has provided a rent-free unfurnished house at Hanuman Nagar (population of Hanuman Nagar is 11 lakh).
Rent paid by Q Ltd. is Rs. 12,000 per month.
exceed Rs. 50 lakh.
Income of X from other sources is Rs. 4,90,000 (out of which Rs. 8,000 per month is pension from the Government where he was employed
before joining P Ltd. and Q Ltd.). P Ltd., Q Ltd. and X contribute 10 per cent of salary towards recognized provident fund. Interest
is credited in the provident fund account at the rate of 9 per cent. Every year X deposits Rs. 80,000 in PPF. Find out the net income and
tax liability of X for the assessment year 2020-21.
Solution :
Rs.
Salary from P Ltd. (Rs. 20,000 × 12) 2,40,000
House rent allowance from P Ltd. (Rs. 6,000 × 12, no exemption is available as rent is not paid by X) 72,000
Car provided by P Ltd. [(Rs. 1,800 + Rs. 900) × 12] 32,400
Salary from Q Ltd. (Rs. 36,000 × 12) 4,32,000
Transport allowance from Q Ltd. (Rs. 1,800 × 12) 21,600
Perquisite in respect of rent-free house [see Note 1] 1,29,240
Pension from Government (Rs. 8,000 × 12) 96,000
Income from other sources (pension is taxable as salary income, remaining income out of Rs. 4,90,000
given in the problem is taxable as income from other sources) 3,94,000
Less: Deduction under section 80C (10% of Rs. 2,40,000 + 10% of Rs. 4,32,000 + PPF of Rs. 80,000) 1,47,200
Tax on net income
Notes -
1. X gets salary from P Ltd. and Q Ltd. and pension (which is also taxable as salary income) from Government. He has been
provided a rent-free unfurnished house at Hanuman Nagar by Q Ltd. Population of Hanuman Nagar is 11 lakh. House is
not owned by Q Ltd. Value of perquisite shall be determined at the rate of 15% of “salary” or Rs. 12,000 per month, being
rent of the house paid by Q Ltd., whichever is lower. Salary for this purpose includes salary paid by P Ltd., Q Ltd. and pension
paid by Government which comes to Rs. 8,61,600 (i.e., Rs. 2,40,000 + Rs. 72,000 + Rs. 4,32,000 + Rs. 21,600 + Government
pension of Rs. 96,000). 15% of salary is Rs. 1,29,240 which is less than rent paid by Q Ltd. Consequently, Rs. 1,29,240 is
chargeable to tax.
2. Contributions by P Ltd. and Q Ltd. towards recognized provident fund do not exceed 12% of salary. Interest credited in
provident fund account by the two employers does not exceed 9.5%. Consequently, these are not taxable.
53-E10 [P4.57]* X (age : 24 years) is offered an employment by PQR Ltd. at basic salary of Rs. 45,000 per month. Besides, he is
entitled for dearness allowance, forming part of salary, @ Rs. 3,000 per month, bonus (2 months’ basic pay) and city compensatory
allowance @ Rs. 10,000 per month. The company gives X an option to take a rent-free unfurnished house in Chennai for which the
company would directly bear rent of Rs. 8,000 per month, or to accept house rent allowance of Rs. 8,000 per month and find out own
accommodation. X decides to accept the house rent allowance and takes a house at Chennai at a rent of Rs. 8,000 per month. Examine
from the income-tax point of view whether X has made a wise choice?
53-P11 Mrs. X (30 years) is employed in Delhi by A Ltd., a private sector company. She gets Rs. 55,000 per month as salary and
Rs. 10,000 per month as hard furnishing allowance. Besides, A Ltd. provides her a rent-free house at Delhi (house is owned by A Ltd.
and original cost of furniture provided in the house is Rs. 90,000). However, A Ltd. recovers Rs. 500 per month as rent of the house with
effect from January 1, 2020. Besides, the company gives two months’ hard furnishing allowance as bonus.
The company has provided her a laptop with effect from December 1, 2019 (cost to the employer : Rs. 65,000) and a music system (cost
to the employer : Rs. 20,000) for her personal use. Mrs. X owns a 1200cc car, which is used by her for official and private purposes. The
employer company reimburses the entire expenditure of Rs. 44,000 during the previous year 2019-20. Log book of the car is not
maintained and it is not possible to find out expenditure attributable towards official use of the car.
Income of Mrs. X from other sources is Rs. 2,20,000. A Ltd. maintains recognized provident fund and contributes Rs. 6,000 per month
out of its pocket. Mrs. X, however, contributes Rs. 7,500 per month. Mrs. X deposits every year Rs. 30,000 in Sukanya Samriddhi
Account of her minor daughter. Find out the net income and tax liability of Mrs. X for the assessment year 2020-21.
exceed Rs. 50 lakh.
Solution :
Rs.
Salary (Rs. 55,000 × 12) 6,60,000
Hard furnishing allowance (Rs. 10,000 × 12) 1,20,000
Rent-free furnished house [see Note 1] 1,27,500
Bonus (Rs. 10,000 × 2) 20,000
Laptop (it is not chargeable to tax) Nil
Music system (10% per annum of Rs. 20,000 for 4 months) 667
Car [see Note 2] 22,400
Employer’s contribution towards recognized provident fund (nothing is taxable as it is less than 12% of
salary) Nil
Less: Deduction under section 80C (Rs. 7,500 × 12 + Sukanya Samriddhi Account : Rs. 30,000) 1,20,000
Tax on net income
Notes –
1. Salary for the purpose of computation of perquisite value in respect of rent-free house is Rs. 8,00,000 (i.e., Rs. 6,60,000 +
Rs. 1,20,000 + Rs. 20,000). House is owned by the employer and situated at Delhi. 15% of salary + 10% cost of furniture of
Rs. 90,000 is chargeable to tax which comes to Rs. 1,29,000. A Ltd. recovers Rs. 500 per month as rent of the house with effect
from January 1, 2020. Consequently, amount chargeable to tax is Rs. 1,27,500.
2. Mrs. X uses her own car for official and private purposes. A Ltd. has incurred an expenditure of Rs. 44,000. Out of this
amount attributable towards official use of the car is not taxable in the hands of Mrs. X. Log book of the car is not maintained.
A deduction at standard rate of Rs. 1,800 per month will be allowed for official use of the car and the remaining amount of
Rs. 22,400 is chargeable to tax.
53-E11 [P4.58]* X (age : 37 years), who is employed with LMN Ltd. up to October 31, 2019, gets the following salary and benefits:
Basic salary : Rs. 80,000 per month; bonus : Rs. 6,000 per month; club facility (expenditure of the company: Rs. 7,000 per month);
house rent allowance : Rs. 28,000 per month; employer’s contribution towards unrecognised provident fund : Rs. 8,000 per month
(X also makes a matching contribution).
On November 1, 2019, X joins DEF Ltd. on monthly salary of Rs. 1,20,000 and house rent allowance of Rs. 6,000 per month. Besides,
he enjoys club facility (expenditure of the company : Rs. 4,000 per month), car facility (expenditure of the company : Rs. 6,000 per
month) and employer’s contribution towards recognised provident fund : Rs. 9,600 per month (X also makes a matching
contribution).
On March 1, 2020, DEF Ltd. purchases a music system for Rs. 35,000 and the same is sold on the same day to X for Rs. 20,000.
Determine the taxable income and tax liability for the assessment year 2020-21 on the following assumptions :
1. Salary in both cases becomes due on the last day of each month.
2. He resides in Goa and pays rent of Rs. 12,000 per month throughout the previous year.
3. Car facility is used by X only for journey between office and residence and back.
4. Club facility is provided only for private benefit of X.
5. Income of X from other sources is Rs. 5,48,000.
6. X annually deposits Rs. 90,000 in public provident fund.
53-P12 X (50 years) is in the marketing department of A Ltd. He gets Rs. 80,000 per month as salary and Rs. 10,000 per month as
dearness allowance (100 per cent is considered as part of salary for calculating gratuity, provident fund, etc.). He gets a fixed commission
at the rate of Rs. 4,000 per month. He has been given stock appreciation rights by the employer company. On redemption of these rights
on November 30, 2019, X gets a sum of Rs. 6,00,000. It is calculated as follows–
Market price of shares of A Ltd. on the date of grant on January 1, 2019 : Rs. 900 per share.
Market price of shares of A Ltd. on the date of redemption on November 30, 2019 : Rs. 1,500 per share.
Amount received at the time of redemption (price difference of Rs. 600 per share × 1,000 shares) : Rs. 6,00,000.
exceed Rs. 50 lakh.
Shares are not allotted in the employer-company. But on the basis of performance of the company in stock market, he has been paid
Rs. 6,00,000 as redemption price of stock appreciation rights. He has been provided a rent-free unfurnished house in Kolkata. The house
is owned by the company. Find out the net income and tax liability of X for the assessment year 2020-21 on the assumption that X and
A Ltd. each contribute 12 per cent of basic salary towards recognized provident fund and X has income from other sources of Rs. 93,05,200.
Solution : Computation of value of stock appreciation rights - In the case of stock appreciation rights, shares are not allotted in
the employer-company. These rights are generally redeemed at the option of an employee and price difference of the shares
in the employer on two different dates (i.e., the date of grant and date of exercise) is given to the concerned employee in cash
or by cheque. In a layman’s language, the redemption price is nothing but a cash reward given to an employee, quantification
of which depends upon performance of shares of employer-company in stock markets. In the given problem, Rs. 6,00,000
is taxable. It will also be considered for the purpose of valuation of rent-free house, as it is not a perquisite.
Income of X will be computed as follows –
Rs.
Basic salary (Rs. 80,000 × 12) 9,60,000
Redemption of stock appreciation rights 6,00,000
Rent-free house [15% of (Rs. 9,60,000 + Rs. 1,20,000 + Rs. 48,000 + Rs. 6,00,000)] 2,59,200
Provident fund contribution by employer (not taxable) Nil
Any other income 93,05,200
Gross total income 1,12,42,400
Less: Deduction under section 80C (contribution to recognized provident fund) 1,15,200
Net income 1,11,27,200
Tax on net income
Income-tax 31,50,660
Less: Rebate under section 87A (not available as taxable income exceeds Rs. 5,00,000) Nil
Income-tax (after rebate under section 87A) 31,50,660
Add: Surcharge (applicable @ 15% of income-tax as taxable income exceeds Rs. 1 crore but does not
exceed Rs. 2 crore) 4,72,599
53-E12 [P4.59]* Mrs. X (49 years) receives from A Ltd. the following emoluments during the previous year ending March 31, 2020 :
Basic pay : Rs. 1,92,000, city compensatory allowance : Rs. 3,000 and commission : Rs. 12,000. Besides the aforesaid emoluments,
her employer provides free use of company’s car partly for official purposes and partly for private purposes for being used by Mrs.
X and her family members (expenditure of the employer : Rs. 43,000, cost of the car to the employer : Rs. 7,95,000), free water supply
(expenditure : Rs. 2,000) and free watchman (salary : Rs. 7,600). Rs. 3,000, being salary of a sweeper engaged by Mrs. X, is paid by
the employer. On an official tour of Mrs. X to Cochin, X accompanied her. Expenses incurred by the employer — air fare of Mrs. X
and X : Rs. 86,000, boarding and lodging of Mrs. X and X : Rs. 1,90,000. During this year, while Mrs. X contributes Rs. 96,000
towards recognised provident fund, her employer makes a contribution of Rs. 34,040. Income of Mrs. X from other sources is
Rs. 7,00,000. Mrs. X also pays insurance premium of Rs. 12,000 (policy taken in 2005) (sum assured : Rs. 80,000) on life insurance
policy of her major married son, Rs. 2,000 (sum assured : Rs. 40,000) on the life insurance policy of her husband and Rs. 1,000 on
the life insurance policy of her brother-in-law. Under the employees’ stock option scheme, Mrs. X has been allotted on March 31, 2020,
500 equity shares in A Ltd. @ Rs. 90 per share (market rate : Rs. 460 per share on the date of allotment and Rs. 372 on the date of
exercise of option).
Find out the taxable income and the tax liability of Mrs. X for the assessment year 2020-21.
53-P13 X (63 years) is production officer of Q Ltd., Bangalore. During the previous year he gets Rs. 7,20,000 as salary and Rs. 2,40,000
as dearness allowance (60 per cent is part of salary for calculating retirement benefits). Besides, he gets the following perks and
allowances –
Health club facility: Rs. 75,000 (this facility is available only to a few employees of the company).
Credit card facility: Rs. 30,000 (out of which Rs. 20,000 is for purchase of goods and Rs. 10,000 is annual fees, 90 per cent of goods
purchased for official use as per certificate given by the employer).
A painting purchased from company (cost of painting when purchased during September 2016 : Rs. 60,000, sold to X in June 2019 for
Rs. 10,000, during this period the painting was used for decoration purposes in company’s office). Current market value of the painting
is Rs. 2,50,000.
Gift of computer in February 2020 (it was purchased by company in May 2015 for Rs. 80,000; since then it was used in company’s office).
X contributes 12 per cent of his salary towards recognized provident fund. A matching contribution is made by the employer. Besides,
X deposits Rs. 70,000 in the public provident fund account of his daughter-in-law. Find out the net income of X for the assessment year
2020-21 on the assumption that income of X from other sources is Rs. 2,40,000.
Rs.
Dearness allowance 2,40,000
Health club facility [see Note 1] 75,000
Credit card facility [see Note 2] 3,000
Painting [see Note 3] 38,000
Gift of computer [see Note 4] Nil
Employer’s contribution towards recognized provident fund Nil
Less: Deduction under section 80C [see Note 5] 1,03,680
Notes –
1. Health club facility - It is chargeable to tax, as the facility is not available uniformly to all employees.
2. Credit card facility - As 90% expenses pertain to official purposes, 10% of Rs. 30,000 is chargeable to tax.
3. Purchase of painting - In the case of painting, normal wear and tear are calculated at the rate of 10% of actual cost for each
completed year. Painting is transferred after 2 years (+ a few months). Normal wear and tear for 2 years at the rate of 10%
per annum on actual cost of Rs. 60,000 come to Rs. 12,000. Balance amount is Rs. 48,000. It is transferred for Rs. 10,000. The
difference of Rs. 38,000 is taxable value of perquisite.
4. Gift of computer - Perquisite value of gift of computer shall be calculated as follows –
Rs.
Cost of computer to employer company in May 2015 80,000
Less: Normal wear and tear for the first year (50% of Rs. 80,000) 40,000
Written down value at the end of May 2016 40,000
Less: Normal wear and tear for the second year (50% of Rs. 40,000) 20,000
Less: Normal wear and tear for the third year (50% of Rs. 20,000) 10,000
Less: Normal wear and tear for the fourth year (50% of Rs. 10,000) 5,000
Value of computer gifted to X in February 2020 is Rs. 5,000. Gift-in-kind of Rs. 5,000 is not chargeable to tax.
5. Deduction under section 80C - Amount deposited in the public provident fund account of daughter-in-law is not deductible.
However, provident fund contribution [i.e., 12% of (Rs. 7,20,000 + 60% of Rs. 2,40,000)] is deductible.
53-E13 [P4.60]* X is offered an employment by ABC (P.) Ltd. with the following two alternatives :
I II
Rs. Rs.
Basic pay 6,96,000 6,96,000
Transport allowance for private use including commutation between office and residence 19,200 —
Conveyance facility for private use of X and his family members — 19,200
Entertainment allowance 1,12,000 —
Club facility — 1,12,000
School books allowance for one child 18,200 —
Reimbursement of education expenses of one child — 18,200
Servant allowance 42,000 —
Free sweeper — 42,000
A rent-free unfurnished house owned by employer-company at Pune (population : 25 lakh),
market rent : 80,000 80,000
Which of the two alternatives X should opt for on the assumption that both employer and employee will contribute 20 per cent of the
basic pay towards unrecognised provident fund.
53-P14 X (47 years) is employed by PQR Chemicals Ltd., Chennai. From the information given below, find out net income and tax
liability of X for the assessment year 2020-21 –
Basic salary : Rs. 45,000 per month, commission at the rate of Rs. 5,000 per month, dearness allowance : Rs. 8,000 per month (3/4 is
part of salary for computing pension but only 60 per cent is part of salary for computing other retirement benefits, like provident fund,
gratuity, etc.), house rent allowance : Rs. 8,000 per month and tiffin allowance : Rs. 6,000 per month (but only with effect from March
1, 2020).
He resides in a rented accommodation at 164, T. Nagar, Chennai (rent being Rs. 10,000 per month). However, the employer-company
acquires this property from the landlord on January 31, 2020 and the same house is allotted as a rent-free unfurnished house to X without
charging him any rent. House rent allowance is discontinued on the same day.
X contributes Rs. 5,000 per month towards recognized provident fund. Contribution by the employer company is not more than 12 per
cent of salary. Provident fund interest is credited at the rate of 9.5 per cent which comes to Rs. 72,000 for the previous year 2019-20.
X pays (since 2008) life insurance premium on the life of his married daughter (annual insurance premium being Rs. 10,000, sum assured
Rs. 95,000, premiums which became due on May 15, 2018 and May 15, 2019 are paid during the previous year 2019-20). Income of
X from other sources is Rs. 1,40,000. X purchases NSC VIII issue of Rs. 50,000 during the previous year 2019-20. Besides, he gets a
pension of Rs. 5,000 per month from the previous employer with whom X was employed till 2000.
Solution :
Rs.
Basic salary (Rs. 45,000 × 12) 5,40,000
Commission (Rs. 5,000 × 12) 60,000
Rent-free house [15% of salary of Rs. 1,25,600, see Note 2] 18,840
Provident fund contribution by employer (not taxable as it is not more than 12% of salary) Nil
Provident fund interest (not taxable as rate of interest does not exceed 9.5%) Nil
Pension from previous employer (Rs. 5,000 × 12) 60,000
Less: Deduction under section 80C [(Rs. 5,000 × 12) + (Rs. 10,000 × 2, but subject to maximum of
20% of sum assured of Rs. 95,000) +(Rs. NSC : Rs. 50,000)] 1,29,000
Net income 7,71,640
Tax on net income
Income-tax† 66,828
Notes –
1. House rent allowance - X gets house rent allowance at the rate of Rs. 8,000 per month up to January 31, 2020. Salary for the
purpose of house rent allowance shall be calculated as follows –
Rs.
Basic salary (Rs. 45,000 × 10) 4,50,000
Commission (fixed commission is not included) Nil
Total 4,98,000
Exempt house rent allowance shall be calculated as follows –
a. Rs. 2,49,000 (i.e., 50% of Rs. 4,98,000);
b. Rs. 80,000 (i.e., house rent allowance of Rs. 8,000 per month for 10 months);
c. Rs. 50,200 [being excess of rent paid (i.e., Rs. 10,000 × 10) over 10% of Rs. 4,98,000],
whichever is lower is exempt. Rs. 50,200 is exempt under section 10(13A) and Rs. 29,800 is chargeable to tax.
2. Rent-free house - Rent-free house is allotted with effect from January 31, 2020. It is owned by the employer. 15% of salary,
which is calculated below, is chargeable to tax –
exceed Rs. 50 lakh.
Rs.
Basic salary (Rs. 45,000 × 2) 90,000
Commission (Rs. 5,000 × 2) 10,000
Pension from the previous employer (Rs. 5,000 × 2) 10,000
Total 1,25,600
53-E14 [P4.61]* X (age : 37 years) is employed by an Indian company in Bombay. During the previous year 2019-20, he is posted
in the London branch of the company for 4 months (i.e., June 2019 to September 2019). Determine the taxable income and tax liability
for the assessment year 2020-21 with the following data :
Rs.
Salary of 8 months of service in Bombay 1,24,000
Salary of 4 months of service in London (salary of June-August 2019 is paid in London, whereas salary of
September 2019 is paid in Bombay) 4,96,000
House rent allowance of 8 months paid in Bombay (rent paid : Rs. 10,000 × 8) 80,000
Employer’s contribution towards recognised provident fund 20,000
X’s contribution towards recognised provident fund 70,000
Conveyance facility in London (50% of which is attributable towards use of car by X and his family members) 79,000
Payment of insurance premium on own life policy since 2008 (sum assured : Rs. 1,00,000) 12,000
Income of X from other sources in India 3,05,710
From 2009-10 to 2018-19, he was posted in the London branch of the company. On March 10, 2020, the employer sells an air-
conditioning system for Rs. 10,500 (it was purchased by the company for business purposes on April 10, 2017 for Rs. 60,500).
➠ 53-P15 X (age : 62 years) is in the Central Government service till his retirement on May 31, 2014 when he joins A Ltd. During
the previous year 2019-20, he gets the following from A Ltd. —
Basic salary : Rs. 20,000 per month ; dearness allowance : Rs. 2,000 per month (half of which is part of salary for retirement purposes);
overtime allowance up to May 31, 2019 : Rs. 2,000 per month; helper allowance for office use : Rs.1,000 per month (expenditure :
Rs. 800 per month); medical bills reimbursement : Rs. 44,000 (out of which Rs.12,000 is in respect of treatment in a Government hospital);
free gas and electricity only for personal use : Rs. 24,000; free telephone at residence : Rs. 9,000; free lunch in office : Rs.15,000 (amount
paid directly to canteen @ Rs. 50 per day for 300 days); interest-free loan for purchasing a house (repayable in 3 years) given on October
1, 2019 : Rs. 2,00,000 (employer’s cost of capital is @ 14 per cent, SBI lending rate on April 1, 2019 : 10.10 per cent); earned leave
encashment : Rs.16,000 (as per service rules X is entitled for 2 days leave for each month of service and during 2019-20, X has encashed
24 days leave earned during the year); mediclaim insurance on life of X : Rs. 5,060 ; reimbursement of mediclaim insurance premium
on the life of X’s brother who is not dependent upon X : Rs. 4,100; leave travel concession for X and his family : Rs.12,300 (no journey
is undertaken). Up to May 31, 2019, X has been paid house rent allowance Rs. 4,000 per month (rent paid at Delhi : Rs. 4,000 per month).
With effect from June 1, 2019, he has been provided rent-free furnished house at Saket, New Delhi whose lease rent is Rs.15,000 per month
(cost of furniture provided with effect from September 15, 2019 : Rs.1,40,000). Further, A Ltd. bears the following expenses in respect
of the house – repairs of house : Rs. 6,000 and rent of air- conditioning system : Rs. 9,000 (for the summer of 2019).
Income of X from other sources is Rs. 2,71,483 (which includes Government monthly pension of Rs. 9,167, it comes to Rs. 1,10,000 for
the whole year).
Find out the taxable income and tax liability of X for the assessment year 2020-21 on the assumption that X annually contributes
Rs. 30,000 towards recognised provident fund and Rs.1,10,000 towards public provident fund.
Solution : Rs. Rs.
Basic salary (Rs. 20,000 × 12) 2,40,000
Overtime allowance (Rs. 2,000 × 2) 4,000
Helper allowance [(Rs.1,000 — Rs. 800) × 12] 2,400
Medical bills reimbursement 44,000
Less : Reimbursement of Government hospital bills 12,000 —
Balance 32,000
Less : Amount not taxable Nil 32,000
Free gas and electricity 24,000
Free residential telephone (not taxable) [see Note 3] —
Free lunch [(Rs. 50 – Rs. 50) × 300] Nil
Earned leave encashment [see Note 4] 16,000
Rs. Rs.
Mediclaim insurance on the life of X [see Note 5] —
Mediclaim insurance on the life of X’s brother not dependent on X [see Note 5] 4,100
Leave travel concession [see Note 6] 12,300
Interest-free loan (10.10% of Rs. 2,00,000 from October 1, 2019 to March 31, 2020) 10,100
Rent free furnished house [see Note 2] 64,133
Pension from Government 1,10,000
Less : Deduction under section 80C [see Note 8] 1,40,000
Tax† 13,744
Add: Surcharge (surcharge is applicable only if net income exceeds Rs. 50 lakh) Nil
Tax and surcharge 13,744
Add : Health and education cess (4% of tax and surcharge) 550
Notes —
1. House rent allowance - Salary for this purpose is Rs. 21,000 (being basic salary : Rs. 20,000 + 50% of dearness allowance) per
month. Amount exempt from tax is calculated as follows —
a. Rs. 10,500 per month (being 50% of “salary”) ;
b. Rs. 4,000 per month (being house rent allowance) ; or
c. Rs. 1,900 per month (being the excess of rent paid over 10% of salary, i.e., Rs. 4,000 — Rs. 2,100).
The least of the three sums is Rs.1,900 per month. Amount taxable is Rs. 4,200 [i.e., (Rs. 4,000 — Rs. 1,900) × 2].
2. Rent free house - With effect from June 1, 2019, X has been provided a house by the employer. “Salary” for the period June
1, 2019 to March 31, 2020 for the purpose of valuation of the perquisite is as follows —
Rs.
Basic salary (Rs. 20,000 ×10) 2,00,000
Helper allowance (Rs. 200 × 10) 2,000
Earned leave encashment (20 days leave) 13,333
Pension from Government (Rs. 1,10,000 ÷ 12 × 10) 91,667
Salary 3,17,000
Lease rent of 10 months 1,50,000
Value of unfurnished house (15% of salary or lease rent, whichever is lower) 47,550
Add : Value of furniture (10% per annum of Rs. 1,40,000 from September 15, 2019 to March 31, 2020) 7,583
Add : Rent of air-conditioning system 9,000
Value of furnished house 64,133
3. Free telephone at residence is not chargeable to tax.
4. Leave encashment taken while in service is taxable without any exemption. Since in this case, leave earned during the
current year is encashed, the same is taken into consideration in order to determine the perquisite value of furnished house.
5. Mediclaim insurance premium paid by employer on the life of X is not taxable. However, the same on the life of X’s brother
is taxable as the brother is not dependent upon X.
6. Leave travel concession is not exempt, as no journey is undertaken by X.
7. Expenditure incurred in respect of house repairs is not chargeable to tax.
8. X is entitled to Rs. 1,40,000 deduction under section 80C on account of contribution to recognised provident fund and
public provident fund.
53-E15 Find out the tax liability of X in problem 53-P15 if equity share in A Ltd. are held by the Central Government : 30 per cent,
Punjab Government : 4 per cent, RBI : 2 per cent and A and his family members : 64 per cent. Does it make any difference if X is
employed by a society which is mainly financed by the Government of India ?
53-P16 X (age : 48 years) is in the service of A Ltd. since 1980. He dies on January 31, 2020. The following information is available —
Basic salary : Rs. 20,000 per month; dearness allowance : Rs. 6,000 per month (40 per cent of which is included for the purpose of
determining retirement benefit); transport allowance : Rs. 4,600 per month (out of which only Rs. 600 is used for the journey between
office and residence ; the remaining amount is not spent); and entertainment allowance : Rs. 1,000 per month. He contributes 15 per
cent of basic salary towards recognised provident fund and A Ltd. also makes a matching contribution. Interest is credited at the rate
of 8 per cent. X contributes Rs. 1,00,000 towards PPF on January 5, 2020.
After the death of X, his legal heirs (i.e., Mrs. X and her children) get the following payments from A Ltd.—
1. Salary for the month of January 2020.
2. Family pension : Rs. 10,000 per month.
3. Encashment of leave standing to the credit of X on January 31, 2020 : Rs. 2,40,000 (as per service rules X is entitled for 45 days leave
for each year of service).
4. Provident fund balance : Rs. 41,90,000.
5. Gratuity : Rs. 12,60,000 (X is not covered by the Payment of Gratuity Act, 1972, nor is there any agreement with the employer to
get gratuity).
X is a doctor. He runs a small clinic near his residence which is discontinued after the death of X. His income (computed on receipt basis)
from the clinic for the period April 1, 2019 to January 31, 2020 is Rs. 9,83,000.
After the discontinuation of the clinic, Mrs. X recovers some of the outstanding bills issued by X (amount recovered during February
1, 2020 to March 31, 2020 : Rs. 2,93,000). Mrs. X does not have any other income. On March 30, 2020, Mrs. X withdraws Rs. 9,40,000
being the balance in account of X in National Saving Scheme, 1987.
Assuming that salary, allowances and pension become “due” on the last day of the month, find out —
a. who will be chargeable to tax in respect of the aforesaid receipts ?
b. net income and tax liability for the assessment year 2020-21.
Solution : Income and tax computation of X
Rs.
Basic salary (Rs. 20,000 × 10) 2,00,000
Entertainment allowance (Rs. 1,000 × 10) 10,000
Employer’s contribution to recognised provident fund in excess of 12% of salary [i.e., 15% of
Rs. 2,00,000 — 12% of (Rs. 2,00,000 + 40% of dearness allowance)] 3,120
Business income 9,83,000
Tax on Rs. 11,22,120† 1,49,136
Add: Surcharge (surcharge is applicable only if net income exceeds Rs. 50 lakh) Nil
Income and tax computation of Mrs. X
Salary of X of January 2020 (it is taxable as income of X) —
Family pension (i.e., Rs. 10,000 × 2) 20,000
Leave encashment [see Note 1] —
Provident fund (not taxable) —
Gratuity [see Note 2] —
Withdrawal of balance from NSS 1987 [see Note 3] —
Gross income under the head “Income from other sources” 20,000
Less : Deduction under section 57 in respect of family pension (i.e., 1/3 of Rs. 20,000 or Rs. 15,000,
whichever is lower) 6,667
Rs.
Income from other sources 13,333
Professional income (being recovery from patients after the death of X [Note 2, point (d)] 2,93,000
Tax 2,817
Less: Rebate under section 87A (100% of tax or Rs. 12,500, whichever is lower) 2,817
Balance Nil
Add: Surcharge Nil
Tax Nil
Add : Health and education cess (4% of tax and surcharge) Nil
Tax liability (rounded off) Nil
Notes :
1. Leave encashment paid to legal heirs in respect of earned leave is not taxable.
2. Gratuity received by Mrs. X (after the death of X) cannot be construed as income in the hands of X. The same is not “income”
in the hands of Mrs. X and other legal heirs. One may argue that the exemption under section 10(10)(iii) is available even
if the recipient of gratuity is widow of the employee. But the exemption provision cannot enlarge the scope of term “income”.
Merely because an exemption is available one cannot claim that the receipt is chargeable to tax. In this context, it is of interest
to refer the following :
a. salary income is taxable either on “due” basis or on “receipt” basis, whichever comes earlier. “Gratuity” does not become
due during the life time of X , nor is it paid to him before his death. It cannot be included in the income of X. As per section
159, when a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable
if he had not died and all the provisions of the Act apply accordingly. However, the legal representative is not liable for
payment of tax on income that had not accrued to the deceased till his death—Arvind Bhogilal v. CIT [1976] 105 ITR 764
(Bom.);
b. the Central Board of Direct Taxes has clarified that a lump sum payment made gratuitously or by way of compensation
or otherwise to the widow or other legal heirs of an employee, who dies while still in active service, is not taxable—
Circular No. 573, dated August 21, 1990 ;
c. the Central Board of Direct Taxes in its Circular Letter No. F35/1/65-IT(B), dated November 5, 1965, has clarified that
salary paid to legal heirs of deceased employee in respect of earned leave is not taxable in the hands of the legal heirs (on
the same analogy gratuity is not “income”) ;
d. under section 176(4), where any profession is discontinued on account of death of the person carrying on the profession,
any sum received after the discontinuance shall be deemed to be the income of the recipient (to tax gratuity in the hands
of legal heirs, a similar provision has not been made) ;
e. the Central Board of Direct Taxes has further clarified in Circular No. 743, dated May 6, 1996 (in the context of taxability
of unutilised deposit under the Capital Gains Deposit Account Scheme in the hands of legal heirs) that the amount is not
taxable in the hands of legal heirs as the unutilised portion of the deposit does not partake the character of income in their
hands but is only a part of the estate devolving upon them.
On the basis of aforesaid reasoning, it can be said that gratuity received by Mrs. X is not “income” in her hands.
3. Amount withdrawn from the National Saving Scheme, 1987 is taxable in the hands of recipient. If, however, the amount
is received by legal heirs after the death of the depositor, it is not taxable in the hands of deceased or his legal heirs—Circular
No. 532, dated March 17, 1989.
4. Income-tax return of X will be submitted by Mrs. X, as legal heirs of X.
5. Transport allowance for commuting between office and residence is not exempt.
6. X is entitled to deduction under section 80C of Rs. 1,30,000 (i.e., 15% of Rs. 2,00,000, as contribution to recognised provident
fund and PPF contribution of Rs. 1,00,000)
53-E16 Find out the tax liability of X and Mrs. X if salary, allowances and pension become due on the first day of the next month
in problem 53-P16 and X dies on February 1, 2020.
➠ 53-P17 X (46 years) is a sales manager in A Ltd. During the previous year 2019-20, he gets the following from A Ltd. :
Salary/allowances - Basic salary : Rs. 60,000, dearness allowance : 10 per cent of basic salary (43 per cent of dearness allowance is part
of salary for computing all retirement benefits, but 70 per cent is considered for computing gratuity); dearness pay : Rs. 2,000 (not being
part of salary) ; commission @ 4.8 per cent of turnover achieved by X (turnover achieved by X during 2019-20 : Rs. 10,00,000) ;
entertainment allowance : Rs. 6,000 ; conveyance allowance : Rs. 8,000 (just 10 per cent is used for official purposes) ; education allowance
for two children : Rs. 3,600 (@ Rs. 150 per month per child) ; hostel expenditure allowance for elder son: Rs. 1,100 (@ Rs. 550 per month
only from February 1, 2020) ; employer’s contribution towards recognised provident fund : Rs. 10,800 ; credit of interest on July 7, 2019
in the provident fund account of X @ 11.5 per cent : Rs. 23,000; medical allowance : Rs. 6,000 @ Rs. 500 per month (expenditure incurred
is approximately Rs. 125 per month); lunch allowance : Rs. 9,000 ; uniform allowance: Rs. 24,000 (expenditure incurred on purchase
of uniform for office use : Rs. 16,750, maintenance of such uniform: Rs. 3,000) ; transfer allowance : Rs. 3,000 (it is paid at the time of
his transfer to Sikkim on December 1, 2019, for two months for conducting market research, amount used for meeting his expenditure
on transfer: Rs. 900); allowance for conducting market research in Sikkim : Rs. 20,000 (amount spent for this purpose : Rs. 11,700) ;
and remote area allowance for Sikkim : Rs. 7,550 (@ Rs. 3,775 per month for two months) [out of remote area allowance, Rs. 1,300 per
month is exempt under section 10(14)].
Perquisites - House at Delhi throughout the previous year — lease rent of the house : Rs. 80,000, rent paid by X : Rs. 3,000 ; expenditure
on providing car facility only for his personal use : Rs. 16,000 ; free refreshment during office hours : Rs. 4,000 ; free lunch during working
hours in a remote area in Sikkim: Rs. 9,710; expenditure on giving training to X for updating his knowledge of market research before
undertaking such research : Rs. 6,000 ; leave travel concession for X and his family: Rs. 58,770 (travel by air by business class : Rs. 24,300,
boarding and lodging expenses: Rs. 29,400, other expenses : Rs. 5,070, as per company’s rule such concession is available twice in a block
of four years, economy class air fare for covering the same distance: Rs. 13,640) ; bonus: Rs. 15,000 and expenses on maintenance of garden
(including salary to gardener Rs. 3,000) : Rs. 10,000.
Investments - Contribution of X towards recognised provident fund @ 18 per cent of basic salary : Rs. 10,800 ; public provident fund
contribution : Rs. 30,000 ; deposit in home loan account scheme of the National Housing Bank : Rs. 24,000 and insurance premium on
life of major married daughter of X who is not dependent upon X : Rs. 4,240 (sum assured : Rs. 72,000).
Other income - Interest on company deposit : Rs. 9,00,000 (net of tax deducted at source @ 10 per cent) received on December 10, 2019.
Pre-paid tax - Tax deducted by A Ltd. : Rs. 500 and tax deducted at source on interest : Rs. 1,00,000.
Determine the amount of net income and net tax liability for the assessment year 2020-21. Does it make any difference if commission
is payable @ Rs. 4,000 per month ?
Solution : If commission is If commission is Salary for the
payable @ 4.8 payable @ purpose of
per cent of Rs. 4,000 valuation of
turnover per month rent-free house
Rs. Rs. Rs.
Basic salary 60,000 60,000 60,000
Dearness pay 2,000 2,000 —
Commission 48,000 48,000 48,000
Entertainment allowance 6,000 6,000 6,000
Conveyance allowance 7,200 7,200 7,200
Education allowance (i.e., Rs. 3,600 — Rs. 2,400) 1,200 1,200 1,200
Hostel expenditure allowance (i.e., Rs. 1,100 — Rs. 300 × 2) 500 500 500
Employer’s contribution towards recognised provident fund [i.e.,
Rs. 10,800 to the extent it is in excess of 12% of (Rs. 60,000 +
Rs. 2,580 + Rs. 48,000 or Rs. 60,000 + Rs. 2,580 + Nil)] Nil 3,290 —
Provident fund interest [Rs. 23,000 × 2/11.5] 4,000 4,000 —
Medical allowance (medical allowance is fully taxable) 6,000 6,000 6,000
Lunch allowance 9,000 9,000 9,000
Uniform allowance (i.e., Rs. 24,000 — Rs. 19,750) 4,250 4,250 4,250
Transfer allowance (i.e., Rs. 3,000 — Rs. 900) 2,100 2,100 2,100
Research allowance (i.e., Rs. 20,000 — Rs. 11,700) 8,300 8,300 8,300
Remote area allowance (i.e., Rs. 7,550 — Rs. 1,300 × 2 - see
para 42.3) 4,950 4,950 4,950
Residential house [see Note 1] 23,262 23,262 —
Car facility 16,000 16,000 —
Free refreshment [tax free] — — —
Free lunch in remote area (not taxable) — — —
Expenditure on training of X — — —
Leave travel concession (i.e., Rs. 58,770 — Rs. 13,640) 45,130 45,130 —
Bonus 15,000 15,000 15,000
Garden expenses 10,000 10,000 —
Gross salary 2,78,892 2,82,182 1,75,080
Less : Standard deduction 50,000 50,000 —
Income from salary 2,28,892 2,32,182 —
Interest on company deposits (i.e., Rs. 9,00,000 + Rs. 1,00,000) 10,00,000 10,00,000 —
Gross total income 12,28,892 12,32,182 —
Less : Deductions under section 80C [see Note 2] 69,040 69,040 —
149 Theoretical problems on computation of salary income Problem 54-P1
If commission is If commission is Salary for the

payable @ 4.8 payable @ purpose of
per cent of Rs. 4,000 valuation of
turnover per month rent-free house
Rs. Rs. Rs.
Net income (rounded off) 11,59,850 11,63,140 —
Tax on net income
Tax 1,60,455 1,61,442 –
Less: Rebate under section 87A Nil Nil –
Balance 1,60,455 1,61,442 –
Add: Surcharge (not applicable as taxable income does not
exceed Rs. 50 lakh) Nil Nil –
Tax and surcharge 1,60,455 1,61,442 –
Add : Health and education cess (4% of tax and surcharge) 6,418 6,458 –
Tax liability 1,66,873 1,67,900 –
Less : Pre-paid taxes (i.e., Rs. 500 + Rs. 1,00,000) 1,00,500 1,00,500 —
Refund (rounded off) 66,370 67,400 —
Notes : 1. Valuation of the perquisite in respect of residential house - While the lease rent is Rs. 80,000, salary for the purpose of
valuation is Rs. 1,75,080. Rs. 26,262 (15% of salary) is taxable value of the perquisite if no rent is charged by the employer.
Rs. 23,262 (i.e., Rs. 26,262 — Rs. 3,000, being rent charged) is the value of concession in rent.
2. Deduction under section 80C Rs.
Contribution to recognised provident fund 10,800
Contribution to public provident fund 30,000
Deposit in home loan account scheme of National Housing Bank 24,000
Insurance premium on the life of major married daughter 4,240
Total deduction 69,040
➠ 53-E17 [P4.62]* Mrs. X (age : 55 years), an employee-director of XYZ Ltd., submits the following information relevant for the
Salary : Rs. 8,00,000 ; entertainment allowance : Rs. 20,000 ; bonus : Rs. 1,60,000 ; education allowance : Rs. 3,000 (for her grand
children), IT penalty paid by employer : Rs. 8,000 ; leave travel concession : Rs. 80,000 ; free residential telephone : Rs. 17,500 ; free
refreshment during office hours : Rs. 12,000 ; payment of electricity bills by employer : Rs. 11,000 ; reimbursement of gas bills : Rs.
4,500 ; professional tax paid by Mrs. X : Rs. 2,000 ; furnished flat owned by the employer at concessional rate at Cochin (population
: 31 lakh)—fair rent of the house : Rs. 40,800 ; cost of maintenance : Rs. 2,000, salary of two watchmen : Rs. 10,000, salary of personal
attendant : Rs. 21,200, rent of air-conditioner : Rs. 12,000, cost of furniture : Rs. 48,000 ; Maruti 800cc car owned by the employer
for official and personal use—depreciation of the car : Rs. 40,000 ; maintenance of car : Rs. 78,000, salary of driver : Rs. 72,000 (10
per cent of the expenditure is attributable for the journey between office and residence and back) ; arrears of bonus of 2009-10 (not
taxed earlier) : Rs. 70,000, payment of delegation fee to FICCI for attending All India Conference of Corporate Managers and Tax
Executives : Rs. 6,000 ; employer’s contribution towards recognised provident fund : Rs. 75,000, interest credited in PF account @
14 per cent : Rs. 2,12,000 (credited on June 10, 2019) ; dividend from XYZ Ltd., a foreign company : Rs. 91,50,000 ; and agricultural
income from Nepal : Rs. 8,00,000.
During the year, Mrs. X makes the following contribution and expenditure : (a) rent of furnished house paid to the employer :
Rs. 14,000, (b) payment in respect of use of Maruti car : Rs. 3,000, as per service rule Mrs. X has to pay an amount equal to Rs. 1.60
per km., whenever car is used for personal purposes ; however, nothing is payable in respect of journey from office to residence and
back, (c) contribution towards recognised provident fund : Rs. 67,200, (d) insurance premium (since 2006) for a policy of Rs. 45,000
on the life of her husband : Rs. 10,400, (e) insurance premium for a policy of Rs. 10,000 on the life of her father : Rs. 4,000, and (f)
expenditure on fare : Rs. 86,000. Calculate the net income and tax liability of Mrs. X for the assessment year 2020-21. X owns a
residential house in Cochin which is vacant, as a suitable tenant is not available.
 Theoretical problems on computation of salary income

➠ 54-P1 The term “perquisites” has been defined by section 17(2) under eight different clauses as including the following items —
a. rent-free house [sec. 17(2)(i)] ;
b. concession in the matter of rent [sec. 17(2)(ii)] ;

c. any benefit in the case of a specified employee [sec. 17(2)(iii)] ;
d. expenditure on meeting employee’s obligation [sec. 17(2)(iv)] ;
e. any sum to effect an assurance on the life of an employee [sec. 17(2)(v)] ;
f. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former
employer, free of cost or at concessional rate to the assessee [sec. 17(2)(vi)];
g. the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds
Rs. 1.50 lakh [sec. 17(2)(vii)]; and
h. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)(viii)].
Discuss in which year these perquisites are chargeable to tax.
Solution : The statute has used the word “provided” in sub-clauses (i), (ii), (iii) of section 17(2), “paid” in sub-clause (iv),
“payable” in sub-clause (v) of section 17(2) and allotted in sub-clause (vi) of section 17(2).
In other words, perquisites mentioned in sub-clauses (i), (ii) and (iii) of section 17(2) are taxable when they are provided by
the employer. Perquisite mentioned in sub-clause (iv) of section 17(2) is taxable only when the sum is actually paid by the
employer. Perquisites of the nature specified in sub-clause (v) of section 17(2) are taxable when the sum mentioned becomes
payable (even if not paid by the employer during the previous year). Perquisite of the nature specified in sub-clause (vi) of
section 17(2) are taxable when sweat equity shares or ESOP shares are allotted to the employee.
On the basis of the aforesaid discussion, the following conclusions can be drawn :
1. If an assessee has been provided rent-free accommodation by his employer, he is chargeable to tax, even though he may
not have utilised it. To put it differently, if an assessee is provided with rent-free house by the employer, and he has not
foregone or waived his right at the time when it is so provided, the perquisite has to be brought to charge—CIT v. Bawa Singh
Chauhan [1984] 150 ITR 8 (Delhi). A similar rule is applicable in the case of concession in rent [sec. 17(2)(ii)] and other benefits
and amenities such as free gas, free water supply [sec. 17(2)(iii)].
2. Any obligation of an employee met by his employer is taxable only when such sum is actually paid by the employer. If
an obligation of the employee has become due and, as per employment contract, is to be paid by the employer, it is taxable
only when sum is actually paid by the employer [sec. 17(2)(iv)]. For instance, electricity bills of an employee are to be paid
by his employer. The due date of payment is March 25, 2020 whereas it is actually paid by the employer on April 10, 2020.
It is taxable as perquisite for the previous year 2020-21.
3. Any sum [mentioned in section 17(2)(v)] is taxable when such sum becomes due for payment, even if it is not actually paid
during the previous year. For instance, as per contract of employment, life insurance premium on the life of X is to be paid
by his employer-company. The due date of insurance premium is March 25, 2020, whereas the insurance premium is actually
paid by the employer on April 10, 2020. The perquisite will be taxable as income of the previous year 2019-20.
4. The perquisite in respect of sweat equity shares [mentioned in section 17(2)(vi)] is taxable when such shares are allotted
or transferred to the employee, even if the grant date or the date of vesting of the option or the date of exercise of the option
falls in a year earlier than the previous year in which shares are allotted.
➠ 54-E1 State, giving reasons, whether the following are correct or incorrect :
1. X has been provided a furnished flat in Delhi by his employer A Ltd. X has occupied the flat. However, during the previous year
2019-20, he could not use it. The perquisite in respect of rent-free flat is not taxable for the assessment year 2020-21.
2. Y is employed by A Ltd. As per terms of employment, insurance premium on the life of Y is payable by A Ltd. Insurance premium
due on March 16, 2020 is paid by A Ltd. on April 5, 2020. It is taxable in the hands of Y for the assessment year 2020-21.
3. Z is employed by B Ltd. As per contract of employment, B Ltd. will pay water bills of Z. Water bill which becomes due on March
10, 2020 is paid by B Ltd. on April 6, 2020. It is taxable in the hands of Z for the assessment year 2020-21.
➠ 54-P2 Discuss “profits in lieu of salary”.
Solution : “Profits in lieu of salary” is defined by section 17(3). These payments are made to an employee in lieu of or in
addition to salary. These are the following —
 Compensation for loss of employment or modification of the employment terms - Compensation for loss of employment or
modification of terms of employment is generally treated as a capital receipt. But by virtue of section 17(3)(i), any
compensation due to or received by an assessee from his employer or former employer at or in connection with the
termination of his employment or modification of terms of employment is taxable as profit in lieu of salary. It is taxable on
“due” or “receipt” basis, whichever comes earlier. The recipient may claim exemption under section 10(10B) or 10(10C) [see
paras 41 and 41.5].
The following are the salient features —
a. compensation is received by an assessee from his employer or former employer ;
b. it is received at or in connection with termination of his employment or modification of terms and conditions relating
thereto.
 Payment from unrecognised provident or unapproved superannuation fund - At any given time, accumulated balance in any
provident fund/superannuation fund consists of the following —
a. employer’s contribution ;
b. interest on employer’s contribution ;
151 Theoretical problems on computation of salary income Problem 54-P3
c. employee’s contribution ; and

d. interest on employee’s contribution.
The first two are taxable as “profits in lieu of salary” subject to the following propositions —
1. The provident fund/superannuation fund is an unapproved fund.
2. These are taxable at the time of payment to the assessee [as the word “payment” is used in section 17(3)(ii)]. In other words,
employer’s contribution to unrecognised provident/superannuation fund is not taxable in the year in which contribution
is made but is taxable when payment becomes due or payment is actually made to an employee. Similarly, interest on
employer’s contribution is not taxable in the year in which the amount is credited to the provident fund account but in the
year in which payment becomes due or the payment is made. It may be noted that interest on employee’s contribution is
taxable under the head “Income from other sources”.
 Payment under Keyman insurance policy - Any sum received under Keyman insurance policy (including the sum allocated
by way of bonus on such policy) is taxable as “profits in lieu of salary”.
 Any payment before or after employment - Any sum due or received (whether in lump sum or otherwise) by an assessee before
his joining any employment or after cessation of his employment will be taxable as “profits in lieu of salary”.
 Any other payment - Any other payment (other than what is exempt under different clauses of section 10) due to or received
by an assessee from his employer (or former employer) is treated as “profits in lieu of salary”. For instance, medical
allowance is taxable as “profits in lieu of salary”.
Exemption is, however, available in respect of following—
a. payment of gratuity exempted under section 10(10) [see para 41.2] ;
b. payment of house rent allowance exempted under section 10(13A) [see para 42.1] ;
c. payment of commuted pension exempted under section 10(10A) [see para 41.3] ;
d. payment of retrenchment compensation exempted under section 10(10B);
e. payment from an approved Superannuation Fund under section 10(13) ;
f. payment from statutory provident fund or public provident fund ;
g. payment from recognised provident fund to the extent it is exempt under section 10(12) [see para 46].
54-E2 State, giving reasons, whether the following are “true” or “false”.
1. “Profits in lieu of salary” is taxable under the head “Income from other sources”.
2. Compensation payable to an employee on termination of service is a capital receipt. It is, therefore, not chargeable to tax.
3. Compensation for voluntary retirement [to the extent it is not exempt under section 10(10C)] is treated as “profits in lieu of salary”.
4. Employer’s contribution to unrecognised provident fund is taxable as “profits in lieu of salary” in the year in which contribution
is made by the employer.
5. Bonus received on Keyman insurance policy taken by the employer and assigned in favour of the employee is taxable under the head
“Income from other sources”.
6. “Overtime allowance” is taxable as “profits in lieu of salary”.
➠ 54-P3 What is “transferred balance” when unrecognised provident fund is recognised ? Discuss the tax treatment with the help of
a simple illustration.
Solution :
What is “transferred balance” - An organisation maintains unrecognised provident fund. The organisation has obtained
recognition to its provident fund with existing balances during the previous year. The amount transferred from unrecognised
provident to recognised provident fund is “transferred balance”.
How much of the “transferred balance” is taxable - In order to discuss the tax treatment of “transferred balance”, one has to keep
in mind the following in respect of recognised provident fund vis-a-vis unrecognised provident fund —
Recognised provident fund Unrecognised
provident fund
Employer’s contribution The amount in excess of 12% of employee’s salary is taxable in the year Not taxable in the year of
of making contribution contribution
Credit of interest Amount in excess of 9.5% per annum is taxable in the year in which it Not taxable in the year in
in provident fund is credited. which amount is credited.
Of all the sums comprised in the transferred balance, the amount, which would have been liable to tax if the provident fund
had been recognised from the date of the institution of the fund, shall be deemed to be the income received by the employee
in the previous year in which recognition of the fund takes effect. The remaining amount is not chargeable to tax. No other
relief or exemption is granted.
To put it differently, it will be assumed that unrecognised provident fund was recognised provident fund since the time it
was created. If the employer’s contribution towards provident fund was in excess of limit specified above (i.e., 12% of salary)
and/or the interest credited was in excess of 9.5% per annum, then the excess amount shall be taxable in the year in which
the unrecognised provident fund is accorded recognition. Out of the “transferred balance”, the aforesaid amount is taxable.
If the employer’s contribution was not more than 12% of salary and/or interest was not more than 9.5% per annum, then
nothing is taxable out of the transferred balance.
X is employed (with effect from July 1, 2017) by A Ltd. which maintains unrecognised provident fund. The provident fund
is accorded recognition by the concerned authority with effect from December 1, 2019 with existing balances. From the
records of the company, the following information is available in respect X —
X (date of joining July 1, 2017) Salary Employer’s Employee’s Employer’s
contribution contribution contribution
@ 15% @ 15% in excess
of 12%
Rs. Rs. Rs. Rs.
1. Year ending March 31, 2018 (salary : Rs. 10,000 per 90,000 13,500 13,500 2,700
month)
2. Previous year 2018-19 (salary : Rs. 12,000 per month) 1,44,000 21,600 21,600 4,320
3. April 1, 2019 to November 30, 2019 (salary : Rs. 14,000 1,12,000 16,800 16,800 3,360
per month)
Total 3,46,000 51,900 51,900 10,380
Interest is credited in the provident fund account at the rate of 9.5% and accumulated interest up to November 30, 2019 is
Rs. 6,000.
In this case “transferred balance” shall be calculated as follows —
Rs.
Employer’s contribution up to November 30, 2019 51,900
Employee’s contribution 51,900
Interest thereon 6,000
Transferred balance 1,09,800
Out of which chargeable to tax 10,380
Computation of “salary” of X for the previous year 2019-20
Basic salary (Rs.14,000 × 12) 1,68,000
Amount taxable out of “transferred balance” 10,380
Employer’s contribution towards recognised provident fund in excess of 12% of salary (with effect
from December 1, 2019) 1,680
Income from “Salaries” 1,30,060
Any other Nil
Less: Deduction under section 80C [15% of (Rs. 14,000 × 4)] 8,400
Net income 1,21,660
X’s contribution towards provident fund up to November 30, 2019 is not qualified for deduction under section 80C. In other
words, nothing out of “transferred balance” of Rs. 1,09,800 is qualified for deduction under section 80C.
54-E3 In the example given above, if the employer contributes @ 11 per cent of salary towards provident fund and interest credited
up to November 30, 2019 towards provident fund account at the rate of 9.5 per cent is Rs. 4,400, find out (a) transferred balance and
(b) salary income of the previous year 2019-20.
➠ 54-P4 Discuss the exemption available to foreign citizens under section 10(6).
SOLUTION : Exemption under section 10(6) available to foreign citizens is as follows —
 Salary of diplomatic personnel [Sec. 10(6)(ii)] - The remuneration received by a foreign citizen as an official (by whatever name
called) of an embassy, high commission, legation, commission, or consulate or the trade representation of a foreign State,
or as a member of staff of any of these officials, for service in such capacity is exempt from tax, if corresponding Indian
officials in that foreign country enjoy a similar exemption.
 Salary of foreign employees [Sec. 10(6)(vi)] - The remuneration received by a foreign national, as an employee of a foreign
enterprise for services rendered by him during his stay in India, is totally exempt from tax provided :
a. the foreign enterprise is not engaged in any business or trade in India ;
b. his stay in India does not exceed a period of 90 days in such previous year ; and
c. such remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act.
 Salary received by a ship’s crew [Sec. 10(6)(viii)] - Salary received by, or due to, a non-resident foreign national as ship’s crew,
provided his total stay in India does not exceed 90 days during the previous year, is exempt from tax.
153 Let us recapitulate
 Remuneration of a foreign trainee [Sec. 10(6)(xi)] - Remuneration received by a foreign national as an employee of a foreign
Government during his stay in India is exempt from tax if remuneration is received in connection with training in an
undertaking or office owned by (a) the Government ; or (b) any company owned by the Central Government or any State
Government ; or (c) any company which is subsidiary of a company referred to in (b) supra ; or (d) any statutory corporation ;
or (e) any co-operative society wholly financed by the Central Government or any State Government.
54-E4 Discuss, giving reasons, whether the following are taxable (T) in India or exempt (E) from tax —
1. X, a non-resident foreign citizen, comes to India for the first time on April 10, 2019 for a visit of 100 days in connection with the
shooting of cinematograph film in Delhi. For this, he has been paid a remuneration of Rs.1,40,000 in India by A Ltd., a foreign
company. None of the shareholders in A Ltd. is a citizen of India or resident in India.
2. Suppose in 1 supra A Ltd. is an Indian company.
3. Y, a foreign citizen, is a trade representative of the Russian Government in India since July 2001. During the previous year
2019-20, the foreign Government pays Rs. 9,60,000 as remuneration in India. Y is resident in India for the assessment year
2020-21.
4. Z, a foreign citizen, comes to India for the first time on March 20, 2019 to join the Delhi University on April 1, 2019 as a Professor
of Finance at South Delhi Campus. The contract of his service is approved by the Government on April 10, 2019. During the previous
year 2019-20, he has been paid Rs. 4,00,000 as remuneration.
➠ 54-P5 X retires on March 31, 2020 from A Ltd. which maintains recognised provident fund. Rs. 9,00,000 (being accumulated balance
of the provident fund—Rs. 3,80,000 as employer’s contribution, Rs. 53,000 as interest thereon, Rs. 4,10,000 as employee’s contribution
and Rs. 57,000 as interest thereon) is paid on the same day. Discuss when it is taxable/not taxable ?
Solution :
1. Service of 5 years - If X has rendered continuous service with A Ltd. for a period of 5 years (or more) then nothing is
chargeable to tax. In other words, if X had joined A Ltd. prior to April 1, 2015, then Rs. 9,00,000 is not chargeable to tax. If
X had joined A Ltd. after March 31, 2015 (say, on June 6, 2016) but prior to June 6, 2016 he was employed by Y Ltd. which
maintained recognised provident fund and the accumulated balance of X’s provident fund with Y Ltd. was transferred to
A Ltd. which is included in Rs. 9,00,000, then it is not taxable provided he had joined Y Ltd. prior to April 1, 2015.
2. Termination beyond the control of the employee - Even when X does not come in (1) (supra), nothing is taxable if service of X
has been terminated because of any of the following reasons,—
a. ill-health of X ; or
b. discontinuation of A Ltd.’s business ; or
c. due to some other reason which is beyond the control of X (for instance, if X has been asked to resign on completion of
the project for which he was employed).
3. Employment with new employer - Even when X does not come in (1) and (2) (supra), nothing is taxable if the following
conditions are satisfied –
a. immediately after March 31, 2020, X should join a new employer (say, Z Ltd.) ;
b. Z Ltd. maintains recognised provident fund ;
c. Rs. 9,00,000, being accumulated provident fund balance, is transferred by A Ltd. to Z Ltd.
4. Transfer to NPS - Even when X does not come in (1), (2) or (3) (supra) nothing is taxable if the entire provident fund balance
standing to his credit is transferred to his NPS account (i.e., under a pension scheme referred to in section 80CCD and notified
by the Central Government).
5. Any other case - If X comes in none of the aforesaid four situations, then the total income of X shall be computed by the
concerned Assessing Officer, as if the fund was unrecognised from the beginning.
During the previous year 2019-20, out of Rs. 9,00,000, Rs. 4,10,000 being X’s contribution shall not be taxable and the balance
will be taxable as under —
a. income under the head “Salaries” : Rs. 4,33,000 (Rs. 3,80,000 being employer’s contribution plus Rs. 53,000 being interest
thereon) ; and
b. income under the head “Income from other sources” : Rs. 57,000 (being interest on X’s contribution).
➠ 54-E5 X resigns from his service on April 30, 2019 to start a business and receives Rs. 86,000 being accumulated balance of
recognised provident fund which represents Rs. 38,000 as contribution of employer, Rs. 3,000 as interest thereon, Rs. 40,000 as his
own contribution and Rs. 5,000 as interest thereon. Discuss whether Rs. 86,000 is taxable if he had joined the employer on (a) April
1, 2016, (b) April 1, 1999, and (c) April 1, 2016 but had to resign on April 30, 2019 on completion of special assignment for which
he was appointed.
Let us recapitulate
Basis of charge Salary is taxable on due or receipt basis whichever is earlier as per section 15.
Computation of income Salary xxxx
under the head “Salaries” Allowances xxxx
Perquisites xxxx
Gross salary xxxx
Income under the head ‘Salaries’ and its computation 154

Entertainment allowance deduction [Sec. 16(ii)] xxxx
Professional tax [Sec. 16(iii)] xxxx
Income under the head “Salaries” xxxx
Note - Professional tax is deductible on “payment basis”. If it is paid by the employer on
behalf of the employee, it is first included in gross salary as perquisite and then
deduction is allowed under section 16(iii).
Different forms of salary
Basic salary Taxable.
Dearness allowance/pay Taxable.
Advance salary Taxable in the year of receipt.
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in Taxable.
service
Leave encashment at the time 1. In case of Government employees, it is fully exempt from tax.
of retirement or at the time 2. In case of non-Government employees, it is exempt from tax to the extent of the
of leaving the job least of the following :
a. Cash equivalent of leave salary in respect of the period of earned leave at the credit
of employee at the time of retirement (which cannot exceed 30 days’ “average
salary” for every completed year of service); or
b. 10 months “average salary”; or
c. Amount specified by the Government, i.e., Rs. 3,00,000; or
d. Leave encashment actually received at the time of retirement.
Notes -
1. Government employee for this purpose is a Central Government employee or a State
Government employee.
2. “Average salary” for this purpose is to be calculated on the basis of average salary
drawn during the period of 10 months immediately preceding the retirement.
Salary in lieu of notice Taxable
Salary to partner Not chargeable under the head “Salaries” but taxable under the head “Profits and gains
of business or profession”.
Fees and commission Taxable.
Bonus Taxable on receipt basis if not taxed earlier on due basis.
Gratuity 1. In case of Government employee it is fully exempt from tax.
2. In case of non-Government employee covered by the Payment of Gratuity Act, 1972
it is exempt from tax to the extent of the least of the following :
a. 15 days’ salary for each year of service (or part thereof exceeding 6 months);
b. Rs. 20,00,000; or
c. Gratuity actually received.
3. In case of non-Government employee (not covered by the Payment of Gratuity Act) it
is exempt from tax to the extent of the least of the following :
a. Rs. 20,00,000;
b. Half month’s salary for each completed year of service; or
c. Gratuity actually received.
Note - “Average salary” for this purpose is to be calculated on the basis of average salary
drawn during the period of 10 months immediately preceding the month in which the
employee has retired.
Pension Uncommuted pension is taxable in all cases. Commuted pension is fully exempt from tax
in the case of a Government employee (i.e., an employee of the Central Government, State
Government, local authority and statutory corporation). In the case of non-Government
employee, commuted pension is exempt to the extent given below—
a. one-third of normal pension is exempt if the employee receives gratuity; or
b. one-half of normal pension is exempt from tax if the employee does not receive
gratuity.
Pension under new pension 1. Employer’s contribution is first included in salary and then a deduction is available
scheme in the case of a Govern- (to the extent of 10 per cent of salary) under section 80CCD.
ment employee or any other 2. Employee’s contribution is deductible under section 80CCD to the extent of 10 per
employee joining on or after cent of salary.
January 1, 2004 3. When pension is received out of the aforesaid amount, it will be taxable in the year
of receipt.
Annuity from employer Taxable as salary.
Annual accretion to the credit 1. Excess of employer’s contribution over 12% of salary is taxable.
balance in recognized provident 2. Excess of interest over notified interest is taxable (notified rate of interest is 9.5 per
fund cent).
Retrenchment compensation Exempt from tax to the extent of least of the following :
a. Amount calculated* under section 25F(b) of the Industrial Disputes Act; or
b. An amount specified by the Government (i.e., Rs. 5,00,000).
When compensation is paid under any scheme approved by the Central Government,
these limits are not applicable and the entire amount is exempt.
Remuneration for extra duties Fully taxable under section 15.
Compensation received under Exempt up to Rs. 5 lakh, if a few conditions are satisfied. One of the conditions is the
voluntary retirement scheme amount payable on account of voluntary retirement or voluntary separation of the
(VRS) employees does not exceed (a) the amount equivalent to three months’ salary for
each completed year of service, or (b) salary at the time of retirement multiplied by the
balance months of service left before the date of his retirement on superannuation. Relief
under section 89 is not available.
Salary from UNO Not chargeable to tax.
Salary received by a teacher/ Not taxable up to 2 years
researcher from a SAARC
member State
Different allowances
City compensatory allowance Fully taxable under section 15.
House rent allowance Exempt from tax to the extent of the least of the following :
a. 50% of salary in Delhi, Bombay, Calcutta, Madras or 40% of salary in other cases;
b. house rent allowance; or
c. the excess of rent paid over 10% of salary.
Entertainment allowance This allowance is first included in salary and thereafter a deduction is allowed. In the
case of Government employees, least of the following is exempt from tax :
a. Rs. 5,000;
b. 20% of salary; or
c. entertainment allowance.
Children education allowance It is exempt from tax to the extent it does not exceed Rs. 100 per month per child for
a maximum of two children (actual expenditure is not taken into consideration).
Hostel expenditure allowance It is exempt from tax to the extent it does not exceed Rs. 300 per month per child for a
maximum of two children (actual expenditure is not taken into consideration). Exemp-
tion is in addition to the exemption available in the case of children education allowance.
Transport allowance It is given to an employee to meet his expenditure for the purpose of commuting between
office and residence. In the case of an employee who is blind or deaf and dumb or
orthopaedically handicapped, transport allowance is exempt up to Rs. 3,200 per month.
In the case of serving Chairman and members of UPSC, transport allowance is exempt
from tax without any monetary ceiling.
In any other case, exemption is not available.
Allowance for transport It is given to employees of transport undertaking to meet their personal expenditure
employees during duty performed in the course of running of such transport from one place to
another place. The amount is exempt to the extent it does not exceed (a) 70 per cent of the
allowance or (b) Rs. 10,000 per month, whichever is lower (actual expenditure is not
taken into consideration).
Tribal area allowance Exempt up to Rs. 200 per month in some cases
*Compensation is equivalent to 15 days’ “salary” for each year (or part thereof exceeding 6 months) of service. The mode of computation of
“salary” and length of service for this purpose and for the purpose of gratuity (covered under the Payment of Gratuity Act) is same.
Travelling allowance, convey- These allowances are given to meet specific expenditure in performance of duties of
ance allowance, helper allow- an office. Exemption is available to the extent the amount is utilized for the specific
ance, research allowance, purpose for which the allowance is given.
uniform allowance
Transfer allowance It is exempt from tax to the extent expenditure is incurred in connection with transfer,
packing and transportation of personal effects on transfer from one place to another
place.
Foreign allowance Exempt from tax if paid outside India by the Government to an Indian citizen for
rendering service outside India.
Tiffin allowance Taxable.
Fixed medical allowance Taxable.
Allowance received by a Not taxable up to 2 years.
teacher/researcher from a
SAARC member State
Sumptuary allowance to Not chargeable to tax.
serving Chairman/members
of UPSC
Allowance to retired Chairman An allowance (subject to a maximum of Rs. 14,000 per month) for defraying the service
and retired members of UPSC of an orderly and for meeting expenses incurred towards secretarial assistance on
contract basis, is not chargeable to tax.
Perquisites
Rent-free unfurnished house  In the case of Government employee (i.e., Central Government employee, State
Government employee or a Government employee on deputation to a public sector
undertaking if house is allotted by the Government): Taxable value is the license fees of
the house as per house allotment scheme of the Government.
 In the case of non-Government employees :
- If the house is owned by employer : Taxable value is 15 per cent of salary of employee of
the relevant period (7.5 per cent if population is 10 lakh or less or 10 per cent if
population is above 10 lakh but not more than 25 lakh).
- If house is taken on lease by employer : Taxable value is either 15 per cent of the salary or
lease rent, whichever is lower.
Rent-free furnished house Value of “furniture” will be added to the value of rent-free unfurnished house as
computed above. Value of furniture is 10 per cent per annum of cost of furniture to the
employer or rent paid/payable of the furnishing by the employer, as the case may be.
Concession in rent Value of the perquisite in respect of rent-free furnished/unfurnished house will be
calculated as given above. From the amount so calculated, rent charged by employer
shall be deducted. The balance (if it is positive) is taxable value of the perquisite in respect
of concession in rent.
Rent-free/concessional  Not chargeable to tax if provided in a “remote area”.
furnished/unfurnished house  Hotel accommodation/guest house accommodation provided to an employee is
in special cases taxable at the rate of 24 per cent of salary of the relevant period or hotel tariff, whichever
is lower.
 Hotel accommodation for 15 days (in aggregate in a previous year) can be provided
immediately after transfer at the new location as a tax-free perquisite.
 Further, if an employee is transferred and housing facility is provided to him at the new
location (he has yet to vacate a house given at the old location), for a period of 90 days
immediately after transferred only one house (at the option of the employee at the old
location or new location) is chargeable to tax.
 Perquisite in respect of rent-free furnished/unfurnished house is not taxable if
provided to a High Court Judge, Supreme Court Judge, Union Minister, leader of
opposition in Parliament, an official in Parliament and serving Chairman/members of
UPSC.
Free domestic servants Actual expenditure of the employer (as reduced by any amount paid by the employee)
is a taxable perquisite in the hands of an employee.
Gas, electricity or water Actual amount spent by the employer (as reduced by any amount recovered from the
supplied after purchasing employee) is a taxable perquisite in the hands of an employee.
from outside agency
Free education facility Expenditure relating to providing training to employees is not taxable. If education
facility is provided to the family members of employee, expenditure incurred by the
employer is the taxable value of perquisite. If education facility is provided to the family
members in an educational institute owned or maintained by the employer, then
reasonable cost of education in a similar institute in or near the locality is taxable. Up to
Rs. 1,000 per month per child is not taxable if the employer provides education facility
to the children of an employee in an educational institution owned/maintained by the
employer.
Leave travel concession (LTC) Only 2 journeys in a block of 4 years is exempt (however, carry over concession is
available). Exemption is based upon actual expenditure relating to travel fare only in
respect of the shortest route from the place of origin to farthest point.
Employee’s obligation met by Taxable in all cases
employer
Interest-free/concessional Find out the maximum outstanding balance on the last day of each month. It shall be
loan multiplied by SBI landing rate on the first day of the previous year. Amount recovered
from the employee on account of interest is deductible. Perquisite is not taxable if the
aggregate amount of original loan does not exceed Rs. 20,000. Moreover, if loan is given
by employer for medical treatment (given in rule 3A) of the employee or his family
members, it is not chargeable to tax.
Use of employer’s movable 10 per cent per annum of actual cost of asset to the employer or hire charges as reduced
assets by any amount recovered from the employee, is a taxable perquisite in the hands of an
employee.
Sale of movable assets Actual cost to the employer minus normal wear and tear minus sale consideration paid
by the employee, is taxable (normal wear and tear for each year of use is calculated as
follows — computer/electronic items: 50 per cent by reducing instalment method; car:
20 per cent by reducing instalment method; any other asset: 10 per cent of cost).
Medical facilities  The perquisite in respect of medical facility provided by an employer in the following
hospitals/clinic is not chargeable to tax — hospital owned/maintained by the employer,
hospital of Central Government/State Government/local authority, private hospital if
it is also recommended by the Government for the treatment of Government employees,
specified medical facility (given in rule 3A) in a hospital approved by the Chief
Commissioner.
 Medical insurance premium paid or reimbursed by the employer is not chargeable to
tax.
 Any other expenditure incurred or reimbursed by the employer for providing medical
facility in India is chargeable to tax (exemption of Rs. 15,000 was available for such
reimbursement up to the assessment year 2018-19).
 Expenditure on medical treatment (including boarding and lodging) incurred by an
employer outside India is not chargeable to tax in the hands of employee if it does not
exceed the amount permitted by RBI under foreign exchange regulations. Travelling
expenditure for going outside India for medical treatment purposes is generally charge-
able to tax.
Motor car Car owned or hired by employer, expenses incurred by employer and used for partly official and
partly personal purposes - Rs. 1,800 per month (1,600cc or less)/Rs. 2,400 per month (above
1,600cc) for car and Rs. 900 per month for driver. Expenditure recovered from employee
is not deductible.
Car owned or hired by employer, expenses incurred by employer and used wholly for personal
purposes - Entire expenditure incurred by employer including depreciation at the rate of
10 per cent per annum of actual cost of the car, is taxable in the hands of employer.
Expenses recovered from employee are deductible.
Car owned or hired by employer, used for partly official and partly personal purposes, expenses
for private purposes incurred by employee - Rs. 600 per month (1,600cc or less)/Rs. 900 per
month (above 1,600cc) for car and Rs. 900 per month for driver. Expenditure recovered
from employee is not deductible.
Car owned by employee, expenses incurred by employer and used for partly official and partly
personal purposes - Actual expenditure incurred by employer minus expenditure pertain-
ing to official use minus anything recovered from employee, is taxable in the hands of
employee. Expenditure pertaining to official use can be calculated as per logbook of the
car. Alternatively, expenditure pertaining to official use can be calculated at the rate of
Rs. 1,800 per month (1,600cc or less)/Rs. 2,400 per month (above 1,600cc) for car and Rs.
900 per month for driver.
Conveyance facility when not taxable - Conveyance facility between office and residence is
not chargeable to tax in the case of any employee of any organization. Moreover,
conveyance facility to a High Court Judge, Supreme Court Judge and serving Chair-
man/members of UPSC, is not chargeable to tax.
Free transport Taxable as a perquisite in the hands of an employee on the basis of value at which the
employer offers such benefit to the public as reduced by any amount recovered from the
employee (tax free perquisite in the hands of employees of railways/airlines).
Lunch, refreshment, etc.  Food and non-alcoholic beverages are provided in working hours in remote area or in
an off-shore installation: Fully exempt from tax.
 Lunch/refreshment is provided in working hours at any other place: Cost to the
employer in excess of Rs. 50 per meal (as reduced by the amount recovered from the
employee) is the taxable value of perquisite in the hands of the employee (tea and snacks
in working hours is tax-free perquisite).
Travelling, touring, accommo-  When such facility is available uniformly to all employees : Taxable as a perquisite in the
dation hands of an employee on the basis of actual expenditure of the employer as reduced by
any amount recovered from the employee.
 When such facility is not available uniformly to all employees : Taxable as a perquisite in the
hands of an employee on the basis of value at which such facilities are offered by other
agencies to the public as reduced by any amount recovered from the employee.
Gift, voucher or token Taxable as a perquisite in the hands of an employee on the basis of actual expenditure
of the employer (gift may be made either to employee or any member of his household.
Gift-in-kind up to Rs. 5,000 per annum is exempt).
Credit card Expenditure incurred by the employer minus expenditure pertaining to official use minus
anything recovered from the employee, is taxable.
Club Expenditure incurred (including annual or periodical fees) by the employer minus
expenditure pertaining to official use minus anything recovered from the employee, is
taxable. Health club/sports club facility given uniformly to all employees in employer’s
premises, is not taxable. The initial one time deposits or fees for corporate or institutional
membership, where benefit does not remain with particular employee after cessation of
employment, are exempt.
Specified security or sweat Fair market value of shares/securities on the date on which option is exercised by the
equity shares allotted on or employee, is taxable in the hands of employee. Amount, if any, recovered from the
after April 1, 2009 employee is deductible.
Employer’s contribution Amount in excess of Rs. 1.5 lakh per assessment year is taxable in the hands
towards approved super- of employee.
annuation fund
Perquisite received by a Not taxable up to 2 years.
teacher/researcher from a
SAARC member State
Telephone/mobile phone Not taxable.
Residential telephone to retired Value of a residential telephone free of cost and the number of free calls to the extent of
Chairman/members of UPSC Rs. 1,500 per month (over and above the number of free calls per month allowed by the
telephone authorities), is not taxable.
Any other facility Taxable as a perquisite in the hands of an employee on the basis of actual expenditure
of the employer as reduced by any amount paid by the employee.
Deduction under section 16
Standard deduction Gross salary or Rs. 50,000, whichever is lower
Entertainment allowance Rs. 5,000 or 20% of salary or entertainment allowance, whichever is lower
deduction in the case of
Government employees
Professional tax Amount paid is deductible
Employee’s provident fund Statutory provident fund - Deduction under section 80C on employee’s contribution is
available. All other contributions/interest/lump sum payment exempt from tax.
Recognized provident fund - Deduction under section 80C on employee’s contribution is

available. Excess of employer’s contribution over 12% of salary is taxable (exempt up to
12% of salary). Excess of interest over 9.5% is taxable. Lump sum payment at the time of
retirement exempt in certain cases.
Unrecognized provident fund - Deduction under section 80C on employee’s contribution
is not available. Employer’s contribution and interest are exempt from tax. Lump sum
payment (except employee’s contribution) at the time of retirement taxable.
Deduction under Up to Rs. 1,50,000.
section 80C
Meaning of “salary” for  For the purpose of calculating (a)house rent allowance, (b) gratuity (not being gratuity under
different calculations the Payment of Gratuity Act), (c) leave encashment at the time of retirement, (d) NPS, and
(e) employer’s contribution towards recognized provident fund, not chargeable to tax - For these
purposes, “salary” means basic salary, dearness allowance/pay if part of salary for
computing all retirement benefits and commission (if paid as a percentage of turnover
achieved by an employee).
 For the purpose of calculating gratuity received under the Payment of Gratuity Act, 1972, not
chargeable to tax - For this purpose, “salary” means basic salary and dearness allowance
whenever dearness allowance is paid.
 For the purpose of calculating perquisite value of rent-free/concessional house - For this
purpose, “salary” means basic salary, dearness allowance/pay if part of salary for
computing all retirement benefits, bonus, commission, fees, taxable allowances and any
monetary benefit otherwise chargeable to tax. However, “salary” does not include tax-
free allowances, value of a perquisite, retirement benefits and employer’s contribution
towards provident fund.
CHAPTER 5 “Income from house pro-
perty” and its computation
T
his Chapter deals with income which falls under the head “Income from house
property”. While the scope of the income charged under this head is defined by section
22, the computation of income falling under this head is governed by sections 23 to
27. All the provisions having a bearing on tax treatment of income from house property are
explained in this Chapter.
 WHAT IS THE BASIS OF CHARGE [SEC. 22]

66. Income is taxable under the head “Income from house property” if the following three conditions are
satisfied :
Condition 1 The property should consist of any buildings or lands appurtenant thereto.
Condition 2 The assessee should be owner of the property.
Condition 3 The property should not be used by the owner for the purpose of any business or profession carried on
by him, the profits of which are chargeable to income-tax.
Unless, therefore, all the aforesaid conditions are satisfied, the property income cannot be charged to tax under
the head “Income from house property”.
To put it differently, if all the aforesaid conditions are satisfied, property income is taxable under section 22 under
the head “Income from house property”. It makes no difference if the assessee is a company which has been
incorporated with the object of buying and developing landed properties.
1. X owns a building. It is given on rent. Income of the property is taxable under the head “Income from house property”,
as the above-noted three conditions are satisfied.
2. Y owns a building. It is used by him for carrying on a business or he uses the building as his office/factory/godown. In
this case, no income is taxable under the head “Income from house property”, as Condition 3 is not satisfied.
66.1 Property consisting of any buildings or lands appurtenant thereto - The property should consist of any
buildings or land appurtenant thereto. Rental income of a vacant plot (not appurtenant to building) is not
chargeable to tax under the head “Income from house property”, but is taxable either under the head “Profits
and gains of business or profession” or under the head “Income from other sources”, as the case may be.
“Building” - The word “building” is wide enough to include residential houses (whether let out or self-occupied),
building let out for office use, or for storage or for use as factory. Even music halls, dance halls, lecture halls and
other public auditoriums are “buildings”.
“Land appurtenant thereto” - The appurtenant lands in respect of a building may be in the form of approach roads
to and from public streets, compounds, courtyards, backyards, playgrounds, etc. It also includes car-parking
spaces, roads connecting one department with another department, playgrounds for the benefits of employees,
etc.
66.2 Assessee should be owner of the property - Income is taxable under the head, “Income from house
property” only if the assessee is the owner of a house property :
160
161 Assessee should be owner of the property Para 66.2
 The word “owner” includes a legal owner as well as deemed owner.

 For the purpose of section 22, owner may be an individual, HUF firm, company, co-operative society or
association of persons, etc.
 Annual value of property is assessed to tax under section 22 in the hands of owner even if he is not in receipt
of income.
 It is not necessary that ownership should extend to the site on which building stands as well as the
superstructure.
66.2-1 INCOME FROM SUBLETTING IS NOT TAXABLE UNDER SECTION 22 - Income from subletting is not taxable as income
from house property†.
X owns a house property. He lets it out to Y for 3 years (rent being Rs. 10,000 per month). Y sublets it to Z on monthly rent
of Rs. 40,000. Rental income of X is taxable under the head “Income from house property”. Since Y is not the owner of the
house, his income is not taxable as under the head “Income from house property”, but is taxable as business income under
section 28 or as income from other sources under section 56.
66.2-2 DEEMED OWNER - Besides the legal owner, section 27 provides that the following persons are to be treated
as deemed owner of house property for the purpose of charging tax on annual value under the head “Income
from house property”:
66.2-2a TRANSFER TO SPOUSE OR MINOR CHILD - If an individual transfers a house property without adequate
consideration to his/her spouse or his/her minor child, the transferor is deemed as owner of the property. This
rule is, however, not applicable, if an individual transfers a house property to his/her spouse under an
agreement to live apart or to his or her minor married daughter.
1. X, an individual, owns a house property. On April 1, 2019, he transfers the property without any consideration to his wife.
Rental income is received by Mrs. X after April 1, 2019. However, for the purpose of charging tax on rental income, X will
be deemed as “owner” of the property. Consequently, income would be taxable in the hands of X.
2. Y gifts Rs. 10,00,000 to Mrs. Y. Mrs. Y purchases a house property out of the gifted money. In this case, the aforesaid
provisions are not applicable, as Y has transferred a sum of money to his wife who has purchased a property out of the gifted
amount (he has not transferred a house property). Consequently, Y will not be deemed as “owner” of the property. In such
a case, income of the property would be computed in the hands of Mrs. Y (as she is the owner of the property) and the income
so calculated will be included in the income of Y under the provisions of section 64(1) [see para 123].
66.2-2b HOLDER OF IMPARTIBLE ESTATE - The holder of impartible estate is deemed as owner of the property.
X is one of the ex-Rulers of a former princely state. He has divided all his properties amongst his three sons. However, he
could not transfer a building, which is occupied by a temple and which is given, as per family convention, to his eldest son.
All the three brothers along with other family members have right to enjoy the benefit of the property. Property is given to
the eldest son as it cannot be divided amongst the three brothers as per the family convention. The eldest son is not the
beneficial owner of the property. In other words, he holds the property as a trustee on behalf of his younger brothers. For
the purpose of section 22, the eldest son, as holder of “impartible estate”, is deemed as “owner” of the property.
66.2-2c PROPERTY HELD BY A MEMBER OF CO-OPERATIVE SOCIETY/COMPANY/AOP - A member of co-operative society,

company or other association of persons to whom a building (or a part thereof) is allotted or leased under the
house building scheme of the society, company or association, is treated as deemed owner of such property.
A flat is allotted by a co-operative group housing society to X, one of its members under the house building scheme of the
society. X is deemed as “owner” of the property for the purpose of section 22 (although under the general law the property
is owned by the co-operative society).
66.2-2d A PERSON WHO HAS ACQUIRED A PROPERTY UNDER A POWER OF ATTORNEY TRANSACTION - If a person has acquired
a property under a “power of attorney transaction” by satisfying the conditions of section 53A of the Transfer
of Property Act, he is deemed as owner of the property, although he may not be the “registered owner” of the
property.
†For exception, see para 66.2-2e.

Para 66.2 Income from house property 162
Section 53A of the Transfer of Property Act requires the following conditions :
Condition 1 There is an agreement in writing between the purchaser and the seller.
Condition 2 The purchaser has paid the consideration or he is ready to pay the consideration (if there is no
consideration as in the case of gift, then section 53A of the Transfer of Property Act is not applicable).
Condition 3 The purchaser has taken the possession of the property.
If the aforesaid three conditions are satisfied, the purchaser becomes the deemed “owner” of the property for
the purpose of income-tax, even if he is not the registered owner of the property.
X enters into a written agreement to purchase a property from Y for Rs. 25,00,000. He has paid the consideration and taken
possession of the property. The sale deed is yet to be registered. He becomes deemed “owner” of the property for the purpose
of paying tax on rental income, although he is not the registered owner of the property.
66.2-2e A PERSON WHO HAS ACQUIRED A RIGHT IN A BUILDING UNDER SECTION 269UA(f) - If a person acquires a right in a
building by virtue of a transaction which is referred to in section 269UA(f), then he is deemed as owner of the
property. Broadly speaking, section 269UA(f) covers the case of taking a property on lease for a term of not less
than 12 years (whether fixed originally or there is a provision for extension of term and the aggregate period is
not less than 12 years). This provision of deemed ownership does not cover any right by way of a lease from
month to month or for a period not exceeding one year.
1. X owns a property. It is given on lease for a period of 12 years to Y, lease rent being Rs. 40,000 per month. As the period
of lease is not less than 12 years, Y becomes deemed “owner” of the property.
2. A owns a property. It is given on lease for a period of 6 years to B, lease rent being Rs. 20,000 per month. B has a right to
get renewal of lease for further period of 6 years after the expiry of lease. In this case, the aggregate period of lease is not
less than 12 years. Therefore, B is deemed as “owner” of the property.
3. C owns a property, it is given on lease to D for a period of one month, rent being Rs. 10,000. D has a right to get renewal
of the lease subject to the condition that every time it will be renewed only for a period of one month and such renewal is
possible with mutual consent till 2050. In this case, the aggregate period of lease is more than 12 years, but D will not become
deemed “owner” of the property (the property is given on lease from month to month).
66.3 Property should not be occupied by the owner for his own business or profession - Annual value of a
house property is not chargeable to tax under the head “Income from house property”, if the owner uses the
property for the purposes of carrying on his business or profession (whose income is chargeable to tax). The
reason of this exclusion seems to be that notional rent of property is not allowable as a permissible deduction
while computing business income, if a person carries on business or profession in his own house property.
 A few examples - A few examples are given below –
1. X owns a property. He uses the property as his office, factory or godown. As the property is used for the
purpose of carrying on own business or profession, nothing is taxable under section 22.
2. X Ltd. is a manufacturing company. The factory of the company is situated in Andhra Pradesh. Within the
factory campus, there is a residential colony having 80 quarters for workers. These quarters are given to the
workers for residential purposes. A nominal rent of Rs. 100 per month is recovered from the workers. As the
purpose of letting out of residential quarters is to run the business smoothly, the residential quarters will be
treated as house property used by the assessee for the purpose of its business. Accordingly, annual value thereof
is not chargeable under section 22. Recovery of rent of Rs. 100 per month from the workers will be taken as
business receipt.
3. Y Ltd. makes available a few rooms in its factory on nominal rent to the Government for locating a branch of
nationalised bank, post office and central excise office for carrying on its business efficiently and smoothly.
Nothing is taxable under section 22. Rent collected, being incidental to the business of Y Ltd., is assessable as
business income under section 28.
66.4 Applicability of section 22 in certain typical cases - Apart from what is discussed earlier, the following
points merit consideration while understanding implications and scope of section 22 :
66.4-1 HOUSE PROPERTY IN A FOREIGN COUNTRY - A resident assessee is taxable under section 22 in respect of annual
value of a property situated in a foreign country. A resident but not ordinarily resident or a non-resident is,
however, chargeable under section 22 in respect of income of a house property situated abroad, provided income
163 Applicability of section 22 in certain typical cases Para 66.4
is received in India during the previous year. If tax incidence is attracted under section 22 in respect of a house
property situated abroad, annual value will be computed as if property is situated in India.
66.4-2 DISPUTED OWNERSHIP - If title of ownership of a house property is under dispute in a court of law, the decision
about who is owner rests with the Income-tax Department. Thus, mere existence of dispute as to title cannot hold
up an assessment even if a suit has been filed. Generally, the person who is in receipt of income or the person
who enjoys the possession of a house property as owner, though his claim is disputed, is assessable to tax under
section 22.
66.4-3 PROPERTY HELD AS STOCK-IN-TRADE - As a specific head of charge is provided for income from house property,
annual value of house property cannot be brought to tax under any other head of income. If three conditions
given by section 22† are satisfied, rental income of a house property is taxable under the head “Income from house
property”. This rule is applicable even if the property is held by the owner as his stock-in-trade.
66.4-4 TREATMENT OF COMPOSITE RENT - Apart from recovering rent of the building, in some cases, the owner gets
rent of other assets (like furniture) or he charges for different services provided in the building (for instance,
charges for lift, security, air conditioning, etc.). The amount so recovered is known as “composite rent”. The tax
treatment of the composite rent is as follows—
66.4-4a WHERE COMPOSITE RENT INCLUDES RENT OF BUILDING AND CHARGES FOR DIFFERENT SERVICES (LIKE LIFT, AIR CONDITION-
ING) - If the owner of a house property gets a composite rent for the property as well as for services rendered to
the tenants, composite rent is to be split up and the sum which is attributable to the use of property is to be
assessed in the form of annual value under section 22. The amount which relates to rendition of the services (such
as electricity supply, provision of lifts, supply of water, arrangement for scavenging, watch and ward facilities,
etc.) is charged to tax under the head “Profits and gains of business or profession” or under the head “Income
from other sources”.
1. X owns a property. It is given on rent to Y. Y annually pays Rs. 1,00,000 as rent of the property and Rs. 20,000 for different
services like lift, security, air-conditioning, etc. In this case, Rs. 20,000 is not taxable in the hands of X as income from house
property. Rs. 20,000 would be taxed in the hands of X after deducting his actual expenditure for providing different services
(lift, security, air-conditioning, etc.) as income from other sources or as business income.
2. A owns a property. It is given on rent to B. B annually pays Rs. 1,50,000 as rent of the building as well as the charges for
different services (like lift, security, etc.) provided by A. In this case, one has to split up the annual payment of Rs. 1,50,000
into rent of the building and charges for different services. The amount, which relates to rendition of the services (after
deducting actual expenditure) is taxable either as business income or as income from other sources. The sum, which is
attributable to the use of the property, is to be assessed in the form of annual value under section 22 under the head “Income
from house property”. This rule is applicable even if it is difficult to split up the annual payment of Rs. 1,50,000. In other
words, in such a case it is not legally correct to assess the entire amount of Rs. 1,50,000 (less expenditure) as business income
or as income from other sources.
66.4-4b WHERE COMPOSITE RENT IS RENT OF LETTING OUT OF BUILDING AND LETTING OUT OF OTHER ASSETS (LIKE FURNITURE) AND
THE TWO LETTINGS ARE NOT SEPARABLE - If there is letting of machinery, plant and furniture and also letting of the
building and the two lettings are inseparable (in the sense that letting of one is not acceptable to the other party
without letting of the other), then such income is taxable either as business income or income from other sources.
This rule is applicable even if sum receivable for the two lettings is fixed separately.
The following illustrations are given to have a better understanding—
1. X owns an air-conditioned furnished lecture hall. It is let out, annual rent being Rs. 5,00,000 (it includes rent of building
and rent of air-conditioner and furniture). In this case, letting of lecture hall is not separable from the letting of air-
conditioner/furniture. This income (after excluding expenditure) is taxable as business income or as income from other
sources.
2. X owns an air-conditioned furnished lecture hall. It is let out, annual rent being Rs. 3,00,000 for building and Rs. 2,00,000
as rent of air-conditioner and furniture. In this case, letting of lecture hall is not separable from the letting of air-conditioner/
furniture. This income (after excluding expenditure) is taxable as business income or as income from other sources. This rule
is applicable even if from the agreement one can find out rent of building and rent of air-conditioner/furniture separately.
66.4-4c WHERE COMPOSITE RENT IS RENT OF LETTING OUT OF BUILDING AND LETTING OUT OF OTHER ASSETS AND THE TWO LETTINGS
ARE SEPARABLE - If there is letting out of building and letting of other assets and the two lettings are separable (in
† See para 66.

the sense that letting of one is generally acceptable without letting out of the other; for instance letting out of
building along with car), then income from letting out of building is taxable under the head “Income from house
property” and income from letting out of other assets is taxable either as business income or income from other
sources. This rule is applicable even if the assessee receives composite rent from his tenant for two lettings.
X gets Rs. 20,000 per month as rent from Y for letting out of a building and a car [the two lettings are separable in the sense
that Y was given an option to take on rent either the building (at Rs. 16,000) or the car (at Rs. 4,000) or both]. The rent of the
building is taxable under the head “Income from house property” and the rent of car is taxable either as business income
or income from other sources.
66.4-5 WHEN A HOUSE PROPERTY IS OWNED BY CO-OWNERS [SEC. 26] - If a house property is owned by two or more
persons, then such persons are known as co-owners. If respective shares of co-owners are definite and
ascertainable, the share of each such person (in the computed income of property) shall be included in his total
income. It may be noted that co-owners are not taxable as an association of persons [for detailed discussion, see
problem 73-P1].
66.4-6 PRINCIPLE OF MUTUALITY † AND SECTION 22 - Tax levied under section 22 is tax on income from house property
and it is not a tax on house property. A club owns a house property and it provides recreational and refreshment
facilities exclusively to its members and their guests. Its facilities are not available to non-members. The club is
run on ‘no profit no loss’ basis. The members pay for all their expenses and are not entitled to any share in the
profit. Surplus, if any, is used for maintenance and development of the club. The business of club is governed
by principle of mutuality. It is not only the surplus from the activities of the business of the club that is excluded
from the levy of income-tax, even the annual value of the club’s house property as contemplated in section 22
will be outside the purview of the levy of income-tax—Chelmsford Club v. CIT [2000] 109 Taxman 215 (SC).
 ➠ WHEN PROPERTY INCOME IS NOT CHARGED TO TAX

67. In the following cases, rental income is not charged to tax :
a. income from farm house [sec. 2(1A)(c) read with sec. 10(1)] ;
b. annual value of any one palace of an ex-ruler [sec. 10(19A)] ;
c. property income of a local authority [sec. 10(20)] ;
d. property income of an approved scientific research association [sec. 10(21)] ;
e. property income of an educational institution and hospital [sec. 10(23C)] ;
f. property income of a trade union [sec. 10(24)] ;
g. house property held for charitable purposes [sec. 11] ;
h. property income of a political party [sec. 13A] ;
i. property used for own business or profession [sec. 22] ; and
j. one self-occupied property [sec. 23(2)].
 WHAT IS THE BASIS OF COMPUTING INCOME FROM A LET OUT HOUSE PROPERTY
68. Income from a let out house property is determined as under : Rs.
Gross annual value [see para 68.1] xxxx

Less : Municipal taxes [see para 68.2] xxxx
Net annual value xxxx
Less : Deduction under section 24 [see para 68.3]
- Standard deduction [see para 68.3-1] xxxx
- Interest on borrowed capital [see para 68.3-2] xxxx
Income from house property xxxx
68.1 Gross annual value [Sec. 23(1)] - Tax under the head “Income from house property” is not a tax upon rent of a property.
It is tax on inherent capacity of a building to yield income. The standard selected as a measure of the income to be taxed is
“annual value”.
†For principle of mutuality, kindly refer to para 6.1-1.

165 Gross annual value Para 68.1
Gross annual value is determined as follows—

Step I Find out reasonable expected rent of the property [see para 68.1-1]
Step II Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due
to vacancy [see para 68.1-2]
Step III Find out which one is higher—amount computed in Step I or Step II.
Step IV Find out loss because of vacancy
Step V Step III minus Step IV is gross annual value [see para 68.1-3]
Where the house property is held as stock-in-trade and it is not let during the whole or any part of the previous
year, the annual value of such property (or part thereof) shall be taken as nil (with effect from the assessment
year 2018-19). However, this concession is available only for a limited period given below –
- period up to 1 year from the end of the financial year in which the certificate of completion of construction of
the property is obtained from the competent authority (applicable for the assessment years 2018-19 and
2019-20),
- period up to 2 years from the end of the financial year (as stated above) (applicable for the assessment year
2020-21).
68.1-1 STEP I - FIND OUT REASONABLE EXPECTED RENT [SEC. 23(1)(a)] - Reasonable expected rent is deemed to be the sum
for which the property might reasonably be expected to be let out from year to year.
In determining reasonable rent, several factors have to be taken into consideration, such as, location of the
property, annual ratable value of the property fixed by municipalities, rents of similar properties in neighbourhood,
rent which the property is likely to fetch having regard to demand and supply, cost of construction of the
property and nature and history of the property. These factors play a vital role in determining reasonable
expected rent of a house property. In a majority of cases, however, expected rent can be determined by taking
into consideration the following factors :
a. municipal valuation of the property [see para 68.1-1a]; or
b. fair rent of the property [see para 68.1-1b],
The higher of (a) or (b) is generally taken as expected rent.
If, however, a property is covered by a Rent Control Act, then the amount so computed cannot exceed the
‘standard rent’ [see para 68.1-1c] determinable under the Rent Control Act.
68.1-1a MUNICIPAL VALUATION - For collecting municipal taxes, local authorities make a periodical survey of all
buildings in their jurisdiction. Such valuation may be taken as a strong evidence representing the earning
capacity of a building. It cannot, however, be considered to be a conclusive evidence. In some big cities (like Delhi,
Mumbai, Chennai and Kolkata) municipal authorities determine net ratable value after deducting 10 per cent
of the gross ratable value on account of repairs and an allowance for service taxes (such as sewerage tax and water
tax). The net municipal valuation, therefore, requires an adjustment for determining expected rent for income-
tax purposes.
68.1-1b FAIR RENT OF THE PROPERTY - Fair rent of the property can be determined on the basis of a rent fetched by
a similar property in the same or similar locality. Though two properties cannot be alike in every respect, the
evidence afforded by transactions of other parties in the matter of other properties in the neighbourhood, more
or less comparable with the property in question, is relevant in arriving at reasonable expected rent.
68.1-1c STANDARD RENT UNDER RENT CONTROL ACTS - Standard rent is the maximum rent which a person can legally
recover from his tenant under a Rent Control Act. The Supreme Court has observed in a few cases† that a landlord
cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent under the
Rent Control Act. This rule is applicable even if a tenant has lost his right to apply for fixation of the standard
rent. This rule is also applicable to the owner himself. In other words, if a property is covered under the Rent
Control Act, its reasonable expected rent cannot exceed the standard rent (fixed or determinable) under the Rent
Control Act.
68.1-1d PROVISION ILLUSTRATED - As mentioned earlier, the reasonable expected rent is computed on the basis of
three factors, namely—
a. municipal valuation (MV),
b. fair rent of the property (FR); and
c. standard rent of the property (SR).
†Sheila Kaushish v. CIT [1981] 7 Taxman 1 (SC), Amolak Ram Khosla v. CIT [1981] 7 Taxman 51 (SC).
The higher of (MV) and (FR), subject to maximum of (SR) is reasonable expected rent.
The example given below illustrates the aforesaid propositions—
(Rs. in thousand)
A B C D E
Municipal value (MV) 40 40 40 40 40
Fair rent (FR) 46 46 46 48 51
Standard rent (SR) NA 45 35 45 63
Reasonable expected rent under Step I [MV or FR
whichever is higher, subject to maximum of SR] 46 45 35 45 51*
*Reasonable expected rent cannot exceed the amount of standard rent. Reasonable expected rent can, however, be lower than
standard rent—see Dr. Balbir Singh v. MCD [1985] 152 ITR 388 (SC). In other words, standard rent is the maximum amount
of reasonable expected rent. In the case of E, Rs. 51,000 (being higher of municipal valuation and fair rent) is the reasonable
expected rent. Since this amount is lower than the maximum ceiling (i.e., standard rent: Rs. 63,000), it is taken as reasonable
expected rent.
68.1-2 STEP II - FIND OUT RENT ACTUALLY RECEIVED OR RECEIVABLE - For the purpose of Step II, rent received or receivable
shall be calculated as follows—
Rent of the previous year (or that part of the previous year) for which the property is available for letting out xxxx
Less : Unrealised rent if a few conditions are satisfied [see para 68.1-2a] xxxx
Rent received/receivable before deducting loss due to vacancy xxxx
The following points should be noted—

1. Loss due to vacancy shall not be deducted from the computation of rent received/receivable as given above.
It shall be deducted under Step IV.
2. Sometimes a tenant pays a composite rent of property as well as certain benefits provided by the landlord. To
determine rent received/receivable, composite rent must be disintegrated and it is only that part of it attributable
to the let out of property which would form the basis for the aforesaid calculation.
3. Occupier’s (i.e., tenant’s) share of municipal tax realised from the tenant cannot be added to actual rent
received/receivable, as it is the occupier’s duty to pay municipal tax—CIT v. Gillanders Arbuthnot & Co. Ltd.
[1983] 142 ITR 598 (Cal.).
4. If the tenant has undertaken to bear the cost of repairs, the amount spent by the tenant cannot be added to rent
received or receivable—CIT v. Parbutty Churn Law [1965] 57 ITR 609 (Cal.).
5. A non-refundable deposit will be included in rent received or receivable on pro rata basis.
6. A refundable deposit cannot be included in rent received or receivable.
7. Advance rent cannot be rent received/receivable of the year of receipt.
8. Commission paid by the owner of a property to a broker for rental income is not deductible.
9. If maintenance charges are recovered from the tenant by a service provider (and not by the landlord), such
maintenance charges cannot be added to actual rent received/receivable. Conversely, if maintenance charges
are collected by the landlord, it shall be excluded from actual rent received/receivable in order to calculate rent
of the property.
68.1-2a WHEN UNREALISED RENT SHALL BE EXCLUDED [EXPLN. TO SEC. 23(1)] - Unrealised rent (which the owner could not
realise) shall be excluded from rent received/receivable only if the following conditions are satisfied—
a. the tenancy is bona fide ;
b. the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
c. the defaulting tenant is not in occupation of any other property of the assessee; and
d. the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent
or satisfies the Assessing Officer that legal proceedings would be useless.
68.1-3 COMPUTATION WITH THE HELP OF ILLUSTRATIONS - To have better understanding, the following problems are
given—
Problems
68.1-3P1 X, Y, Z, A and B separately own the following properties—
167 Gross annual value Para 68.1
(Rs. in thousand)
H1 H2 H3 H4 H5
X Y Z A B
Fair rent (FR) 107 107 107 107 107
Standard rent under the Rent Control Act (SR) NA 88 88 135 135
Actual rent 103 112 86 114 97
Unrealized rent (conditions mentioned in para 68.1-2a are satisfied) 1 2 1 2 1
Period of the previous year (in months) 12 12 12 12 12
Period during which the property remains vacant Nil Nil Nil Nil Nil
Find out the gross annual value for the assessment year 2020-21.
Solution : In this case gross annual value shall be determined as follows—
(Rs. in thousand)
X Y Z A B
Computation of gross annual value
Step I - Reasonable expected rent of the property [MV or FR,
whichever is higher, but subject to maximum of SR] 107 88 88 107 107
Step II - Rent received/receivable after deducting unrealized
rent but before adjusting loss due to vacancy 102 110 85 112 96
Step III - Amount computed in Step I or Step II, whichever is higher 107 110 88 112 107
Step IV - Loss due to vacancy Nil Nil Nil Nil Nil
Step V - Gross annual value is Step III minus Step IV 107 110 88 112 107
68.1-3E1 Find out the gross annual value in the following cases for the assessment year 2020-21—
(Rs. in thousand)
X Y Z
Municipal value (MV) 95 60 60
Fair rent (FR) 96 54 55
Standard rent under the Rent Control Act (SR) 94 78 79
Actual rent 93 106 78
The entire rent is realised. Properties are let out throughout the previous year. Find out the gross annual value for the assessment
year 2020-21.
68.1-3P2 X owns a house property (municipal valuation: Rs. 1,45,000, fair rent: Rs. 1,36,000, standard rent: Rs. 1,24,000). It is let
out throughout the previous year (rent being Rs. 8,000 per month up to November 15, 2019 and Rs. 14,000 per month thereafter). X
transfers the property to Y on January 31, 2020. Find out the gross annual value of the property in the hands of X for the assessment
year 2020-21.
Solution : Computation of gross annual value
Rs.
Municipal value from April 1, 2019 to January 31, 2020 (Rs. 1,45,000 ÷ 12 × 10) (MV) 1,20,833
Fair rent from April 1, 2019 to January 31, 2020 (Rs. 1,36,000 ÷ 12 × 10) (FR) 1,13,333
Standard rent from April 1, 2019 to January 31, 2020 (Rs. 1,24,000 ÷ 12 × 10) (SR) 1,03,333
Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum
of SR] 1,03,333
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy
(Rs. 8,000 × 7½ + Rs. 14,000 × 2½) 95,000
Step III - Amount computed in Step I or Step II, whichever is higher 1,03,333
Step IV - Loss due to vacancy Nil
Step V - Gross annual value is Step III minus Step IV 1,03,333
68.1-3E2 In problem 68.1-3P2, find out gross annual value in the hands of Y for the assessment year 2020-21.
68.1-3P3 Find out the gross annual value in the case of the following properties let out throughout the previous year for the assessment
year 2020-21—
(Rs. in thousand)
X Y Z A B
Fair rent (FR) 68 68 68 117 117
Standard rent under the Rent Control Act (SR) 62 62 70 115 115
Annual rent 67 67 73 121 110
Unrealised rent of the previous year 2019-20 which could not be realised and
conditions of rule 4 are satisfied [see para 68.1-2a] 2 6 5 50 40
Loss due to vacancy 1 1 1 1 -
Solution :
Step I - Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 62 62 68 115 115
Step II - Rent received/receivable after deducting unrealized rent but
before adjusting loss due to vacancy 65 61 68 71 70
Step IV - Loss due to vacancy 1 1 1 1 -
1. Unrealised rent shall be deducted from rent received/receivable only if conditions of rule 4 are satisfied [see para
68.1-2a]. Conversely, if these conditions are not satisfied, then unrealised rent shall not be deducted from rent received or
receivable.
2. If the conditions of rule 4 are satisfied, unrealised rent of the current previous year is deductible. In other words, unrealised
rent of the earlier year(s) is not deductible.
68.1-3E3 Recalculate gross annual value in problem 68.1-3P3 after taking into consideration the following additional information—
1. In the case of X, the defaulting tenant has not vacated the property, nor have steps been taken to compel the tenant to vacate the
property.
2. In the case of Y, the defaulting tenant has occupied another property of Y.
3. Z has not taken any step to institute legal proceedings for the recovery of unpaid rent, though Z agrees that legal proceeding will
not be useless.
4. A has rented out another property owned by him to defaulting tenant with effect from March 1, 2020.
5. B satisfies all the conditions of rule 4.
68.1-3P4 Find out the gross annual value in the case of the following properties for the assessment year 2020-21 (there is no unrealised
rent)—
(Rs. in thousand)
X Y Z A B C D
Municipal value (per annum)(MV) 60 61 60 80 80 140 140
Fair rent (per annum) (FR) 65 66 64.5 78 78 150 150
Standard rent under the Rent Control Act (per annum) (SR) 59.5 59 63 85 76 120 120
Annual rent 72 57 72 72 NA 96 144
Property remains vacant (in number of month) (1) (1½) (5) (3) (12) (10) (10)
Loss due to vacancy 6 7.125 30 18 - 80 120
Solution :
Step I - Reasonable expected rent of the property [MV or
FR, whichever is higher, but subject to maximum of SR] 59.5 59 63 80 76 120 120
Step II - Rent received/receivable after deducting un-
realized rent but before adjusting loss due to vacancy 72 57 72 72 Nil 96 144
Step III - Amount computed in Step I or Step II, whichever
is higher 72 59 72 80 76 120 144
Step IV - Loss due to vacancy 6 7.125 30 18 76 80 120
Step V - Gross annual value is Step III minus Step IV 66 51.875 42 62 Nil 40 24
68.1-3E4 Recalculate the gross annual value in the case of A if his property remains vacant throughout the previous year 2019-20
and, consequently, the figure of annual rent is not available. Also recalculate gross annual value in the cases of C and D if their
properties remain vacant for one month only.
169 Deduct municipal taxes Para 68.2
68.1-3P5 Find out the gross annual value in the following cases for the assessment year 2020-21 (there is no unrealised rent)—
X Y
Rs. Rs.
Municipal value (per annum) (MV) 61,000 61,000
Fair rent (per annum) (FR) 1,08,000 30,000
Standard rent under the Rent Control Act (per annum) (SR) 60,000 60,000
Rate of rent
- old tenant (from April 1, 2019 to June 30, 2019) (per month) 5,000 2,000
- new tenant (from July 1, 2019 to December 31, 2019) (per month) 9,000 2,500
Period when the property remains unoccupied because suitable tenant January 1, 2020 to January 1, 2020 to
was not available March 31, 2020 March 31, 2020
Actual rent received/receivable (if there is no vacancy) 96,000 28,500
Loss due to vacancy 27,000 7,500
Solution : Computation of gross annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever
is higher, but subject to maximum of SR] 60,000 60,000
Step II - Rent received/receivable after deducting unrealized rent but
before adjusting loss due to vacancy 96,000 28,500
Step III - Amount computed in Step I or Step II, whichever is higher 96,000 60,000
Step IV - Loss due to vacancy 27,000 7,500
Step V - Gross annual value is Step III minus Step IV 69,000 52,500
68.1-3E5 In problem 68.1-3P5, assume that the property of X remains vacant throughout the previous year 2019-20. However, the
property of Y remains vacant from April 1, 2019 to January 31, 2020 and it is let out from February 1, 2020 onwards (rent being
Rs. 10,000 per month). Recalculate the gross annual value for the assessment year 2020-21 (other figures remain the same).
68.1-3P6 Find out the gross annual value in respect of the following properties for the assessment year 2020-21—
(Rs. in thousand)
X Y Z A B
Fair rent (FR) 145 185 185 145 262
Standard rent (SR) 142 175 175 142 241
Actual rent if property is let out throughout the previous year 2019-20 168 168 168 168 252
Unrealised rent of the previous year 2019-20 14 42 1 70 42
Unrealised rent of the previous year 2018-19 3 4 5 6 7
Period when the property remains vacant (in number of months) (½) (1) (1) (3) (5)
Loss due to vacancy 7 14 14 42 105
Solution :
Step I - Reasonable expected rent of the property [MV or FR, whichever
is higher, but subject to maximum of SR] 142 175 175 142 241
Step II - Rent received/receivable after deducting unrealized rent of the
current previous year but before adjusting loss due to vacancy (un-
realized of earlier years is not considered) 154 126 167 98 210
Step IV - Loss due to vacancy 7 14 14 42 105
68.1-3E6 In problem 68.1-3P6 recalculate the gross annual value in the case of A if property is let out (rent being Rs. 48,000 per
annum) only for 10 months, vacant for 2 months and rent of 4 months could not be realised (other figures remain the same).
68.2 Deduct municipal taxes - From the gross annual value computed above, deduct municipal taxes (including
service taxes) levied by any local authority in respect of the house property. Municipal taxes are deductible only
if (a) these taxes are borne by the owner, and (b) are actually paid by him during the previous year.
Municipal taxes, levied by local authority but not paid by the assessee during the previous year, are not
deductible. If property is situated in a foreign country, municipal taxes levied by foreign local authority are
deductible (if such taxes are paid by the owner).
The remaining amount left after deduction of municipal taxes is net annual value.
68.3 Deduction under section 24 - The following two deductions are available under section 24—
a. standard deduction [see para 68.3-1] ; and
b. interest on borrowed capital [see para 68.3-2].
The list of allowance of section 24 is exhaustive—Indian City Properties v. CIT [1965] 55 ITR 262 (Cal.), CIT v. H.G.
Gupta & Sons [1984] 149 ITR 253 (Delhi). In other words, no other deduction can be claimed. For instance, no
deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection
charges, electricity, water supply, salary of liftman, etc.
68.3-1 STANDARD DEDUCTION [SEC. 24(a)] - 30 per cent of net annual value is deductible irrespective of any
expenditure incurred by the taxpayer.
68.3-2 INTEREST ON BORROWED CAPITAL [SEC. 24(b)] - Interest on borrowed capital is allowable as deduction, if capital
is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.
The following points should also be kept in view :—
 If capital is borrowed for the purpose of purchasing a plot of land, interest liability is deductible even if
construction is financed out of own funds.
 Interest on borrowed capital is deductible on “accrual” basis. It can be claimed as deduction on yearly basis,
even if the interest is not actually paid during the year.
 Deduction is available even if neither the principal nor the interest is a charge on property.
 Interest on unpaid interest is not deductible.
 No deduction is allowed for any brokerage or commission for arranging the loan.
 Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is allowable as
deduction—Circular No. 28, dated August 20, 1969. This rule is applicable even if the first loan was interest-free
loan.
 Any interest chargeable under the Act, in the hands of recipient and payable out of India, on which tax has not
been paid or deducted at source, and in respect of which there is no person who may be treated as an agent, is
not deductible, by virtue of section 25, in computing income chargeable under the head “Income from house
property”.
 Interest on borrowed capital (according to rules given in this para and para 68.3-2a) is deductible fully without
any maximum ceiling (in the case of a let out property).
 Transaction of allotment of a property to an assessee on instalment basis does give rise to relationship of
borrower and lender between the assessee and the estate officer and as such interest paid by the assessee on
instalments constitutes interest on borrowed capital.
68.3-2a INTEREST OF PRE-CONSTRUCTION PERIOD - Interest payable by an assessee in respect of funds borrowed for
the acquisition or construction of a house property and pertaining to a period prior to the previous year in which
such property has been acquired or constructed, to the extent it is not allowed as a deduction under any other
provision of the Act, will be deducted in five equal annual instalments, commencing from the previous year in
which the house is acquired or constructed.
 What is pre-construction period - Interest of pre-construction period is deductible in five equal instalments. The
first instalment is deductible in the year in which construction of property is completed or in which property is
acquired. For this purpose “pre-construction period” means the period commencing on the date of borrowing
and ending on (a) March 31 immediately prior to the date of completion of construction/date of acquisition or
(b) date of repayment of loan, whichever is earlier.
Problems
➠ 68.3-2P1 X takes a loan of Rs. 40,000 @ 15 per cent per annum for constructing a house on June 10, 2014. Construction of the house
is completed on January 20, 2020.
Date of repayment of loan is (a) January 16, 2025, or (b) June 30, 2021, or (c) October 31, 2017.
Solution : If date of repayment of loan is January 16, 2025 or June 30, 2021, then pre-construction period ends on March 31,
2019 (being March 31 immediately prior to the date of completion of construction/acquisition). Interest on Rs. 40,000 @ 15
per cent per annum from June 10, 2014 to March 31, 2019 is Rs. 28,849. Amount of instalment deductible in first 5 years is
Rs. 5,770 (i.e., Rs. 28,849/5).
If date of repayment of loan is October 31, 2017, then pre-construction period ends on October 31, 2017 (being March 31,
immediately prior to completion of construction or date of repayment of loan, whichever is earlier). Interest on Rs. 40,000
@ 15 per cent per annum from June 10, 2014 to October 31, 2017 comes to Rs. 20,351 (instalment deductible in first 5 previous
years being Rs. 4,070). The table given below highlights the interest deductible in different previous years :
171 Compute taxable income from self-occupied property Para 69
Previous years
Ending 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26
on March
31, 2020
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
If date of repayment of loan is January
16, 2025 :
Current year’s interest 6,000* 6,000 6,000 6,000 6,000 4,767 Nil
Pre-construction period’s interest 5,770 5,770 5,770 5,770 5,770 Nil Nil
Total deduction 11,770 11,770 11,770 11,770 11,770 4,767 Nil
If date of repayment of loan is June 30,
2021
Current year’s interest 6,000* 6,000 1,479 Nil Nil Nil Nil
Total deduction 11,770 11,770 7,249 5,770 5,770 Nil Nil
If date of repayment of loan is October 31,
2017 :
Current year’s interest Nil Nil Nil Nil Nil Nil Nil
Total 4,070 4,070 4,070 4,070 4,070 Nil Nil
Note - Interest is calculated on the basis of number of days. While the day of borrowing is included, the day of repayment
of loan is excluded.
➠ 68.3-2E1 [P5.12]** X takes a loan on January 3, 2016 of Rs. 1,60,000 @ 18 per cent per annum for construction of a commercial
house property. Construction of the property is completed on July 17, 2019. Loan is repaid on November 30, 2019. Calculate the
amount of interest which is deductible for the assessment years 2020-21 and 2021-22.
 HOW TO COMPUTE TAXABLE INCOME FROM SELF-OCCUPIED PROPERTY

69. Before steps for computation are explained, it would be advisable to highlight the following features which
regulate tax incidence on self-occupied properties—
 A property occupied for own business purposes - Where an assessee uses his property for carrying on any business
or profession, no income is chargeable to tax under the head “Income from house property”. The assessee, in such
a case, is not entitled to claim any deduction on account of rent in respect of such house property in computing
taxable profits of the business or profession [see para 66.3].
 Own property used for own residential purposes - Where an assessee has occupied his property for own residen-
tial purposes, tax treatment is as follows –

If only one property is used for own residential It is treated as self-occupied property
purposes
If two properties are used for own residential Two residential properties are treated as self-occupied proper-
purposes ties
If more than two properties are used for own resi- Only two houses (according to the choice† of the taxpayer) are
dential purposes treated as self-occupied properties and other house/houses will
be treated as “deemed to be let out”
In the case of “deemed to be let out” property/properties, taxable income will be calculated in the manner
explained in para 68 (gross annual value shall be taken as reasonable expected rent).
In the case of two self-occupied properties, treated as such, the procedure for determining taxable income is as
follows –
*Although the construction of the property is completed on January 20, 2020 (i.e., during 2019-20), the interest of the entire financial year
2019-20 is treated as current year’s interest. Interest prior to the year 2019-20 (i.e., the year in which construction is completed) is pre-construction
period’s interest. The same rule is applicable if the construction is completed on March 31, 2020.
†The option should be exercised in such a way that the net income of a taxpayer is reduced to the minimum possible level. Moreover, the option
may be changed every year [see problem 69.4-P1 for how to exercise the option in order to reduce the tax bill].
69.1 Computation of annual value of self-occupied properties - Mode of computation is given below –
 If a person has occupied one property (or two properties) for his residential purposes, such property (or
properties) are treated as “self-occupied property (or properties)”. Such property (or properties) may fall in any
one of the following categories –
 If a person has occupied more than two properties for his residential purposes, only two properties (selected
by the taxpayer) are treated as “self-occupied properties” and these properties may fall under any of the
following categories –
Different situations Para No.
 If such property is used throughout the previous year for own residential purposes, it is not let out or 69.1-1
put to any other use
 If such property could not be occupied throughout the previous year because employment, business 69.1-2
or profession of the owner is situated at some other place
 When a part of the property (being independent residential unit) is self-occupied and the other part 69.1-3
is let out
 When such property is self-occupied for a part of the year and let out for the other part of the year 69.1-4
69.1-1 A HOUSE PROPERTY FULLY UTILISED THROUGHOUT THE PREVIOUS YEAR FOR SELF-RESIDENTIAL PURPOSES [Sec. 23(2)(a)] -
Where the property is in the occupation of the owner for his own residence, the annual value of such house shall
be taken to be nil, under section 23(2)(a), if the following conditions are satisfied :
Condition 1 The property (or part thereof) is not actually let during whole (or any part) of the previous year.
Condition 2 No other benefit is derived therefrom.
 Examples - The following are some of the examples where the above conditions are satisfied—
1. X owns a property. Throughout the previous year 2019-20, it is used by him (and his family members) for own
residence purposes. No part of the property is let out or put to some other use.
2. Y owns a property. He sells the property on December 1, 2019. Between April 1, 2019 and December 1, 2019
it is used by Y and his family for residential purpose. It is neither let out nor put to any other use.
3. Z purchases a property on June 1, 2019. Since then it is occupied by Z for his residential purposes. Neither it
is let out nor it is put to some other use.
4. A owns a house property. During the previous year 2019-20, he retains exclusive control over possession of
house owned by him, though he may not be actually present in house, when he is away from it, he is still in
constructive possession of his residential house.
 Computation of income - In the case of one property (or two properties) used throughout the previous year by
the owner for his residential purpose, income shall be determined as follows—
Gross annual value Nil
Less: Municipal tax Nil
Net annual value Nil
Less: Deduction under section 24
Standard deduction Nil
Interest on borrowed capital Deductible [see para 69.1-1a]
Income from one self-occupied property xxxx
69.1-1a INTEREST ON BORROWED CAPITAL [SEC. 24(b)] - Interest on borrowed capital [of the current year and pre-
construction period] is deductible as explained in para 68.3-2. However, it is deductible in the case of one self-
occupied property (or two self-occupied properties) subject to a maximum ceiling given below –
 Maximum ceiling if capital is borrowed on or after April 1, 1999 - If the following three conditions are satisfied,
interest on borrowed capital is deductible up to Rs. 2,00,000—
Condition 1 Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
Condition 2 The acquisition or construction should be completed within 5 years from the end of financial year in which
the capital was borrowed.
Condition 3 The person extending the loan certifies that such interest is payable in respect of the amount advanced
for acquisition or construction of the house or as re-finance of the principal amount outstanding under
an earlier loan taken for such acquisition or construction.
1. If capital is borrowed for any other purpose (e.g., if capital is borrowed for reconstruction, repairs or renewals
of a house property), then the maximum amount of deduction on account of interest is Rs. 30,000 (and not Rs.
2,00,000).
173 Computation of annual value of self-occupied properties Para 69.1
2. There is no stipulation regarding the date of commencement of construction. Consequently, the construction
of the residential unit could have commenced before April 1, 1999 but, if the aforesaid three conditions are
satisfied, the higher deduction of Rs. 2,00,000 would be available.
3. There is no stipulation regarding the construction/acquisition of the residential unit being entirely financed
by the loan taken on or after April 1, 1999. It may be so in part. However, the higher deduction of Rs. 2,00,000
towards interest can be claimed only in relation to that part of the loan which has been taken and utilised for
construction/acquisition after April 1, 1999. The loan taken prior to April 1, 1999 will carry deduction of interest
up to Rs. 30,000 only (as stated in para given below).
 Maximum ceiling in any other case - If the above three conditions [i.e., conditions (1), (2) and (3) (supra)] are not
satisfied, then interest on borrowed capital is deductible up to a maximum of Rs. 30,000. In other words, in the
following two cases, interest on borrowed capital is deductible up to Rs. 30,000—
Case 1 If capital is borrowed before April 1, 1999 for purchase, construction, reconstruction, repairs or renewals of
a house property.
Case 2 If capital is borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
Problems
69.1-1P1 X owns a house property. It is used by him throughout the previous year 2019-20 for his (and his family members) residence.
Municipal value of the property is Rs. 1,66,000, whereas fair rent is Rs. 1,76,000 and standard rent is Rs. 1,50,000. The following
expenses are incurred by X: repairs: Rs. 20,000, municipal tax : Rs. 16,000, insurance: Rs. 2,000; interest on capital borrowed to
construct the property: Rs. 1,66,000; interest on capital borrowed by mortgaging the property for daughter’s marriage: Rs. 20,000 (in
either case capital is borrowed before April 1, 1999). Income of X from business is Rs. 7,10,000. Find out the net income of X for the
Solution : Rs.
Less: Interest on borrowed capital (maximum: Rs. 30,000) – 30,000
Property income – 30,000
Net income 6,80,000
69.1-1E1 Recompute the income in problem 69.1-1P1 if capital is borrowed (a) for construction of the property on April 1, 1999 and
construction is completed on December 2, 1999; or (b) on April 1, 1999 for repairs of the property and repair is completed on December
2, 1999.
69.1-1P2 X owns two residential houses – one at Mumbai and another at Bengaluru. These properties are used by X and his family for
own residential purposes throughout the previous year (not let out, not put to any other use). Acquisition of these properties was partly
financed by taking housing loan from banks. Find out income from these properties for the assessment year 2020-21 under the following
different situations (construction in all cases completed within 3-4 years of taking loan) –
Different Mumbai property Bengaluru property
situations When loan Interest liability of the previous year When loan Interest liability of the previous year
was taken 2019-20 (including pre-construction was taken 2019-20 (including pre-construction
period interest) period interest)
Rs. Rs.
Situation 1 2010-11 2,60,000 2012-13 3,10,000
Situation 2 2012-13 1,90,000 2014-15 1,70,000
Situation 3 2011-12 2,80,000 2009-10 90,000
Situation 4 2014-15 2,10,000 1997-98 40,000
Situation 5 1997-98 2,10,000 2013-14 40,000
Situation 6 2015-16 2,70,000 1998-99 20,000
Situation 7 2014-15 1,60,000 1997-98 80,000
Situation 8 2017-18 4,90,000 1998-99 27,000
Situation 9 1997-98 25,000 1998-99 21,000
Situation 10 2007-08 1,10,000 2001-02 63,000
Solution :
In the case of one or two self-occupied properties, annual value is nil. Interest liability is deductible up to Rs. 30,000. If,
however, capital is borrowed on or after April 1, 1999 for acquisition/construction of a property (and a few conditions as
given above are satisfied), interest liability is deductible in aggregate up to Rs. 2,00,000. In view of this legal position,
computation of deductible interest and income under the head “Income from house property” will be as follows –
Interest deductible for Interest deductible for Aggregate interest deductible Income from two self-
Mumbai property Bengaluru property under section 24 occupied properties
Rs. Rs. Rs. Rs.
Situation 1 2,00,000 2,00,000 2,00,000 (–) 2,00,000
Situation 2 1,90,000 1,70,000 2,00,000 (–) 2,00,000
Situation 3 2,00,000 90,000 2,00,000 (–) 2,00,000
Situation 4 2,00,000 30,000 2,00,000 (–) 2,00,000
Situation 5 30,000 40,000 70,000 (–) 70,000
Situation 6 2,00,000 20,000 2,00,000 (–) 2,00,000
Situation 7 1,60,000 30,000 1,90,000 (–) 1,90,000
Situation 8 2,00,000 27,000 2,00,000 (–) 2,00,000
Situation 9 25,000 21,000 30,000 (–) 30,000
Situation 10 1,10,000 63,000 1,73,000 (–) 1,73,000
69.1-1E2 Recompute the taxable income in Situation 10 in the above problem if interest liability of Mumbai property pertains to
loan taken by X for the purpose of reconstruction of the property.
69.1-2 A HOUSE PROPERTY, WHICH IS NOT ACTUALLY OCCUPIED BY THE OWNER OWING TO EMPLOYMENT OR BUSINESS/PROFESSION,
CARRIED ON AT ANY OTHER PLACE [SEC. 23(2)(b)] - Section 23(2)(b) is applicable if the following conditions are satisfied—
Condition 1 The taxpayer owns one (or two) house properties, which cannot actually be occupied by him by reason
of the fact that owing to his employment, business or profession, carried on at any other place.
Condition 2 He has to reside at that other place in a building not owned by him.
Condition 3 The property (or properties) mentioned at (a) (or part thereof) is not actually let out during whole (or any
part of the previous year).
Condition 4 No other benefit is derived from the above property (or properties) by the owner.
If the above conditions are satisfied, income from the property (or properties) shall be determined according to
the method given in para 69.1-1.
69.1-2a OTHER POINTS - The following points should also be kept in view—
 Some nexus between the fact of residing in a building not belonging to the assessee and his employment,
business or profession must be shown before the benefit of section 23(2)(b) can be availed in respect of residential
house which is not occupied by the assessee. Examine the case given below—
X owns a house but he resides with his father in the same town in a house two miles away. He is a bachelor and,
therefore, for his own convenience resides with his father. His own house is lying vacant. Since X has not left his
house vacant on account of business compulsion but on account of personal convenience, he will not be entitled
to the benefit of section 23(2)(b). Gross annual value in this case cannot be taken as equal to zero. Income from
house property shall be calculated as if the house is deemed to be let out.
 Section 23(2)(b) would apply in all those cases where officials and dignitaries, under the Constitution of India
and even otherwise had to reside in official residences instead of their own residences by reason of their office
— CIT v. Justice Avadh Behari Rohtagi [1985] 21 Taxman 409 (Delhi).
69.1-3 WHEN A PART OF PROPERTY IS SELF-OCCUPIED AND A PART IS LET OUT - If a house property consists of two or more
independent residential units, one of which is self-occupied for own residential purposes and other unit(s) are
let out, income is computed as follows—
1. Unit self-occupied for residential purpose throughout the previous year (which is not let out
nor put to any other use) See para 69.1-1
2. Let out units See para 68
3. Unit self-occupied for residential purpose for a part of year and lying vacant for remaining part
because of business, profession or employment, is situated at some other place See para 69.1-2
175 Computation of annual value of self-occupied properties Para 69.1
Problems
69.1-3 P1 X owns a residential house property. It has two equal residential units—Unit 1 and Unit 2. While Unit 1 is self-occupied
by X for his residential purpose, Unit 2 is let out (rent being Rs. 6,000 per month, rent of 2 months could not be recovered). Municipal
value of the property is Rs. 1,30,000, standard rent is Rs. 1,25,000 and fair rent is Rs. 1,40,000. Municipal tax is imposed @ 12 per cent
which is paid by X. Other expenses for the previous year 2019-20 being repairs: Rs. 250, insurance: Rs. 600, interest on capital (borrowed
during 1998) for constructing the property: Rs. 63,000.
Find the income of X for the assessment year 2020-21 on the assumption that income of X from other sources is Rs. 1,80,000.
Solution : Unit 1 - Self-occupied Rs.
Less: Interest on borrowed capital [1/2 of Rs. 63,000 or Rs. 30,000 whichever is lower] 30,000
Income of Unit 1 (-) 30,000
Unit 2 - Let out
Municipal value (50% of Rs. 1,30,000) (MV) 65,000
Fair rent (50% of Rs. 1,40,000) (FR) 70,000
Standard rent (50% of Rs. 1,25,000) (SR) 62,500
Annual rent (Rs. 6,000 × 12) 72,000
Unrealised rent 12,000
Gross annual value
of SR] 62,500
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy 60,000
Step III - Amount computed in Step I or Step II, whichever is higher 62,500
Step V - Gross annual value is Step III minus Step IV 62,500
Less: Municipal tax (50% of 12% of Rs. 1,30,000) 7,800
Net annual value 54,700
Standard deduction (30% of Rs. 54,700) 16,410
Interest on borrowed capital (50% of Rs. 63,000) 31,500
Income of Unit 2 6,790
Computation of income of X
Income from house property
Unit 1: Rs. (-) 30,000
Unit 2: Rs. 6,790 (-) 23,210
Other income 1,80,000
Net income 1,56,790
69.1-3E1 Make the following changes in problem 69.1-3P1 and recalculate net income for the assessment year 2020-21—
a. municipal tax is paid by X on April 1, 2020;
b. Unit 2 is let out on monthly rent of Rs. 11,000 (rent of two months could not be recovered); and
c. capital is borrowed on April 1, 2017 and construction of the house is completed on March 31, 2018.
69.1-4 WHERE A HOUSE IS SELF-OCCUPIED FOR A PART OF THE YEAR AND LET OUT FOR REMAINING PART OF THE YEAR - In this case
the benefit of section 23(2)(a) [see para 69.1-1] is not available and income will be computed as if the property is
let out.
Problems
69.1-4P1 X owns a property at Delhi (municipal value: Rs. 1,64,000, fair rent: Rs. 2,16,000, standard rent: Rs.1,80,000). The house
is let out up to January 31, 2020 (monthly rent being Rs. 14,000). From February 1, 2020, the property is self-occupied for own residential
purposes. Expenses incurred by X are: municipal tax: Rs. 6,000 (actually paid), repairs: Rs. 2,100, insurance: Rs. 1,100, interest on
capital borrowed (date of borrowing being June 10, 1991) for acquiring the property: Rs. 1,23,000. Assuming that the income of X from
other sources is Rs. 1,86,000, find out the net income of X for the assessment year 2020-21. Does it make any difference if property is
let out up to January 31, 2020 @ Rs. 19,000 per month? There is no unrealised rent.
Solution : If rent is If rent is

Rs. 14,000 Rs. 19,000
per month per month
Rs. Rs.
Municipal valuation (MV) 1,64,000 1,64,000
Fair rent (FR) 2,16,000 2,16,000
Standard rent (SR) 1,80,000 1,80,000
Annual rent 1,40,000 1,90,000
Gross annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but
subject to maximum of SR] 1,80,000 1,80,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting
loss due to vacancy 1,40,000 1,90,000
Step III - Amount computed in Step I or Step II, whichever is higher 1,80,000 1,90,000
Step IV - Loss due to vacancy Nil Nil
Step V - Gross annual value is Step III minus Step IV 1,80,000 1,90,000
Less: Municipal tax 6,000 6,000
Net annual value 1,74,000 1,84,000
Standard deduction (30% of Rs. 1,74,000 or Rs. 1,84,000) 52,200 55,200
Interest on borrowed capital 1,23,000 1,23,000
Income from property (-)1,200 5,800
Other income 1,86,000 1,86,000
Net income 1,84,800 1,91,800
69.1-4E1 Suppose in problem 69.1-4P1, the property is let out up to April 15, 2019 (rent being Rs. 14,000 per month) and self-
occupied for the remaining part of the previous year 2019-20 and other information remains the same. Find out the net income for
the assessment year 2020-21.
69.2 Provisions in brief - The provisions governing tax incidence on self-occupied house property/properties
may be summarized as follows—
Self-occupied property/properties Tax treatment
1. If such property is used by the owner for the purpose Income is not taxable under the head “Income from house
of carrying on his business or profession property”. Any income and expenditure in respect of such
property will be considered while calculating income from
business or profession under section 28
2. If such property is used for the residence of the owner
and his family members
2.1 If only one property is used for such purpose–
2.1-1 If such property is used throughout the previ- Nothing is taxable. Only interest on borrowed capital is
ous year for own residential purposes, it is not let out deductible subject to a maximum of Rs. 30,000/2,00,000 [see
or put to any other use para 69.1-1]
2.1-2 If such property could not be occupied through- Same as above [see para 69.1-2]
out the previous year because employment, busi-
ness or profession of the owner is situated at some
other place
2.1-3 When a part of the property (being indepen- Income from the independent unit, which is self-occupied,
dent residential unit) is self-occupied and the other will not be taxable. Interest on borrowed capital is deductible
part is let out up to Rs. 30,000/Rs. 2,00,000. Income from the unit which is let
out is to be computed as if the unit is let out [see para 68]
2.1-4 When such property is self-occupied for a part No concession is available. The house will be taken as let out
of the year and let out for the other part of the year property
2.2 If two properties are used for own residential pur- Two residential properties are treated as self-occupied prop-
poses erties and tax treatment, as given in point 2.1, is applicable.
177 How to make selection Para 69.4
Self-occupied property/properties Tax treatment

2.3 If more than two properties are used for own resi- Only two houses (according to the choice of the taxpayer) are
dential purposes treated as self-occupied properties and tax treatment, as given
in point 2.1, is applicable. Other remaining property/proper-
ties will be treated as “deemed to be let out” property (in the
case of a deemed to be let out property, income is calculated
as if it is a let out property). See para 69.4 for detailed discus-
sion.
69.3 Other points for consideration - The aforesaid rule (i.e., provision mentioned in paras 69.1-1, 69.1-2 and
69.1-3) is applicable only in the case of natural persons. In other words, limited liability companies, firms,
associations and clubs cannot claim the benefit of steps mentioned above as they cannot occupy a house for
residential purposes. The karta of a Hindu undivided family (being a natural person) is, however, entitled to the
aforesaid benefit.
 When owner occupies a house in some other capacity - The aforesaid provisions cannot be applied to cases where
the owner of the house is not occupying his own house in his capacity as “owner” for residential purposes. If the
assessee lets out his house to his employer-company which, in turn, allots the same to him as rent-free quarter,
the assessee is not entitled to the aforesaid benefits, as he occupies the house not as owner but only in his capacity
as sub-tenant of the employer-company—D.R. Sunder Raj v. CIT [1979] 2 Taxman 458 (AP).
69.4 How to make selection if more than two properties occupied for own residential purposes - If a person
has occupied more than two properties for his residential purposes, only two properties will be treated as self-
occupied properties. Other remaining property/properties will be deemed as let out. Method of calculating
taxable income in such case is discussed in the problem given below.
Problem
69.4-P1 X owns 5 houses. These houses are used by him for his residential purposes. These houses are not let out during any part of
the previous year 2019-20. No other benefit is derived from these houses. The following information is noted from the records of X –
House 1 House 2 House 3 House 4 House 5
Rs. Rs. Rs. Rs. Rs.
Municipal value or fair rent, whichever is higher (but subject to
maximum of standard rent) 12,00,000 12,70,000 27,60,000 4,90,000 15,90,000
Municipal taxes paid by X 40,000 1,20,000 1,90,000 30,000 1,20,000
Interest on capital borrowed to purchase properties (date of
borrowing in all cases is after April 1, 1999) – 11,000 1,70,000 2,00,000 2,30,000
Interest on capital borrowed to finance repair, renewal or recons-
truction of house properties 2,10,000 7,89,000 14,00,000 – –
Business income of X is Rs. 32,00,000. He is entitled for a deduction of Rs. 2,40,000 under sections 80C and 80D. Compute net income
Solution :
X has occupied 5 properties for his own residential purposes. Only two houses (according to the choice of X) will be treated
as self-occupied properties. Other 3 houses will be “deemed to be let out”. He has the following options –
Different options Houses to be treated as self-occupied Houses deemed to be let out
Option 1 House 1 and House 2 House 3, House 4 and House 5
Para 70 Income from house property 178
In order to minimise taxable income (and maximise loss to be carried forward), one may proceed as follows –
Step 1 - Find out income of 5 houses as if these are treated as “self-occupied property”.
Step 2 - Find out income of 5 houses as if these are “deemed to be let out”.
Step 3 - Find out the difference between income of each house computed under Step 1 and Step 2.
Step 4 - Two houses (reporting highest difference as per Step 3) may be taken as “self-occupied properties”. Other remaining
houses will be “deemed to be let out”.
House 1 House 2 House 3 House 4 House 5
Rs. Rs. Rs. Rs. Rs.
Step 1 - Computation of income if these are self-occupied properties –
Net annual value Nil Nil Nil Nil Nil
Less: Interest on borrowed capital 30,000 41,000 2,00,000 2,00,000 2,00,000
Income from property (a) (–)30,000 (–)41,000 (–)2,00,000 (–)2,00,000 (–)2,00,000
Step 2 - Computation of income if these are deemed to be let out –
Gross annual value (being municipal value or fair rent, which-
ever is lower but subject to maximum of standard rent) 12,00,000 12,70,000 27,60,000 4,90,000 15,90,000
Less: Municipal taxes 40,000 1,20,000 1,90,000 30,000 1,20,000
Net annual value 11,60,000 11,50,000 25,70,000 4,60,000 14,70,000
Standard deduction 3,48,000 3,45,000 7,71,000 1,38,000 4,41,000
Interest on borrowed capital 2,10,000 8,00,000 15,70,000 2,00,000 2,30,000
Income from property (b) 6,02,000 5,000 2,29,000 1,22,000 7,99,000
Step 3 - Step 1 minus Step 2 [(a) – (b)] (–)6,32,000 (–)46,000 (–)4,29,000 (–)3,22,000 (–)9,99,000
Step 4 - Selection : House 1 and House 5 (to be taken as self-occupied
properties)
Income of House 1 and House 5 (self-occupied properties)
(*total interest pertaining to self-occupied properties cannot
exceed Rs. 2,00,000) (–)30,000 – – – (–)1,70,000*
Income of House 2, House 3 and House 4 (deemed to be let out
properties) – 5,000 2,29,000 1,22,000 –
Income from properties (–)30,000 5,000 2,29,000 1,22,000 (–)1,70,000
Income computation of X –
Rs.
Income from house property [Rs. (–)30,000 + Rs. 5,000 + Rs. 2,29,000 + Rs. 1,22,000 + Rs. (–)1,70,000] 1,56,000
Less: Deduction under sections 80C and 80D 2,40,000
69.4-E1 Recompute the taxable income in the above problem on the assumption that X has occupied House 1, House 2, House 3 and
House 4 for his residential purposes. House 5 is let out (annual rent being Rs. 15,00,000). No other change in data.
 WHAT ARE SPECIAL PROVISIONS WHEN UNREALISED RENT IS REALISED SUBSE-

QUENTLY [SEC. 25A]
70. The amount of rent received in arrears or the amount of unrealised rent realised subsequently by an assessee
shall be charged to income-tax in the previous year in which such rent is received or realized. The following
points should be noted –
1. The recipient of arrears of rent (or the recipient of unrealised rent) is chargeable to tax in the year in which
such rent is received, regardless of the fact whether in the year of receipt the house property is owned by him
or not.
2. The recipient can claim 30 per cent of the arrears of rent or the unrealised rent realised subsequently as
deduction.
179 Problems on computation of property income Problem 72-P1
Problem
70-P1 X owns a residential property in Chennai. It is let out to A Ltd. (rent being Rs. 40,000 per month). Municipal value of the
property is Rs. 2,20,000, fair rent is Rs. 4,80,000. A Ltd. pays municipal tax. On April 7, 2019, rent is increased from Rs. 40,000
per month to Rs. 45,000 per month with retrospective effect from April 1, 2018. X gets Rs. 60,000 (being arrears of rent for the financial
year 2018-19) on April 20, 2019. Find out the net income of X for the assessment year 2020-21 on the assumption that his income
from other sources is Rs. 5,00,000.
Solution :
Rs.
Municipal value (MV) 2,20,000
Fair rent (FR) 4,80,000
Standard rent (SR) NA
Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, subject to maximum of SR] 4,80,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy
(Rs. 45,000 × 12) 5,40,000
Less: Municipal tax (paid by tenant, not deductible) Nil
Net annual value 5,40,000
Less: Standard deduction under section 24(a) (i.e., 30% of net annual value) 1,62,000
Income from property 3,78,000
Arrears of rent (pertaining to earlier year) received in the previous year 2019-20
Arrears received (Rs. 5,000 × 12) 60,000
Less: Standard deduction under section 25A(2) [i.e., 30% of Rs. 60,000] 18,000
Arrears of rent chargeable to tax 42,000
Income under the head “Income from house property” (i.e., Rs. 3,78,000 + Rs. 42,000) 4,20,000
Net income 9,20,000
70-E1 In problem 70-P1 make a following changes and recalculate net income for the assessment year 2020-21 –
1. Rent is increased from Rs. 40,000 per month to Rs. 50,000 (and not Rs. 45,000) per month.
2. Arrears of rent (pertaining to the previous year 2018-19) is Rs. 1,20,000. Out of which Rs. 60,000 is received on April 20, 2019
and Rs. 60,000 is received on April 20, 2020.
 WHAT IS MODE OF TAXATION OF ARREARS OF RENT

71. See para 70.
 Problems on computation of property income
72-P1 X (age : 24 years, resident) has occupied two houses for his residential purposes, particulars of which are as follows:
House I House II
Rs. Rs.
Municipal valuation (MV) 60,000 30,000
Fair rent (FR) 85,000 32,000
Standard rent under Rent Control Act (SR) 65,000 36,000
Municipal taxes paid 10 per cent 10 per cent
Fire insurance 600 360
Interest on capital borrowed for construction of houses (loan was taken in 2015-16 and
construction is completed within one year) 1,40,000 1,70,000
Income of X from business is Rs. 9,30,000. Determine the taxable income and tax liability for the assessment year 2020-21 on the
assumption that he contributes Rs. 1,40,000 towards the public provident fund.
Solution : X has occupied two houses for his own residential purposes. These houses will be treated as self-occupied and
income will be calculated as follows –
Rs.
Annual value of two houses Nil
Problem 72-P2 Income from house property 180
Rs.
Interest on borrowed capital (Rs. 1,40,000 + Rs. 1,70,000, but subject to maximum of Rs. 2,00,000) 2,00,000
Income from House 1 and House 2 (–) 2,00,000
Net income 5,90,000
Tax on Rs. 5,90,000 30,500
Less: Rebate under section 87A Nil
Balance 30,500
72-E1 [P5.13]* Mrs. X (age : 22 years) has occupied two houses for her residential purposes, particulars of which are as follows :
House I House II
Rs. Rs.
Municipal valuation (MV) 30,000 90,000
Fair rent (FR) 28,000 95,000
Standard rent under the Rent Control Act (SR) 20,000 80,000
Municipal taxes paid 3,000 9,000
Interest on borrowed capital 400 1,200
Repairs Nil 100
Business income of Mrs. X is Rs. 11,26,000. Besides Mrs. X is employed by a private limited company on monthly salary of Rs. 68,500.
Mrs. X contributes Rs. 1,22,000 towards public provident fund. Determine the taxable income and tax liability of Mrs. X for the
72-P2 X (age : 61 years) has occupied three houses for his residential purposes, particulars of which are as follows :
House I House II House III
Rs. Rs. Rs.
Standard rent under the Rent Control Act (SR) [*not applicable] 15,000 20,000 —*
Municipal valuation (MV) 10,000 30,000 30,000
Fair rent (FR) 18,000 18,000 35,000
Municipal taxes paid 1,200 2,400 3,600
Repairs Nil Nil 200
Insurance premium 1,200 1,300 600
Ground rent 1,800 7,000 400
X borrows Rs. 90,000 @ 20 per cent per annum for construction of House III (date of borrowing : June 1, 2010, date of repayment of loan :
May 10, 2021).
Construction of all the houses is completed in May 2017. X is a salaried employee, drawing Rs. 14,30,680 per annum as salary. Determine
the taxable income and tax liability of X for the assessment year 2020-21 on the assumption that he contributes Rs. 1,34,160 towards
recognised provident fund.
Solution : X has occupied 3 properties for his own residential purposes. Only two houses (according to the choice of X) will
be treated as self-occupied properties. Other remaining property will be “deemed to be let out”. He has the following
options –
Different options Houses to be treated as self-occupied Houses deemed to be let out
Option 1 House 1 and House 2 House 3
In order to minimise taxable income (and maximise loss to be carried forward), one may proceed as follows –
Step 1 - Find out income of 3 houses as if these are treated as “self-occupied property”.
Step 2 - Find out income of 3 houses as if these are “deemed to be let out”.
Step 3 - Find out the difference between income of each house computed under Step 1 and Step 2.
Step 4 - Two houses (reporting highest difference as per Step 3) may be taken as “self-occupied properties”. Other remaining
house will be “deemed to be let out”.
House 1 House 2 House 3
Rs. Rs. Rs.
Step 1 - Computation of income if these are self-occupied properties –
Net annual value Nil Nil Nil
Less: Interest on borrowed capital (current year’s interest : Rs. 18,000 + precons-
truction period interest : Rs. 24,600, subject to maximum of Rs. 30,000, as cons-
truction is completed after 5 years) Nil Nil 30,000
Income from property (a) Nil Nil (–)30,000
Step 2 - Computation of income if these are deemed to be let out –
Gross annual value (being municipal value or fair rent, whichever is lower
but subject to maximum of standard rent) 15,000 20,000 35,000
Less: Municipal tax 1,200 2,400 3,600
Net annual value 13,800 17,600 31,400
Standard deduction 4,140 5,280 9,420
Interest on borrowed capital (Rs. 18,000 + Rs. 24,600) Nil Nil 42,600
Income from property (b) 9,660 12,320 20,620
Step 3 - Step 1 minus Step 2 [(a) – (b)] (–)9,600 (–)12,320 (–) 50,620
Step 4 - Selection : House 3 and House 2 (to be taken as self-occupied properties)
Income of House 2 and House 3 (self-occupied properties) – Nil (–) 30,000
Income of House 1 (deemed to be let out property) 9,660 – –
Income from properties 9,660 Nil (–) 30,000
Note - Pre-construction period’s interest is calculated from June 2010 to March 31, 2017 (Rs. 90,000 at the rate of 20% per
annum = Rs. 1,23,000, deductible in 5 years from previous years 2017-18 to 2021-22, instalment of one year being Rs. 24,600).
COMPUTATION OF NET INCOME Rs. Rs.
Income from salary (Rs. 14,30,680 - standard deduction : Rs. 50,000) 13,80,680
Income from house property :
House I 9,660
House II Nil
House III (–)30,000 (–)20,340
Less : Deduction under section 80C (contribution to recognised provident fund) 1,34,160
Income-tax on Rs. 12,26,180† 1,77,854
Add : Surcharge (applicable only if net income exceeds Rs. 50 lakh) Nil
72-E2 [P5.14]* X (age : 36 years), a salaried employee (drawing Rs. 60,000 per month as salary) has occupied three houses for his
residential purposes, particulars of which are as follows:
I II III
Rs. Rs. Rs.
Standard rent under the Poona Rent Control Act (SR) 33,000 55,000 40,000
Municipal valuation (MV) 40,000 60,000 40,000
Fair rent (FR) 43,000 58,000 48,000
I II III
Rs. Rs. Rs.
Municipal taxes paid 3,000 6,000 4,000
Repairs Nil Nil Nil
Ground rent due but outstanding 200 — 300
Insurance premium due but outstanding 300 400 500
X borrows from a relative Rs. 10,000 @ 12 per cent per annum for construction of House II (date of borrowing June 1, 2016, date
of repayment of loan May 31, 2019).
Construction of all the houses is completed in August 2018. Determine the taxable income and tax liability of X for the assessment
year 2020-21 on the assumption that X contributes Rs. 1,06,000 towards statutory provident fund and Rs. 2,000 towards National
Relief Bonds.
72-P3 X (age : 55 years) owns four houses, particulars of which are as follows :
I II III IV
Rs. Rs. Rs. Rs.
Municipal valuation (MV) 30,000 5,000 68,000 95,000
Fair rent (FR) 39,000 18,000 77,000 95,000
Standard rent (SR) 36,200 12,000 75,000 90,000
Rent (if property is let out throughout the year) 42,000 — — —
Unrealised rent 3,500 — — —
Municipal taxes
- Paid by X — 500 7,000 9,000
- Paid by tenant 3,000 — — —
Date of completion of construction May 31, May 31, March 31, April 1,
2018 2018 2018 2017
Repairs Nil 2,000 1,000 3,000
Collection charges 200 — — —
Land revenue 400 300 — 600
Ground rent 300 400 300 —
Nature of occupation Let out Self- Self- Self-
for occupied occupied occupied
residence for for for
residence business residence
Property I remains vacant for 2 months (March 16, 2020 to May 15, 2020). X borrows Rs. 30,000, Rs. 40,000 and Rs. 65,000 for
construction of House I, House II and House IV, respectively (date of borrowing : June 15, 2013, date of repayment of loan along with
interest : December 31, 2017, rate of interest : 15 per cent per annum).
Business income of X for the previous year 2019-20 is Rs. 13,55,000 (it has been computed as per the provisions of Income-tax Act).
Determine the taxable income and tax liability of X for the assessment year 2020-21 on the assumption that he contributes Rs. 1,40,000
towards public provident fund.
Solution : X uses House III for his business purposes. Annual value of it is, therefore, not chargeable to tax under the head
“Income from house property”.
House II and House IV are used by X for his residential purposes. These houses will be treated as self-occupied properties.
House I is let out. Income of these houses will be calculated as follows –
House I House II House IV
Rs. Rs. Rs.
Municipal value (MV) 30,000
Fair rent (FR) 39,000
Standard rent (SR) 36,200
Annual rent 42,000
Unrealised rent 3,500
Loss due to vacancy (i.e., rent from March 16, 2020 to March 31, 2020;
16/366 of Rs. 42,000) 1,836
House I House II House IV

Rs. Rs. Rs.
Computation of annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever is
higher, but subject to maximum of SR] 36,200
Step II - Rent received/receivable after deducting unrealized rent but before
adjusting loss due to vacancy 38,500
Step IV - Loss due to vacancy 1,836
Step V - Gross annual value is Step III minus Step IV 36,664 Nil Nil
Less: Municipal taxes (municipal tax* paid by tenant is not deductible) Nil* – –
Net annual value 36,664 Nil Nil
Less: Standard deduction (30% of net annual value) 10,999 Nil Nil
Less: Interest on borrowed capital (current year) Nil Nil Nil
Less: Interest of pre-construction period (i.e., interest of Rs. 30,000 or Rs. 40,000
or Rs. 65,000 @ 15% per annum from June 15, 2013 to December 31, 2017)
deductible in 5 years in 5 equal instalments 4,091 5,454 7,399
Income from property 21,574 (–) 5,454 (–) 7,399
Computation of taxable income of X
Income from house property:
House I 21,574
House II (–)5,454
House III Nil
House IV (–)7,399 8,721
Less : Deduction under section 80C (contribution to public provident fund) 1,40,000
Tax† (see Appendix 1) 1,79,616
Note : Collection charges, land revenue and ground rent are not deductible.
72-E3 [P5.15]* X (age : 31 years) owns four houses (outside the jurisdiction of the Rent Control Act) particulars of which are as
follows :
House I House II House III House IV

Rs. Rs. Rs. Rs.
Municipal valuation (MV) 40,000 6,000 16,000 60,000
Fair rent (FR) 50,000 8,000 22,000 55,000
Rent (if property is let out throughout the year) — — — 72,000
Unrealised rent — — — 3,000
Municipal tax paid by X 4,000 500 1,000 6,000
Date of completion of construction June 16, June 5, June 14, March 31,
1991 1974 1997 1998
Repairs Nil 2,000 500 Nil
Collection charges — — — 300
Land revenue 200 — 100 500
Interest on capital borrowed for repairs of house property 1,000 200 400 600
House I House II House III House IV

Rs. Rs. Rs. Rs.
Interest on capital borrowed for construction of house property 3,700 — — —
Interest on capital borrowed for payment of municipal taxes 300 — 200 600
Nature of occupation Self Self Self Let
occupied occupied occupied out
for for for for
residence business residence residence
House IV remains vacant for the month of January 2020. Business income of X for the previous year 2019-20 is Rs. 13,80,000 (it
has been computed as per the provisions of Income-tax Act). Determine the taxable income and tax liability of X for the assessment
year 2020-21 on the assumption that he could not occupy House III for 2 months during the previous year and X pays insurance
premium of Rs. 65,000 on his insurance policy of Rs. 3,70,000 (policy taken in 2010).
72-P4 X owns a big house (erection completed on March 31, 2015). The house has three independent units. Unit 1 (50 per cent of the
floor area) is let out for residential purpose on monthly rent of Rs. 8,200. Unit 1 remains vacant for 1 month when it is not put to any
use. A sum of Rs. 700 could not be collected from the tenant. Unit 2 (25 per cent of the floor area) is used by X for the purpose of his
profession, while Unit 3 (the remaining 25 per cent) is utilised for the purpose of his residence. Other particulars of the house are as
follows :
Municipal valuation : Rs. 60,000, fair rent : Rs. 70,000, standard rent under the Rent Control Act : Rs. 90,000, municipal taxes : Rs.
15,000, repairs : Rs. 4,000, interest on capital borrowed for renewal of the property: Rs. 36,000, ground rent : Rs. 6,400, annual charge
created under the will by father in favour of Mrs. X : Rs. 9,000 and fire insurance premium paid : Rs. 15,000. Income of X from profession
is Rs. 7,95,000 (without debiting house rent and other incidental expenditure including admissible depreciation on the portion of house
used for profession : Rs. 8,000). Determine the taxable income of X for the assessment year 2020-21. X deposits Rs. 1,10,000 in PPF
account.
Solution : Unit 1 (let out) Rs.
Municipal valuation (50% of Rs. 60,000) (MV) 30,000
Fair rent (50% of Rs. 70,000) (FR) 35,000
Standard rent (50% of Rs. 90,000) (SR) 45,000
Annual rent (Rs. 8,200 × 12) 98,400
Unrealised rent 700
Loss of rent because of vacancy 8,200
Gross annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to
maximum of SR] 35,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due
to vacancy 97,700
Step V - Gross annual value is Step III minus Step IV 89,500
Less : Municipal tax (50% of Rs. 15,000) 7,500
Less : Deductions under section 24
Standard deduction (30% of Rs. 82,000) 24,600
Interest (50% of Rs. 36,000) 18,000
Income of Unit 1 39,400
Unit 3 (self-occupied)
Less : Interest (25% of Rs. 36,000) 9,000
Income of Unit 3 (-) 9,000
COMPUTATION OF PROFESSIONAL INCOME
Income 7,95,000
Less : Rs.
Municipal taxes (¼ of Rs. 15,000) 3,750
Repairs (¼ of Rs. 4,000) 1,000
Interest (¼ of Rs. 36,000) 9,000
Ground rent (¼ of Rs. 6,400) 1,600
Annual charge (*personal expenditure not deductible) Nil*
Rs.
Insurance premium (¼ of Rs. 15,000) 3,750
Depreciation 8,000 27,100
7,67,900
COMPUTATION OF TOTAL INCOME
Unit 1 39,400
Unit 3 (-)9,000 30,400
Income from profession 7,67,900
Less : Deduction under section 80C 1,10,000
Net income 6,88,300
Note - Ground rent, annual charge and fire insurance premium are not deductible while calculating property income.
72-E4 [P5.17]* X (age : 50 years) owns a big house (erection completed on March 1, 2015). The house has three independent
residential units. Unit 1 (50 per cent of the floor area) is let out for residential purposes on monthly rent of Rs. 16,000 (this unit is,
however, used by X from January 15, 2020 to March 15, 2020 for his residential purposes). A sum of Rs. 1,000 could not be collected
from the tenant. Unit 2 (25 per cent of the floor area) is used by X for the purpose of his residence, while Unit 3 (the remaining 25
per cent) is used by him for the purpose of his business. Other particulars of the house are : municipal valuation : Rs. 3,84,000 ;
municipal taxes (paid) Rs. 32,000 ; repairs : Rs. 40,000 ; ground rent : Rs. 16,000 ; land revenue (paid) : Rs. 9,800, insurance
premium : Rs. 16,000, and interest on capital borrowed for payment of municipal tax : Rs. 14,000. Income of X from business is
Rs. 4,61,200 (without debiting house rent and other incidental expenditure including admissible depreciation of Rs. 1,600 on the one-
fourth portion of house used for business). Determine the taxable income and tax liability of X for the assessment year 2020-21. X
contributes Rs. 18,000 towards Home Loan Account of the National Housing Bank.
72-P5 For the assessment year 2020-21, X (age : 64 years) submits the following information :
Income from business Rs. 9,82,000
Property income :
House I House II
Rs. Rs.
Fair rent (FR) 3,50,000 3,20,000
Standard rent (SR) 3,00,000 5,00,000
Annual rent 6,00,000 4,20,000
Unrealised rent of the previous year 2019-20 10,000 80,000
Unrealised rent of the previous year 2018-19 — 3,00,000
Vacant period (number of months) (2) (4)
Loss on account of vacancy 1,00,000 1,40,000
Repairs 5,000 7,000
Insurance 20,000 30,000
Land revenue 25,000 40,000
Ground rent 66,000 82,000
Interest on capital borrowed by mortgaging House I (funds are used for construction of House II) 1,40,000 —
Nature of occupation Let out for Let out for
residence business
Determine the taxable income and tax liability of X for the assessment year 2020-21 assuming that X deposits Rs. 1,40,000 in the
public provident fund account of Mrs. X and invests Rs. 50,000 in NSC VIII issue.
Solution : HOUSE I Rs.
Gross annual value
maximum of SR] 3,00,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to
vacancy 5,90,000
Step IV - Loss due to vacancy 1,00,000
Less : Municipal taxes 40,000
Less : Deductions under section 24 Rs.
Standard deduction (30% of Rs. 4,50,000) 1,35,000
Interest (*as the funds are utilised for the construction of House II, it is not deductible from
the income of House I) Nil* 1,35,000
Income from House I 3,15,000
HOUSE II
Gross annual value
Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject
to maximum of SR] 3,50,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss
due to vacancy 3,40,000
Step IV - Loss due to vacancy 1,40,000
Standard deduction (30% of Rs. 1,60,000) 48,000
Interest on capital (*as the capital is borrowed for construction of House II, it is deductible,
even if House I is mortgaged by X for this purpose) 1,40,000* 1,88,000
Income from House II (-) 28,000
COMPUTATION OF NET INCOME OF X
House I 3,15,000
House II (-) 28,000 2,87,000
Less : Deduction under section 80C (Rs. 1,40,000 + Rs. 50,000, subject to a maximum of
Rs. 1,50,000) 1,50,000
Tax† (see Appendix 1) 1,45,700
Tax payable (rounded off) 1,51,530
Note : Deduction on account of unrealised rent of earlier years is not available. Moreover, insurance, land revenue and
ground rent are not deductible.
72-E5 [P5.18]* For the assessment year 2020-21, X (age : 46 years) submits the following information :
Income from business Rs. 4,54,220
Interest on debentures Rs. 2,05,000
Investment in NSC VIII issue 40,000
Property income :
House I House II
Rs. Rs.
Fair rent (FR) 1,29,000 3,97,000
Annual rent 4,80,000 5,40,000
House I House II
Rs. Rs.
Standard rent (SR) 1,25,000 6,00,000
Repairs 2,000 1,80,000
Land revenue 20,000 1,60,000
Insurance 5,000 15,000
Unrealised rent of 2018-19 30,000 20,000
Unrealised rent of 2019-20 10,000 3,50,000
Interest on capital borrowed for purchase of house property 10,000 1,40,000
Repayment of loan taken from a friend for the purpose of purchasing House I 3,640 —
Vacant period (number of months) (1) (3)
Loss on account of vacancy 40,000 1,35,000
Nature of occupation Let out for Let out for
residence of the profession
managing
director of
A Ltd.
Date of completion of construction March 31, 2015 May 15, 1987
Determine the taxable income and tax liability of X for the assessment year 2020-21. Also calculate the amount of unrealised rent
which can be claimed as deduction in the assessment year 2021-22.
72-P6 X (age : 63 years) owns two houses. Relevant details are given below—
House I House II
Let out April 1, 2019 to June 30, 2019 July 1, 2019 to March 31, 2020
(rent being Rs. 6,000 per (rent being Rs. 13,000 per
month) month)
Self-occupied July 1, 2019 to March 31, 2020 April 1, 2019 to June 30, 2020
Rs. Rs.
Municipal valuation per annum (MV) 60,000 1,00,000
Fair rent per annum (FR) 70,000 95,000
Standard rent per annum (SR) 66,000 1,10,000
Rent of let out period 18,000 1,17,000
Interest on borrowed capital 2,000 40,000
Municipal tax paid 10,000 17,000
Assuming that income of X from business is Rs. 12,80,000 (he does not have any other income) and he deposits Rs. 1,50,000 in public
provident fund, find out his net income and tax liability for the assessment year 2020-21.
Solution : House I House II
Rs. Rs.
Gross annual value
subject to maximum of SR] 66,000 1,00,000
loss due to vacancy 18,000 1,17,000
Step III - Amount computed in Step I or Step II, whichever is higher 66,000 1,17,000
Step V - Gross annual value is Step III minus Step IV 66,000 1,17,000
Less: Municipal tax 10,000 17,000
Net annual value 56,000 1,00,000
Standard deduction (30% of Rs. 56,000 or Rs. 1,00,000) 16,800 30,000
Income from property 37,200 30,000
Rs.
Income from property 67,200
Less : Deduction under section 80C (contribution to public provident fund) 1,50,000
Net income† 11,97,200
Income-tax on net income 1,69,160
Notes:
1. In this case, House II is self-occupied up to June 30, 2019. It is let out with effect from July 1, 2019. As the property having
a single residential unit is self-occupied for a part of the year (not for the whole year) and let out for the remaining part of
the year, the benefit of section 23(2)(a) is not available. It is covered by situation given in para 69.1-4. The income will have
to be computed as if the property is let out. Similarly, the income of House I will be calculated as if the property is let out.
2. It has been assumed that there is no unrealized rent.
72-E6 [P5.20]* In problem 72-P6, assume that instead of X, the houses are owned by Mrs. X (age 51 years) and rent of House I is
Rs. 25,000 per month and rent of House II is Rs. 10,000 per month (all other data remains the same), find out net income and tax
liability for the assessment year 2020-21.
72-P7 X owns a 10 storey commercial complex in Mumbai. It has 60 shops and offices. For the previous year 2019-20, rent is
Rs. 44,00,000 on accrual basis. Fair rent is Rs. 34,70,000. X pays 20 per cent of municipal tax imposed by Brihanmumbai Municipal
Corporation (BMC), while the balance 80 per cent is paid by tenants (total municipal tax imposed at the rate of 14 per cent by BMC for
the previous year amounts to Rs. 5,46,000). For the previous year, X gives the following information :
Amount charged annually Expenses
from the tenants and which incurred
is included in the rent of by X
Rs. 44,00,000
Rs. Rs.
Maintenance of lift (*including depreciation) 1,24,000 1,20,000*
Water supply 9,000 15,000
Maintenance of swimming pool 1,05,000 90,000
Lighting of stairs 2,000 6,000
Extension of water connection (*including depreciation) 50,000 46,000*
Fire insurance premium for the houses owned by X 1,50,000 2,10,000
Total 4,40,000 4,87,000
The following additional information is available –
1. Out of maintenance expenditure of swimming pool, a payment of Rs. 32,000 is made by a bearer cheque.
2. Interest on capital borrowed for the purpose of construction of some of the properties is Rs. 2,60,000 for the previous year 2019-20.
Out of the outstanding loan of Rs. 25,00,000, X has repaid Rs. 90,000 on March 31, 2020 and wants to claim deduction in respect of
the repayment under section 80C.
3. Unrealised rent (defaulting tenant has not vacated, nor steps have been taken to vacate the property) : Rs. 40,000.
4. Salary of manager for supervising maintenance of the complex and recovery of rent is Rs. 60,000.
5. One flat of rental value of Rs. 10,000 remains vacant during the year for a period of 6 months commencing from January 1, 2020.
6. The above property is outside the jurisdiction of the Rent Control Acts
Determine the net income of X for the assessment year 2020-21 on the assumption that he gets interest on debentures of Rs. 3,00,000
during the previous year 2019-20.
Solution : Rent receivable is Rs. 44,00,000. Out of which Rs. 4,40,000 is charged from tenants for providing different amenities
as given in the problem. In other words, 10% of Rs. 44,00,000 is charged for providing different amenities and 90% of
Rs. 44,00,000 is recovered as rent of offices/shops.
189 Theoretical problems on computation of property income Problem 73-P1
Computation of property income - Rs.

Rent receivable pertaining to house property (90% of Rs. 44,00,000) 39,60,000
Municipal value (i.e., Rs. 5,46,000 × 100 ÷ 14) (MV) 39,00,000
Standard rent (SR) NA
Unrealised rent (not deductible, as the tenant has not vacated the property, nor steps have been taken to
compel him to vacate the property) Nil
Loss due to vacancy [i.e., 90% of Rs. 10,000 for 3 months (i.e., January 1, 2020 to March 31, 2020] 27,000
of SR] 39,00,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy 39,60,000
Gross annual value
Less: Municipal taxes borne by X (i.e., 20% of Rs. 5,46,000) 1,09,200
Less: Deductions under section 24 —
Standard deduction @ 30% 11,47,140
Interest on capital 2,60,000
Income from the activity of providing different amenities in commercial complex [see Note] (-) 28,000
Interest on debentures 3,00,000
Less: Deductions under section 80C (repayment of loan taken to construct a commercial complex is not
eligible for deduction) Nil
Note - Income from other sources is calculated as follows —
Amount charged from tenants for providing different amenities (as given in the problem) 4,40,000
Less:
Unrealized amount (of the unrealized amount of Rs. 40,000, 10% pertains to different amenities) 4,000
Salary of manager (10% pertains to providing different amenities) 6,000
Loss due to vacancy (10% of Rs. 10,000 for 3 months) 3,000
Expenditure incurred for providing different amenities (Rs. 4,87,000 as given in the problem – Rs. 32,000
to be disallowed being paid by bearer cheque) 4,55,000
Income from the activity of providing different amenities in the commercial complex (-)28,000
72-E7 [P5.19]* X (age : 28 years, resident) is owner of a house property in Chennai which is let out for Rs. 1,44,000 (which includes
Rs. 16,800 for maintenance of lift and garden). Municipal valuation : Rs. 1,20,000; Fair rent : Rs. 1,24,000; Standard rent : Rs.
1,23,200; rent of ½ month could not be collected (1/24 of Rs. 1,44,000) : Rs. 6,000. The local taxes, payable by the owner, amounts
to Rs. 12,000 but the tenant has undertaken to pay it. The tenant has also undertaken to bear cost of repairs. However, X bears the
following expenditure during the previous year 2019-20 :
Annual charges : Rs. 3,000 ; insurance of house : Rs. 5,800 ; ground rent : Rs. 1,400 ; lift maintenance : Rs. 15,200 ; salary of gardener :
Rs. 2,200; interest on borrowed capital : Rs. 2,700.
Assuming that business income is Rs. 23,46,000, determine the income (and tax thereon) for the assessment year 2020-21. The
construction of the house was completed on March 31, 1996. During the previous year 1999-2000, X had claimed and allowed a
deduction of unrealised rent of Rs. 20,000. On March 10, 2020, X recovers Rs. 18,000 from the defaulting tenant [legal expenditure
on recovery of rent : Rs. 19,000]. X contributes Rs. 1,20,000 towards National Savings Certificates, VIII Issue on April 1, 2020.
 Theoretical problems on computation of property income

73-P1 Discuss the tax treatment, with the help of examples, when a house property is owned by two or more persons.
Solution : If a house property is owned by two or more persons, such persons are known as co-owners. Section 26 is
applicable if a property is owned by co-owners. Section 26 is applicable if the following conditions are satisfied—
1. The property must consist of building or building and land appurtenant thereto.
2. It is owned or deemed to be owned by two or more persons.
3. The respective shares of the co-owners are definite and ascertainable.
If these conditions are satisfied, then the share of each co-owner in the income of the property (as computed under the head
“Income from house property”) shall be included in the total income of each such person. The following points should be
noted —
1. In respect of property income, co-owners shall not be assessed as an association of persons.
2. The concessional tax treatment in respect of self-occupied property [see para 69.1] is applicable as if each such person is
individually entitled to such relief.
The following examples are given to have better understanding of the above provisions—
1. X and Y are two co-owners of a house property (individual share being X : 60%, Y : 40%). The property is self-occupied
by the co-owners. Interest on capital borrowed taken on April 7, 1998 to purchase the property is Rs. 60,000 (out of which
share of X and Y is Rs. 36,000 and Rs. 24,000, respectively). If other income of co-owners is X : Rs. 7,86,000 and Y : Rs. 9,20,000,
the total income of the co-owners shall be determined as follows—
X Y
Rs. Rs.
Net annual value Nil Nil
Standard deduction Nil Nil
Interest on borrowed capital (*maximum : Rs. 30,000) 30,000* 24,000
Income from property (-)30,000 (-)24,000
Other income 7,86,000 9,20,000
Net income 7,56,000 8,96,000
2. X and Y are equal owners of a house property. The property has four units of which X and Y each own two units. Each
of them has let out one of two units on monthly rent of Rs. 15,000 (each unit remains vacant for one month) and the other
unit is self-occupied for own residence. Other expenses in respect of the property shared equally by the co-owners are—
Repairs : Rs. 5,000 ; municipal tax : Rs. 60,000 ; interest on capital borrowed on May 6, 1998 : Rs. 1,35,000.
Income from the property shall be determined as under—
Unit 1 Unit 2 Unit 3 Unit 4
Owner X X Y Y
Use of property Own residence Let out Own residence Let out
Rs. Rs. Rs. Rs.
Gross annual value Nil 1,65,000 Nil 1,65,000
Less : Municipal tax Nil 15,000 Nil 15,000
Net annual value Nil 1,50,000 Nil 1,50,000
Standard deduction [30% of net annual value] Nil 45,000 Nil 45,000
Interest on borrowed capital 30,000 33,750 30,000 33,750
Income (-) 30,000 71,250 (-) 30,000 71,250
Income from house property of X 41,250
Income from house property of Y 41,250
73-E1 Discuss the tax treatment in the case of property income when property is owned by co-owners whose shares are definite.
A house property is equally owned by X, Y and Z. It has three residential units. The unit owned by X is self-occupied by him. Y carries
on a business in his unit. Z’s unit is let out on monthly rent of Rs.1,00,000. The following expenses are incurred during the previous
year 2019-20 (which are shared equally by X, Y and Z)—municipal tax : Rs. 60,000, repairs : Rs. 12,000 ; lease rent : Rs. 12,000 ;
ground rent : Rs. 9,000; interest on loan (which was taken in 2008) : Rs. 9,00,000.
Find out income of the co-owners from house property.
73-P2 Discuss the following—
1. Can net annual value be negative ?
2. Is it possible to have negative income under the head “Income from house property” ?
3. What will be tax treatment if income under the head “Income from house property” is negative ?
191 Test your knowledge
Solution : Pointwise answer

1. Net annual value - Can it be negative - If the municipal tax paid by the landlord is more than the gross annual value, then
the net annual value can be negative. For instance, X lets out a property on annual rent of Rs. 90,000 (which is also the fair
rent). During the previous year 2019-20, the following expenses are paid by the owner—
Municipal taxes of 2019-20 : Rs. 30,000 ; municipal tax of earlier years : Rs. 70,000 ; repairs : Rs. 6,000 and interest on capital
borrowed for construction : Rs. 25,000.
The property income shall be determined as under —
Rs.
Gross annual value 90,000
Less : Municipal tax 1,00,000
Net annual value (-)10,000
Interest on borrowed capital 25,000
Income from property (-)35,000
2. Negative income from property - When it is possible - As can be seen in the example given above, it is possible to have negative
income under the head “Income from house property”. The rules in the different situations are given below —
a. if a property is let out or deemed to be let out, it can have positive or negative income ;
b. in the case of one residential property fully self-occupied by the owner (if it is not let out at all), the income always lies
in range of (-)Rs.2,00,000 to zero ; and
c. in the case of partly self-occupied and partly let out residential property, income may be negative or positive.
2. Tax treatment of loss under the head “Income from house property” - If there is a loss under the head “Income from house
property”, it can be set-off against any income under other heads of income during the current year (no loss can be set-off
against winnings from lotteries, races, etc.). If it is not possible to set-off the loss (fully or partly), it can be carried forward
to the next year for being set-off against the income under the head “Income from house property”.
73-E2 Discuss whether the following are true or false —
1. In the example given under 73-P2, if the taxpayer’s other income is Rs. 1,64,000, then income chargeable to tax is Rs. 1,29,000.
2. If net annual value is negative, standard deduction is not available.
3. If net annual value is negative, interest on borrowed capital is not deductible.
4. In the case of one self-occupied residential property, net annual value cannot be negative.
5. In the case of two self-occupied residential properties, income from property cannot be positive.
6. In the case of partly self-occupied and partly let out property, income may be positive or negative.
7. In the example given under 73-P2, if other income of the taxpayer is Rs. 30,000, then the loss of Rs. 5,000 can be carried backward.
8. In the example given under 73-P2, if other income of the taxpayer is Rs. 20,000, then loss of Rs. 15,000 can be carried forward.
●
Test your knowledge

1. Explain clearly the term “annual value” under section 23(1) of the Income-tax Act. Give examples. [para 68]
2. In computing the taxable income from house property, what deductions are allowed from annual value. [para 71]
3. X maintains books of account on the basis of mercantile system. Can he claim deduction of expenses under the head
“Income from house property” on due basis ? If not, state the correct basis of deduction. [para 71]
4. Owner of a “house property” (including deemed owner under section 27) is chargeable to tax under the head “Income
from house property”.
Is there any provision under the Income-tax Act under which a person is chargeable to tax under the head “Income from
house property” even if he is not “owner” or “deemed owner” of a house property during the previous year ? Explain
the provision (if any) with a suitable example. [paras 70 and 71].
Income under the head “Profits
CHAPTER 6 and gains of business or profes-
sion” and its computation
W
hile section 28 defines the scope of income, which can be taxed under this head,
sections 29 to 44D specify the method of computation of income. Expenses/
allowances expressly allowed by the Act are listed under sections 29 to 37,
whereas sections 40, 40A and 43B enumerate those expenses which are expressly
disallowed while computing taxable income. This Chapter deals with all the provisions which
have a bearing on the computation of taxable income of a business or profession

77. Under section 28, the following income is chargeable to tax under the head “Profits and gains of business or
profession” :
a. profits and gains of any business or profession ;
b. any compensation or other payments due to or received by any person specified in section 28(ii) ;
c. income derived by a trade, professional or similar association from specific services performed for its
members ;
d. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the
exercise of a profession ;
e. any profit on transfer of the Duty Entitlement Pass Book Scheme;
f. any profit on the transfer of the duty free replenishment certificate;
g. export incentive available to exporters;
h. any interest, salary, bonus, commission or remuneration received by a partner from firm [see para 221, for
detailed discussion] ;
i. any sum received for not carrying out any activity in relation to any business or profession or not to share any
know-how, patent, copyright, trademark, etc.;
j. 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;
k. any sum received under a Keyman insurance policy including bonus ;
l. any sum received (or receivable) in cash or kind, on account of any capital asset (other than land or goodwill
or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expendi-
ture on such capital asset has been allowed as a deduction under section 35AD; and
m. income from speculative transaction.
Income from the aforesaid activities is computed in accordance with the provisions laid down in sections 29 to
44DB.
77.1 Meaning of business - In view of section 2(13), business includes any (a) trade, (b) commerce, (c)
manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture. Though the
definition is not exhaustive, it covers every facet of an occupation carried on by a person with a view to earning
profit.
 Significance of profit motive - The word “business” is one of large and indefinite import and connotes something
which occupies attention and labour of a person for the purpose of profit.
 Business cannot be carried on with oneself - Business arises out of commercial transactions between two or more
persons. One cannot enter into a business transaction with oneself.
77.2 Business income not taxable under the head “Profits and gains of business or profession” - In the
following cases, income from trading or business is not taxable under section 28, under the head “Profits and
gains of business or profession” :
192
193 Income of previous year Para 78.3
Nature of income Head under which it is chargeable to tax

Rental income in the case Rent of house property is taxable under section 22 under the head “Income from house
of dealer in property property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of
rent is engaged in the business of letting properties on rent.
Dividend on shares in the Dividends on shares are taxable under section 56(2)(i), under the head “Income from
case of a dealer-in-shares other sources”, even if they are derived from shares held as stock-in-trade or the recipient
of dividends is a dealer-in-shares. Dividend received from an Indian company is not
chargeable to tax in the hands of shareholders (this rule is subject to a few exceptions‡).
Winnings from lotteries, Winnings from lotteries, races, etc., are taxable under the head “Income from other sources”
etc. (even if derived as a regular business activity).
Interest received on com- Such interest is always taxable in the year of receipt under the head “Income from other
pensation or enhanced sources” (even if it pertains to a regular business activity). A deduction of 50 per cent is
compensation allowed and effectively only 50 per cent of such interest is taxable under the head “Income
from other sources”.
Profits derived from the aforesaid business activities are not taxable under section 28, under the head “Profits
and gains of business or profession”. Profits and gains of any other business are taxable under section 28, unless
such profits are exempt under sections 10 to 13A.
77.3 Taxation on certain incomes [Sec. 145B] - Section 145B has been inserted by the Finance Act, 2018. It is
applicable from the assessment year 2017-18 onwards. It provides mode of taxation of the following incomes –
1. 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 (however, it is taxable under section 56 under the head “Income from
other sources”).
2. 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.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concession or
reimbursement) as referred to in section 2(24)(xviii) 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.
77.4 Distinction between business, profession or vocation, not significant - As per section 2(36), profession
includes vocation. As profits and gains of a business, profession or vocation are chargeable to tax under the head
“Profits and gains of business or profession”, distinction between “business”, “profession” and “vocation” does
not have any material significance while computing taxable income. What does not amount to “profession” may
amount to “business” and what does not amount to “business” may amount to “vocation”.
 WHAT ARE THE BASIC PRINCIPLES FOR ARRIVING AT BUSINESS INCOME

78. One has to keep in mind the following general principles while computing income taxable under the head
“Profits and gains of business or profession” :
78.1 Business or profession carried on by the assessee - Business or profession should be carried on by the
assessee.
78.2 Business or profession should be carried on during the previous year - Income from business or
profession is chargeable to tax under this head only if the business or profession is carried on by the assessee at
any time during the previous year (not necessarily throughout the previous year). There are a few exceptions to
this rule.
78.3 Income of previous year is taxable during the following assessment year - Income of business or
profession carried on by the assessee during the previous year is chargeable to tax in the next following
assessment year. There are, however, certain exceptions to this rule.
‡ Dividend income from a domestic company is generally exempt in the hands of recipient shareholders. However, the exemption is not available
Para 78.4 Profits and gains of business or profession 194
78.4 Tax incidence arises in respect of all businesses or professions - Profits and gains of different businesses
or professions carried on by the assessee are not separately chargeable to tax. Tax incidence arises on aggregate
income from all businesses or professions carried on by the assessee. If, therefore, an assessee earns profit in one
business and sustains loss in another business, income chargeable to tax is the net balance after setting off loss
against income. However, profits and losses of a speculative business are kept separately.
78.5 Legal ownership vs. Beneficial ownership - Under section 28, it is not only the legal ownership but also
the beneficial ownership that has to be considered. The courts can go into the question of beneficial ownership
and decide who should be held liable for the tax after taking into account the question as to who is, in fact, in
receipt of the income which is going to be taxed.
78.6 Real profit vs. Anticipated profit - Anticipated or potential profits or losses, which may occur in future,
are not considered for arriving at taxable income of a previous year. This rule is, however, subject to one
exception : stock-in-trade may be valued on the basis of cost or market value, whichever is lower.
78.7 Real profit vs. Notional profit - The profits which are taxed under section 28 are the real profits and not
notional profits. For instance, no person can make profit by trading with himself in another capacity.
78.8 Recovery of sum already allowed as deduction - Any sum recovered by the assessee during the previous
year in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as business
income of the year in which it is recovered [sec. 41—see para 83.1].
78.9 Mode of book entries not relevant - The mode or system of book-keeping cannot override the substantial
character of a transaction.
78.10 Illegal business - The income-tax law is not concerned with the legality or illegality of a business or
profession. It can, therefore, be said that income of illegal business or profession is not exempt from tax.
78.11 Losses incidental to trade - Commercial principles for computing business income - Trading losses of
revenue nature incurred in carrying out the business are deductible, if they are incidental to the operation of
business. This rule is applicable even if it is not specially coded anywhere under the Act.
 Instances of losses deductible from business income :
1. Loss of stock-in-trade as a result of enemy action, or arising under similar circumstances.

2. Loss of stock-in-trade due to destruction by an act of God.
3. Loss arising on account of failure on the part of the assessee to accept delivery of goods.
4. Depreciation in funds kept in foreign country for purchase of stock-in-trade.
5. Loss due to exchange rate fluctuations of foreign currency held on revenue account.
6. Loss arising from sale of securities held in the regular course of business.
7. Loss of cash and securities in a banking company on account of dacoity (maybe after banking hours.)
8. Loss incurred on realisation of amount advanced in connection with business.
9. Loss of security deposited for the purposes of acquisition of stock-in-trade.
10. Loss due to forfeiture of a deposit made by the assessee for properly carrying out of contract for supply of
commodities.
11. Loss on account of embezzlement by an employee.
12. Loss incurred due to theft or burglary in factory premises during or after working hours.
13. Loss of precious stones or watches of a dealer while bringing them from business premises to his house.
14. Loss arising from negligence or dishonesty of employees.
15. Loss incurred on account of insolvency of banker with which current account is maintained by the assessee.
16. Loss incurred due to freezing of the stock-in-trade by enemy action.
17. Loss incurred by a sugar manufacturing company by foregoing advance made to sugarcane growers who
used to sell sugarcane crop exclusively to the company.
18. Loss on account of non-recovery of advances given by the assessee-company (engaged in the business of
financing its subsidiaries) to its 100 per cent subsidiary company.
19. Loss incurred by a holding company which has guaranteed a loan taken by its subsidiary company.
20. Loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss
against income from illegal business—T.A. Qureshi v. CIT [2006] 157 Taxman 514 (SC).
21. Loss arising as a result of rejection of goods by the importer (as goods are unfit for human consumption).
 Instances of losses not deductible from business income :
1. Loss which is not incidental to trade or profession, carried on by the assessee.

2. Loss incurred due to damage, destruction, etc., of capital assets.
195 Method of accounting in certain cases Para 79.2
3. Loss incurred due to sale of shares held as investment.

4. Loss of advances made for setting up of a new business which ultimately could not be started.
5. Depreciation of funds kept in foreign currency for capital purposes.
6. Loss arising from non-recovery of tax paid by an agent on behalf of the non-resident.
7. Anticipated future losses.
8. Provision made by assessee in respect of non-performing assets.
9. Loss relating to any business or profession discontinued before the commencement of previous year.
 METHOD OF ACCOUNTING - HOW FAR RELEVANT FOR COMPUTING BUSINESS INCOME

79. Income under the heads “Profits and gains of business or profession” and “Income from other sources” shall
be computed in accordance with method of accounting regularly employed by the assessee†.
 There are two main methods of accounting—mercantile system and cash system.
 In the case of mercantile system, net profit or loss is calculated after taking into consideration all income and
expenditure of a particular accounting year irrespective of the fact whether income is not received or expenditure
is not actually paid during the accounting period. Therefore, if books of account are kept by an assessee on the
basis of mercantile system, income of a business or profession, accrued during the previous year, is taxable
whether it is received during the previous year or in a year preceding or following the previous year. Similarly,
expenditure of business or profession, relating to the previous year, is deductible even if it is not paid during the
previous year.
 In the case of cash system of accounting, on the other hand, a record is kept of actual receipts and actual
payments of a particular year. If books of account are kept by an assessee on the basis of cash system of
accounting, income actually collected during the previous year is taxable whether it relates to the previous year
or some other year(s). Similarly, expenditure actually paid during the previous year is deductible irrespective
of the fact whether it relates to the previous year or some other year(s).
 In order to further clarify the same principle, section 43(2) defines the word “paid”, to mean actually paid or
incurred according to the method of accounting upon the basis of which the profits or gains are computed under
the head “Profits and gains of business or profession”.
79.1 Tax accounting standards [Sec. 145] - The Central Board of Direct Taxes has notified the Income
Disclosure and Tax Accounting Standards (ICDS) vide Notification No. 87/2016, dated September 29, 2016.
These standards 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
account. These standards are applicable from the assessment year 2017-18.
79.2 Method of accounting in certain cases [Sec. 145A] - For the purpose of determining the income chargeable
under the head “Profits and gains of business or profession”, the following valuation rules are applicable with
effect from the assessment year 2017-18 —
1. The valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner
provided in ICDS.
2. 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.
3. Inventory (being securities not listed, or listed but not quoted, on a recognised stock exchange) shall be valued
at actual cost initially recognised in the manner provided in ICDS.
4. Inventory (being securities held by a scheduled bank or financial institution) shall be valued in accordance
with ICDS after taking into account extant guidelines issued by the RBI.
5. Inventory (being listed securities) shall be valued at lower of actual cost or net realisable value in the manner
provided in ICDS and for this purpose the comparison of actual cost and net realisable value shall be done
category-wise.
6. Any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include
all such payment notwithstanding any right arising as a consequence of such payment for the purposes of the
said section.
†However, 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 and it is chargeable to tax under the head “Income from other sources” (50 per cent of such interest is deductible and effectively 50
per cent is chargeable to tax).
Para 80 Profits and gains of business or profession 196
 WHAT IS THE SCHEME OF BUSINESS DEDUCTIONS/ALLOWANCES

80. Section 28 defines various income which are chargeable to tax under the head “Profits and gains of business
or profession”. Section 29 permits deductions and allowances laid down by sections 30 to 43D while computing
profits or gains of a business or profession. Loss of revenue nature, which is incidental to business, is allowable
as deduction while computing taxable business income, even though it is not codified specifically under any of
these sections. Sections 40, 40A and 43B give a list of expenses which are not deductible.
Before studying the nature and amount of permissible and non-permissible deductions under sections 30 to 43D,
it will be useful if one keeps in view the following principles governing admissibility of these deductions :
80.1 Onus of proof - It is the responsibility of the assessee to prove that a particular deduction is admissible in
his case.
80.2 Allowances are cumulative - The allowances laid down under sections 30 to 37 are cumulative and not
alternative. For instance, if a particular expense is expressly dealt with by a particular section, its admissibility
under the residual section 37 cannot be denied unless the particular section prohibits any allowance under any
other provision.
80.3 Expenditure should relate to the previous year - It is necessary to claim deduction that the expenditure
should relate to the previous year. In order to ascertain whether the expenditure relates to the relevant previous
year or not, one has to examine method of accounting generally adopted by the assessee. If the assessee keeps
his books of account on the basis of mercantile system, expenses of the previous year would be deductible
irrespective of the fact whether they are actually paid during the previous year or not. If the assessee, on the other
hand, keeps his books of account on the basis of cash system, expenses actually paid during the previous year
are deductible, whether or not they are in respect of previous year. The rule described in this para is, however,
subject to one exception.
80.4 Business should be carried on during the previous year - In order to avail deduction of expenditure, it
is necessary that the business in respect of which expenses are incurred, should be carried on by the assessee
during the previous year. If the business has been closed or discontinued before the commencement of the
previous year, no deduction in respect of such discontinued business is permissible while computing taxable
income of the previous year from other sources. Sections 41 and 176 [see para 83] bring into charge certain receipts
relating to a business or profession, not in existence during the previous year.
80.5 Expenditure should have been incurred in connection with assessee’s business - An expenditure is
allowable as deduction in computation of taxable income only if it is incurred for the purpose of assessee’s own
business. For instance, parent company cannot be allowed a deduction in respect of an expenditure incurred for
the benefit of its subsidiary company (even if it is a wholly-owned subsidiary company).
80.6 Benefit of expenditure may extend to somebody else - If the expenditure is incurred primarily in
connection with assessee’s own business, it would still be allowed as deduction even if it enured to the benefit
of someone else. For instance, insurance premium, repairs and other expenditure incurred on leased out business
assets are deductible from the income of the lessor, even though the expenditure enures to the benefit of the
lessee.
80.7 Benefit of expenditure may extend beyond the relevant previous year - It is not necessary that benefit
of the expenditure should be limited to the previous year in which the expenditure is incurred. A revenue
expenditure incurred during the previous year is deductible even if benefit of expenditure is extended beyond
the year of expenditure.
80.8 No allowance in respect of exhaustion of wasting assets - No deduction is admissible in respect of
diminution or exhaustion of the capital asset from which income is derived. Wasting assets such as mines and
quarries, timber-bearing land, leasehold interest are capital assets and their diminution or exhaustion in value
represents capital loss which is not allowable as deduction, as the Act permits deduction of revenue loss.
80.9 No allowance in respect of expenditure incurred before the setting up of a business - In the case of a
new business the first previous year commences on the date when the business or profession is set-up.
Expenditure incurred prior to setting up of a business falls outside the previous year. Section 28 applies only in
respect of business carried on during the previous year. As a consequence, expenditure incurred before setting
up of a business would not be deductible, while computing income of the previous year. However, there is
sometimes a time-lag between setting up a business and its actual commencement. Expenditure incurred after
setting up of a business may be allowed as deduction under sections 30 to 37, even if it is incurred before the actual
commencement of business.
80.9-1 EXCEPTION - To the aforesaid general rule that expenditure incurred before setting up of a business is not
permissible as deduction, some exceptions are provided. If business is commenced by promoters of a company
before its incorporation, tax incidence on profit earned during pre-incorporation period, falls on the company
197 Depreciation allowance Para 81.3
and in arriving at taxable profit, expenditure incurred during pre-incorporation period is allowable as
deduction. Three more instances when expenditure incurred before setting up of a business are allowable as
deductions are found in sections 35A, 35D and 35E.
80.10 No allowance in respect of non-assessable business - If an assessee carries on a non-taxable business
(such as agricultural income in India), no deduction on account of expenditure relating to such non-taxable
business can be claimed.
80.11 Expenditure relating to illegal business - As said earlier, profits of illegal business are chargeable to tax.
In arriving at chargeable profits, ordinary business expenditure incurred in carrying on an illegal business is
allowable as deduction. However, infringements of law including breaches of obligations are not ordinary
incidence of business and penalty or damages paid in connection with such infringement do not constitute
expenditure, wholly and exclusively laid out for the business of the assessee; such expenses are, therefore, not
deductible.
80.12 No allowance in respect of anticipated losses - Under the present scheme of the Act, anticipated loss
cannot be deducted, though the loss is certain. The only exception to this rule is that stock-in-trade may be valued
at cost or market value, whichever is lower.
80.13 No deduction in respect of depreciation of investment - A deduction in respect of depreciation of
investment in shares and securities is not allowable.
80.14 Relevance of distinction between capital and revenue expenditure - The question whether the
expenditure is capital expenditure or revenue expenditure is relevant only in the case of expenditure falling
under sections 30, 31 and 37(1) which expressly exclude the items of the nature of “capital expenditure” from
being allowed as permissible deduction. However, expenditure falling under other sections may fall either
under the category of capital expenditure or revenue expenditure.
 WHAT ARE SPECIFIC DEDUCTIONS UNDER THE ACT

81. Sections 30 to 37 cover expenses which are expressly allowed as deduction while computing business income,
sections 40, 40A and 43B cover expenses which are not deductible. The following expenses are expressly allowed
as deductions against profits and gains of business or profession :
81.1 Rent, rates, taxes, repairs and insurance for building [Sec. 30] - Under section 30, the following
deductions are allowed in respect of rent, rates, taxes, repairs and insurance for premises used for the purpose
of business or profession :
a. the rent of premises, the amount of repairs (not being capital expenditure), if he has undertaken to bear the
cost of repairs (this is applicable if the assessee has occupied the property as a tenant) ;
b. the amount of current repairs (not being capital expenditure) (if the assessee has occupied the premises
otherwise than as a tenant) ;
c. any sum on account of land revenue, local rates or municipal taxes ; and
d. amount of any premium in respect of insurance against risk of damage or destruction of the premises.
 Application of section 43B - Land revenue, local rates or municipal taxes are deductible subject to the conditions
as specified by section 43B [see para 82.9].
 Judicial rulings - The following judicial ruling one should keep in view —
1. If an assessee takes premises on lease for carrying on a business or profession and agrees to pay arrears of rent
of previous tenant, such arrears of rent cannot be deducted, whether arrears of rent are paid under legal
obligation or voluntarily.
2. A fluctuating item like a share in profit cannot be treated as rent.
3. Painting the outside of a house is repair.
81.2 Repairs and insurance of machinery, plant and furniture [Sec. 31] - The expenditure incurred on current
repairs (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for
business purposes is allowable as deduction under section 31.
 “Current” cannot be interpreted to mean petty. The section does not say anything about the magnitude of the
expenditure. However, the expenditure should not be capital expenditure.
81.3 Depreciation allowance [Sec. 32] - Depreciation shall be determined according to the provisions of
section 32.
81.3-1 CONDITIONS FOR CLAIMING DEPRECIATION - In order to avail depreciation, one should satisfy the following
conditions :
Condition 1 Asset must be owned by the assessee.

Condition 2 It must be used for the purpose of business or profession.
Condition 3 It should be used during the relevant previous year.
Condition 4 Depreciation is available on tangible as well as intangible assets.
81.3-1a ASSET SHOULD BE OWNED BY THE ASSESSEE - The asset should be owned by the assessee or the assessee should
be the co-owner of the asset. The following points should be noted –
1. It is not necessary that the assessee should be the registered owner of the asset. If a person acquires a building
by satisfying conditions of section 53A of the Transfer of Property Act [i.e., under a Power of Attorney
Transaction], depreciation is available even if he is not the registered owner of the building.
2. Where an assessee carries on a business or profession in a building not owned by him but in respect of which
he holds a lease or right of occupancy, he is entitled to depreciation*, in respect of capital expenditure incurred
by him on construction of any structure or any work in relation to the building by way of improvement,
renovation or extension.
3. If an assessee acquires an asset under financial lease, he can claim depreciation.
4. Generally, in the case of a hire purchase agreement, the hirer has an uninterrupted right over the asset for all
practical purposes, if he discharges his obligation (i.e., payment of all instalments). In such a case, the hirer (and
not seller) can claim depreciation from the year in which the asset is taken on hire.
81.3-1b ASSET MUST BE USED FOR THE PURPOSE OF BUSINESS OR PROFESSION - The asset, in respect of which depreciation
is claimed, must have been used for the purpose of business or profession. Even if an asset is put to use for trial
production, depreciation can be claimed. The user of the asset should be understood in a wide sense so as to
embrace passive as well as active user. If a machine is kept ready for use at any moment in a particular factory,
the machinery can be said to be “used” for the purpose of the business and depreciation is available. Any forced
idleness of the machinery cannot disentitle the assessee from getting the benefit of depreciation allowance. If an
asset is used partly for business purposes and partly for other purposes, proportionate depreciation is available.
81.3-1c USER OF THE ASSET IN THE PREVIOUS YEAR - The asset, in respect of which depreciation is claimed, must have
been used for the purpose of business during the relevant previous year. Even if an asset is used for a few days
(or even for a few hours) during the previous year, depreciation for the entire year is available. However, in the
first year, in which an asset is acquired, the asset should be used at least for 180 days to claim fully year’s
depreciation (if it is used for less than 180 days, half year’s depreciation is available in the first year in which the
asset is acquired).
81.3-1d DEPRECIATION IS AVAILABLE ON TANGIBLE AS WELL AS INTANGIBLE ASSETS - Under the Income-tax Act, one can claim
depreciation in respect of the following assets—
Tangible assets Building, machinery, plant or furniture
Intangible assets acquired Know-how, patents, copyrights, trade marks, licences, franchises or any other business
after March 31, 1998 or commercial rights of similar nature.
“Building” means the superstructure only and does not include site. “Plant” includes ships, vehicle, books
(including technical know-how report), scientific apparatus and surgical equipments used for the purpose of
business or profession. It does not include tea bushes or livestock or buildings or furniture and fittings.
81.3-2 BASIC CONCEPTS FOR COMPUTATION OF DEPRECIATION ALLOWANCE IN RESPECT OF UNITS OTHER THAN POWER UNITS 1 -
Depreciation is admissible for block of assets. Method of computation of depreciation is written down value
method. However, depreciation is available (at the option of assessee) in respect of tangible assets according to
“straight-line” method in the case of an undertaking engaged in generation or generation and distribution of
power in some cases [see para 81.3-9].
To understand method of computation of depreciation, one must know the meaning of the following terms :
 Block of assets [sec. 2(11) — see para 81.3-3].
 Written down value [sec. 43(6) — see para 81.3-4].
 Actual cost [sec. 43(1) — see para 81.3-7].
81.3-3 BLOCK OF ASSETS [SEC. 2(11)] - The term “block of assets” means a group of assets falling within a class of assets
comprising—
*Expenditure on construction of road/bridge by an assessee on leased land provided by a State Government is qualified for depreciation.
1. For computation of depreciation in the case of power units, see para 81.3-9.
a. tangible assets, being buildings, machinery, plant or furniture ;

b. intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed.
There are 10 different blocks$ of assets (from the assessment year 2020-21) as given below -
Number Nature of asset Rate of depreciation
Block 1 Buildings - Residential buildings other than hotels and boarding houses 5%
Block 2 Buildings - Office, factory, godowns or buildings which are not mainly used for 10%
residential purpose [it covers hotels and boarding houses but does not cover those
which are covered under Blocks 1 and 3]
Block 3 Buildings - The following buildings : 40%
a. buildings acquired on or after September 1, 2002 for installing 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
under section 80-IA(4)(i);
b. temporary erections such as wooden structures
Block 4 Furniture - Any furniture/fittings including electrical fittings 10%
Block 5 Plant and machinery - Any plant or machinery [not covered by Block 6, 7, 8 or 9], 15%
motor cars (other than those used in a business of running them on hire) acquired or
put to use on or after April 1, 1990, oil well (not covered under any other block)
Block 6 Plant and machinery - Ocean - going ships, vessels ordinarily operating on inland 20%
waters including speed boats
Block 7 Plant and machinery - Block includes the following – 30%
 Buses, lorries and taxies used in the business of running them on hire*
 Motor cars (other than those used in a business of running them on hire) acquired
on or after August 23, 2019 but before the April 1, 2020 and is put to use before April
1, 2020
 Moulds used in rubber and plastic goods factories
 Machinery and plant, used in semi-conductor industry
Block 8 Plant and machinery - Block includes the following – 40%

 Aeroplanes. It also includes commercial vehicle acquired after September 30, 1998
but before April 1, 1999 and put to use before April 1, 1999 and life saving medical
equipment and plant and machinery which satisfy conditions of rule 5(2).
 Containers made of glass or plastic used as refills and the following—
a. new commercial vehicle acquired during 2001-02 and put to use before March 31,
2002 for the purpose of business or profession;
b. machinery/plant used in weaving, processing and garment sector of textile
industry which is purchased under Technology Upgradation Fund Scheme
during April 1, 2001 and March 31, 2004 and put to use up to March 31, 2004; and
c. new commercial vehicle which is acquired during January 1, 2009 and Septem-
ber 30, 2009 and is put to use before October 1, 2009 for the purposes of business
or profession.
 Computers** including computer software and new commercial vehicle acquired
in replacement of condemned vehicle of 15 years of age which is put to use before
April 1, 1999 (if acquired during October 1, 1998 and March 31, 1999) or before April
1, 2000 (if acquired during 1999-2000). It also includes books (other than annual
publications) owned by a professional. It also includes gas cylinders; plant used in
field operations by mineral oil concerns; direct fire glass melting furnaces.
 Energy saving devices; renewal energy devices; rollers in flour mills, sugar works
and steel industry (however, it does not include windmills or any special device,
which run on windmills installed after March 31, 2012 but before April 1, 2014).
$
It may be noted that “block of assets” means assets of all units of the assessee having the same rate of depreciation and not assets of only one
unit.
*This block is applicable only when the assessee is in the business of hiring out its/his buses, lorries or taxies. If lorries are used by a timber merchant
for delivery of goods to his customers, this block is not applicable even if transportation income is included in business income.
**Printers, scanners, NT server, UPS, router, are part of computer and eligible for depreciation at the rate of 40 per cent. However, EPABX and
mobile phones are not computers.
Number Nature of asset Rate of depreciation
 Air pollution control equipments; water pollution control equipments; solid waste
control equipments, recycling and resource recovery systems; machinery acquired
and installed on or after September 1, 2002 in a water supply project or water
treatment system or for the purpose of providing infrastructure facility; wooden parts
used in artificial silk manufacturing machinery; cinematograph films, bulbs of studio
lights; wooden match frames; some plants used in mines, quarries and salt works; and
books (being annual publications) owned by assessees carrying on a profession or
books (may or may not be annual publications) owned by a person carrying on
business in running lending libraries.
Block 9 Plant and machinery - Motor buses, motor lorries and motor taxis (used in a busi- 45%
ness of running them on hire) acquired on or after August 23, 2019 but before the April
1, 2020 and is put to use before April 1, 2020
Block 10 Intangible assets (acquired after March 31, 1998) - Know-how, patents, copyrights, 25%
trademarks, licences, franchises and any other business or commercial rights of
similar nature†.
Note : In section 2(11), it is not necessary that the asset should be used for purpose of business during the year under
consideration. The user of the asset is important for the purpose of actual allowability of depreciation, but not for
determining whether the asset falls within the block of assets or not.
81.3-4 WRITTEN DOWN VALUE [SEC. 43(6)] - Written down value for the assessment year 2020-21 will be determined
as under :
Step 1 Find out the “depreciated” value of the block on April 1, 2019.
Step 2 To this value, add “actual cost” [see para 81.3-7] of the asset (falling in the block) acquired during the previous
year 2019-20.
Step 3 From the resultant figure, deduct money received/receivable (together with scrap value) in respect of that
asset (falling within the block of assets) which is sold, discarded, demolished or destroyed during the previous
year 2019-20.
 Other points - The following points should be noted—

1. The resulting amount is the written down value of the block of assets on March 31, 2020 relevant for the
2. The amount of reduction under Step 3 cannot exceed the value of assets computed under Step 1 and Step 2.
3. One may determine written down value for any other assessment years on similar basis.
4. In some cases, computation of written down value is based upon notional figures.
5. Under Step 3, only actual money (received or receivable in cash or by cheque or draft) is deductible. In other
words, any other things or benefit (which can be converted in terms of money) cannot be deducted under Step
3. Value to be reduced from the block of asset shall be the actual sale consideration received and not the fair
market value of the asset transferred.
6. In the case of a slump sale, the method of computation of the amount deductible under Step 3 is different.
Problems
81.3-4P1 Compute the written down value from the following information for the assessment year 2020-21—
Blocks of asset Rate of Depreciated value
depreciation on April 1, 2019
(per cent) Rs.
1. Plant A, B and C 15 10,40,000
2. Plant D and E 40 2,60,000
3. Plant F 30 70,000
4. Building A, B, C and D 10 10,90,600
5. Building E, F and G 5 7,10,200
6. Building H, I, J and K 40 16,90,000
†Stock exchange membership card, goodwill, licence granted by a Government to collect toll, website, non-compete rights acquired by payment
of non-compete fees, licences/approvals/registrations acquired for operating hotels, etc., are qualified for depreciation under this provision.
After April 1, 2019, the company purchases the following assets —

Assets Date of purchase Rate of depreciation (per cent) Actual cost
Rs.
Plant G April 6, 2019 30 6,000
Plant H May 11, 2019 15 18,000
Furniture June 6, 2019 10 56,000
Car July 7, 2019 15 2,56,000
Building L September 26, 2019 5 7,28,700
Computer September 27, 2019 40 90,000
Copyright September 30, 2019 25 17,50,000
The following assets are transferred —
Assets Date of sale Sale consideration
Rs.
Plant B December 20, 2019 25,10,900
Plant D January 31, 2020 12,000
Building L March 6, 2020 6,00,000
Solution : Block 1 - Plant and machinery (rate of depreciation 15%) Rs.

Depreciated value of the block consisting of Plants A, B and C 10,40,000
Add : Actual cost of Plant H and car (+)2,74,000
Total 13,14,000
Less : Sale proceeds of Plant B [although sale proceeds of Plant B is more than Rs. 13,14,000,
amount to be deducted is restricted to Rs. 13,14,000] (–)13,14,000
Written down value of the block consisting of Plants A, C and H on March 31, 2020 Nil
Block 2 - Plant and machinery (rate of depreciation : 40%)
Depreciated value of the block consisting of Plants D and E on April 1, 2019 2,60,000
Add : Cost of computer purchased during 2019-20 90,000
Less : Sale proceeds of Plant D sold during 2019-20 (–)12,000
Written down value of the block consisting Plant E on March 31, 2020 3,38,000
Block 3 - Plant and machinery (rate of depreciation : 30%)
Depreciated value of the block consisting of Plant F on April 1, 2019 70,000
Add : Cost of Plant G purchased during 2019-20 6,000
Written down value of the block consisting of Plants F and G on March 31, 2020 76,000
Block 4 - Building (rate of depreciation : 10%)
Depreciated value of the block on April 1, 2019 consisting of Buildings A, B, C and D 10,90,600
Written down value on March 31, 2020 10,90,600
Block 5 - Buildings (rate of depreciation : 5%)
Depreciated value of the block consisting of Buildings E, F and G 7,10,200
Add : Cost of Building L purchased during 2019-20 7,28,700
Less : Sale proceeds of Building L sold during 2019-20 (–)6,00,000
Written down value of the block consisting of Buildings E, F and G on March 31, 2020 8,38,900
Block 6 - Building (rate of depreciation : 40%)
Depreciated value of the block consisting of Buildings H, I, J and K on April 1, 2019 16,90,000
Written down value 16,90,000
Block 7 - Furniture (rate of depreciation : 10%)
Depreciated value on April 1, 2019 Nil
Add : Cost of furniture purchased during 2019-20 56,000
Written down value on March 31, 2020 56,000
Block 9 - Copyright (rate of depreciation : 25%)
Depreciated value on April 1, 2019 Nil
Add : Cost of copyright purchased during 2019-20 17,50,000
81.3-4E1 Find out the written down value for different blocks on March 31, 2020 (i.e., the assessment year 2020-21) in the case of
X Ltd. from the information given below—
Blocks of asset Depreciation rate Depreciated value on April 1, 2019
(per cent) Rs.
1. Plant A and B 15 3,40,000
2. Building A 10 16,92,000
After April 1, 2019, the company purchases the following assets —
Assets Date of purchase Depreciation rate Actual cost
Rs.
Plant C April 1, 2020 15 19,26,000
Building B March 30, 2020 10 5,00,000
Patent A April 10, 2019 25 15,000
The following assets are transferred by X Ltd. —
Assets Date of sale Sale consideration
Rs.
Plant B November 1, 2019 4,10,000
Building A May 10, 2019 22,00,000
Patent A March 1, 2020 15,500
81.3-5 COMPUTATION OF NORMAL DEPRECIATION ALLOWANCE - Depreciation allowance is of two types—normal and
additional. The rule for normal depreciation is given in this para. Additional depreciation is covered in para
81.3-6.
To ascertain the amount of normal depreciation, one should find out the following :
 Written down value of block of assets [see para 81.3-4] .
1
 Rate of depreciation [see para 81.3-3].
81.3-5a RULE OF COMPUTATION - Normal depreciation is calculated as follows –

Written down value of the block of asset on the last day of the previous year × Rate of depreciation
 For instance, if written down value of a block of assets [i.e., buildings, rate of depreciation : 10 per cent] is
Rs. 3,19,400 for the previous year 2019-20, depreciation will be Rs. 31,940 for the said previous year and the
depreciated value of the block on April 1, 2020 will be Rs. 2,87,460 (i.e., Rs. 3,19,400—Rs. 31,940)].
The aforesaid rule is, however, not applicable in the cases mentioned in para 81.3-5b.
 Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment
(or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use
of electronic clearing system through a bank account (or through prescribed electronic mode), exceeds Rs.
10,000, such payment shall not be eligible for depreciation.
81.3-5b EXCEPTIONS TO THE RULE - In the cases given below, the above-mentioned rule is not applicable :
Exception one If written down value of the block of asset is reduced to zero, though the
block is not empty See para 81.3-5b1.
Exception two If the block of assets is empty or ceases to exist on the last day of the previous
year (though the written down value is not zero) See para 81.3-5b2.
Exception three In the case of imported cars See para 81.3-5b3.
Exception four In the case of succession or amalgamation or business re-organisation or
demerger See para 81.3-5b4.
Exception five If in the first year in which an asset is acquired, it is put to use for less than
180 days See para 81.3-5b5.
81.3-5b1 When the written down value of a block of asset is reduced to zero - No depreciation is admissible where
written down value has been reduced to zero, though the block of assets does not cease to exist on the last day
of the previous year.
1. In a few cases, one has to take actual cost in the case of an undertaking engaged in generation or generation and distribution of power [see
para 81.3-9].
On April 1, 2019, depreciated value of a block of assets (rate of depreciation : 15 per cent) is Rs. 80,000. It consists of Plants
A and B. The assessee purchases Plant C (rate of depreciation: 15 per cent) during the previous year 2019-20 for Rs. 30,000
and sells Plant A on May 3, 2019 for Rs. 1,80,000. In this case on March 31, 2020, the assessee has Plant B and Plant C in the
block of the assets, though the written down value of the block is zero. No depreciation will be admissible for the previous
year 2019-20 (i.e., the assessment year 2020-21) as is evident from the computations given below :
Rs.
Depreciated value of the block consisting of Plants A and B 80,000
Add : Actual cost of Plant C 30,000
Total 1,10,000
Less : Sale consideration of Plant A [though the plant is sold for Rs. 1,80,000, the amount of reduction
cannot exceed Rs. 1,10,000 ; the difference of Rs. 70,000 is short-term capital gain under section 50(1)† 1,10,000
Written down value of the block consisting of Plants B and C Nil
Less : Depreciation for the previous year 2019-20 Nil
Depreciated value of the block consisting of Plants B and C on April 1, 2020 Nil
81.3-5b2 If block of assets ceases to exist - If a block of assets ceases to exist or if all assets of the block have been
transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible
in such case.
X Ltd. owns two plants—Plant A and Plant B—on April 1, 2019 (rate of depreciation : 15 per cent, depreciated value on April
1, 2019 : Rs. 2,37,000). The company purchases Plant C on May 31, 2019 for Rs. 20,000 and sells Plant A (on April 10, 2019),
Plant B (on December 12, 2019) and Plant C (on March 1, 2020) for Rs. 10,000, Rs. 15,000 and Rs. 24,000, respectively.
Written down value of the block of assets will be determined as under :
Rs.
Depreciated value of the block consisting of Plants A and B 2,37,000
Add : Cost of Plant C 20,000
Total 2,57,000
Less : Sale proceeds of Plants A, B and C 49,000
Written down value of the block (which is empty) 2,08,000
In the aforesaid case, no depreciation is admissible, as the block of assets ceases to exist on the last day of the previous year.
Rs. 2,08,000 will be treated as short-term capital loss on sale of Plants A, B and C under section 50(2)†. Depreciated value
of the block on the first day of the next previous year (i.e., on April 1, 2020) will be taken as nil (i.e., written down value on
March 31, 2020 : Rs. 2,08,000 minus short-term capital loss : Rs. 2,08,000).
In the case study given above if Plants A, B and C are transferred for a consideration which is higher than Rs. 2,57,000 (say,
Rs. 3,57,000), then no depreciation will be available and Rs. 1,00,000 shall be taken as short-term capital gain on sale of Plants
A, B and C.
81.3-5b3 Imported cars - If an imported car was acquired during March 1, 1975 and March 31, 2001, depreciation
is not admissible, unless it is used in the business of running it on hire for tourist or for the purpose of business
or profession outside India. Any imported car (acquired after March 31, 2001) is eligible for depreciation like any
other car.
81.3-5b4 Depreciation in case of succession, amalgamation, business re-organisation or demerger - [Fifth proviso to sec.
32(1) and sec. 44DB] - These provisions are applicable while determining depreciation if there is a change of
ownership of assets because of the following —
a. conversion of firm or sole proprietary concern into company [by satisfying conditions of section 47(xiii)/(xiv)];
b. succession to business other than on death — business of HUF taken over by a member, business of a firm
taken over by a partner, conversion of HUF concern into company;
c. amalgamation of a company*;
d. demerger of a company**;
e. conversion of private company/unlisted public company into limited liability partnership by satisfying
conditions of section 47(xiiib); and
f. amalgamation or demerger of co-operative banks.
†For section 50, one may refer to para 101.3.
*Amalgamation should satisfy the requirement of section 2(1B). However, the reference of section 47(vi) is missing. Consequently, this rule is
applicable even if the amalgamated company is a foreign company.
**Demerger should satisfy the requirement of section 2(19AA). However, the reference of section 47(vib) is missing. Consequently, this rule is
applicable even if the resulting company is a foreign company.
In the year in which change of ownership takes place because of the aforesaid reasons, depreciation shall be
calculated as under —
1. Find out the amount of depreciation of the previous year in which ownership of assets changes (because of the
aforesaid reasons) on the assumption that the succession, amalgamation or demerger has not taken place.
2. The amount of depreciation so determined shall be apportioned between the predecessor and successor, in the
ratio of number of days for which the assets are used by them during the previous year in which ownership
changes.
A firm owns Plants A and B on April 1, 2019 (rate of depreciation : 15 per cent ; depreciated value : Rs. 30,000). It purchases
Plant C on April 1, 2019 for Rs. 20,000 (it is not qualified for additional depreciation). The firm is converted into a company
with effect from June 26, 2019 [conditions of section 47(xiii) are satisfied]. The amount of depreciation available to the firm
and company will be determined as under —
Rs.
Depreciated value of April 1, 2019 30,000
Add : Cost of Plant C purchased by the firm during 2019-20 20,000
Written down value on March 31, 2020 50,000
Depreciation @ 15% 7,500
Depreciation available to the firm (i.e., 86/366 of Rs. 7,500) 1,762
Depreciation available to the company (i.e., 280/366 of Rs. 7,500) 5,738
81.3-5b5 When an asset is put to use for less than 180 days in the year of acquisition - If any asset falling within a block
of assets is acquired by the assessee during the previous year and it is put to use for the purposes of business or
profession for a period of less than 180 days in that previous year, the deduction in respect of such asset shall
be restricted to 50 per cent of the amount calculated at the percentage prescribed in the case of block of asset
comprising such asset.
 The aforesaid provision is applicable if the following conditions are satisfied :
Condition one If the asset is “acquired” during the previous year.

Condition two It is put to use for a period of less than 180 days.
When the two conditions are satisfied, depreciation shall be restricted to 50 per cent of the amount calculated at the
percentage prescribed.
 The following observations one should keep in mind :
1. The aforesaid restriction is applicable only in the year in which an asset is acquired and not in subsequent years.
2. Since in the case of partition of joint Hindu family, dissolution of firm, conversion of firm into company, no
asset is “acquired” by the successor, the aforesaid provision is not applicable.
3. If an asset is kept ready for use for more than 180 days before the end of the previous year but actually used
for less than 180 days, the aforesaid restriction would not apply. This view is in line with the interpretation of
the Courts that “use” includes “ready to use”. In other words, the word “use” in this section may be given a wider
meaning and embrace passive as well as active user.
 The following table highlights these provisions —
Whether the asset is How many days the Depreciation (of the first year Depreciation (of any
put to use during the asset is put to use in which the asset is “acquired”) subsequent year)
year
No — No depreciation No depreciation
Yes Less than 180 days Half of usual depreciation Usual depreciation
Yes 180 days or more Usual depreciation Usual depreciation
The above provisions are explained in the following examples —
1. X Ltd. purchases an old plant (rate of depreciation : 15 per cent) on May 10, 2019. It is put to use on January 10, 2020. In
this case, the plant is acquired during 2019-20 and in 2019-20 it is put to use for less than 180 days. It is, therefore, qualified
for half of the usual depreciation (i.e., 7.5 per cent).
2. Y Ltd. purchases a plant (being an office appliance) (rate of depreciation : 15 per cent) on May 10, 2019. It is put to use on
January 10, 2021. In this case, the plant is acquired during 2019-20 and in 2019-20 it is not put to use at all. Therefore, for the
previous year 2019-20, no depreciation will be available. It is put to use in the previous year 2020-21. For the previous year
2020-21, the usual depreciation will be available (as the asset is not acquired during 2020-21), although it is put to use for
less than 180 days.
3. X Ltd. owns two buildings A and B on April 1, 2019 (rate of depreciation : 10 per cent, depreciated value: Rs. 14,15,700).
It purchases on December 1, 2019 building C (rate of depreciation : 10 per cent) for Rs. 4,10,000 (out of which Rs. 3,10,000
is paid by an account payee cheque and Rs. 1,00,000 is paid in cash). It sells building A during the previous year 2019-20 (say
on January 10, 2020) for Rs. 8,70,000. In this case, depreciation for the previous year 2019-20 shall be determined as under –
Rs.
Depreciated value of the block (i.e., buildings A and B) on April 1, 2019 14,15,700
Add : Cost of building C (purchased on December 1, 2019) (amount paid exceeding Rs. 10,000 by bearer
cheque or in cash, is not considered) 3,10,000
Total 17,25,700
Less : Sale proceeds of building A 8,70,000
Written down value of the block 8,55,700
Depreciation [as building C is purchased in the year 2019-20 and it is put to use for less than 180 days,
depreciation on Rs. 3,10,000 will be 50 per cent of 10 per cent of Rs. 3,10,000 and on the remaining amount
depreciation will be 10 per cent of (Rs. 8,55,700 — Rs. 3,10,000)] 70,070
Depreciated value of the block on April 1, 2020 7,85,630
If, in the aforesaid case, building A is sold for Rs. 15,87,000, depreciation will be determined as under :
Depreciated value on April 1, 2019 14,15,700
Add : Cost of building C 3,10,000
Total 17,25,700
Less : Sale proceeds of building A 15,87,000
Depreciation [as the written down value is lower than cost of building C which is put to use for less
than 180 days, depreciation shall be 50 per cent of 10 per cent of Rs. 1,38,700] 6,935
Problems
81.3-5P1 X Ltd. owns the following assets on April 7, 2019 :
Assets Actual cost Written down value on April Rate of depreciation (per cent)
1, 2019
Rs. Rs.
Building
A 30,00,000 13,50,000 10
B 6,00,000 2,25,000 10
C 8,00,000 40,000 5
Plant
A 1,70,000 45,100 15
B 3,10,000 68,000 15
C 30,000 7,000 40
D 50,000 31,000 40
The company acquires the following assets after April 1, 2019 :

Asset Cost Date of acquisition Date when the asset Rate of depreciation
Rs. is put to use (per cent)
Building D 6,00,000 May 28, 2019 June 1, 2019 10
Building E 4,00,000 June 8, 2019 June 8, 2019 5
Plant E 4,90,000 August 12, 2019 September 1, 2019 15
Plant F 2,10,000 September 18, 2019 September 19, 2019 15
Plant G 1,50,000 September 19, 2019 October 30, 2019 40
Building F 2,00,000 May 10, 2019 May 10, 2019 10
Plant H 1,30,500 June 5, 2019 July 6, 2019 15
The company sells the following assets after April 1, 2019 :
Asset Date of sale Sale consideration
Rs.
Building A May 11, 2019 13,00,000
Plant B May 16, 2019 20,000
Plant D December 18, 2019 2,15,000
Plant C December 8, 2019 32,000
Determine the amount of depreciation for the assessment year 2020-21 on the assumption that additional depreciation is not
available.
Solution : The written down value and amount of depreciation for the assessment year 2020-21 will be as follows :
 First block : Building (rate of depreciation : 10%) Rs.
Aggregate amount of written down value of buildings A and B on April 1, 2019 (i.e., Rs. 13,50,000 +
Rs. 2,25,000) 15,75,000
Add : Cost of Building D and F acquired during the previous year 2019-20 (+) 8,00,000
Less : Sale consideration of building A sold during the previous year 2019-20 (this amount cannot,
however, exceed Rs. 15,75,000 + Rs. 8,00,000) (–) 13,00,000
Written down value for the previous year 2019-20 10,75,000
Depreciation for the previous year 2019-20 (assessment year 2020-21) (i.e., 10% of Rs. 10,75,000) 1,07,500
 Second block : Building (rate of depreciation : 5%)
Written down value of Building C 40,000
Add : Cost of building E acquired during the previous year 2019-20 (+) 4,00,000
Depreciation for the previous year 2019-20 (assessment year 2020-21) (5% of Rs. 4,40,000) 22,000
 Third block : Plant [rate of depreciation : 15%]
Aggregate amount of written down value of Plants A and B on April 1, 2019 (i.e., Rs. 45,100 +
Rs. 68,000) 1,13,100
Add : Cost of Plants E, F and H acquired during the previous year 2019-20 (+) 8,30,500
Less : Sale consideration of Plant B sold during the previous year 2019-20 (–) 20,000
Depreciation for the previous year 2019-20 (assessment year 2020-21) (i.e., 15% of Rs. 9,23,600) 1,38,540
 Fourth block : Plant [rate of depreciation : 40%]
Aggregate amount of written down value of Plants C and D on April 1, 2019 (i.e., Rs. 7,000 + Rs. 31,000) 38,000
Add : Cost of Plant G acquired during the previous year 2019-20 (+) 1,50,000
Less : Sale consideration of Plants C and D sold during the previous year 2019-20 (though the plants are
sold for Rs. 2,47,000 (i.e., Rs. 2,15,000 + Rs. 32,000), the amount of reduction cannot exceed Rs. 38,000 +
1,50,000) 1,88,000
Written down value for the previous year 2019-20 Nil
Depreciation for the previous year 2019-20 (assessment year 2020-21) Nil
Depreciation admissible
First block 1,07,500
Second block 22,000
Third block 1,38,540
Fourth block —
Total 2,68,040
81.3-5E1 [P6.25]* X owns the following assets on April 1, 2019 :

Assets Written down value on April 1, 2019 Rate of depreciation
Rs.
Plant A 50,400 40%
Plant B 6,10,415 15%
Plant C 15,450 15%
Plant D 14,714 40%
Furniture 42,700 10%
Building A 5,37,570 10%
Building B 4,28,429 10%
Building C 75,835 5%
He acquires the following second-hand assets during the previous year 2019-20 :
Asset Cost price Date of purchase Date when the asset is Rate of depreciation
Rs. put to use
Plant E 35,000 April 10, 2019 May 1, 2019 15%
Plant F 75,000 April 30, 2019 May 15, 2019 15%
Asset Cost price Date of purchase Date when the asset is Rate of depreciation
Rs. put to use
Plant G 4,67,000 May 17, 2019 June 1, 2019 40%
Plant H 15,25,680 June 15, 2019 June 15, 2019 15%
Building D 2,00,000 July 18, 2019 November 30, 2019 10%
Building E 4,00,000 September 7, 2019 September 8, 2019 5%
He sells the following assets during 2019-20 :
Assets Sale consideration
Rs.
Plant B 11,20,000
Plant D 3,000
Plant C 72,000
Building A 3,20,000
Building C 15,80,000
Determine the amount of depreciation for the assessment year 2020-21.
81.3-5P2 X owns the following assets on April 1, 2019 :

Assets Written down value on April 1, 2019 Rate of depreciation (per cent)
Rs.
Furniture 20,170 10
Building 9,00,500 10
Plant and machinery 2,10,000 20
During the previous year 2019-20, the following assets are purchased by X :
Date of purchase Date when the Asset Cost Rate of depreciation

asset is put to use Rs. (per cent)
October 1, 2019 October 9, 2019 Trade mark 15,000 25
June 20, 2019 June 22, 2019 Plant (second-hand) 1,90,000 40
November 30, 2019 December 1, 2019 Foreign made office machinery 1,40,000 15
December 6, 2019 December 10, 2019 Books for professional use 2,700 40
Determine the amount of depreciation for the assessment year 2020-21.
Solution : Depreciation will be determined as under
First Second Third Fourth Fifth Sixth
block block block block block block
Furniture Building Plant Plant Plant Trade
mark
Rate of depreciation 10% 10% 20% 15% 40% 25%
Depreciated value on April 1, 2019 20,170 9,00,500 2,10,000 64,00,000 2,05,000 —
Cost of assets acquired during the
previous year — — — 1,40,000* 1,92,700 15,000*
Written down value 20,170 9,00,500 2,10,000 65,40,000 3,97,700 15,000
Depreciation 2,017 90,050 42,000 9,70,500 1,58,540 1,875
Admissible depreciation for the assessment year 2020-21 Rs.
First block 2,017
Second block 90,050
Third block 42,000
Fourth block 9,70,500
*As trade mark, office machinery and books are purchased during the previous year 2019-20 and put to use for less than 180 days during the year
2019-20, only 50% of normal depreciation is admissible.
Rs.
Fifth block 1,58,540
Sixth block 1,875
Total 12,64,982
81.3-5E2 [P6.26]** X Ltd., a sugar manufacturing company, owns the following assets on April 1, 2019 :
Assets Written down value on April 1, 2019 Rate of depreciation
Rs.
Plant A 3,15,000 15%
Plant B 16,20,000 15%
Plant C 8,05,000 15%
Plant D 97,000 40%
On March 25, 2020, it sells plant D for Rs. 3,05,000. On November 10, 2019, it acquires the following assets (none of them is eligible
for additional depreciation):
Assets Cost Rate of depreciation
Rs.
Plant E (second-hand) 5,000 40%
Plant F 3,80,000 15%
Plant G 75,000 15%
Building A 4,85,000 10%
Know-how 16,00,000 25%
Plant H (office telephone system) 15,000 40%
Plant I (office machine) 55,000 40%
Computer (second hand) 46,000 40%
Determine the amount of depreciation admissible for the assessment year 2020-21.
81.3-6 COMPUTATION OF ADDITIONAL DEPRECIATION - The provisions of additional depreciation are given below—
81.3-6a CONDITIONS - To claim additional depreciation, the following conditions should be satisfied—
Condition one The assessee must be engaged in manufacture/production of any article or thing or generation,
transmission or distribution of power*.
Condition two New plant and machinery should be acquired and installed after March 31, 2005.
Condition three It should be an eligible plant and machinery.
1. Manufacture/production of any article - The assessee should be engaged in the manufacture or production of any
article or thing (maybe priority sector item or even non-priority sector item given in the Eleventh Schedule).
2. New plant and machinery installed and acquired after March 31, 2005 - Additional depreciation is available only
in respect of new plant and machinery acquired and installed after March 31, 2005. The following points should
be noted—
 Additional depreciation is not available in respect of building or furniture even if the other conditions are
satisfied.
 Additional depreciation is not available in respect of old plant and machinery.
3. Eligible plant and machinery - Any plant and machinery which has been acquired and installed after March 31,
2005 by an assessee is qualified for additional depreciation. However, the following assets are not eligible for
additional depreciation—
a. ships and aircrafts; or
b. any machinery or plant which, before its installation by the assessee, was used either within or outside India
by any other person; or
*After the amendment made by the Finance Act, 2012 (applicable from the assessment year 2013-14) an assessee engaged in the business of
generation or generation and distribution of power shall also be allowed additional depreciation. However, even after the amendment, a power
generating unit which claims depreciation on straight-line basis under section 32(1)(i) cannot claim any additional depreciation in respect of
investment in new plant and machinery. This is because of the fact that the additional depreciation under section 32(1)(iia) is available only in
those cases where normal depreciation is claimed under section 32(1)(ii) on the basis of written down value of block of assets.
c. any machinery or plant which is installed in any office premises or any residential accommodation, or
accommodation in the nature of a guest house; or
d. any office appliances or road transport vehicles; or
e. 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.
81.3-6b RATE OF ADDITIONAL DEPRECIATION - Additional depreciation shall be available @ 20 per cent of the actual
cost of new plant and machinery acquired and installed after March 31, 2005. If, however, the asset is put to use
for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 10 per cent
(the remaining 10 per cent shall be allowed as deduction in the next year†).
Where an assessee incurs any expenditure for acquisition of a depreciable asset in respect of which a payment
(or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use
of electronic clearing system through a bank account (or through prescribed electronic mode), exceeds Rs.
10,000, such payment shall not be eligible for additional depreciation.
 Additional depreciation at the rate of 35 per cent in Andhra Pradesh, Bihar, Telangana and West Bengal - If new plant
and machinery is acquired for setting up an undertaking/enterprise (during April 1, 2015 and March 31, 2020)
in a notified backward area in Andhra Pradesh, Bihar, Telangana and West Bengal, the above scheme of
additional depreciation has been modified. Investment in new plant and machinery (on or after April 1, 2015)
will be qualified for additional depreciation at the rate of 35 per cent (instead of 20 per cent). If, however, the new
plant and machinery is put to use for less than 180 days in the year of acquisition, then additional depreciation
will be limited to 17.5 per cent of actual cost in that year. The balance 17.5 per cent will be allowed in the
immediately succeeding previous year.
Problems
81.3-6P1 X Ltd. is engaged in the business of manufacture of computer hardware in Rajasthan since 1995. During the previous year
2019-20, the following assets are acquired and put to use—
(Rs. in thousand)
Block 1 Block 2 Block 3
Rate of depreciation 15% 30% 40%
Number of assets in the block 11 12 17
Depreciated value of the block on April 1, 2019 18,00 25,00 5,00
Additions of plants (new) during the previous year 2019-20
Plant A 57,00 — —
Plant B — 4,00 —
Plant C — — 17,00
Sale of old plants (one plant in each block) 8 28,70 42,00
Plants A, B and C are acquired during May 2019 and put to use during September 2019. However, Plant B is put to use in the last week
of March 2020. Find out the amount of depreciation, additional depreciation and capital gains.
Solution : Computation of additional depreciation
Plant A Plant B Plant C
Whether additional depreciation is available Yes Yes Yes
Rate of additional depreciation 20% 10% 20%
Rs. Rs. Rs.
Actual cost 57,00,000 4,00,000 17,00,000
Additional depreciation (total Rs. 15,20,000) 11,40,000 40,000 3,40,000
Computation of normal depreciation—
Block 1 Block 2 Block 3
Rate of depreciation 15% 30% 40%
Rs. Rs. Rs.
Depreciated value of the block on April 1, 2019 18,00,000 25,00,000 5,00,000
Add : Actual cost of Plants A, B and C acquired during the previous
year 57,00,000 4,00,000 17,00,000
Total (a) 75,00,000 29,00,000 22,00,000
Less : Sale proceeds of old plants (-) 8,000 (-) 28,70,000 (-) 42,00,000
Written down value of the block on March 31, 2020 74,92,000 30,000 Nil
† The Finance Act, 2015 has amended section 32 for this purpose from the assessment year 2016-17. For earlier assessment years, one can take the
shelter of the judicial rulings given in Apollo Tyres Ltd. v. ACIT [2014] 45 taxmann.com 337 (Cochin.).
Plant A Plant B Plant C

Less : Normal depreciation 11,23,800 4,500 Nil
Less : Additional depreciation as computed earlier 11,40,000 40,000 3,40,000
Depreciated value of the block on April 1, 2020 52,28,200 Nil Nil
Computation of capital gains
Sale proceeds of old plants 8,000 28,70,000 42,00,000
Whether capital gain is taxable [*the block does not cease to exist,
sale proceeds do not exceed the opening balance plus new addition,
i.e., (a)] No* No* Yes
Less : Cost of acquisition [i.e., (a)] - - 22,00,000
Short-term capital gain Nil Nil 20,00,000
Note - X Ltd. can claim normal depreciation of Rs. 11,28,300 [i.e., Rs. 11,23,800 + Rs. 4,500]. Besides, it is also eligible for
additional depreciation of Rs. 15,20,000 as computed above.
81.3-6E1 In problem 81.3-6P1 make the following modification and find out the additional depreciation—
1. Plants A, B and C are old.
2. Plants A, B and C are new but these plants are office appliances.
81.3-7 MEANING OF “ACTUAL COST” [SEC. 43(1)] - “Actual cost” is considered for calculating the written down value of
a block of asset to find out normal depreciation. “Actual cost” of a new plant and machinery is taken into
consideration to find out the quantum of additional depreciation. Meaning of the expression “actual cost” as
given in section 43(1) and other related issues are summarized below –
 The accepted accounting rule for determining cost of the fixed asset is to include all expenses directly relatable
to acquisition of the asset (viz., cost price of the asset, interest on money borrowed for purchase of the asset, bank
charges), expenses necessary to bring the asset to site, install it and make it fit for use (viz., carriage inwards,
loading and unloading charges, installation charges, etc.), and expenses incurred to facilitate the use of the asset
(viz., cost of repairs and modification prior to use of the asset to make it workable, training expenses of the staff
before the use of the plant, expenses on essential construction work such as, cold storage rooms, cooling towers,
etc.) and expenses on insurance, power and fuel, incurred before commencement of business. Regularization
fees paid by an assessee towards violation of certain regulations in construction of a building forms part of
“actual cost” of building for claiming depreciation.
 If an assessee incurs any expenditure for acquisition of any asset in respect of which a payment (or aggregate
of payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic
clearing system through a bank account (or through prescribed electronic mode), exceeds Rs. 10,000, such
payment shall be ignored for the purposes of determination of actual cost of such asset. Consequently, normal
depreciation/additional depreciation under section 32 and investment allowance under section 32AD will not
be available pertaining to a payment (exceeding Rs. 10,000) which is made otherwise than by an account payee
cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic
mode).
 Interest pertaining to the period till the asset is put to use should be added to the “actual cost” of the asset.
However, interest relatable to any period after the asset is first put to use cannot be included in actual cost.
 Expenditure on travelling incurred for acquiring depreciable assets is part of actual cost.
 “Actual cost” of an asset for the purpose of depreciation is zero if it is used in business after it ceases to be used
for scientific research related to that business.
 If inventory is converted into capital asset, “actual cost” of such asset shall be the fair market value of such asset
on the date of conversion.
 If an asset is acquired by gift of inheritance, written down value in the hands of previous owner will be
considered as cost acquisition.
 If an asset is acquired from 100 per cent subsidiary company, or from 100 per cent holding company, written
down value in the hands of transferor will be considered as cost acquisition.
 If an asset is acquired in a scheme of amalgamation or demerger by an Indian company, written down value
in the hands of transferor will be considered as cost acquisition.
 Where any portion of cost is met by Government (or any other person) in the form of subsidy, grant or
reimbursement, the amount met by the Government (or any other person) shall be deducted from the cost.
 If deduction is claimed under section 35AD, actual cost is zero†.
† Where any capital asset in respect of which deduction allowed under section 35AD is deemed to be the income of the assessee in accordance
with the provisions of sub-section (7B) of the said section, the actual cost to the assessee shall be the actual cost 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 for the purposes
of business since the date of its acquisition.
81.3-8 UNABSORBED DEPRECIATION - While dealing with unabsorbed depreciation, one should keep in mind the
following points :
Step one Depreciation allowance of the previous year is first deductible from the income chargeable under the head
Step two If depreciation allowance is not fully deductible under the head “Profits and gains of business or
profession” because of absence or inadequacy of profits, it is deductible from income chargeable under
other heads of income [except income under the head “Salaries”] for the same assessment year.
Step three If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assessment year(s)
by the same assessee [see also the points given below].
Notes:
1. No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation; it can be carried forward for
indefinite period, if necessary.
2. In the subsequent year(s), unabsorbed depreciation can be set off against any income whether chargeable under the head
“Profits and gains of business or profession” or under any other head [except income under the head “Salaries”]. In the
matter of set off, the following order of priority is followed in the subsequent year(s) :
a. Current depreciation.
b. Brought forward business loss.
c. Unabsorbed depreciation.
It may be said that if in the subsequent year(s), there is no brought forward business loss, unabsorbed depreciation can be
added to current depreciation for the purpose of claiming deduction.
3. Continuity of business is not relevant for the purpose of above set off and carry forward.
4. Depreciation can be carry forward by the same assessee. This rule is, however, not applicable in some cases [for a few
exceptions, see para 135.1-2].
Problems
81.3-8P1 X submits the following particulars :
Previous years
2019-20 2020-21
Rs. Rs.
Income from salary (after standard deduction) 1,00,000 2,00,000
Business profits (before depreciation) 16,000 18,000
Current depreciation 1,34,000 1,32,000
Income from other sources 10,000 80,000
Determine the taxable income of X for the assessment years 2020-21 and 2021-22.
Solution : ASSESSMENT YEAR 2020-21 (PREVIOUS YEAR 2019-20) Rs. Rs.
Profits and gains of business or profession :
Business profits 16,000
Less : Depreciation 1,34,000 Nil
Depreciation not deductible against business profits 1,18,000
Less: Depreciation 10,000 —
Net income 1,00,000
Note: Unabsorbed depreciation of Rs. 1,08,000 will be carried forward.
ASSESSMENT YEAR 2021-22 (PREVIOUS YEAR 2020-21)
Business income 18,000
Less : Depreciation (i.e., current depreciation : Rs. 1,32,000 + unabsorbed
depreciation of the previous year 2019-20 : Rs. 1,08,000) 2,40,000 Nil
Depreciation not deductible against business income 2,22,000
Income from other sources : 80,000
Less : Depreciation 2,22,000 Nil
Net income 2,00,000
Note: As per section 71(2A), an assessee shall not be entitled to set-off of any loss under the head “Profits and gains of business
or profession” against income under the head “Salaries”. Consequently, unabsorbed depreciation of Rs. 80,000 is set off
against income from other sources and remaining unabsorbed depreciation of Rs. 1,42,000 will be carried forward.
81.3-8E1 [P6.27]* X submits the following particulars :
Previous years
2019-20 2020-21
Rs. Rs.
Business profits (before depreciation) 2,15,000 2,35,000
Current depreciation 3,96,000 4,34,000
Income from property (computed) 8,000 40,000
Income from salary (after standard deduction) 1,60,000 2,00,000
Determine the net income of X for the assessment years 2020-21 and 2021-22.
81.3-8P2 X submits the following particulars :

Previous years
2019-20 2020-21
Rs. Rs.
Business profits (before depreciation) (—) 50,000 45,000
Current depreciation 18,000 20,000
Solution : ASSESSMENT YEAR 2020-21 (PREVIOUS YEAR 2019-20) :
Rs. Rs.
Less : Business loss 20,000
Net income Nil
Amount to be carried forward :
 Business loss : Rs. 30,000
 Unabsorbed depreciation : Rs. 18,000
ASSESSMENT YEAR 2021-22 (PREVIOUS YEAR 2020-21)
Business profits 45,000
Less : Current depreciation 20,000
Profit after depreciation 25,000
Less : Brought forward business loss of the previous year 2019-20 30,000 Nil
Business loss of previous year 2019-20 to be carried forward to the next year 5,000*
Income from other sources :
Income 70,000
Less : Unabsorbed depreciation of the previous year 2019-20 18,000 52,000
Net income 52,000
*Brought forward business loss can be set off only against business profits and not against any other income.
81.3-8E2 [P6.28]* X submits the following particulars :

Previous years
2019-20 2020-21
Rs. Rs.
Business profits (before depreciation) (—) 70,000 80,000
Current depreciation 20,000 18,000
81.3-9 DEPRECIATION ON STRAIGHT-LINE BASIS IN THE CASE OF POWER UNITS - An undertaking engaged in generation or
generation and distribution of power can claim depreciation (in respect of assets acquired after March 31, 1997)
according to any one of the following methods—
213 Tea/coffee/rubber development account Para 81.6
Straight- Depreciation can be claimed according to straight-line basis in the case of tangible assets at the percentage
line basis specified in Appendix IA to the Income-tax Rules [see Appendix 3 given at the end of the book] on the actual
cost of individual asset. The aggregate depreciation cannot exceed the “actual cost”.
Written Alternately, such undertaking can claim depreciation, at its option, according to written down value
down value method like any other assessee [see para 81.3-5]. The option for this purpose shall be exercised before
basis the due date of furnishing return of income. Once the option is exercised, it shall be final and shall apply
to all the subsequent years.
81.4 Investment allowance for acquisition and installation of new plant and machinery [Sec. 32AC] -
Deduction under section 32AC was available only for the assessment years 2014-15 to 2017-18. From the
assessment year 2018-19, deduction under section 32AC is not available.
81.5 Investment allowance in notified backward area in Andhra Pradesh, Bihar, Telangana and West
Bengal [Sec. 32AD] - Additional investment allowance is available from the assessment year 2016-17 under
section 32AD. This deduction is over and above the deduction available under section 32AC. Accordingly, if an
undertaking is set up in the notified backward areas in Andhra Pradesh, Bihar, Telangana and West Bengal by
a company, it shall be eligible to claim deduction under the existing provisions of section 32AC as well as under
section 32AD if it fulfils the conditions (such as investment above a specified threshold) specified in the said
section 32AC and conditions specified under section 32AD.
 Conditions for claiming deduction under section 32AD - The following conditions should be satisfied in order to
avail tax incentive of additional investment allowance under section 32AD –

1. The assessee may be a company or any other person.
2. He/it sets up an undertaking/enterprise for manufacture or production of any article or thing on or after April
1, 2015.
3. Such undertaking must be set up in any backward area (notified by the Central Government) in Andhra
Pradesh, Bihar, Telangana and West Bengal.
4. He/it acquires and installs (for the purposes said undertaking) a “new asset”. “New asset” for this purpose
is a new plant or machinery. But it does not include second hand machinery, machinery installed in office/
residential accommodation/guest house, vehicle, ship or aircraft or any plant and machinery, the whole of the
actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing
business income of any previous year.
5. The new asset should be acquired and installed after March 31, 2015 but before April 1, 2020. Both ‘acquisition’
and ‘installation’ of the new asset (i.e., new plant and machinery) are required to be made after March 31, 2015
but before April 1, 2020.
 Quantum of investment allowance - If the above conditions are satisfied, investment allowance under section
32AD is 15 per cent of actual cost† of “new asset”. It is available in the year in which the new asset is installed.
81.6 Tea/coffee/rubber development account [Sec. 33AB] - An assessee can claim deduction under section
33AB as follows—
 Conditions - The assessee must satisfy the following conditions –
1. Engaged in tea/coffee/rubber plantation - It must be engaged in the business of growing and manufacturing tea
or coffee or rubber in India.
2. Deposit - The assessee must make a deposit in a “special account” (i.e., deposit with NABARD) or deposit under
a scheme approved by the Tea Board or Coffee Board or Rubber Board. Deposit should be made within 6 months
from the end of the previous year or before the due date of furnishing return of income, whichever is earlier.
3. Audit - The accounts of the taxpayer should be audited by a chartered accountant.
 Amount of deduction - Amount of deduction is –
a. a sum equal to amount deposited in the “special account”; or

b. 40 per cent of the profit of such business computed under the head “Profits and gains of business or
profession” before making any deduction under section 33AB and before adjusting brought forward business
loss under section 72,
whichever is less.
† Where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment (or aggregate of payments made to a person
in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed
electronic mode), exceeds Rs. 10,000, such payment shall not be eligible for investment allowance under section 32AD.
 Other points - The following points should be noted –

1. Where any deduction is claimed under this section, no deduction shall be allowed in respect of such amount
in any other previous year.
2. The amount standing to the credit of the special account may be withdrawn only for the purpose specified in
the approved scheme. If the amount released from the “special account” in a year is not utilized in the same
previous year for the purpose for which it is released, the amount not so utilized will be treated as taxable profits
of that year and taxed accordingly.
3. Where an amount is withdrawn because of closure of business or because of dissolution of firm, the amount
withdrawn will be treated as taxable profit and taxed accordingly on the basis as if the business was continuing
or the firm had not been dissolved. In all other cases, viz., death of the taxpayer, partition of the Hindu undivided
family and liquidation of the company, the amount withdrawn on closure of account because of the occurrence
of any of these events will not be included in the taxable income even though the amount has not been utilized
for any of the purposes specified in the scheme.
4. The amount withdrawn from the “special account” cannot be utilised for acquiring plant and machinery which
is to be installed in any office premises or residential accommodation or guest houses. Barring computers, office
appliances cannot be purchased. Even any machinery which is to be installed in an undertaking producing low
priority items (specified in the Eleventh Schedule) or is an item of plant or machinery entitled to 100 per cent
deduction in any one year, cannot be acquired. Machinery so acquired should not be transferred within 8 years
from the end of the year in which it is acquired (this rule of 8 years is not applicable in the case of transfer to the
Central Government, State Government, statutory corporation, Government company or transfer in a scheme
of conversion of firm into company).
81.6-P1 X Ltd. is engaged in the business of growing and manufacturing tea in India. During the previous year 2018-19, it deposits
Rs. 100 lakh in the “special account” and claims the same as deduction under section 33AB (i.e., 40 per cent of the business profit :
Rs. 250 lakh). During 2019-20, the company withdraws Rs. 35 lakh from the “special account” which is utilised as follows —
a. Rs. 25 lakh on December 31, 2019 for the purpose of the scheme framed by the Tea Board ; and
b. Rs. 4 lakh for other purpose on January 27, 2020.
Rs. 6 lakh is not utilised up to March 31, 2020.
Find out the amount chargeable to tax for the assessment year 2020-21.
Solution : For the assessment year 2020-21, Rs. 10 lakh is treated as business income (i.e., Rs. 4 lakh, being the amount
misutilised by the company plus Rs. 6 lakh, being the amount which is not utilised by the company during 2019-20).
81.6-E1 Suppose in problem 81.6-P1, Rs. 6 lakh is utilised for the purpose of the scheme on April 1, 2020, find out the amount
81.6-P2 Find out the tax consequences in the following cases —
1. Business profit of X Ltd., a tea growing and manufacturing company, is Rs. 70 lakh for the assessment year 2019-20. It deposits
Rs. 25 lakh in the “special account” for claiming deduction under section 33AB. It wants to claim set-off of brought forward business
loss of Rs. 12,00,000.
2. By withdrawing Rs. 20 lakh on January 20, 2020 from the “special account”, X Ltd. purchases a non-depreciable asset for Rs. 18 lakh
according to the scheme framed by the Tea Board. The remaining amount of Rs. 2 lakh is not utilised up to March 31, 2020.
3. The asset which is purchased for Rs. 18 lakh is sold to Y for Rs. 31 lakh on December 3, 2022.
Solution :
1. Amount deductible for the assessment year 2019-20 is —
a. Rs. 28 lakh (i.e., 40% of Rs. 70 lakh) ; or
b. Rs. 25 lakh (being the deposit with the “special account”),
whichever is lower.
Rs. 25 lakh is, therefore, deductible under section 33AB. Taxable income of X Ltd. shall be determined as under —
Rs. in lakh
Business income 70
Less : Deduction under section 33AB 25
Net income 45
As per rule 8 [see para 187] 40% of Rs. 45 lakh is taken as non-agricultural income which is chargeable to
tax and the balance 60% is treated as agricultural income which is not taxable
Non-agricultural income [i.e., 40% of Rs. 45 lakh] 18
Less : Brought forward loss 12
Net income 6
215 Expenditure on scientific research Para 81.9
2. Rs. 2 lakh, being the amount not utilised up to March 31, 2020, will be business income (40% of which will be taxable as
non-agricultural income) for the assessment year 2020-21.
3. The new asset is transferred within eight years from March 31, 2020. Consequently, the taxable income for the assessment
year 2023-24 (i.e., previous year 2022-23 in which the asset is transferred) will be determined as follows —
Rs.
Business income [40% of which is taxable as non-agricultural income] 18,00,000
Short-term capital gain (i.e., Rs. 31 lakh – Rs. 18 lakh) 13,00,000
81.6-E2 Discuss the following —

1. When should the asset purchased in problem 81.6-P2 be sold without attracting revocation of the tax incentive claimed under
section 33AB ?
2. What is the taxable amount if the new asset is transferred on December 3, 2022 for Rs. 31 lakh to Y Ltd., a Government company ?
3. What is the amount of taxable income if the new asset is transferred to Y on December 3, 2022 and the consideration of Rs. 31 lakh
is determined by the Government ?
81.7 Site restoration fund [Sec. 33ABA] - An assessee can claim deduction under section 33ABA as follows—
 Conditions - The assessee must satisfy the following conditions –
1. Production of petroleum/natural gas - The taxpayer is engaged in the business of the prospecting for, or extraction
or production of, petroleum or natural gas or both in India.
2. Agreement - The Central Government has entered into an agreement with the taxpayer for such business.
3. Deposit - It must make a deposit with SBI in a “special account” in accordance with a scheme approved by the
Ministry of Petroleum and Natural Gas or deposit any amount in a “site restoration account” under a scheme
framed by the Ministry of Petroleum and Natural Gas. The deposit should be made before the end of the previous
year.
4. Audit - Books of account of the taxpayer should be audited.
 Amount of deduction - Amount of deduction is –
a. a sum equal to amounts deposited as given above; or
b. 20 per cent of the profit of such business computed under the head “Profits and gains of business or
profession” before making any deduction under section 33ABA and before adjusting brought forward
business loss under section 72,
whichever is less.
81.8 Reserves for shipping business [Sec. 33AC] - No deduction under section 33AC is available from the
81.9 Expenditure on scientific research [Sec. 35] - The term “scientific research” means “any activity for the
extension of knowledge in the fields of natural or applied sciences including agriculture, animal husbandry or
fisheries”. The term ‘scientific research’ has a wide scope. It does not necessarily mean only invention or
successful scientific research. With a view to accelerating scientific research, section 35 provides tax incentives.
Under this section amount deductible in respect of scientific research may be classified as under :
Expenditure on research carried on Contribution to outsiders
by the assessee
1. Revenue expenditure under section 35(1)(i) [see 1. Contribution to an approved research association under
para 81.9-1] section 35(1)(ii)/(iii) [see para 81.9-2]
2. Capital expenditure under section 35(2) [see para 2. Payment to National Laboratory under section 35(2AA)
81.9-3] [see para 81.9-4]
3. Expenditure on an approved in-house research 3. Contribution to an Indian scientific research company [see
under section 35(2AB) [see para 81.9-5] para 81.9-6].
81.9-1 REVENUE EXPENDITURE INCURRED BY THE ASSESSEE HIMSELF [SEC. 35(1)(I)] - Where the assessee himself carries on
scientific research and incurs revenue expenditure, deduction is allowed for such expenditure only if such
research relates to the business.
Suppose X Ltd. is engaged in the business of manufacture of paper and it incurs revenue expenses for conducting scientific
research for improving the quality of steel, such expenditure is not deductible, as it is not related to the business of the
taxpayer.
 Pre-commencement period expenses - Revenue expenses (other than expenditure on providing perquisites to
employees) incurred before the commencement of business (but within three years immediately before
commencement of business) on scientific research related to the business are deductible in the previous year in
which the business is commenced. However, the deduction is limited to the extent it is certified by the prescribed
authority.
X Ltd. starts a business on May 21, 2019. Revenue expenditure (for conducting scientific research related to the business)
incurred by it from May 21, 2019 to March 31, 2020 is allowed as deduction for the assessment year 2020-21. Besides, the
following expenses on scientific research related to the business incurred by X Ltd. during May 21, 2016 and May 20, 2019
(and approved by the prescribed authority) will be allowed as deduction for the assessment year 2020-21—
a. expenses on purchase of material used in scientific research ; and
b. salary paid to employees (not expenses on perquisites).
81.9-2 CONTRIBUTION MADE TO OUTSIDERS [SEC. 35(1)(II)/(III)] - Where the assessee does not himself carry on research but
makes contributions to other institutions for this purpose, a weighted deduction is allowed, as follows—
To whom contribution can be given Weighted deduction for the
assessment year 2020-21
An approved research association which has, as its object, undertaking of scientific 150% of actual
research related or unrelated to the business of assessee [sec. 35(1)(ii)] expenditure†
An approved university, college or other institution for the use of scientific research 150% of actual
related or unrelated to the business of assessee [sec. 35(1)(ii)] expenditure†
An approved association which has as its object the undertaking of research in social 100% of actual
science or statistical science or an approved university, college or other institution expenditure
for the use of research in social sciences or statistical research related or unrelated
to the business of the assessee [sec. 35(1)(iii)]
Approval under section 35(1)(ii)/(iii) is given by the Central Government. Contribution to these institutions are
qualified for weighted deduction even if after the date of making contribution, the approval granted to these
institutions have been withdrawn.
81.9-3 CAPITAL EXPENDITURE INCURRED BY AN ASSESSEE HIMSELF [SEC. 35(2)] - Where the assessee incurs any expenditure
of a capital nature on scientific research related to his business, the whole of such expenditure incurred in any
previous year is allowable as deduction for that previous year.
One should note the following points —
 Capital expenditure on conducting scientific research (relating to the business of assessee) is deductible at the
rate of 100 per cent in the year in which expenditure is incurred. Deduction is available even if the relevant asset
is not put to use for research and development purposes during the previous year in which the expenditure is
incurred.
 For instance, deduction under section 35 is allowable on capital expenditure for research purposes for
construction of a building (which is under construction) even if it is not put to use for research and development
during the previous year.
 The above expenses may be on plant or equipment for research or constructing building (excluding cost of land)
for research or expenses of capital nature connected with research like expenses on purchase of buses to transport
research personnel.
 Where any capital expenditure has been incurred on scientific research related to business before the
commencement of business, the amount of such expenditure, incurred within three years immediately
preceding the commencement of the business, is deductible in the previous year in which the business is
commenced.
 The aforesaid deduction is not available in respect of capital expenditure incurred on the acquisition of any
land.
† 150% of actual expenditure (for the assessment years 2018-19 to 2020-21) and 100% of actual expenditure (from the assessment year 2021-22
onwards).
 No deduction by way of depreciation is admissible in respect of an asset used in scientific research.

 If the asset is sold without having been used for other purposes, the following amount shall be chargeable to
tax—
a. surplus (i.e., sale price); or
b. deduction already allowed under section 35,
whichever is less.
It is chargeable to tax as business income of the previous year in which the sale took place [section 41(3)]. The
excess of sale price over cost of acquisition (or indexed cost of acquisition) is chargeable to tax under section 45
under the head “Capital gains” [see problem 81.9-P2 for detailed discussion].
81.9-4 CONTRIBUTION TO NATIONAL LABORATORY [SEC. 35(2AA)] - The provisions of section 35(2AA) are given below—
 Conditions - The following conditions should be satisfied—
1. The payment is made to National Laboratory†, university, IIT, or a specified person as approved by the
prescribed authority‡.
2. The above payment is made under a specific direction that it should be used by the aforesaid person for
undertaking scientific research programme approved by the prescribed authority‡.
 Amount of deduction - If the aforesaid payment is eligible for weighted deduction which is equal to 150 per cent .
#
Such contribution which is eligible for weighted deduction is not eligible for any other deduction under the
Act.
81.9-5 EXPENDITURE ON IN-HOUSE RESEARCH AND DEVELOPMENT EXPENSES [SEC. 35(2AB)] - Section 35(2AB) provides for a
weighted deduction in respect of expenditure on in-house research and development expenses subject to the
following —
 Conditions - One has to satisfy the following conditions —
1. The taxpayer is a company.

2. The company should be in the business of bio-technology or in the business of manufacture or production of
any article or thing except those specified in the Eleventh Schedule.
3. It incurs any expenditure on scientific research and such expenditure is of capital nature or revenue nature*
(not being expenditure in the nature of cost of any land and building)**. The expenditure on scientific research
in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, regulatory
approval and filing an application for a patent.
4. The research and development facility is approved by the prescribed authority.
5. The taxpayer has entered into an agreement with the prescribed authority for co-operation in such research
and development facility and for audit of the accounts maintained for that facility or fulfils such conditions with
regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be
prescribed.
 Amount of deduction - If all the above conditions are satisfied, then a sum equal to 150 per cent of the expenditure
#
so incurred shall be allowed as deduction. If the aforesaid conditions are not satisfied, then deduction may be
claimed as per the rules mentioned in paras 81.9-1 and 81.9-3.
81.9-6 CONTRIBUTION TO A COMPANY TO BE USED BY SUCH COMPANY FOR SCIENTIFIC RESEARCH [SEC. 35(1)(iia)] - Section 35(1)(iia)
is applicable if the taxpayer has paid any sum to an approved Indian scientific research company. In respect of
such payment, a deduction of 100 per cent is available. Research may or may not be related to the business of the
person making the contribution.
† “National Laboratory” for this purpose means a scientific laboratory functioning at national level under the aegis of the Indian Council of
Agricultural Research, the Indian Council of Medical Research or the Council of Scientific and Industrial Research, the Defence Research and
Development Organisation, the Department of Electronics, the Department of Bio Technology or the Department of Atomic Energy.
‡The prescribed authority is the head of a National Laboratory or a University or an Indian Institute of Technology, as the case may be. In the
case of “specified person” the prescribed authority is the Principal, Scientific Adviser to the Government of India. Such authority shall before
granting approval satisfy itself about the feasibility of carrying out the scientific research. The aforesaid authority shall submit its report to the
Director-General in such form as may be prescribed.
* There is no need to find out whether the expenditure is capital expenditure or revenue expenditure because under this section both revenue and
capital expenditure are allowable as deduction.
**Cost of building (excluding cost of land) is eligible for 100 per cent deduction under section 35(2) [see para 81.9-3].
# 150% (for the assessment years 2018-19 to 2020-21) and 100% (from the assessment year 2021-22 onwards).
 Restriction on payee-company - The payee-company cannot claim weighted deduction of 150 per cent under
section 35(2AB). However, the payee-company can claim a deduction to the extent of 100 per cent of the sum
spent as revenue expenditure or capital expenditure on scientific research, under section 35(1).
81.9-7 CARRY FORWARD AND SET-OFF OF DEFICIENCY IN SUBSEQUENT YEARS - If on account of inadequacy or absence of
profits of the business, deduction on account of capital expenditure on scientific research cannot be allowed, fully
or partly, the deficiency so arising is to be carried forward as if it is unabsorbed depreciation [see para 81.3-8].
81.9-8 CONSEQUENCES IN CASE OF AMALGAMATION - In pursuance of an agreement of amalgamation, if the amalgam-
ating company transfers to the amalgamated company, which is an Indian company, any asset representing
capital expenditure on scientific research, provisions of section 35 would apply to the amalgamated company
as they would have applied to the amalgamating company if the latter had not transferred the asset.
Problems
81.9-P1 X Ltd. commenced production of paper on December 1, 2019. The company has made the following expenditure on scientific
research up to the year ending on March 31, 2020 :
1. On December 13, 2019, the company pays Rs. 80,000 to the Indian Agricultural Research Institute, New Delhi, being an approved
research institution under section 35(1)(ii), for the purpose of carrying out scientific research in natural science.
2. On December 21, 2019, the company pays Rs. 70,000 to the Indian Institute of Management, Ahmedabad, being an approved institute
under section 35(1)(iii), for the purpose of carrying out research in social or statistical science.
3. On January 10, 2020, the company pays Rs. 40,250 to an approved National Laboratory for carrying out programmes of scientific
research.
4. On December 23, 2019, the company purchases a plot of land for Rs. 6,00,000. Later on a laboratory building is constructed (cost of
construction : Rs. 4,70,000, date of completion of construction : March 1, 2020) to start an in-house research.
5. Before the commencement of the production, the company had made the following revenue expenditure for its research laboratory —
 Expenditure on salary and perquisite to research personnel and research material during the 12 months ending on November 30, 2016 :
Rs. 30,000.
 Expenditure on salary of research professional from December 1, 2016 to November 30, 2019 : Rs. 91,000 (out of which amount certified
by the prescribed authority is Rs. 32,000).
 Expenditure on providing rent-free flat and club facility to research personnel from December 1, 2016 to November 30, 2019 :
Rs. 18,000.
 Expenditure on research material from December 1, 2016 to November 30, 2019 : Rs. 76,800 (out of which amount certified by the
prescribed authority is Rs. 44,800).
 Capital expenditure on scientific research (not certified by the prescribed authority).
Expenditure Expenditure
incurred up to incurred
November 30, between
2016 December 1,
2016 and
November 30,
2019
Rs. Rs.
Purchase of land for growing herbals for research 2,50,000 3,60,000
Purchase of equipments for research 2,30,000 1,40,000
Cost of cultivation of herbals 22,000 44,600
Determine the amount of deduction available to X Ltd. under section 35(1) for the assessment year 2020-21, if the scientific research is
related to the business of the assessee-company.
Solution : The amount of deduction under section 35 for the assessment year 2020-21 will be determined as
under — Rs.
1. Payment of Rs. 80,000 to an approved research institution for carrying on research in natural science is
deductible under section 35(1)(ii) and is qualified for weighted deduction (i.e., Rs. 80,000 × 1.50) 1,20,000
2. Payment of Rs. 70,000 to an approved institution for carrying on research in social science is deductible
under section 35(1)(iii) 70,000
3. Payment of Rs. 40,250 to an approved National Laboratory is qualified for weighted deduction (i.e.,
Rs. 40,250 × 1.50) 60,375
4. Cost of laboratory building (excluding cost of land) [deductible under section 35(2)] 4,70,000
Rs.
5. Expenditure on salary (excluding perquisite) to research personnel and expenditure on material for
scientific research incurred within 3 years before commencement of business is deductible under section
35(1)(i) —
 Rs. 30,000 being expenditure on salary and perquisites is not deductible as it is not incurred within 3
years before commencement of business Nil
 Rs. 32,000 being expenditure on salary to research personnel as certified by the prescribed authority
within 3 years before commencement of business is deductible 32,000
 Rs. 18,000 being expenditure on providing perquisites to research personnel before commencement of
business is not deductible Nil
 Rs. 44,800 being expenditure as certified by the prescribed authority on purchasing research material
within 3 years before commencement of business is deductible 44,800
 Cost of land purchased for growing herbals (not deductible) —
 Rs. 1,40,000 (being the cost of equipment) is deductible 1,40,000
 Rs. 44,600 being cost of growing herbals is deductible 44,600
Amount deductible under section 35 for the assessment year 2020-21 9,81,775
81.9-E1 Assume in problem 81.9-P1 that research is not related to the business of the taxpayer.
81.9-P2 XYZ Ltd., a paper manufacturing concern, purchases a machine on March 1, 2017 for Rs. 6,10,000 for its laboratory with
a view to improving the quality of art paper manufactured by the company.
1. What will be the amount of deduction under section 35 on account of capital expenditure of Rs. 6,10,000 for the assessment year
2017-18 ?
2. If the research activity for which the aforesaid machine is purchased, ceases in 2018 and the machinery is brought into business proper
on November 1, 2018 (market value of the machine : Rs. 2,30,000) ; depreciation is admissible at the rate of 15 per cent ; depreciated value
of the relevant block of assets on April 1, 2018 is Rs. 14,07,860; the scientific research machine is sold for Rs. 1,90,000 on April 4, 2019,
what will be the amount of depreciation for the assessment year 2020-21 and amount of chargeable profit under section 41(3) ?
3. If the research activity for which the machine was purchased ceases on November 1, 2018 (market value of the machine : Rs. 2,30,000)
and the machine is sold on April 4, 2019 without using it for another purpose, sale price being Rs. 1,90,000 or Rs. 15,00,000.
Solution :
1. As the scientific research is related to the business of assessee, the whole of capital expenditure of Rs. 6,10,000 is allowable
as deduction under section 35 for the assessment year 2017-18.
2. The machine is brought into business proper on November 1, 2018.
Tax treatment of depreciation will be as under :
Rs.
Depreciated value of the block of assets on April 1, 2018 14,07,860
Add : Cost of machine transferred from laboratory on November 1, 2018 [i.e., Rs. 6,10,000—deduction of
Rs. 6,10,000 claimed under section 35] Nil
Less : Depreciation for the previous year 2018-19 [15% of Rs. 14,07,860] 2,11,179
Less : Sale proceeds of machine sold on April 4, 2019 1,90,000
Less : Depreciation for the previous year 2019-20 (15% of Rs. 10,06,681) 1,51,002
There will be no capital gain or loss in this case
3. Tax treatment should be as under :
If the sale price is
Rs. 1.90 lakh Rs. 15 lakh
Rs. Rs.
Amount chargeable under section 41(3) (i.e., sale proceeds but subject to maximum
of deduction claimed under section 35 for the assessment year 2017-18) 1,90,000 6,10,000
Capital gain under section 45
Sale proceeds 1,90,000 15,00,000
Less : Cost of acquisition 6,10,000 6,10,000
Short-term capital gain (–) 4,20,000 8,90,000
Para 81.9A Profits and gains of business or profession 220
Note - It can be seen from the above computation that when the capital asset is transferred for Rs. 1.90 lakh without putting
it to some other use, the taxpayer can claim short-term capital loss of Rs. 4.20 lakh, apart from claiming deduction under
section 35—Pharmson Pharmaceuticals Ltd. v. CIT [2003] 87 ITD 668 (Delhi). To avoid double deduction, it is suggested to the
Government that a suitable amendment should be made in section 35 incorporating the following —
“Where deduction is allowed in respect of a capital expenditure under section 35(1)(iv), no deduction shall be allowed in
respect of the said expenditure under any other provision of the Act in any year.”
81.9-E2 [P6.29]* X Ltd. is engaged in the business of manufacture of telecommunication equipments. During the previous year
2019-20, it incurs the following expenditure on in-house research and development facility—
Rs.
a. purchase of land 26,00,000
b. construction of building 12,90,000
c. purchase of plant and equipment 7,80,000
d. research material, etc. 2,10,000
Find out the amount of deduction under section 35 if (a) the research and development facility is approved by the prescribed authority
for the purpose of section 35(2AB), (b) it is not approved by the prescribed authority.
81.9A Expenditure for obtaining right to use spectrum for telecommunication services [Sec. 35ABA] -
Section 35ABA provides tax treatment of spectrum fees on the following lines —
1. Any capital expenditure incurred and “actually paid”† by an assessee on the acquisition of any right to use
spectrum for telecommunication services by paying spectrum fee will be allowed as a deduction in equal
instalments over the period for which the right to use spectrum remains in force. Deduction will be available
starting from the year in which actual payment is made (or the year of commencement of business, whichever
is later) and ending with the year when spectrum comes to an end, 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 or payable in such manner as may be prescribed.
2. Where the spectrum is transferred and proceeds of the transfer are less than the expenditure remaining
unallowed, a deduction equal to the expenditure remaining unallowed as reduced by the proceeds of transfer,
shall be allowed in the previous year in which the spectrum has been transferred.
3. If the spectrum is transferred and proceeds of the transfer exceed the amount of expenditure remaining
unallowed, the excess amount shall be chargeable to tax as profits and gains of business in the previous year in
which the spectrum has been transferred.
4. Unallowed expenses in a case where a part of the spectrum is transferred would be amortised.
81.10 Amortisation of telecom licence fees [Sec. 35ABB] - The provisions of section 35ABB are given below—
 Conditions - Deduction under section 35ABB is available if the following conditions are satisfied —
Condition one The expenditure is capital in nature.

Condition two It is incurred for acquiring any right to operate telecommunication services.
Condition three The expenditure is incurred either before the commencement of business or thereafter at any time
during any previous year.
Condition four The payment for the above has been actually made to obtain licence.
If all the above conditions are satisfied, then one can claim deduction under section 35ABB. If, however, these
conditions are not satisfied, then deduction under section 35ABB is not available [one may claim deduction
under section 37(1)].
 Amount of deduction - The payment will be allowed as deduction in equal instalments over the period starting
from the year in which such payment has been made** and ending in the year in which the licence comes to an
end. It may be noted that the deduction starts from the year in which actual payment of expenditure is made
irrespective of the previous year in which the liability for the expenditure is incurred according to the method
of accounting regularly employed by the assessee.
†For this purpose, rule 6A has been inserted. It provides that where an assessee has opted for and has been allowed by the Department of
Telecommunications, Government of India (DOT) to make deferred payment, the amount which would have been payable by the assessee had
he opted for full upfront payment of spectrum fee, will be considered as amount “actually paid”.
**In a case where the licence fee is actually paid before the commencement of the business to operate telecommunication services, then deduction
is available for the previous years beginning with the previous year in which such business is commenced and ending with the previous year in
which the licence comes to an end.
221 Amortisation of telecom licence fees Para 81.10
Where deduction is claimed and allowed under section 35ABB, no deduction will be available in respect of the
same expenditure under section 32.
 Profit or loss on sale of telecom licence - Any profit or loss on sale of telecom licence is taken into consideration while
computing business income. The relevant rules are discussed with the help of Problem 81.10-P2.
 Consequences in case of amalgamation or demerger - Where under a scheme of amalgamation/demerger, a telecom
licence is transferred to an Indian company, then the provisions of section 35ABB shall continue to apply to the
transferee-company.
Problems
81.10-P1 X Ltd., a company providing telecommunication service, obtains a telecom licence on April 20, 2019 for a period of 10 years
which ends on March 31, 2029 (licence fee being Rs.18 lakh). Find out the amount of deduction under section 35ABB if —
a. the entire amount is paid on May 6, 2019 ; or
b. the entire amount is paid on April 1, 2020 ; or
c. the entire amount is paid in three equal instalments on April 30, 2019, April 30, 2020 and April 30, 2021.
Solution :
Situation (a) - The payment of Rs.18 lakh is deductible in 10 instalments over a period of 10 years during the previous years
2019-20 to 2028-29 (the amount deductible each year being Rs. 1.8 lakh).
Situation (b) - The payment is deductible in 9 years starting from the year of payment, i.e., the previous year 2020-21 and
ending with the previous year 2028-29 (the amount deductible each year being Rs. 2 lakh).
Situation (c) - The entire payment is made in three instalments. Deduction under section 35ABB is available as under—
First instalment Second instalment Third instalment Total
Date of payment April 30, 2019 April 30, 2020 April 30, 2021
Period during which deduction is available 10 years (2019-20 9 years (2020-21 to 8 years (2021-22
to 2028-29) 2028-29) to 2028-29)
Amount of payment Rs. 6 lakh Rs. 6 lakh Rs. 6 lakh
Amount deductible in previous year
2019-20 60,000 — — 60,000
2020-21 60,000 66,667 — 1,26,667
2021-22 onwards 60,000 66,667 75,000 2,01,667
81.10-E1 Assume in problem 81.10-P1 that the payment is made in four instalments as follows —
April 30, 2019 : Rs. 4,00,000
October 31, 2019 : Rs. 5,00,000
April 30, 2020 : Rs. 5,00,000
October 31, 2020 : Rs. 4,00,000.
Compute the amount of deduction under section 35ABB for different assessment years.
➠ 81.10-P2 X Ltd., a company which provides telecom services, acquires a telecom licence on April 5, 2019 for a period of 15 years which
ends on March 31, 2034 (licence fees being Rs.15 lakh paid on May 6, 2019). The licence is transferred by X Ltd. on December 20, 2021
for (a) Rs. 6,92,000, (b) Rs. 13,70,000 or (c) Rs. 15,60,000. Compute the amount chargeable to tax.
Solution : Rs.
Cost of licence which is paid on May 6, 2019 15,00,000
Less : Amount written off during the previous years 2019-20 and 2020-21 2,00,000
Written down value on April 1, 2021 13,00,000
Tax treatment when telecom licence is transferred on December 20, 2021
Sale consideration
Rs. 6.92 lakh Rs. 13.70 lakh Rs. 15.60 lakh
Rs. Rs. Rs.
Sale proceeds 6,92,000 13,70,000 15,60,000
Less : Written down value on April 1, 2021 13,00,000 13,00,000 13,00,000
Surplus (-)6,08,000 70,000 2,60,000
Amount deductible during the previous year 2021-22 under section
35ABB(2) 6,08,000 — —
Rs. 6.92 lakh Rs. 13.70 lakh Rs. 15.60 lakh

Rs. Rs. Rs.
Amount chargeable to tax during the previous year 2021-22 as notional
business income, it cannot exceed the amount of deduction claimed in
earlier years under section 35ABB — 70,000 2,00,000
Short-term capital gains
Sale proceeds 6,92,000 13,70,000 15,60,000
Less : Cost of acquisition 15,00,000 15,00,000 15,00,000
Short-term capital gain/loss (-)8,08,000 (-)1,30,000 (+)60,000
Note - It can be seen from the above data that when the telecom licence is transferred for Rs. 6.92 lakh, the taxpayer can claim
short-term capital loss of Rs. 8.08 lakh, apart from claiming deduction under section 35ABB. To avoid double deduction, it
is suggested to the Government that a suitable amendment should be made in section 35ABB incorporating the following—
“Where a deduction is allowed in respect of a capital expenditure under section 35ABB, no deduction shall be allowed in
respect of the said expenditure under any other provision of the Act in any year.”
81.10-E2 Assume in problem 81.10-P2 that X sells the licence on December 31, 2021 for (a) Rs. 13,00,000, (b) Rs. 15,00,000,
compute the amount of business income and capital gains chargeable to tax for the assessment year 2021-22.
81.11 Expenditure on eligible projects or scheme [Sec. 35AC] - Deduction is available under section 35AC (up
to the assessment year 2017-18)† for promoting social and economic welfare or uplift of the public.
81.12 Deduction in respect of expenditure on specified business [Sec. 35AD] - Section 35AD provides
investment-linked tax incentives.
81.12-1 CONDITIONS - The following conditions should be satisfied to avail of the benefit of deduction under
section 35AD—
 Condition 1 - Specified business - Deduction under section 35AD is available only in the case of a “specified
business” given below—

Specified business Who should own the Approval (if any) Date of commencement
business of business
1. Setting up and operating Any person Not required On or after April 1, 2009
a cold chain facility [see
Note 1]
2. Setting up and operating Any person Not required On or after April 1, 2009
a warehousing facility for
storage of agricultural
produce
3. Laying and operating a An Indian company or a Should be approved by  On or after April 1, 2007,
cross-country natural gas consortium of Indian com- Petroleum and Natural in the case of laying and
or crude or petroleum oil panies or an authority/ Gas Regulatory Board and operating a cross-country
pipeline network for dis- Board/corporation esta- notified by the Central natural gas pipeline net-
tribution, including stor- blished under any Central Government [see Note 2] work for distribution or
age facilities being an inte- or State Act storage.
gral part of such network  In other cases, on or after
April 1, 2009.
4. Building and operating Any person No approval required; On or after April 1, 2010
anywhere in India a hotel however, hotel should be
of 2 star or above category classified by the Central
[see Note 3] Government as 2 star
hotel or above category
5. Building and operating, Any person No approval required On or after April 1, 2010
anywhere in India, any
hospital with at least 100
beds for patients
† No deduction under section 35AC will be available from the assessment year 2018-19 onwards.
223 Deduction in respect of expenditure on specified business Para 81.12
Specified business Who should own the Approval (if any) Date of commencement
business of business
6. Developing and building Any person Developing and building On or after April 1, 2010
a housing project housing project should be
under a scheme for slum
redevelopment or rehabili-
tation framed by the Cen-
tral Government/State
Government and notified
by the Board in accordance
with prescribed guidelines
7. Developing and building Any person Developing and building On or after April 1, 2011
a housing project a housing project should
be under a scheme for af-
fordable housing framed
by the Central Government
or a State Government and
notified by the Board
8. Production of fertilizer in Any person Not required On or after April 1, 2011
India
9. Setting up and operating Any person As notified or approved On or after April 1, 2012
an inland container depot under the Customs Act
or a container freight
station
10. Bee-keeping and produc- Any person No approval On or after April 1, 2012
tion of honey and bees-
wax
11. Setting up and operating a Any person No approval On or after April 1, 2012
warehousing facility for
storage of sugar
12. Laying and operating a Any person No approval On or after April 1, 2014
slurry pipeline for the tra-
nsportation of iron ore
13. Setting up and operating a Any person As notified by the Board On or after April 1, 2014
semi-conductor wafer fab- in accordance with such
rication manufacturing guidelines as may be pre-
unit scribed
14. Developing or maintain- An Indian company or a The eligible entity has On or after April 1, 2017
ing and operating or deve- consortium of Indian com- entered into an agreement
loping, maintaining and panies or an authority/ with Central/State Gover-
operating a new infrastruc- board/ corporation /any nment / local authority/
ture facility (applicable other body established or any other statutory body
from the assessment year constituted under any for developing, maintain-
2018-19) Central or State Act ing, etc., of new infrastruc-
ture facility
Note 1 - “Cold chain facility” means a chain of facilities for storage or transportation of agricultural and forest produce, meat
and meat products, poultry, marine and dairy products, products of horticulture, floriculture and apiculture and processed
food items under scientifically controlled conditions including refrigeration and other facilities necessary for the preserva-
tion of such produce.
Note 2 - This business should make not less than one-third (for a natural gas pipeline network) or one-fourth (for petroleum
product pipeline network) of its total pipeline capacity available for use on common carrier basis by any person other than
the assessee or an associated person. Associated person is a person who participates in the management of the assessee;
holds at least 26 per cent voting power in the assessee; appoints more than half of the board of directors or who guarantees
not less than 10 per cent of the total borrowing of the assessee.
Note 3 - Where an assessee builds a two-star (or above category) hotel and, subsequently, while continuing to own the hotel,
transfers the operation thereof to another person, the assessee shall be deemed to be carrying on the specified business of
building and operating hotel for the purpose of section 35AD.
Note 4 - Infrastructure facility means— (a) a road including toll road, a bridge or a rail system; (b) a highway project including
housing or other activities being an integral part of the highway project; (c) a water supply project, water treatment system,
irrigation project, sanitation and sewerage system or solid waste management system; and (d) a port, airport, inland
waterway, inland port or navigational channel in the sea.
 Condition 2 - Specified business should be new business - The specified business should not be set up by splitting
up, or the reconstruction, of a business already in existence. Moreover, it should not be set up by the transfer of
old plant and machinery.
20 per cent old machinery is permitted - If the value of the transferred assets does not exceed 20 per cent of the total
value of the machinery or plant used in the business, this condition is deemed to have been satisfied.
Second-hand imported machinery is treated as new - Any machinery or plant which was used outside India by any
person (other than the assessee) shall not be regarded as machinery or plant previously used for any purpose,
if the following conditions are fulfilled—
1. Such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in
India.
2. Such machinery or plant is imported into India from any country outside India.
3. No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable
under the Act in computing the total income of any person for any period prior to the date of the installation of
the machinery or plant by the assessee.
 Condition 3 - Audit of books of account - Books of account of the assessee should be audited.
81.12-2 AMOUNT OF DEDUCTION - 100 per cent of capital expenditure incurred wholly and exclusively for the
purpose of specified business carried on by an assessee is deductible in the previous year in which the
expenditure is incurred. However, this is subject to the following two propositions—
1. Expenditure incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any
deduction under section 35AD.
2. Deduction under section 35AD is not available (with effect from the assessment year 2018-19) pertaining to
any expenditure in respect of which payment (or aggregate of payments) made to a person in a day [otherwise
than by an account payee cheque/draft/use of electronic clearing system through a bank account (or through
prescribed electronic mode)] exceeds Rs. 10,000.
3. Expenditure incurred prior to the commencement of operation, wholly and exclusively, for the purpose of any
specified business, shall be allowed as deduction during the previous year in which the assessee commences the
operation of his specified business, if the amount is capitalized in the books of account of the assessee on the date
of commencement of operation.
81.12-3 CONSEQUENCES OF CLAIMING DEDUCTION UNDER SECTION 35AD - The following consequences should be noted—
1. If deduction is claimed and allowed under section 35AD, the assessee shall not be allowed any deduction in
respect of the specified business under the provisions of Chapter VIA under sections 80HH to 80RRB or under
section 10AA for the same or any other assessment year.
2. No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed
to the assessee under any other provisions of the Income-tax Act.
3. Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed
under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the
assessee and chargeable to income-tax under the head “Profits and gains of business or profession”.
4. Any loss computed in respect of the specified business shall not be set off except against profits and gains, if
any, of any other specified business. To the extent the loss is unabsorbed, the same will be carried forward for
set off against profits and gains from any specified business in the following assessment year and so on (no time-
limit for carry forward of such loss).
5. If the assessee owns two units one of them qualifies for deduction under section 35AD and the other one is not
eligible for the same and there is inter-unit transfer of goods or services between the two units, then for the
purpose of section 35AD calculation will be made as if such transactions are made at the market value.
6. An asset (in respect of which a deduction is claimed and allowed under section 35AD) shall be used only for the
specified business for a period of 8 years beginning with the previous year in which such asset is acquired or
constructed. If such asset is used for any purpose other than the specified business, the total amount of deduction
so claimed and allowed in any previous year 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)
225 Deduction in respect of expenditure on specified business Para 81.12
shall be deemed to be business income of the assessee of the previous year in which the asset is so used. However,
this provision will not apply to a company which has become a sick industrial company under section 17(1) of the
Sick Industrial Companies (Special Provisions) Act within the time period of 8 years as stated above.
Problems
81.12-P1 On April 1, 2019, X Ltd. commences the operation of a warehousing facility in Andhra Pradesh for storage of agricultural
produce. The following information is available from the records of company -
Expenses incurred prior to April 1, 2019
Rs.
Purchase of land for warehouse 50,00,000
Construction cost of warehouse 8,00,000
Purchase of know-how for warehouse 10,00,000
Salary to staff 78,000
These expenses are capitalized on March 31, 2019.
Expenses incurred during 2019-20
Purchase of old plant and machinery (from domestic market) 2,00,000
Purchase of old plant and machinery (from Germany) 4,00,000
Purchase of new plant and machinery 9,00,000
Purchase of goodwill 3,50,000
Profit and loss account for the year 2019-20
Rs. Rs.
Depreciation of building (@ 5%) 3,40,000 Amount collected from persons using warehouse 78,00,000
Depreciation of machinery (@ 23.333%) 3,50,000
Cost of know-how (amount written off) 10,00,000
Other operating expenses 7,51,000
Donation to a political party 10,000
Net profit 53,49,000
78,00,000 78,00,000
Out of other operating expenses, a payment of Rs. 40,000 is made in cash. Other operating expenses are deductible under section 37. Find
out the taxable income of X Ltd. for the assessment year 2020-21 on the assumption that X Ltd. has the following income from other
sources—income from the business of commission agency: Rs. 20,15,000 (computed under the provisions of the Income-tax Act) and
dividend from a foreign company : Rs. 50,000.
Solution : Amount deductible under section 35AD
Rs.
Expenditure incurred prior to the commencement of operation (to the extent these are capitalized)
Purchase of land (not qualified for deduction) Nil
Purchase of know-how 10,00,000
Expenditure incurred during the previous year
Purchase of machinery (Rs. 2,00,000 + Rs. 4,00,000 + Rs. 9,00,000) 15,00,000
Total 93,78,000
Amount deductible under section 35AD (deduction @100% of Rs. 93,78,000) 93,78,000
Computation of income from warehouse
Add: Depreciation of building (not deductible as cost of building is eligible for deduction under
section 35AD) 3,40,000
Add: Depreciation of machinery (not deductible as cost of machinery is qualified for deduction under
section 35AD) 3,50,000
Add: Cost of know-how (not deductible as deduction is available under section 35AD) 10,00,000
Add: Amount paid in cash (operating expenses) 40,000
Add: Donation to political party 10,000
Less: Deduction under section 35AD (-) 93,78,000
Loss from warehouse (-) 22,89,000
Computation of income
Rs. Rs.
Commission agency business 20,15,000
Warehouse (-) 22,89,000
Business income (loss from operating warehouse, being a specified business under
section 35AD cannot be set off against any other income except income from a
specified business) 20,15,000
Income from other sources (dividend from foreign company) 50,000
Less: Deduction under section 80GGB (donation to a political party) 10,000
Notes—
1. Second hand imported machinery is taken as new machinery. The business of operating warehouse is formed by using
new machinery of Rs. 13,00,000 and old machinery of Rs. 2,00,000. Value of old plant and machinery does not exceed 20 per
cent of the total value of plant and machinery. Other conditions of section 35AD are satisfied. X Ltd. is, therefore, eligible
for deduction under section 35AD.
2. Loss from operating warehouse (by virtue of section 73A) can be set off only against profit and gains, if any, of any other
business specified under section 35AD. In this case, X Ltd. does not have any other specified business. Loss will be carried
forward (without any time-limit) for being set off against income from operating warehouse or any other specified business
under section 35AD.
81.12-E1 On December 1, 2019, X Ltd. commences the operation of an inland container depot in Gujarat (approved under Customs
Act). The following information is available from the records of company -
Expenses incurred prior to December 1, 2019
Rs.
Cost of land 50,00,000
Brokerage paid for purchase of land 10,000
These expenses are capitalized on December 1, 2019.
Expenses incurred during December 1, 2019 and March 31, 2020
Construction cost of inland container depot 20,00,000
Purchase of old plant and machinery 30,00,000
Purchase of new plant and machinery 40,00,000
Profit and loss account for the inland container depot for the year 2019-20 is given below—
Rs. Rs.
Depreciation of building (@ 10%) 2,00,000 Amount collected from persons using inland
Depreciation of machinery (@ 15%) 10,50,000 container depot 1,90,00,000
Other operating expenses 86,00,000
1,90,00,000 1,90,00,000
Out of other operating expenses, a payment of Rs. 10,000 is made in cash. Other operating expenses are deductible under section 37.
X Ltd. has generated a loss of Rs. 3,00,000 from the business of trading in electronic items. Find out the taxable income of X Ltd. for
the assessment year 2020-21 in the following different situations—
1. The old plant and machinery was imported from Taiwan (no other person has used it in India prior to its import by X Ltd.).
2. The old plant and machinery was purchased from Calcutta.
81.13 Payment to associations and institutions for carrying out rural development programmes [Sec.
35CCA] - Any sum paid to the following is eligible for deduction under section 35CCA –
a. any association or institution to be used for carrying out any programme of rural development approved
before March 1, 1983;
b. an association or institution which has its object the training of persons for implementation of a rural
development programme approved before March 1, 1983;
c. the National Fund for Rural Development; and
d. notified National Urban Poverty Eradication Fund.
81.14 Weighted deduction for expenditure incurred on agricultural extension project [Sec. 35CCC] - Where
an assessee incurs any expenditure on notified agricultural extension project, then he is eligible to claim a
227 Amortisation of preliminary expenses Para 81.16
weighted deduction of 150 per cent of such expenditure for the assessment years 2013-14 to 2020-21 [from the
assessment year 2021-22, an assessee can claim 100 per cent of expenditure as deduction (but not weighted
deduction)].**
1. Project shall be undertaken by an assessee for training, education and guidance of farmers.
2. Project shall have prior approval of the Ministry of Agriculture.
3. Expenditure (not being cost of land/building) exceeding Rs. 25 lakh is expected to be incurred for the project.
4. For getting approval for the purpose of claiming weighted deduction under section 35CCC, an application in
Form No. 3C-O should be submitted to the Member (IT), CBDT.
5. Application shall be accompanied by –
a. a detailed note on the agricultural extension project;
b. details of the expenditure expected to be incurred and expected date of completion; and
c. approving letter of Ministry of Agriculture.
81.15 Weighted deduction for expenditure for skill development [Sec. 35CCD] - Where a company incurs any
expenditure (not being expenditure in the nature of cost of any land or building) on any notified skill
development project, then such company can claim a weighted deduction of 150 per cent of such expenditure
for the assessment years 2013-14 to 2020-21 [from the assessment year 2021-22, an assessee can claim 100 per cent
of expenditure as deduction (but not weighted deduction)].**
1. A company engaged in manufacture/ production of any article/thing (not being alcoholic spirits and tobacco
products) or a company engaged in providing specified services (31 services have been notified for this purpose)
can claim the benefit of weighted deduction under section 35CCD.
2. Expenditure should be incurred on notified skill development project.
3. The project should be undertaken in separate facilities in a training institute set up by Government, local
authority or in an institute affiliated to National Council for Vocational Training or State Council for Vocational
Training.
4. For the purpose of claiming weighted deduction, an application should be submitted in Form No. 3CQ to
National Skill Development Agency (NSDA).
5. A copy of Form No. 3CQ should be sent to the Commissioner of Income-tax.
6. Form No. 3CQ to be accompanied by detailed note on skill development project, expected expenditure and
expected completion date, letter of concurrence from the training institute.
81.16 Amortisation of preliminary expenses [Sec. 35D] - An Indian company or a resident non-corporate
assessee can claim deduction under section 35D in respect of preliminary expenses. Such expenditure may be
incurred before commencement of the business or after commencement of the business in connection with
extension of an undertaking or in connection with setting up a new unit.
81.16-1 QUALIFYING EXPENDITURE -The heads of qualifying expenditure are the following —
The work should be carried on by the The work can be carried on by the assessee itself or by any concern
assessee itself or by a concern (approved or not approved)
approved by the Board
 Expenditure in connection with pre-  Legal charges for drafting any agreement between the assessee and any
paration of feasibility report, prepara- other person relating to the setting up of the business of the assessee.
tion of project report, conducting a  Legal charges for drafting the memorandum and articles of association if
market survey (or any other survey the taxpayer is a company.
necessary for the business of the  Printing expenses of the memorandum and articles of association if the
assessee), or engineering services taxpayer is a company.
relating to the business of the assessee,  Registration fee of a company under the provisions of the Companies Act.
**Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to above, deduction
shall not be allowed in respect of such expenditure under any other provisions of the Act for the same or any other assessment year.
The work should be carried on by the The work can be carried on by the assessee itself or by any concern
assessee itself or by a concern (approved or not approved)
approved by the Board
provided the work is carried on by the  Expenses in connection with the public issue of shares or debentures of a
assessee himself or by a concern company, underwriting commission, brokerage and charges for drafting,
which is for the time being approved typing, printing and advertisement of the prospectus.
in this behalf by the Board.  Any other expenditure which is prescribed.*
81.16-2 QUALIFYING EXPENDITURE - MAXIMUM CEILING - The aggregate expenditure cannot exceed the following—
In the case of a corporate assessee In the case of a non-corporate assessee

a. 5 per cent of cost of project; or 5 per cent of cost of project
b. 5 per cent of capital employed, whichever is more
 Cost of project - It means the actual cost (or additional cost incurred after commencement of business in
connection with extension or setting up an undertaking) of fixed assets, namely, land, buildings, leaseholds,
plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and
buildings), which are shown in the books of the assessee as on the last day of the previous year in which the
business of the assessee commences.
 Capital employed in the business of a company - It is the aggregate of the issued share capital, amount outstanding
as share premium† account, debentures and long-term borrowings, as on the last day of the previous year in
which the business of the company commences (in the case of an existing company only capital, debentures and
long-term borrowing issued or obtained in connection with the extension of the undertaking or the setting up
of the new unit of the company, shall be considered).
81.16-3 AMOUNT OF DEDUCTION - One-fifth of the qualifying expenditure is allowable as deduction in each of the
five successive years beginning with the year in which the business commences, or as the case may be, the
previous year in which extension of the undertaking is completed or the new unit commences production or
operation.
81.16-4 AUDIT REPORT - In the case of a person (other than a company/co-operative society), deduction is available
only if a report of audit is obtained in Form No. 3AE‡ from a chartered accountant.
81.16-5 CONSEQUENCES IN THE CASE OF AMALGAMATION OR DEMERGER - The benefit of deduction under section 35D is
not lost in a case where the undertaking of an Indian company which is entitled to the amortisation is transferred
to another Indian company in a scheme of amalgamation or demerger within the 5-year period of amortisation.
In that event, the transferee-company can claim the deduction for unexpired period.
A similar benefit is available in the case of amalgamation/demerger of co-operative banks.
81.16-6 DOUBLE DEDUCTION NOT PERMISSIBLE - If an expenditure is allowed as deduction under section 35D, the same
expenditure is not allowed as deduction under any other provision of the Act.
81.16-7 DIFFERENT EXPENSES - The table given below highlights whether different expenses are deductible under
section 35D or 37(1)—
*Nothing is prescribed so far.

†Issued share capital can only be considered to be a sum of share capital plus amount outstanding as share premium account; sums standing to
credit of ‘Reserve and Surplus’ Account cannot be considered as part of issued share capital. However, the Delhi Bench of the Tribunal held that
the premium collected by an assessee-company on its subscribed share capital is not ‘capital employed in business of company’ within meaning
of section 35D – Berger Paints India Ltd. v. CIT [2006] 154 Taxman 293 (Delhi).
‡ Form No. 3AE is to be submitted electronically.
229 Amortisation of expenditure in case of amalgamation Para 81.17
Different expenses Incurred by a new concern Incurred by an existing

before commencement concern after commence-
of business ment of business
Expenditure on issue of bonus shares Sec. 35D Sec. 37(1)*
Expenditure on issue of shares (not being bonus shares) Sec. 35D Sec. 35D
Expenditure on issue of debentures Sec. 35D Sec. 37(1)
Problems
81.16-P1 X Ltd. is incorporated in Bangalore on September 6, 2019. It commences production on March 15, 2020. The following
expenses are incurred by the company before commencement of business—
a. expenses on incorporation, issue of shares, etc. : Rs. 92,000.
b. preparation of feasibility report, project report and conducting market survey (the work is completed by the taxpayer itself) :
Rs. 1,40,000.
c. engineering services (work is carried on by a concern which is not approved by the Board) : Rs. 1,30,000.
Determine the amount of deduction under section 35D assuming the following figures of fixed assets and capital on March 31, 2020 (i.e.,
the last day of the year in which the taxpayer starts production) —
Rs. in lakh
Cost of fixed asset 55
Share capital 40
Debentures 12
Long-term borrowing from a financial institution (repayable for not less than 7 years) 8
Solution : Rs.
Cost of project 55,00,000
Capital employed (i.e., Rs. 40 lakh + Rs. 12 lakh + Rs. 8 lakh) 60,00,000
Maximum qualifying expenditure [i.e., 5% of Rs. 55 lakh or Rs. 60 lakh, whichever is higher] (a) 3,00,000
Qualifying expenditure
Expenses on incorporation (these are included even if the work is undertaken by a person not approved by
the Board) 92,000
Preparation of feasibility report, project report and conducting market survey (these are included only if the
work is done by the taxpayer or it is undertaken by a concern approved by the Board) 1,40,000
Engineering services (the expenditure is included only if the work is done by the taxpayer or it is
undertaken by a concern approved by the Board; since it is completed by a concern not approved by the
Board, it is not included) —
Total (b) 2,32,000
Amount eligible for amortisation [(a) or (b), whichever is lower] 2,32,000
Amount deductible in 5 years for the assessment years 2020-21 to 2024-25 46,400
Note : Expenditure on engineering services in this case is not qualified for deduction under section 35D. These expenses may
be capitalised by the taxpayer to claim depreciation.
81.16-E1 Compute the amount of deduction under section 35D in problem 81.16-P1 if the engineering services are provided by a
concern which is approved by the Board.
Also ascertain whether the following are correct or not —
1. A foreign company which is resident in India, can claim deduction under section 35D.
2. “Capital employed” includes long-term borrowing which is repayable within 5 years.
3. Expenses on issue of shares are qualified for deduction under section 35D only if the work is undertaken by an approved concern.
4. An Indian company engaged in manufacturing garments wants to start a chain of retail outlets throughout the country. For this
purpose, the expenses incurred on preparation of feasibility report by an approved concern are qualified for deduction.
81.17 Amortisation of expenditure in the case of amalgamation/demerger [Sec. 35DD] - If an Indian

company incurs any expenditure for the purpose of amalgamation or demerger, it is allowed as deduction in five
successive years in five equal instalments. The first instalment is deductible in the previous year in which
*In CIT v. General Insurance Corpn. [2006] 156 Taxman 96, the Supreme Court has said that the issue of bonus shares by capitalization of reserves
is merely a reallocation of company’s funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. If that
be so, then it cannot be held that the company has acquired a benefit or advantage of enduring nature. The total funds available with the company
will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company. Issue of bonus shares
does not result in the expansion of capital base of the company. Thus, the expenditure on issuance of bonus shares is revenue expenditure.
amalgamation or demerger takes place. A similar provision is applicable in the case of amalgamation or
demerger of co-operative banks.
81.18 Amortisation of expenditure under voluntary retirement scheme [Sec. 35DDA] - Expenditure by way
of payment of any sum to an employee in connection with his voluntary retirement (under any scheme of
voluntary retirement), is deductible in 5 successive years in 5 equal instalments. The first instalment is deductible
in the year in which such amount is actually paid (deduction is available on payment basis and not on accrual
basis). Each part of the payment in connection with voluntary retirement is deductible in 5 years in 5 equal
instalments.
 The following points should be noted—
1. The above rule is applicable even if the scheme of voluntary retirement has not been framed in accordance with
guidelines prescribed under section 10(10C).
2. Where voluntary retirement payment is made by predecessor and before completion of 5 years it is succeeded
in a scheme of business reorganization (like amalgamation/merger of Indian companies or co-operative banks,
conversion of firm/proprietary concern/private or unlisted company into company/LLP), the deduction for the
remaining years will be available to the successor from the year in which the conversion takes place.
Provisions Illustrated
According to voluntary retirement scheme of X Ltd., each employee will get voluntary retirement compensation in three
instalments (35 per cent at the time of voluntary retirement, 10 per cent on November 1 of the first financial year immediately
after retirement and remaining 55 per cent on December 1 of the second financial year immediately after retirement). The
scheme is opened for the financial year 2019-20 only. During the financial year, 17 employees take voluntary retirement (total
compensation of Rs. 80 lakh payable by way of 3 instalments as stated above).
Previous years in First instalment of Rs. 28 lakh Second instalment of Rs. 8 Third instalment of Rs. 44 Total
which the payment (being 35% payable during the lakh (being 10% payable lakh (being 55% payable
is deductible financial year 2019-20) on November 1, 2020) on December 1, 2021)
Rs. Rs. Rs.
2019-20 5,60,000 - - 5,60,000
2020-21 5,60,000 1,60,000 - 7,20,000
2021-22 5,60,000 1,60,000 8,80,000 16,00,000
2022-23 5,60,000 1,60,000 8,80,000 16,00,000
2023-24 5,60,000 1,60,000 8,80,000 16,00,000
2024-25 - 1,60,000 8,80,000 10,40,000
2025-26 - - 8,80,000 8,80,000
➠81.19 Amortisation of expenditure on prospecting, etc., for development of certain minerals [Sec. 35E
read with Seventh Schedule] - Section 35E provides for the amortisation of expenditure incurred wholly and
exclusively on any operation relating to prospecting for the minerals or group of associated minerals or on the
development of a mine or other natural deposit of any such minerals or group of associated minerals specified
in the Seventh Schedule.
 Who can claim deduction - Deduction under section 35E is allowed only in the case of Indian companies and
resident assessees other than companies.

 Qualifying expenditure - When it should be incurred - The qualifying expenditure should be incurred during the
“year of commercial production” and four years immediately preceding that year.
 Qualifying expenditure - What does it include - Expenditure incurred wholly and exclusively on any operations
relating to prospecting for any mineral (or group of associated minerals) specified in the Seventh Schedule or
on the development of a mine or other natural deposit of any such mineral or group of associated minerals, is
“qualifying expenditure”. However, a few expenses (like expenses met by any other person, expenditure on
acquisition of site, capital expenses on acquiring building, plant, machinery and furniture) are excluded.
 Amount and period of deduction - The amortisation of qualifying expenditure is allowed in equal instalments over
a period of 10 years. The amount deductible for each year is—

a. one-tenth of “qualifying expenditure”; or
b. income (before section 35E deduction) of the previous year arising from commercial exploitation of any mine
(i.e., not only the mine in respect of which commercial exploitation resulted from the operation of development
231 Amortisation of expenditure on prospecting, etc., Para 81.19
in question but also where commercial production has been established as a result of operations undertaken
earlier) or deposit of minerals of any other nature,
whichever is less.
The following points should be noted —
1. Income in (b) supra includes only income from mine operations as specified in the Seventh Schedule. It does
not include any other income of the taxpayer.
2. Deduction is available for a period of 10 years beginning with the year of commercial production.
3. The amortisation of qualifying expenditure is allowed over a period of 10 years against the profits arising from
commercial exploitation of any mine or natural deposit.
4. Where the instalment of amortisable expenditure relating to a given year cannot be wholly absorbed by the
profits against which the amortisation is to be allowed, the unabsorbed amount is to be carried forward to the
subsequent year and added to that year’s instalment and so on for succeeding previous years. Such carry forward
is allowed only up to and including the tenth previous year as reckoned from the year of commercial production.
If there is any unabsorbed amount at the end of the tenth year, it will lapse.
 Audit report - If the assessee is a person, other than a company/co-operative society, then books of account of
the relevant year(s) in which the expenditure is incurred should be audited.

 Consequences in the case of amalgamation or demerger - In the case of amalgamation/demerger of Indian
companies, the above benefit for the unexpired period will be available to the transferee.
Problems
➠ 81.19-P1 X Ltd., an Indian company, is engaged in the business of production of minerals since 1960. During the year ending March
31, 2019, it starts commercial exploitation of a new mine at Hazaribag. Compute the amount deductible under section 35E for the
assessment years 2019-20 and 2020-21 from the given information —
Previous year Previous year
2018-19 2019-20
Rs. Rs.
Income from mining (before section 35E deduction)
- from old mining 20,000 4,00,000
- from new mining at Hazaribag 25,000 75,000
Other business income 4,00,000 3,90,000
Qualifying expenditure Rs.
Expenses for the purpose of exploring and locating mineral incurred up to March 31, 2014 7,20,000
Expenses for the purpose of exploring and locating mineral from April 1, 2014 to March 31, 2019 (out of which
Rs. 6,000 is met by the State Government) 9,36,000
Acquisition of site on June 30, 2014 4,00,000
Purchase of plant, machinery and building on July 31, 2015 6,00,000
Solution : Computation of qualifying expenditure — Rs.
1. Rs. 7,20,000 incurred prior to April 1, 2014 is not part of qualifying expenditure (expenditure incurred
during 2018-19 and earlier 4 years will be considered) —
2. Out of Rs. 9,36,000, Rs. 6,000 is met by the State Government, only Rs. 9,30,000 shall be included 9,30,000
3. Expenditure on acquisition of site is not qualifying amount —
4. Building, plant and machinery are qualified for depreciation, deduction under section 35E is not available —
Qualifying expenditure 9,30,000
Amount deductible during 10 years : assessment years 2019-20 to 2028-29 93,000
Assessment year 2019-20
Income from mining (old and new) 45,000
Less : Deduction under section 35E (i.e., Rs. 45,000 or Rs. 93,000 whichever is less) 45,000
Mining income Nil
Net income 4,00,000
Note : The amount of unabsorbed deduction under section 35E of Rs. 48,000 (i.e., Rs. 93,000 — Rs. 45,000) will become a part
of deduction for the next year.

Rs.
Mining income (old and new) 4,75,000
Less : Deduction under section 35E (i.e., Rs. 93,000 + Rs. 48,000, subject to a maximum of mining income) 1,41,000
Balance 3,34,000
Other business income 3,90,000
Net income 7,24,000
81.19-E1 What will be amount of deduction in problem 81.19-P1 for the assessment years 2021-22 and 2022-23 if mining income
(old and new activity) is Rs. 1,00,000 and Rs. 90,000 respectively?
81.20 Insurance premium [Sec. 36(1)] - Insurance premium is deductible in the following cases –
1. Any premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for
the purposes of business or profession.
2. Insurance premium paid by a federal milk co-operative society on the lives of cattle, owned by the members
of a primary milk co-operative society affiliated to it.
3. Health insurance premium of employees paid by employer by any mode other than cash.
81.21 Bonus or commission to employees [Sec. 36(1)(ii)] - Bonus or commission paid to an employee is
allowable as deduction subject to certain conditions :
 Admissible only if not payable as profit or dividend - One of the conditions is that the amount payable to employees
as bonus or commission should not otherwise have been payable to them as profit or dividend. This is provided
to check an employer from avoiding tax by distributing his/its profits by way of bonus among the member-
employees of his/its concern, instead of distributing the sum as dividend or profits.
 Deductible on payment basis - Bonus or commission is allowed as deduction only where payment is made during
the previous year or on or before the due date of furnishing return of income under section 139 [see para 82.9].
81.22 Interest on borrowed capital [Sec. 36(1)(iii)] - Interest on capital borrowed is allowed as deduction if the
following conditions are satisfied —
1. The assessee must have borrowed money.
2. The money so borrowed must have been used for the purpose of business.
3. Interest is paid or payable on such borrowing.
 Assessee must have borrowed capital - Interest in respect of capital borrowed for the purpose of business/
profession is a permissible deduction. Interest on own capital is not deductible. In other words, interest shall be
paid to another person. Interest paid by one unit of the assessee to another unit is not deductible.
 The following propositions should also be kept in view –
1. Deduction of interest on borrowed capital cannot be denied only because the borrowed capital produces non-
taxable income.
2. Guaranteed interest paid to shareholder on paid-up capital is not deductible.
3. Interest paid to wife and daughters on money allotted to them on partition, is deductible.
4. Interest paid by a firm to partners is deductible according to the provisions of section 40(b) [i.e., @ 12 per cent
per annum simple interest]. However, interest paid by an association of persons to its members is not deductible.
 Capital must be used for the purpose of business - Capital should have been borrowed for the purpose of business
or profession.
 Interest on capital borrowed for acquiring a capital asset - Interest liability pertaining to the period beginning from
the date on which capital is borrowed by an existing concern for the acquisition of an asset till the date, when
such asset is first put to use, should be capitalised and it cannot be claimed as deduction under section 36. Only
interest on capital borrowed to purchase a capital asset for business purposes pertaining to the period after the
asset is put to use, is deductible on year to year basis under section 36.
 Other points - The following proposition taken from different judicial pronouncements should also be kept in
view :
233 Employer’s contribution to notified pension scheme Para 81.25
1. If borrowed money is utilised in earning non-assessable income, no deduction is allowed for interest paid on
such borrowing.
2. It is not for the income-tax department to examine whether there was no need to borrow money because the
assessee had ample fund of his own.
3. A taxpayer who is engaged in the business of trading in paper can claim deduction in respect of interest on
capital borrowed for the setting of a garment business (even if the new business generates negative income).
4. It is not open to the Assessing Officer to reject the claim of the assessee in respect of the interest paid on that
capital merely because the use of the capital is unremunerative.
5. Interest on money originally borrowed for business purposes would be disallowable in a subsequent year in
which the money is used for non-business purposes.
6. Interest paid by the assessee on money borrowed for payment of dividends is an allowable deduction.
7. Where the assessee-partner borrows money for investing as capital in partnership, interest paid by the assessee
on borrowed money is allowable as deduction.
8. Interest on money borrowed to pay income-tax is not allowable as deduction. Interest for late payment/non-
payment of income-tax/advance tax/tax deducted or collected at source or for late filing of return, is not
allowable as deduction. Similarly, where interest is paid for meeting tax liability of partners, such interest is not
deductible.
81.23 Discount on zero coupon bonds [Sec. 36(1)(iiia)] - Discount on notified zero coupon bonds (being the
difference between amount received and the amount payable on redemption/maturity by the issuing company)
is allowed as deduction on pro rata basis. The pro rata deduction is available having regard to the period of life
of such bond. “Period of life of the bond” means the period commencing from the date of issue of the bond and
ending on the date of the maturity or redemption of such bond.
 What are zero coupon bonds - According to section 2(48), zero coupon bond is a notified bond issued by any
infrastructure capital company (or infrastructure capital fund or public sector company or scheduled bank) on
or after June 1, 2005. In respect of such bond, no payment/benefit is received (or receivable) by a bondholder
before maturity/redemption.
Problems
81.23-P1 - Zero coupon bonds are issued by X Ltd. (infrastructure capital company) on October 4, 2019 (issue price: Rs. 85, face value
as well as amount payable at the time of redemption : Rs. 100, redemption date: July 10, 2030, number of bonds subscribed by public:
1,00,000). These bonds are notified by the Government as zero coupon bonds.
Solution : Pro rata deduction available to X Ltd.
Date of issue : October 4, 2019
Date of issue (rounded off) : October 1, 2019 (if fraction is 15 days or more, it is taken as one month)
Date of redemption : July 10, 2030
Date of redemption (rounded off) : June 30, 2030 (if fraction is less than 15 days, it shall be ignored)
Amount of discount offered by X Ltd. [(Rs. 100 – Rs. 85) × 1,00,000]: Rs. 15,00,000 (a)
Period of life of the bond (June 30, 2030 minus October 1, 2019): 129 months (b)
Pro rata deduction for 1 month: Rs. 11,628 [(a) ÷ (b)] (c)
Amount deductible for the previous year 2019-20: Rs. 69,767 [(c) × 6]
Amount deductible for the previous years 2020-21 to 2029-30 : Rs. 1,39,535 [(c) × 12] per year
Amount deductible for the previous year 2030-31 : Rs. 34,884 [(c) × 3]
81.23-E1 Find out the amount of deduction in problem 81.23-P1 if the date of redemption is June 17, 2030.
81.24 Employer’s contribution to recognised provident fund and approved superannuation fund [Sec.
36(1)(iv)] - Employer’s contribution towards a recognised provident fund or an approved superannuation fund
is allowable as deduction subject to the limits laid down for the purpose of recognising the provident fund or
approving superannuation fund.
81.25 Employer’s contribution to notified pension scheme (NPS) [Sec. 36(1)(iva)] - Employer’s contribution
towards NPS is deductible (to the extent of 10 per cent of “salary” of employees). Meaning of “salary” for this
purpose and for the purpose of calculating house rent allowance exemption is the same.
81.26 Contribution towards approved gratuity fund [Sec. 36(1)(v)] - Employer’s contribution towards an
approved gratuity fund created by him exclusively for the benefit of his employees under an irrevocable trust
is allowable as deduction.
81.27 Employees’ contribution towards staff welfare schemes [Sec. 36(1)(va)] - Section 2(24) defines income.
Clause (x) of section 2(24) provides that any sum received by an employer from his employees as contribution
to provident fund (or any fund for the welfare of such employees) shall be included in the employer’s income.
Moreover, section 36(1)(va) provides that any sum received by the employer as contribution from his employees
towards provident fund (or any welfare fund of such employees) shall be allowed as deduction only if such sum
is credited by the employer to the employee’s account in the relevant fund on or before the due date. For this
purpose “due date” means the date by which the employer is required to credit such contribution to the
employee’s account in the relevant fund under the provisions of any law or term of contract of service or
otherwise. The cumulative impact of these provisions is illustrated in the problem given below –
Problems
81.27-P1 The profit and loss account for the year ending March 31, 2020 is as follows —
Rs. Rs.
Cost of goods sold 75,000 Sale proceeds of goods 2,30,000
Salary to employees 99,000
Other expenses 10,000
Net profit 46,000
2,30,000 2,30,000
The salary of Rs. 99,000 comprises Rs. 9,000 as employee’s contribution towards recognised provident fund. Out of Rs. 9,000, Rs. 6,000
is credited in the employees’ provident fund within “due date” and Rs. 3,000 is credited after “due date”. Compute the net income of
X for the assessment year 2020-21.
Solution : Rs.
Net profit 46,000
Add : Employees’ contribution towards provident fund [it is first included in income by virtue of section
2(24)(x)] 9,000
Total 55,000
Less : Employees’ contribution towards provident fund if credited on a date before the due date [Sec. 36(1)(va)] 6,000
Net income 49,000
81.27-E1 Net profit as per profit and loss account for the year ending March 31, 2020 is Rs. 4,00,000. Salary paid to employees,
debited to the profit and loss account is Rs. 50,000, out of which Rs. 5,000 is employees’ provident fund contribution which is credited
as follows —
a. Rs. 4,500 after “due” date but within the previous year ; and
b. Rs. 500 after “due” date within the next previous year.
Compute the net income for the assessment year 2020-21.
81.28 Write off of allowance for animals [Sec. 36(1)(vi)] - In respect of animals† which are used for the
purposes of business or profession (not as stock-in-trade) and have died or become useless, the difference
between the actual cost of the animals† to the assessee and the amount realised (if any) in respect of carcasses
or sale of animals,† is allowable as deduction.
81.29 Bad debts [Sec. 36(1)(vii)] - Amount of any debt or part is allowable as deduction subject to the following
conditions :
a. the debt has been taken into account in computing the income of the assessee of that previous year or of an
earlier previous year, or represents money lent in the ordinary course of business of banking or money-
lending which is carried on by the assessee ; and
b. it has been written off as irrecoverable in the accounts of the assessee for that previous year.
In order to claim deduction under section 36(1)(vii), one must keep in view the following points :
81.29-1 THERE MUST BE A DEBT - Before claiming an amount as a debt, it must be shown that it is a proper debt. In
other words, a bad debt presupposes the existence of a debt and relationship of a debtor and creditor. Unless,
therefore, there is an admitted debt it cannot be allowed as bad debt when it becomes irrecoverable.
†Word ‘animals’ used in section 36(1)(vi) includes birds and chicken also.
235 Bad debts Para 81.29
81.29-2 DEBT MUST BE INCIDENTAL TO THE BUSINESS OR PROFESSION OF THE ASSESSEE - The debt which is claimed as bad debt
under section 36(1)(vii) must be incidental to the business or profession carried on by the assessee. In other words,
debts not connected with business or profession carried on by the assessee or not arising out of the operation of
business or profession carried on by the assessee, are not admissible as bad debts even if other conditions are
satisfied.
81.29-3 DEBT MUST HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING ASSESSABLE INCOME - No deduction on account of bad
debt is admissible unless the amount of debt is taken into account in computing the total income of the assessee
of that previous year or of an earlier year. This condition is however, not relevant, if bad debt represents money
lent in the ordinary course of money-lending or banking business.
81.29-4 DEBT MUST HAVE BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT OF THE ASSESSEE - No deduction in respect of bad
debt is allowable under section 36(1)(vii) unless it is written off as irrecoverable in the books of the assessee in
the previous year in which claim for deduction is made††. It is not necessary to establish that debt has become
bad during the relevant previous year. For this purpose, transfer to “provision for bad and doubtful debts
account” shall not be taken as bad debts written off.
To illustrate the aforesaid provisions, the following examples are given —
1. X, a trader, sells goods on credit. Out of the credit sales made in the current year (or in the earlier years), Rs. 50,000 is written
off as bad debt. As sales turnover is considered in calculating income, bad debts so written off is allowable as deduction.
2. Y owns an industrial undertaking. One of the plants in the factory is replaced by him. The old plant is sold for Rs. 60,000
on credit to A. A, however, becomes insolvent before making payment of sale consideration. This is capital loss and it cannot
be debited to profit and loss account. It is, therefore, not deductible. In other words, “debt” should be revenue in nature.
3. Z, a money-lender, gives a loan to A. Before repaying loan along with interest, A becomes insolvent. In this case if interest
is included in income on “accrual” basis, it can be written off as bad debt and the same is allowable as deduction. Loss on
account of non-recovery of loan is also deductible if it is written off in the books of account (the condition that the debt is
deductible only if it was taken into account in computing the total income of the taxpayer, is not applicable in the case of
non-recovery of loan where it represents money lent in the ordinary course of money-lending business).
81.29-5 DEDUCTION IN THE CASE OF AN ASSESSEE WHO IS ALSO ELIGIBLE FOR DEDUCTION UNDER SECTION 36(1)(viia) - Deduction
relating to a bad debt (or part thereof) in the case of an assessee to which section 36(1)(viia) applies is limited to
the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts account
made under that section.
81.29-6 ADJUSTMENT AT THE TIME OF RECOVERY - A deduction on account of bad debt is based upon a mere estimate
and it is allowed as deduction on the basis of amount written off in the books of account of the taxpayer.
Therefore, in a case where debt ultimately recovered is less (or more) than the amount of debt left after writing
off bad debt, some adjustment is required. The mode of adjustment is discussed in the problem given below –
Problems
81.29-6P1 X, a trader, sells goods on credit to Y (outstanding balance on April 1, 2019 : Rs. 40,000 and total bills issued during
2019-20 : Rs. 60,000). Out of Rs. 1,00,000, he recovers only Rs. 10,000 from Y during 2019-20. On March 31, 2020, he writes off Rs.
32,000 as bad debt. However, on December 19, 2020, X recovers from Y as full and final payment (a) Rs. 15,000, or (b) Rs. 55,000, or
(c) Rs. 70,000. Find out the tax consequences for different assessment years.
Solution : Assessment year 2020-21 - During the previous year 2019-20, X writes off Rs. 32,000 as bad debt. It is, therefore,
deductible for the assessment year 2020-21.
Assessment year 2021-22 - Tax treatment, when recovery is made during the previous year 2020-21, will be as follows —
Amount of debt as on April 1, 2020 (i.e., Rs. 1 lakh — Amount recovered as full and Deduction/income
Rs. 10,000 — Rs. 32,000 being the amount written off) final payment (2) - (1)
(1) (2)
Rs. Rs. Rs.
(a) 58,000 15,000 (-)43,000
(b) 58,000 55,000 (-) 3,000
(c) 58,000 70,000 12,000
In situation (a) Rs. 43,000 is deductible as bad debt if he writes off Rs. 43,000 in his books of account as bad debt during the
previous year 2020-21. Likewise, in situation (b) Rs. 3,000 is deductible as bad debt if X writes off Rs. 3,000 in his books of
account for the year ending March 31, 2021. In situation (c), however, Rs. 12,000, being the excess recovery, is taxable as
†† If a debt becomes irrecoverable on the basis of Income Computation and Disclosure Standards without recording the same in the accounts, it
shall be allowed as deduction in the previous year in which such debt becomes irrecoverable and it shall be deemed that such debt has been written
off as irrecoverable in the accounts for the purposes of section 36(1)(iii).
business income by virtue of section 41(4) for the previous year 2020-21 [irrespective of the fact whether the business is in
existence during the previous year 2020-21 or not].
81.29-6E1 What are the consequences if, in problem 81.29-6P1, amount recovered from Y on December 19, 2020 is (a) Rs. 58,000,
(b) Rs. 90,000 as full and final payment ?
1. Debts of a discontinued business not deductible - No allowance can be claimed in respect of bad debts of a business
which has been discontinued before the commencement of the previous year. Such bad debt cannot be deducted
even from profits of a separate existing business.
2. Allowable in the hands of successor - In some cases (e.g., one of the partners taking over business of the firm with
all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the successor
can claim the benefit of deduction of bad debt if the successor carries on the business of the predecessor and bad
debt is written off in the books of account of the successor.
81.30 Provision for bad and doubtful debts relating to rural branches of scheduled commercial banks [Sec.
36(1)(viia)] - A deduction is allowed while computing the taxable profits in respect of any provision for bad and
doubtful debts made by a bank and financial institutions. The amount of deduction is given below :
Amount deductible in respect of provision for bad and doubtful debts
Scheduled bank Public financial institution, Foreign bank or
[other than foreign bank], State financial corporation, State non-banking
non-scheduled bank and industrial investment corporation financial company
co-operative bank
 Total income (computed before 8.5 per cent of such income 5 per cent of such income 5 per cent of
this deduction and amount such income
deductible under sections 80C
to 80U)
 Aggregate average advances 10 per cent of such advan- — —
made by rural branches ces
 Rural branch - “Rural branch” means a branch of a bank situated in a “place” which has a population of not more
than 10,000 according to the last preceding census of which the relevant figures have been published before the
first day of the previous year. “Place”referred to in the above definition is the revenue village. It is certainly not
a ward of a local authority/municipality
 Deduction in the case of an assessee who is eligible for deduction under section 36(1)(vii) and (viia) - In the case of above
taxpayers, no deduction is allowed under section 36(1)(vii) in respect of bad debts unless the amount of bad and
doubtful debts is debited to the provision for bad and doubtful debts account and the deduction admissible
under section 36(1)(vii) is limited to the amount by which such debt or part thereof exceeds the credit balance
in the provision for bad and doubtful debts account.
 Non-banking finance companies (NBFC) - NBFCs are not covered by section 36(1)(viia) and, therefore, are not
entitled to deduction of any provision created for bad and doubtful debts even if such provision is created based
on the guidelines issued by RBI.
Problems
81.30-P1 XY Ltd., a public financial institution, is eligible for claiming deduction under section 36(1)(viia). Its business income (before
claiming this deduction) for the previous year 2019-20 is Rs. 160 lakh. Provision for bad and doubtful debts account has an opening
balance of Rs. 1 lakh on April 1, 2019. XY Ltd. wants to write off Rs. 14 lakh during 2019-20 on account of bad debts. Compute the amount
of deduction under section 36(1)(vii)/(viia). What are the formalities the taxpayer is required to complete ?
Solution : The amount of bad debt, i.e., Rs. 14 lakh should be debited to “Provision for bad and doubtful debt” account as
follows —
Provision for bad and doubtful debt account
(Rs. in lakh) (Rs. in lakh)
March 31, 2020 To debtors a/c (being bad 14 April 1, 2019 By balance b/d 1
debt the taxpayer wants to write off) March 31, 2020 By P & L a/c [being deduc-
tion eligible under section 36(1)(viia), i.e., 5%
of Rs.160 lakh] 8
March 31, 2020 By P & L a/c [being deduc-
tion under section 36(1)(vii)] 5
14 14
237 Transfer to special reserve Para 81.31
The following conclusions, one can draw —

1. The amount of deduction under section 36 is as follows —
a. provision for bad and doubtful debts under section 36(1)(viia) : Rs. 8 lakh (being 5% of Rs. 160 lakh) ;
b. bad debts under section 36(1)(vii) : Rs. 5 lakh.
2. The amount of bad debt (i.e., Rs. 14 lakh) should be debited to the provision for bad and doubtful debts account and only
if such amount is more than the credit balance in the provision for bad and doubtful debts account (i.e., Rs. 1 lakh + Rs. 8
lakh), the excess is eligible for deduction under section 36(1)(vii).
81.30-E1 Compute the amount deductible under section 36(1)(vii) and 36(1)(viia) if the taxpayer in problem 81.30-P1 wants to
write off (a) Rs. 2 lakh, (b) Rs. 9 lakh, (c) Rs. 60 lakh on account of bad debts.
81.31 Transfer to special reserve [Sec. 36(1)(viii)] - A financial corporation, banking company, co-operative
bank and a housing finance company can claim deduction under section 36(1)(viii) as follows, if a few conditions
are satisfied —
a. the amount transferred during the previous year to the special reserve account created for the purpose of
section 36(1)(viii) ; or
b. 20 per cent of the profits derived from the business of providing long-term finance before claiming deduction
under section 36(1)(viii) ; or
c. 200 per cent of (paid-up share capital and general reserve as on the last day of the previous year) minus the
balance of the special reserve account on the first day of the previous year,
whichever is lower.
 Amount withdrawn from reserve account - If any amount is withdrawn from the aforesaid reserve account [in
respect of which deduction was allowed under section 36(1)(viii)], it will be chargeable to tax in the year in which
the amount is withdrawn, under section 41(4A), regardless of the fact whether the business is in existence in that
year or not.
Problems
81.31-P1 X Ltd. is a financial corporation for the purpose of section 36(1)(viii). Income of the taxpayer for the previous year 2019-20
from different sources is as follows — (Rs. in lakh)
a. from providing long-term finance for industrial/agricultural development or development of infrastructure
facility (before any deduction under section 36) 560
b. business income from other activities 105
Compute the amount of deduction under section 36(1)(viii) for the assessment year 2020-21 taking into consideration the following
data —
1. Paid up capital and general reserve on March 31, 2020 : Rs. 610 lakh
2. Balance standing to the credit of special reserve account as on April 1, 2019 : Rs. 1,150 lakh (and the same was allowed as deduction
in the earlier years).
3. Amount transferred to special reserve account during 2019-20 is Rs. 220 lakh.
Solution : The amount of deduction under section 36(1)(viii) is the least of the following —
a. Rs. 220 lakh (being the amount transferred to the special reserve account during 2019-20) ;
b. Rs. 112 lakh (being 20% of Rs. 560 lakh) ; or
c. Rs. 70 lakh (being 200% of Rs. 610 lakh minus Rs. 1,150 lakh).
Therefore, the amount of deduction under section 36(1)(viii) is Rs. 70 lakh.
81.31-E1 From the following information, compute the amount of deduction under section 36(1)(viii) in the case of X Ltd. [a financial
corporation for purpose of section 36(1)(viii)] for the assessment year 2020-21 :
1. Income of X Ltd. for the previous year 2019-20 from providing long-term finance for industrial development before any deduction
under section 36 : Rs. 120 lakh.
2. Income from rent, brokerage, etc. : Rs. 40 lakh.
3. Paid-up share capital and general reserve on March 31, 2020 : Rs. 400 lakh.
4. Amount standing at the credit of the special reserve account on April 1, 2019 : Rs. 783 lakh (and the same was allowed as deduction
in the earlier years).
5. Amount transferred to the special reserve account during 2019-20 : Rs. 50 lakh.
81.31-P2 Assume in problem 81.31-P1, X Ltd. withdraws the following amount from the special reserve account —
a. Rs. 55 lakh on May 10, 2020 ; and
b. Rs. 120 lakh on June 10, 2020.
Solution : The balance at the credit of the special reserve account on April 1, 2020 is as follows —
Balance in the special Out of which deduction has been allowed
reserve account in earlier years under section 36(1)(viii)
(Rs. in lakh) (Rs. in lakh)
Balance as on April 1, 2019 1,150 1,150
Amount transferred during 2019-20 220 70
Balance as on April 1, 2020 1,370 1,220
In other words, the taxpayer has to maintain a balance of Rs. 1,220 lakh without attracting any tax liability under section
41(4A). After the withdrawal of Rs. 175 lakh during the previous year 2020-21, the balance of the special reserve account is
reduced to Rs. 1,195 lakh. Therefore, Rs. 25 lakh (i.e., Rs. 1,220 lakh —Rs. 1,195 lakh) is chargeable to tax for the assessment
year 2021-22 under section 41(4A). This rule is applicable even if the business of the taxpayer is not in existence during the
previous year 2020-21.
81.31-E2 In problem 81.31-E1, the taxpayer withdraws Rs. 47 lakh on July 10, 2020 out of the special reserve account. Compute
the amount chargeable to tax for the assessment year 2021-22 under section 41(4A).
81.32 Family planning expenditure [Sec. 36(1)(ix)] - Any bona fide expenditure incurred by a company for the
purpose of promoting family planning among its employees, is allowable as deduction. If, however, such
expenditure is of capital nature, one-fifth of such expenditure is allowable as deduction for the previous year in
which it was incurred and the balance is deductible in equal instalments in the next four years.
 The following points should be considered —
1. No deduction is available under section 36(1)(ix) in the case of a non-corporate assessee. A non-corporate
assessee may claim deduction under sections 32 and 37(1) if the relevant conditions are satisfied.
2. Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be set
off and carried forward as if it is unabsorbed depreciation.
81.33 Revenue expenditure incurred by entities established under any Central, State or Provincial Act [Sec.
36(1)(xii)] - Any revenue expenditure incurred by a notified corporation or a body corporate (by whatever name
called) constituted (or established) by a Central, State or Provincial Act for the objects and purposes authorised
by the Act, shall be allowed as a deduction.
81.34 Banking cash transaction tax, securities transaction tax and commodities transaction tax - These
taxes are deductible. However, securities transaction tax and commodities transacted tax are deductible only if
the assessee is a dealer in securities or commodity derivatives.
81.35 Contribution to credit guarantee trust fund [Sec. 36(1)(xiv)] - A public financial institution can claim
deduction in respect of its contribution to the Credit Guarantee Fund Trust for Micro and Small Enterprises.
81.36 Expenditure by co-operative society for purchase of sugarcane [Sec. 36(1)(xvii)] - Deduction is allowed
in respect of expenditure incurred by a co-operative society (engaged in the business of manufacture of sugar)
for purchase of sugarcane at a price which is equal to (or less than) the price fixed or approved by the
Government.
Problems
81.36-P1 XYZ Co-operative Sugar Ltd. is a registered co-operative society under the Tamil Nadu Coop. Societies Act. It is in the
business of manufacture and sale of sugar along with byproducts to the best advantage of its shareholding members (who are farmers
and engaged in cultivation of sugarcane). The following data is noted from the accounts of the co-operative society –
Rs.
Gross turnover of sale of sugar and by products 2,87,86,000
Less:
- Cost of sugarcane (quantum of sugarcane utilised during the year to manufacture sugar : 8,700 tonne ×
Rs. 3,200 per tonne paid to the members for procurement of sugarcane) 2,78,40,000
-` Other expenses (including depreciation) 9,10,000
Net profit as per profit and loss account 36,000
Other information - Sugarcane procurement price fixed by Tamil Nadu Government is Rs. 2,800 per tonne [i.e., Fair Remunerative
Price (FRP) fixed by the Central Government : Rs. 2,400 per tonne + State Advisory price : Rs. 400 per tonne]. However, higher amount
is paid (as given above) by the assessee co-operative society for procuring sugarcane from its members. Determine the taxable income of
co-operative society if the assessment year is 2020-21.
Solution : By paying higher amount for procurement of sugarcane, the accounting profit of the society has been reduced
and income of its members has increased. This will result in lower tax liability for co-operative society. However, tax liability
of its members will not increase as income in the hands of members is agricultural income which is not chargeable to tax.
239 Expenses deductible from commission Para 81.39
To check this practice, clause (xvii) has been inserted in section 36(1) (applicable from the assessment year 2016-17). Under
the amended provisions, co-operative societies (engaged in manufacture of sugar) will get deduction pertaining to purchase
of sugarcane at a price which is equal to (or less than) the price fixed or approved by the Government. The excess amount
(if any) will not be deductible under section 36 or under section 37 (or under any provisions of the Act).
Taxable income of XYZ Co-operative Sugar Ltd. will be calculated as follows –
Rs.
Add: Cost of sugarcane debited to profit and loss account 2,78,40,000
Less: Cost of sugarcane as per section 36(1)(xviii) (i.e., 8,700 tonne × Rs. 2,800 per tonne) 2,43,60,000
81.36-E1 Determine the amount of taxable income in the above case if the assessment year is 2015-16.
81.37 Marked to market loss [Sec. 36(1)(xviii)] - Clause (xviii) has been inserted in section 36(1) with effect from
the assessment year 2017-18. It provides that deduction in respect of any marked to market loss (or other expected
loss) shall be allowed. However, deduction is available only if such loss is computed in accordance with notified
Income Computation and Disclosure Standards (ICDS).
81.38 Advertisement expenses [Sec. 37(2B)] - Deduction is not available in respect of expenditure incurred by
an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
Contribution to a political party is deductible under section 80GGB (if a contribution is made by an Indian
company) or under section 80GGC (if a contribution is made by a person other than an Indian company).
Expenditure by way of advertisement in a magazine owned by a political party is treated as “contribution” to
a political party for the purpose of section 80GGB, but not for the purpose of section 80GGC. In other words,
advertisement expenditure (in a magazine owned by a political party) is deductible under section 80GGB (if the
taxpayer is an Indian company) but the same is not deductible under section 80GGC (if the taxpayer is a person
other than an Indian company).
Net profit as per profit and loss account of an assessee for the year ending March 31, 2020, is Rs. 14,35,000. Advertisement
expenditure debited to profit and loss account is Rs. 8,00,000 (out of which Rs. 1,40,000 is in respect of advertisement which
appeared in a magazine owned by a political party). In this case, income of the assessee shall be calculated as follows –
If the assessee If the assessee is
is an Indian a person other
company than an Indian
company
Rs. Rs.
Net profit as per profit and loss account 14,35,000 14,35,000
Add: Advertisement expenditure not deductible by virtue of section 37(2B) [being
advertisement expenditure in a magazine owned by a political party] 1,40,000 1,40,000
Business income 15,75,000 15,75,000
Any other income Nil Nil
Less : Deductions—
Under section 80GGB (in the case of an Indian company, advertisement expenditure
paid to a political party is treated as “contribution” to the political party and
deductible under section 80GGB) 1,40,000 —
Under section 80GGC (in the case of a person other than an Indian company,
advertisement expenditure paid to a political party is not treated as “contribution”
to the political party and not deductible under section 80GGC) — Nil
Net income 14,35,000 15,75,000
81.39 Expenses deductible from commission earned by life insurance agents, UTI agents, post office/
Government securities agent and agents of notified mutual funds - If the aggregate commission of these
agents does not exceed Rs. 60,000, they can claim an ad hoc deduction as follows –
 LIC agents - 50 per cent of first years commission, 15 per cent of renewal commission (if separate figures of first
year commission and renewal commission are not available : 33 per cent of the commission), subject to a
maximum of Rs. 20,000. No deduction is available out of bonus commission.
 UTI agents, agents of specified Government securities and agents of notified mutual fund - 50 per cent of commission.
Problems
81.39-P1 X is an agent of LIC and UTI. His gross commission for the previous year 2019-20 is computed as follows —
1. From LIC : Rs.
a. first year’s commission 41,000
b. renewal commission 6,000
c. bonus commission 4,000
2. From UTI 7,000
Total 58,000
Calculate the amount of ad hoc deduction assuming that X does not maintain detailed account for expenses.
Solution : Amount of deduction
Gross receipt Rate of ad hoc Amount Maximum
deduction ceiling
Rs. Rs. Rs.
1. Commission from LIC
1.1 First year’s commission 41,000 50% 20,500
1.2 Renewal commission 6,000 15% 900
1.3 Bonus commission 4,000 Nil Nil
Total (1.1+1.2+1.3) 21,400
Maximum ceiling in respect of LIC’s commission 20,000
2. Commission from UTI 7,000 50% 3,500
Ad hoc deduction 23,500
81.39-E1 Compute the ad hoc deduction in the cases given below —

1. X becomes LIC agent on April 1, 2019. During 2019-20, he gets a sum of Rs. 46,000 as commission. He is not eligible for bonus
commission.
2. Y’s commission income from mutual fund is Rs. 46,000.
3. Z, an agent of post office, gets Rs. 16,000 as commission from post office for collecting deposits under different schemes.
4. A, an agent of PNB mutual fund, gets Rs. 64,000 as commission during 2019-20.
81.40 General deduction [Sec. 37(1)] - Section 37(1) is a residuary section. In order to claim deduction under
this section, the following conditions should be satisfied :
Condition one The expenditure should not be of the nature described under sections 30 to 36.
Condition two It should not be in the nature of capital expenditure.
Condition three It should not be personal expenditure of the assessee.
Condition four It should have been incurred in the previous year.
Condition five It should be in respect of business carried on by the assessee.
Condition six It should have been expended wholly and exclusively for the purpose of such business.
Condition seven It should not have been incurred for any purpose which is an offence or is prohibited by any law.
81.40-1 EXPENDITURE SHOULD NOT BE COVERED BY SECTIONS 30 TO 36 - For claiming deduction of an expenditure under
section 37(1), it should be ensured that the expenditure is not in the nature described by sections 30 to 36. The
rule is that if an item of expenditure is covered under any of the aforesaid sections, the same cannot be claimed
under the residuary section.
81.40-2 EXPENDITURE SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE - Capital expenditures are not deductible
under section 37(1). As the Act does not define the terms “capital expenditure” and “revenue expenditure”, one
has to depend upon its natural meaning as well as decided cases :
 Acquisition of fixed assets v. Routine expenditure - Capital expenditure is incurred in acquiring, extending or
improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as a routine
business expenditure.
 Several previous years v. One previous year - Capital expenditure produces benefits for several previous years,
whereas revenue expenditure is consumed within a previous year.

 Improvement v. Maintenance - Capital expenditure makes improvements in earning capacity of a business.
Revenue expenditure, on the other hand, maintains the profit-making capacity of a business.
241 General deduction Para 81.40
 Non-recurring v. Recurring - Usually capital expenditure is a non-recurring outlay, whereas revenue expendi-
ture is normally a recurring item.
 Lump sum payment v. Periodic payment - In order to determine whether an expenditure is capital or revenue in
nature, the fact that it is a lump sum payment or periodic payment is not important.
Though the dividing line between a capital and revenue expenditure is real, yet sometimes it becomes difficult
to draw. Therefore, the distinction depends on facts and surrounding circumstances of each case.
81.40-3 EXPENDITURE SHOULD NOT BE PERSONAL EXPENDITURE OF THE ASSESSEE - Section 37(1) expressly prohibits
deduction on account of personal expenses. Personal expenses mean expenses satisfying personal needs such
as food, cloth, shelter, etc., which are not related to the business. In other words, money expended for domestic
or private purpose, as distinct from the purpose of the trade or profession, are not deductible.
81.40-4 EXPENDITURE SHOULD HAVE BEEN INCURRED IN THE PREVIOUS YEAR - In order to claim deduction, the amount
should have been laid out or expended in the previous year. If a business liability has definitely arisen in the
previous year, the deduction should be allowed although the liability may have to be quantified and discharged
at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated
with reasonable certainty though the actual quantification may not be possible.
81.40-5 EXPENDITURE SHOULD HAVE BEEN LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION -
The main requirement of provision of section 37(1) is that expenditure should have been laid out wholly and
exclusively for the purpose of the business. The nexus between the expenditure and the business in connection
with which expenditure has been incurred has to be established before the assessee gets entitled to deduction
under section 37(1). When an assessee is carrying on business in various ventures and some of them yield taxable
income and the others do not, the question of allowability of the expenditure under section 37 will depend on
the provisions of section 14A [see para 7].
81.40-5a INTEREST ON DELAYED PAYMENTS TO MICRO, SMALL AND MEDIUM ENT. - NOT DEDUCTIBLE - See problem 91-P2.
81.40-5b CORPORATE SOCIAL RESPONSIBILITY EXPENDITURE [EXPLN. 2 TO SEC. 37(1)] - Any expenditure incurred by an
assessee on the activities relating to corporate social responsibility (CSR) referred to in section 135 of the
Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not
be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in
sections 30 to 36 or section 80G shall be allowed as deduction under those sections subject to fulfilment of
conditions, if any, specified therein.
81.40-6 EXPENSES SHOULD BE IN RESPECT OF THE BUSINESS CARRIED ON BY THE ASSESSEE - For the purpose of claiming
deduction under section 37(1), expenditure should be incurred for the purpose of the business which is carried
on by the assessee in the previous year and profits of which are to be computed and assessed and expenditure
should be incurred after the business is set up.
81.40-7 ILLEGAL EXPENDITURE - Any expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by any law shall not be deemed to have been incurred for the purpose of the business or
profession and no allowance or deduction shall be made in respect of such expenditure. Unlawful expenditure
is not allowable as deduction. These provisions apply only to ‘business expenditure’ and not to ‘business loss’
and, hence, loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business
loss against income from illegal business.
 Pharma companies incur expenditure for providing gift, travel facility, hospitality, cash or monetary grant or
similar freebies to medical practitioners. Now-a-days, such expenditure is in violation of the provisions of the
Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. Since such expenditure
is prohibited by law, it is not deductible in computing income of pharma companies. The same is, however,
taxable in the hands of recipient medical practitioners – Circular No. 5/2012, dated August 1, 2012. It may be
noted that the expenditure incurred by a pharma or healthcare company through distribution of free samples
to doctors, is not covered by the aforesaid circular and is deductible.
81.40-8 INSTANCES OF EXPENSES DEDUCTIBLE UNDER SECTION 37(1) - A complete list of instances where expenses are
allowable under section 37(1) cannot be drawn. However, to have better understanding of section 37(1), a few
instances are given where expenditures are allowable under section 37(1) :
1. Litigation expenses in protecting the trade or business.
2. Expenditure incurred for the preservation or protection of the asset or for saving such asset from destruction,
dissipation or wastage in the interest of and for the benefit of assessee’s business.
3. Litigation expenses incurred in order to defend or maintain an existing title to the business asset.
4. Litigation expenses for the purposes of protecting capital assets of a business.
5. Expenses on litigation (whether civil or criminal) if incurred wholly and exclusively for the purpose of the
business.
6. Litigation expenses of a company in connection with a petition for its winding up.
7. Legal charges for obtaining a loan from a financial institution.
8. Expenditure incurred by an assessee for fly air ash collection system.
9. Royalty paid by an assessee to a company for using its logo.
10. Consultancy charges paid for maintenance of software.
11. Environment monitoring expenses and community development expenses.
12. Provision for foreseeable losses under AS-7.
13. Litigation expenses for making agreements, various deeds, etc.
14. Litigation expenses incurred in restraining another company from using assessee’s trade mark.
15. Legal expenses incurred in altering the articles of association so as to bring it in conformity with the changes
brought about in the Companies Act.
16. Damages for breach of contract for export of goods before declaration of export policy of the Government.
17. Damages paid to a worker in order to dismiss him in the interest of business.
18. Damages for failure to fulfil a contract in time.
19. Brokerage paid for raising loan to finance business.
20. Stamp and registration charges for the purpose of entering into agreement for obtaining overdraft facilities.
21. Amount spent towards stamps, registration fees, lawyer’s fees, etc., for obtaining loan or raising money by
issue of debentures (not shares).
22. Guarantee commission paid to brokers and shareholders for giving personal guarantee to obtain credit
facility.
23. Commission paid at a percentage of profits to general manager.
24. Commission paid to selling agents.
25. Contribution to a trade syndicate with a view to preventing uneconomic competition.
26. Contribution to a union formed for opposing nationalisation of assessee’s business.
27. Salary and perquisite to employees.
28. Salary, bonus and travelling expenses paid by a partner-assessee to his staff to look after his interest and to
earn income for partnership.
29. Expenditure incurred in obtaining use of trademark, technical information, training of apprentices and
technicians.
30. Recurring expenses incurred on imparting of the basic training to apprentices under the Apprentices Act,
1961.
31. Expenses incurred on the occasion of Diwali and mahurat subject to the Assessing Officer being satisfied that
the expenses are admissible as a deduction under the law and are not expenses of a personal, social or religious
nature.
32. Initial expenditure on the first installation of fluorescent lights is treated as capital expenditure and all
subsequent expenditure for replacement of tubes is treated as revenue expenditure and are allowed in toto.
33. Expenditure in respect of commitment charges paid by the borrower with regard to the amount of loan not
drawn by him but kept in readiness by the lender for disbursement.
34. Revenue expenses incurred by an industrial undertaking in connection with the maintenance of the industrial
home guard units.
35. Premia paid on loss of profit policies.
36. Professional tax paid by a person carrying on business or trade.
243 General deduction Para 81.40
37. All expenditure on maintenance of a tea garden including expenditure on the maintenance of an area that
has not reached maturity.
38. Deposit made under “own your telephone” scheme [is allowable as deduction in the year of payment and
in case the telephone is not installed and money is returned, it is chargeable to tax under section 41(1)].
39. Forfeiture of security deposit for breach of contract.
40. Expenses on registration of trademarks.
41. Amount paid to third parties in order to use his quota rights.
42. Penalty levied for supply of foodgrains not conforming to the contract quality.
43. Expenditure incurred by a surgeon to keep himself up-to-date about the latest technique in surgery.
44. Substantial repair charges on plant and machinery being necessary owing to long neglect of assets.
45. Entertainment expenses incurred on opening of new branches at different places.
46. Expenditure incurred to protect capital asset income of which is assessable to tax.
47. Cash shortage found in business at the end of day.
48. Periodical payment for the use of goodwill.
49. Expenditure incurred on renovation of the living room, bathroom, back verandah, study, etc., of branch
office.
50. Road and Public Works Cess under the Bengal Cess Act and Education Cess under the Bengal (Rural) Primary
Education Act.
51. Municipal property tax chargeable under local tax law of Japan.
52. Settlement amount paid by the sub-lessee of a mine as a result of compromise decree in a suit filed by it against
lesser on latter’s refusal to renew the lease for the option period.
53. Share of profit given by debtor to creditor besides interest.
54. Expenditure incurred to secure overdraft facilities for the business purposes.
55. Expenditure incurred on renovation of a colliery on its derequisition.
56. Amount spent by a turf club or a school for training of jockeys.
57. Annual listing fees paid to stock exchanges.
58. Expenditure on management of temple in factory premises for recreation of employees.
59. Contribution given under a development scheme for construction of roads around factory building for
facilitating the transport of sugarcane to the factory and the flow of manufactured sugar out of the factory.
60. Expenditure incurred for purchase of loom hours.
61. Royalty payable on goods manufactured as a consideration to acquire monopoly rights to manufacture the
product.
62. Expenditure on licence fees for the import of capital goods and registration fees of trade mark.
63. Expenditure on valuation of shares.
64. Amount paid in compromising a bona fide dispute and as part of an arrangement for enabling the assessee
to continue business.
65. Expenditure incurred by the assessee on replacement of damaged moulds.
66. Expenditure in regard to contribution made by the assessee-company to State Electricity Board towards
laying of additional circuit line in order to meet increased demand of company.
67. Expenditure on re-routing of pipeline in order to obtain saline free water for factory.
68. Donation/contribution made by an assessee to any relief fund, such as Chief Minister’s Drought Relief Fund
or a District Welfare Fund established by District Collector for benefit of public with a view to securing benefit
to assessee’s business (it cannot be regarded as payment opposed to public policy irrespective of fact that
contribution is voluntary or at instance of authorities concerned).
69. Amount paid by the assessee-company for Flag Day Fund on Government’s appeal.
70. Contribution made by the assessee, running a refinery, to railway department for construction of railway
track and siding which are necessary for the purpose of smooth running of business in a profitable and
advantageous manner (only expenditure incurred in relevant year of assessment alone is to be allowed).
71. Contribution made by the assessee-company to State Housing Board for construction of tenements for its
workers, ownership of which tenements remained with Housing Board.
72. Expenditure incurred by the assessee-company on foreign visit of director and his wife in connection with
medical treatment of the director.
73. Expenditure incurred by the assessee on plantations in factory premises and residential quarters of company,
with a view to making atmosphere pollution free.
74. Royalty paid by the assessee for user of trademark of another company.
75. The expenditure incurred solely for repairs and modernizing the hotel and replacing the existing components
of the building, furniture and fittings, with a view to create a conductive and beautiful atmosphere for the
purpose of running of the business of a hotel.
76. Penalty which is compensatory in nature and which is paid for breach of a contract or statute is deductible.
If something more is payable, then it is not deductible.
Suppose, sales tax is charged at the regular rate of 8 per cent. If, however, goods are purchased for manufacturing
equipment for checking pollution, then on such purchases, concessional sales tax is payable at the rate of 3 per
cent. If a person purchases goods for manufacturing equipment for the checking pollution by paying sales tax
@ 3 per cent and later on it is discovered that these goods are used for other purposes, then for such default penal
sales tax is payable at the rate of 9 per cent. In this case, penalty of 9 per cent comprises both the element of
compensation (i.e., the difference between regular rate and concessional rate of 5 per cent) and penalty (i.e., 4 per
cent). The penalty by way of compensation is deductible but the extra payment of 4 per cent is not deductible.
The following should also be noted—
- Penalty, interest and fine paid/payable under direct taxes is not deductible.
- Expenses tainted will illegality (like penalty for evading provisions of FEMA, Central Excise Act, Customs
Act, Factories Act, Provident Fund Act, ESI Act, fines for criminal offences) are not deductible.
77. Software programme once developed by the assessee cannot be said to be of enduring benefit and expenses
incurred in developing such software programme are allowable as revenue expenditure.
78. Expenditure on issue of bonus shares.
79. Harvesting and transportation expenses incurred by the Co-operative Sugar Mills for procuring sugarcane
from farmers, who are members of such Co-operative Sugar Mills and who are bound under an agreement to
supply the sugarcane exclusively to the concerned sugar mill.
80. Expenditure for improving the performance of existing products is deductible.
81. Expenditure incurred for purpose of sub-division of shares for easy trading of shares in market, is revenue
in nature and deductible.
82. Expenses incurred by an assessee for preliminary work for a project (which has been abandoned for some
unavoidable reasons) is deductible.
83. Advertisement expenditure incurred by an assessee for building up its brand is deductible.
84. Expenses on replacement of mother board/UPS and expenditure incurred on ERP software/customizing
software, are deductible.
85. Expenditure incurred on garden to control pollution is deductible.
81.40-9 INSTANCES OF EXPENSES NOT DEDUCTIBLE UNDER SECTION 37(1) - Few instances are given below :
1. Damages and penalty paid for transgressing the terms of agreement with the State.
2. Penalty and damages paid in connection with infringement of law.
3. Litigation expenditure incurred for curing any defect in title of assets or completing that title.
4. Litigation expenses for registration of shares.
5. Fees paid for increase of authorised capital.
6. Expenditure on raising equity share capital and preference share capital (may be redeemable). However,
expenditure on issue of bonus shares is deductible.
7. Amount paid for acquiring technical know-how which is to be utilised for the purpose of manufacturing any
new article and such know-how is to become the property of the assessee at the end of the stipulated period.*
8. Amount expended for acquiring a business or a right of a permanent character or an asset which generates
income or for avoiding compensation in business.
9. Payments made for acquisition of goodwill.
*Depreciation is available.
245 Interest, royalty, fees for technical services Para 82.1
10. Expenditure incurred for acquiring right over or in land to win minerals (where, however, minerals are
already on surface, expenditure incurred for obtaining right to acquire raw material is deductible).
11. Fees paid to obtain licence to investigate and search minerals.
12. Payment made in consideration of acquiring a monopoly right to manufacture a product (royalty payable on
the basis of goods produced under the same arrangement is, however, deductible).
13. Tax paid by the assessee (who is defaulter by not deducting tax at source under section 195) on behalf of non-
resident.
14. Compensation paid to contracting party with the object of avoiding an unnecessary investment in capital
asset.
15. Expenditure on shifting of registered office.
16. Insurance premia paid by a firm on life insurance policies of its partners.
17. Amount paid by liquor contractor to police staff and other officer to enable it to make unauthorised purchases
and sales of liquor.
 WHAT ARE THE SPECIFIC DISALLOWANCES UNDER THE ACT

82. The following expenses given by sections 40, 40A and 43B are expressly disallowed by the Act while
computing income chargeable under the head “Profits and gains of business or profession”.
These disallowances are narrated briefly in the table given below –
Nature of expenditure Disallowance
 TDS default when payment/credit (other than salary) Such payment or credit is not deductible in a few cases [see
is given to a non-resident para 82.1]
 TDS default when payment/credit is given to a 30 per cent of such payment or credit is not deductible in
resident a few cases [see para 82.2]
 TDS default when salary is paid to a non-resident Such payment is not deductible in a few cases [see para 82.3]
 Default pertaining to non-deduction/non-deposit of Expenditure pertaining to equalisation levy is not deduct-
equalisation levy ible [see para 82.2A].
 Fringe benefit tax, income-tax, dividend tax, wealth-tax These are not deductible
(including penalty, fine, interest)
 Tax on non-monetary perquisite paid by employer It is not deductible [see para 82.4]
 Salary/interest paid by a firm to its partners In some cases these are not deductible [see paras 216 and
217]
 Salary/interest paid by an AOP to its members Not deductible
 Excessive or unreasonable payment to relatives/inter- Not deductible in some cases [see para 82.5]
connected concerns
 Expenditure exceeding Rs. 10,000 paid by a mode Not deductible [see para 82.6]
other than account payee cheque/draft
 Contribution towards unapproved gratuity fund Not deductible [see para 82.7]
 Employer’s contribution towards non-statutory funds Not deductible [see para 82.8]
 Marked to market loss Not deductible [except as allowable under section 36(1)(xviii)
– see para 81.37]
 Certain unpaid liabilities Not deductible [see para 82.9]
82.1 Interest, royalty, fees for technical services payable outside India or payable to a non-resident [Sec.
40(a)(i)] - If the following three conditions are satisfied, the assessee (i.e., the payer) is supposed to deduct tax
at source (TDS) under section 195—
1. The amount paid is interest, royalty, fees for technical services or any other sum (not being salary).
2. The aforesaid amount is chargeable to tax in India in the hands of the recipient.
3. The aforesaid amount is paid/payable to a non-resident.
If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct tax at source and deposit
the same with the Government.
 Disallowance of expenditure under section 40(a)(i) - If TDS default is committed in respect of payment/credit given
to a foreign company/non-resident, the expenditure is disallowed in the hands of payer under section 40(a)(i).
These provisions are given below –
TDS default Is such expenditure Is such expenditure deductible in any

deductible in the current subsequent previous year
previous year
Case 1 - Tax is deductible but not deducted 100 per cent of such ex- If tax is deducted in any subsequent year, the
penditure is disallowed expenditure (which is disallowed in the cur-
in the current year rent year) will be deducted in the year in
which TDS will be deposited by the assessee
with the Government
Case 2 - Tax is deductible (and is so deduc- 100 per cent of such ex- If tax is deposited with the Government after
ted) during the current financial year but penditure is disallowed the due date of submission of return of income,
it is not deposited on or before the due in the current year the expenditure (which is disallowed in the
date of submission of return of income current year) will be deductible in that year
under section 139(1) in which tax will be deposited
Note - If recipient is a non-resident or foreign company and TDS default is committed by the payer, 100 per cent of the
expenditure is disallowed in the hands of payer, as given above. Similar rule is applicable if recipient is a resident and TDS
default is committed (however, not 100 per cent but 30 per cent expenditure is disallowed). The rule pertaining to TDS default
(in case recipient is resident) is given by section 40(a)(ia) and explained in para 82.2.
Problems
82.1-P1 X Ltd. is an Indian company. Profit and loss account of X Ltd. for the year ending March 31, 2020 is given below –
Rs. Rs.
Commission 2,00,000 Gross profit 1,05,50,000
Interest 3,00,000
Rent 8,00,000
License fees of software 17,50,000
Salary 18,00,000
Other expenses 27,00,000
1,05,50,000 1,05,50,000
The due date of filing of return of income of the assessment year 2020-21 for X Ltd. is September 30, 2020. Recipients of commission,
interest, rent, license fees and salary (given in the profit and loss account) are non-residents or foreign companies. In the hands of
recipients, these payments/credits are chargeable to tax in India. Consequently, tax is deductible by X Ltd. Tax deduction (TDS) details
of these payments are given in the table below –
Nature of expenditure Date on which tax is required Actual date of tax deduction Date of deposit of TDS
to be deducted by X Ltd. by X Ltd. by X Ltd.
Commission : Rs. 2,00,000 July 13, 2019 July 13, 2019 July 30, 2020
Interest : Rs. 3,00,000 December 24, 2019 December 24, 2019 November 8, 2020
Rent : Rs. 8,00,000 June 6, 2019 Not deducted –
License fees of software : October 20, 2019 May 10, 2020 June 3, 2020
Rs. 17,50,000
Salary : Rs. 18,00,000 January 1, 2020 January 1, 2020 December 17, 2020
In the case of rent, tax is not deducted during the financial year 2019-20 (and till date it is not deducted). In the case of license fees
of software, tax is not deducted during the financial year 2019-20 (but it is deducted and deposited in the next financial year, i.e.,
2020-21 as given above). Find out the net income of X Ltd. for the assessment year 2020-21.
Solution :
Payment/credit of commission, interest, rent and fees to a non-resident/foreign company are covered by section 40(a)(i).
Salary to a non-resident is, however, covered by section 40(a)(iii) and discussed in para 82.3. These payments are deductible
as follows –
Nature of expenditure Which TDS default In which year expenditure is deductible in the hands of X Ltd.
is applicable -
Case 1 or Case 2
Commission : None Tax is deducted in the current previous year (i.e., 2019-20). It is deposited
Rs. 2,00,000 with Government on or before the due date of submission of return of
income for the current year (i.e., September 30, 2020). Consequently,
commission of Rs. 2,00,000 is deductible in the previous year 2019-20.
247 Interest, royalty, fees for technical services Para 82.1
is applicable -
Case 1 or Case 2
Interest : Rs. 3,00,000 Case 2 Tax is deducted in the current previous year (i.e., 2019-20). However, tax
is not deposited with the Government till the due date of submission of
return of income for the previous year 2019-20 (i.e., September 30, 2020).
Consequently, interest of Rs. 3,00,000 is not deductible for computing
income of the previous year 2019-20. However, it is deductible in the year
of deposit of TDS. If TDS is deposited on November 8, 2020, the interest of
Rs. 3,00,000 will be deductible in the previous year 2020-21.
Rent : Rs. 8,00,000 Case 1 Tax is deductible but not deducted. Consequently, the entire rent of
Rs. 8,00,000 is not deductible for computing income of the previous year
2019-20. If X Ltd. deducts and deposits TDS in any subsequent year, it will
be allowed as deduction in the year in which TDS is deposited by X Ltd.
License fees of soft- Case 1 Tax is deductible during the previous year 2019-20 but it is not deducted
ware : Rs. 17,50,000 during the previous year 2019-20. Consequently, the entire license fees of
Rs. 17,50,000 becomes a non-deductible business expenditure of X Ltd. for
the previous year 2019-20. However, license fees will be allowed as
deduction in the previous year in which TDS is deposited. If TDS is
deposited on June 3, 2020, license fees of Rs. 17,50,000 will become
deductible in the previous year 2020-21.
Salary : Rs. 18,00,000 – Salary to non-resident is covered by section 40(a)(iii) which is explained in
para 82.3. Under section 40(a)(iii) disallowance is applicable only if tax is
neither deposited nor deducted. Date of deduction and deposit of tax is not
relevant if recipient of salary is a non-resident. Consequently, there is no
disallowance in this case and the entire salary is deductible for the
previous year 2019-20.
Computation of income of X Ltd. –

Rs.
Adjustments –
Add: Interest 3,00,000
Add: Rent 8,00,000
Add: Fees 17,50,000
82.1-E1 Recalculate the net income of X Ltd. in Problem 82.1-P1 after making the following changes –
1. Tax on commission is deducted on July 13, 2020 (and not on July 13, 2019).
2. TDS on commission is deposited on September 20, 2020 (and not on July 30, 2020).
3. Tax on interest is deducted on March 31, 2020 (and not on December 24, 2019).
4. Tax on rent is deducted on April 1, 2020 and deposited on April 6, 2020.
5. Tax on license fees is deposited on May 10, 2020 (and not on June 3, 2020).
There is no other change.
82.1-1 WHEN RECIPIENT HAS PAID TAX - The above provisions have been amended with effect from the assessment
year 2020-21. Under the amended provisions, a relief is given in Case 1 (and not in Case 2) of para 82.1. This relief
is available if the following conditions are satisfied –
1. Tax is deductible on the aforesaid payments but it is not deducted (wholly or partly) by the payer (i.e.,
Case 1).
2. The payer is not deemed to be an assessee-in-default under the first proviso to section 201(1). Under the first
proviso to section 201(1), the payer is not deemed to be an assessee-in-default if –
a. the recipient has furnished his return of income under section 139;
b. the recipient has taken into account the above income in such return of income;
c. the recipient has paid the tax due on the income declared in such return of income, and
d. the payer uploads a certificate to this effect from a chartered accountant in Form No. 26A.
If the above conditions are satisfied, then for the purpose of section 40(a)(i) it shall be deemed that the payer has
deducted and paid the tax on such amount on the date of the furnishing of return of income by the recipient [see
para 82.2-1 for illustrations].
82.2 Any sum payable to a resident [Sec. 40(a)(ia)] - In respect of the following payments/credit to a resident,
tax is deductible under Chapter XVII-B of the Income-tax Act (i.e., sections 192 to 206AA) –
1. Salary 8. Payment in respect of life insurance policy
2. Interest 9. Payment in respect of deposits under NSS
3. Dividends 10. Payment on account of certain units
4. Winnings from lottery or crossword puzzles 11. Rent
5. Winnings from horse races 12. Payment on purchase of immovable property
6. Payments to contractors 13. Technical/professional fees, royalty, fees to a part time director
7. Commission or brokerage (including insurance 14. Payment of compensation on acquisition of immovable
commission) property
 Disallowance of above expenditure under section 40(a)(ia) - If TDS default is committed in respect of the above
payment/credit given to a resident, 30 per cent of such expenditure is disallowed in the hands of payer under
section 40(a)(ia). These provisions are given below –
TDS default Is such expenditure Is such expenditure deductible in any subsequent
deductible in the previous year
current previous year
Case 1 - Tax is deductible but not 30 per cent of such ex- If tax is deducted in any subsequent year, the
deducted penditure is disallowed expenditure (which is disallowed in the current
in the current year year) will be deducted in the year in which TDS will
be deposited by the assessee with the Government
Case 2 - Tax is deductible (and is so 30 per cent of such ex- If tax is deposited with the Government after the
deducted) during the current finan- penditure is disallowed due date of submission of return of income, the
cial year but it is not deposited on or in the current year expenditure (which is disallowed in the current
before the due date of submission of year) will be deductible in that year in which tax
return of income under section 139(1) will be deposited

1. If TDS default (Case 1 or Case 2) pertaining to payment/credit given to a resident is committed, 30 per cent of
such expenditure becomes a non-deductible expenditure under section 40(a)(ia) with effect from the assessment
year 2015-16. Up to the assessment year 2014-15, 100 per cent of such expenditure was not deductible.
2. If TDS default pertaining to salary payment to a resident in India is committed, disallowance provisions of
section 40(a)(ia) are applicable only with effect from the assessment year 2015-16. Salary TDS default were not
covered by provisions of section 40(a)(ia) up to the assessment year 2014-15.
Problems
82.2-P1 Calculate the income of X Ltd. in Problem 82.1-P1 on the assumption that recipients of commission, interest, rent, license fees
of software and salary are persons resident in India. Dates of deduction of tax and deposit of TDS are the same as given in the problem.
Solution :
Payment/credit of commission, interest, rent, fees and salary to a resident are covered by section 40(a)(ia). These payments
are deductible as follows –
is applicable -
Case 1 or Case 2
Commission : None Tax is deducted in the current previous year (i.e., 2019-20). It is deposited
Rs. 2,00,000 with Government on or before the due date of submission of return of
income for the current year (i.e., September 30, 2020). Consequently,
commission of Rs. 2,00,000 is deductible in the previous year 2019-20.
Interest : Rs. 3,00,000 Case 2 Tax is deducted in the current previous year (i.e., 2019-20). However, tax
is not deposited with the Government till the due date of submission of
return of income for the previous year 2019-20 (i.e., September 30, 2020).
249 Any sum payable to a resident Para 82.2
is applicable -
Case 1 or Case 2
Consequently, 30% of interest of Rs. 3,00,000 (i.e., Rs. 90,000) is not

deductible for computing income of the previous year 2019-20 (however,
balance of Rs. 2,10,000 is deductible for the previous year 2019-20). Rs.
90,000 will be deductible in the year of deposit of TDS. If TDS is deposited
on November 8, 2020, Rs. 90,000 (being the amount disallowed earlier)
will be deductible in the previous year 2020-21.
Rent : Rs. 8,00,000 Case 1 Tax is deductible but not deducted. Consequently, 30% of rent of Rs.
8,00,000 (i.e., Rs. 2,40,000) is not deductible for computing income of the
previous year 2019-20 (however, the balance of Rs. 5,60,000 is deductible
for the previous year 2019-20). If X Ltd. deducts and deposits TDS in any
subsequent year, Rs. 2,40,000 (being the amount disallowed earlier) will
be allowed as deduction in the year in which TDS is deposited by X Ltd.
License fees of software : Case 1 Tax is deductible during the previous year 2019-20 but it is not deducted
Rs. 17,50,000 during the previous year 2019-20. Consequently, 30% of license fees of
Rs. 17,50,000 (i.e., Rs. 5,25,000) becomes a non-deductible business
expenditure of X Ltd. for the previous year 2019-20 (the balance of Rs.
12,25,000 is deductible for the previous year 2019-20). If TDS is deposited
on June 3, 2020, Rs. 5,25,000 (being the amount disallowed earlier) will
become deductible in the previous year 2020-21.
Salary : Rs. 18,00,000 Case 2 TDS default pertaining to salary payments to resident employees are
now covered by disallowance provisions of section 40(a)(ia). Since TDS
is not deposited till the due date of submission of return of income, 30%
of salary (i.e., Rs. 5,40,000) is not deductible for computing income of the
previous year 2019-20 (however, the balance of Rs. 12,60,000 is deductible
for the previous year 2019-20).TDS pertaining to this payment is deposited
on December 17, 2020. Rs. 5,40,000 (being the amount disallowed earlier)
will be deductible in the previous year 2020-21.
Computation of income of X Ltd. –

Rs.
Adjustments –
Add: 30% of interest (i.e., 30% of Rs. 3,00,000) 90,000
Add: 30% of rent (i.e., 30% of Rs. 8,00,000) 2,40,000
Add: 30% of fees (i.e., 30% of Rs. 17,50,000) 5,25,000
Add: 30% of salary (i.e., 30% of Rs. 18,00,000) 5,40,000
82.2-E1 Recalculate the net income of X Ltd. in Problem 82.2-P1 after making the following changes –
1. Tax on rent is deducted on June 1, 2020 and deposited on June 10, 2020.
2. In all other cases, TDS is deposited on July 7, 2020.
There is no other change.
82.2-1 WHEN RECIPIENT HAS PAID TAX - In respect of TDS defaults pertaining to payment/credit given to residents,
a relief is given by the Finance Act, 2012 with effect from the assessment year 2013-14. Under the amended
provisions, the relief is given in Case 1 (and not in Case 2). This relief is available if the following conditions are
satisfied –
1. Tax is deductible on the aforesaid payments but it is not deducted by the payer (i.e., Case 1).
2. The payer is not deemed to be an assessee-in-default under the first proviso to section 201(1). Under the first
proviso to section 201(1), the payer is not deemed to be an assessee-in-default if –
a. the recipient has furnished his return of income under section 139;
b. the recipient has taken into account the above income in such return of income;
c. the recipient has paid the tax due on the income declared in such return of income, and
d. the payer furnishes electronically a certificate [in Form No. 26A] to this effect from a chartered accountant.
Para 82.2A Profits and gains of business or profession 250
If the above conditions are satisfied, then for the purpose of section 40(a)(ia) it shall be deemed that the payer has
deducted and paid the tax on such amount on the date of the furnishing of return of income by the resident
recipient.
X Ltd. pays (by passing a book entry) a sum of Rs. 45,000 as commission to Y Ltd. (an Indian company) on April 20, 2019
without deducting tax at source. Y Ltd. pays advance tax on the due dates on its income (including Rs. 45,000).
Entire tax liability is paid by Y Ltd. by advance payment of tax during the financial year 2019-20 and/or by payment of self-
assessment tax at the time of submission of return of income. Return of income of Y Ltd. for the assessment year 2020-21 is
submitted on July 10, 2020. X Ltd. has submitted electronically a certificate in Form No. 26A to this effect from a chartered
accountant.
Tax treatment of non-deduction of tax by X Ltd. and subsequent payment by the recipient is as follows –
Assessment year 2020-21 - Tax is not deducted by X Ltd. during the financial year 2019-20. Consequently, 30 per cent of
commission of Rs. 45,000 (i.e., Rs. 13,500) will be disallowed in the hands of X Ltd. for the assessment year 2020-21.
Assessment year 2021-22 - After payment of tax by Y Ltd., the recipient of commission, X Ltd. cannot be treated as an assessee-
in-default under the provisions of first proviso to section 201(1), as the following conditions are satisfied –
a. Y Ltd., the recipient of commission, has furnished its return of income under section 139 (late submission does not affect
on this point);
b. Y Ltd. has taken into account the above income in such return of income;
c. Y Ltd. has paid the tax due on the income declared in such return of income; and
d. X Ltd. has submitted electronically a certificate to this effect from a chartered accountant in Form No. 26A.
Under the provisions as amended by the Finance Act, 2012, it will be assumed that X Ltd. has deducted and deposited
tax on July 10, 2020. As a consequence, Rs. 13,500 will be allowed as deduction in the hands of X Ltd. for the previous year
2020-21.
82.2A Default pertaining to non-deduction/non-deposit of equalisation levy [Sec. 40(a)(ib)] - Any

consideration paid or payable (to a non-resident for a specified service on which equalisation levy is applicable)
will be disallowed from the assessment year 2017-18 in the following cases—
1. Equalisation levy is deductible and such levy has not been deducted.
2. Equalisation levy is deductible (and it is so deducted) but it is not deposited [on or before the due date of
submission of return of income under section 139(1)].
If, however, equalisation levy is deducted/deposited in a subsequent year, the aforesaid consideration shall be
allowed as a deduction in computing the income of the previous year in which such levy has been paid.
82.2B Disallowance of royalty, licence fees, etc., in case of State Government Undertakings [Sec.
40(a)(iib)] - The following shall not be allowed as deduction from the assessment year 2014-15 –
1. Any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or
charge (by whatever name called), which is levied exclusively on a State Government undertaking by the State
Government.
2. Any amount which is appropriated (directly or indirectly) from a State Government Undertaking by the State
Government.
 What is State Government undertaking - For the above purpose, a State Government undertaking includes the
following–
a. a corporation established by (or under) any Act of the State Government;
b. a company in which more than 50 per cent of the paid-up equity share capital is held by the State Government;
c. a company in which more than 50 per cent of the paid-up equity share capital is held by the above two entities
(whether singly or taken together);
d. a company or corporation in which the State Government has the right to appoint the majority of the directors
or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding
or management rights or shareholders agreements or voting agreements or in any other manner;
e. an authority, a board or an institution or a body established or constituted by or under any Act of the State
Government or owned or controlled by the State Government.
82.3 Salary payable outside India without tax deduction [Sec. 40(a)(iii)] - Section 40(a)(iii) is applicable if
salary is paid outside India or paid to a non-resident and tax has not been paid to the Government nor deducted
at source under the Income-tax Act.
251 Amounts not deductible in respect of payment Para 82.5
The following illustration is given in respect of salary payable for the previous year 2019-20 by a company to (a) any person
outside India or (b) a non-resident in India—
Amount Date on which tax is Actual date of tax Actual date of tax Previous year in
supposed to be deducted deduction deposit which salary payment
(i.e., the date of salary is deductible
Rs. payment)
40,000 July 31, 2019 July 31, 2019 November 10, 2019 2019-20
90,000 March 31, 2020 March 31, 2020 April 30, 2020 2019-20
1,60,000 March 31, 2020 March 31, 2020 May 12, 2020 2019-20
70,000 March 31, 2020 Not deducted May 12, 2020 2019-20
75,000 March 31, 2020 March 31, 2020 Not deposited 2019-20
95,000 March 31, 2020 Not deducted Not deposited Not deductible
1,28,000 July 31, 2019 July 31, 2019 December 15, 2020 2019-20
82.4 Tax on non-monetary perquisite paid by the employer [Sec. 40(a)(v)] - The provisions of section 40(a)(v)
are given below –
1. The employer provides non-monetary perquisites to employees.
2. Tax on non-monetary perquisites is paid by the employer.
3. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10(10CC).
4. While calculating income of the employer, the tax paid by the employer on non-monetary perquisites is not
deductible under section 40(a)(v).
During the previous year 2019-20, A Ltd. pays Rs. 40,000 per month as salary to X (age : 31 years) and provides a rent-free
unfurnished house (lease rent being Rs. 10,000 per month). The tax on perquisite is paid by A Ltd. as follows—
Rs.
Salary 4,80,000
Value of perquisite (15 per cent of salary) 72,000
Net income 5,02,000
Tax on net income (including health and education cess) 13,416
Average rate of tax (Rs. 13,416/Rs. 5,02,000 × 100) : 2.67%
Tax on perquisite (2.67% of Rs. 72,000) 1,920
Total expenditure incurred by A Ltd. in respect of employee X is as follows:

Rs.
Rent-free house to X (Rs. 10,000 × 12) 1,20,000
Tax on perquisite borne by A Ltd. 1,920
Total 6,01,920
While calculating business income of A Ltd. Rs. 1,920 is not deductible by virtue of section 40(a)(v) [amount
deductible being Rs. 4,80,000 + Rs. 1,20,000]. In the hands of X, Rs. 1,920 is not chargeable to tax. The same rule
is applicable if tax on perquisite paid by A Ltd. is lower than Rs. 1,920. If, however, tax paid by A Ltd. is more
than Rs. 1,920 then the “excess” amount is deductible in the hands of A Ltd. and the same is chargeable to tax
in the hands of X.
82.5 Amounts not deductible in respect of payment to relatives [Sec. 40A(2)] - Section 40A(2) is applicable
if expenditure is incurred for goods, services or facilities, payment is made to the persons given below and such
payment is considered as excessive or unreasonable having regard to –
a. the fair market value* of the commodity or service or facility; or
* For the assessment years 2013-14 to 2016-17, the aforesaid disallowance shall not be made if such transaction is at arm’s length price [as defined
in section 92F(ii)].
b. legitimate business needs of the assessee; or

c. benefit derived by or accruing to assessee as a result of the expenditure.
To the extent payment is considered as excessive or unreasonable, it will be disallowed.
 To whom the payment is made - Section 40A(2) is applicable in the following cases (list is not complete, only
important cases are given) –
1. Payment made by an individual to his or her relative.
2. Payment made by a company to a director of the company or any relative of the director.
3. Payment made by a firm/AOP/HUF to a partner/member or a relative of partner/member.
4. Payment made to an individual who has a substantial interest in the business of the payer or a relative of such
individual.
5. Payment made to a company who has a substantial interest in the business of the payer, any director of such
company or relative of such director.
6. Payment made to a firm/AOP/HUF who has a substantial interest in the business of the payer or partner/
member of such person or relative of partner/member.
7. Payment made to a person in whose business the payer/any relative of payer has a substantial interest.
 Relative - “Relative” in relation to an individual, means the husband, wife, brother or sister or any lineal
ascendant or descendant of that individual.
 Substantial interest - A person is deemed to have substantial interest in the business or profession, if such person
is the beneficial owner of at least 20 per cent of equity capital (in the case of a company) or if such person is entitled
to 20 per cent profits of a concern (in any other case) at any time during the previous year.
Consider the following cases –
1. X is a trader. He purchases goods from his brother. Market value is Rs. 1,30,000, whereas amount charged by his brother
is Rs. 1,40,000. The excess payment will be disallowed.
2. A, B and C are three directors of X Ltd. X Ltd. pays Rs. 4,00,000 for taking technical advice from Mrs. A. Similar advice
can be obtained from any competent person for Rs. 70,000. The access payment of Rs. 3,30,000 will be disallowed for
computing income of X Ltd.
3. X holds 20 per cent equity share capital in X Ltd. X Ltd. takes on hire trucks owned by the brother of X and pays rent. Any
excess payment of rent can be disallowed.
4. Mrs. X holds 20 per cent equity share capital in Y Ltd. X purchases goods from Y Ltd. Any excess payment by X will be
disallowed.
5. X is a trader. He sells his goods to his brother. Amount of bill is Rs. 1,00,000 whereas market value is Rs. 1,40,000. In this
case, X has not incurred any expenditure. Section 40A(2) would not be attracted. Business income of X will be calculated by
taking into consideration the amount of bill of Rs. 1,00,000.
82.6 Amounts not deductible in respect of expenditure exceeding Rs. 10,000† [Sec. 40A(3)] - The provisions
of section 40A(3) are given below —
 Rule of disallowance - Disallowance is attracted under section 40A(3) if the following conditions are satisfied —
1. The assessee incurs any expenditure which is otherwise deductible under the other provisions of the Act for
computing business/profession income (e.g., expenditure for purchase of raw material, trading goods, expen-
diture on salary, etc.). The amount of expenditure exceeds Rs. 10,000†.
2. A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds
Rs. 10,000†.
3. The above payment is made otherwise than by an account payee cheque or an account payee demand draft
or use of electronic clearing system through a bank account (or through prescribed electronic mode).
If all the above conditions are satisfied, then 100 per cent of such payment will be disallowed.
 Exceptions - The above rule is not applicable to a few cases given below –
1. Payment made to a bank (including private sector banks, co-operative bank, credit societies), LIC, etc.
2. Payment made to Government.
3. Payment through banking system.
4. Payment made by book adjustment by an assessee in the account of the payee against money due to the assessee
for any goods supplied or services rendered by him to the payee.
†Rs. 35,000 if an assessee makes payment for plying, hiring or leasing goods carriages (applicable with effect from October 1, 2009).
253 Amounts not deductible in respect of expenditure Para 82.6
5. Payment made to a cultivator, grower or producer in respect of the purchase of agricultural or forest produce
or product of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming or fish
or fish products or products of horticulture or apiculture (even if these products have been subjected to some
processing provided the processing has been done by the cultivator, grower or the producer of the product).
6. Payment made to a producer in respect of the purchase of the products manufactured or processed without
the aid of power in a cottage industry.
7. Payment made to a person who ordinarily resides or carries on business in a village not served by any bank.
8. Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., not exceeding Rs. 50,000.
9. Payment made by an assessee by way of salary to his employee after deducting tax and when such employee
is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty
or on a ship and does not maintain any account in any bank at such place or ship.
10. Payment required to be made on a day on which the banks were closed either on account of holiday or strike.
11. Payment made by any person to his agent who is required to make payment in cash for goods or services on
behalf of such person.
12. Payment made by an authorised dealer or a money changer against purchase of foreign currency or travellers
cheques in the normal course of his business.
Problems
82.6-P1 Determine the amount of disallowance in the cases given below —
1. Generally X pays salary to his employees by account payee cheques. Salary of December 2019 is, however, paid to three employees A,
B and C by bearer cheques (payment being Rs. 6,000, Rs. 10,000 and Rs. 10,500, respectively).
2. X Ltd. purchases goods on credit from Y Ltd. on May 6, 2019 for Rs. 86,000 which is paid as follows—
a. Rs. 5,000 in cash on May 11, 2019 ;
b. Rs. 30,000 by a bearer cheque on May 31, 2019 ;
c. Rs. 51,000 by an account payee cheque on May 16, 2019.
3. Z Ltd. purchases goods on credit from A Ltd. on May 10, 2019 for Rs. 6,000 and on May 30, 2019 for Rs. 5,000. The total payment
of Rs. 11,000 is made by a crossed cheque on June 1, 2019.
4. A Ltd. purchases goods on credit from a relative of a director on June 20, 2019 for Rs. 50,000 (market value : Rs. 42,000). The amount
is paid in cash on June 25, 2019.
5. B Ltd. purchases raw material on credit from A who holds 20 per cent equity share capital in B Ltd. (the amount of bill being Rs. 36,000,
market price being Rs. 9,000). It is paid in cash on July 26, 2019.
Solution :
1. Rs. 10,500, being 100% of salary paid by bearer cheque to C, will be disallowed.
2. Nothing will be disallowed out of the payment of Rs. 5,000 in cash on May 11, 2019, as the payment does not exceed Rs.
10,000. 100% of Rs. 30,000 will be disallowed. Nothing will be disallowed out of Rs. 51,000.
3. Though the amount of payment exceeds Rs. 10,000, nothing shall be disallowed. To attract disallowance, the amount of
bill as well as the amount of payment should be more than Rs. 10,000.
4. Out of the payment of Rs. 50,000, Rs. 8,000 (being the excess payment to a relative) shall be disallowed under section 40A(2).
As the payment is made in cash and the remaining amount exceeds Rs. 10,000, 100% of the balance (i.e., Rs. 42,000) shall be
disallowed under section 40A(3).
5. Out of the payment of Rs. 36,000, Rs. 27,000 (being the excess payment to a person holding a substantial interest) shall be
disallowed under section 40A(2). The remaining amount (i.e., Rs. 9,000) does not exceed Rs. 10,000. Nothing shall be
disallowed under section 40A(3) even if the payment is made in cash.
82.6-E1 Compute the amount of disallowance in the cases given below —
1. X pays Indian railways a bill of Rs. 28,750 in cash.
2. Customs duty is paid to the Government in cash (amount being Rs. 76,592).
3. Y, a grain trader, purchases wheat from a cultivator. The payment, being Rs. 1,20,000, is, however, made by a crossed cheque.
4. Z pays a bill of Rs. 36,000 in cash on April 7, 2019 when banks are closed on account of a strike.
82.6-1 WHEN OUTSTANDING LIABILITY OF EARLIER YEARS IS PAID IN THE CURRENT YEAR [SEC. 40A(3A)] - Section 40A(3A) is
applicable if an outstanding liability was allowed as deduction in any of the earlier years and during the current
year payment in respect of such liability is made otherwise than by an account payee cheque or draft. If such
payment to a person in a day exceeds Rs. 10,000†, the payment so made shall be chargeable to tax as business
income in the year of payment. This rule will, however, be not applicable in the exceptions given above.
†Rs. 35,000 if an assessee makes payment for plying, hiring or leasing goods carriages (applicable with effect from October 1, 2009).
X Ltd. claimed a deduction of Rs. 70,000 in the previous year 2016-17 pertaining to an outstanding bill of purchase of raw
material (payable to B Ltd.). Out of Rs. 70,000, Rs. 15,000 is paid to B Ltd. in cash on April 20, 2019 and Rs. 55,000 is paid by
an account payee cheque on April 28, 2019. In this case, Rs. 15,000 (being payment in cash) will be treated as business income
of X Ltd. for the previous year 2019-20.
82.7 Amount not deductible in respect of provision for unapproved gratuity fund [Sec. 40A(7)] - Provision
for gratuity fund (for meeting future liability) is deductible only if such gratuity fund is an approved gratuity
fund. In other words, any provision for unapproved gratuity fund (for meeting future liability) is not deductible.
1. An employee retires during the current year. The employer does not maintain any gratuity fund. Gratuity is
paid to him during the current year. It is deductible during the current year.
2. An employee retires during the current year. Gratuity is payable to him. A part of the amount is paid during
the current year and the balance will be paid in the next year. A provision is made towards gratuity in the books
of account of the current year for making payment in the next year. The entire amount is deductible during the
current year (if no deduction was claimed earlier). In this case, deduction is available during the current year
even if provision is made for gratuity fund, which is unapproved.
3. A company has 50 employees. To meet future liability to pay them gratuity at the time of retirement, a gratuity
fund is created and the employer makes contribution every year. Employers’ contribution to this fund is
deductible only if the fund is an approved gratuity fund.
Problems
82.7-P1 Discuss the amount deductible in the following cases —
1. X retires from the service of Y Ltd. on May 31, 2019. The company pays gratuity of Rs. 1,60,000, according to the provisions of the
Payment of Gratuity Act, 1972. Y Ltd. does not maintain any provision for gratuity account.
2. Z Ltd. maintains an approved gratuity fund. A sum of Rs. 1,00,000 being the employer’s contribution towards the gratuity fund, is
debited to the profit and loss account for the year ending March 31, 2020.
Solution :
1. Where gratuity is paid during the previous year or where gratuity has become payable during the previous year, it is
deductible if no deduction has been claimed on the basis of provisions earlier. Consequently, Rs. 1,60,000 is allowed as
deduction for the assessment year 2020-21.
2. Where any provision is made for the purpose of payment of a sum by way of any contribution towards an approved
gratuity fund, it is allowed as deduction. It is assumed that provisions of section 43B are satisfied [see para 82.9].
82.7-E1 Discuss whether the following are correct or incorrect —

1. A provision for any contribution towards an approved gratuity fund is deductible.
2. A provision for gratuity which has become due and payable during the previous year, is not deductible.
3. Even if a provision is not made for gratuity liability in the books of account maintained by the assessee, the amount of actuarial
valuation of such liability can be claimed as deduction on the ground that section 40A(7) is not attracted as no “provision” is made
in books of account.
82.8 Amount not deductible in respect of contributions to non-statutory funds [Sec. 40A(9)] - Any sum paid
by the assessee as an employer by way of contribution towards recognised provident fund, or approved
superannuation fund or an approved gratuity fund, is deductible to the extent it is required by any law.
 What is not deductible - If the following conditions are satisfied, then contribution or payment is not deductible
by section 40A(9) —
1. The contribution/payment is made by an assessee as an employer.
2. It is paid towards setting up (or formation of) any trust, company, association of persons, body of individuals,
society or it is paid by way of contribution to any fund.
3. The contribution or payment is not required by any law.
To clarify the above provisions, one may examine the following illustrations—
1. X Ltd. incurs an expenditure of Rs. 30,000 for maintenance of street lights in workers’ colony. The expenditure is incurred
without any legal or contractual requirement. In this case, nothing will be disallowed under section 40A(9), as it is not
towards setting up or formation of, or as contribution to, any fund, society, etc.
255 Amount not deductible in respect of certain unpaid liabilities Para 82.9
2. Y Ltd. has a tea club in its office. Tea club provides tea, coffee, snacks, soft drinks to the employees during tea breaks. The
club has been set up by employees (and or by Y Ltd.) for the benefit of employees without any legal requirement. Y Ltd.
contributes Rs. 50,000 annually towards tea club. It will be disallowed under section 40A(9) in the hands of Y Ltd. The
position will remain the same even if tea club was set up by the employer under the terms of employment but without any
legal obligation.
3. Z Ltd. provides free tea, coffee, snacks, soft drinks to the employees during tea breaks. The actual expenditure for
providing this facility is Rs. 56,950 during the previous year 2019-20. Nothing will be disallowed under section 40A(9), as
it is not towards setting up or formation of, or as contribution to, any fund, society, etc.
4. Employer’s contribution towards unrecognized provident fund or any other staff welfare fund (without any statutory
requirement) will be disallowed under section 40A(9).
82.9 Amount not deductible in respect of certain unpaid liabilities [Sec. 43B] - Section 43B is applicable only
if the taxpayer maintains books of account on the basis of mercantile system of accounting. The provisions of
section 43B are given below—
 General rule - Certain expenses are deductible on payment basis - The following expenses (which are otherwise
deductible under the other provisions of the Income-tax Act) are deductible on payment basis—
a. any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being
in force);
b. any sum payable by an employer by way of contribution to provident fund or superannuation fund or any
other fund for the welfare of employees;
c. any sum payable as bonus or commission to employees for service rendered†;
d. any sum payable as interest on any loan or borrowing from a public financial institution (i.e., ICICI, IFCI, IDBI,
LIC and UTI) or a State financial corporation or a State industrial investment corporation;
e. any sum payable as interest on any loan or borrowing from a deposit-taking non-banking finance company
(NBFC) and systematically important non deposit-taking NBFC;
f. interest on any loan or advance taken from a scheduled bank or a co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural and rural development bank;
g. any sum payable by an employer in lieu of leave at the credit of his employee; and
h. any sum payable to the Indian Railways for the use of railway assets.
The above expenses are deductible in the year in which payment is actually made‡. There is, however, one
exception given below.
 Exception - When deductible on accrual basis - If the aforesaid payment is actually made on or before the due date
of submission of return of income, deduction can be claimed on accrual basis. Due date of submission of return
of income in the case of a company (or in the case of a taxpayer whose books of account are required to be audited
under any law) is September 30 of the assessment year. In the case of any taxpayer (having international or
specified domestic transactions) due date of submission of return of income is November 30 of the assessment
year. In all other cases, the due date of submission of return of income is July 31 of the assessment year.
X Ltd. (not having any international or specified domestic transaction) maintains books of account on mercantile basis. For
the previous year 2019-20 (i.e., the assessment year 2020-21), interest on term loan taken from Punjab National Bank (or any
other sum given above) is Rs. 1,95,000. The amount is paid as follows—
Date of payment Amount
Rs.
May 2, 2019 25,000
November 20, 2019 20,000
August 16, 2020 25,000
December 5, 2020 30,000
June 12, 2021 35,000
November 2, 2021 40,000
Not paid so far 20,000
As the expenditure is covered by section 43B, it is deductible on payment basis in the year in which payment is made.
However, if the payment is made on or before the due date of submission of return of income for the assessment year
†Arrears of salary and other benefits payable to employees are not covered by section 43B.
‡ Even advance deposit of central excise in personal ledger account is deductible in the year of payment – CIT v. Modipon Ltd. [2017] 87
taxmann.com 275 (SC).
2020-21 (i.e., on or before September 30, 2020), then such payment is deductible on accrual basis for the previous year
2019-20. Consequently, these payments are deductible as follows :
Date of Amount Previous year in Reasons
payment Rs. which deductible
May 2, 2019 25,000 2019-20 Payment made during the relevant year is deductible in that year
November 20, 20,000 2019-20 Payment made during the relevant year is deductible in that year
2019
August 16, 25,000 2019-20 Payment made after the end of the relevant year but on or before the due
2020 date of submission of return of income (i.e., September 30, 2020) is
deductible in the year in which the liability is incurred
December 5, 30,000 2020-21 Payment made after the due date of submission of return of income (i.e.,
2020 made after September 30, 2020) is deductible in the year in which the
payment is made
June 12, 2021 35,000 2021-22 Payment made after the due date of submission of return of income (i.e.,
made after September 30, 2020) is deductible in the year in which the
payment is made
November 2, 40,000 2021-22 Payment made after the due date of submission of return of income (i.e.,
2021 made after September 30, 2020) is deductible in the year in which the
payment is made
Not paid 20,000 Not deductible Not deductible as the payment is not made.
 What is the status of conversion of unpaid sales tax into loan by a State Government - Conversion of unpaid sales tax
into loan by a State Government is treated as payment of sales tax in the year of conversion.
 What is status of conversion of unpaid interest on loan as a fresh loan by a bank/financial institution - If any sum payable
by an assessee as interest on any loan (or borrowing or advance) is converted by the bank or financial institution
into a fresh loan, the interest so converted (and not ‘actually paid’) shall not be deemed as ‘actual payment’ and
not allowed as deduction in the computation of income under section 43B. The converted interest (by whatever
name called) will be eligible for deduction in the computation of income of the previous year in which the
converted interest will be ‘actually paid’.
1. Loan taken from bank on March 31, 2016 is Rs. 20,00,000. Interest unpaid up to March 31, 2019 is Rs. 2,00,000. In the
restructuring arrangement entered into in this case, the unpaid interest has been converted into a Funded Interest Term Loan
(FITL) which has been shown separately from the original loan and no interest is chargeable on FITL. This converted interest
(i.e., FITL) is to be paid in 4 annual instalments from April 1, 2023 (each instalment being Rs. 50,000). In this case, deduction
to the extent of the amount actually paid against the payment of instalment of FITL of Rs. 2,00,000 under section 43B shall
be allowed in the relevant assessment year when it is actually paid. Interest on the original principal of Rs. 20,00,000, if any,
actually paid will be independently allowable under section 43B.
2. Suppose in the above case, interest is payable on FITL. In such a situation, the following shall be deductible on actual
payment basis according to the provisions of section 43B—
a. interest on original loan of Rs. 20,00,000;
b. re-payment of FITL; and
c. interest on FITL
3. Loan taken by the assessee from a term lending institution in May 2017 is Rs. 14 crore. Interest not paid up to April 1, 2019
is Rs. 2 crore. In a restructuring arrangement unpaid interest of Rs. 2 crore is merged with the principal amount of Rs. 14
crore. After merger the amount of loan becomes Rs. 16 crore which is payable by the taxpayer in 5 equal annual instalments
from April 1, 2019. In the previous year 2019-20, the first instalment of Rs. 3.2 crore is paid by the taxpayer. The amount of
deduction in the computation of income on account of actual payment of interest will be worked out in the following
manner :
Rs. 3.2 crore × Rs. 2 crore ÷ Rs. 16 crore = Rs. 40 lakh.
Out of the repayment of Rs. 3.2 crore in the first year, deduction of Rs. 40 lakh will be admissible in terms of the provisions
of section 43B as deduction, as Rs. 40 lakh out of Rs. 3.2 crore actually paid represents interest component. Balance Rs. 2.80
crore representing repayment of the principal shall not be admissible as deduction in the computation of income.
Problems
82.9-P1 X Ltd. is a manufacturing company (not having any international or specified domestic transaction). The profit and loss account
of X Ltd. for the year ending March 31, 2020 is given below —
Rs. Rs.
Opening stock 17,000 Sales 52,55,000
Manufacturing expenses 32,56,500 Income-tax refund 2,000
Salary to employees 5,16,000 Excise duty refund (earlier allowed as deduction) 7,000
Employer’s contribution to provident 30,000 Customs duty refund (not being allowed as 8,000
fund deduction earlier)
Employer’s contribution towards gratuity 10,000 Interest on income-tax refund, excise duty refund 1,000
fund and customs duty refund
Taxes 1,50,000 Closing stock 33,000
Interest 2,12,000
Audit fees to chartered accountant 20,000
Licence fees to municipal authority 25,000
Net profit 9,83,500
53,06,000 53,06,000
Notes:
1. Salary to employees is calculated as follows —
Different component Amount Payment Paid from
made during April 1, 2020 to
2019-20 September 30, 2020
Rs. Rs. Rs.
Basic salary, allowances and perquisites 4,68,000 2,00,000 2,60,000
Bonus 10,000 1,000 8,500
Commission on sales 20,000 2,000 17,000
Commission on purchases 18,000 500 12,000
Total 5,16,000
Less:
Employees’ contribution towards provident fund 28,000 28,000
Tax deducted at source 2,000 1,900 100
Balance 4,86,000
Out of employees’ contribution towards provident fund of Rs. 28,000, Rs. 25,000 is credited in the provident fund account of employees
on or before the due date of making payment under the provident fund regulation.
2. Out of employer’s contribution towards provident fund of Rs. 30,000, Rs. 26,000 is paid during the previous year 2019-20, Rs. 3,500
is paid on May 16, 2020 and Rs. 500 is paid on December 10, 2020. Provident fund is recognised provident fund.
3. Gratuity fund is approved gratuity fund and the amount is contributed during the relevant year.
4. Taxes and interest are calculated as follows—
Different component Amount Payment Paid from
made during April 1, 2020 to
2019-20 September 30, 2020
Rs. Rs. Rs.
Excise duty, GST, customs duty and municipal tax 1,10,000 32,500 32,000
Income-tax 40,000 2,000 38,000
Interest from loan taken from a relative of director 87,000 4,000 2,000
Interest on term loan taken from State Bank of India 1,25,000 15,000 98,000
5. Outstanding GST of Rs. 30,000 is converted by the Karnataka Government into loan on March 31, 2020.
6. Out of the outstanding interest, Rs. 10,000 is converted by SBI into fresh loan.
7. Licence fee to municipal authority and fees to chartered accountant are not paid till September 30, 2020.
Determine the amount of taxable income of X Ltd. for the assessment year 2020-21.
Solution : In this case, bonus, commission on sales, commission on purchases, employer’s contribution towards provident
fund, employer’s contribution towards gratuity fund, excise duty, GST, customs duty, municipal tax, interest on loan to State
Bank of India and licence fee to municipal authority are covered by section 43B. If payment in respect of these expenses is
made up to September 30, 2020 (i.e., on or before the due date of submission of return of income), then such amount is
deductible on “accrual” basis for the previous year 2019-20; otherwise such payment is deductible on payment basis in the
year in which the payment is made.
Rs.
Adjustments under section 43B :
Add: Bonus to employees + 10,000
Less: Bonus paid during 2019-20 (deductible on payment basis) – 1,000
Less: Bonus paid during April 1, 2020 and September 30, 2020 (deductible on accrual basis) – 8,500
Add: Commission on sales to employees + 20,000
Less: Commission on sales paid during 2019-20 (deductible on payment basis) – 2,000
Less: Commission on sales paid during April 1, 2020 and September 30, 2020 (deductible on accrual basis) – 17,000
Add: Commission on purchases to employees + 18,000
Less: Commission on purchases paid during 2019-20 (deductible on payment basis) – 500
Less: Commission on purchases paid during April 1, 2020 and September 30, 2020 (deductible on accrual
basis) – 12,000
Add: Employer’s contribution to recognised provident fund + 30,000
Less: Employer’s contribution to recognised provident fund paid during 2019-20 (deductible on
payment basis) – 26,000
Less: Employer’s contribution to recognised provident fund paid during April 1, 2020 and September 30,
2020 (deductible on accrual basis) – 3,500
Add: Excise duty, GST, customs duty and municipal tax 1,10,000
Less: Excise duty, GST, customs duty and municipal tax paid during 2019-20 (deductible on payment
basis) – 32,500
Less: Excise duty, GST, customs duty and municipal tax paid during April 1, 2020 and September 30,
2020 (deductible on accrual basis) – 32,000
Less: Outstanding GST which is converted by Government into loan [see Note 4] – 30,000
Add: Interest on SBI loan + 1,25,000
Less: Interest on SBI loan paid during 2019-20 (deductible on payment basis) – 15,000
Less: Interest on SBI loan paid during April 1, 2020 and September 30, 2020 (deductible on accrual basis – 98,000
Less: Outstanding interest which is converted by SBI into loan [see Note 4] Nil
Add: Municipal licence fees + 25,000
Less: Municipal licence fees paid during 2019-20 Nil
Less: Municipal licence fees paid during April 1, 2020 and September 30, 2020 Nil
Adjustments under other sections :
Add: Employees’ contribution towards provident fund [the entire amount is part of income as per
section 2(24)(x)] + 28,000
Less: Employees’ contribution towards provident fund credited on or before the due date of making
payment under the provident fund regulation [sec. 36(1)(va)] – 25,000
Add: Income-tax (income-tax is not a deductible expenditure) [sec. 40(a)] + 40,000
Less: Income-tax refund (as income-tax is not deductible, income-tax refund is not chargeable to tax) – 2,000
Less: Customs duty refund (as it was not allowed as deduction earlier, it is not chargeable to tax at the
time of claiming refund) – 8,000
Notes:
1. Excise duty refund is chargeable to tax as it was allowed as deduction earlier.
2. Interest on income-tax refund, etc., is chargeable to tax.
3. Employer’s contribution towards provident fund paid on December 10, 2020 is deductible in the previous year 2020-21.
4. Conversion of outstanding GST by a State Government into a loan is treated as payment of GST to the State Government
on the date of conversion for the purpose of section 43B. In such a case, if the conversion of GST takes place during the
previous year or till the due date of submission of return of income, it is deductible as payment of GST. Conversely,
conversion of outstanding interest by a bank into a loan is not treated as payment of interest to bank on the date of conversion.
Consequently, it is not deductible.
82.9-E1 In problem 82.9-P1, make the following amendments and calculate net income:
1. The provident fund is unrecognised provident fund.
2. The gratuity fund is unapproved gratuity fund.
82.9-P2 X Ltd. is a manufacturing company (not having any international or specified domestic transaction). The profit and loss account
of X Ltd. for the year ending March 31, 2020 is given below—
Rs. Rs.
GST 50,000 Sales 20,10,000
Net profit 5,45,000
20,10,000 20,10,000
Other information—
1. Out of GST of Rs. 50,000, only Rs. 47,000 is paid. The payment is made as follows—
a. Rs. 40,000 on September 2, 2019;
b. Rs. 4,000 on September 5, 2020; and
c. Rs. 3,000 on November 1, 2020.
2. Return of income is submitted on November 10, 2020.
3. During the previous year 2019-20, the following payments are made in respect of expenses pertaining to earlier years—
a. bonus to employees pertaining to the previous year 2017-18 paid on April 30, 2019: Rs. 15,000;
b. customs duty pertaining to the previous year 2017-18 paid on December 1, 2019: Rs. 25,000;
c. electricity bill payable to BSES pertaining to previous year 2017-18 paid on May 3, 2019: Rs. 35,000;
d. excise duty pertaining to the previous year 2018-19 paid on May 20, 2019: Rs. 40,000; and
e. leave salary payable to employees pertaining to the previous year 2018-19 paid on December 2, 2019: Rs. 45,000.
These payments do not pertain to the previous year 2019-20. Consequently, these are not recorded in the profit and loss account given
above. Find out the net income of X Ltd. for the assessment year 2020-21.
Solution : Rs.
Adjustments :
Add: GST + 50,000
Less: GST paid during 2019-20 (deductible on payment basis) – 40,000
Less: GST paid during April 1, 2020 and September 30, 2020 [see Note 1] – 4,000
Less: Bonus to employees [see Note 2] – 15,000
Less: Customs duty [see Note 2] – 25,000
Less: Leave salary [see Note 3] – 45,000
Net income 4,66,000
Notes:
1. GST debited to the profit and loss account given in the problem is covered by section 43B. The due date of submission of
return of income is September 30, 2020. If the payment is made up to September 30, 2020, then it is deductible on accrual basis
for the previous year 2019-20. The payment of GST of Rs. 4,000 on September 5, 2020 is, therefore, deductible on accrual basis.
The payment made on November 1, 2020 is not deductible for the previous year 2019-20.
2. Bonus to employees pertaining to the previous year 2017-18 is paid on April 30, 2019. Similarly, customs duty pertaining
to the previous year 2017-18 is paid on December 1, 2019. The due date of submission of return of income for the previous
year 2017-18 (or the assessment year 2018-19) is September 30, 2018. As these payments were not made up to September 30,
2018, these were not allowed as deduction for the previous year 2017-18. Payment made after this date is allowable as
deduction on payment basis in the year in which the payment is made. Therefore, payments made on April 30, 2019 and
December 1, 2019 are deductible for the previous year 2019-20.
3. For the previous year 2018-19 (i.e., the assessment year 2019-20), the due date of submission of return of income is
September 30, 2019†. Excise duty and leave salary are covered by section 43B. If payment in respect of these expenses are
made up to September 30, 2019†, then these payments are deductible on accrual basis for the previous year 2018-19. Excise
duty is paid on May 20, 2019. It is deductible for the previous year 2018-19. However, leave salary is paid on December 2,
2019 (i.e., after September 30, 2019† being the due date of submission of return of income). It is not deductible for the previous
year 2018-19. It is deductible on payment basis for the previous year 2019-20.
4. Electricity bill payable to BSES is not covered by section 43B. Any expenditure, which is not covered by section 43B is
deductible on accrual basis if the taxpayer maintains books of account on accrual basis. Consequently, it was deductible for
the previous year 2017-18.
82.9-E2 In problem 82.9-P2, make the following amendments and calculate net income—
1. Out of other expenses debited to profit and loss account, a sum of Rs. 40,000 is paid to a Government company on account of
consultancy fees but the payment is made on November 1, 2020.
†Extended to October 31, 2019.

2. Out of other expenses debited to profit and loss account, a sum of Rs. 10,000 is paid to a tax consultant but the payment is made
on December 1, 2020.
3. Other expenses debited to profit and loss account include Rs. 5,000 as interest payable on bank overdraft. The amount is debited
by the bank on May 30, 2020.
4. Other expenses include a sum of Rs. 1 lakh as salary payable to a non-resident in India. Tax is neither deducted at source nor paid
to the Government.
5. Other expenses include a sum of Rs. 20,000 which is paid as commission to the general manager on April 30, 2021.
6. On March 10, 2020, the company pays a sum of Rs. 17,000 on account of advance bonus to deputy general manager. This bonus
pertains to the previous year 2020-21 and is not debited to the profit and loss account for the year ending March 31, 2020. The company
wants to claim it as a deduction on “payment” basis.
 WHAT ARE THE DEEMED PROFITS AND HOW THEY ARE CHARGED TO TAX
83. The following receipts are chargeable to tax as business income :
83.1 Recovery against any deduction [Sec. 41(1)] - Section 41(1) is applicable if the following conditions are
satisfied—
Condition 1 In any of the earlier years a deduction was allowed to the taxpayer in respect of loss, expenditure
(revenue or capital expenditure) or trading liability incurred by the assessee.
Condition 2 During the current previous year, the taxpayer—
a. has obtained a refund of such loss or expenditure (it may be in cash or any other manner); or
b. has obtained some benefit in respect of such trading liability by way of remission or cessation
thereof (“remission or cessation” for this purpose includes unilateral act of the assessee by way of
writing-off of such liability in his books of account).
83.1-1 CONSEQUENCES WHEN THE ABOVE CONDITION ARE SATISFIED - If the above two conditions are satisfied, the amount
obtained by such person (or the value of benefit accruing to the taxpayer) shall be deemed to be profits and gains
of business or profession and, accordingly, chargeable to tax as the income of that previous year. It will be taxable,
even if the business is not in existence in the year of recovery. If there is amalgamation/demerger of companies
or business is succeeded under any other mode, the amount obtained by successor shall be taxable in his hands.
83.1-2 PROVISIONS ILLUSTRATED - To clarify the above provisions, one can go through the following examples—
1. Rs.1,50,000 is paid as GST by X during the previous year 2018-19 and the same is allowed as deduction. The
taxpayer claims a refund of Rs.10,000 on June 16, 2019 from the GST department after getting a favourable verdict
from the Delhi High Court. Rs.10,000 is taxable for the previous year 2019-20, even if the business is not in
existence during 2019-20 [in this case, conditions 1 and 2(a) are satisfied].
2. Suppose in 1 supra before the verdict of the Delhi High Court, X dies and the business is continued by his son
Y who gets a refund of Rs.10,000 from the GST department, then Rs.10,000 is taxable as business income of Y [in
this case, conditions 1 and 2(a) are satisfied].
3. X Ltd. purchases goods on credit from different parties and claims deduction on “accrual” basis. Generally,
these bills are paid at Bombay office within 6 months of submission of delivery documents signed by the incharge
of the Pune depot. As some of these documents are misplaced by A, one of the suppliers, he could not claim
payment of a bill of Rs. 20,000 pertaining to 2015-16, although X Ltd. has claimed deduction during the same year.
After the expiry of limitation period of three years, during 2019-20, the company credits the same in its profit and
loss account, although A, the supplier, has not discharged the liability of the company. In this case, Rs. 20,000,
is chargeable to tax by virtue of section 41(1) as business income of the assessment year 2020-21 [in this case,
conditions 1 and 2(b) are satisfied].
4. An assessee is allowed deduction for the assessment year 2017-18 in respect of Rs. 42,000 misappropriated by
his cashier, and later on in the previous year relevant for the assessment year 2020-21, Rs. 8,000 (out of the sum
so misappropriated) is recovered by the assessee. Rs. 8,000 is chargeable to tax as business profits for the
assessment year 2020-21 [in this case, conditions 1 and 2(a) are satisfied].
5. X pays Rs. 80,000 as excise duty and claims the same as deduction in 2013-14. Later on in 2019-20, he gets a
refund of Rs. 20,000 from the department by obtaining a favourable verdict from the Delhi High Court. The
department files an appeal in the Supreme Court and the matter is still pending.
In this case, Rs. 20,000 is taxable in the previous year 2019-20 [conditions 1 and 2(a) are satisfied]. For condition
2(a), there may not be any cessation of trading liability. If the Supreme Court decides the appeal against the
assessee, the amount, which will be paid back, will be deductible in the year of payment by virtue of section 43B.
261 Adjustment of loss Para 83.6
6. Excise duty refund for the financial year 2015-16 is received on April 2, 2019. During 2015-16, it was not debited
to profit and loss account. The taxpayer had kept a separate account in respect of collection and payment of excise
duty and the net balance was transferred to profit and loss account. In this case, refund of excise duty is
chargeable to tax under section 41(1) in the previous year 2019-20—Mysore Thermo Electric (P.) Ltd. v. CIT [1996]
271 ITR 504 (Ker.).
83.2 Sale of assets used for scientific research [Sec. 41(3)] - Where any capital asset used in scientific research
is sold without having been used for other purposes and the sale proceeds, together with the amount of deduction
allowed under section 35, exceed the amount of the capital expenditure incurred on purchase of such asset, such
surplus (i.e., sale price) or the amount of deduction allowed, whichever is less, is chargeable to tax as business
income in the year in which the sale took place.
For instance, a company purchases scientific research equipment for Rs. 86,000 during the previous year
2007-08 and claims/is allowed Rs. 86,000 as deduction under section 35 for the assessment year 2008-09. If the
company sells the equipment (without using it for a purpose other than for scientific research) in the previous
year 2019-20 for Rs. 41,000, Rs. 41,000 is chargeable to tax for the assessment year 2020-21, even if the assessee’s
business is not in existence during the previous year 2019-20.
 For detailed discussion, see problem 81.9-P2.
83.3 Recovery of bad debt [Sec. 41(4)] - Where any bad debt has been allowed as deduction under section
36(1)(vii) and the amount subsequently recovered on such debt is greater than the difference between the debt
and the deduction so allowed, the excess realisation is chargeable to tax as business income of the year in which
the debt is recovered.
For instance, an assessee sells goods worth Rs. 40,000 on credit on October 1, 2004. By writing off Rs. 15,000 out
of Rs. 40,000, he claims a deduction of Rs. 15,000 for the previous year 2004-05 under section 36(1)(vii) as bad
debts. On June 10, 2019, he recovers Rs. 28,000 from the defaulting debtor. In this case, Rs. 3,000 [i.e., Rs. 28,000
minus (Rs. 40,000—Rs. 15,000)] is chargeable to tax for the previous year 2019-20 under section 41(4).
For this purpose, it is, however, immaterial whether the business of the assessee is in existence (or not) during
the previous year in which recovery is made.
 For detailed discussion, see problem 81.29-6P1.
83.4 Amount withdrawn from reserve created under section 36(1)(viii) [Sec. 41(4A)] - See para 81.31.
83.5 Recovery after discontinuance of business or profession [Sec. 176(3A), (4)] - Section 176(4) is applicable
where any profession is discontinued in any year on account of cessation of the profession by, or the retirement
or death of, the person carrying on the profession. Section 176(3A) is applicable where any business is
discontinued in any year. By virtue of these sub-sections of section 176, any sum received after the discontinu-
ance of the business or profession is deemed to be business or profession income of the recipient and charged
to tax in the year of receipt.
83.6 Adjustment of loss [Sec. 41(5)] - Generally, loss of a business cannot be carried forward after 8 years. An
exception is, however, provided by section 41(5). This exception is applicable if the following conditions are
satisfied :
Condition 1 The business or profession is discontinued.
Condition 2 Loss of such business or profession pertaining to the year in which it is discontinued could not be set-off
against any other income of that year.
Condition 3 Such business is not a speculation business.
Condition 4 After discontinuation of such business or profession, there is a receipt which is deemed as business income
under section 41(1), (3), (4) or (4A).
The unabsorbed loss pertaining to the year in which business/profession was discontinued is permitted to be
set off against notional business income under section 41(1), (3), (4) or (4A) even after 8 years. It can be set off
even if the return of loss is not submitted in time.*
Problems
83.6-P1 A business (not being a speculation business) is discontinued on December 10, 1996. At that time there is unadjusted business
loss of Rs. 35,000 (i.e., Rs. 10,000 of the previous year 1995-96 and Rs. 25,000 pertaining to the period commencing on April 1, 1996
and ending on December 10, 1996). On May 20, 2019, the assessee recovers a debt of Rs. 48,000 from a debtor which was allowed as
*Section 80 does not override section 41(5). It overrides only sections 66 to 79.
bad debt in 1995-96 (or may be in some other year). Find out the notional profit chargeable to tax for the previous year 2019-20 under
section 41.
Rs.
Solution : Recovery of debt earlier allowed as bad debt [chargeable to tax under section 41(4) in
spite of the fact that the business was discontinued on December 10, 1996] 48,000
Less : Unabsorbed business loss of the previous year in which the business was discontinued (i.e.,
April 1, 1996 to December 10, 1996) by virtue of section 41(5) 25,000
Business income chargeable to tax for the assessment year 2020-21 23,000
83.6-E1 Assume in problem 83.6-P1, the amount recovered from the defaulting debtor is Rs.17,000 on May 10, 2018, Rs. 3,000 on
June 10, 2019 and Rs. 28,000 on December 15, 2020, then ascertain the notional business income chargeable to tax.
 HOW AND WHEN UNDISCLOSED INCOME/INVESTMENTS ARE TAXED†

84. The following are treated as income from undisclosed sources :
84.1 Cash credit [Sec. 68] - Where any sum is found credited in the books of an assessee maintained for any
previous year and the assessee offers no explanation about the nature and source thereof or the explanation
offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged
to income-tax as the income of the assessee of that previous year.
 The onus of satisfactorily explaining such credits remains on the person in whose books such sum is credited.
If such person fails to offer an explanation or the explanation is not found to be satisfactory then the sum is added
to the total income of the person.
 The nature and source of any sum credited, as share capital, share premium, etc., in the books of a closely-held
company shall be treated as explained only if the source of funds is also explained by the recipient assessee-
company in the hands of the resident shareholder. However, provision is not applicable if the shareholder is a
well regulated entity, i.e., a Venture Capital Fund, Venture Capital Company registered with the SEBI as referred
to in section 10(23FB).
84.2 Unexplained investments [Sec. 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, if any, maintained by
him for any source of income and the assessee offers no explanation about the nature and source of the
investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the
value of the investments may be deemed to be the income of the assessee of such financial year.
84.3 Unexplained money, etc. [Sec. 69A] - Where in any financial year the assessee is found to be the owner
of any money, bullion, jewellery, or other valuable article and such money, bullion, jewellery, or other valuable
article is not recorded in the books of account, if any, maintained by him for any source of income and the assessee
offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable
article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money
and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee
for such financial year.
84.4 Amount of investments, etc., not fully disclosed in books of account [Sec. 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 expended on making such investments or in acquiring
such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of
account maintained by the assessee for any source of income, and the assessee offers no explanation about such
excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the
excess amount may be deemed to be the income of the assessee, for such financial year.
84.5 Unexplained expenditure, etc. [Sec. 69C] - Where in any financial year an assessee has incurred any
expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation,
if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such
expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial
year.
The proviso to section 69C provides that notwithstanding anything contained in any other provision of the Act,
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.
† These incomes are taxable @ 60 per cent [+ SC @ 25 per cent of tax + HEC] (effective rate is 78 per cent for the assessment year 2020-21).
263 Accounts audited on compulsory basis Para 86.1
84.6 Amount borrowed or repaid on hundi [Sec. 69D] - Where any amount is borrowed on a hundi from, or
any amount due thereon is repaid to, any person otherwise than through 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 aforesaid for the previous year in which the amount was borrowed or repaid, as the case may be.
To avoid double taxation, it has been provided that if any amount borrowed on a hundi has been deemed under
the provisions of this section to be the income of any person, such person should not be liable to be assessed again
in respect of such amount under the provisions of this section on repayment of such amount. Moreover, for the
purposes of this section, the amount repaid includes the amount of interest paid on the amount borrowed.
 WHEN MAINTENANCE OF BOOKS OF ACCOUNT BECOMES COMPULSORY [SEC. 44AA]

85. The provisions regulating compulsory maintenance of books of account are given below.
 Persons carrying on “specified professions” - For the purpose of section 44AA and rule 6F legal, medical,
engineering, architectural, accountancy, technical consultancy, or interior decoration or any other notified
profession [i.e., authorised representative, film artist, company secretary and information technology] are
specified professions. In these cases, if annual gross receipts (of any one or more of preceding 3 years) do not
exceed Rs. 1,50,000, the taxpayer is required to maintain such books of account as may enable the Assessing
Officer to compute his taxable income under the Income-tax Act. If, however, gross receipts are more than
Rs. 1,50,000 (of all preceding 3 years), the taxpayer will have to maintain books of account prescribed by rule 6F
[i.e., cash book, journal, ledger, copies of bills issued by the taxpayer, etc.].
 Persons carrying on “non-specified professions” or any business - If annual income does not exceed Rs. 1,20,000† and
annual gross receipts/turnover do not exceed Rs. 10,00,000‡ (of all preceding 3 years), the taxpayer is not
required to maintain any books of account. Conversely, if the annual income and/or annual receipts/turnover
exceed these figures (in any one or more of preceding 3 years), the taxpayer is required to maintain such books
of account as may enable the Assessing Officer to compute his taxable income under the Income-tax Act (books
are not prescribed by Board).
 Persons covered by sections 44AD, 44ADA, 44AE, 44BB, 44BBB - If it is claimed that business income is lower than
the income computed under these sections on estimated basis, or the assessee is covered by section 44AD(4), the
taxpayer will have to maintain such books of account as may enable the Assessing Officer to compute his taxable
income (books are not prescribed by Board). This rule is applicable irrespective of turnover or income. However,
in the case of section 44AD or 44ADA, this rule of maintenance of books of account is not applicable, if income
of the taxpayer is not more than the exemption limit.
 WHEN AUDIT OF ACCOUNTS BY CERTAIN PERSONS IS COMPULSORY [SEC. 44AB]

86. The provisions of section 44AB are given below —
86.1 Who has to get his accounts audited on compulsory basis - The following persons are required to get their
accounts compulsorily audited by a chartered accountant —
Different taxpayers When they are covered by the provisions of compulsory audit under section 44AB
A person carrying on If the total sales, turnover or gross receipt in business for the previous year(s) relevant to
business the assessment year exceed or exceeds Rs. 1 crore#.
A person carrying on If his gross receipts in profession for the previous year(s) relevant to the assessment year
profession exceeds Rs. 50 lakh.
A person covered If such person claims that the profits and gains from the business are lower than the profits
under section 44AE and gains computed under these sections (irrespective of his turnover).
44BB or 44BBB
A person covered If such person claims that the profits and gains from the profession are lower than the
under section 44ADA profits and gains computed in accordance with the provisions of section 44ADA and if his
income exceeds the maximum amount which is not chargeable to tax.
A person covered If a person carrying on business is covered by the provisions of section 44AD(4) and his
under section 44AD(4) income exceeds the maximum amount which is not chargeable to income-tax in any
previous year.
† Rs. 2,50,000 (from the assessment year 2018-19) in the case of an individual/HUF.
‡ Rs. 25,00,000 (from the assessment year 2018-19) in the case of an individual/HUF.
# Rs. 2 crore in the case of a person, who declares business profit in accordance with the provisions of section 44AD(1).
86.2 Due date for obtaining audit report - Audit report should be obtained on or before the due date of
submission of return of income under section 139(1)*. The audit report should be submitted electronically on or
before the due date of submission of return of income.
 WHAT ARE SPECIAL PROVISIONS FOR COMPUTATION OF BUSINESS INCOME
➠ 87. A few special provisions for computation of business income are given below –
87.1 Computation of cost of acquisition in certain cases under section 43C - Where an asset [not an asset
referred to in section 45(2)], which has become the property of an amalgamated company under a scheme of
amalgamation, is sold as stock-in-trade, then, in computing the profits and gains from the sale of such asset, the
cost of acquisition of the asset to the amalgamated company shall be the cost of acquisition of the asset to the
amalgamating company, as increased by the cost, if any, of any improvement made thereto and the expenditure
incurred wholly and exclusively in connection with such transfer. Similar rules are applicable when an asset
(acquired by an assessee by way of total or partial partition of his Hindu undivided family or under a gift or will
or an irrevocable trust) is sold as stock-in-trade. In such a case, the cost of acquisition shall be the cost of
acquisition in the hands of the transferor or the donor, as increased by the cost of any improvement made and
the expenditure incurred wholly and exclusively in connection with such transfer including the payment of gift-
tax, by the transferor or the donor, as the case may be.
To have better understanding, the following examples are given —
1. X Ltd. purchases a capital asset on April 6, 1986 for Rs. 2,00,000 and spends Rs.10,000 for making some alterations. This
asset is later on transferred as stock-in-trade at Rs. 2,40,000 to Y Ltd. in the scheme of amalgamation of the two companies.
Y Ltd. sells the stock-in-trade for Rs. 5 lakh on May 6, 2019. Business income of Y Ltd. will be Rs. 2.90 lakh (i.e., Rs. 5 lakh
minus cost of the capital asset to X Ltd. : Rs. 2 lakh minus improvement expenses : Rs. 10,000).
2. X purchases a capital asset on May 1, 1983 for Rs. 1,00,000 and for making some alteration he incurs an expenditure of
Rs. 50,000. He gifts the asset to Y on June 5, 1994 (value of the asset being Rs. 2,30,000) and pays Rs. 54,000 as gift-tax on the
same day. Y sells the asset as stock-in-trade on April 20, 2019 for Rs. 8,40,000. Business income of Y for the assessment year
2020-21 will be determined as follows—
Rs.
Sale price of stock 8,40,000
Less :
Cost to X 1,00,000
Cost of improvement 50,000
Gift-tax paid by X 54,000
87.2 Special provisions for determining sale consideration in the case of transfer of immovable property
[Sec. 43CA] - Section 43CA is applicable if an asset (other than capital asset), being land or building or both, is
transferred. If, however, the asset which is transferred is a capital asset, section 50C (not section 43CA) is
applicable.
 When section 43CA is applicable - Section 43CA is applicable if stamp duty value (of land/building) is more than
sale consideration. The provisions applicable for different years are given below –
For the assessment years 2014-15 to 2018-19 From the assessment year 2019-20
Where the consideration for the transfer of land (or build- Where stamp duty value is more than 105 per cent of
ing or both) is less than the stamp duty value, the value so actual consideration, stamp duty value shall be deemed to
adopted (or assessed or assessable) shall be deemed to be be full value of consideration for the purpose of comput-
the full value of the consideration for the purposes of coming business income.
puting business income.
 When date of agreement and date of registration are not same - Where the date of an agreement fixing the value of
consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the
stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration
for such transfer. However, this exception shall apply only in those cases where amount of consideration (or a
part thereof) for the transfer has been received by way of an account-payee cheque/draft or by use of electronic
clearing system through a bank account (or through prescribed electronic mode), on or before the date of
agreement for transfer of the asset.
*For due date of submission of return of income, see para 244.3.
265 Computation of business income u/s 44AD Para 88.1
 Can an assessee challenge stamp duty valuation - The assessee can claim that the value adopted (or assessed or
assessable) for stamp duty purposes exceeds the fair market value of the property as on the date of transfer. If
this claim is made before the Assessing Officer and the assessee has not disputed the value so adopted (or
assessed or assessable) in any appeal or revision or reference before any authority or Court, the Assessing Officer
shall refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A. If the fair
market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the
Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair
market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty
purposes, the Assessing Officer shall not adopt such fair market value and shall take the full value of
consideration to be the value adopted or assessed for stamp duty purposes.
87.3 Computation of income from construction and service contracts [Sec. 43CB] - Section 43CB has been
inserted by the Finance Act, 2018, with effect from the assessment year 2017-18. It provides as follows –
 Percentage of completion method - Profits and gains arising from construction contracts/service contracts shall
be determined on the basis of percentage of completion method. Computation will be done on the basis of
notified Income Computation and Disclosure Standards (ICDS).
 Service contracts - Income from service contracts with duration of not more than 90 days, shall be determined
on the basis of project completion method. Moreover, service contracts involving indeterminate number of acts
over a specific period of time, shall be determined on the basis of straight line method.
 Retention money - For making above computations, contract revenue shall include retention money.
 Cost - Contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital
gains.
 WHAT ARE THE SPECIAL PROVISIONS FOR COMPUTING INCOME ON ESTIMATED BASIS
UNDER SECTIONS 44AD, 44ADA AND 44AE
88. The provisions are given below–
88.1 Computation of business income under section 44AD - Section 44AD is applicable if the taxpayer is a
resident individual, resident Hindu undivided family or a resident partnership firm (not being a limited liability
partnership). The taxpayer should be engaged in any business (but not in the negative list given below). The
annual turnover should not exceed Rs. 2 crore. In such a case, income is computed on estimated basis at the rate
of 8 per cent† of turnover. The rate of 8 per cent† is comprehensive (i.e., no further deduction is allowed under
any other section, even the deduction of remuneration and interest to partners is not available). An assessee
(who opts for the above scheme) is eligible for the following benefits–
1. He can submit his return of income in ITR-4 (ITR-4 is a simplified form as compared to other forms).
2. He is exempted from maintenance of books of account.
3. He can pay advance tax pertaining to his business income in one instalment (i.e., on or before March 15 of the
financial year immediately prior to the assessment year). Other assessees are required to pay advance tax in four
instalments (i.e., on or before June 15, September 15, December 15 and March 15 of the financial year
immediately prior to the assessment year).
 Negative list - The following persons are not eligible to avail any benefit under section 44AD–
a. a person carrying on profession as referred to in section 44AA(1);

b. a person earning income in the nature of commission or brokerage;
c. a person carrying on any agency business; or
d. a person who is in the business of plying, hiring or leasing goods carriages;
e. the assessee who has claimed any deduction under sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB in the
relevant assessment year.
 Is it possible to declare higher income - A taxpayer who is covered by section 44AD can declare higher income.
 Is it possible to declare lower income - If an assessee declares profit for any previous year under the scheme of
section 44AD, he cannot declare lower profit for the next 5 consecutive subsequent assessment years. If he
declares lower profit, then he shall not be eligible to claim the benefit of the provisions of section 44AD for 5
subsequent assessment years [i.e., subsequent to the assessment year relevant to the previous year in which the
profit has not been declared at the rate of 8 per cent†]. For example, an eligible assessee claims to be taxed on
presumptive basis of 8 per cent† of turnover under section 44AD for assessment year 2019-20. He offers income
†6 per cent in respect of total turnover or gross receipts received by an account payee cheque/draft or use of electronic clearing system through
a bank account (or through prescribed electronic mode) during the previous year or before the due date of submission of return of income under
section 139(1).
of Rs. 8 lakh on the turnover of Rs. 1 crore. For assessment year 2020-21 and assessment year 2021-22 also he offers
income in accordance with the provisions of section 44AD. However, for assessment year 2022-23, he offers
income of Rs. 4 lakh on turnover of Rs. 1 crore. In this case, since he has not offered income in accordance with
the provisions of section 44AD for 5 consecutive assessment years, after assessment year 2019-20, he will not be
eligible to claim the benefit of section 44AD for next five assessment years (i.e., for assessment years 2023-24 to
2027-28). Consequently, for the assessment years 2022-23 to 2027-28,—
a. he will have to maintain the books of account as per section 44AA (irrespective of income or turnover), if his
total income exceeds the exemption limit; and
b. he will have to get his books of account audited under section 44AB (irrespective of turnover), if his total
income exceeds the exemption limit.
If the taxpayer wants to declare lower income, he cannot submit his return of income in ITR-4 (return can be
submitted in ITR-3 or ITR-5).
Problems
88.1-P1 X & Co. (a firm of X and Y with unlimited liability) is engaged in the business of whole sale trading (turnover of 2019-20 being
Rs. 87,80,000, out of which Rs. 64,50,000 is received by account-payee cheques up to September 30, 2020). It wants to claim the following
deduction — Rs.
Salary and interest to partners [as permitted by section 40(b)] 60,000
Salary to employees 4,90,000
Depreciation 2,70,000
Cost of material used (a bill of Rs. 70,000 is paid in cash) 75,90,000
Total 87,55,000
Net profit (Rs. 87,80,000 minus Rs. 87,55,000) 25,000
Determine the net income of X & Co. for the assessment year 2020-21 assuming that long-term capital gain is Rs. 40,000, the firm is
eligible for a deduction of Rs. 5,000 under section 80G and the firm wants to pay tax under section 44AD.
Solution : Rs.
Income from the wholesale business (6% of Rs. 64,50,000 + 8% of Rs. 23,30,000) 5,73,400
Less : Expenses
Salary/interest paid to partners as permitted by section 40(b) Nil
Other expenses Nil
Add : Disallowance under section 40A(3) for payment of Rs. 70,000 in cash (not applicable when income
is computed on estimated basis under section 44AD or 44AE or under any other section) Nil
Income from business 5,73,400
Capital gains 40,000
Less : Deductions under sections 80C to 80U 5,000
Net income 6,08,400
88.1-E1 Assume in problem 88.1-P1 that the taxpayer X and Co is a limited liability partnership. Find out the net income for the
88.2 Computation of professional income on estimated basis under section 44ADA - The provisions of
section 44ADA are given below -
1. The assessee is resident and engaged in a profession referred to in section 44AA(1) (i.e., such as legal, medical,
engineering or architectural profession or the profession of accountancy or technical consultancy or interior
decoration or any other profession as is notified by the Board).
2. Gross receipts of the assessee from the profession does not exceed Rs. 50 lakh.
3. If the above two conditions are satisfied, income of the assessee shall be calculated on estimated basis at a sum
equal to 50 per cent of the total gross receipts.
4. The assessee can voluntarily declare a higher income in his return.
5. All deductions under sections 30 to 38, including depreciation and unabsorbed depreciation, are deemed to
have been already allowed and no further deduction is allowed under these sections.
6. The written down value is calculated, where necessary, as if depreciation as applicable has been allowed.
Moreover, it will be assumed that disallowance, if any, under sections 40, 40A and 43B has been considered while
calculating the estimated income @ 50 per cent.
267 Computation of income on estimated basis Para 88.3
7. An assessee can declare his income to be lower than the deemed profits and gains as stated above. The
following consequences are applicable if the taxpayer declares his income which is lower than the deemed profits
and gains as stated above -
- The assessee will have to maintain the books of account as per section 44AA, if his total income exceeds the
exemption limit.
- The assessee will have to get his books of account audited under section 44AB (irrespective of turnover), if his
total income exceeds the exemption limit.
88.3 Computation of income on estimated basis in the case of taxpayers engaged in the business of plying,
leasing or hiring trucks [Sec. 44AE] - Section 44AE is applicable, if the taxpayer is engaged in the business of
plying, hiring and leasing goods carriages and he/it does not own more than 10 goods carriages at any time
 How to calculate income - In such a case income will be calculated on estimated basis as follows –
Heavy goods vehicle - For a heavy goods vehicle, the profits and gains shall be an amount equal to Rs. 1,000 per
ton of gross vehicle weight (or unladen weight) for every month (or part of a month) during which the heavy
goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned
from such vehicle, whichever is higher.
Other than heavy goods vehicle - In the case of a goods carriage other than heavy vehicle, the profits and gains shall
be an amount equal to Rs. 7,500 for every month (or part of a month) during which the goods carriage is owned
by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage,
whichever is higher.
 Other points - One should note the following points –
1. Heavy goods vehicle - For this purpose, “heavy goods vehicle” means any goods carriage the gross vehicle
weight of which exceeds 12,000 kilograms.
2. No further deduction - No further deduction is allowed under any other section except remuneration and interest
to partners.
3. Is it possible to declare lower income - If the taxpayer wants to declare lower income, he will have to maintain books
of account and get his account audited on compulsory basis (and in such a case, return will have to be submitted
electronically with digital signature).
Problems
88.3-P1 X Ltd. is engaged in the business of carriage of goods. On April 1, 2019, it owns 10 trucks as follows –
- 7 heaving goods vehicles (weight of each one of them is 14 ton).
- 3 light goods vehicles (weight of each one of them is 5 ton).
On May 6, 2019, one of the heavy goods vehicles is sold by X Ltd. to purchase 1 light goods vehicle on May 10, 2019. The newly purchased
light goods vehicle is put to use only from June 17, 2019.
X Ltd. wants to pay tax under section 44AE. Find out the net income of X Ltd. for the assessment year 2020-21 taking into consideration
the following data —
Rs.
Freight collected 8,90,000
Less :
Operational expenses (a bill of Rs. 30,000 is paid in cash) 6,40,000
Depreciation as per section 32 1,90,000
Other office expenses 15,000
Net profit 45,000
Other business/non-business income 6,70,000
Solution : Income shall be computed under section 44AE as follows —
Trucks owned by X Ltd.
Type of carriage Period during which trucks Number of months Rate per Amount (in Rs.)
are owned (including a part of month) month [(1) × (3) × (4)]
(1) (2) (3) (4) (5)
6 heavy goods vehicles April 1, 2019 to March 31, 2020 12 Rs. 1,000 × 14 ton 10,08,000
1 heavy goods vehicle April 1, 2019 to May 6, 2019 2 Rs. 1,000 × 14 ton 28,000
1 light goods vehicle May 10, 2019 to March 31, 2020 11 Rs. 7,500 82,500
3 light goods vehicles April 1, 2019 to March 31, 2020 12 Rs. 7,500 2,70,000
Total 13,88,500
Computation of income — Rs.

Income from carriage of goods 13,88,500
88.3-E1 Make the following changes in problem 88.3-P1 and determine the net income and tax liability for the assessment year
2020-21—
1. The taxpayer is X, an individual aged 31 years.
2. He also purchases a light commercial vehicle on January 10, 2020 which is, however, put to use in April 2020.
3. He deposits Rs. 32,000 in public provident fund account.
 WHAT ARE PERMISSIBLE METHODS OF VALUATION OF CLOSING STOCK

89. The valuation of closing stock or inventory shall be made at lower of actual cost or net realizable value (NRV)
[sec. 145A(i)]. Cost/NRV shall be computed in the manner provided in Income Computation and Disclosure
Standards (ICDS). The following points should also be noted –
1. The method of valuation of inventories once adopted by a person in any previous year shall not be changed
without reasonable cause.
2. Inventory (being securities not listed, or listed but not quoted, on a recognised stock exchange) shall be valued
at actual cost.
3. Inventory (being listed securities) shall be valued at lower of actual cost or NRV. For this purpose, the
comparison of actual cost and NRV shall be done category-wise (different categories are : shares, debt securities,
convertible securities and any other securities).
4. Even in the case of dissolution of a partnership firm or AOP or BOI, the inventory on the date of dissolution
shall be valued at cost or NRV, whichever is lower [there is a conflict between para 24 of ICDS-VIII and section
145A(i), section 145A(i) will supersede para 24].
 Problems on computation of income from business/profession

90-P1 From the Profit and Loss Account of X (age : 31 years, resident) for the year ending March 31, 2020, ascertain his total income
and tax liability for the assessment year 2020-21 :
Rs. Rs.
General expenses 13,400 Gross profits 14,15,500
Bad debts 22,000 Commission 8,600
Advance tax 2,000 Brokerage 37,000
Insurance 600 Sundry receipts 2,500
Salary to staff 26,000 Bad debt recovered (earlier allowed as deduction) 11,000
Salary to X 51,000 Interest on debentures (i.e., net amount Rs. 22,500 +
Interest on overdraft 4,000 tax deducted at source : Rs. 2,500) 25,000
Interest on loan to Mrs. X 42,000 Interest on deposit with a company (non-trade) (net
Interest on capital of X 23,000 interest : Rs. 11,700 + tax deducted at source :
Depreciation 48,000 Rs. 1,300) 13,000
Advertisement expenditure 7,000
Contribution to employees’ recognised provident
fund 13,000
15,12,600 15,12,600
Other information :
1. The amount of depreciation allowable is Rs. 37,300 as per the Income-tax Rules. It includes depreciation on permanent sign board.
2. Advertisement expenditure includes Rs. 3,000, being cost of permanent sign board fixed on office premises.
3. Income of Rs. 4,500, accrued during the previous year, is not recorded in the Profit and Loss Account.
4. X pays Rs. 6,000 as premium on own life insurance policy of Rs. 70,000.
5. General expenses include (a) Rs. 500 given to Mrs. X for arranging a party in honour of a friend who has recently come from Canada
(b) Rs. 1,000 being contribution to a political party.
6. Loan was taken from Mrs. X for payment of arrears of income-tax.
269 Problems on computation of income from business/profession Problem 90-P1
Solution : Rs. Rs.

Net profit as per Profit & Loss Account 12,60,600
Add : Inadmissible expenses :
Expenses for arranging personal party 500
Contribution to a political party 1,000
Advance tax 2,000
Salary to X 51,000
Interest on capital to X 23,000
Interest on loan taken for payment of income-tax 42,000
Capital expenditure on advertisement 3,000
Excess depreciation (i.e., Rs. 48,000 — Rs. 37,300) 10,700 1,33,200
13,93,800
Add : Income not recorded in the Profit and Loss Account 4,500
13,98,300
Less : Income credited to the Profit and Loss Account but not chargeable under the head
Interest on debentures 25,000
Interest on company deposit 13,000 38,000
COMPUTATION OF NET INCOME OF X
Profits and gains of business or profession 13,60,300
Income from other sources (interest on debentures and company deposit) 38,000
Less : Deductions
Under section 80C (payment of insurance premium) 6,000
Deduction under section 80GGC (being contribution to a political party) 1,000
Tax on net income 2,29,890
Less: Rebate under section 87A (not available, net income exceeds Rs. 5,00,000) Nil
Balance 2,29,890
Add : Surcharge (surcharge is applicable if net income exceeds Rs. 50 lakh) Nil
Add : Health and education cess 9,196
Tax 2,39,086
Less : Pre-paid tax (i.e., advance tax + tax deducted at source) 5,800
90-E1 [P6.30]* X (age : 34 years, resident) furnishes the following information relevant for the assessment year 2020-21:
Profit and Loss Account for the year ending March 31, 2020
Rs. Rs.
Household expenses 11,200 Gross profit 85,69,000
Bad debts 600 Commission 5,000
Provision for bad debts 4,800 Sundry receipts 8,000
Fire insurance 1,000 Interest on investment 11,000
Salary to : Bad debts recovered (earlier allowed as deduction) 2,000
 Staff 2,08,000 Interest on securities (gross) 6,000
X 3,000
 Contribution towards unrecognised provident
fund 32,000
Interest on :
 Overdraft taken for payment of GST 6,000
 Capital of X 13,000
Problem 90-P2 Profits and gains of business or profession 270
Rs. Rs.
 Loan given by X’s brother 1,000
Depreciation on building and furniture 13,600
Advertisement :
 Revenue expenditure 3,800
 Capital expenditure on a sign board 1,000
General expenses 4,700
86,01,000 86,01,000
Other information :
1. General expenses include medical expenditure of X Rs. 1,700.
2. Income of Rs. 3,000, accrued during the previous year ending March 31, 2020, is not recorded in the Profit and Loss Account.
3. X contributes Rs. 1,40,000 towards public provident fund.
4. Depreciation on building, furniture and sign board comes to Rs. 3,000 according to the tax provision.
90-P2 X (age : 64 years), a resident individual, furnishes the following particulars relevant for the assessment year 2020-21 :
Rs. Rs.
Salary to staff 34,000 Gross profit 16,86,000
General expenses 48,000 Commission and discount 2,17,200
Bad debts written off 15,000 Sundry receipts 43,000
Reserve for losses 2,000 Short-term profit on sale of investment 31,000
Fire insurance premium (office premises) 4,200
Advertisement Rs. 2,400
Add : Outstanding Rs. 1,600 4,000
Interest on X’s capital 3,500
Interest on bank loan 14,500
Expenditure on acquisition of a patent right acquired
and put to use on June 30, 2019 17,000
Lump sum consideration for acquiring know-how on
March 3, 2020 60,000
Depreciation on plant and machinery 28,000
Provision for outstanding GST 13,000
19,77,200 19,77,200
Other information :
1. Advertisement expenditure includes Rs. 3,400, being cost of 2 diaries (cost of each being Rs. 1,700) presented to customers.
2. Depreciation on plant and machinery according to income-tax provision comes to Rs. 29,700.
3. Salary to staff includes payment of Rs. 8,000 to a relative which is unreasonable to the extent of Rs. 3,000.
4. General expenses include (a) expenditure of Rs. 4,800, incurred by X on training of his employees, (b) commission of Rs. 10,000 for
securing a business order, and (c) compensation of Rs. 6,000 paid to an employee while terminating his service in the business interest.
5. Out of outstanding GST, Rs. 3,000 is paid on July 10, 2020 and Rs. 8,000 is paid on October 3, 2020. The balance is not paid as yet.
Due date of filing return of income is July 31, 2020.
6. Income of X from company deposit is Rs. 12,000, which is not shown in the Profit and Loss Account.
Determine the taxable income and tax liability of X for the assessment year 2020-21, assuming that insurance premium paid by X on
the life insurance policy (since 2011) of Mrs. X is Rs. 1,03,200 (sum assured : Rs. 10,00,000).
Solution : Rs. Rs.
Profit as per Profit and Loss Account 17,34,000
Add : Inadmissible expenditure :
Salary to staff (salary paid to a relative to the extent it is treated as excessive or unreasonable) 3,000
Reserve for losses 2,000
Interest on capital 3,500
Depreciation on patent right (amount deductible is 25% of Rs. 17,000, i.e., Rs. 4,250 ;
therefore, amount inadmissible is Rs. 17,000 — Rs. 4,250) 12,750
Rs. Rs.
Depreciation on know-how (50% of 25% of Rs. 60,000, as it is put to use for less than 180
days, is deductible which comes to Rs. 7,500 ; amount not deductible is Rs. 52,500) 52,500
Outstanding GST [Rs. 3,000 paid on or before July 31, 2020 is deductible.
The balance is not deductible for the previous year ending March 31, 2020—see para 82.9
for detailed study] 10,000 83,750
18,17,750
Less : Provision for depreciation on plant and machinery (i.e., Rs. 29,700 — Rs. 28,000) 1,700
18,16,050
Less : Short-term capital gain on sale of investment 31,000
COMPUTATION OF NET INCOME
Less: Deduction under section 80C [payment of insurance premium] 1,03,200
Tax† 3,27,455
Notes :
1. Expenditure on training of employees is a deductible expenditure. Likewise, commission for securing a business order
is deductible.
2. Advertisement expenditure (being expenditure of revenue nature) is fully deductible under section 37(1).
3. Compensation payable for terminating service of an employee is deductible.
90-E2 [P6.31]* X (age : 53 years), a resident individual, furnishes the following particulars for the previous year relevant for the
assessment year 2020-21:
Rs. Rs.
Salary to staff 13,000 Gross profit 15,49,700
Staff welfare expenditure 6,000 Sundry receipts 4,400
General expenses 6,500 Short-term capital gains 3,000
Bad debts 3,000
Advance tax for the assessment year 2020-21 400
Fire insurance 4,000
Advertisement expenses 11,000
Interest on X’s capital and loan 3,600
Expenditure on acquisition of a copyright incurred on
March 1, 2020 (it is put to use on the same day) 2,800
Lump sum consideration for acquiring know-how incurred
on March 10, 2020 (it is put to use on April 1, 2020) 12,000
Depreciation on other business assets 6,000
Provision for income-tax 2,000
Contribution to a political party 1,000
15,57,100 15,57,100
Other information :
1. Salary to staff includes salary paid to a relative which is unreasonable to the extent of Rs. 3,400.
2. Advertisement expenses include Rs. 8,000, being cost of 8 diaries presented to the customers.
3. Depreciation on other assets according to income-tax provision comes to Rs. 9,600.

4. Provision for income-tax is excessive to the extent of Rs. 600.
5. During the year 2019-20, X has purchased National Savings Certificate VIII Issue of Rs. 1,10,000.
6. General expenses include an expenditure of Rs. 1,780 for arranging a long-term loan.
7. During the previous year 2019-20, the following payments are made :
a. Rs. 7,000 paid on May 5, 2019 on account of outstanding customs duty of the previous year 2018-19; and
b. Rs. 5,000 paid on January 3, 2020 on account of outstanding GST of the previous year 2018-19.
Find out the taxable income and tax liability (net of advance tax) of X for the assessment year 2020-21. Due date of filing return of
income is July 31, 2019 (for the assessment year 2019-20) and July 31, 2020 (for the assessment year 2020-21).
90-P3 X (age : 29 years) furnishes the following information relevant for the assessment year 2020-21:
Rs. Rs.
Office expenses 45,000 Gross profits 8,03,000
Sundry expenses 39,000 Sundry receipts 11,000
Entertainment expenditure 5,000 Bad debts recovered (not allowed as deduction
Audit fees 12,000 earlier) 7,100
Legal charges/expenses 4,000 Customs duties recovered from the Government
Extension of building 6,000 (earlier allowed as deduction) 32,500
Depreciation on plant and machinery 23,000 Gift received from father 43,000
Salary to staff :
 Salary 43,000
 Bonus 36,000
Contribution towards :
 Employees’ recognised provident fund 15,000
 Unapproved gratuity fund 4,000
GST 38,000
Provision for GST 25,000
Payment to an approved research association
for carrying on scientific research 19,000
Net profit 5,82,600
8,96,600 8,96,600
Other information :
1. As shown in the Profit and Loss Account, Rs. 19,000 is paid to a research association for the purpose of carrying on approved scientific
research in natural science, not related to the business of X. Besides, X purchases a plant of Rs. 30,000 for the purpose of carrying on
scientific research related to his business. Neither cost of plant nor depreciation thereon is debited to profit and loss account.
2. Out of bonus of Rs. 36,000, Rs. 4,000 is paid during 2019-20 and Rs. 26,000 is paid by July 31, 2020 (being the due date of furnishing
return of income). The balance of Rs. 6,000 is, however, paid on November 11, 2020.
3. Depreciation on plant and machinery and extension of building as per income-tax provision is Rs. 19,000.
4. GST of Rs. 38,000 includes (a) interest for late payment of GST : Rs. 1,200 ; (b) penalty for evading GST : Rs. 10,000.
5. Provision for GST represents an outstanding GST liability, which is, however, paid on July 10, 2020.
6. Salary to staff includes a payment of pension of Rs. 5,000 to the widow of a former employee.
Ascertain the net income and tax liability of X for the assessment year 2020-21, assuming that he deposits Rs. 1,20,000 in public provident
fund account during the previous year 2019-20 and his income from other sources is Rs. 2,06,000.
Solution :
Rs.
Adjustments –
Add: Extension of building (capital expenditure, not allowed) (depreciation available, as given below) 6,000
Add: Depreciation on plant and machinery as per books of account (taken separately) 23,000
Less: Depreciation (as per income-tax provisions) on plant and machinery and extension of building (–) 19,000
Add: Bonus not paid till the due date of furnishing of return of income (i.e., Rs. 36,000—Rs. 30,000) 6,000
Add: Contribution to unapproved gratuity fund 4,000
Add: GST penalty 10,000
Add: Payment to an approved scientific research association (taken separately) 19,000
Less: Capital expenditure on scientific research related to the business of the assessee (i.e., 100% of Rs. 30,000) (–) 30,000
Less: Payment to an approved research association for carrying on scientific research is qualified for weighted
deduction (i.e., Rs. 19,000 × 1.50) (–) 28,500
Less : Recovery of bad debts (not taxable, as earlier it was not deducted) (–) 7,100
Rs.
Less: Gift received from father (not an income, gift received from a non-relative is taxable in some cases – see
para 114) (–) 43,000
Less : Deduction under section 80C [contribution to public provident fund] 1,20,000
Net income 6,09,000
Tax on net income† 34,300
Notes :
1. Outstanding bonus and GST paid up to July 31, 2020 (i.e., the due date of submission of return of income) is deductible.
Amount paid after this date is deductible in the year of payment.
2. Pension paid to the widow of a former employee is deductible.
3. Interest for non-payment of GST is deductible.
90-E3 [P6.32]* X (age : 35 years), a resident individual, furnishes the following particulars for the assessment year 2020-21:
Rs. Rs.
Office expenses 2,400 Gross profit 28,98,000
Audit fees 8,000 Sundry receipts 9,000
Legal expenses 1,000 Customs duties recovered from the Government
Cost of extension to building 10,000 (earlier not allowed as deduction) 5,300
Depreciation on machinery and extension of building 11,000 Bad debts recovered (earlier allowed as deduction) 3,000
Salary to staff 21,000 Gift from a friend 10,000
Bonus to staff 15,000
Contribution to an approved gratuity fund 6,000
Outstanding liability in respect of interest payable
to IDBI 8,000
29,25,300 29,25,300
Other relevant particulars :
1. Bonus is outstanding on March 31, 2020. Rs. 10,500 is, however, paid on July 31, 2020 (being the due date of furnishing return
of income).
2. Depreciation on machinery and extension of building shown in the Profit and Loss Account is calculated according to the income-
tax provisions.
3. General expenses include payment of Rs. 9,000 to an approved institute for the purpose of carrying on a scientific research in natural
science. The research is, however, not related to the business of the assessee.
4. During the previous year 2019-20, X also makes a capital expenditure of Rs. 25,000 for the purpose of carrying on a scientific
research related to his business. This expenditure is, however, not recorded in the Profit and Loss Account.
5. Outstanding interest payable to IDBI is paid as follows : Rs. 500 on April 10, 2020, Rs. 1,000 on May 10, 2020, Rs. 2,000 on June
30, 2020 and Rs. 1,000 on September 10, 2020, Rs. 3,500 is still outstanding.
6. Salary to staff includes Rs. 2,000 being compensation paid for termination of an employee.
Determine the net income and tax liability of X for the assessment year 2020-21, assuming that he deposits Rs. 1,50,000 in the public
provident fund and invests Rs. 30,000 in NSC VIII issue.
90-P4 X (age : 24 years), a resident individual, furnishes the following information for the assessment year 2020-21 :
Rs. Rs.
Telephone 8,000 Sundry receipts 8,000
Rs. Rs.
Depreciation 28,000
Travelling expenses 43,000
Loss of cash by an employee through embezzlement 5,000
Amount transferred to special reserve account 7,500
Expenditure on the occasion of Diwali 7,100
Interest and legal expenses 44,000
Sundry expenses 8,500
Net profit 6,81,900
8,86,000 8,86,000
Other information :
1. Salary to staff includes payment of Rs. 12,000 out of India on which tax has not been deducted at source nor paid to the Government.
2. Depreciated value of plant and machinery on April 1, 2019 is Rs. 1,10,000 (rate of depreciation : 15 per cent).
 A plant whose written down value on April 1, 2019 is Rs. 17,440 is sold during the previous year for Rs. 11,000.
 A machinery (cost price Rs. 20,000) whose written down value on April 1, 2019 is Rs. 2,350 is sold during the previous year for
Rs. 15,000.
 During the year, X purchases a new plant for office for Rs. 1,22,670 which is eligible for depreciation at the rate of 15 per cent. The
plant is installed and put to use on May 15, 2019.
3. Travelling expenses include Rs. 10,000 being hotel expenditure of an employee in respect of an official visit to Bombay for 5 days.
4. Expenditure on the occasion of Diwali includes a gift of Rs. 2,000 to Mrs. X.
5. Interest includes a payment of Rs. 3,000 out of India on which tax has not been deducted.
6. Sundry expenses include expenditure of Rs. 1,000 on maintenance of guest house in Delhi for the purpose of carrying on the business
and Rs. 4,000 being employer’s contribution towards ESI out of which Rs. 600 is paid after the due date of submission of return of income.
7. Legal expenses include the following payments :
 Payment of Rs. 4,000 to B, an employee of X, for filing income-tax appeal.
 Payment of Rs. 5,000 to C, not being an employee of X, for preparation of return of income.
 Payment of Rs. 11,000 to D, an advocate who is not an employee of X, for filing income-tax appeals and giving tax advice.
 Payment of Rs. 2,000 to E, a chartered accountant who is not an employee of X, for obtaining tax advice.
Determine the taxable income and tax liability of X for the assessment year 2020-21 assuming that sundry receipts include Rs. 5,000,
being amount of endowment insurance policy received from the Life Insurance Corporation of India at the time of maturity of the policy
(i.e., December 5, 2019) [amount of insurance premium last paid on June 5, 2019 : Rs. 400]. Besides, X has FD bank interest of
Rs. 2,40,000 (not given above) and he deposits Rs. 1,30,000 in PPF account of Mrs. X on March 31, 2020.
Solution : Rs. Rs.
Net profit as per Profit and Loss Account 6,81,900
Salary paid outside India [not deductible as tax has not been deducted at source—see para 82.3] 12,000
Depreciation (taken separately) 28,000
Travelling expenses [now fully deductible under section 37(1)] —
Gift to Mrs. X on the occasion of Diwali 2,000
Payment of interest out of India [not deductible as tax is not deducted at source and the
recipient is not represented in India—see para 82.1] 3,000
Expenditure on maintenance of guest house [now deductible under section 37(1)] —
Employer’s contribution towards ESI which is paid after due date of submission of return of
income 600
Legal expenses in respect of income-tax matters [such expenses are now fully deductible] —
Amount transferred to special reserve account 7,500 53,100
7,35,000
Less : Depreciation [see Note] 31,000
7,04,000
Less : Amount credited but not taxable (amount of insurance policy) 5,000
Income under the head “Profits and gains of business or profession” 6,99,000
Income from any other sources 2,40,000
Less : Deduction under section 80C [payment of insurance premium : Rs. 400 + PPF : Rs. 1,30,000] 1,30,400
Net income 8,08,600
Rs.
Add : Surcharge (applicable if net income exceeds Rs. 50 lakh) Nil
Note : Computation of depreciation :
Depreciated value of plant and machinery on the first day of the previous year 1,10,000
Add : Cost of plant and machinery acquired during the previous year (+) 1,22,670
Less : Sale proceeds of plant and machinery sold during the previous year
[Rs. 11,000 + Rs. 15,000] (–) 26,000
Amount of depreciation [15% of Rs. 2,06,670] 31,000
90-E4 [P6.33]* X (age : 26 years), a resident individual, furnishes the following particulars for the assessment year 2020-21:
Rs. Rs.
Salary to staff 24,000 Sundry receipts 38,000
Depreciation 15,000
Travelling expenses for business 9,000
Loss of cash by an employee through embezzlement 6,000
Transfer to special reserve account 1,875
Expenditure on festival 2,000
Interest and legal expenses 22,600
Telephone for employees 25,000
19,24,575 19,24,575
Other information :
1. Salary to staff includes payment of Rs. 6,000 out of India on which tax has not been deducted at source nor paid to the Government.
2. Depreciated value of plant and machinery on April 1, 2019 is Rs. 70,000 (rate of depreciation : 15 per cent).
 An air-conditioner (cost price : Rs. 7,500) whose written down value on April 1, 2019 is Rs. 2,450, is disposed of for Rs. 7,000.
 A typewriter whose written down value on April 1, 2019 is Rs. 570 is sold for Rs. 200.
 X purchases a telephone set for Rs. 10,000 on November 1, 2019 which is eligible for depreciation at the rate of 15 per cent.
3. Travelling expenses include Rs. 7,600 being hotel expenditure of an employee in respect of an official visit to Madras for 5 days.
4. Amount debited as expenditure on festival is cost of a gift presented to a relative.
5. Sundry expenses include expenditure of Rs. 4,000 on maintenance of a guest house at Bombay.
6. Legal expenses include cash payment of Rs. 12,000 to an advocate (who is not an employee of X) for giving income-tax advice.
Determine the taxable income and tax liability of X for the assessment year 2020-21, assuming that sundry receipts include
Rs. 12,000, being amount of a loan taken from public provident fund account to which X annually contributes Rs. 12,000. Moreover,
X pays life insurance premium of his minor daughter of Rs. 1,60,000 (sum assured : Rs. 20,00,000)
90-P5 XYZ Ltd., an Indian company, furnishes the following particulars for the assessment year 2020-21:
Rs. Rs.
Salary to staff 12,40,000 Gross profit 25,58,000
Expenses on issue of shares for setting up an Rent of flats given to officers 12,000
industrial undertaking (cost of project : Rs. 10 lakh) 18,000 Sundry receipts 5,000
Expenditure on promotion of family planning among Interest on bank deposits 17,000
the employees 3,000 Capital gains on sale of short-term investment 3,000
GST 28,500
Contribution to a National Laboratory for carrying
out approved scientific research 79,500
Gratuity fund 5,000
Reserve for future losses 20,000
Bad debts written off 3,000
Rs. Rs.
Reserve for payment of advance income-tax 13,000
Car expenses 9,000
Depreciation :
 Machinery 18,000
 Car 3,000
 Furniture 5,000
 Building 3,000
Office expenses 7,500
Rent and repairs of building 3,000
Municipal taxes and ground rent of flats given to
officers 7,000
Income-tax 11,000
Dividend tax 700
25,95,000 25,95,000
Other information :
1. Expenditure on family planning includes capital expenditure of Rs. 2,500.
2. Car is utilised for non-business purposes by a friend of a director. In the past years, one-fourth of this expenditure was disallowed.
3. Sundry expenses include Rs. 9,000 being payment of printing bill to relative of the managing director; payment is unreasonable to
the extent of Rs. 4,700.
4. Salary includes payment of Rs. 21,000 in cash to an employee. It also includes “mediclaim” insurance premium for the benefit of
employees of Rs. 15,000 out of which Rs. 6,000 is paid in cash. It further includes salary of Rs. 4,00,000 paid to an employee on which
tax was deductible but not deducted.
5. Though amount of depreciation on building, car and furniture is calculated as per tax provisions, depreciation in respect of machinery
is excessive to the extent of Rs. 2,000.
6. Rs. 79,500 being payment to National Laboratory is qualified for weighted deduction under section 35(2AA).
7. The company has deposited Rs. 2,40,000 with Maruti Udyog Ltd. on March 1, 2020 for purchasing Maruti Alto car. The car is likely
to be delivered by June 2020. The said amount is not debited to Profit and Loss Account.
8. During the previous year 2017-18, the company pays Rs. 15,00,000 as compensation to employees on voluntary retirement under the
voluntary retirement scheme of the company. The amount is not debited to the P & L A/c.
9. The company deposits Rs. 10,000 in National Housing Bank.
10. On March 16, 2020, the company gets a refund of sales tax of Rs. 3,000 (it was allowed as deduction for the previous year 2015-16).
The amount is not credited to the profit and loss account, as the Commissioner’s appeal against the refund is still pending in the Delhi
High Court.
Determine the taxable income and tax liability of the assessee-company for the assessment year 2020-21. Applicable tax rate is 25 per
cent (turnover of the company does not exceed Rs. 400 crore).
Solution : Rs. Rs.
Profit as per Profit and Loss Account 11,01,800
Add : Sales tax refund [it is taxable under section 41(1) even if the matter is still pending] 3,000
Add : Inadmissible expenditure :
Expenses on issue of shares [1/5 of Rs. 18,000 is deductible under section 35D—see para 81.16] 14,400
Expenditure on family planning [amount deductible is revenue expenditure plus one-fifth of
capital expenditure ; therefore, inadmissible amount is (Rs. 3,000—Rs. 500—1/5 of Rs. 2,500)] 2,000
Reserve for advance tax 13,000
Car expenses (i.e., 1/4 of Rs. 9,000) 2,250
Depreciation on machinery (excess depreciation) 2,000
Depreciation on car (1/4 of Rs. 3,000 as car is used partly for non-business purposes) 750
Payment of printing bill to a relative of the director (excess amount disallowed) 4,700
Payment of Rs. 21,000 in cash (100% of Rs. 21,000) [see para 82.6] 21,000
Mediclaim insurance premium paid in cash [if it is paid by cheque, it is deductible] 6,000
Salary paid without tax deduction (30% of Rs. 4,00,000 will be disallowed) 1,20,000
Income-tax (not deductible) 11,000
Dividend tax (not deductible) 700 2,17,800
Balance 13,22,600
Less : Compensation paid under voluntary retirement scheme [1/5 of Rs. 15,00,000 is
deductible in 5 years under section 35DDA] 3,00,000
Rs. Rs.
Weighted deduction in respect of contribution to National Laboratory [amount deductible
is Rs. 1,19,250 being 150% of Rs. 79,500 ; as the amount debited to P & L A/c is Rs. 79,500
the balance of Rs. 39,750 is deducted] 39,750 3,39,750
Balance 9,82,850
Less : Income taxable under other heads
Capital gains 3,000
Interest on bank deposits 17,000 20,000
Capital gains 3,000
Income from other sources (interest on bank deposit) 17,000
Less : Deductions under sections 80C to 80U Nil
Net income 9,82,850
Tax on Rs. 9,82,850 @ 25% 2,45,713
Add : Surcharge [not applicable as net income does not exceed Rs. 1 crore] Nil
Notes :
1. The company cannot claim any deduction under section 80C.
2. It has been assumed that letting out of residential flats to employees is subservient and incidental to the main business
of the company. Therefore, rental income is not taxable under the head “Income from house property”.
3. Amount deposited with Maruti Udyog Ltd. is not deductible.
90-E5 [P6.34]* XYZ Ltd., an Indian company, submits the following particulars relevant for the assessment year 2020-21:
Rs. Rs.
Income tax 10,000
Expenses on issue of shares for setting up a new show
room at Delhi 20,000
Expenses on raising a long-term loan for setting up a
new show room at Bombay 30,000
Interest on public deposits 10,000
Capital expenditure for promotion of family planning
among employees 4,000
Legal expenses for filing income-tax appeals before the
Delhi High Court 5,500
Reserve for losses 8,000
Reserve for payment of fines and penalty 3,000
Reserve for bad and doubtful debts 200
Maintenance expenses of car 6,000
Bad debts written off 1,800
Depreciation of:
 Plant and machinery 21,000
 Car 3,000
Rent and repairs 14,000
Sundry expenses 1,21,500
Net profit 6,52,000
11,76,000 11,76,000
Other information :
1. Car is partly used for non-business purposes by a friend of a shareholder. In past 50 per cent of car expenditure is disallowed.
2. Sundry expenses include payment of an advertisement bill to a person who has substantial interest in the company. The payment
is excessive to the extent of Rs. 4,800.
3. Office expenses include an expenditure of Rs. 2,000 which is paid in cash.
4. Sundry expenses include an expenditure of Rs. 20,050 which is paid by a bearer cheque.
5. Depreciation on machinery as per tax provisions is Rs. 9,000.
6. On March 10, 2020, the company pays Rs. 1,30,000 to a National Laboratory for carrying an approved scientific research
programme in natural science. The payment is not recorded in the above P & L A/c.
7. Sundry expenses include royalty payment of Rs. 50,000 to a resident on which tax is deducted at source on March 31, 2020 and
paid to the Government on December 20, 2020.
Determine the taxable income and tax liability of the company for the assessment year 2020-21. Applicable tax rate is 25 per cent.
90-P6 X (age : 40 years) furnishes the following particulars of his income relevant for the assessment year 2020-21:
Rs. Rs.
Advertisement 8,000 Rent of house property 2,40,000
Repairs to house property 20,000 Dividends from a foreign company 12,500
Municipal tax of house property 30,000 Profit on sale of import licence 63,800
Fire insurance :
 House property 16,000
 Office and godown 20,000
Life insurance premium on own life policy 3,000
Depreciation :
 Business assets 13,400
Wealth-tax 6,000
Patent rights [½ of Rs. 70,000 being cost of such
right acquired on April 6, 2019] 35,000
Income-tax penalty 1,000
Interest on capital borrowed :
 for business 3,800
 for reconstruction of house property 50,000
 for investment in shares 2,000
Rent paid to X (for using 25 per cent portion for
business purposes) 1,00,000
Net profit 7,98,600
14,02,300 14,02,300
X owns a house property (outside the jurisdiction of any Rent Control Act), erection of which was completed in March 1999. There are
three residential units in the house. Unit 1 (consisting of 50 per cent of the carpet area) is let out to a tenant at Rs. 20,000 per month.
Unit 2 (25 per cent of the carpet area) is used by X for own residential purposes. Unit 3 (25 per cent) is utilised by him for his business
purposes. Determine the taxable income and tax liability of X for the assessment year 2020-21. During the previous year 2019-20, X
has received a gift of Rs. 3,79,500 by cheque from his non-resident friend out of which he deposits Rs. 1,00,000 in his minor son’s PPF
account.
Solution : Rs. Rs.
BUSINESS INCOME
Net profit as per Profit and Loss Account 7,98,600
Repairs to house property (inadmissible amount is 3/4 of Rs. 20,000) 15,000
Municipal taxes (inadmissible amount is 3/4 of Rs. 30,000) 22,500
Fire insurance of house property (inadmissible amount is 3/4 of Rs. 16,000) 12,000
Life insurance premium (personal expenses not admissible) 3,000
Depreciation on house property (inadmissible amount is 3/4 of Rs. 60,000) 45,000
Wealth-tax and income-tax penalty (i.e., Rs. 6,000 + Rs. 1,000) 7,000
Patent right [i.e., amount in excess of 25% of Rs. 70,000] 17,500
Rs. Rs.
Interest on capital borrowed for :
 house property (3/4 of Rs. 50,000) 37,500
 investment in shares 2,000
Rent paid to X 1,00,000 2,61,500
10,60,100
Less : Income not taxable as business income
Rent of house property 2,40,000
Dividend 12,500 2,52,500
Business profit 8,07,600
INCOME FROM OTHER SOURCES
Dividend (i.e., Rs. 12,500 – Rs. 2,000) 10,500
Gift 3,79,500 3,90,000
INCOME FROM HOUSE PROPERTY
Unit 1
Fair rent (Rs. 20,000 × 12) 2,40,000
Less : Municipal taxes (50% of Rs. 30,000) 15,000
Annual value of Unit 1 2,25,000
Interest (50% of Rs. 50,000) 25,000
Income of Unit 1 (a) 1,32,500
Unit 2 (self-occupied)
Annual value Nil
Less: Municipal taxes Nil
Interest on borrowed capital (25% of Rs. 50,000) 12,500
Income of Unit 2 (b) (-) 12,500
Total income from house property (a)+(b) 1,20,000
Income from other sources [dividend : Rs. 10,500 + gift : Rs. 3,79,500] 3,90,000
Less : Deduction under section 80C [payment of life insurance premium : Rs. 3,000 + PPF : Rs. 1,00,000] 1,03,000
Tax on net income† 1,76,880
Add : Surcharge (surcharge is applicable if net income exceeds Rs. 50 lakh) —
Note : Profit on sale of import licence is taxable as business income.
90-E6 [P6.35]* X (age : 31 years) furnishes the following particulars of his income for the assessment year 2020-21:
Rs. Rs.
Repairs : Rent of house property received from tenant
 House property 1,00,000 (Rs. 90,000 was received in advance during
 Machinery 20,000 2018-19) 2,70,000
Rs. Rs.
Municipal taxes of house property 18,000 Refund of deposit from a supplier (deposit was
Fire insurance : made to purchase a machine, the supplier could
 House property 2,000 not supply the machine) 2,10,000
 Machinery 3,000 Interest on such refund 10,000
Depreciation :
 Business assets (allowable) 80,000
Interest on capital borrowed for construction
of house property 1,00,000
Net profit 6,31,500
12,91,000 12,91,000
X owns a house property, erection of which was completed in May 1974. 50 per cent of the carpet area (Unit 1) is let out to a tenant
at Rs. 30,000 per month; 25 per cent of the carpet area (Unit 2) is used by X for his own residence and the remaining portion (Unit
3) is used by him for his business purposes (no rent is charged). Income of X from other sources not included in the profit and loss
account is Rs. 8,50,000.
Determine the taxable income and tax liability of X for the assessment year 2020-21 on the assumption that he deposits on April 1,
2019, Rs. 1,56,000 in the Home Loan Account Scheme of the National Housing Bank.
90-P7 X (age : 26 years), a leading tax consultant, who maintains books of account on cash basis furnishes the following particulars of
income and expenditure for the assessment year 2020-21 :
Receipt and Payment Account for the year ending March 31, 2020
Rs. Rs.
Balance brought down 12,400 Purchase of a typewriter 6,000
Fees from clients : Car expenses 18,000
 of 2019-20 7,30,500 Office expenses 40,000
 of 2018-19 1,11,500 Salary to staff :
 of 2020-21 1,13,000  of 2019-20 32,000
Presents from clients 24,000  of 2020-21 11,000
Interest-free loan from a client for purchase 2,38,000 Expenses in respect of let out property
of a car [municipal tax : Rs. 2,000, repairs :
Winnings from lottery 46,000 Rs. 1,000, insurance : Rs. 3,000] 6,000
Interest from UTI (received on September 11, Car purchased on December 10, 2019 2,40,000
2019) 12,000 Repairs of office 12,000
Rent of a let out property 60,000 Interest on loan 10,000
Share of income from a firm 15,000 Income-tax payment 2,000
Life insurance premium 2,08,000
Balance credit down 7,77,400
13,62,400 13,62,400
Car is partly used for official purposes (40%) and partly for private purposes (60%).
Solution : Rs. Rs.
Fees from clients (i.e., Rs. 7,30,500 + Rs. 1,11,500 + Rs. 1,13,000) 9,55,000
Add : Presents from clients 24,000
Gross receipts 9,79,000
Less : Admissible expenses
Depreciation of typewriter (i.e., 15% of Rs. 6,000) 900
Car expenses (i.e., 40% of Rs. 18,000) 7,200
Salary to staff (i.e., Rs. 32,000 + Rs. 11,000) 43,000
Repairs 12,000
Depreciation of car (i.e., 7.5% of 40% of Rs. 2,40,000) 7,200
Interest on loan 10,000 1,20,300
Property income [i.e., Rs. 60,000—Rs. 2,000—30% of Rs. 58,000] 40,600
Winnings from lottery 46,000
Interest from UTI [exempt from tax] Nil
Share of income from firm [exempt] Nil
Rs.
Less : Deduction under section 80C [payment of life insurance premium] 1,50,000
Net income 7,95,300
Tax on net income† [i.e., 30% of Rs. 46,000 + normal tax on balance†] 76,160
Add : Surcharge (surcharge is if net income exceeds Rs. 50 lakh) Nil
Note : As books of account are maintained on the basis of cash system, income is taxable on “receipt” basis and expenditures
are deductible on “payment” basis.
90-E7 [P6.36]* X (age : 32 years), a lawyer, who maintains books of account on cash basis, furnishes the following particulars of
his income for the previous year ending March 31, 2020 :
Receipt and Payment Account for the year ending March 31, 2020
Rs. Rs.
Balance brought down 21,000 Purchase of typewriter 7,000
Fees from clients : Car expenses 8,000
 of 2019-20 12,40,000 Office expenses 7,000
 of 2018-19 2,03,000 Salary to staff 9,18,000
Presents from clients 4,000 Interest on loan 1,000
Loan from a client 8,000 Income-tax penalty 2,000
Contribution to public provident fund 1,30,000
Purchase of notified bonds of infrastructure
company 72,000
Balance carried down 3,31,000
14,76,000 14,76,000
Notes :
1. 20 per cent of car expenses are attributable towards use of car for personal purposes.
2. Fees due but outstanding is Rs. 40,000.
3. Depreciation of car is Rs. 3,000.
4. Income of X from other sources is Rs. 1,45,000.
5. X purchased a computer for Rs. 80,000 on March 10, 2019. It is, however, put to use on December 3, 2019 (rate of depreciation :
40 per cent).
6. Staff salary includes salary of manager of Rs. 4,50,000 (tax of Rs. 19,000 was deducted by X but it is deposited on December 10,
2020).
90-P8 X (age : 34 years) is a businessman in Mumbai. Determine his net income and tax liability on the basis of the following profit
and loss account for the year ending March 31, 2020 :
Rs. Rs.
Opening stock 1,04,000 Sales agency business 92,51,000
Purchases 80,08,750 Closing stock 2,10,000
Salaries and wages 1,75,000
Rent and rates 1,31,000
Commission 21,500
Household expenses 20,000
Income-tax for 2019-20 36,100
Advertisement 5,000
Postage and telegram 4,000
Interest on own capital 84,000
Reserve for bad debts 3,400
Depreciation on furniture 18,000
Net profit 8,50,250
94,61,000 94,61,000
Other particulars :
1. Closing stock and opening stock has consistently been valued at 10 per cent below cost price.
2. Depreciation on furniture, as per tax provisions, is Rs. 17,200.
3. Amount of sales includes a sum of Rs. 41,250 representing the value of goods withdrawn for the use of X’s family members. These goods
were purchased at cost of Rs. 27,850. Market value of these goods is Rs. 45,240.
4. Purchases include a consultancy bill of Rs. 1,00,000 (out of Rs. 1,00,000, tax of Rs. 10,000 was deducted at source but it is deposited
on January 10, 2021).
5. Household expenses include a contribution of Rs. 6,000 towards public provident fund.
6. On September 20, 2019, X has received a gift of Rs. 96,000 from a friend settled in UK. The entire amount is invested in NSC VIII
issue.
7. X purchases notified bonds of an infrastructure company on April 2, 2020 for Rs. 1,06,000.
Solution : Rs. Rs.
Add : Inadmissible expenses
Income-tax 36,100
Interest on capital 84,000
Reserve for bad debts 3,400
Consultancy fees (30% of Rs. 1,00,000, as tax deducted at source is deposited after due
date of submission of return of income) 30,000
Excessive depreciation on furniture (i.e., Rs. 18,000—Rs. 17,200) 800 1,74,300
10,24,550
Less : Notional profit on goods withdrawn by X (i.e., Rs. 41,250—Rs. 27,850) 13,400
10,11,150
ADJUSTMENT IN RESPECT OF VALUATION OF STOCK SO AS TO BRING THEM AT COST
Add : 1/9 of Rs. 2,10,000 23,333
10,34,483
Less : 1/9 of Rs. 1,04,000 11,556
Any other income [gift from a friend is income, see para 114] 96,000
Less : Deductions under section 80C (PPF : Rs. 6,000 + NSC : Rs. 96,000) 1,02,000
Add : Surcharge (surcharge is applicable if net income exceeds Rs. 50 lakh) —
Notes :
1. Goods withdrawn by the owner is not treated as sale. Profit element on this notional sale (i.e., Rs. 41,250—Rs. 27,850) is,
therefore, excluded while computing net income. This is because of the fact that one cannot make profit by selling goods to
oneself.
2. Stock is valued by X at 10% below cost. Therefore, for computing taxable income, amount of closing and opening stock
is worked out at cost (as shown under) and necessary adjustment is made accordingly :
Rs.
Closing stock shown in books 2,10,000
Closing stock at cost price (i.e., Rs. 2,10,000 × 100 ÷ 90) 2,33,333
Amount added to book profit 23,333
Opening stock shown in books 1,04,000
Opening stock at cost price (i.e., Rs. 1,04,000 × 100 ÷ 90) 1,15,556
Amount deducted from book profit 11,556
90-E8 [P6.37]* X (age : 45 years), a resident individual, is owner of a departmental store at Madras. He requests you to compute
his total income and tax liability of the assessment year 2020-21 on the basis of the following profit and loss account for the year ending
March 31, 2020 :
Rs. Rs.
Opening stock 3,60,000 Sales (agency business) 69,00,000
Purchases 50,00,000 Closing stock 4,50,000
Salaries and wages 11,20,000
Rent and rates 40,000
Household expenses 1,18,000
Commission 27,000
Income-tax for 2018-19 42,000
Advertisement 10,000
Postage and telegrams 4,000
Interest on own capital 6,000
Depreciation (furniture) 1,000
Net profit 6,17,000
73,50,000 73,50,000
The following additional particulars are furnished :
1. Stock of goods at the opening as well as the closing day of the accounting year had consistently been valued at 10 per cent below
the cost price.
2. The amount of household expenses include a contribution of Rs. 1,07,000 towards public provident fund.
3. Sales include a sum of Rs. 50,000 representing goods withdrawn for the use of X’s family members. These goods were purchased
at a cost of Rs. 60,000. Market value of these goods is Rs. 63,000.
4. Depreciation according to the Income-tax Rules works out to Rs. 500.
5. Salary and wages include salary to an employee of Rs. 2,80,000 (tax was deductible but not deducted).
➠ 90-P9 X Ltd. is a public company. Its profit and loss account for the year ending March 31, 2020 discloses a net profit of Rs. 7,86,000.
Particulars noted from accounts are as follows —
1. The company purchases a new machine for Rs. 1,80,000 (rate of depreciation : 15 per cent) on September 1, 2019. The new unit is,
however, started on January 3, 2020. The company has claimed full year’s depreciation of Rs. 27,000 (i.e., 15 per cent of Rs. 1,80,000)
in books of account.
2. Salary to staff and directors debited to profit and loss account is Rs. 8,90,000. It includes the following —
a. entertainment allowance : Rs. 70,000 ;
b. expenditure on food or beverages provided to employees in office, factory or other place of their work : Rs. 60,000 ;
c. expenditure on food provided to employees in a place other than their place of work : Rs. 30,000 (Rs. 100 per employee for 50 employees
for 6 days) ;
d. entertainment allowance paid to directors : Rs. 40,000 ;
e. salary paid to an employee in cash (after tax deduction at source) when he was temporarily posted for a period of 20 days at Patna
(bank account not maintained at Patna) : Rs. 16,000.
3. Entertainment expenditure debited to profit and loss account is Rs. 1,76,000.
4. A building is purchased for the purpose of promoting family planning amongst its employees for Rs. 5,00,000. The company has
charged depreciation at the rate of 5 per cent in books.
5. Purchases debited to profit and loss account include the following —
Date of purchase Amount of bill Name of supplier Bill No.

Rs.
April 10, 2019 9,500 A 1
April 10, 2019 9,000 A 2
April 30, 2019 51,000 B 8
July 17, 2019 40,000 C 15
November 6, 2019 25,000 D (through agent E) 32
December 25, 2019 37,000 F 40
January 10, 2020 48,000 G 92
C is a director in X Ltd. and fair market value of goods supplied by him (i.e., Bill No. 15) is Rs. 32,000. Payment of Bill No. 40 is required
to be made on the same day.
The aforesaid bills are paid as follows—

Bill No. Amount of To whom Date of payment Mode of payment Comments
payment payment
Rs. is made
1 2 3 4 5 6
1 and 2 18,500 A April 30, 2019 Cash
8 10,000 B May 1, 2019 Cash —
8 21,000 B May 2, 2019 A/c payee cheque —
8 10,000 B May 3, 2019 Crossed cheque —
15 36,000 C July 17, 2019 Bearer cheque —
15 4,000 C July 18, 2019 Cash —
32 25,000 E November 2, 2019 Cash E has paid on
behalf of X Ltd.
to D
40 37,000 F December 25, 2019 Cash Banks were closed
on December 25,
2019
92 48,000 G January 27, 2020 Crossed cheque —
6. Penalty of Rs. 60,000 has been debited to the profit and loss account. It is paid to the Government for company’s failure to complete
a project undertaken by it from the Government.
7. On March 1, 2020, the company decides to change the mode of valuation of closing stock from “cost” to “cost plus 10 per cent”. The
amount of closing stock as on March 31, 2020 as shown in balance sheet is Rs. 55,000.
Taking into consideration the above information, determine the taxable income of X Ltd. for the assessment year 2020-21.
Solution : Rs.
Profit as per profit and loss account 7,86,000
Adjustment :
Purchase of machine on September 1, 2019 (as the machine is put to use for a period of less than 180 days,
it is qualified for half depreciation ; normal depreciation : ½ of 15% of Rs. 1,80,000 plus additional
depreciation ½ of 20% of Rs. 1,80,000; the excess amount is deductible) (–) 4,500
Entertainment allowance to employees [it is fully deductible under section 37(1)] —
Expenditure on food and beverages in office [deductible as normal expenditure under section 37(1)] —
Expenditure on food and beverages outside office [it is fully deductible under section 37(1)] —
Entertainment allowance paid to directors [it is fully deductible under section 37(1)] —
Salary exceeding Rs. 10,000 paid in cash [it is deductible under exceptions—see para 82.6] —
Entertainment expenditure [it is deductible fully] —
Capital expenditure on family planning (amount deductible is 20% of Rs. 5,00,000, i.e., Rs. 1,00,000 ; amount
debited to profit and loss account is 5% of Rs. 5,00,000, i.e., Rs. 25,000 ; the difference of Rs. 75,000
allowed as deduction) (–) 75,000
Payment on account of purchases [see Note] (+) 84,000
Penalty for failure to perform a job in time [allowable as deduction— see CIT v. Reliable Water Supply
Services of India [1980] 124 ITR 199 (All.)] —
Over valuation of closing stock [i.e., 1/11 of Rs. 55,000] (-)5,000
Net income 7,85,500
Note : Rs.
Payment for purchases
Payment of Bill No. 1 (it is paid in cash, it is allowed as deduction as the amount of bill does not exceed
Rs. 10,000) —
Payment of Bill No. 2 (allowed as deduction as the amount of bill does not exceed Rs. 10,000; disallowance
is applicable only if amount of bill and amount of payment in cash or by bearer cheque exceeds
Rs. 10,000) —
Payment of Bill No. 8 (the amount of bill exceeds Rs. 10,000, disallowance is applicable if payment
exceeding Rs. 10,000 is not made by an account payee cheque/draft)— —
 Payment of Rs. 10,000 on May 1, 2019 (allowed as deduction even if the amount is paid in cash as the
payment does not exceed Rs. 10,000) —
 Payment of Rs. 21,000 on May 2, 2019 (allowed as deduction as it is paid by an account payee cheque) —
 Payment of Rs. 10,000 on May 3, 2019 (allowed as deduction as the payment made by a crossed cheque
does not exceed Rs. 10,000) —
Rs.
Payment of Bill No. 15 [amount disallowed under section 40A(2) [see para 82.5] is Rs. 8,000, being the excess
amount paid to a director of the taxpayer ; another disallowance which is applicable is Rs. 28,000, i.e., 100%
of Rs. 28,000 (i.e., Rs. 36,000 – Rs. 8,000) by virtue of section 40A(3) [see para 82.6] as Rs. 36,000 is paid by
bearer cheque ; therefore the effective disallowance is Rs. 36,000] 36,000
Payment of Bill No. 32 [where the payment exceeding Rs. 10,000 is made by a person to his agent who is
required to make payment in cash for goods or services on behalf of such person, disallowance under
section 40A(3) read with exceptions of rule 6DD is not applicable—see para 82.6] —
Payment of Bill No. 40 [where the payment exceeding Rs. 10,000 is required to be made in cash on a day
on which the banks were closed either on account of holiday or strike, disallowance under section 40A(3)
read with exceptions of rule 6DD is not applicable—see para 82.6] —
Payment of Bill No. 92 [100% of Rs. 48,000 is disallowed under section 40A(3)] 48,000
Amount disallowed under section 40A(2)/(3) 84,000
➠ 90-E9 [P6.38]* Profit and loss account of X (age : 31 years), an individual, shows a net profit of Rs. 5,92,000 for the year ending
March 31, 2020. Particulars noted from accounts are as under —
1. Rs. 2,80,000 is debited to the profit and loss account as entertainment expenditure. It is calculated as under —
Rs.
Expenditure on lunch given to dealers 1,50,000
Expenditure on food or beverages provided to employees in office and factory [Rs. 40 per day per employee for 10
employees for 200 days] 80,000
Expenditure on food or beverages provided to employees at a place other than their place of work [Rs. 45 per day
per employee for 6 employees for 100 days plus Rs. 25 per employee per day for 4 employees for 230 days] 50,000
2. Rs. 7,93,000 is debited to the profit and loss account as “salary to staff”. It is determined as follows —
Basic salary to 20 employees @ Rs. 2,000 per month 4,80,000
Employer’s contribution to unrecognised provident fund 48,000
Entertainment allowance to some of the employees 45,000
Salary to X 96,000
Salary to X’s brother [X’s brother may not get salary of more than Rs. 2,000 per month in any other concern] 84,000
Mediclaim insurance premium of 20 employees 40,000
3. Rs. 30,000 is debited to the profit and loss account as interest on capital borrowed for payment of income-tax.
4. X receives a plant on November 10, 2019 from his friend A as gift. The fair market value of the plant on November 10, 2019 is
Rs. 2,30,000 and rate of depreciation is 15 per cent. Written down value of the plant in the hand of A on April 1, 2019 is, however,
Rs. 2,60,000. In respect of this plant, no depreciation is claimed in the books of account. For tax purposes, the following points are
noted from the books of account —
Rs.
Depreciated value of plants (rate of depreciation : 15 per cent on April 1, 2019) 7,10,000
Cost of new machine imported from Germany (it is put to use on June 30, 2019) 6,00,000
Sale proceeds of a plant sold on March 30, 2020 (it was purchased in 1991-92) 14,00,000
Depreciation debited to profit and loss account 80,000
5. Rs. 30,000 is given to an approved Indian Institute of Technology for carrying out an approved programme [under section
35(2AA)] of scientific research. Rs. 30,000 is debited to the profit and loss account as “expenditure on scientific research”.
6. Donations debited to the profit and loss account include a donation of Rs. 1,40,000 for the National Urban Poverty Eradication
Fund. X wants to claim the same as deduction under section 35CCA.
7. During 2019-20, X has presented 400 diaries to its distributors for advertisement purposes. The entire cost of Rs. 5,00,000 is debited
to the profit and loss account. These diaries were purchased from a “relative” on different dates. The market value of these diaries and
other information noted from the books of account are as follows —
Number of diaries Amount of bill Fair market value Mode of payment
Rs. Rs.
100 1,50,000 1,85,000 A/c payee cheque
260 2,60,000 2,00,000 Crossed draft
40 90,000 80,000 Crossed cheque
400 5,00,000 4,65,000
8. Capital expenditure (purchase of land) of Rs. 4,60,000 is incurred for promoting family planning amongst employees. The entire
expenditure is debited to the profit and loss account. Besides cost of a second hand medical equipment (Rs. 40,000; date of purchase
and put to use : March 13, 2020) for promoting family planning amongst employees is debited to the profit and loss account. X intends
to claim deduction under section 36(1)(ix). Alternatively, he wants to claim depreciation under section 32.
9. Some of the items on debit side of the profit and loss account are —
a. Rs. 10,000 regarding expenditure incurred for printing invitation cards and hiring and transport charges of furniture and
shamiyana in connection with the inauguration of a new branch opened for expanding the business ;
b. Rs. 24,000 regarding payment by way of contribution towards unapproved gratuity fund ;
c. Rs. 15,000 regarding payment of internet charges;
d. Rs. 12,000 regarding expenses of shifting business premises from the original site to the present site which is more advantageously
situated.
Compute the taxable income and tax liability of X for the assessment year 2020-21 if X deposits Rs. 1,20,000 in Public Provident Fund
account on November 30, 2019.
➠ 90-P10 X Ltd., an Indian company, is engaged in the business of manufacture of goods in India for domestic market. The audited
profit and loss account for the year ending March 31, 2020 is as follows :
Rs. Rs.
Cost of goods sold 14,52,500 Sales 40,70,500
Office expenses 1,30,000 Rent of quarters near factory given to workers 60,000
Salary to employees 12,80,000 Rent of a commercial property given on rent to
Expenditure on scientific research 84,000 a foreign bank 1,30,000
Bad debts 10,000 Sale proceeds of gold (not being stock-in-trade) 2,60,000
Entertainment expenses 57,000 Amount charged from persons using guest house
Advertisement expenditure 2,27,000 of company 10,000
Travelling expenses 3,20,000
Interest 82,000
Income and wealth tax 1,16,400
GST and customs duty 1,76,000
Municipal tax of quarters given to workers 16,000
Municipal tax of commercial property 12,000
Repairs of workers’ quarters 12,000
Repairs of commercial property given on rent 7,000
Repairs of factory 10,000
Insurance 36,000
Land revenue of workers’ quarters 2,000
Land revenue of commercial building 6,000
Net profit 2,72,290
45,30,500 45,30,500
Other information :
1. Cost of goods sold includes the following :
a. goods of Rs. 3,80,000 purchased on May 10, 2019 from B Ltd. in which Mrs. X holds 70 per cent equity capital (Mrs. X does not
hold any share in X Ltd., but X is a director and holds 25 per cent share capital in X Ltd., similar goods were purchased on May 11,
2019 from market for Rs. 2,86,000) (out of Rs. 3,80,000, Rs. 3,50,000 is paid by an account payee cheque and Rs. 30,000 is paid in
cash) ;
b. goods purchased from Y Ltd. of Rs. 90,000 which is paid by a bearer cheque.
2. Out of salary to employees of Rs. 12,80,000 —
a. Rs. 40,000 is employees’ contribution to recognised provident fund, Rs. 37,500 of which is credited in the employee’s account in the
relevant fund before the “due date”;
b. Rs. 26,000 is bonus which is paid on September 13, 2020 ;
c. Rs. 46,000 is commission which is paid on December 1, 2020 ;
d. Rs. 10,000 is incentive to workers which is paid on December 10, 2020 ;
e. Rs. 30,000 is paid outside India on which tax is not deducted at source nor paid to the Government;
f. Rs. 5,000 being capital expenditure for promoting family planning amongst employees; and
g. Rs. 30,000 being entertainment allowance given to employees.
3. Expenditure on scientific research includes Rs. 40,000 being cost of land and Rs. 10,000 paid to an approved National Laboratory
for undertaking scientific research under an approved programme.
4. Entertainment expenses include the following :
a. expenses at a five-star hotel : Rs. 14,000 ;
b. expenses on providing food/beverages to employees in office, factory or other place of their work : Rs. 4,000 ;
c. expenses on providing food/beverages to employees during working hours in a place other than place of work : Rs. 8,000 (i.e., Rs. 40
for an employee for 60 days plus Rs. 25 for an employee for 224 days) ;
d. club bills for entertaining customers : Rs. 9,000 ;
e. entertainment expenditure incurred outside India : Rs. 4,700 (permission of RBI has been taken).
5. Advertisement expenditure includes the following :
a. expenditure incurred outside India : Rs. 46,000 (permitted by RBI to the extent of Rs. 41,400) ;
b. articles presented by way of advertisement (60 articles cost of each being Rs. 900, 36 articles cost of each being Rs. 1,700) ;
c. Rs. 16,000 being cost of advertisement which appeared in a newspaper owned by a political party ;
d. Rs. 11,400 being capital expenditure on advertisement ;
e. Rs. 15,000 paid in cash ;
f. Rs. 7,000 paid to a concern in which X has substantial interest (amount is excessive to the extent of Rs. 1,400).
6. Travelling expenses include the following :
a. Rs. 1,60,000 being expenditure incurred on a foreign tour, Rs. 9,000 out of which is incurred in Indian currency and Rs. 1,51,000
in foreign currency (Rs. 1,40,000 permitted by RBI under foreign exchange regulations) for a visit of 8 days to Germany, out of 8
days, 2 days are utilised by X for attending personal work ;
b. Rs. 40,000 being expenditure on air fare in India by a sales manager (who is otherwise entitled for a first class rail travel) ;
c. Rs. 6,000 incurred for purchasing a machine for factory which is put to use on March 1, 2020 ;
d. Rs. 54,000 being hotel expenses as follows :
i. 4 days’ visit to Madras : Rs. 16,000 ;
ii. 3 days’ visit to Bombay : Rs. 6,000 ;
iii. 17 days’ visit to Bangalore : Rs. 32,000.
7. Out of Rs. 82,000 (being interest), Rs. 60,000 is paid to an Indian company (no tax is deducted at source during the previous year
but it deducted on April 1, 2020 and deposited an April 2, 2020). Rs. 15,000 is payable to IDBI (amount is paid on December 6, 2020).
8. Taxes debited to P & L a/c have been paid as follows :
a. income-tax and wealth-tax on May 31, 2020 ;
b. GST and customs duty : Rs. 1,70,000 on March 31, 2020 and Rs. 6,000 on December 10, 2020 ;
c. municipal tax (workers’ quarters) on June 30, 2020 ;
d. municipal tax (commercial building) on June 30, 2020.
9. Out of insurance of Rs. 36,000, Rs. 6,000 is fire insurance premium of workers’ quarters (paid on April 10, 2020) and
Rs. 4,000 is fire insurance premium of commercial building (paid on April 10, 2020).
10. Land revenue of Rs. 8,000 is paid on September 10, 2020.
11. Other expenses include the following :
a. repairs of guest house : Rs. 6,000 ;
b. cost of facilities provided in the guest house : Rs. 41,200 ;
c. cost of maintaining a holiday home for the benefit of 140 employees of the company : Rs. 30,000 ;
d. amount not deductible under section 37(1) : Rs. 4,000.
12. Depreciation of Rs. 1,11,600 is calculated as follows : 15 per cent of Rs. 4,00,000, being the depreciated value of the block on April
1, 2019 + 15 per cent of Rs. 3,44,000, being cost of a new machine which is put to use on March 1, 2020 ; cost of Rs. 3,44,000 does not
include travelling expenditure of Rs. 6,000 which is included in “travelling expenses”.
13. Other expenses include a sum of Rs. 25,000 paid to the auditor (tax is deducted on January 10, 2020 and it is deposited on September
17, 2020).
14. Indexed cost of acquisition of gold : Rs. 2,41,000.
Determine the amount of net income of X Ltd. for the assessment year 2020-21.
Solution : Rs.
Net profit as per P & L a/c 2,72,290
Adjustment
Income-tax and wealth-tax (+)1,16,400
Excess cost of purchasing goods from B Ltd. [not allowed under section 40A(2)] (+)94,000
Payment of Rs. 30,000 to B Ltd. in cash [no adjustment is required as Rs. 94,000 paid to B Ltd. is
disallowed under section 40A(2)] —
Payment of Rs. 90,000 by bearer cheque (100% of Rs. 90,000) (+)90,000
Employees’ contribution to provident fund (treated as income) (+)40,000
Amount credited to employees’ provident fund before “due date” (–)37,500
Commission paid after September 30, 2020 (not allowed by virtue of section 43B) (+)46,000
Salary paid outside India on which tax is not deducted at source [not allowed by virtue of section
40(a)(i)] (+)30,000
Capital expenditure on family planning (one-fifth of such expenditure is deductible every year in
5 years) (+)4,000
Cost of land (not deductible under section 35) (+)40,000
Payment to an approved National Laboratory (amount deductible is 150% of Rs. 10,000) (–)5,000
Entertainment expenses [it is fully deductible under section 37(1)] —
Advertisement expenses incurred outside India to the extent not permitted by RBI [deductible under
section 37(1)] —
Rs.
Articles presented of an amount exceeding Rs. 1,000 per article [it is deductible under section 37(1)] —
Advertisement appeared in a newspaper owned by a political party [not deductible by virtue of
section 37(2A)] (+)16,000
Advertisement expenses exceeding Rs. 10,000 paid in cash (+)15,000
Capital expenditure on advertisement [not deductible under section 37(1)] (+)11,400
Advertisement expenses paid to a relative [to the extent it is excessive] (+)1,400
Travelling expenses incurred outside India [amount deductible is 6/8 of (Rs. 1,60,000 : Rs. 1,20,000;
amount not deductible is Rs. 1,60,000—Rs. 1,20,000)] (+)40,000
Expenditure on air fare for inland travel (fully deductible) —
Capital expenditure on travelling [not deductible; it can be capitalised and depreciation can be claimed] (+)6,000
Hotel expenses [amount is deductible] —
Interest paid to a resident without deducting tax at source [as tax is deductible but not deducted during
the current year, 30% of interest is not deductible. Since tax is deducted in the next year, interest (which
is disallowed during the current year) will be allowed as deduction in the next year] (+)18,000
Interest payable to IDBI paid after the due date of furnishing of return (+)15,000
GST, etc., paid after the due date of furnishing of return (+)6,000
Municipal tax of commercial property given on rent (+)12,000
Repairs of commercial property given on rent (+)7,000
Fire insurance premium of property given on rent (+)4,000
Land revenue of workers’ quarters paid before the due date of furnishing of return (deductible) —
Land revenue of property given on rent (not deductible) (+)6,000
Repairs of guest house (deductible under section 30) —
Cost of providing different facilities in the guest house [deductible under section 37(1)] —
Amount not deductible under section 37(1) (+)4,000
Rent of quarters given to workers (treated as business receipt as quarters are generally given to
workers for running the business smoothly) —
Rent of property given to a foreign bank (it is taxable as house property income) (–)1,30,000
Sale proceeds of gold (it is taxable under section 45) (–)2,60,000
Depreciation [see note] (–)9,650
Auditor’s fees [it is deductible and no adjustment is required, since tax is deducted during the current
year and it is deposited before the due date of submission of return of income: September 30, 2020] Nil
Income under the head “Profits and gains of business or profession” (a) 4,52,340
Gross annual value (being rent of commercial property) 1,30,000
Less : Municipal tax (not deductible as not paid during the previous year) Nil
Less : Standard deduction (30% of Rs. 1,30,000) 39,000
Income from property (b) 91,000
Capital gain
Sale proceeds of gold 2,60,000
Less : Indexed cost of acquisition 2,41,000
Long-term capital gain (c) 19,000
Gross total income [(a) + (b) + (c)] 5,62,340
Less : Deduction under section 80GGB (payment of advertisement by an Indian company to a political
party is treated as “contribution” to the political party) 16,000
Net income 5,46,340
Note - Depreciation
Add : Actual cost of asset which is put to use on March 1, 2020 (i.e., Rs. 3,44,000 + Rs. 6,000, being
travelling expenses) 3,50,000
Amount of depreciation which is deductible under section 32 [i.e., 15% of Rs. 4,00,000 + 50% of 15%
of Rs. 3,50,000] 86,250
Additional depreciation [50% of 20% of Rs. 3,50,000] 35,000
Total admissible depreciation 1,21,250
Depreciation debited to P & L a/c 1,11,600
Amount further deductible 9,650
➠ 90-E10 [P6.39]* X (age : 35 years) owns a business. The following profit and loss account is prepared by the accountant for the
year ending March 31, 2020 —
Rs. Rs.
Office expenses 75,000 Dividend from a foreign company 25,000
Salary to employees 3,78,000 Amount charged from employees who have
Cost of acquisition of a patent right (purchased and used holiday home at Ooty 36,000
put to use on May 6, 2019) 26,000 Amount charged from persons who have
Lump sum consideration for acquisition of technical used the guest house near factory 40,000
know-how (purchased and put to use on December Other receipts 3,000
18, 2019) 30,000 Net loss 62,132
Expenditure on scientific research 2,10,000
Transfer to general reserve 40,000
Reserve for doubtful debts 6,000
Interest on capital and loan 4,30,000
Repairs of Ooty holiday home 9,000
Repairs of guest house 7,000
Expenditure on providing food at Ooty holiday home 1,70,000
Expenditure on providing food at guest house 36,000
Entertainment expenditure 1,15,000
Travelling expenses 3,10,000
Advertisement expenses 2,82,000
GST 1,68,000
Customs duty 3,14,000
Repair of office 60,000
Audit fees 30,000
Expenditure for obtaining long-term loan 18,000
Provision for gratuity 32,000
Employer’s contribution towards provident fund 26,000
Depreciation (on buildings as per section 32) 6,90,000
Depreciation on car purchased on December 1, 2019
(4 months’ depreciation @ 15% per cent on Rs. 3,30,000) 16,500
66,41,918 66,41,918
Other information —
1. Cost of goods sold include the following bills in respect of goods purchased from a relative :
Date of purchase Amount of bill Fair market value Amount paid by A/c Amount paid in cash
of goods payee cheque/draft or by bearer cheque
Rs. Rs. Rs. or by crossed cheque
Rs.
April 10, 2019 36,000 28,000 6,000 30,000
May 7, 2019 73,400 74,800 73,400 —
May 13, 2019 15,250 14,000 4,250 11,000
June 17, 2019 51,336 38,200 20,000 31,336
January 20, 2020 28,000 27,000 5,000 23,000
The bill of Rs. 28,000 is paid on March 12, 2020.
2. Salary to employees include the following :
Rs.
Entertainment allowance to employees 16,000
Employees’ contribution to recognised provident fund (out of which Rs. 26,000 is credited by the employer before
the “due date”) 32,000
Salary paid outside India (tax is deducted at source) 80,000
Salary to a relative (which is excessive to the extent of Rs. 12,000) 30,000
3. On July 15, 2019, X has paid tax at source on salary paid outside India of Rs. 78,000 during previous year 2018-19. This salary
was not allowed as deduction for the same year as tax was not deducted at source during 2018-19.
4. Expenditure on scientific research includes the following :

Rs.
Plant and machinery for conducting in-house research (related to business) 92,000
Salary to persons engaged in research 60,000
Contribution to an approved research association for carrying an approved scientific research programme which is
not related to the business of X 50,000
5. Interest on loan/capital includes the following :
Interest on own capital of X 40,000
Interest on loan taken from a public financial institute (two-fifths of loan is utilised for payment of income-tax,
Rs. 20,000 is paid on July 30, 2020 and Rs. 10,000 paid on November 30, 2020) 30,000
6. On June 30, 2019, X has paid Rs. 84,780 being interest on loan taken from outside India (after deducting tax at source). This interest
pertains to the previous year 2018-19 and it was not allowed as deduction for the assessment year 2018-19, as tax was not deducted
at source during the previous year 2018-19.
7. Entertainment expenditure includes the following —
Rs.
Expenditure incurred outside India (permission of RBI not taken) 38,500
Expenses on providing food/beverages to employees during working hours in place other than place of their work
(i.e., Rs. 140 for an employee for 50 days) 7,000
8. Travelling expenses are incurred in India. A bill of Rs. 63,000 is paid by a crossed cheque.
9. Advertisement expenses include cost of 50 audio systems (cost of each being Rs. 5,000) presented to customers.
10. GST and customs duty are paid on July 1, 2020. On January 10, 2020, X paid GST of Rs. 14,000 pertaining to the previous year
2018-19.
11. Gratuity is an approved gratuity fund.
12. Other expenses include —
Payment of income-tax in foreign country 14,700
Salary paid to X 24,000
Expenses incurred to eliminate a drain under statutory obligation (being capital expenditure) 67,000
Penalty for illegal import of goods 24,400
Contribution towards public provident fund 56,000
Telephone expenses 15,000
Expenditure on shifting of office 6,000
Payment for acquisition of trademark on November 1, 2019 10,000
Fines paid for breach of Factories Act 8,000
 Theoretical problems on business/profession income

91-P1 What are the provisions regulating tax incidence of trade and professional associations as given by sections 28(iii) and 44A ?
Solution : No person can trade with himself and make an assessable profit. If different persons combine themselves into
a distinct and separate legal entity for the purpose of rendering services to themselves, the resulting surplus is not assessable
to tax, if the surplus is to be refunded to the members.
It is a settled principle that excess of income over expenditure accruing to a mutual association is not income and,
consequently, it is not liable to tax. The principle is based upon the fact that in the case of surplus, the contributors are to
receive back a part of their own contributions.
The aforesaid rule is not applicable in the following two cases —
a. where the mutual concern is a mutual insurance society and the income is derived from the carrying on of any business
of insurance [sec. 2(24)(vii)] ; or
b. where the mutual concern is a trade, professional or similar association and the income is derived from specific services
performed for its members. [sec. 28(iii)].
Except in the two cases given above, any surplus of a mutual concern is not chargeable to tax.
Tax implication of section 44A - To understand the implications of section 44A, one should note that if a loss arises from a
business whose income is taxable, it can be set off against taxable income. Where income from a particular source is not
chargeable to tax, a loss from such source cannot be set off against income chargeable to tax. To this general provision, an
exception is provided by section 44A. Under section 44A, the amount of any deficiency in the case of a trade or professional
association is allowed as deduction from the assessable income of the association to the extent of 50 per cent of the assessable
income of the association.
X Chamber of Commerce is an association of traders of South India.
The following data is available —
Situation 1 Situation 2
Rs. Rs.
Income derived from performing specific services for members (which is taxable) (a) 86,000 90,000
Surplus from other activities (not taxable) (b) 50,000 (-)1,60,000
Taxable income
Income mentioned at (a) 86,000 90,000
Less : Loss from other activities but subject to maximum of 50% of (a) — 45,000
Net income 86,000 45,000
91-E1 The following information is submitted by a trade association. Compute the net income chargeable to tax for the assessment
year 2020-21—
Rs. Rs.
Surplus from providing specific services to members 1,28,000 2,56,000
Surplus from other activities (-)5,000 (-)1,33,000
➠ 91-P2 Under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMEDA, 2006) interest payable on delayed
payments to a Micro, Small and Medium enterprise is not deductible. Explain.
Solution : The Micro, Small and Medium Enterprises Development Act, 2006 (MSMEDA, 2006) which provides for
facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises has
come into force from October 2, 2006. The provisions of sections 22 and 23 of the said Act have a bearing on the assessment
of ‘buyers’ under the Income-tax Act, 1961. Here, the term ‘buyer’ means a person who buys any goods or receives any
services from a ‘supplier’ for a consideration.
Section 23 of MSMEDA, 2006 lays down that the amount of interest payable or paid by any buyer under or in accordance
with the provisions of this Act shall not be allowed as deduction in the computation of income. Section 22 of the MSMEDA,
2006, inter alia, requires disclosure of the principal and interest due thereon separately in the annual statement of accounts.
This enables the Assessing Officers to ascertain correct amount of disallowance on account of interest payable or paid by
the buyer - Instruction No. 12/2006, dated December 14, 2006.
➠ 91-E2 X Ltd. purchases goods on credit from Y, a small scale industrial undertaking. As per the agreement with Y, X Ltd. is
supposed to pay interest at the rate of 1/2 per cent per month whenever the payment is not made within 5 days of supply of goods (such
interest comes to Rs. 4,500 for the previous year 2019-20). However, as per the provisions of the MSMEDA, 2006, it has to pay
Rs. 60,710 as interest to Y during 2019-20. After debiting Rs. 60,710, net profit of X Ltd. is Rs. 7,25,290. Find out the net income
of X Ltd. for the assessment year 2020-21.
How to compute assessable profits/loss from business or profession - Let us recapitulate

Rs. Rs.
Net profit as per P & L Account ..... .....
Add : Amount debited to P & L Account in respect of the following :
Losses of earlier years .....
Capital losses .....
Personal expenses (such as drawings) .....
Income-tax, surtax, wealth-tax, gift-tax, estate duty (tax penalty, penal interest, fine, etc.) .....
Charity and donation (deductible separately under section 80G) .....
Gifts and presents to others (personal and for non-business purposes) .....
All reserves [except depreciation reserve to the extent permissible, provisions for bad debts under
section 36(1)(viia) and transfer to reserve by financial institutions under section 36(1)(viii)/(viiia)] .....
All expenses related to other heads of income .....
Expenses not deductible under section 40 [see para 82] .....
Expenses not deductible under section 40A [see para 82] .....
Depreciation (taken separately) .....
Other expenses, etc., debited to P & L Account to the extent not admissible under sections 30 to 40A ..... .....
Profits and gains of business or profession 292
Add : Amount not credited to P & L Account : Rs. Rs.

a. in respect of deemed income chargeable under section 41 [see para 83] .....
b. any other chargeable profits .....
Deduct : Income credited to P & L Account but not chargeable under the head
“Profits and gains of business or professions” .....
Salary income .....
Rental income .....
Capital gain .....
Dividend .....
Income-tax, wealth-tax, gift-tax, estate duty, surtax, CDS refunds .....
Bad debts, excise duty recovered (if earlier not allowed as deduction) ..... .....
Deduct :
Expenses not debited to P & L Account but allowable as deduction under sections 30 to 40A .....
Depreciation under section 32 [see para 81.3] ..... .....
Income chargeable under the head “Profits and gains of business or profession” .....
●
Test your knowledge

For answer, see relevant paras indicated at the end of each question :
1. Define clearly the terms “business”, “profession” and “vocation”. [para 77]
2. Set out in detail, specific statutory deduction in computing business income. [para 81]
3. Discuss the provision relating to the allowance of the following expenditure while computing income under the head
“Profits and gains of business or profession” :
a. Interest paid on loans received by a company.
b. Bad debts.
c. Salary and perquisites to employees of a company (other than directors or their relatives).
4. What expenses are disallowed to a businessman in computing profits? [para 82]
5. What do you mean by the term “depreciation” as used in the Income-tax Act? Discuss the different types of
depreciation allowances admissible under the Act. [para 81.3]
6. How would you treat unabsorbed depreciation while calculating total income? [para 81.3]
7. Write notes on :
a. Scientific research expenditure.
b. Bad debts. [para 81.29]
8. Discuss the condition laid down for allowance of :
a. Expenditure in respect of salaries and perquisites given to directors and other employees.
b. Travelling expenses of directors and other employees.
9. Discuss briefly the provisions relating to allowance of the following expenditure while computing income under the
head “Profits and gains of business or profession” :
a. Bonus to employees. [para 81.21]
b. Expenditure on scientific research. [para 81.9]
10. Discuss the admissibility of the following claims for expenses against business profits :
a. Loss by burglary of cash from the cash safe in the business premises of a money-lender.
b. Loss of money through embezzlement by an employee.
c. Loss of stock-in-trade in fire.
d. Expenses incurred in contesting the title suit of business premises. [para 81.40]
11. What do you understand by methods of accounting? Enumerate them and discuss which of them will you advise
assessee to follow.
CHAPTER 7 “Capital gains” and its
computation
A
ny gain arising on the transfer [except such transfers as are given in sections 46
and 47] of a capital asset [sec. 2(14)] is chargeable to tax under section 45, if it is not
eligible for exemption under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA,
54GB and 54H. Incidence of tax on capital gains, however, depends upon whether capital
gain is a short-term capital gain or a long-term capital gain [sec. 2(42A)]. All the provisions
of the Act regulating tax incidence on capital gains are discussed in this chapter.

92. Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax under the head
“Capital gains” in the immediately following assessment year, if it is not eligible for exemption under sections
54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB. In other words, capital gain’s tax liability arises only when the
following conditions are satisfied :
Condition 1 There should be a capital asset. See para 93.
Condition 2 The capital asset is transferred by the assessee. For meaning of transfer, see para 94.
Condition 3 Such transfer takes place during the previous year. See para 94.2.
Condition 4 Any profit or gains arises as a result of transfer. For computation of capital gain, see para 95.
Condition 5 Such profit or gains is not exempt from tax under sections See para 103.
54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB.
If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous
year in which the capital asset is transferred.
However, in a few cases different rules are applicable. These cases are narrated briefly in para 101.
 WHAT IS INCLUDED IN AND EXCLUDED FROM CAPITAL ASSET

93. “Capital asset” is defined by section 2(14).
 Positive list - “Capital asset” means property of any kind, whether fixed or circulating, movable or immovable,
tangible or intangible. Besides, it includes the following –
1. Any rights in or in relation to an Indian company, including rights of management or control or any other
rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business or profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance
with the regulations made under the SEBI Act.
 Negative list - The following assets are excluded from the definition of “capital assets” –
1. Stock-in-trade (other than securities referred to in point 3 above).

2. Personal effects (movable assets).
3. Agricultural land in a rural area in India.
4. A few gold bonds and special bearer bonds (this point does not have any practical utility).
5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold
Monetisation Scheme, 2015.
293
Para 93.1 Income under the head ‘Capital gains’ and its computation 294
 Stock-in-trade is not a capital asset - Any stock-in-trade, (not being securities held by a Foreign Institutional
Investor), consumable stores or raw material held for the purpose of business or profession is not a capital asset.
This is because of the fact that any surplus arising on sale or transfer of stock-in-trade, consumable stores or raw
material is chargeable to tax as business income under section 28. What shall be included in the term “stock-in-
trade” must always be dependent upon the nature of the business of the taxpayer. For instance, if the taxpayer
deals in house properties, then such properties are stock-in-trade and, consequently, they are not capital asset.
If a dealer in properties transfers his stock-in-trade (i.e., house properties), the resulting profit is business income
not capital gains. Conversely, if a doctor transfers a house property, the resulting income is taxable under the
head “Capital gains”.
 Personal effects (being movable assets) are not capital assets - Any movable property (including wearing apparel and
furniture) held for personal use of the owner or for the use of any member of his family dependent upon him,
is not a “capital asset” for the purpose of income under the head “Capital gains”. However, the following are
not “personal effects” (in other words, the following are “capital assets”) even if these are for personal use—
jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.
1. X purchased a computer for his personal use at his residence for Rs. 34,000 during 2017-18. He recently sells it for Rs. 44,000.
Personal computer is treated as “personal effects”. Consequently, it is not a capital asset. Surplus of Rs. 10,000 cannot be taxed
under the head “Capital gains”. Since it is capital profit, it cannot be taxed under any other head of income (this income of
Rs. 10,000 will not be chargeable to tax at all). This rule is applicable on transfer of any other movable personal effects (not
being jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art). For instance, on transfer of
personal car, personal garments, personal furniture, personal household goods, nothing is chargeable to tax.
2. Personal jewellery/house property/immovable asset/archaeological collections, drawings, paintings, sculptures or any
work of art are capital assets. Suppose, an individual purchases jewellery/house property/immovable asset/archaeologi-
cal collections, drawings, paintings, sculptures or any work of art for his personal use or for the use of his family members.
Although these are purchased for personal purposes, these are not taken as “personal effects” (by default such items are not
taken as personal effects). Consequently, these are capital asset. Any surplus, which arises on transfer of such capital asset,
is taxable under section 45 under the head “Capital gains”.
 Agricultural land situated in rural area is not a capital asset - Agricultural land in India in a rural area† is not capital
asset.
1. X, a farmer, transfers a piece of agricultural land situated in a village (population : 6,000) in Madhya Pradesh. Since this
agricultural land is situated in a rural area, any surplus on its transfer cannot be taxed under the head “Capital gains”. Nor
can it be taxed under any other head of income. It will be a tax-free income.
2. The above rule is equally applicable if X is not a farmer, but the land which is transferred is used for agricultural purposes
either by X or by any other person authorized by X.
3. If agricultural land is situated in a village which comes within a municipality, then population of the municipality shall
be considered (and not of village). In such a case if population of the municipality exceeds 10,000, then agricultural land is
a capital asset, even if population of the village is less than 10,000.
93.1 Short-term/long-term capital assets - “Short-term capital asset” means a capital asset held by an assessee
for not more than 36 months, immediately prior to its date of transfer. In other words, if a capital asset is held
by an assessee for more than 36 months, then it is known as “long-term capital asset”.
†Rural area for the above purpose is any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000
or more and also which does not fall within distance (to be measured aerially) given below –
2 kilometers from the local limits of municipality/cantonment If the population of the municipality/cantonment board is more than
board 10,000 but not more than 1 lakh
board 1 lakh but not more than 10 lakh
board 10 lakh.
For the above purpose, “population” means the population according to the last preceding census of which the relevant figures have been
published before the first day of the previous year.
295 Short-term/long-term capital assets Para 93.1
93.1-1 WHEN SUCH PERIOD IS TAKEN AS 12 MONTHS/ 24 MONTHS - If a capital asset is transferred after 36 months, it is
known as long-term capital asset. However, in the following cases a capital asset becomes long-term capital asset
if it is transferred after 12 months or 24 months –
 Category A - Period of holding more than 12 months (if transfer takes place after July 10, 2014) –
1. Equity or preference shares in a company (listed in a recognised stock exchange in India).
2. Securities (like debentures, bonds, Government securities, derivatives, etc.) listed in a recognised stock exchange in
India.
3. Units of UTI (whether quoted or not).
4. Units of an equity oriented mutual fund (whether quoted or not).
5. Zero coupon bonds (whether quoted or not).
 Category B - Period of holding more than 24 months–
1. Equity or preference shares in a company (unlisted) (if transfer takes place on or after April 1, 2016).
2. Immovable property (being land or building or both) (if transfer takes place on or after April 1, 2017).
93.1-2 HOW TO DETERMINE PERIOD OF HOLDING - Specific rules are provided by the Income-tax Act to determine
period of holding of a capital asset in a few cases.
93.1-3 WHY CAPITAL ASSETS ARE DIVIDED IN SHORT/LONG-TERM ASSETS - The tax incidence under the head “Capital gains”
depends upon whether the capital gain is short-term or long-term. Long-term capital gain is generally taxable
at a lower rate. If the asset transferred is a short-term capital asset, capital gain will be short-term capital gain.
Conversely, long-term capital gain arises on transfer of a long-term capital asset.
 In the case of transfer of a depreciable asset (other than an asset used by a power generating unit eligible for
depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain, irrespective of period
of holding.
Problems
93.1-P1 State, giving reason, whether the asset is short-term or long-term in the cases given below —
1. X purchases a house property on March 10, 2018 and transfers it on June 6, 2019.
2. Y purchases listed shares in an Indian company on March 10, 2018 and transfers it on June 6, 2019.
3. Z acquires units of an equity oriental mutual fund on July 7, 2018 and he transfers these units on July 10, 2019.
4. A purchases diamonds on September 12, 2016 and gifts the same to his friend B on December 31, 2017. B transfers the asset on October
20, 2019.
5. C purchases unlisted shares in a company on November 21, 2017; the company transfers shares in the name of C : January 5, 2018).
These shares are transferred by C on December 20, 2019.
Solution :
Taxpayer Asset Minimum period Period of holding Short-term or
to become long- long-term
term capital asset
X House property 24 months + March 10, 2018 to June 6, 2019 (i.e., Short-term
14 months and 27 days)
Y Listed Shares 12 months + 14 months and 27 days Long-term
Z Units of a equity 12 months + 12 months and 3 days Long-term
oriented mutual fund
B Diamonds 36 months + September 12, 2016 to October 20, Long-term
2019
C Unlisted shares 24 months + November 21, 2017 to December 20, Long-term
2019
Notes—
1. If an asset is acquired by gift, will, etc. [i.e., circumstances mentioned under section 49(1)—see para 101.1], then the period
of holding of the previous owner is also taken into consideration.
2. In the case of shares, the purchase date by the broker is taken as the date of acquisition.
93.1-E1 State, giving reasons, whether the asset is short/long-term capital asset in the cases given below —
1. X purchases preference shares in a foreign company on January 20, 2017 which are transferred by him on January 18, 2020. Shares
are not listed on any recognised stock exchange in India.
2. Y purchases debentures of a company on March 10, 2017 which are transferred on January 5, 2020. Debentures are not listed on
any recognised stock exchange in India.
Para 94 Income under the head ‘Capital gains’ and its computation 296
3. In 2 supra, suppose debentures are listed on the Cochin Stock Exchange with effect from January 1, 2020.
4. Z purchases Government securities on March 6, 2018 which are transferred by Mrs. Z on March 31, 2020 after his death (Z dies
on February 20, 2020).
 WHAT IS TRANSFER OF CAPITAL ASSET

94. Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)].
94.1 Certain transactions not included in transfer - For the purpose of section 45, the following transactions
are not regarded as transfers (in other words, in the following cases†, there is no capital gain)—
1. Distribution of assets in kind by a company to its shareholders on its liquidation.
2. Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or
partial partition.
3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception — gift of ESOP* shares is
chargeable to tax).
4. Transfer of capital asset between holding company and its 100 per cent subsidiary company, if the transferee-
company is an Indian company.
5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-company is an Indian
company.
6. Transfer of shares in amalgamating company/demerged company in lieu of allotment of shares in amalgam-
ated company/resulting company in the above case.
7. Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution.
8. Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme
of amalgamation/demerger of the two foreign companies, if a few conditions are satisfied.
9. Transfer of a capital asset by a non-resident of foreign currency convertible bonds or Global Depository
Receipts to another non-resident if the transfer is made outside India and if a few conditions are satisfied.
10. Transfer by an individual of Sovereign Gold Bond (issued by RBI under the Sovereign Gold Bond Scheme,
2015) by way of redemption.
11. Transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting,
photograph or print, to the Government or a University or the National Museum, National Art Gallery, National
Archives or any other notified public museum or institution.
12. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form,
of a company into shares or debentures of that company.
13. Transfer by way of conversion of preference shares of a company into equity shares of that company.
14. Land transferred by a sick industrial company, if a few conditions are satisfied.
15. Transfer of a capital asset by a private company/unlisted public company to a limited liability partnership
in the case of conversion of company into LLP, if a few conditions are satisfied.
16. Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in a company, if a few
conditions are satisfied.
17. Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfied.
18. Any transfer of capital asset in a reverse mortgage.
19. Transfer of a capital asset (being a Government security carrying periodic payment of interest) made
outside India through an intermediary dealing in settlement of securities by a non-resident to another non-
resident.
20. Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units
allotted by that trust to the transferor.
21. Any transfer by a unitholder of units held by him in the consolidating scheme of a mutual fund, made in
consideration of the allotment to him of units in the consolidated scheme of the mutual fund, if the consolidation
is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity
oriented fund.
*In the case of gift of ESOP shares, fair market value on the date of gift is taken as full value of consideration.
†Provisions of sections 46 and 47 are given in brief (keeping in view the requirement of undergraduate/IPC students).
297 Transfer when complete and effective Para 94.2
22. Transfer by a unitholder of units held by him in the consolidating plan of a mutual fund scheme, made in
consideration of the allotment to him of units, in the consolidated plan of that scheme of the mutual fund.
23. Transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company issued
outside India, by a non-resident to another non-resident.
24. Transfer of capital asset [being bonds/GDR referred to in section 115AC(1) or rupee denominated bond of
an Indian company or derivative or (notified) securities] made by a non-resident on a recognised stock exchange
located in any International Financial Services Centre and where the consideration is paid/payable in foreign
currency.
If the aforesaid conditions are satisfied, then the transaction is not treated as “transfer”.
Problems
94.1-P1 State, giving reasons, whether the capital gain is taxable in the following cases —
1. A house property is purchased by a Hindu undivided family in 1950 for Rs. 40,000. It is given to one of the family members in
2019-20 at the time of partition of the family.
2. Y purchases gold in 1974 for Rs.10,000. In 2019-20, it is gifted to his son at the time of his marriage.
3. Z purchases 10 convertible debentures in 1987 which are converted into 100 shares in 2019 by the company.
4. A Ltd. is 100 per cent holding company of B Ltd. A Ltd. transfers a capital asset (acquired in 1987 for Rs. 50,000) to B Ltd. on June
16, 2019 for Rs. 2,70,000. B Ltd. is an Indian company, while A Ltd. is a foreign company. The capital asset is transferred as capital asset.
5. Suppose in 4, the capital asset is transferred as stock-in-trade.
Solution :
1. Distribution of a capital asset by a Hindu undivided family to its members at the time of partition is not treated as
“transfer”. As the element of “transfer” is missing, capital gain is not chargeable to tax [see, however, para 101.1].
2. Transfer by way of gift is not treated as “transfer”. Therefore, no capital gain tax liability arises in the case of gift [see,
however, para 101.1].
3. No capital gain tax liability will arise in the case of conversion of bonds into shares as such conversion is not treated as
transfer [see, however, para 101.13].
4. Any transfer between a holding company and 100% subsidiary company is not treated as transfer if the transferee-
company is an Indian company. In this case, therefore, the element of “transfer” is missing, and hence capital gains tax
liability does not arise.
5. The rule stated in 4 supra is not applicable if a capital is transferred as a stock-in-trade. Therefore, in this case, capital gain
is chargeable to tax.
94.1-E1 State, giving reasons, whether the following are treated as “transfer” —
1. X Ltd. is a foreign company. It holds shares in A Ltd., an Indian company. Y Ltd., a foreign company, takes over the business of
X Ltd. in a scheme of amalgamation of X Ltd. and Y Ltd. Shareholders holding 75 per cent shares in X Ltd. become shareholders in
Y Ltd. Consequently, shares in A Ltd. owned by X Ltd. are transferred to Y Ltd. On this transaction, there is no foreign tax liability.
2. At the time of liquidation, capital assets are distributed by a company to its members.
3. X gifts his house property to his daughter-in-law.
4. Y, Finance Head in A Ltd., gets 2,000 equity shares in A Ltd. under ESOP from A Ltd. at a pre-determined price of Rs. 2 per share
(fair market value: Rs. 900 per share). On March 2, 2020, X gifts these shares to his daughter-in-law (fair market value : Rs. 1,200
per share).
94.2 Transfer when complete and effective - Generally, capital gain is taxable in the year in which capital asset
is transferred. Different rules are applicable in case of movable/immovable assets to find out when a capital asset
is “transferred”.
1. Immovable property when documents are registered - Title to immovable assets will not pass till the conveyance
deed is executed or registered.
2. Immovable property when documents are not registered - Even if the documents are not registered but the following
conditions of section 53A of the Transfer of Property Act are satisfied, ownership in an immovable property is
“transferred”—
a. there should be a contract in writing;
b. the transferee has paid consideration or is willing to perform his part of the contract; and
c. the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of capital gains.
3. Movable property - Title to a movable property passes at the time when property is delivered pursuant to a
contract to sell. Entries in the books of account are not relevant for determining date of transfer.
Problems
94.2-P1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below —
1. X sells a house property to Y as per sale deed dated March 30, 2020. The documents are, however, registered on April 6, 2020.
2. Z sells a house property to A as per agreement to sale dated May 6, 2019. A pays the consideration on the same day. The possession
is given on June 1, 2019. The sale deed is yet to be registered.
3. B sells shares to C on March 1, 2020. Transfer deed is signed on the same day. Share certificates are delivered at the time of signing
the transfer deed. Shares are, however, transferred in the name of C in the records of the company on May 10, 2020.
Solution :
1. In the case of immovable property, ownership is transferred when sale deed is registered. In such a case, “transfer” takes
effect from the date of execution of the sale deed (and not from the date of registration)— CIT v. Ghaziabad Engg. Co. (P.) Ltd.
[2001] 116 Taxman 268 (Delhi). Therefore, in this case transfer takes place during the previous year 2019-20 and,
consequently, capital gain is taxable for the assessment year 2020-21.
2. Even if sale deed is not registered, an immovable property is transferred when the three conditions of section 53A of the
Transfer of Property Act [see para 94.2] are satisfied. The three conditions are satisfied on June 1, 2019. Therefore, capital gain
is taxable for the assessment year 2020-21.
3. When a movable property is delivered pursuant to a contract to sell, the ownership is transferred. In this case, ownership
is transferred on March 1, 2020 and, consequently, capital gain is taxable for the assessment year 2020-21.
94.2-E1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below—
1. X sells a house property to Y as per sale deed dated March 1, 2020. The documents are registered on April 1, 2020. As per the
contract, sale consideration is paid on April 1, 2020.
2. Z sells a commercial property to A as per agreement to sell dated March 11, 2020. The possession is given on April 1, 2020 after
receiving the entire consideration on March 31, 2020. The documents are not registered.
 CAPITAL GAINS - HOW COMPUTED [SEC. 48]

95. Computation of capital gain depends upon the nature of capital asset transferred, viz., short-term capital
asset or long-term capital asset. Capital gain arising on transfer of a short-term capital asset is short-term capital
gain, whereas transfer of long-term capital asset generates long-term capital gain. The tax incidence is generally
higher in the case of short-term capital gain as compared to long-term capital gain.
The method of computation of short-term and long-term capital gain is as follows :
Computation of short-term capital gain Computation of long-term capital gain
1. Find out full value of consideration [see para 96] 1. Find out full value of consideration [see para 96]
2. Deduct the following : 2. Deduct the following :
a. expenditure incurred wholly and exclusively in a. expenditure incurred wholly and exclusively in connec-
connection with such transfer [see para 97]; tion with such transfer [see para 97];
b. cost of acquisition [see para 98]; and b. indexed cost of acquisition—see para 100 [in some cases
c. cost of improvement [see para 99]. cost of acquisition is deducted — see para 95.1]; and
c. indexed cost of improvement—see para 100 [in some cases
cost of improvement is deducted — see para 95.1].
3. From the resulting sum deduct the exemption pro- 3. From the resulting sum deduct the exemption provided by
vided by sections 54B, 54D, 54G and 54GA [see para sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB
103] [see para 103]
4. The balance amount is short-term capital gain. 4. The balance amount is long-term capital gain.
Notes : No deduction will be allowed in respect of payments of securities transaction tax in computing income under the head
“Capital gains”.
95.1 When the benefit of indexation is not available in the case of long-term capital asset - In the following
cases, the benefit of indexation is not available even if a long-term capital asset is transferred—
Capital assets Who is the transferor
Bonds or debentures* [other than (a) capital indexed bonds issued by the Government or (b)
Sovereign Gold Bond issued by RBI under the Sovereign Gold Bond Scheme, 2015] Any person
Shares in or debentures of an Indian company acquired by utilizing convertible foreign Non-resident
exchange as mentioned in first proviso to section 48†
†In these cases, indexation benefit is not available. No option is given to the taxpayer to opt out of the special provisions of sections 48 (first
proviso), 50B, 115AB, 115AC, 115ACA and 115AD and claim indexation benefit.
*Preference shares (redeemable or non-redeemable) are not bonds or debentures and indexation benefit is available.
299 Capital gains exempt from tax Para 95.2
Capital assets Who is the transferor

Equity share in a company or a unit of equity oriented mutual fund or a unit of a business
trust referred to in section 112A [see para 104.2] Any person
Depreciable asset (other than an asset used by a power generating unit eligible for Any person
depreciation on straight line basis)
Undertaking/division transferred by way of slump sale as covered by section 50B† Any person
Units purchased in foreign currency as given in section 115AB† Offshore fund
Global Depository Receipts (GDR) purchased in foreign currency as given in section
115AC† Non-resident
Global Depository Receipts (GDR) purchased in foreign currency as given in section
115ACA† Resident individual
Securities as given in section 115AD† Foreign Institutional
Investors [FII]
Note : In the above cases, the provisions relating to indexed cost of acquisition and indexed cost of improvement are not
applicable.
95.2 Capital gains exempt from tax - In the cases given below, capital gains are not chargeable to tax by virtue
of section 10. Conversely, in the cases given below if assets are transferred at a loss, such capital loss is not taken
into consideration.
95.2-1 CAPITAL GAIN ON TRANSFER OF US64 [Sec. 10(33)] - Any income arising from the transfer of a capital asset being
a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002. This
rule is applicable whether the capital asset (US64) is long-term capital asset or short-term capital asset.
95.2-2 LONG-TERM CAPITAL GAIN ON TRANSFER OF BSE-500 EQUITY SHARES [Sec. 10(36)] - This exemption is available if the
following conditions are satisfied –
1. Capital gain arises on transfer of long-term equity shares (being shares in a BSE-500 Index of the Bombay Stock
Exchange, as on March 1, 2003).
2. These shares were purchased on or after March 1, 2003 but before March 1, 2004.
3. Capital gain arises on transfer of these shares in a recognized stock exchange.
95.2-3 CAPITAL GAIN ON COMPULSORY ACQUISITION OF URBAN AGRICULTURE LAND [SEC. 10(37)] - Section 10(37) is applicable
if the following conditions are satisfied—
1. The assessee is an individual or a Hindu undivided family.
2. He or it owns an agriculture land situated in urban area mentioned in section 2(14)(iii)(a)/(b).
3. There is transfer of the agriculture land by way of compulsory acquisition or the consideration for transfer is
approved or determined by the Central Government (not by a State Government) or RBI.
4. The agriculture land was used by the assessee (and/or his parents if the land was owned by an individual)
for agricultural purposes during 2 years immediately prior to the date of transfer.
5. The asset may be long-term capital asset or short-term capital asset.
6. Capital gain arises from compensation (and/or additional compensation) or consideration which is received
by the assessee after March 31, 2004.
 If the above conditions are satisfied, capital gain (short-term or long-term) is exempt from tax.
95.2-4 LONG-TERM CAPITAL GAIN ON TRANSFER OF SECURITIES IN CASES COVERED BY SECURITIES TRANSACTION TAX [SEC. 10(38)] -
Exemption under section 10(38) is not available from the assessment year 2019-20. Long-term capital gain is
taxable according to the provisions of section 112A [see para 104.2].
95.2-5 CAPITAL GAIN EXEMPTION UNDER SECTION 115JG(1) - Under section 115JG(1) capital gains which arise on
conversion of an Indian branch of a foreign bank into an Indian subsidiary, is not chargeable to tax. The
exemption is available only if the conversion takes place in accordance with the scheme framed by RBI and
subject to the conditions notified by the Central Government.
95.2-6 CAPITAL GAIN EXEMPTION WHEN OWN SHARES ARE PURCHASED [SEC. 10(34A)] - See para 101.17.
95.2-7 COMPENSATION UNDER SECTION 96 OF RFCTLARR ACT, 2013 - Capital gain arising out of any award/agreement
under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act,
2013, is exempt from tax.
†In these cases, indexation benefit is not available. No option is given to the taxpayer to opt out of the special provisions of sections 48 (first
proviso), 50B, 115AB, 115AC, 115ACA and 115AD and claim indexation benefit.
95.2-8 CAPITAL GAIN ARISING UNDER LAND POOLING SCHEME OF ANDHRA PRADESH GOVERNMENT [SEC. 10(37A)] - In Land
pooling scheme (of Andhra Pradesh Government), the compensation in the form of reconstituted plot or
land is provided to landowners. For this scheme, capital gain exemption is available (from the assessment year
2015-16) under section 10(37A) if the following conditions are satisfied –
1. Taxpayer is an individual/Hindu undivided family.
2. He/it owns land or building or both on June 2, 2014.
3. The above land/building is transferred under the Andhra Pradesh Capital City Land Pooling Scheme, 2015.
4. If the above conditions are satisfied, capital gains arising from following transfer shall not be chargeable to
income-tax –
- Transfer of capital asset (being land or building or both) under land pooling scheme.
- Sale of land pooling ownership certificate issued under the above land pooling scheme (such certificate is
given to the land owner in lieu of land transferred under the scheme).
- Sale of reconstituted plot or land by said persons within 2 years from the end of the financial year in which
the possession of such plot or land was handed over to the said persons.
 WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48]
96. Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which
he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market
value of such assets is taken as full value of consideration. Full value of consideration does not mean market value
of that asset which is transferred.
 Adequacy of consideration - Adequacy or inadequacy of consideration is not a relevant factor for the purpose of
determining full value consideration. However, in the case of transfer of land or building (or both), if stamp duty
value is more than 105 per cent of sale consideration, the stamp duty value is taken as full value of consideration.
 Receipt of consideration - It makes no difference whether (or not) “full value of consideration” is received during
the previous year. Even if consideration is not received, capital gain is chargeable to tax in the year of transfer.
 If consideration is not determinable - Where in the case of a transfer, consideration for the transfer of a capital
asset(s) is not determinable, then for the purpose of computing capital gains, the fair market value of the asset
shall be taken to be the full market value of consideration [sec. 50D].
 HOW TO FIND OUT EXPENDITURE ON TRANSFER

97. Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from
full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with
such transfer” means expenditure incurred which is necessary to effect the transfer.
Examples of such expenses are : brokerage or commission paid for securing a purchaser, cost of stamp,
registration fees borne by the vendor, travelling expenses incurred in connection with transfer, litigation
expenditure for claiming enhancement of compensation awarded in the case of compulsory acquisition of assets.
 WHAT IS COST OF ACQUISITION

98. Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature
for completing or acquiring the title to the property are includible in the cost of acquisition. Interest on money
borrowed to purchase asset is part of actual cost of asset.
The amount paid for discharge of a mortgage is part of “cost of acquisition”, if the mortgage was not created by
the transferor. For instance, on June 1, 2014, X took a loan of Rs. 5 lakh by mortgaging his house property. X could
not repay the loan during his lifetime and after his death on July 2, 2016, the property (with mortgage) is
transferred to Mrs. X. Mrs. X transfers the property on May 2, 2018 and before transfer, a sum of Rs. 7.2 lakh is
paid to clear the mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the property while
calculating capital gains in the hands of Mrs. X. If, however, loan is taken by Mrs. X, then repayment of loan will
not be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of
Mrs. X.
 WHAT IS COST OF IMPROVEMENT

99. Cost of improvement is capital expenditure incurred by an assessee in making any additions/improvement
to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets
301 How to convert cost of acquisition Para 100
or to cure such title. Any expenditure incurred to increase the value of the capital asset is treated as cost of
improvement.
 Improvement cost incurred before April 1, 2001 - Cost of improvement incurred before April 1, 2001 is never taken
into consideration. This rule does not have any exception.
 HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT INTO INDEXED COST OF

ACQUISITION/IMPROVEMENT
100. Indexed cost of acquisition is calculated as follows –
Cost of acquisition × Cost inflation index for the year in
Cost inflation index (CII) for the year in which asset was first which the asset is transferred
held by the assessee* or 2001-02, whichever is later
*or the previous owner in cases specified under section 49(1) [see para 101.1].
 Indexed cost of improvement is calculated as follows –
Cost of improvement × Cost inflation index for the year in
CII for the year in which improvement took place which the asset is transferred
 Cost inflation index for different previous years –

Previous year CII Previous year CII Previous year CII Previous year CII
2001-02 100 2006-07 122 2011-12 184 2016-17 264
2002-03 105 2007-08 129 2012-13 200 2017-18 272
2003-04 109 2008-09 137 2013-14 220 2018-19 280
2004-05 113 2009-10 148 2014-15 240 2019-20 289
2005-06 117 2010-11 167 2015-16 254 2020-21 NA
Problems
100-P1 X purchases a house property for Rs. 76,000 on June 30, 1977. The following expenses are incurred by him for making addition/
alteration to the house property :
Rs.
a. Cost of construction of first floor in 1985-86 1,10,000
b. Cost of construction of the second floor in 2003-04 3,40,000
c. Alteration/reconstruction of the property in 2012-13 2,90,000
Fair market value of the property on April 1, 2001 is Rs. 4,50,000. The house property is sold by X on June 15, 2019 for Rs. 99,50,000
(expenses incurred on transfer : Rs. 10,000).
Solution : Computation of long-term capital gain
Rs. Rs.
Sale consideration 99,50,000
Less :
Indexed cost of acquisition (Note 1) 13,00,500
Indexed cost of improvement (Note 2) 13,20,518 26,31,018
Long-term capital gain 73,18,982
Notes :
1. Indexed cost of acquisition is computed as follows :
Rs. 4,50,000*÷100** × 289***= Rs. 13,00,500
*Fair market value on April 1, 2001 (actual cost of acquisition is ignored, as it is lower than fair market value on April 1, 2001).
**Cost inflation index for 2001-02.
***Cost inflation index for 2019-20, i.e., the year in which asset is transferred.
2. Indexed cost of improvement is determined as under : Rs.
Construction of first floor in 1985-86 (expenses incurred prior to April 1, 2001 are not considered) Nil
Construction of second floor (i.e., Rs. 3,40,000* × 289**÷109***) 9,01,468
Alteration/reconstruction in 2012-13 (i.e., Rs. 2,90,000* × 289**÷ 200****) 4,19,050
Indexed cost of improvement 13,20,518
*Cost of improvement
**Cost inflation index for 2019-20

***Cost inflation index for 2003-04
****Cost inflation index for 2012-13
100-E1 [P7.31]* X purchases a house property on September 1, 1979 for Rs. 2,16,000. Fair market value of the property on
April 1, 2001 is Rs. 1,70,000. He incurs the following expenses :
Rs.
a. Construction of a room on the ground floor during 2000-01 40,000
b. Renewals/reconstruction in 2003-04 92,000
The property is transferred on March 31, 2020 for Rs. 29,45,000. Find out the amount of long-term capital gain for the assessment
year 2020-21.
100-P2 X sells the following capital assets during the previous year 2019-20 :
Non-listed House
shares property
Rs. Rs.
Sale consideration 24,00,000 6,80,000
Year of acquisition 2002-03 2005-06
Cost of acquisition 2,90,000 18,000
Cost of improvement incurred in 2016-17 — 70,000
Solution : Computation of capital gain
Less :
Indexed cost of acquisition 7,98,1901 44,4622
Indexed cost of improvement Nil 76,6293
Long-term capital gain 16,01,810 5,58,909
Income under the head “Capital gains” 21,60,719
Notes :
1. Indexed cost of acquisition of shares is determined as under :
Rs. 2,90,000* × 289** ÷ 105*** = Rs. 7,98,190
*Cost of acquisition
***Cost inflation index for 2002-03.
2. Indexed cost of acquisition of house property is determined as under :
Rs. 18,000* × 289** ÷ 117*** = Rs. 44,462
*Cost of acquisition
***Cost inflation index for 2005-06
3. Indexed cost of improvement is determined as under :
Rs. 70,000* × 289** ÷ 264*** = Rs. 76,629
*Cost of improvement
***Cost inflation index for 2016-17.
100-E2 [P7.32]* A Co. (a partnership firm) sells a commercial building on May 10, 2019 for Rs. 20,47,500. From the data given
below, find out the income under the head “Capital gains” for the assessment year 2020-21.
Rs.
Cost of plot of land (acquired in 2004-05) 50,000
Cost of construction (incurred in 2005-06) 1,70,000
Cost of additional construction (incurred in 2009-10) 20,000
Expenditure on transfer 2,500
100-P3 X purchases a house property for Rs. 26,000 on May 10, 1982. He gets the first floor of the house constructed in 1987-88 by
spending Rs. 40,000. He dies on September 12, 1998. The property is transferred to Mrs. X by his will. Mrs. X spends Rs. 30,000 and
Rs. 26,700 during 1999-00 and 2005-06 respectively for renewals/reconstruction of the property. Mrs. X sells the house property for
Rs. 21,50,000 on March 15, 2020 (brokerage paid by Mrs. X is Rs. 11,500). The fair market value of the house on April 1, 2001 is
Rs. 1,60,000.
303 How to convert cost of acquisition Para 100
Solution : Computation of capital gain Rs. Rs.

Less :
Expenditure on transfer 11,500
Indexed cost of acquisition [see Note 1] 4,62,400
Indexed cost of improvement [see Note 2] 65,951 5,39,851
Notes
1. Indexed cost of acquisition
Cost to the previous owner 26,000
Fair market value on April 1, 2001 1,60,000
Cost inflation index for 2001-02 100
Indexed cost of acquisition (i.e., Rs. 1,60,000 × 289 ÷ 100) 4,62,400
2. Indexed cost of improvement
Cost of improvement incurred prior to April 1, 2001 (not considered) —
Cost of improvement incurred in 2005-06 26,700
Indexed cost of improvement (i.e., Rs. 26,700 × 289 ÷ 117) 65,951
100-E3 [P7-33]* X Ltd. purchases a plot of land for Rs. 25,000 on June 6, 1994. The company spends Rs. 80,000 on construction
of a residential building in 1996-97 on the plot of land. In 1999-00, the building is transferred to A Ltd. (a 100 per cent Indian
subsidiary company of X Ltd.) for a consideration of Rs. 1,50,000. Fair market value of the building on April 1, 2001 is Rs. 4,00,000.
A Ltd. sells the building for Rs. 22,96,000 on May 10, 2019. Find out the capital gain chargeable to tax for the assessment year
2020-21.
100-P4 X purchases a property on April 1, 1996 for Rs. 95,000. He enters into an agreement for sale of the property to A on November
1, 2003 and receives Rs. 10,000 as advance. A could not, however, keep his promise and advance of Rs. 10,000 given by him is forfeited
by X. Later on he gifts the property to his friend Y on May 15, 2005. The following expenses are incurred by X and Y for renewal of the
property :
Cost in Rs.
Addition of two rooms by X during 1998-99 25,000
Addition of first floor by X during 2003-04 40,000
Addition of second floor by Y during 2011-12 1,15,000
Fair market value of the property on April 1, 2001 is Rs. 1,15,000.
Y enters into an agreement to sell the property for Rs. 8,50,000 to B on April 1, 2006 after receiving an advance of Rs. 50,000. B could
not pay the balance within the stipulated time of two months and Y forfeits the advance of Rs. 50,000 as per agreement with B. Y ultimately
finds a buyer in C to whom property is transferred for Rs. 18,75,000 on December 1, 2019. Compute the capital gain chargeable to tax
in the hands of Y for the assessment year 2020-21.
Solution : Computation of capital gain in the case of Y Rs.
Less : Indexed cost of acquisition (Note 1) 1,87,850
Indexed cost of improvement (Note 2) 2,86,680
Notes :
1. Indexed cost of acquisition is determined as under :
Cost of acquisition to the previous owner (a) 95,000
Fair market value on April 1, 2001 (b) 1,15,000
Cost to the previous owner or fair market value on April 1, 2001 [(a) or (b), whichever is more] 1,15,000
Less : Advance money forfeited by Y (amount forfeited by the previous owner shall not be considered) 50,000
Amount to be considered for indexation 65,000
Cost inflation index for 2001-02 (i.e., the year in which property was held by the previous owner or 2001-02,
whichever is later) 100
Indexed cost of acquisition (i.e., Rs. 65,000 × 289 ÷ 100) 1,87,850
Rs.
2. Indexed cost of improvement is determined as under :
Expenditure incurred prior to April 1, 2001 (it shall be ignored) Nil
Expenditure incurred on or after April 1, 2001
- during 2003-04 (indexed cost of improvement : Rs. 40,000 × 289 ÷ 109) 1,06,055
- during 2011-12 (indexed cost of improvement : Rs. 1,15,000 × 289 ÷ 184) 1,80,625
2,86,680
100-E4 [P7.34]* X purchases the following capital assets :

Year of purchase Cost Fair market value on
April 1, 2001
Rs. Rs.
Gold 1994-95 20,000 60,000
Shares in A Ltd. (unlisted) 1999-00 1,10,000 70,000
X dies on August 5, 2007 and as per his will these assets are transferred to his son B. B sells these assets on June 5, 2019 for a total
consideration of Rs. 19,50,000 (gold : Rs. 7,40,000, shares : Rs. 12,10,000). Find out the amount of capital gains chargeable to tax
100-P5 X Ltd. owns the following assets : Units of mutual fund

(debt-oriented) House property
Cost of acquisition Rs. 1,40,000 Rs. 70,000
Date of acquisition April 10, 2014 March 10, 2018
These capital assets (no depreciation is claimed) are transferred by X Ltd. to its wholly-owned Indian subsidiary company — S Ltd. on
April 1, 2018. On July 18, 2019, these assets are transferred by S Ltd. for a consideration of Rs. 4,50,500 (i.e., units : Rs. 2,15,700, house
property : Rs. 2,34,800). Compute the capital gain chargeable to tax in the case of S Ltd. for the assessment year 2020-21.
Solution : Units House property
Rs. Rs.
Less :
Cost of acquisition to the previous owner — 70,000
Indexed cost of acquisition (i.e., Rs. 1,40,000 × 289 ÷ 240) 1,68,583 —
Short-term capital gain — 1,64,800
Long-term capital gain 47,117 —
100-E5 [P7.35]* X purchases the following assets on March 10, 2016 :

Cost
Rs.
Listed debentures of A Ltd. 40,000
Listed debentures of B Ltd. 70,000
On June 10, 2017, he gifts debentures of B Ltd. to his son Y. X dies on April 3, 2019 and as per his will debentures of A Ltd. are
transferred to his son Y. On March 1, 2020, Y sells debentures of A Ltd. for Rs. 98,000 (expenditure on transfer : Rs. 2,000) and
debentures of B Ltd. for Rs. 78,000 (expenditure on transfer : Rs. 3,000). Find out the amount of capital gains chargeable to tax for
 CAPITAL GAIN IN SPECIAL CASES - HOW TO FIND OUT

101. In the following cases, the method of computation is different from what is discussed in the above
paras –
101.1 Cost to the previous owner [Sec. 49(1)] - If a person has acquired a capital asset in the circumstances
specified under section 49(1), then to calculate capital gain at the time of transfer of such asset cost to the previous
owner is taken as cost of acquisition. This rule is always applicable and does not have any exception.
Circumstances specified by section 49(1) are as follows–
a. acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided
family;
b. acquisition of property under a gift or will ;
305 Cost to the previous owner Para 101.1
c. acquisition of property —
i. by succession, inheritance or devolution, or
ii. on any distribution of assets on the dissolution of a firm, body of individuals or other association of
persons where such dissolution had taken place before April 1, 1987, or
iii. on any distribution of assets on the liquidation of a company, or
iv. under a transfer to a revocable or an irrevocable trust, or
v. by a wholly-owned Indian subsidiary company from its holding company, or
vi. by an Indian holding company from its wholly-owned subsidiary company, or
vii. under a scheme of amalgamation, or
viii. under a scheme of demerger; or
ix. under a scheme of conversion of private company/unlisted company into LLP;
x. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or
d. acquisition of property, by a Hindu undivided family where one of its members has converted his self-
acquired property into joint family property after December 31, 1969.
 Other points - The following points should be duly considered —
1. No option - If a capital asset was acquired in any one of the modes given above, then cost to the previous owner
shall be taken as “cost of acquisition” for the purpose of calculating capital gain at the time of its transfer. There
is no option in this regard.
2. Last previous owner - Where the previous owner has acquired the property in the aforesaid manner, the previous
owner of the property means the last previous owner who had acquired the property by means other than those
discussed above. Cost of any improvement of the asset borne by the previous owner, or the assessee, will be
added to such cost.
X purchases a capital asset in November 2018 for Rs. 40,000. He transfers this asset to his friend Y by gift during December
2018. Y dies during March 2019 and the asset is transferred by his Will to Mrs. Y. Mrs. Y transfers this property during June
2019 for a consideration of Rs. 90,000. To calculate capital gain in the hands of Mrs. Y, cost of acquisition of the capital assets
to X (i.e., Rs. 40,000) will be considered and capital gain will be Rs. 50,000.
3. Period of holding of previous owner - In order to find out whether the capital asset is short-term or long-term in
the above cases, the period of holding of the previous owner shall be taken into consideration.
4. Indexation - The benefit of indexation will be available from the year in which the asset was first held by the
previous owner*.
Problems
101.1-P1 X purchases gold on April 15, 2010 for Rs. 1,00,000. He transfers this gold by gift to his friend Y on January 20, 2017 (market
value of gold: Rs. 1,40,000). Y transfers gold for Rs. 4,90,000 on May 16, 2019. Find out capital gain chargeable to tax in the hands of
X and Y.
Solution : Capital gain in the hands of X - X has transferred gold on January 20, 2017 by gift. Transfer by gift is not treated as
“transfer” for the purpose of calculating capital gain. Consequently, in the hands of X nothing is chargeable to tax.
Capital gain in the hands of Y - Since the asset was acquired by Y by gift, which is covered by section 49(1), cost the previous
owner will be taken as cost of acquisition and period of holding by the previous owner will be considered to find out whether
the capital asset is short-term and long-term. Period of holding is more than 36 months (i.e., difference between April 15,
2010 and May 16, 2019). In the hands of Y, the asset is long-term capital asset. Moreover, indexation benefit will be available
from April 15, 2010* (i.e., previous year 2010-11 when the asset was first held by X). Capital gain in the hands of Y will be
calculated as follows–
Rs.
Less: Indexed cost of acquisition (Rs. 1,00,000 × CII of 2019-20: 289 ÷ CII of 2010-11 : 167) 1,73,054
*The Bombay High Court in CIT v. Manjula J. Shah [2012] 204 Taxman 691 has held that indexed cost of acquisition has to be computed with
reference to the year in which the previous owner first held the asset and not the year in which the current assessee became the owner of asset.
Practical problems are solved in the book on the basis of this ruling of Bombay High Court.
101.1-E1 X purchases debentures of A Ltd. on January 1, 2016 for Rs. 20,000. He gifts these debentures to his friend Y, on June 10,
2016 (fair market value on June 10, 2016: Rs. 33,000). Y dies on March 13, 2017 and as per his will, debentures are transferred to
his son Z (fair market value on March 13, 2017: Rs. 40,000). Z sells these debentures on November 10, 2019 for Rs. 86,000. Determine
the amount of capital gain arising to X, Y and Z from the aforesaid transactions. Debentures are not listed in any recognised stock
exchange in India.
101.2 Cost of acquisition being the fair market value as on April 1, 2001 - In the following cases, the assessee
may take, at his option, either actual cost or the fair market value of the asset as on April 1, 2001 as cost of
acquisition :
a. where the capital asset became the property of the assessee before April 1, 2001; or
b. where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the
capital asset became the property of the previous owner before April 1, 2001.
Suppose X purchases preference shares on April 30, 1990 @ Rs. 40 per share. Fair market value on April 1, 2001 is Rs. 90 per
share. If he sells the shares in 2019-20 at the rate of Rs. 200 per share, he has an option. He can either take the actual cost of
Rs. 40 per share as cost or, fair market value on April 1, 2001, i.e., Rs. 90 per share. As the fair market value on April 1, 2001
is higher, the resulting capital gain will be lower if it is taken as the cost of acquisition.
 The following points should be duly considered —

1. Adopting fair market value on April 1, 2001 (in place of actual cost of acquisition) is optional. An assessee may
(or may not) opt for it.
2. The option is available only when an asset was acquired by the assessee [or by the previous owner in case
section 49(1) is applicable] before April 1, 2001.
3. When option is available, the cost of the asset or fair market value as on April 1, 2001, whichever is higher, is
taken as the cost of acquisition.
4. The option is not available in the case of depreciable assets.
5. Further option is not available in respect of transfer of a capital asset being goodwill of a business; trade mark/
brand name associated with a business; right to manufacture, produce or process any article or thing; right to
carry on business/profession; tenancy right; route permits or loom hours (whether self generated or otherwise).
Problems
101.2-P1 Find out capital gain chargeable to tax in the following cases –
House Silver Diamond
Date of acquisition May 20, 1989 March 10, 1999 May 1, 2003
Date of transfer April 29, 2019 June 10, 2019 August 12, 2019
Rs. Rs. Rs.
Sale consideration 15,00,000 8,00,000 8,10,000
Stamp duty value 16,50,000 – –
Cost of acquisition 95,000 58,000 70,000
Fair market value on April 1, 2001 90,000 60,000 84,000
Cost of construction of first floor (in 1999-00) 18,000 – –
Cost of construction of second floor (in 2014-15) 40,000 – –
Solution :
House Silver Diamond
Whether option of using fair market value on April 1, 2001 is available Yes Yes No
Whether fair market value on April 1, 2001 is more than actual cost of
acquisition and should it be adopted No Yes –
Rs. Rs. Rs.
Full value of consideration (stamp duty value is taken in the case of house, as it
exceeds 105% of sale consideration) 16,50,000 8,00,000 8,10,000
Less:
Indexed cost of acquisition 2,74,550 1,73,400 1,85,596
Indexed cost of improvement 48,167 – –
Long-term capital income 13,27,283 6,26,600 6,24,403
307 Capital gain in case of transfer of depreciable assets Para 101.3
Notes—
1. Indexed cost of acquisition of house - Fair market value on April 1, 2001 is less than actual cost of acquisition. It should not
be taken as cost of acquisition. Consequently, cost of acquisition of Rs. 95,000 is taken. Cost inflation index (CII) of the year
of transfer of 2019-20 is 289. CII of the year of acquisition (i.e., 1999-00 or 2001-02, whichever is later) is 100. Indexed cost of
acquisition is Rs. 2,74,550 (i.e., Rs. 95,000 × 289 ÷ 100).
2. Indexed cost of improvement of house - Any cost of improvement which is incurred prior to April 1, 2001 is never taken into
consideration. Cost of improvement incurred during 1999-00 will be ignored. Improvement cost incurred in 2014-15 is
Rs. 40,000. CII of 2014-15 is 240. Indexed cost of improvement is Rs. 48,167 (i.e., Rs. 40,000 × 289 ÷ 240).
3. Indexed cost of acquisition of silver- Fair market value on April 1, 2001 is more than actual cost of acquisition. It should be
taken as cost of acquisition. Consequently, cost of acquisition of Rs. 60,000 is taken. Cost inflation index (CII) of the year of
transfer of 2019-20 is 289. CII of the year of acquisition (i.e., 1998-99 or 2001-02, whichever is later) is 100. Indexed cost of
acquisition is Rs. 1,73,400 (i.e., Rs. 60,000 × 289 ÷ 100).
4. Indexed cost of acquisition of diamond - Fair market value on April 1, 2001 cannot be adopted, as diamond was acquired on
or after April 1, 2001. Cost of acquisition is Rs. 70,000. Cost inflation index (CII) of the year of transfer of 2019-20 is 289. CII
of the year of acquisition (i.e., 2003-04) is 109. Indexed cost of acquisition is Rs. 1,85,596 (i.e., Rs. 70,000 × 289 ÷ 109).
101.2-E1 X purchases a plot of land on March 1, 1997 for Rs. 45,000. He transfers the plot to his nephew Y on July 20, 2017 for
Rs. 55,00,000. Y transfers the plot on April 6, 2019 for Rs. 61,00,000. Expenditure incurred on transfer by Y is Rs. 10,000. However,
it is reimbursed by the purchaser. The fair market value of the plot on April 1, 2001 was Rs. 2,30,000. Find out the amount of capital
gain chargeable to tax in the hands of Y.
101.3 Capital gain in the case of transfer of depreciable assets [Sec. 50] - The following rules† are applicable –
 Capital gain arises only in two cases - If a depreciable asset is transferred, capital gain (or loss) will arise only in
the following two cases –

1. When on the last day of the previous year written down value of the block of assets is zero [sec. 50(1)].
2. When the block of assets is empty on the last day of the previous year [sec. 50(2)].
In no other case capital gain is chargeable to tax, when a depreciable asset is transferred. This rule is equally
applicable whether depreciation is allowed in the current year (or any of earlier years).
 Cost of acquisition - In the above two cases, cost of acquisition shall be the aggregate of the following–
Step 1 Find out written down value of block of assets at the beginning of the previous year.
Step 2 Add : Actual cost of‡ any asset(s) falling within that block of asset acquired by the assessee during the previous
year (whether put to use or not).
 Always short-term - On transfer of depreciable assets gain (or loss) is always short-term capital gain (or loss).
It can never be treated as long-term capital gain (or loss).
Problems
101.3-P1 X Ltd owns two plants – A and B (depreciation rate: 15 per cent, depreciated value of the block on April 1, 2019 : Rs. 8,16,000).
On June 1, 2019, it purchases Plant C (old) (depreciation rate: 15 per cent) for Rs. 1,00,000. On November 5, 2019, it transfers Plant
A for Rs. 1,30,000 (expense on transfer: Rs. 500). Plant A was purchased for Rs. 45,000 in 2014. Find out the amount of depreciation
and capital gain for the assessment year 2020-21.
Solution : Depreciation will be calculated as follows–
Rs.
Depreciated value of the block consisting of Plants A and B on April 1, 2019 8,16,000
Add: Actual cost of Plant C (old) purchased during the previous year 2019-20 1,00,000
Less: Sale proceeds of Plant A transferred during the previous year 2019-20 (–) 1,30,000
Depreciation (15% of Rs. 7,86,000) 1,17,900
Capital gain on transfer of Plant A - In the case of transfer of depreciable asset, capital gain (or loss) arises only if on the last
day of previous year, the written down value of the block of assets is zero or the block of assets is empty. In this case written
down value is not zero (it is Rs. 7,86,000). Nor is the block empty on March 31, 2020 (the block has Plants B and C).
Consequently, there is no capital gain on transfer of Plant A.
†These rules are not applicable in the case of transfer of assets by a power generating unit which claims depreciation on straight line basis.
‡Where an assessee incurs any expenditure for acquisition of any depreciable asset in respect of which a payment (or aggregate of payments made
to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through
prescribed electronic mode), exceeds Rs. 10,000, such payment shall not be eligible for this purpose.
101.3-E1 Suppose in problem 101.3-P1, actual cost of Plant C is Rs. 1,40,000. What would be the amount of capital gain/
depreciation?
101.3-P2 Suppose in problem 101.3-P1, Plant A is transferred for Rs. 9,50,000. What would be the amount of capital gain/depreciation?
Solution : Depreciation will be calculated as follows–
Rs.
Total 9,16,000
Less: Sale proceeds of Plant A transferred during the previous year 2019-20 (it cannot exceed Rs. 9,16,000) (–) 9,16,000
Written down value on March 31, 2020 Nil
Depreciation Nil
Capital gain on transfer of Plant A - In this case, written down value of the block of assets is zero on the last day of the previous
year. Consequently, capital gain can be computed. For this purpose, cost of acquisition is Rs. 9,16,000 (i.e., the opening
balance of the block on the first day of the previous year : Rs. 8,16,000 + assets falling in the block purchased during the
previous year : Rs. 1,00,000). Capital gain shall be calculated as follows–
Rs.
Full value of consideration of Plant A 9,50,000
Less:
Cost of acquisition (Rs. 8,16,000 + Rs. 1,00,000) 9,16,000
Expenses of transfer 500
Short-term capital gain 33,500
101.3-E2 [P7.28]* X Ltd., a manufacturing company, owns the following assets on April 1, 2019 :
Assets Rate of depreciation Written down value
on April 1, 2019
Rs.
Plant A 30% 2,00,100
Plant B 15% 4,05,700
Plant C 15% 14,70,000
Plant D 30% 20,000
X Ltd. purchases the following assets on March 10, 2020 :
Assets Rate of depreciation Cost price
Rs.
Plant E 30% 7,00,000
Plant F 15% 4,00,000
X Ltd. sells the following plants during the previous year 2019-20 :
Assets Rate of depreciation Sale consideration Expenses on
transfer
Rs. Rs.
Plant C 15% 24,05,000 15,700
Plant A 30% 8,50,000 200
Determine the amount of depreciation and capital gain for the assessment year 2020-21. The company is not eligible for additional
depreciation
101.3-P3 Suppose in problem 101.3-P1, Plant A is transferred for Rs. 20,000 on November 5, 2019, Plant B is transferred on December
1, 2019 for Rs. 15,000 and Plant C is transferred for Rs. 25,000 on January 1, 2020. Expenditure on transfer of these plants is Rs. 1,650.
Find out the amount of depreciation and capital gain for the assessment year 2020-21.
Solution : Depreciation will be calculated as follows –
Rs.
Less: Sale proceeds of Plants A, B and C transferred during the previous year 2019-20
(Rs. 20,000 + Rs. 15,000 + Rs. 25,000) (–)60,000
Written down value on March 31, 2020 (but block is empty) 8,56,000
Depreciation Nil
Depreciated value of the block on April 1, 2020 Nil
309 Advance money was forfeited earlier Para 101.4
Capital gain on transfer of Plants A, B and C - In this case, block of assets is empty on the last day of the previous year.
Consequently, capital gain can be computed. For this purpose cost of acquisition is Rs. 9,16,000 (i.e., the opening balance of
the block on the first day of the previous year: Rs. 8,16,000 + assets falling in the block purchased during the previous year:
Rs. 1,00,000). Capital gain shall be calculated as follows–
Rs.
Full value of consideration of Plants A, B and C 60,000
Less:
Cost of acquisition (Rs. 8,16,000 + Rs. 1,00,000) 9,16,000
Expenses of transfer 1,650
Short-term capital loss (–)8,57,650
Note - Suppose, Plants A, B and C are transferred for an aggregate consideration which is more than Rs. 9,17,650 (assume
that it is Rs. 10,00,000), then depreciation will remain as zero, but short-term capital gain of Rs. 82,350 [i.e., full value of
consideration : Rs. 10,00,000 – Cost of acquisition : Rs. 9,16,000 – expenditure on transfer : Rs. 1,650] will be chargeable to
tax.
101.3-E3 [P7.29]* The following buildings (rate of depreciation 10 per cent) are owned by a firm on April 1, 2019 :
Asset Depreciated value
Rs.
Building A 12,00,000
Building B 50,000
Building C 9,12,600
After April 1, 2019, the firm acquires the following assets :
Assets Date of acquisition Rate of depreciation Cost price
Rs.
Building D April 10, 2020 10% 26,00,000
Building E January 10, 2020 5% 14,15,000
Furniture March 10, 2020 10% 25,000
On March 16, 2020, the firm sells buildings A, B and C for a total consideration of Rs. 22,00,000 (expenses on transfer : Nil).
Determine the amount of capital gain/loss on sale of buildings A, B and C for the assessment year 2020-21.
101.4 When advance money was forfeited earlier [Sec. 51] - In the course of negotiations for transfer of a
capital asset, the assessee (i.e., transferor) received advance money. Later on, the prospective purchaser could
not pay the balance consideration and the advance money is retained or forfeited by the assessee or advance
money is forfeited by the assessee because of some other reason. The tax treatment of advance money so
forfeited or retained by the assessee is as follows –
1. If advance money is forfeited during the previous year 2013-14 (or any earlier previous year) - It is not taxable in the
hands of recipient till the capital asset (in respect of which advance money was received and forfeited) is
transferred. If capital asset is not transferred during his lifetime, advance money forfeited by him will not be
chargeable to tax. Conversely, if the capital asset is transferred during his lifetime, the advance money will be
deducted from the cost for which the asset was acquired or the written down value or the fair market value,
as the case may be, in computing the cost of acquisition.
2. If advance money is forfeited during the previous year 2014-15 (or any subsequent previous year) - It is taxable in the
hands of recipient under section 56(2)(ix) under the head “Income from other sources” in the year in which
advance money is forfeited. Consequently, it will not be deducted from cost of acquisition when the capital
asset is ultimately transferred.
Problems
101.4-P1 X purchased a house property on September 18, 2002 for Rs. 1,00,000. On April 4, 2003, he entered into an agreement
to sell the house to A for Rs. 6,50,000 (after receiving an advance of Rs. 10,000). On A’s failure to pay the balance within the
stipulated period of 45 days, X forfeited the advance money. X died on October 12, 2003 and Mrs. X (as per his will) got the
property.
Mrs. X enters into an agreement on January 13, 2005 to sell the property to B after receiving advance of Rs. 80,000 and on B’s
failure to pay the balance within 2 months, as per the agreement, the advance money is forfeited by Mrs. X. Further, Mrs. X enters
into an agreement on April 6, 2019 to transfer the property to C after receiving advance of Rs. 1,00,000. C could not pay the balance
consideration within the stipulated period of 45 days and Mrs. X forfeits the advance money.
Mrs. X ultimately sells the property to Y on June 26, 2019 for Rs. 42,90,000. Find out the tax consequences in the hands of X and
Mrs. X for different assessment years. Also calculate net income of Mrs. X for the assessment year 2020-21, on the assumption that
she is a businesswoman and her income from business is Rs. 20,00,000.
Solution :
Forfeiture of advance money of Rs. 10,000 by X during the previous year 2003-04 - Since property is not transferred during the
lifetime of X, advance forfeited by him is not taxable. It is not even deducted from cost of acquisition while calculating
capital gain in the hands of Mrs. X.
Forfeiture of advance money of Rs. 80,000 by Mrs. X during the previous year 2004-05 - Rs. 80,000 will not be taxable in the
previous year 2004-05. However, it will be deducted from cost of acquisition while calculating capital gain on transfer of
the property in the hands of Mrs. X.
Forfeiture of advance money of Rs. 1,00,000 by Mrs. X during the previous year 2019-20 - Advance money is forfeited during
the previous year 2019-20. It will be taxable in the hands of Mrs. X under section 56(2)(ix) under the head “Income from
other sources” for the previous year 2019-20 (assessment year 2020-21).
Computation of capital gain of Mrs. X for the assessment year 2020-21 –
Rs.
Full value of consideration 42,90,000
Indexed cost of acquisition [cost of acquisition : Rs. 20,000 (see Note) × CII of 2019-20 : 289 ÷
CII of 2002-03 : 105] 55,047
Computation of income of Mrs. X for the assessment year 2019-20 –
Income from other sources (being advance money forfeited by Mrs. X during the previous
year 2019-20) 1,00,000
Note - Cost of acquisition of the property in the hands of Mrs. X is Rs. 20,000. It is calculated as follows –
Cost of acquisition to the previous owner (as Mrs. X got the property after the death of her husband as
per his will) 1,00,000
Less: Amount forfeited by X (amount forfeited by the previous owner is not to be considered) Nil
Less: Amount forfeited by Mrs. X during the previous year 2003-04 80,000
Less: Amount forfeited by Mrs. X during the previous year 2019-20 (it is taxable in the hands of Mrs. X
as income from other sources, consequently, it is not to be deducted from cost of acquisition) Nil
Cost of acquisition 20,000
101.4-E1 [P7.30]* X Ltd. is a manufacturing company. It owns the following depreciable assets on April 1, 2019 :
Depreciated value
Rs.
Block 1 (comprising plants A, B and C, rate of depreciation : 15 per cent) 8,67,000
Block 2 (comprising building A, rate of depreciation : 10 per cent) 6,18,540
The company purchases plant D (rate of depreciation 30 per cent) on June 1, 2019 for Rs. 10 lakh. After April 1, 2019, it sells the
following assets :
Name Date of sale Sale consideration Amount forfeited by the company
in 2006-07 at the
time of negotiations for
its transfer
Rs. Rs.
Plant B April 3, 2019 12,40,000 1,50,000
Building A April 7, 2019 3,70,000 3,00,000
Plant A April 8, 2020 1,60,000 10,000
Find out the amount of capital gain chargeable to tax for the assessment year 2020-21.
101.5 Conversion of capital asset into stock-in-trade - If capital asset is converted into stock-in-trade during
a previous year relevant to the assessment year 1985-86 (or any subsequent year), the following special rules are
applicable–
1. It will be assumed that capital asset is transferred in the year in which conversion takes place.
2. Fair market value of the asset on the date of conversion will be taken as full value of consideration.
3. However, capital gain will not be taxable in the year of conversion. It will be taxable in the year in which stock-
in-trade is transferred.
311 Distribution of capital assets Para 101.7
Problems
101.5-P1 X converts his capital asset (acquired on June 10, 2002 for Rs. 70,000) into stock-in-trade on May 10, 2007 (fair market value :
Rs. 4,80,000) and subsequently sells the stock-in-trade so converted for Rs. 18,00,000 on July 20, 2019. Determine the amount of
assessable profits.
Solution : Since capital asset in this case is converted into stock-in-trade during the previous year 2007-08, it will be treated
as “transfer” for the assessment year 2008-09. However, such capital gains will be taxable for the assessment year 2020-21
(i.e., relevant to the previous year in which stock-in-trade is transferred). The asset was acquired on June 10, 2002 and it is
transferred (i.e., converted into stock-in-trade) on May 10, 2007. The time gap is more than 36 months. The asset will be
treated as long-term capital asset. Long-term capital gain is chargeable to tax for the previous year 2019-20 (i.e., the
assessment year 2020-21) as follows –
Rs.
Full value of consideration (i.e., fair market value on the date of conversion) 4,80,000
Less : Indexed cost of acquisition (i.e., Rs. 70,000 × CII of the year of conversion of 2007-08 : 129 ÷ CII
of the year of acquisition of 2002-03 : 105) 86,000
Apart from long-term capital gain, X will have to pay tax on business income for the assessment year 2020-21 which comes
to Rs. 13,20,000 (i.e., Rs. 18,00,000 – fair market value at the time of conversion : Rs. 4,80,000).
Note - The mode of computation of capital gain given above is applicable only if the capital asset is converted into stock-in-
trade during a previous year relevant to the assessment year 1985-86 (or any subsequent year). If, however, capital asset is
converted into stock-in-trade during a previous year relevant to the assessment year 1984-85 (or any earlier year), then
capital gain will not be chargeable to tax. Suppose, an asset is converted into stock-in-trade on March 1, 1984, capital gain
will not be chargeable to tax.
101.5-E1 [P7.36]* X acquires a capital asset on April 1, 2006 for Rs. 40,000. He converts the capital asset into stock-in-trade on
April 1, 2011 (fair market value on the day of conversion : Rs. 1,62,000). The stock-in-trade is sold by X on March 10, 2020 for
Rs. 5,86,000. Determine the amount of chargeable profit indicating separately business income and capital gains.
101.6 Transfer of capital asset by a partner to a firm - A capital asset is transferred by a partner to his
partnership firm by way of his capital contribution (or otherwise). It is treated a “transfer” and capital gain will
be taxable in the hands of the partner. The amount recorded in the books of account is taken as full value of
consideration. This rule is also applicable when a member transfers a capital assets to his association of persons
or body of individuals.
Problems
101.6-P1 X, Y and Z form a partnership firm. Soon after formation of the firm, X brings a house property as his capital contribution
on August 20, 2019. On the date of transfer fair market value of the house is Rs. 20,00,000. However, the amount recorded in the books
of firm is Rs. 18,00,000. The house was purchased by X in 2005-06 for Rs. 2,50,000. Find out the amount of capital gain.
Solution : Capital gain will be taxable in the hands of X for the assessment year 2020-21 –
Rs.
Full value of consideration (i.e., amount recorded in the books of account of the firm) 18,00,000
Less: Indexed cost of acquisition (Rs. 2,50,000 × 289 ÷ 117) 6,17,521
101.6-E1 X and Y are two partners of a firm : A Co. On January 1, 2020, B joins the firm and brings unlisted shares in a company
as his capital contribution. Fair market value of these shares on January 1, 2020 is Rs. 86,000, whereas amount credited in B’s account
in the firm is Rs. 4,90,000. Assuming that cost of acquisition in 2003-04 of these shares is Rs. 45,000, find out the amount of chargeable
capital gain for the assessment year 2020-21.
101.7 Distribution of capital assets by a firm to partners at the time of dissolution - It is treated as transfer.
Capital gain is taxable in the hands of firm. The fair market value of the asset on the date of distribution is taken
as full value of consideration. This rule is also applicable when an asset is transferred by an association of persons
or body of individuals.
Problems
101.7-P1 X and Y are two partners of a hardware trading firm. It is dissolved on March 10, 2020. At the time of dissolution, a plot of
land owned by the firm is given to X (amount recorded in books of the firm is Rs. 45,00,000, however, fair market value is Rs. 66,00,000).
This plot was purchased by the firm for Rs. 36,00,000 on March 5, 2012. Find out the amount of capital gain.
Solution : Capital gain will be taxable for the assessment year 2020-21 – Rs.
Full value of consideration (i.e., fair market value on the date of distribution) 66,00,000
101.7-E1 A Co. (a firm which deals in chemical goods and has three partners : X, Y and Z) acquires gold on May 10, 2002 for
Rs. 40,000. This is taken over at time of dissolution by Y on March 31, 2020. Though on March 31, 2020 its market value is
Rs. 4,60,000, agreed value as per dissolution deed is Rs. 2,40,000. Determine the amount of capital gain chargeable to tax for the
101.8 Compulsory acquisition of a capital asset - The special rules given below are applicable where the
Government has acquired an asset of a person by way of compulsory acquisition. These rules are also applicable
when consideration is approved or determined by the Central Government or RBI (even if there is no compulsory
acquisition).
 Initial compensation - Initial compensation† is taken as full value of consideration. Capital gain is chargeable to
tax in the year in which the initial compensation (or part thereof) is first received. Indexation benefit is, however,
available up to the year in which the asset is compulsorily acquired.
 Additional compensation - If a Court/Tribunal/authority enhances compensation, it will be taxable in the year
in which enhanced compensation or additional compensation is received. For this purpose cost of acquisition
and cost of improvement are taken as nil. However, litigation expenses or incidental expenditure for obtaining
additional compensation is deductible.
If the enhanced compensation is received by any other person (because of the death of the transferor or for any
other reason), it is taxable as income of the recipient.
Problems
101.8-P1 The Central Government acquires a house property owned by X on October 17, 2015. This property was purchased on April
10, 2007 for Rs. 3,00,000. The Central Government awards Rs. 16,00,000 as compensation out of which Rs. 1,00,000 is received on May
4, 2019 and Rs. 15,00,000 is received on April 1, 2020. Expenditure incurred by X for getting compensation fixed : Rs. 2,000. Being
aggrieved against the award, X files an appeal. The Bombay Court, as per order dated August 1, 2021, enhanced the compensation from
Rs. 16,00,000 to Rs. 28,00,000 (legal expenditure incurred in Court’s proceedings : Rs. 10,000). X receives the additional compensation
of Rs. 12,00,000 on April 15, 2022. Compute the income under the head “Capital gains”. Does it make any difference if the additional
compensation is received by X’s son after the death of X ?
Solution : Assessment year 2020-21, i.e., relevant to the previous year 2019-20 in which initial compensation (or part thereof) is received
for the first time
Rs.
Full value of consideration (i.e., initial compensation) 16,00,000
Less: Indexed cost of acquisition (i.e., Rs. 3,00,000 × CII of year of compulsory acquisition of 2015-16 :
254 ÷ CII of year of purchase of 2007-08 : 129) 5,90,698
Less: Expenses 2,000
Assessment year 2023-24 (i.e., relevant to the previous year 2022-23 in which additional compensation is received) –
Full value of consideration (i.e., additional compensation) 12,00,000
Less :
Cost of acquisition Nil
Cost of improvement Nil
Expenditure 10,000
Note : If the additional compensation is received by X’s son, it will be taxable in the hands of son.
101.8-E1 The Government of Kerala acquires a commercial building owned by X Ltd. on March 10, 2010. Compensation is fixed
by the Central Government. The Government awards Rs. 14,00,000 as compensation in the first instance (out of which Rs. 10,000
is received on April 1, 2019 and the balance Rs. 13,90,000 is received on April 10, 2020) (cost of acquisition on May 5, 2005 :
Rs. 6,70,000). On appeal of X Ltd. the Kerala High Court increased the compensation to Rs. 16,25,000 (expenditure on Court’s
proceedings Rs. 5,000). The additional compensation of Rs. 2,25,000 is received by X Ltd. on May 6, 2021. Find out the capital gains
chargeable to tax for the assessment years 2010-11, 2020-21 and 2022-23.
101.8-1 WHEN AFTER RECEIPT OF COMPENSATION, LATER ON IT IS REDUCED - The tax treatment of reduction in compensa-
tion (after receipt of compensation) is given below —
† However, the amount of compensation received in pursuance of an interim order of the court, Tribunal or other authority shall be chargeable
to tax in the previous year in which the final order of such court, Tribunal or other authority is made.
313 Capital gain on transfer of shares Para 101.9
1. X purchases a house property in 1995. It is compulsorily acquired by the Government on April 20, 2010 (indexed cost of
acquisition is Rs. 40,000).
2. Compensation paid by the Government on May 6, 2019 : Rs. 6,00,000.
3. The Delhi High Court increases the compensation from Rs. 6,00,000 to Rs. 9,30,000 on the appeal filed by X (legal
expenditure incurred by X : Rs. 10,000). The Government on June 10, 2021 pays the additional compensation of Rs. 3,30,000
but the Government files an appeal in the Supreme Court against the judgment of the Delhi High Court.
4. The Supreme Court reduces the quantum of compensation from Rs. 9,30,000 to Rs. 7,50,000 by its judgment dated March
20, 2023. X repays Rs. 1,80,000 to the Government on April 6, 2023. Legal expenditure incurred by X in Supreme Court is
Rs. 25,000.
In this case income would be computed as follows —
Assessment year 2020-21 Rs.
Sale consideration (being the original compensation) 6,00,000
Less : Indexed cost of acquisition 40,000
Long-term capital gains 5,60,000
Sale consideration (being the additional compensation awarded by Delhi High Court) 3,30,000
Less : Indexed cost of acquisition Nil
Less : Expenses on transfer 10,000
Recomputation of income of the assessment year 2022-23 after the verdict of Supreme Court
Sale consideration (Rs. 7,50,000 minus Rs. 6,00,000 being the original compensation) 1,50,000
Less : Indexed cost of acquisition Nil
Less : Expenses on transfer (Rs. 10,000 + Rs. 25,000) 35,000
Note - The Assessing Officer can re-compute the income of the assessment year 2022-23 within 4 years from the end of the
year in which order of the Supreme Court, reducing the compensation, is passed (i.e., March 31, 2027, being 4 years from
the last day of the year in which March 20, 2023 falls).
101.9 Capital gain on transfer of shares/debentures in the hands of non-residents - If a non-resident acquires
shares in, or debentures of, an Indian company by utilizing foreign currency, the gain will be calculated in the
same foreign currency, which was initially utilized in acquiring shares/debentures. After calculating capital
gain in foreign currency, it will be converted into Indian currency.
The aforesaid rule is not optional but it is compulsory and applicable whether the asset is short-term or long-term.
The benefit of indexation is not available, even if the asset is long-term.
Problems
101.9-P1 X, a non-resident, remits US $ 60,000 to India on August 10, 2002. The amount is partly utilised on August 17, 2002 for
purchasing 50,000 preference shares in Lotus Ltd., an Indian company at the rate of Rs. 6 per share. These shares are sold for Rs. 28 per
share on April 10, 2019.
Find out the capital gains chargeable to tax for the assessment year 2020-21 on the assumption that telegraphic transfer buying and selling
rate of US dollars adopted by the State Bank of India is as follows :
Buying Selling
(1 US $) (1 US $)
Rs. Rs.
August 10, 2002 18.30 19.10
August 17, 2002 18.40 19.30
April 10, 2019 45.90 46.40
Solution : For computing capital gains, one has to find out the average of the telegraphic transfer buying rate and telegraphic
transfer selling rate by SBI on the date of purchase and sale of shares. These rates are as follows :
Average rate on Rs. (1 US $)
August 17, 2002 18.85
April 10, 2019 46.15
Assessment year 2020-21 Rs. US $

Sale consideration
(*50,000 × Rs. 28, 14,00,000*
**Rs. 14,00,000 ÷ Rs. 46.15) 30,335.86**
Less : Cost of acquisition
(*50,000 × Rs. 6, 3,00,000*
**Rs. 3,00,000 ÷ Rs. 18.85) 15,915.12**
Long-term capital gain N.A. 14,420.74
Long-term capital gain in Indian currency ($ 14,420.74 × Rs. 45.90) for the assessment
year 2020-21 6,61,912 —
Note :
1. The benefit of deduction of indexed cost of acquisition is not available in the aforesaid case.
2. The aforesaid procedure is applicable even in the case of short-term capital gain.
101.9-E1 X, a non-resident, remits US $ 40,000 to India on April 4, 2007. This amount is partly utilised in purchasing the following
assets on April 10, 2007.
Assets Quantity Amount
Rs.
Silver 10 Kg. 30,000
Shares in an Indian company (non-listed) 2,000 24,000
X transfer these assets on June 10, 2019 for total consideration of Rs. 8,50,000 (silver : Rs. 70,000 ; shares : Rs. 7,80,000). Find out
the amount of capital gains chargeable to tax for the assessment year 2020-21, on the assumption that telegraphic transfer buying/
selling rate of US dollar adopted by SBI is as follows :
Buying Selling
(1 US $) (1 US $)
Rs. Rs.
April 10, 2007 17.50 18.10
June 10, 2019 28.30 29.10
101.10 Self-generated capital assets - An asset which does not cost anything to the assessee in terms of money
in its creation or acquisition, is a self-generated asset. When a self-generated capital asset is transferred, the
following special rules are applicable –
 Self-generated goodwill of a business, right to manufacture/produce an article/thing or right to carry on business or
profession - In the case of transfer of these capital assets, cost of acquisition and cost of improvement are taken
as nil. Expenses on transfer are, however, deductible on the basis of actual expenditure.
 Self-generated assets being tenancy right, route permit, loom hours, trade mark or brand name associated with a
business - In the case of transfer of these self-generated capital assets, cost of acquisition is taken as nil. Cost of
improvement and expenses on transfer are, however, deductible on the basis of actual expenditure.
 Any other self-generated asset - In the case of transfer of any other self-generated capital asset, capital gain is not
chargeable to tax.
 Fair market value on April 1, 2001 - Option not available - Even if the aforesaid assets self-generated were acquired
before April 1, 2001, the option of adopting the fair market value on the said date is not available.
Problems
101.10-P1 X transfers the following assets on May 15, 2019 :
Cost Fair market Sale consi-
value on deration
April 1, 2001
Rs. Rs. Rs.
Land (acquired in 1968) 20,000 45,000 6,85,000
Goodwill of a business —* 10,000 1,75,000
Tenancy rights —* 30,000 2,00,000
*Self-generated
Determine the amount of capital gains chargeable to tax for the assessment year 2020-21. Does it make any difference if the goodwill is
of a profession ?
315 Conversion of debentures/bonds into shares Para 101.13
Solution : Land Goodwill Tenancy right

Rs. Rs. Rs.
Less : Indexed cost of acquisition in the case of land (i.e., Rs. 45,000 ×
289 ÷ 100) 1,30,050 Nil Nil
Long-term capital gain 5,54,950 1,75,000 2,00,000
Note : If a self-generated goodwill of a profession is transferred, it is now chargeable to tax.
101.10-E1 X Ltd. sells the following assets on March 31, 2020 :
Sale consideration Cost Fair market value
on April 1, 2001
Rs. Rs. Rs.
Brand name of business (acquired in 2003-04) 1,85,000 10,000 —
Tenancy rights 1,05,000 Nil 64,000
(self-acquired)
Determine the amount of capital gain chargeable to tax.
101.11 Capital gain on transfer of bonus shares - If bonus shares were allotted before April 1, 2001, cost of
acquisition is the fair market value on April 1, 2001. If bonus shares are allotted after April 1, 2001, cost of
acquisition is taken as zero.
101.12 Capital gain on transfer of right entitlement - Amount realized by an existing shareholder by selling
rights entitlement (i.e., right to acquire additional shares in the company at a pre-determined price) is taxable in
the year of transfer of the right entitlement. Cost of acquisition of right entitlement is always taken as zero and
the capital gain is deemed as short-term capital gain.
Problems
101.12-P1 X holds 1,000 equity shares in A Ltd. since 1988 (cost of acquisition : Rs. 10,000, fair market value on April 1, 2001 : Rs.
14,000). A Ltd. offers 2,000 rights shares of Rs. 10 each to X on May 1, 2019 at a premium of Rs. 50. X subscribes for 800 rights shares
and renounces 1,200 shares in favour of C by transferring the right entitlement for a consideration of Rs. 4,800. X sells 1,800 shares in
A Ltd. on March 30, 2020 @ Rs. 160 per share (securities transaction tax is not applicable, as shares are transferred outside stock
exchange).
Solution : Assessment of X for the assessment year 2020-21 Rs.
Sale proceeds of 1,000 original shares 1,60,000
Less : Indexed cost of acquisition [Rs. 14,000 × 289 ÷ 100]
Long-term capital gain 40,460
1,19,540
Sale proceeds of 800 rights shares [Rs. 160 × 800] 1,28,000
Less : Cost of acquisition [i.e., Rs. 60 × 800]
80,000
Sale proceeds of right entitlement of 1,200 shares 4,800
Less : Cost of acquisition Nil
101.12-E1 Assume in problem 101.12-P1 that C transfers 1,100 shares (out of 1,200 shares) @ Rs. 79 per share on March 29, 2020
outside a recognised stock exchange.
101.13 Conversion of debentures/bonds into shares - Conversion of debentures into shares is not treated as
“transfer”. Consequently, at the time of conversion of debentures/bonds into shares nothing is chargeable to tax.
When the shares so converted are transferred, the following special rules are applicable –
1. Cost of acquisition of debentures/bonds will become cost of acquisition of shares.
2. To find out whether shares are short-term or long-term capital asset, the period of holding shall be counted
from the date of allotment of debentures.
3. The benefit of indexation is available from the date of allotment of debentures.
X gets 1,000 partly convertible debentures (face value Rs. 100) of A Ltd. (cost being Rs. 200 per debenture) at the time of
original allotment to him on May 16, 2004. As per terms of allotment, A Ltd. converts 60 per cent portion of each debenture
into 2 equity shares of face value of Rs. 10 on July 1, 2012. Immediately after conversion, X holds 1,000 debentures (i.e., 40
per cent investment) and 2,000 equity shares. After conversion, cost of each debenture will be Rs. 80 (i.e., 40 per cent of
Rs. 200) and cost of each equity share will be Rs. 60 (i.e., 60 per cent of Rs. 200 ÷ ½). If X transfers shares and/or debentures,
the period of holding will be determined from May 16, 2004. Suppose, on September 10, 2019, X transfers 2,000 equity shares
in A Ltd. @ Rs. 900 per share and 1,000 (non-convertible portion) debentures @ Rs. 310 per debenture, capital gain will be
determined as follows (on the assumption that shares are transferred outside stock exchange) –
Shares Debentures
Rs. Rs.
Less: Indexed cost of acquisition (Rs. 60 × 2,000 shares × CII of 2019-20 : 289 ÷ CII
of 2004-05 : 113) 3,06,903 –
Less: Cost of acquisition of debentures (Rs. 80 × 1,000, indexation benefit is not
available in the case of debentures) – 80,000
Long-term capital gains 14,93,097 2,30,000
101.14 Transfer of securities in demat form - Demat account is a safe and convenient means of holding
securities just like a bank account is for funds. The idea of dematerialised account is to avoid the need to hold
physical shares. The shares are virtually being bought and sold through the banking account.
 For computing capital gain chargeable to tax, the cost of acquisition and period of holding of any security in
demat form shall be determined on the basis of first-in-first-out (FIFO) method.
The basis of computation of capital gain is illustrated by the following example –
Date of credit Particulars Quantity
June 1, 1997 Purchased directly in dematerialised form on May 25, 1997 2,000
June 5, 1997 Dematerialised share originally purchased in November 1985 5,000
June 10, 1997 Purchased directly in dematerialised form on June 10, 1997 4,000
June 15, 1997 Dematerialised shares originally purchased in May, 1962 3,000
If say, 2,500 shares were sold from out of this account, then the period of holding and the cost of acquisition of the first 2,000
shares should be as from May 25, 1997 and the cost thereof, whereas the balance 500 shares will be treated as having been
acquired in November 1985, at the relevant cost. This is the effect of the FIFO method.
101.15 Insurance compensation - If a person gets insurance claim on account of destruction of a capital asset,
it is taxable in the year in which such compensation is received. The amount of compensation will be taken as
“full value of consideration”. However, this rule is applicable only when insurance compensation is received
because of damage to, or destruction of, any capital asset because of –
a. flood typhoon, hurricane, cyclone, earthquake or other convulsion of nature;
b. riot or civil disturbance;
c. accidental fire or explosion; or
d. action by an enemy or action taken in combating an enemy.
 If an insurance compensation is received in respect of a capital asset because of any other reason, it is not
chargeable to tax.
The basis of computation of capital gain is illustrated by the following examples –
 X is a teacher by profession. He purchased a residential property on March 1, 2017 for Rs. 23,00,000. It was destroyed by
fire on February 15, 2019. He gets insurance compensation of Rs. 24,00,000 on April 20, 2019. Rs. 24,00,000 will be taken as
“full value of consideration”. Capital gain will be chargeable to tax in the year of receipt of compensation (i.e., previous year
2019-20 or assessment year 2020-21). The period of holding of the residential property is less than 24 months (i.e., from March
1, 2017 to February 15, 2019). Consequently, the surplus of Rs. 1,00,000 will be taxable as short-term capital gain.
 X is a trader. His stock-in-trade is destroyed by fire and he gets insurance compensation of Rs. 25,00,000. Stock-in-trade
is not a capital asset. Consequently, Rs. 25,00,000 will be taken as business receipt and profit (if any) will be taxable as
business income.
 A road accident takes place in which a few capital assets (i.e., vehicles and machinery or furniture) being carried are
destroyed. A ship, being overweight, sinks and assets are lost. These are all capital assets. The receipt of insurance
compensation in such circumstances is not chargeable to tax. The reasons for destruction being other than those mentioned
above.
 X Ltd. owns two plants - A and B (depreciation rate is 15 per cent, depreciated value on April 1, 2019 of the block is
Rs. 60,000). Plant A is destroyed by fire on August 1, 2019 and insurance claim of Rs. 65,000 is received on September 1, 2019.
Rs. 65,000 is taken as “full value of consideration”. There is no other purchase or transfer in the block during the previous
year 2019-20. In this case, written down value of the block is zero on March 31, 2020. Consequently, no depreciation will be
317 Capital gain arising on buy-back of shares Para 101.17
available. However, Rs. 5,000 (full value of consideration : Rs. 65,000 – cost of acquisition : Rs. 60,000) will be short-term
capital gain.
 Suppose, in the above case, insurance compensation is Rs. 32,000. Written down value of the block on March 31, 2020 will
be Rs. 28,000 (i.e., opening balance of the block : Rs 60,000, less the sale proceeds of Plant A : Rs. 32,000). X Ltd. can claim
depreciation at the rate of 15% of Rs. 28,000 (i.e., Rs. 4,200). Rs. 32,000 is full value of consideration on transfer of Plant A
for the purpose of computing capital gain. However, in the case of transfer of a depreciable asset capital gain is chargeable
to tax only if on the last day of the previous year written down value is zero or block is empty. None of the two is applicable
in this case. Consequently, capital gain is not chargeable to tax.
101.16 Transfer of sweat equity shares or ESOP shares - Sweat equity shares or ESOP shares are allotted by
an employer to his employees. It is a taxable perquisite chargeable to tax in the hands of concerned employee.
Mode of valuation of perquisite is discussed in “Salary” chapter [see para 44.21].
 Special provisions for computing capital gain when such shares are transferred by employees - Cost of acquisition of
these shares in the hands of concerned employees shall be determined as follows –
1. If sweat equity shares were allotted during 1999-2000 or are allotted on or after April 1, 2009, the cost of
acquisition is the fair market value on the date of exercise of option by the employee.
2. If such shares were allotted during April 1, 2007 and March 31, 2009, the fair market value on the date of vesting
of option, is taken as “cost of acquisition”.
3. If such shares were allotted before April 1, 2007 (not during 1999-2000), the amount actually paid by the
employee is taken as “cost of acquisition”.
X is employed by A Ltd. as finance advisor. As per service rules, he is entitled to get from the company, 1,000 shares in A
Ltd. at a predetermined price of Rs. 110 per share. The option can be exercised during January 1, 2018 and January 1, 2020.
X exercises the option to purchase 700 shares on April 20, 2019 (BSE quotation on April 20, 2019— opening price : Rs. 1,200
and closing price : Rs. 1,100 per share). Shares are allotted on May 1, 2019. Fair market value on the date of exercise option
is Rs. 1,150 per share [i.e., (Rs. 1,200 + Rs. 1,100) ÷ 2]. However, X has paid to the company Rs. 110 per share. The difference
of Rs. 7,28,000 [i.e., (Rs. 1,150 – Rs. 110) × 700] is taxable as perquisite for the previous year 2019-20. If these shares are
transferred by X, Rs. 1,150 per share is taken as “cost of acquisition”. Suppose, 300 shares are transferred on December 2,
2019 at the rate of Rs. 1,800 per share, short-term capital gain of Rs. 1,95,000 [i.e., (Rs. 1,800 – Rs. 1,150) × 300] will be taxable
for the previous year 2019-20.
101.17 Capital gain arising on buy-back of shares [Secs. 10(34A), 46A and 115QA] - Capital gain which
arises to a shareholder on buy-back of shares is exempt from tax under section 10(34A) in the following cases –
- Buy-back of own shares by an unlisted company [at any time on or after June 1, 2013].
- Buy-back of own shares by a listed company [if public announcement pertaining to buy-back is made by the
listed company on or after July 5, 2019 in accordance with the provisions of the SEBI (Buy-back of Securities)
Regulations, 2018].
In the aforesaid cases, tax exemption is available to shareholders. However, in these cases, the company which
purchases its own shares is liable to pay tax under section 115QA.
These provisions are discussed in the case study given below –
On March 3, 2020, X Ltd. purchases its own shares (face value : Rs. 10, amount offered to shareholders : Rs. 90 per share).
Total amount distributed by X Ltd. on buy-back of 20,000 shares is Rs. 18,00,000. These shares were issued in 2004-05 at
a premium of Rs. 15. A is one of the shareholders. He holds 2,000 shares (cost of acquisition : Rs. 27 per share, year of
acquisition : 2007-08). He gets Rs. 1,80,000.
Tax consequences in the hands of A and X Ltd. are given below –
A is not chargeable to tax. His capital gain is exempt under section 10(34A). However, X Ltd. will have to pay tax on
distributed income† under section 115QA as follows –
Rs.
Amount paid to shareholders at the time of buy-back (Rs. 90 × 20,000) 18,00,000
Less: Amount received at the time of issue of shares in 1998-99 (Rs. 25 × 20,000) 5,00,000
Distributed income 13,00,000
Tax on distributed income @ 20% 2,60,000
Add: Surcharge @ 12% 31,200
Add: Health and education cess [4% of (Rs. 2,60,000 + Rs. 31,200)] 11,648
Tax liability of X Ltd. under section 115QA 3,02,848
†Quantum of distributed income shall be determined in accordance with rule 40BB.

101.18 Computation of capital gains in the case of transfer of land and building [Sec. 50C] - Section 50C
is applicable if the following conditions are satisfied—
1. There is a transfer of land or building or both. The asset may be long-term capital asset or short-term capital
asset. It may be depreciable or non-depreciable asset.
2. Stamp duty value adopted (or assessed or assessable) by the Stamp duty authority in respect of such transfer,
is more than 105 per cent of sale consideration.
If the above conditions are satisfied, the value adopted by the Stamp duty authority shall be taken as “full value
of consideration” for the purpose of computation of capital gains. In other words, section 50C is applicable only
in those cases, where stamp duty value is more than 105 per cent of actual consideration [it is illustrated in
Problem 101.18-P1].
 If the stamp duty value on the date of agreement and on the date of registration is different - It is quite possible that stamp
duty on the date of agreement (fixing the value of consideration) is different from stamp duty on the date of
registration. In such a case, the stamp duty on the date of agreement may be taken (and not as on the date of
registration). However, this rule shall apply only in those cases where amount of consideration (or a part thereof)
has been received by way of an account payee cheque/draft [or by use of electronic clearing system through a
bank account (or through prescribed electronic mode)] before the date of the agreement [it is illustrated in
Problem 101.18-P2].
 When assessee disputes value adopted by stamp duty authority - Stamp duty value may be determined as
follows –
Different situations Stamp duty value [see Problem 101.18-P3]
Where the assessee accepts the value adopted by Stamp Value adopted by Stamp duty authority.
duty authority
Where the assessee has disputed value adopted by Stamp The stamp duty valuation as finally accepted for stamp
duty authority under the Stamp Act (i.e., stamp duty pro- duty purpose
ceedings)
Where the assessee claims before Income-tax authorities The Assessing Officer will have to refer the matter to the
that value adopted by Stamp duty authority is more than Valuation Officer and the fair market value determined by
the fair market value (but he has not disputed such valua- him will be substituted for stamp duty value (if value so
tion in stamp duty proceedings) determined is more than original stamp duty value, the
original stamp duty value will be taken).
Problems
101.18-P1 X transfers a house property on February 15, 2020 (sale consideration given below in different situations). Indexed cost of
acquisition is Rs. 8,00,000 (in all situations). Find out long-term capital gain chargeable to tax for the assessment year 2020-21 in
Situations 1, 2 and 3.
Different situations Stamp duty value at the time of transfer Sale consideration as per agreement
Rs. Rs.
Situation 1 65,00,000 60,00,000
Situation 2 63,00,000 60,00,000
Situation 3 61,00,000 60,00,000
Situation 4 83,50,000 80,00,000
Situation 5 83,90,000 80,00,000
Situation 6 84,00,100 80,00,000
Solution :
Different Sale 105% of sale Stamp duty Full value of Indexed cost of Long-term capital gain
situations consideration consideration value consideration [see Note] acquisition [Column 5 – Column 6]
(1) (2) (3) (4) (5) (6) (7)
Situation 1 60,00,000 63,00,000 65,00,000 65,00,000 8,00,000 57,00,000
Situation 2 60,00,000 63,00,000 63,00,000 60,00,000 8,00,000 52,00,000
Situation 3 60,00,000 63,00,000 61,00,000 60,00,000 8,00,000 52,00,000
319 Computation of capital gain Para 101.19
Note - Stamp duty value at the time of transfer is taken as full value of consideration, if it exceeds 105% of actual sale
consideration. In other words, if Column 4 is more than Column 3, Column 4 value will be taken, otherwise section 50C is not
applicable and value of Column 2 will be taken.
101.18-E1 In the above problem, find out long-term capital gain chargeable to tax in Situations 4, 5 and 6.
101.18-P2 On April 6, 2019, X enters into an agreement to transfer a commercial plot for an agreed consideration of Rs. 65,00,000
(advance payment of Rs. 1,00,000 is received by an account payee cheque on the same day). Stamp duty value on April 6, 2019 is Rs.
68,00,000. Sale deed is registered on December 27, 2019 (stamp duty value on the date of registration is Rs. 71,00,000). Indexed cost
of acquisition of the commercial plot is Rs. 34,00,000. Find out the amount of long-term capital gain chargeable to tax for the assessment
year 2020-21.
Solution : Section 50C provides that where stamp duty value on the date of agreement and on the date of registration are
not the same, the stamp duty value on the date of the agreement shall be taken [if the amount of consideration or a part thereof
has been received on or before the date of agreement by an account payee cheque/draft or by use of electronic clearing system
through a bank account (or through prescribed electronic mode)]. In this case, a part of consideration is received by an
account payee cheque on the date of agreement. Stamp duty value on the date of agreement shall be taken (i.e., Rs. 68,00,000).
105% of agreed consideration is Rs. 68,25,000 (i.e., 105% of Rs. 65,00,000). Capital gain shall be calculated as follows –
Rs.
Full value of consideration (stamp duty value of Rs. 68,00,000 does not exceed 105% of actual sale
consideration, section 50C is not applicable and actual sale consideration is taken as full value of
consideration) 65,00,000
Less: Indexed cost of acquisition 34,00,000
101.18-E2 In the above problem, find out long-term capital gain if advance payment cheque is received on April 7, 2019.
101.18-P3 X owns a piece of land situated in Noida (date of acquisition: March 1, 2004, cost of acquisition: Rs. 71,097, value adopted
by Stamp duty authority at the time of purchase: Rs. 85,000). On March 30, 2020, the piece of land is transferred for Rs. 4 lakh. Find
out the capital gains chargeable to tax in the following situations—
1. The value adopted by Stamp duty authority is Rs. 5.5 lakh. X does not dispute it.
2. The value adopted by the Stamp duty authority is Rs. 5.75 lakh. X files an appeal under the Stamp Act and Stamp duty valuation has
been reduced to Rs. 4.90 lakh by the Allahabad High Court.
3. The value adopted by the Stamp duty authority is Rs. 5.60 lakh. X does not challenge it under the Stamp Act. However, he claims before
the Assessing Officer that Rs. 5.60 lakh is more than the fair market value of the land. The Assessing Officer refers it to the Valuation
Officer who determines Rs. 5.25 lakh as fair market value.
4. In Situation (3), suppose the value adopted by the Valuation Officer is Rs. 6.10 lakh.
Solution :
Situations
(1) (2) (3) (4)
Rs. Rs. Rs. Rs.
Full value of consideration [see Note 1] 5,50,000 4,90,000 5,25,000 5,60,000
Less: Indexed cost of acquisition [Rs. 71,097 × 289 ÷ 109] 1,88,505 1,88,505 1,88,505 1,88,505
Long-term capital gains 3,61,495 3,01,495 3,36,495 3,71,495
Notes –
1. Stamp duty value at the time of transfer is taken as full value of consideration, if it exceeds 105% of actual sale
consideration. In this case, actual sale consideration is Rs. 4,00,000. Stamp duty value (in Situations 1, 2, 3 and 4) exceeds
Rs. 4,20,000 (i.e., 105% of Rs. 4,00,000). Consequently, stamp duty value is taken as full value of consideration by virtue of
section 50C.
2. Value adopted by the Stamp duty authority at the time of acquisition cannot be taken as cost of acquisition.
101.18-E3 Suppose in problem 101.18-P3 (Situation 4), the value adopted by the Valuation Officer is Rs. 25 lakh, find out the amount
of long-term capital gain chargeable to tax.
101.19 Computation of capital gain in the case of joint development agreement [Secs. 45(5A) and 49(7)]-
The following special provisions have been made with effect from the assessment year 2018-19 for computation
of capital gains in the case of joint development agreement.
 Conditions - These provisions are applicable when the following conditions are satisfied –
1. The assessee (i.e., land/building owner) is an individual or a Hindu undivided family.

2. The assessee has entered into a “specified agreement” with a builder/joint developer for development of
housing project. “Specified agreement” means a registered agreement in which a person owning land or
building or both, agrees to allow another person to develop a real estate project on such land or building or both,
in consideration of a share, being land or building or both in such project, whether with or without payment
of part of the consideration in cash.
 Capital gain computation - If the above two conditions are satisfied, capital gain shall be taxable in the hands
of owner of land/building as income of the previous year in which the certificate of completion for the whole
or part of the project is issued by the competent authority. The stamp duty value of the share of owner of land/
building in the developed property on the date of issuing of said certificate of completion (as increased by any
monetary consideration received, if any), shall be deemed to be the full value of the consideration received or
accruing because of the transfer of the capital asset. However, if the owner of land/building transfers his share
in the project to any other person on or before the date of issue of said certificate of completion, the capital gains
(as determined under general provisions of the Act) shall be deemed to be the income of the previous year in
which such transfer took place and shall be computed as per provisions of the Act without considering the
above special provisions of section 45(5A).
101.20 Computation of capital gain in the case of transfer of unlisted shares in a company [Sec. 50CA] -
Section 50CA is applicable if an assessee transfers shares in a company (other than quoted shares) at less than
the fair market value (FMV) of such share determined in accordance with the prescribed manner. In such a case,
the FMV of such shares shall be deemed to be the full value of consideration for the purposes of computation
of capital gain.
101.21 Conversion of stock-in-trade into capital asset and computation of capital gain - If stock-in-trade
is converted into capital asset, the following special provisions are applicable –
1. In the year of conversion - The fair market value of the inventory as on the date of its conversion into capital asset,
shall be chargeable to tax under the head “Profit and gains of business and profession”.
2. In the year of transfer of capital asset - When such capital asset is transferred, cost of acquisition of such capital
asset shall be deemed to be the fair market value on the date of conversion. The period of holding of such capital
asset shall be reckoned from the date of its conversion. Indexation benefit will be available from the year in which
conversion takes place.
101.22 Computation of capital gain in relation to a long-term capital asset referred to in section 112A -
In the case of long-term capital asset (being an equity share in a company or unit of an equity oriented fund or
a unit of a business trust) referred to in section 112A, the mode of computation of capital gain is subject to the
following special provisions –
1. Indexation benefit is not available.
2. Cost of acquisition of such asset shall be computed in the manner provided by section 55(2)(ac).
These provisions are discussed in para 104.2.
 VALUATION OF CAPITAL ASSET - WHEN CAN BE REFERRED TO VALUATION OFFICER

102. With a view to ascertaining the fair market value of a capital asset, the concerned Assessing Officer may
refer the valuation of the capital asset to the Valuation Officer appointed by the Income-tax Department in the
following cases :
a. where the value of the assets as claimed by the assessee is in accordance with the estimate made by a registered
valuer (who works in a private capacity under a licence issued by the Central Board of Direct Taxes and his
valuation is not binding on the Income-tax Department), but the Assessing Officer is of the opinion that the
value so claimed is –
i. less than its fair market value; or
ii. at variance with its fair market value [sec. 55A(a)];
b. where the Assessing Officer is of the opinion that the fair market value of the asset exceeds the value of the
asset by more than Rs. 25,000 or 15 per cent of the value claimed by the assessee, whichever is less ; or
c. where the Assessing Officer is of the opinion that having regard to nature of an asset and relevant
circumstances, it is necessary to do so.
 CAPITAL GAINS - WHEN AND TO WHAT EXTENT EXEMPT FROM TAX

103. The Income-tax Act grants total/partial exemption of capital gains under sections 54, 54B, 54D, 54EC, 54EE,
54F, 54G, 54GA, 54GB and 54H†. These provisions are explained in paras 103.1 to 103.8. It is possible to avail of
† In order to understand these provisions, it is advised that one should first refer to the table given in problem 106-P2 which summarises these
provisions.
321 Capital gains from house property Para 103.1
multiple exemptions under these sections. However, the aggregate amount of exemption cannot exceed the
quantum of capital gain.
103.1 Capital gains arising from the transfer of residential house property [Sec. 54] - The provisions of
section 54 are given below –
Who can claim exemption An individual or a Hindu undivided family
Which specific asset is eligible for exemption If a residential house property (long-term)† is transferred
Which asset the taxpayer should acquire to get the Exemption is available if one residential house‡ is purchased or con-
benefit of exemption structed in India
What is time-limit for acquiring the new asset Purchase - Residential house can be purchased within 1 year before
transfer or within 2 years after transfer
Construction - Residential house can be constructed within 3 years
from transfer. For bank deposit, see para 103.1-1
In the case of compulsory acquisition, these time-limits shall be
determined from the date of receipt of compensation (original or
additional)
How much is exempt Investment in the new asset or capital gain, whichever is lower
Is it possible to revoke the exemption in a subsequent If the new asset is transferred within 3 years of its acquisition, exemp-
year tion will be taken back. For calculating capital gain on transfer of new
asset, cost of acquisition will be calculated (as original cost of acqui-
sition – exemption availed under section 54).
103.1-1 SCHEME OF DEPOSIT - If the new asset is not acquired up to the due date of submission of return of income,
then the taxpayer will have to deposit the money in “Capital gain deposit account scheme” with a nationalised
bank or IDBI. On the basis of actual investment and the amount deposited in the deposit account, exemption will
be given to the taxpayer.
The taxpayer can acquire the new asset by withdrawing from the deposit account. But the new asset should be
acquired within the time-limit mentioned in the relevant sections. If the deposit account is not fully utilised for
acquiring the new asset, the unutilised amount [but in case of section 54F it is proportionate unutilised amount]
will become chargeable to tax in the previous year in which the specified time-limit for making investment in
the new asset expires [in case of sections 54 and 54F when the 3 year time limit expires]. It will be taxable as short-
term/long-term capital gain depending upon the original capital gain. The unutilised amount can be withdrawn
by the taxpayer after the expiry of the aforesaid time limit. If the taxpayer dies before the expiry of specified time-
limit (for making investment in the new asset), then unutilised amount paid to the legal heirs is not taxable in
the hands of recipient.
103.1-2 OTHER POINTS - A few points which are relevant for availing exemption under section 54 are given below –
 Construction of the residential house should be completed within 3 years from the date of transfer. Date of
commencement of construction is irrelevant. Construction may be commenced even before the transfer of house.
Case of allotment of flat under the self-financing scheme of DDA (or similar scheme of co-operative societies or
other institutions) is treated as construction of house for this purpose.
 Investment in residential house would not only include cost of purchase of house but also cost incurred for
making house habitable.
 Holding of legal title is not necessary. If the taxpayer pays full consideration or substantial portion of it (in terms
of the purchase agreement) within the period given above, the exemption under section 54 is available. This rule
is applicable even if possession is handed over after the stipulated period or the sale deed is registered later on.
 Purchase of tenancy right in a building, does not amount to purchase of a house property and exemption under
section 54 is not available.
 A taxpayer may sell two house properties and he may purchase one house property for the purpose of availing
the exemption.
†The house property is a long-term capital asset [i.e., it must be held for a period of more than 24 months before sale or transfer].
‡ If the amount of capital gain does not exceed Rs. 2 crore, the assessee can purchase/construct two residential house properties (from the
assessment year 2020-21). However, this concession is available only once in lifetime.
Problems
103.1-P1 X and Y give the following information—
Residential house property situated at Delhi X Y
Rs. Rs.
Date of transfer July 10, 2019 September 19, 2019
Date of purchase October 6, 2004 April 10, 2003
(Stamp duty value) (15,00,000) (17,50,000)
Cost of acquisition 1,87,000 3,75,000
Expenses on transfer 10,000 6,000
To get the exemption under section 54, the following residential house properties
are purchased by X and Y at Noida—
Date of purchase December 20, 2019 July 1, 2019
X and Y transfer their house properties at Noida as follows:
Stamp duty value 23,20,000 16,10,000
Date of transfer December 25, 2021 May 20, 2021
Find out the capital gain chargeable to tax in the hands of X for different assessment years.
Solution : Assessment year 2020-21 Rs.
Sale consideration (stamp duty value is taken, as it exceeds 105% of actual sale consideration) 15,00,000
Less:
Indexed cost of acquisition [Rs. 1,87,000 × 289 ÷ 113] 4,78,257
Balance 10,11,743
Less: Exemption under section 54 [amount of investment in new residential property, i.e., Rs. 12,00,000
or amount of capital gain, i.e., Rs. 10,11,743, whichever is lower] 10,11,743
Long-term capital gains chargeable to tax for the assessment year 2020-21 Nil
Sale consideration (stamp duty value is taken, as it exceeds 105% of actual sale consideration) 23,20,000
Less: Indexed cost of acquisition [see Note] 2,01,937
Note - Noida property is transferred within 3 years from its acquisition. Exemption claimed under section 54 will be
revoked. Cost of acquisition will be taken as Rs. 1,88,257 (i.e., Rs. 12,00,000 minus exemption to be taken back : Rs.
10,11,743). Since Noida property is transferred after 2 years, it will be long-term capital asset and indexation benefit will
be available. Indexed cost of acquisition will be Rs. 2,01,937 [cost of acquisition : Rs. 1,88,257 × CII of 2021-22 being year
of transfer : 310 (assumed figure) ÷ CII of 2019-20 being year of acquisition : 289].
103.1-E1 In problem 103.1-P1, calculate the amount of capital gains chargeable to tax in the hands of Y for different assessment years.
103.1-P2 X and Y give the following information—
Residential house property situated at Kolkata X Y
Rs. Rs.
Date of transfer December 30, 2019 September 5, 2019
Date of purchase June 30, 2002 April 26, 2006
(Value adopted for stamp duty purpose) 36,00,000 27,50,000
Amount deposited in capital gains deposit account scheme on July 20, 2020 21,00,000 12,00,000
To get the exemption under section 54, the following residential house properties
are purchased at Chennai by X and Y by withdrawing from the deposit account—
Date of purchase June 20, 2021 March 1, 2021
Find out the following in the case of X—
a. capital gain chargeable to tax for different assessment years;
323 Capital gains arising from transfer of land Para 103.2
b. X does not want to purchase or construct another property, what is the earliest date when he can withdraw the unutilised amount
from the deposit account; and
c. is it possible to take back the exemption given under section 54 in a subsequent year.
Sale consideration (stamp duty value is ignored, as it does not exceed 105% of actual sale consideration) 35,00,000
Less:
Balance 23,86,571
Less: Exemption under section 54 [amount deposited in capital gain deposit account scheme, i.e.,
Rs. 21,00,000 or amount of capital gain, i.e., Rs. 23,86,571, whichever is lower] 21,00,000
Long-term capital gains chargeable to tax for the assessment year 2020-21 2,86,571
Amount deposited in capital gains deposit account scheme 21,00,000
Less: Amount utilised by purchasing a new residential property at Chennai 15,00,000
Unutilised amount 6,00,000
Notes:
1. In this case, X can complete construction of another residential property up to December 29, 2022. If he does not want to
complete construction of another property, he can withdraw the unutilised amount of Rs. 6,00,000 in the deposit account
at any time after December 29, 2022.
2. Rs. 6,00,000 would be taxable as long-term capital gains of the previous year 2022-23, i.e., assessment year 2023-24.
3. The new residential property purchased at Chennai should not be transferred before 3 years from the date of its purchase
(in other words, the new residential property should not be transferred up to June 19, 2024). If the new residential property
is transferred before June 20, 2024, then the exemption given under section 54 (i.e., Rs. 21,00,000 minus Rs. 6,00,000) would
be taken back.
103.2 Capital gains arising from the transfer of land used for agricultural purpose [Sec. 54B] - The
provisions of section 54B are given below –
Who can claim exemption Individual or Hindu undivided family
Which specific asset is eligible for exemption Any short-term or long-term capital asset (being agricultural land), if it was
used by the individual (or his parents) [or by the Hindu undivided family]
for agricultural purpose for 2 years immediately prior to transfer
Which asset the taxpayer should acquire to Agricultural land (maybe in rural area or urban area).
get the benefit of exemption
What is time limit for acquiring the new asset Within 2 years from the date of transfer. For bank deposit, see para 103.1-1
How much is exempt Investment in the new asset or capital gain, whichever is lower
Is it possible to revoke the exemption If the new asset is transferred within 3 years of its acquisition, exemption will
be taken back. For calculating capital gain on transfer of new asset, cost of
acquisition will be calculated as (original cost of acquisition – exemption
availed under section 54B).
Problems
103.2-P1 X sells agricultural land situated within the municipal limits of Calcutta for Rs. 50,00,000 (stamp duty value as per circle
rate : Rs. 38,75,000) on July 4, 2019, which was purchased by him on March 1, 2007 for Rs. 14,70,726. On July 15, 2020, he purchases
agricultural land in rural area for Rs. 4,30,000 and deposits Rs. 10,80,000 in a deposit account for availing exemption under section
54B. He purchases another agricultural land (situated within the limit of Delhi Municipal Corporation) on June 30, 2021 for Rs. 8,47,000
by withdrawing from the deposit account. Amount left in the deposit account is withdrawn on July 10, 2021. The agricultural land in
rural area is transferred on April 1, 2022 for Rs. 4,90,000 and the land in Delhi is transferred on July 17, 2022 for Rs. 8,70,000. Determine
the amount of capital gains.
Less : Indexed cost of acquisition [Rs. 14,70,726 × 289 ÷ 122] 34,83,934
Balance 15,16,066
Rs.
Less : Exemption under section 54B
- Cost of agricultural land purchased on July 15, 2020 4,30,000
- Amount deposited in the deposit account 10,80,000
Long-term capital gains 6,066
Assessment year 2022-23 (i.e., relevant to the previous year in which 2 years from the date of sale of agricultural
land expires)
Amount deposited in the deposit account 10,80,000
Less : Amount utilised in purchasing agricultural land up to July 3, 2021 8,47,000
Assessment year 2023-24 (i.e., relevant to the previous year 2022-23 in which the new assets are transferred before the expiry of 3
years)
Agricultural Agricultural
land in rural land in urban
area area
Rs. Rs.
Sale proceeds 4,90,000 8,70,000
Less : Cost of acquisition after deduction of the amount of exemption under
section 54B as the new assets are transferred within 3 years [i.e., Rs. 4,30,000—
Rs. 4,30,000; Rs. 8,47,000— Rs. 8,47,000] Nil Nil
Short-term capital gain Not taxable* 8,70,000
*As the agricultural land is situated in rural area, it is not a “capital asset” and, consequently, capital gain arising on its
transfer is not chargeable to tax.
103.2-E1 X sells agricultural land in municipal limits of Delhi for Rs. 9,00,000 on August 13, 2019 which was acquired by him in
1970. Fair market value of the land on April 1, 2001 was Rs. 40,000. To avail exemption under section 54B, he deposits Rs. 4,10,000
on July 31, 2020 in a deposit account. By withdrawing from the deposit account, he purchases agricultural land on August 15, 2021
for Rs. 3,45,000. Determine the amount of capital gain chargeable to tax for the assessment years 2020-21 and 2022-23. Does it make
any difference if the land which is sold on August 13, 2019, is situated in a rural area ?
103.3 Capital gains on compulsory acquisition of land and building, forming part of industrial undertaking
[Sec. 54D] - The provisions of section 54D are given below–
Who can claim exemption Any taxpayer
Which specific asset is eligible Land or building (short-term or long-term) forming part of an industrial undertaking
for exemption which is compulsorily acquired by the Government and which is used 2 years for
industrial purposes prior to its acquisition
Which asset the taxpayer Land or building for industrial purposes
should acquire to get the
benefit of exemption
What is time limit for acq- Within 3 years from the date of receipt of compensation. For bank deposit, see para
uiring the new asset 103.1-1
How much is exempt Investment in the new asset or capital gain, whichever is lower. The new asset should not
be transferred within 3 years from the date of acquisition of the new asset
Is it possible to revoke the If the new asset is transferred within 3 years of its acquisition, exemption will be taken
exemption back. For calculating capital gain on transfer of new asset, cost of acquisition will be
calculated as (original cost of acquisition – exemption availed under section 54D).
Problems
103.3-P1 X Ltd., a manufacturing company, purchases a factory building on May 6, 1998 for Rs. 20 lakh (prior to this the company
used the same building as a tenant for about 5 years). The building is compulsory acquired by the Government on April 20, 2019 for
which a sum of Rs. 60 lakh is paid as compensation on March 14, 2020. Compute the amount of capital gains chargeable to tax for the
assessment year 2020-21 taking into consideration the following information —
1. On April 1, 2019, the company owns two buildings (rate of depreciation : 10 per cent) one of which is acquired by the Government
during 2019-20. The depreciated value of the block on April 1, 2019 is Rs. 21.35 lakh.
2. The company purchases a factory building on April 6, 2020 for Rs.15 lakh.
Does it make difference if the factory building is purchased on March 31, 2020?
325 Capital gains on transfer of long-term capital asset Para 103.4
Solution : As the compensation is received on March 14, 2020, capital gain is taxable for the assessment year 2020-21 as
follows — Rs.
Less : Cost of acquisition as per section 50 being the depreciated value of the block on April 1, 2019
[see para 101.3] 21,35,000
Short-term capital gain 38,65,000
Less : Exemption under section 54D [as the taxpayer has purchased a factory building within 3 years
from March 14, 2020, exemption is available under section 54D, the exemption being Rs.15 lakh] 15,00,000
Short-term capital gain chargeable to tax for the assessment year 2020-21 23,65,000
In this case, the amount of capital gain will be reduced if the new building is purchased in the previous year 2019-20 (i.e.,
in the year in which the old building was acquired by the Government). Suppose, the new building is purchased on March
31, 2020, then as per section 50, the cost of acquisition of the building acquired by the Government will increase and the
capital gain shall be determined as follows —
Rs.
Less : Cost of acquisition as per section 50 [being the depreciated value of block on April 1, 2019
and cost of building purchased during 2019-20, i.e., Rs. 21.35 lakh + Rs. 15 lakh] 36,35,000
Less : Exemption under section 54D 15,00,000
103.3-E1 Assume in problem 103.3-P1, the factory building of Rs.15 lakh is purchased on April 10, 2019, ascertain the amount of
exemption under section 54D and short-term capital gain chargeable to tax for the assessment year 2020-21.
103.4 Capital gains on transfer of any long-term capital asset on the basis of investment in certain bonds
[Sec. 54EC] - The provisions of section 54EC are given below –
Which specific asset is eligible Long-term capital asset (being land or building or both) (maybe residential or commer-
for exemption cial, maybe situated in India or outside India).
Which asset the taxpayer Bonds of National Highways Authority of India (NHAI) or Rural Electrification Corpo-
should acquire to get the ration (REC) or notified bonds. Maximum investment in one financial year is Rs. 50 lakh*
benefit of exemption Moreover, investment made by an assessee in the NHAI/REC bonds/notified bonds,
out of capital gains arising from transfer of one or more original asset, during the financial
year in which the original asset or assets are transferred and in the subsequent financial
year should not exceed Rs. 50 lakh.
What is time limit for Within 6 months from the date of transfer
acquiring the new asset
How much is exempt Investment in the new asset or capital gain, whichever is lower. The new asset should not
be transferred within 5 years†.
Is it possible to revoke the In the following cases, exemption will be taken back (and the amount of exemption given
exemption earlier will become long-term capital gain of the year in which the assessee commits the
following default) –
- If the new asset (i.e., bonds of NHAI/REC/notified bonds) is transferred within 5 years†
from its acquisition.
- If the new asset is converted into money or any loan/advance is taken on the security
of the new asset within 5 years† from the date of acquisition of the new asset.
Problems
103.4-P1 On January 2, 2020, X sells commercial plot for Rs. 91,85,000 (cost of acquisition on March 10, 2004 : Rs. 1,05,000). Expenses
on purchase and transfer are Rs. 100 and 200, respectively. To get the benefit of exemption under section 54EC, X makes the following
investments –
1. Purchase of Rs. 46,00,000 NHAI bonds on March 1, 2020.
*If income of minor child or spouse is clubbed in the hands of an individual, minor child and spouse can separately invest up to Rs. 50 lakh for
the purpose of claiming exemption under section 54EC. Capital gain (after claiming exemption under sections 54 to 54GB) will be clubbed in the
hands of individual.
† 3 years, if investment is made before April 1, 2018.
2. Purchase of Rs. 24,00,000 REC bonds on April 10, 2020.

Find out the amount of exemption under section 54EC.
Solution :
Rs.
Less : Expenses on transfer 200
Net sale consideration 91,84,800
Less : Indexed cost of acquisition [i.e., Rs. 1,05,100 × 289 ÷ 109] 2,78,660
Less : Exemption under section 54EC (Rs. 46,00,000 + Rs. 24,00,000, but limited to Rs. 50,00,000) 50,00,000
Capital gain chargeable to tax 39,06,140
Note - X should not transfer the bonds of NHAI/REC or take a loan on the security of these bonds or otherwise convert these
bonds into money, within 5 years from the date of investment. Suppose, X retains REC bonds but transfers NHAI bonds (or
X takes any loan or advance on security of NHAI bonds) within 5 years from March 1, 2020, then Rs. 26,00,000 will be deemed
as income by way of long-term capital gain of the previous year in which he transfers these bonds (or takes loan or advance).
103.4-E1 X sells a commercial house property on March 10, 2020 for Rs. 9,40,000 (indexed cost of acquisition : Rs. 2,00,000). On
April 17, 2020, he purchases the following assets —
a. commercial house property : Rs. 6,00,000 ;
b. bonds of Rural Electrification Corporation (redeemable on May 10, 2026) : Rs. 3,40,000.
103.4-P2 X sells the following long-term capital assets on January 11, 2020—
Residential Gold Silver Diamonds
house
property
Rs. Rs. Rs. Rs.
Sale consideration 3,90,000 8,10,000 2,96,000 6,40,200
Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000
Expenses on transfer 10,000 81,000 6,000 32,000
The due date of filing return of income for the assessment year 2020-21 is July 31, 2020. For claiming exemption under sections 54 and
54EC, X purchases the following assets —
Assets Date of Amount
acquisition Rs.
Land (for constructing a residential house) April 2, 2020 1,00,000
Bank deposit (for constructing house) August 5, 2020 50,000
Bonds of Rural Electrification Corporation (redeemable on July 5, 2026) July 5, 2020 7,50,000
Bonds of National Highways Authority of India (redeemable on August 10, 2031) July 10, 2020 3,05,000
Solution : House Gold Silver Diamonds

property
Rs. Rs. Rs. Rs.
Less : Expenses on transfer 10,000 81,000 6,000 32,000
Net sale consideration (a) 3,80,000 7,29,000 2,90,000 6,08,200
Less : Indexed cost of acquisition 70,000 1,15,000 1,78,000 4,30,000
Long-term capital gain (b) 3,10,000 6,14,000 1,12,000 1,78,200
Exemption under section 54 [Note 1] (c) 1,00,000 — — —
Exemption under section 54EC [Note 2] (d) 2,10,000 — — —
Capital gain chargeable to tax [(b)—(c)—(d)] Nil 6,14,000 1,12,000 1,78,200
Notes :
1. Exemption under section 54 - Since the due date of filing return of income is July 31, 2020, the deposit made on August 5,
2020 is not considered. Exemption under section 54 is limited to amount utilised for constructing residential house up to July
31, 2020 (i.e., Rs. 1,00,000).
2. Exemption under section 54EC - Exemption under section 54EC is available only if the long-term capital asset which is
transferred is land or building or both. It is not available in respect of other assets (e.g., gold, silver, diamonds, etc.).
103.4-E2 Find out the income under the head “Capital gains” in problem 103.4-P2 under the following situations—
a. taxpayer is X, an individual, who has income from business and residential house properties and the due date of filing return of
income is September 30, 2020; or
b. taxpayer is X Ltd., a company, not having any business income.
103.4A Capital gain not to be charged on investment in units of a specified fund [Sec. 54EE] - The provisions
of section 54EE are given below –
1. The assessee has transferred a long-term capital asset.
2. He has invested the whole (or any part) of capital gains in long-term specified assets (to be notified by the
Central Government to finance start-ups). Such investment can be made at any time within 6 months from the
date of transfer of original asset. The amount of such investment (made on or after April 1, 2016) by an assessee
during any financial year cannot exceed Rs. 50 lakh. Moreover, investment made by an assessee in long-term
specified assets, out of capital gains arising from transfer of one or more original assets, during the financial year
in which the original asset or assets are transferred and in the subsequent financial year should not exceed
Rs. 50 lakh.
 Amount of exemption -Amount of exemption under section 54EE is the amount of capital gain or amount invested
in long-term specified assets, whichever is lower.
 Revocation of exemption -The long-term specified assets should not be transferred (not even loan or advance is
taken on security of such assets) within 3 years from the date of acquisition. If long-term specified assets are
transferred (or loan or advance is taken on security of such assets) within 3 years, the amount of exemption given
earlier will be revoked and it shall be chargeable to tax as long-term capital gain in the year in which such
specified assets are transferred (or loan or advance is taken).
103.5 Capital gains on transfer of a long-term capital asset other than a house property [Sec. 54F] - The
provisions of section 54F are given below —
Who can claim exemption An individual or a HUF
Which specific asset is eligible Capital gain arising on transfer of any long-term capital asset (other than a residential
for exemption house property) is qualified for exemption provided on the date of transfer the taxpayer
does not own more than one residential house property (except the new house property
given below)
Which asset the taxpayer One residential house property in India
What is time limit for acq- Purchase - Residential house can be purchased within 1 year before transfer or within 2
uiring the new asset years after transfer
Construction - Residential house can be constructed within 3 years from transfer. For bank
deposit, see para 103.1-1, for other relevant points, see para 103.1-2
In the case of compulsory acquisition, these time-limits shall be determined from the date
of receipt of compensation (original or additional)
How much is exempt Investment in the new asset ÷ Net sale consideration × Capital gain. Amount of exemption
cannot exceed capital gain
Is it possible to revoke the In the following cases, exemption will be taken back (and the amount of exemption given
exemption earlier will become long-term capital gain of the year in which the assessee commits the
following default) –
 If the new asset is transferred within 3 years from the date of its acquisition
 If within 2 years from the date of transfer of the original assets, the taxpayer purchases
another residential house property in India or outside India
 If within 3 years from the date of transfer of original assets, the taxpayer completes
construction of another residential house property in India or outside India.
Problems
103.5-P1 X and Y give the following information (they do not own any residential house property)—
Transfer of gold X Y
Rs. Rs.
Date of transfer May 10, 2019 February 15, 2020
Date of purchase June 23, 2003 June 18, 2001
Cost of acquisition 3,01,730 77,000
To get the exemption under section 54F, the following residential house properties are
purchased by X and Y at Pune—
Date of purchase May 12, 2019 January 3, 2020
X and Y transfer their house properties at Pune as follows—
Date of transfer June 29, 2021 January 1, 2022
Find out the capital gain chargeable to tax in the hands of X for different assessment years.
Less: Expenses on transfer 55,000
Net sale consideration 36,00,000
Less :
Capital gains before any exemption 28,00,000
Less: Exemption under section 54F [amount of investment in new residential property, i.e., Rs. 27,00,000 ÷
net sale consideration, i.e., Rs. 36,00,000 × amount of capital gains, i.e., Rs. 28,00,000] 21,00,000
Long-term capital gains chargeable to tax for the assessment year 2020-21 7,00,000
Less: Indexed cost of acquisition [see Note] 28,96,194
Long-term capital gain (a) 7,03,806
Long-term capital gains (as the new house property at Pune is transferred within 3 years from the
date of its purchase, the exemption given under section 54F will be taken back) (b) 21,00,000
Long-term capital gain chargeable to tax [(a) + (b)] 28,03,806
Note - Pune property is transferred after 2 years from its acquisition. It will be long-term capital asset and indexation
benefit will be available. Indexed cost of acquisition will be Rs. 28,96,194 [cost of acquisition : Rs. 27,00,000 × CII of
2021-22 being year of transfer : 310 (assumed figure) ÷ CII of 2019-20 being year of acquisition : 289].
103.5-P2 X sells (non-listed) shares in a private sector company on July 10, 2019 for Rs. 8,05,000 (cost of acquisition on June 15, 2004 :
Rs. 60,000, expenses on sale : Rs. 5,000). On July 10, 2019, he owns one residential house property. To get the benefit of exemption under
section 54F, X deposits on May 30, 2020 Rs. 6,00,000 in Capital Gains Deposit Account Scheme. By withdrawing from the Deposit
Account, he purchases a residential house property at Delhi on July 6, 2021 for Rs. 4,80,000. Ascertain —
a. the amount of capital gain chargeable to tax for the assessment year 2020-21 ;
b. tax treatment of the unutilised amount ;
c. when can he withdraw the unutilised amount ; and
d. what X has to do to ensure that the exemption under section 54F is never taken back.
Less :
Expenses 5,000
Indexed cost of acquisition [Rs. 60,000 × 289 ÷ 113] 1,53,451
Balance 6,46,549
Less : Exemption under section 54F [Rs. 6,00,000, being the amount deposited in Deposit Account/
Rs. 8,00,000 being net sale consideration × Rs. 6,46,549 being the amount of capital gain] 4,84,912
Notes —
1. In this case, X has not fully utilised the deposit account for acquiring the residential house property. Out of Rs. 6 lakh
deposited in the deposit account, Rs. 4.80 lakh is utilised for purchasing the house. Tax treatment of Rs. 1.20 lakh (being the
unutilised amount) will be as follows —
Rs.
Unutilised amount (a) 1,20,000
Net sale consideration (b) 8,00,000
Original capital gain (c) 6,46,549
Notional long-term capital gain [i.e., (a)/(b) × (c)] 96,982
Effective exemption under section 54F [i.e., Rs. 4,84,912 — Rs. 96,982] 3,87,930
Rs. 96,982 will be chargeable to tax as long-term capital gain after the expiry of 3 years from date of transfer of shares (i.e.,
July 9, 2022). Consequently, it will be taxable for the assessment year 2023-24.
2. The unutilised amount of Rs. 1.20 lakh can be withdrawn by X at any time after July 9, 2022.
3. If X sells the new house at Delhi before July 6, 2024, then Rs. 3,87,930 (exemption under section 54F) will be taken as long-
term capital gains of the year in which the house is sold.
4. If X purchases any other residential house before July 10, 2021 or constructs any other residential house before July 10,
2022, then Rs. 3,87,930 (exemption under section 54F) will be deemed as long-term capital gains of the year in which another
house is purchased or constructed.
103.5-E2 X sells diamonds (or any capital asset other than residential house) on June 30, 2019 for Rs. 8,53,000 (Rs. 3,000 being
expenses on transfer). The diamonds were purchased by him on June 10, 2007 for Rs. 80,000. Can he claim exemption under section
54F by purchasing a residential house for Rs. 4,00,000?
➠ 103.5-P3 X purchases 1,000 (non-listed) shares in Y Ltd. on August 16, 2002 for Rs. 17,967. On May 17, 2004, he gets 500 bonus
shares. On October 20, 2014, he acquires 1,500 right shares for Rs. 13,724. He sells 3,000 (non-listed) shares in Y Ltd. on
February 12, 2020 at the rate of Rs. 110 per share (brokerage on sale : 1 per cent). He owns one residential house property. He purchases
a residential house on June 29, 2020 for Rs. 2,90,000. Ascertain the amount of capital gains chargeable to tax for the assessment year
2020-21.
Solution : 1000 original 500 bonus 1500
shares shares right
shares
Rs. Rs. Rs.
Sale consideration 1,10,000 55,000 1,65,000
Less : Expenses on transfer 1,100 550 1,650
Net sale consideration 1,08,900 54,450 1,63,350
Less : Indexed cost of acquisition [Rs. 17,967 × 289/105 ; Rs. 13,724 ×
289÷240] 49,452 Nil 16,526
Long-term capital gain 59,448 54,450 1,46,824
Long-term capital gain as percentage of net sale consideration 54.59% 100% 89.88%
Order of preference for claiming exemption under section 54F 3 1 2
Exemption under section 54F [see Note] 39,414 54,450 1,46,824
Capital gain 20,034 Nil Nil
Note - The amount of exemption is determined as under —
Investment utilised for Exemption
claiming exemption
Rs. Rs.
Bonus shares [Rs. 54,450/Rs. 54,450 × Rs. 54,450] 54,450 54,450
Right shares [Rs. 1,63,350/Rs. 1,63,350 × Rs. 1,46,824] 1,63,350 1,46,824
Original shares [Rs. 72,200/Rs. 1,08,900 × Rs. 59,448] 72,200 39,414
Total [any other order of preference will give lower exemption] 2,90,000 2,40,688
➠ 103.5-E3 What is the amount of capital gain chargeable to tax in problem 103.5-P3, if cost of the house purchased is (a)
Rs. 3,26,700, or (b) Rs. 1,00,000?
103.5-P4 X sells agricultural land situated in an urban area for Rs. 10,31,000 (brokerage paid @ 2 per cent) on March 31, 2020 (cost
of acquisition : Rs. 3,76,622 on March 1, 2008 ; it was used for agricultural purposes since 2009). On March 31, 2020, he owns one
residential house property. On April 6, 2020, he purchases the following assets —
a. agricultural land : Rs. 1,10,000 ; and

b. a residential house property : Rs. 5,00,000.
Find out the capital gains chargeable to tax for the assessment year 2020-21.
Solution : Rs.
Less :
Indexed cost of acquisition (i.e., Rs. 3,76,622 × 289 ÷ 129) 8,43,750
Brokerage (2% of Rs. 10,31,000) 20,620
Less : Exemptions
Under section 54B [see para 103.2] 1,10,000
Under section 54F [i.e., Rs. 1,66,630 × Rs. 5,00,000/(Rs. 10,31,000 — Rs. 20,620)] 82,459
Long-term capital gains Nil
103.5-E4 Find out the capital gains chargeable to tax in problem 103.5-P4 in the following cases —
1. Taxpayer is X, an individual and the agricultural land is situated in a rural area.
2. Taxpayer is X (HUF) and the agricultural land is situated in urban area.
3. Taxpayer is X Ltd. and the agricultural land is situated in urban area.
➠ 103.5-P5 During the previous year 2019-20, X sells the following assets —
Commercial Residential Shop Urban agri-
property land cultural land
Date of sale January 3, November 17, March 3, March 15,
2020 2019 2020 2020
Year of acquisition 2002-03 2003-04 2007-08 2001-02
Rs. Rs. Rs. Rs.
Indexed cost of acquisition 3,05,000 1,05,172 6,97,534 1,68,593
X owns one residential house property. On April 3, 2020, he invests in the following assets —
1. Residential house property : Rs. 2,15,000.
2. Bonds of National Highways Authority of India (maturity period : 6 years) : Rs. 3,70,000.
3. Bonds of Rural Electrification Corpn. (redeemable after 7 years) : Rs. 7,80,000.
Find out the income chargeable to tax under the head “Capital gains” after giving maximum permissible exemption under different
sections.
Solution : Commercial Residential Shop Urban agri-
property land cultural land
Rs. Rs. Rs. Rs.
Sale consideration (a) 7,00,000 4,00,000 8,90,000 7,80,000
Less : Indexed cost of acquisition (b) 3,05,000 1,05,172 6,97,534 1,68,593
Long-term capital gain (c) 3,95,000 2,94,828 1,92,466 6,11,407
Long-term capital gain as percentage of sale consideration
[i.e., (c)/(a) × 100] 56.43% 73.71% 21.63% 78.39%
Order of preference for section 54F exemption 3 2 4 1
Less : Exemptions under section 54F [i.e., Rs. 2,15,000/
Rs. 7,80,000 × Rs. 6,11,407] — — — 1,68,529
Under section 54EC [i.e., investment in bonds or capital
gain, whichever is lower]
*(Rs. 11,50,000 —Rs. 3,95,000 —Rs. 2,94,828 — Rs. 1,92,466) 3,95,000 2,94,828 1,92,466 2,67,706*
Capital gains Nil Nil Nil 1,75,172
➠ 103.5-E5 Make the following two changes in problem 103.5-P5, and find out chargeable capital gains in respect of transfer of
commercial property, residential land, shop and urban agricultural land for the assessment year 2020-21—
a. the taxpayer is X Ltd. ; and
b. the date of making investment is June 30, 2020 (not April 3, 2020).
331 Capital gain arising on transfer of assets Para 103.6
103.6 Capital gain arising on transfer of assets in cases of shifting of industrial undertaking from urban
area to rural area [Sec. 54G] - The provisions of section 54G are given below –
Which specific asset is On transfer of short-term/long-term capital assets being land, building, plant or machin-
eligible for exemption ery. These assets should be transferred in order to shift an industrial undertaking from an
urban area to a rural area
Which asset the taxpayer Land, building, plant or machinery in order to shift undertaking to a rural area
What is time limit for New asset should be purchased within 1 year before transfer or within 3 years after trans-
acquiring the new asset fer of the original asset. For scheme of deposits, see para 103.1-1
How much is exempt Investment in the new asset or capital gain, whichever is lower.
Is it possible to revoke the If the new asset is transferred within 3 years of its acquisition, exemption will be taken back.
exemption in a subsequent For calculating capital gain on transfer of new asset, cost of acquisition will be (original
year cost of acquisition – exemption availed under section 54G).
Problems
103.6-P1 X Ltd. owns an industrial undertaking at Nagpur which is situated in urban area. As per policy of the State Government,
the industrial undertaking is shifted to a rural area. In the process of shifting, the company sells the following assets :
Plant and Building Furniture Land
machinery
Rate of depreciation 15 per cent 10 per cent 10 per cent —
Year of acquisition 1977 1978 1976 1975
Written down value of the block on April 1, 2019 9,50,000 10,75,000 25,000 —
Cost of acquisition of land (fair market value on April 1, 2001 :
Rs. 2,45,000) — — — 80,000
Sale proceeds (date of sale June 25, 2019) 47,92,000 88,90,000 17,32,000 50,00,000
Value for stamp duty purpose NA 80,00,000 NA 60,00,000
Cost of assets acquired during April-May 2020 for the purpose
of shifting the undertaking to a rural area 30,50,000 4,00,000 3,70,000 50,70,000
Assuming the industrial undertaking is transferred to rural area by June 15, 2020, ascertain the capital gains chargeable to tax for the
assessment year 2020-21. Does it make any difference if the assets are acquired by March 31, 2020 ?
Solution : Computation of capital gain if the new assets are acquired during April-May 2020—

machinery
Rs. Rs. Rs. Rs.
Sale proceeds (*stamp duty value) 47,92,000 88,90,000 17,32,000 60,00,000*
Less :
Cost of acquisition (being written down value on April 1,
2019 of the different blocks as per section 50) 9,50,000 10,75,000 25,000 —
Indexed cost of acquisition in the case of land (i.e., Rs.
2,45,000 × 289÷100) — — — 7,08,050
Short-term capital gain 38,42,000 78,15,000 17,07,000 —
Long-term capital gain — — — 52,91,950
Less : Exemption under section 54G [see Note] 38,42,000 46,78,000 — —
Short-term capital gain Nil 31,37,000 17,07,000 —
Note - Capital gain arising on transfer of furniture is not qualified for any exemption under section 54G. Likewise, no
exemption is available under section 54G in respect of investment of Rs. 3,70,000 in acquiring furniture. The qualifying
investment for claiming exemption under section 54G is Rs. 85,20,000 (i.e., Rs. 30,50,000 + Rs. 4,00,000 + Rs. 50,70,000). As
tax incidence is higher in the case of short-term capital gain, the exemption is first utilised against short-term capital gains.
Computation of capital gain if the new assets are acquired up to March 31, 2020 —

machinery
Rs. Rs. Rs. Rs.
Sale proceeds 47,92,000 88,90,000 17,32,000 60,00,000
Less :
Cost of acquisition (being written down value on April 1,
2019 plus cost of asset purchased during 2019-20, as per
section 50) 40,00,000 14,75,000 3,95,000 —
Indexed cost of acquisition in case of land — — — 7,08,050
Short-term capital gain 7,92,000 74,15,000 13,37,000 —
Less : Exemption under section 54G [see Note supra] 7,92,000 74,15,000 — 3,13,000
Short-term capital gain — — 13,37,000 —
103.6-E1 X Co., a partnership firm, owns an industrial undertaking. One of the factories of the undertaking is situated within the
municipal limit of the Salem Municipal Corporation. As per policy of the State Government, the factory is shifted to a rural area. In
the process of shifting, the firm sells the following depreciable assets :
Plant and Factory Furniture
machinery building
Rs. Rs. Rs.
Year of acquisition 2005 2005 2005
Sale proceeds (date of sale : June 30, 2019) 6,00,000 12,10,000 40,000
Cost of acquisition (being written down value of the block on April 1, 2019,
as per section 50) 3,40,000 7,65,200 17,000
Cost of assets acquired during April 2020 for shifting the factory 13,00,000 — 1,60,000
Determine the capital gain chargeable to tax for the assessment year 2020-21 on the assumption that factory is shifted to rural area
before June 15, 2020.
Is it possible to reduce the tax liability if plant and machinery and/or furniture are purchased during March 2020 ?
103.7 Capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to
any Special Economic Zone [Sec. 54GA] - The provisions of section 54GA are given below —
Which specific asset is eligible On transfer of short-term/long-term capital assets being land, building, plant or machin-
for exemption ery. These assets should be transferred in order to shift an industrial undertaking from an
urban area to any special economic zone
Which asset the taxpayer Land, building, plant or machinery in order to shift undertaking to any special economic
should acquire to get the zone
What is time limit for New asset should be purchased within 1 year before transfer or within 3 years after transfer
acquiring the new asset of the original asset. For scheme of deposits, see para 103.1-1
How much is exempt Investment in the new asset or capital gain, whichever is lower. If the new asset is trans-
Is it possible to revoke the ferred within 3 years of its acquisition, exemption will be taken back. For calculating
exemption in a subsequent capital gain on transfer of new asset, cost of acquisition will be (original cost of acquisition
year – exemption availed under section 54GA).
103.8 Capital gain on transfer of residential property [Sec. 54GB] - The provisions of section 54GB are given
below –
Who can claim exemption An individual or a Hindu undivided family
Which specified asset is eligible for On transfer of a long-term residential property (a house or a plot of land) if transfer
exemption takes place during April 1, 2012 and March 31, 2017 (in case of an investment in
eligible start-up, the residential property can be transferred up to March 31, 2021)
Which asset the taxpayer should Equity shares in an “eligible company”
acquire to get the benefit of exemption
333 Capital gain on transfer of residential property Para 103.8
What is the time-limit for acquiring Equity shares in an “eligible company” should be acquired on or before the due date
the new asset of furnishing of return of income under section 139(1).
The “eligible company” should utilize this amount for the purchase of a “new asset”
within one year from the date of subscription in equity shares. For bank deposit, see
para 103.8-1
How much is exempt Investment in “new asset” by the eligible company ÷ Net sale consideration ×
Capital gain. Exemption cannot exceed capital gain
Is it possible to revoke the exemption In the following cases, exemption will be taken back and the amount of exemption
(or proportionate exemption) given earlier under section 54GB will become long-
term capital gain of the assessee (i.e., transferor of residential property). It shall be
taxable in the year in which the assessee or the eligible company commits the
following defaults –
1. If the equity shares in the eligible company are sold or otherwise transferred by
the assessee within 5 years from the date of acquisition.
2. If the “new asset” is sold or otherwise transferred by the eligible company within
the period given below –
- In the case of a “new asset” being computer or computer software acquired by an
eligible start-up : Within 3 years from the date of acquisition (applicable from the
assessment year 2020-21).
- In the case of any other “new asset” : Within 5 years from the date of acquisition.
3. If the deposit account is not utilized fully or partly by the eligible company for
purchasing the new asset within 1 year from the date of subscription in equity shares
(by the assessee)
103.8-1 BANK DEPOSIT - The “eligible company” should utilize the amount subscribed by the transferor for the
purchase of a “new asset” within one year from the date of subscription in equity shares. If, however, the
company does not utilize this amount for the purchase of a “new asset” before the due date of furnishing of return
of income by the assessee (i.e., transferor of residential property), it shall be deposited by the company in capital
gain deposit account. In such a case, exemption would be available on the basis of amount deposited in the
deposit account.
103.8-2 OTHER RELEVANT POINTS - Other relevant points for this section are given below –
 Net sale consideration - Net sale consideration is sale consideration minus expenditure on transfer incurred by
the transferor.
 “Eligible company” - It means a company which satisfies the following conditions –
1. It is incorporated on or after April 1 (of the previous year in which residential property is transferred) but on
or before the due date of submission of return of income under section 139(1) by the assessee (i.e., transferor of
residential property).
2. It is engaged in the business of manufacture of any article or thing or in an eligible business.
3. The assessee (i.e., transferor of residential property) has more than 25 per cent share capital (or voting right)
after subscription in shares by the assessee.
4. The company qualifies to be a SME (i.e., small or medium enterprise under the Micro, Small and Medium
Enterprises Act, 2006) (i.e., where the investment in plant and machinery is more than Rs. 25 lakh but not more
than Rs. 10 crore). Alternatively, the company is an eligible start-up.
 What is new asset - It means new plant and machinery. However, it does not include the following : (a) any plant
or machinery which is used in India or outside India by any person before its installation by the eligible company;
(b) any plant or machinery which is installed in office premises/residential accommodation/guest house; (c) any
office appliance; (d) computers/computer software†; (e) any vehicle; and (f) any plant or machinery which is
allowed 100 per cent deduction (by depreciation or otherwise) in any previous year.
 What is “eligible start-up” or “eligible business” - “Eligible business” means a business which involves innovation,
development, deployment or commercialisation of new products, processes or services driven by technology or
intellectual property. “Eligible start-up” means a company engaged in eligible business and satisfies the
following conditions –
1. It is incorporated during April 1, 2016 and March 31, 2019.
2. The total turnover of its business does not exceed Rs. 25 crore in any of the previous years during April 1, 2016
and March 31, 2021.
† However (from the assessment year 2017-18), in the case of an eligible start-up, being a technology driven start-up so certified by the Inter-
Ministerial Board of Certification notified by the Central Government, the new asset shall include computers or computer software.
3. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified by the
Central Government.
103.9 Extension of time-limit for acquiring new asset [Sec. 54H] - The cumulative impact of sections 45(5)
and 54H is given below —
1. Initial compensation - Capital gain is chargeable to tax in the previous year in which the compensation (or part
thereof) is first received. For availing the benefit of exemption under sections 54, 54B, 54D, 54EC and 54F, the new
asset should be acquired within time-limit specified for this purpose. But the specified time-limit shall be
determined from the date of receipt of compensation. If initial compensation is received in parts, then the entire
initial compensation is taxable in the year in which a part is first received, but the time-limit for acquiring the new
asset under sections 54, 54B, 54D, 54EC and 54F shall be determined on the basis of dates of receipt of different
parts of initial compensation.
2. Enhanced compensation - If any enhanced compensation is received, it is taxable in the year in which such
compensation is received and for acquiring the new asset under sections 54, 54B, 54D, 54EC and 54F, the time-
limit shall be determined from the date of receipt of additional compensation.
 HOW TO FIND OUT TAX ON SHORT-TERM/LONG-TERM CAPITAL GAIN

104. Tax on short-term and long-term capital gains is computed as follows –
Long-term capital gain (if securities Taxable under section 112 [see para 104.1]
transaction tax is not applicable)
Long-term capital gain (if securities Taxable under section 112A, if a few conditions specified therein are satisfied
transaction tax is applicable) [see para 104.2]. If these conditions are not satisfied, such gain will be taxable
under section 112.
Short-term capital gain (if securities Taxable like any other income (no special rate)
transaction tax is not applicable)
Short-term capital gain (if securities Taxable under section 111A [see para 104.3]
transaction tax is applicable)
104.1 Tax on long-term capital gain [Sec. 112] - Long-term capital gain is taxable under section 112 (but only
if section 112A is not applicable). Under section 112, long-term capital gain is taxable at a flat rate of 20 per cent
[+ SC + HEC]**. However, in some cases [see para 104.1-3] the tax rate is 10 per cent [+ SC + HEC]**.
104.1-1 DEDUCTIONS UNDER SECTIONS 80C TO 80U ARE NOT AVAILABLE - Deductions under sections 80C to 80U are not
available in respect of long-term capital gain.
104.1-2 EXEMPTION LIMIT IN SOME CASES [PROVISO TO SEC. 112(1)(a)] - Long-term capital gain is taxable at the rate of 20
per cent (in some cases 10 per cent). The entire amount is taxable at these rates (no exemption limit). However,
in the case of a resident individual/HUF, the benefit of exemption limit† is available, if taxable income (minus
long-term capital gain) is less than exemption limit†. In such a case, the following shall be deducted from the long-
term capital gain –
Exemption limit†—(Net income or taxable income—Long-term capital gain)
After deducting the aforesaid amount, the balance amount of long-term capital gain is chargeable to tax at the
rate of 20 per cent or 10 per cent [+ SC + HEC]**.
†Exemption limit for the assessment year 2020-21 is Rs. 2,50,000 [higher exemption limit (a) in the case of a resident senior citizen born on or after
April 2, 1940 but on or before April 1, 1960: Rs. 3,00,000; and (b) in the case of a resident super senior citizen born on or before April 1, 1940: Rs.
5,00,000].
**Surcharge is applicable as a percentage (given below) of income-tax –
Net income range Surcharge Net income range Surcharge
Individuals/HUF/AOP/ 0 – Rs. 50 lakh Nil Domestic company 0 – Rs. 1 crore Nil
BOI/artificial juridical Rs. 50 lakh – Rs. 1 crore 10% Rs. 1 crore – Rs. 10 crore 7%
person Rs. 1 crore – Rs. 2 crore 15% Above Rs. 10 crore 12%
Rs. 2 crore – Rs. 5 crore 25%# Foreign company 0 – Rs. 1 crore Nil
Above Rs. 5 crore 37%# Rs. 1 crore – Rs. 10 crore 2%
Firm/co-operative society/ 0 – Rs. 1 crore Nil Above Rs. 10 crore 5%
local authority Above Rs. 1 crore 12%
 Health and education cess [4 per cent of tax and surcharge]
# Surcharge is 15% of income-tax pertaining to income which is chargeable under section 111A or 112A.
335 Tax on long-term capital gain Para 104.1
X (28 years) is a resident individual. For the assessment year 2020-21, he has the following incomes—
Rs.
Long-term capital gain (LT) 8,00,000
Salary income (after standard deduction) 1,70,000
Bank interest (fixed deposits) 30,000
Net income (NI) 10,00,000
In this case, X is a resident individual. Exemption limit is Rs. 2,50,000. Taxable income (minus long-term capital gain) is
Rs. 2,00,000. It is less than exemption limit. Consequently, from the long-term capital gain the following shall be deducted—
Rs. 2,50,000 (exemption limit)—[Rs. 10,00,000 (NI)—Rs. 8,00,000 (LT)] = Rs. 50,000
In this case, the long-term capital gain chargeable to tax will be Rs. 7,50,000 (i.e., Rs. 8,00,000 – Rs. 50,000).
104.1-3 10 PER CENT TAX RATE IN SOME CASES - Long-term capital gain in the hands of non-residents under section
115AB, 115AC, 115AD or 115E is taxable at the rate of 10 per cent [+ SC + HEC]**.
 Long-term capital gain in the hands of a non-resident/foreign company is taxable at the rate of 10 per cent
[+ SC + HEC]**, if such gain arises on transfer of unlisted securities or unlisted shares in a company in which the
public are not substantially interested. However, this rule is applicable only if the indexation benefit is not
claimed and capital gain is calculated without giving effect to the first proviso to section 48 (under this proviso
capital gain is calculated in foreign currency if a few conditions are satisfied).
 Moreover, in the case of any taxpayer if listed securities (i.e., shares, bonds, debentures, Government securities)
or zero coupon bonds are transferred and the taxpayer does not avail the benefit of indexation, he can pay tax
at the rate of 10 per cent [+ SC + HEC]**. In other words, in the case of these securities, etc., the taxpayer has an
option. He can pay tax at the rate of 20 per cent [+ SC + HEC]**, if indexation benefit is claimed or at the rate of
10 per cent [+ SC + HEC]**, if indexation benefit is not taken. In the case of debentures, indexation benefit is not
otherwise available. Consequently, if debentures (long-term) are listed, one should opt for 10 per cent rate. In
the case of transfer of bonus shares, cost of acquisition is generally zero. One should opt for 10 per cent rate if bonus
shares are long-term capital assets and are listed.
Problems
104.1-P1 During the previous year 2019-20, X (33 years) sells the following assets :
Non-listed bonds Gold Shares (non-listed) Debentures (non-listed)
Date of sale March 31, 2020 April 10, 2019 May 17, 2019 March 5, 2020
Date of acquisition April 10, 2019 June 3, 1998 April 10, 2002 April 10, 1982
Rs. Rs. Rs. Rs.
Sale consideration 50,000 8,15,000 3,60,000 70,000
Cost of acquisition 44,000 1,60,000 1,16,263 40,000
Fair market value on April 1, 2001 — 2,76,125 — 34,000
Income from other sources is Rs. 14,18,000. Donation to an approved charitable trust is Rs. 10,000. The assessee deposits Rs. 1,50,000
in public provident fund.
Find out the tax liability.
Solution : Capital gain will be computed as under :
Bonds Gold Shares Debentures
Rs. Rs. Rs. Rs.
Sale consideration 50,000 8,15,000 3,60,000 70,000
Cost of acquisition (in the case of bonds and debentures the
benefit of indexation is not available) 44,000 — — 40,000
Indexed cost of acquisition — 7,98,0001 3,20,0002 —
Capital gain 6,000 17,000 40,000 30,000
**See page 334.

1. Rs. 2,76,125 × 289 ÷ 100.
2. Rs. 1,16,263 × 289 ÷ 105.
Rs.
Long-term capital gain (i.e., Rs. 17,000 + Rs. 40,000 + Rs. 30,000) 87,000
Less : Deduction under section 80G (50% of Rs. 10,000) 5,000
Tax on net income will be determined as under :
Net income (excluding long-term capital gain) 12,69,000
Income-tax on the aforesaid income [see Appendix 1] 1,93,200
Tax on long-term capital gain (@ 20%) 17,400
Tax on net income† (Rs. 1,93,200 + Rs. 17,400) 2,10,600
Note : The benefit of option mentioned under para 104.1-3 is not available as bonds, shares and debentures are non-listed.
104.1-E1 [P7.37]* On April 1, 2019, X (63 years), a resident individual, owns two house properties at Agra apart from investment
in gold. During the previous year 2019-20, X sells the following assets :
Gold Residential house
property at Agra
Date of sale July 10, 2019 June 15, 2019
Date of purchase June 9, 2004 May 17, 2008
Rs. Rs.
Income of X from other sources (including property income) is Rs. 17,56,000.
Assuming that X makes the following investments during the previous year 2019-20, find out the tax liability of X for the assessment
year 2020-21:
a. Purchase of a residential house property : Rs. 6,22,000
b. Deposit in the public provident fund account : Rs. 1,50,000.
104.1-P2 From the following data, find out tax liability for the assessment year 2020-21 :
X (a resident individual) AB (HUF)
(age : 32 years) (a resident Hindu
undivided family)
Rs. Rs.
Income from house property 2,65,000 2,72,000
Capital gain
- Short-term 12,000 12,000
- Long-term on sale of silver 35,000 60,000
Deductions under sections 80CCC, 80D, and 80G 7,000 8,000
Payment of life insurance premium, contribution to public provident fund 28,000 30,000
Solution : Computation of net income
Income from house property 2,65,000 2,72,000
Capital gain 47,000 72,000
Less : Deduction under section 80C 28,000 30,000
X (a resident individual) AB (HUF)

(age : 32 years) (a resident Hindu
undivided family)
Rs. Rs.
Less : Deduction under sections 80CCC, 80D, and 80G 7,000 8,000
Net income 2,77,000 3,06,000
Computation of tax
Net income (excluding long-term capital gain) (a) 2,42,000 2,46,000
Income-tax on (a) Nil Nil
Income-tax on long-term capital gain
*20% of [Rs. 35,000—(Rs. 2,50,000—Rs. 2,42,000)] :
**20% of [Rs. 60,000—(Rs. 2,50,000—Rs. 2,46,000)] : 5,400* 11,200**
Less: Rebate under section 87A (100% of tax or Rs. 12,500, whichever is lower)
(not applicable in the case of HUF) 5,400 Nil
Balance Nil 11,200
Add : Surcharge (applicable if net income exceeds Rs. 50 lakh) — —
Tax and surcharge Nil 11,200
Add: Health and education cess Nil 448
Tax payable (rounded off) Nil 11,650
104.1-E2 [P7.38]* Find out the tax liability of X (63 years), a resident individual, for the assessment year 2020-21 from the data
given below :
Rs.
Long-term capital gain arising on transfer of gold 30,000
Interest on deposit with a firm 3,35,000
Contribution towards public provident fund 1,11,000
Does it make any difference if X is (a) a resident Hindu undivided family or (b) a non-resident Indian citizen ?
104.1-P3 X, a resident Hindu undivided family, has the following income for the previous year 2019-20 :
Rs.
Business income (—)15,000
Short-term capital gain on transfer of silver 63,000
Long-term capital gain on sale of land 8,21,000
Find out the tax liability for the assessment year 2020-21, assuming that the family pays life insurance premium of Rs. 65,000 (sum
assured : Rs. 8,00,000) (policy taken in May 2019).
Solution : Long-term Short-term
Capital gain Capital gain
Rs. Rs.
Capital gain 8,21,000 63,000
Less: Business loss (-) 15,000 —
Gross total income 8,06,000 63,000
Less: Deduction under section 80C — 65,000
Net income 8,06,000 Nil
Tax [i.e., 20% of (Rs. 8,06,000 – Rs. 2,50,000)] 1,11,200
Add: Health and education Cess 4,448
Tax liability [rounded off] 1,15,650
Note : If the net income (other than long-term capital gain) is below the amount of first slab which is not taxable (i.e.,
Rs. 2,50,000), then the long-term capital gain shall be reduced by the amount by which the total income (other than long-
term capital gain) falls short of the maximum amount which is not chargeable to tax.
In this case, net income (other than long-term capital gain) is nil. Therefore, long-term capital gain shall be reduced by
Rs. 2,50,000.
104.1-E3 [P7.39]* X (24 years) has the following income for the previous year 2019-20 :
Rs.
Salary (before standard deduction) 1,97,000
Business income (—)54,000
Short-term capital gain on transfer of land 1,92,000
Long-term capital gain on sale of non-listed shares 79,000
X pays life insurance premium of Rs. 1,05,000 (sum assured : Rs. 15,00,000). Find out the tax liability for the assessment year
2020-21 on the assumption that X is (a) resident and ordinarily resident, or (b) resident but not ordinarily resident, or (c) non-resident
in India.
104.1-P4 On July 30, 2019, X (31 years) sells the following assets —
Preference shares Preference shares Shares in C Ltd.
in A Ltd. (listed) in B Ltd. (listed) (non-listed)
Rs. Rs. Rs.
Cost of acquisition 1,04,000 4,27,000 80,000
Date of acquisition May 10, 2002 June 6, 2003 April 6, 2006
Income of X from other sources is Rs. 8,86,000. X deposits Rs. 1,50,000 in public provident fund. Find out the net income and tax liability
Solution :
Preference shares Preference shares Shares in C Ltd.
in A Ltd. in B Ltd.
Rs. Rs. Rs.
Less : Indexed cost of acquisition 2,86,2481 11,32,1382 1,89,5083
Long-term capital gain 2,13,752 92,862 4,99,492
Computation of net income
Computation of tax
Tax on income other than long-term capital gain (i.e., tax on Rs. 7,36,000) 59,700
Add : Tax on long-term capital gain (see Note) 1,58,070
Tax† 2,17,770
Add : Surcharge Nil
Tax 2,17,770
Note : Computation of tax on long-term capital gain
Shares in A Shares in B Shares in C
Ltd. Ltd. Ltd.
Rs. Rs. Rs.
Tax on long-term capital gain as computed (after deducting indexed
cost of acquisition) @ 20% (a) 42,750 18,572 99,898
1. Rs. 1,04,000 × 289 ÷ 105.
2. Rs. 4,27,000 × 289 ÷ 109.
3. Rs. 80,000 × 289 ÷ 122.
Shares in A Shares in B Shares in C

Ltd. Ltd. Ltd.
Rs. Rs. Rs.
Whether option mentioned in para 104.1-3 is available [*shares in
C Ltd. are non-listed] Yes Yes No*
Sale consideration 5,00,000 12,25,000 —
Less : Cost of acquisition 1,04,000 4,27,000 —
Balance (b) 3,96,000 7,98,000 —
Tax on (b) @ 10% (c) 39,600 79,800 —
Effective tax [(a) or (c), whichever is lower] 39,600 18,572 99,898
104.1-E4 [P7.40]* X Ltd., an Indian company, sells the following assets outside a recognised stock exchange on May 19, 2019—
Government Preference
securities shares (listed)
Rs. Rs.
Sale consideration 90,000 9,92,000
Cost of acquisition 70,000 4,00,000
Date of purchase April 19, 2014 April 28, 2012
Find out the amount of tax liability for the assessment year 2020-21 on the following assumptions —
a. income of X Ltd. from business : Rs. 5,56,000 ;
b. amount invested in NSC VIII issued on March 31, 2020 : Rs. 1,00,000.
Business income of X Ltd. is taxable @ 25 per cent (as the turnover of the company does not exceed Rs. 400 crore for the financial
year 2017-18).
104.2 Tax on long-term capital gain in certain cases [Sec. 112A] - Tax on long-term capital gain (which arises
on transfer of listed equity shares or units of equity oriented mutual funds on or after April 1, 2018) is calculated
as per special provisions given in section 112A. If section 112A is not applicable, then tax will be calculated under
the provisions of section 112.
Section 112A is applicable only if the following conditions are satisfied –
Condition 1 The total income includes any income chargeable under the head “Capital gains”.
Condition 2 The capital gains arise from the transfer of a long-term capital asset being an equity share in a company or
a unit of an equity oriented fund or a unit of a business trust.
Condition 3 At the time of transfer of equity share/equity oriented mutual fund unit/unit of business trust, securities
transaction tax (STT) has been paid.
Condition 4 In case capital gain arises on transfer of equity shares, securities transaction tax (STT) was paid also at the
time of acquisition of shares. However, the Board has clarified that the requirement of STT payment at the
time of acquisition is applicable only when shares were acquired after October 1, 2004.
 Transactions in any International Financial Service Centre not subject to Condition 3 - Condition 3 given above is not
applicable in the case of a transfer undertaken on a recognised stock exchange located in any International
Financial Service Centre. However, this concession is available only when the consideration for such transfer is
received or receivable in foreign currency.
 Condition 4 not applicable in a few notified cases - Condition 4 is not applicable in a few notified cases given below
(in these cases the requirement of payment of STT at the time of acquisition of equity shares is not
applicable) –
- Acquisition which has been approved by the Supreme Court, High Court, National Company Law Tribunal,
SEBI or RBI.
- Acquisition by any non-resident in accordance with FDI guidelines of the Indian Government.
- Acquisition by an investment fund [referred to in sec. 115UB].
- Acquisition through preferential issue to which Chapter VII of SEBI (Issue of Capital and Disclosure)
Regulations does not apply.
- Acquisition through an issue of share by a company.

- Acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions
during their ordinary course of business.
- Acquisition under ESOP.
- Acquisition under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.
- Acquisition from the Government.
- Acquisition by mode of transfer [as per section 45(3)/(4), 47, 50B] if previous owner has acquired shares by
any of the modes given in this list.
104.2-1 TAX COMPUTATION UNDER SECTION 112A - If 4 conditions given above are satisfied, tax on long-term capital
gain (mentioned in Condition 2) is calculated on the basis of parameters given below –
 Long-term capital gain in excess of Rs. 1 lakh taxable at 10 per cent - If long-term capital gain (mentioned in Condition
2) does not exceed Rs. 1 lakh, it is not chargeable to tax. If such gain exceeds Rs. 1 lakh, the amount in excess of
Rs. 1 lakh is taxable at the rate of 10 per cent (+ surcharge + 4 per cent health and education cess). The rate of 10
per cent is applicable whether the assessee is a corporate-assessee or a non-corporate assessee.
 Benefit of exemption limit in some cases - Proviso to section 112A(2) gives exemption limit benefit. This benefit is
available only in the case of a resident individual or a resident HUF (maybe ordinarily resident or not ordinarily
resident). Moreover, this benefit is available only if the total income (as reduced by long-term capital gain
mentioned in Condition 2) is less than the exemption limit.
 Case 1 - Y (64 years) is a resident individual. For the assessment year 2020-21, he has following income –
Rs.
Long-term capital gain on transfer of equity shares (four conditions given above are satisfied) (capital gain
is computed within the parameters given under section 112A) 1,80,000
Net income (or taxable income or total income) 4,55,000
In this case, net income (as reduced by long-term capital gain) is Rs. 2,75,000. Exemption limit is Rs. 3,00,000. Y is unable
to fully utilise his exemption limit. Unutilised exemption limit is Rs. 25,000 which will be deducted from capital gain of Rs.
1,80,000. In other words, out of long-term capital gain of Rs. 1,80,000, amount chargeable to tax under section 112A is Rs.
1,55,000. Tax will be calculated as follows –
Rs.
Tax on long-term capital gain under section 112A [10% of (long-term capital gain exceeding Rs. 1,00,000)] 5,500
Add: Health and education cess @ 4% 220
Tax liability 5,720
 Case 2 - Z (50 years) is a resident individual. For the assessment year 2020-21, he has following income –
Rs.
Long-term capital gain on transfer of equity shares (four conditions given above are satisfied) (capital
gain is computed within the parameters given under section 112A) 1,25,00,000
Other income 60,000
Net income (or taxable income or total income) 1,25,60,000
In this case, net income (as reduced by long-term capital gain) is Rs. 60,000. Exemption limit is Rs. 2,50,000. Z is unable to
fully utilise his exemption limit. Unutilised exemption limit is Rs. 1,90,000 which will be deducted from capital gain of Rs.
1,25,00,000. In other words, out of long-term capital gain of Rs. 1,25,00,000, amount chargeable to tax under section 112A
is Rs. 1,23,10,000. Tax will be calculated as follows –
Rs.
Tax on long-term capital gain under section 112A [10% of (long-term capital gain exceeding Rs. 1,00,000)] 12,21,000
Tax on other income Nil
Tax 12,21,000
Add: Health and education cess @ 4% 56,166
104.2-2 MODE OF COMPUTATION OF COST OF ACQUISITION - If tax is payable under section 112A, cost of acquisition of
equity shares/units shall be calculated according to the provisions given under section 55(2)(ac)†. This provision
is applicable only in respect of equity shares/units acquired by the assessee before February 1, 2018. Cost of
acquisition shall be calculated as follows† –
Step 1 - Find out actual cost of acquisition of equity shares/units.
Step 2 - Find out fair market value of equity shares/units on January 31, 2018 (but it cannot be more than sale
consideration of equity shares/units).
Cost of acquisition shall be deemed to be amount computed in Step 1 or Step 2, whichever is higher.
 Fair market value on January 31, 2018 - Fair market value on January 31, 2018 shall be calculated as follows –
1. Shares/units which are quoted on January 31, 2018 - In a case where equity share/unit is listed on any recognised
stock exchange, the highest price of share/unit quoted on such exchange on January 31, 2018 is taken as fair
market value. Where, however, there is no trading in such share/unit on such exchange on January 31, 2018, the
highest price of such share/unit on such exchange on a date immediately preceding January 31, 2018 when such
share/unit was traded on such exchange, shall be the fair market value.
2. Units not listed - In a case where a unit is not listed on a recognised stock exchange, the net asset value (NAV)
of such unit as on January 31, 2018 is taken as fair market value.
3. Shares (not listed on January 31, 2018) but listed on the date of transfer - In a case, where equity share is listed on
a recognised stock exchange at the time of transfer (but not listed on January 31, 2018), fair market value on
January 31, 2018 will be calculated (after giving indexation benefit in a limited mode up to the previous year
2017-18) as follows –
Cost inflation index (CII) of 2017-18 (i.e., 272)
Cost of acquisition ×
CII for the year in which the shares were first held by the assessee (or previous
owner in a few cases) or 2001-02, whichever is later
 Case 1 - Consider the following situations (1,000 shares are transacted at Bombay Stock Exchange but value of 1 equity share
is given below) –
Situation 1 Situation 2 Situation 3 Situation 4 Situation 5
Rs. Rs. Rs. Rs. Rs.
Cost of acquisition on September 20, 2017 (a) 410 710 900 800 30
Fair market value as per highest quotation
on January 31, 2018 (b) 730 780 300 1,000 100
Sale consideration on March 15, 2020 (c) 760 650 910 825 400
Fair market value for the purpose of calculating tax liability under section 112A shall be calculated as follows –
Step 1 - Cost of acquisition on September

20, 2017 (a) 410 710 900 800 30
Step 2 - Fair market value on January 31,
2018 but it cannot be more than sale con-
sideration [lower of (b) or (c)] (d) 730 650 300 825 100
Cost of acquisition for the purpose of sec-
tion 112A [(a) or (d), whichever is higher] (e) 730 710 900 825 100
Long-term capital gain per share under
section 112A [(c) – (e)] 30 (–) 60 10 Nil 300
† Long-term capital gain on transfer of equity shares/units of equity oriented mutual funds (which was subject to securities transaction tax) was
exempt from tax under section 10(38). The Finance Act, 2018 (Finance Bill was presented in Lok Sabha on February 1, 2018) made significant
amendments to tax such capital gain with effect from the assessment year 2019-20. However, any surplus which arises after the purchase of equity
shares/units but before the presentation of the Finance Bill, is not taxable. To make it workable, definition of “cost of acquisition” has been outlined
in such a way that nothing will be taxable in respect of any appreciation in the value of equity shares/units till January 31, 2018 (i.e., before the
presentation of Finance Bill, 2018 in Lok Sabha).
 Case 2 - The above mode of determining cost of acquisition is applicable only if shares/units are acquired prior to February
1, 2018. Suppose in Situation 1, the date of acquisition is February 10, 2018 (no other change). “Cost of acquisition” will be
taken as Rs. 410 (above rules are not applicable).
 Case 3 - In the following cases, shares are listed after January 31, 2018 (assume that shares are listed for the first time in
March 2018 or April 2018) –
Rs. Rs.
Date of acquisition of 1,000 shares July 1, 2003 June 1, 1995
Cost of acquisition of 1,000 shares (shares are not listed, STT not paid) 60,000 38,000
Fair market value on April 1, 2001 – 40,000
Sale consideration of 1,000 shares on June 7, 2019 (transacted at BSE and STT @ 0.1%
of Rs. 30,000 is paid) 30,00,000 30,00,000
Cost of acquisition and capital gain will be calculated as follows –
Step 1 - Cost of acquisition (actual cost or fair market value on April 1, 2001, which-
ever is higher in Situation 2) (a) 60,000 40,000
Step 2 - Fair market value on January 31, 2018 but it cannot be more than sale con-
sideration (b) 1,49,725* 1,08,800**
Cost of acquisition for the purpose of section 112A [(a) or (b), whichever is higher] (c) 1,49,725 1,08,800
Long-term capital gain under section 112A [i.e., sale consideration – (c)] 28,50,275 28,91,200
*Rs. 60,000 × CII of 2017-18 : 272 ÷ CII of 2003-04 : 109, **Rs. 40,000 × CII of 2017-18 : 272 ÷ CII of 2001-02 : 100.
104.2-3 OTHER POINTS - For computation of tax under section 112A, the following points should be kept in
view –
1. Indexation benefit (barring the case given above) is not available when tax is payable under section 112A.
2. Mode of computation of capital gain in foreign currency in the case of a non-resident (specified by first proviso
to section 48) is not applicable when tax is payable under section 112A.
3. Deductions under sections 80C to 80U are not available from long-term capital gain (mentioned in Condition
2).
4. Rebate under section 87A is not available from income-tax on long-term capital gain mentioned in Condition
2. However, the rebate under section 87A shall be allowed from the income-tax on the total income as reduced
by tax payable on such capital gains.
Problems
104.2-P1 The following information is given by X (32 years) and Y (56 years) –
X Y
Rs. Rs.
Cost of acquisition of 500 equity shares in A Ltd. on March 25, 2014 (securities transaction
tax is paid) 55,000 49,000
Fair market value on January 31, 2018 (highest quotation in Bombay Stock Exchange and
National Stock Exchange on January 31, 2018 : Rs. 180) (Rs. 180 × 500) 90,000 90,000
Date of transfer of 500 equity shares in A Ltd. April 20, 2019 August 6, 2019
Full value of consideration [*(Rs. 490 × 500), **(Rs. 480 × 500) (securities transaction tax
is paid) 2,45,000* 2,40,000**
Income other than capital gains 12,00,000 6,10,000
Find out the tax liability of X for the assessment year 2020-21.
Solution : Conditions of section 112A are satisfied. Consequently, tax on capital gain will be calculated within the
parameters of section 112A as follows –
Rs.
Cost of acquisition for the purpose of section 112A –
- Actual cost of acquisition 55,000
- Fair market value on January 31, 2018 or sale consideration, whichever is lower 90,000
Cost of acquisition (higher of the above figures) 90,000
Rs.
Computation of income –
Long-term capital gain (Rs. 2,45,000 – Rs. 90,000) 1,55,000
Computation of tax –
Income-tax on long-term capital gain (10% of capital gain in excess of Rs. 1,00,000) 5,500
Income-tax on other incomes 1,72,500
Income-tax 1,78,000
104.2-E1 In the above problem, find out the tax liability of Y.
104.2-P2 X (49 years) purchases 1,000 shares in C Ltd. on January 20, 2014 from a friend at the rate of Rs. 350 per share (though shares
in C Ltd. are quoted in Bombay Stock Exchange, securities transaction tax is not paid as transaction is made outside the stock exchange).
Highest market quotation on January 31, 2018 is Rs. 440 per share. He transfers 900 shares in C Ltd. on December 15, 2019 at the rate
of Rs. 470 per share (securities transaction tax is paid at the time of transfer). Income of X from other sources for the previous year
2019-20 is Rs. 20,00,000.
Solution : Tax is computed under section 112A only if 4 conditions are satisfied [see para 104.2]. In this case, Condition 4 is
not satisfied (securities transaction tax is not paid at the time of acquisition of shares). Consequently, section 112A is not
applicable. Tax will be computed under section 112 as follows –
Rs.
Full value of consideration (Rs. 470 × 900) 4,23,000
Less: Indexed cost of acquisition [Rs. 350 × 900 × CII of 2019-20 : 289 ÷ CII of 2013-14 : 220] 4,13,795
Income-tax on long-term capital gain under section 112 [20% of Rs. 9,205 or 10% of capital gain without
indexation of Rs. 1,08,000, whichever is lower] 1,841
Tax on other income 4,12,500
Income-tax 4,14,341
104.2-E2 In the above problem, assume that shares were purchased by X through a transaction in the Bombay Stock Exchange and
securities transaction is paid at the time of acquisition on January 20, 2014. Recalculate the tax liability of X.
104.2-P3 X (61 years) acquires 10,000 equity shares in B Ltd. on March 16, 2006. He gets 8,000 bonus shares on March 11, 2013. X
transfers original shares in the previous year 2014-15. He transfers 5,000 bonus shares on November 2, 2019 at the rate of Rs. 900 per
share (securities transaction tax is paid at the time of transfer). Fair market value of shares in B Ltd. as per Bombay Stock Exchange
quotation is Rs. 300 on January 31, 2018. Income of X for the previous year 2019-20 from other sources is Rs. 26,40,000. He has a brought
forward short-term capital loss of Rs. 2,90,000 pertaining to the assessment year 2016-17.
Solution : Section 112A is applicable only if 4 conditions are satisfied [see para 104.2]. First 3 conditions are satisfied. Condition
4 is not applicable in a few notified cases (securities transaction tax is not paid at the time of acquisition of bonus shares, these
shares are issued by the company, this transaction is covered by the notification issued by CBDT). Consequently, tax is
calculated under section 112A as follows –
Rs.
Full value of consideration (Rs. 900 × 5,000) 45,00,000
Less: Cost of acquisition [Step 1 - Actual cost : Nil, Step 2 - Fair market value on January 31, 2018 : Rs. 300,
whichever is more] (Rs. 300 × 5,000) 15,00,000
Less: Brought forward capital loss 2,90,000
Rs.
Income-tax on long-term capital gain under section 112A [10% of (Rs. 27,10,000 – Rs. 1,00,000)] 2,61,000
Income-tax on other income of Rs. 26,40,000 6,02,000
Income-tax 8,63,000
Add: Surcharge 86,300
Income-tax and surcharge 9,49,300
104.2-E3 Recalculate the tax liability of X in the above problem on the assumption that X transfers only 500 bonus shares (not 5,000
shares) on November 2, 2019. There is no other transaction till March 31, 2020. There is no other change in data.
104.3 Tax on short-term capital gain if securities transaction tax is not applicable - If securities transaction
tax is not applicable, short-term capital gain is taxable like any other income (no special rate).
104.4 Tax on short-term capital gain if securities transaction tax is applicable - Short-term capital gain is
taxable at the rate of 15 per cent [+ SC + HEC]** under section 111A. This rule is applicable if the transaction is
chargeable to securities transaction tax at the time of transfer. This concessional tax treatment is also applicable
if transaction is undertaken in foreign currency on a recognised stock exchange located in an International
Financial Services Centre††.
104.4-1 DEDUCTIONS UNDER SECTIONS 80C TO 80U ARE NOT AVAILABLE - Deductions under sections 80C to 80U are not
available in respect of short-term capital gain, if securities transaction tax is applicable.
104.4-2 EXEMPTION LIMIT IN SOME CASES [PROVISO TO SEC. 111A] - Short-term capital gain (where securities transaction
tax is applicable) is taxable at the rate of 15 per cent. The entire amount is taxable at 15 per cent (no exemption
limit). However, in the case of a resident individual/HUF, the benefit of exemption limit† is available if taxable
income (minus short-term capital gain, which is subject to securities transaction tax) is less than exemption limit.
In such a case, the following shall be deducted from the short-term capital gain –
Exemption limit—(Net income or taxable income–Short-term capital gain,

where securities transaction tax is applicable)
After deducting the aforesaid amount, the balance amount of short-term capital gain is chargeable to tax at the
rate of 15 per cent [+ SC + HEC].
Mrs. X (58 years) is a resident individual. For the assessment year 2019-20, she has the following incomes—
Rs.
Short-term capital gain on transfer of shares (securities transaction tax is applicable) (ST) 6,24,000
Short-term capital gain on transfer of gold 45,000
Bank interest 36,000
Net income (NI) 8,67,000
In this case, Mrs. X is a resident individual. Her exemption limit is Rs. 2,50,000. Taxable income (minus short-term capital
gain subject to securities transaction tax) is Rs. 2,43,000. It is less than exemption limit. Consequently, from the short-term
capital gain the following shall be deducted—
Rs. 2,50,000 (exemption limit)—[Rs. 8,67,000 (NI)—Rs. 6,24,000 (ST)] = Rs. 7,000
In this case, the short-term capital gain chargeable to tax will be Rs. 6,17,000 (i.e., Rs. 6,24,000 – Rs. 7,000).
April 2, 1940 but on or before April 1, 1960: Rs. 3,00,000; and (b) in the case of a resident super senior citizen born on or before April 1, 1940:
Rs. 5,00,000].
†† “International Financial Services Centre” means an International Financial Services Centre which is set-up in a special economic zone and
approved by the Central Government under section 18(1) of Special Economic Zone Act, 2005.
**See page 334.
345 Problems on computation of capital gains Problem 105-P1
 Problems on computation of capital gains

105-P1 X (44 years) is a resident individual. His taxable salary income (after standard deduction) is Rs. 9,40,000. He contributes Rs.
1,50,000 to a recognized provident fund. During the previous year 2019-20, he transfers the following assets –
1. On April 6, 2019, X transfers agricultural land situated in a village in Karachi (population of the village is 6,000). Sale consideration
is Rs. 20,00,000 (cost of acquisition at the time of purchase in 2018-19 was Rs. 16,50,000).
2. On April 20, 2019, he transfers agricultural land situated in a village in Madhya Pradesh (population of the village is 4,000). Sale
consideration is Rs. 26,00,000. Land was purchased in 1984-85 for Rs. 50,000.
3. On July 1, 2019, X transfers debentures of A Ltd. for Rs. 14,00,000. These debentures are transacted in the National Stock Exchange.
Cost of acquisition is Rs. 11,00,000 (date of acquisition April 1, 2018).
Find out the net income and tax liability of X for the assessment year 2020-21, on the assumption that he has invested Rs. 1,00,000 in
the bonds of National Highways Authority of India on July 30, 2019.
Solution :
Capital gain on transfer of Karachi land - Agricultural land in India in a rural area is not “capital asset”. However, this land is
situated in a rural area outside India. It is a capital asset and capital gain is chargeable to tax, which comes to Rs. 3,50,000
(indexation is not available as the asset is short-term capital asset).
Capital gain on transfer of Madhya Pradesh land - It is agricultural land situated in a village in India. Population of the village
is less than 10,000. Consequently, it is a rural area and the agricultural land is not a “capital asset”. The surplus is not
chargeable to tax at all.
Capital gain on transfer of debentures - It is chargeable to tax. Debentures are quoted debentures and period of holding is more
than 12 months. Consequently, debentures are long-term capital assets. However, in the case of debentures indexation
benefit is not available. The surplus of Rs. 3,00,000 is long-term capital gain. In the case of listed securities (if indexation
benefit is not taken) one can pay tax at the rate of 10%. It is given in the problem that X has invested Rs. 1,00,000 in the bonds
of NHAI within 6 months from the transfer of debentures. Generally, such investment is qualified for claiming exemption
under section 54EC. However, exemption under section 54EC is available only if capital gain arises on the transfer of land
or building or both. In the given problem, no exemption is available under section 54EC.
Rs.
Salary 9,40,000
Capital gain –
Short-term 3,50,000
Long-term 3,00,000
Any other income Nil
Tax on net income
Income-tax (10% of Rs. 3,00,000 + normal tax on Rs. 11,40,000)† 1,84,500
105-E1 [P7.41]* On May 22, 2019, the Government of Punjab acquires a plot of land owned by X Ltd. for constructing police
headquarters. On June 10, 2019, X Ltd. receives Rs. 7,60,000 as compensation (cost of acquisition : Rs. 2,45,000 in 1984 ; fair market
value on April 1, 2001: Rs. 2,10,000). Against the award, an appeal is filed by X Ltd. and the High Court by its order dated October
10, 2022 increases the award to Rs. 14,00,000. The additional compensation of Rs. 6,40,000 is received by X Ltd. on December 20,
2022. The following investments are made by X Ltd. :
Date of investment Amount Rs. Investment
July 15, 2019 7,37,200 Residential house property in Nepal
January 1, 2023 4,00,000 Bonds of National Highways Authority of India date of
redemption : January 15, 2036
Assuming that income of X Ltd. from other sources for the assessment years 2020-21 and 2023-24 is Rs. 50,000 and Rs. 1,20,000,
respectively, determine the taxable income for the two assessment years.
exceed Rs. 50 lakh.
Problem 105-P2 Income under the head ‘Capital gains’ and its computation 346
105-P2 X (43 years) purchased a house property on July 17, 1999 for Rs. 45,000 (in addition he paid stamp duty at the rate of 12 per
cent on stamp duty value of Rs. 50,000). Fair market value of the property on April 1, 2001 is Rs. 48,000. X incurred the following
expenses –
Rs.
a. Construction of a room on the ground floor during 1999-00 30,000
b. Renewals/reconstruction in 2018-19 40,000
The property is transferred on April 6, 2019 for Rs. 94,00,000 (stamp duty value is Rs. 99,00,000 on which the purchaser has paid stamp
duty at the rate of 9 per cent). X made the following investments –
1. On April 1, 2019, X purchased Rs. 10,00,000 NHAI bonds for availing of exemption under section 54EC.
2. On March 31, 2019, X purchased a residential house property in Pune for Rs. 13,00,000. In addition he paid stamp duty at the rate
of 6 per cent on stamp duty value of Rs. 15,00,000.
3. On June 30, 2019, X constructed first floor in Pune property by spending Rs. 2,70,000.
4. On October 8, 2019, X purchased Rs. 8,00,000 REC bonds for availing of exemption under section 54EC.
Find out the net income and tax liability for the assessment year 2020-21 (income of X from salary is Rs. 6,50,000 and contribution
towards unrecognized provident fund is Rs. 1,10,000).
Solution : Computation of capital gain –
Rs.
Sale consideration (stamp duty value is taken, as it is more than 105% of actual consideration) 99,00,000
Less: Expenses on transfer Nil
Less: Indexed cost of acquisition [(Rs. 45,000 + stamp duty @ 12% of Rs. 50,000) × 289 ÷ 100] 1,47,390
Less: Indexed cost of improvement (1999-00) Nil
Less: Indexed cost of improvement (2018-19) (Rs. 40,000 × 289 ÷ 280) 41,286
Less: Exemption
Under section 54 (Pune property was purchased within 1 year before transfer; cost of acquisition,
stamp duty and first floor construction expenditure is eligible for exemption, i.e., Rs. 13,00,000 + 6%
of Rs. 15,00,000 + Rs, 2,70,000) 16,60,000
Under section 54EC (NHAI bonds were purchased before transfer of house property and not eligible
for exemption. REC bonds were purchased after 6 months after the transfer of house property, even
it is not eligible for exemption) Nil
Computation of net income and tax liability –
Salary (i.e., salary : Rs. 6,50,000 – standard deduction : Rs. 50,000) 6,00,000
Less: Deduction under section 80C (not available in the case of unrecognized provident fund) Nil
Tax on net income
Income-tax (20% of Rs. 80,51,324 + normal tax on Rs. 6,00,000)† 16,42,764
105-E2 [P7.42]* X sells a residential house at Delhi (no other house is owned by him) on March 20, 2020 for Rs. 11,00,000 (cost
of acquisition in 2005-06 : Rs. 1,00,000). On July 31, 2020, he deposits Rs. 3,00,000 in a bank for purchase/construction of house
property in future to claim exemption under section 54. On November 1, 2020, he purchases 10 bonds of Rs. 100 each of National
Highways Authority of India (not redeemable within 6 years) to claim exemption under section 54EC. Income of X from other sources
for the previous year 2019-20 is Rs. 60,000. He completes construction of a residential house property on March 1, 2023 (total
investment of Rs. 1,90,000 is financed by withdrawing from deposit account). Assume that the income of X from other sources for
the previous years 2021-22 and 2022-23 is Rs. 7,86,000 and Rs. 2,70,000 respectively, determine the taxable income for the
assessment years 2020-21, 2022-23 and 2023-24.
105-P3 X sells (preference) shares in A Ltd. on November 30, 2019 for Rs. 18,00,000. Fair market value of these shares as per Bombay
Stock Exchange quotation is, however, Rs. 20,00,000. These shares were purchased on June 15, 2016 for Rs. 1,55,000. On December
†As taxable income is more than Rs. 5,00,000, rebate under section 87A is not available.
1, 2019, he invests Rs. 8,00,000 in bonds of National Highways Authority of India (date of redemption : May 1, 2030) for claiming
exemption under section 54EC. On July 31, 2021, he deposits Rs. 5,00,000 in a bank account under section 54F for construction of a
house in future. Construction of the house is completed on October 15, 2022. Total investment of Rs. 4,50,000 is financed by withdrawing
from the deposit account. Income of X from other sources is Rs. 8,00,000 and Rs. 10,20,000 for the previous years 2019-20 and
2022-23, respectively. Determine the taxable income for the assessment years 2020-21 and 2023-24. X does not own any other house.
Solution :
Income computation for the assessment year 2020-21
Rs.
Balance 16,30,322
Less: Exemption
Under section 54EC (available only if capital gain arises on transfer of land or building or both) Nil
Under section 54F (not available as deposit is made after the expiry of due date of submission of return
of income for the assessment year 2020-21) Nil
Note - Fair market value of shares on the date of transfer is not taken into consideration, as section 50CA is not applicable. Section 50CA
is applicable only in the case of transfer of unlisted shares [see para 101.20].
Income computation for the assessment year 2023-24 - For the assessment year 2023-24, Rs. 10,20,000 will be chargeable to tax.
Deemed long-term capital gain (because of non-utilisation of deposit account) is not taxable, as initially exemption was not
given under section 54F.
105-E3 [P7.43]* During the previous year 2019-20, X Ltd. sells the following assets :
Date of sale Sale proceeds Date of Cost of
purchase acquisition
Rs. Rs.
Rural agricultural land June 15, 2019 2,00,000 March 1, 2002 20,000
Urban agricultural land November 1, 2019 6,00,000 May 10, 2001 30,000
Shares (not listed) January 15, 2020 1,70,000 January 10, 2017 1,25,000
Debentures (listed at Cochin Stock
Exchange) January 12, 2020 40,000 January 10, 2017 20,000
X Ltd. purchases the following assets :
Date of purchase Assets Amount invested
Rs.
July 10, 2019 Agricultural land 2,00,000
August 1, 2019 Rural Electrification Corporation Bonds 20,000
November 10, 2019 Agricultural land 4,00,000
November 15, 2019 Residential house 90,000
July 14, 2020 Bonds of National Highways Authority of India (date of 1,40,000
redemption July 20, 2027)
Determine the taxable income for the assessment year 2020-21 on the assumption that income from business is Rs. 2,45,000.
105-P4 During the previous year 2019-20, X transfers the following assets –
1. On April 30, 2019, he transfers a personal computer for Rs. 60,000 (it was purchased for Rs. 58,000 on January 1, 2019).
2. On June 15, 2019, he transfers personal jewellery for Rs. 18,00,000 (purchased during 2006-07 for Rs. 80,000). To avail of exemption
he has invested Rs. 18,00,000 in purchasing new jewellery on the same day.
3. On June 18, 2019, he transfers a Tagore painting for Rs. 58,00,000 (purchased during 2004-05 for Rs. 24,00,000). Out of the sale
consideration, X purchases on the same day a Raja Ravi Verma painting for Rs. 40,00,000 and NHAI bonds of Rs. 6,00,000.
4. On July 6, 2019, he transfers his personal car for Rs. 2,50,000 (this car was purchased in 2006 from second hand market for Rs. 80,000
and he spent Rs. 1,00,000 on renewal of the car). On the same day out of the sale consideration, X purchases Rs. 1,00,000 REC bonds.
Solution : Personal computer and personal car are not capital assets. Consequently, capital gain is not chargeable to tax.
However, personal jewellery and personal painting are capital assets and capital gain will be calculated as follows –
Jewellery Painting
Rs. Rs.
Less: Indexed cost of acquisition [Rs. 80,000 × 289 ÷ 122, Rs. 24,00,000 × 289 ÷ 113] 1,89,508 61,38,053
Balance 16,10,492 (-)3,38,053
Capital gain 12,72,439
Less: Exemption under section 54EC Nil
Long-term capital gain chargeable to tax 12,72,439
105-E4 [P7.44]* X sells non-listed preference shares in companies on November 30, 2019 for Rs. 9,00,000 (cost of acquisition when
acquired on June 15, 2018 : Rs. 2,50,000). On May 1, 2020, he invests Rs. 3,00,000 in bonds of National Highways Authority of
India (date of redemption : May 1, 2030) for claiming exemption under section 54EC. On July 31, 2021, he deposits Rs. 6,00,000
in a bank account under section 54F for construction of a house in future. Construction of the house is completed on October 15, 2022.
Total investment of Rs. 4,50,000 is financed by withdrawing from the deposit account. Income of X from other sources is Rs. 20,000
and Rs. 30,000 for the previous years 2019-20 and 2022-23, respectively. Determine the taxable income for the assessment years
2020-21 and 2023-24. X does not own any other house.
105-P5 X owns two houses (at Amritsar and Pune). He transfers the following long-term capital assets during 2019-20—
Residential Gold Silver
house property
at Pune
Date of sale April 10, 2019 April 11, 2019 April 12, 2019
Rs. Rs. Rs.
Indexed cost of acquisition 4,00,000 7,00,000 2,00,000
X purchases the following assets —
Date of purchase Amount invested
Rs.
Residential house at Bombay October 11, 2019 7,00,000
Bonds of National Highways Authority of India for the purpose of section 54EC October 9, 2019 2,50,000
Ascertain the amount of capital gain chargeable to tax for the assessment year 2020-21. Can he claim exemption under sections 54, 54EC
and 54F?
Solution : In this case, X claim exemption under sections 54, 54EC and 54F as follows —
Residential Gold Silver
house
Rs. Rs. Rs.
Long-term capital gain 6,00,000 1,00,000 4,00,000
% of long-term capital gain to net sale consideration 60% 12.5% 66.67%
Order of preference for section 54F — 2 1
Amount of exemption
- Under section 54 [out of Rs. 7 lakh, Rs. 3.50 lakh is utilised for claiming
exemption under section 54] 3,50,000 — —
- Under section 54EC 2,50,000 — —
- Under section 54F [Rs. 3.50 lakh being investment in residential house/Rs. 6
lakh being sale consideration of silver × Rs. 4 lakh being capital gain
on silver] — — 2,33,333
Long-term capital gain Nil 1,00,000 1,66,667
105-E5 Assume in problem 105-P5, the residential house property at Pune is sold on April 13, 2019, ascertain the amount of capital
gain chargeable to tax for the assessment year 2020-21.
105-P6 X (60 years) transfers the following assets –

1. Rural agricultural land situated in Tamil Nadu (date of transfer : April 20, 2019, sale consideration : Rs. 20,00,000, purchase
consideration : Rs. 18,000, year of acquisition : 2003-04, after purchasing the land is lying vacant and has not been used for any purpose,
although it is agricultural land).
2. Agricultural land within the municipal limits of Delhi (date of transfer : May 10, 2019, sale consideration: Rs. 12,15,000, stamp duty
value : Rs. 12,50,000, year of acquisition : 2004-05, indexed cost of acquisition: Rs. 5,70,000, after purchasing it is used by X for
agricultural purposes).
3. Shares in A Ltd. (shares are quoted in Bombay Stock Exchange, transferred to a friend outside stock exchange on June 1, 2019 for Rs.
42,00,000, cost of acquisition : Rs. 4,00,000, year of acquisition : 2007-08). Fair market value on January 31, 2018 (as per Bombay Stock
Exchange quotation) is Rs. 41,00,000.
X is a businessman. His business turnover is Rs. 1.20 crore and income from business is Rs. 4,08,000. To avail of the benefit of exemption
under section 54B, X deposits a sum of Rs. 1,00,000 in capital gain deposit account scheme on September 1, 2020. Another deposit is
made on November 15, 2020 of Rs. 50,000. Find out capital gain and taxable liability on capital gain for the assessment year 2020-21
(due date of submission of return of income is September 30, 2020).
Solution : Agricultural land situated in a rural area in India is not a “capital asset”. This rule is applicable even if land is
meant for agricultural purposes although it is not actually used for agricultural purpose. Nothing is, therefore, taxable on
transfer of agricultural land in Tamil Nadu. Capital gain on transfer of Delhi land and shares in A Ltd. will be calculated
as follows –
Delhi agricultural land Shares
Rs. Rs.
Full value of consideration (stamp duty value is not taken, as it does not
exceed 105% of sale consideration) 12,15,000 42,00,000
Less: Indexed cost of acquisition [Rs. 4,00,000 × 289 ÷ 129] 5,70,000 8,96,124
Balance 6,45,000 33,03,876
Less: Exemption under section 54B (i.e., deposit made up to September 30, 2020) 1,00,000 –
Capital gain chargeable to tax 5,45,000 33,03,876
Tax @ 20% (a) 1,09,000 6,60,775
Tax @ 10% [i.e., 10% of (Rs. 42,00,000 – Rs. 4,00,000), see Note] (b) – 3,80,000
Income-tax [(a) or (b), whichever is lower in the case of listed security] 1,09,000 3,80,000
Add: Health and education cess 4,360 15,200
Tax on capital gains† 1,13,360 3,95,200
Note - At the time of transfer of shares, securities transaction tax is not applicable (as shares are not transferred in a recognised
stock exchange). Tax computation under section 112A is not possible (fair market value as on January 31, 2018 is, therefore,
not relevant). Tax is calculated within the parameters of section 112. Under this section, in the case of listed securities, one
can pay tax on long-term capital gains @ 10% if the benefit of indexation is not taken. This rule is applicable whether securities
are transacted in a stock exchange or otherwise.
105-E6 Assume in Problem 105-P6 that shares in A Ltd. are not quoted in any recognised stock exchange in India. There is no other
change in data. Recalculate tax on capital gains.
105-P7 X (30 years) transferred jewellery on July 10, 2017 (sale consideration : Rs. 40,00,000, indexed cost of acquisition : Rs. 10,00,000
and long-term capital gain after deducting transfer expenses : Rs. 29,90,000). He purchased a residential house property on June 1, 2018
for Rs. 45,00,000 in Ranchi and availed of full exemption in the assessment year 2018-19 under section 54F.
On September 17, 2019, X transfers Ranchi property for Rs. 44,00,000 (stamp duty value Rs. 46,30,000). Income of X from other sources
of the previous year 2019-20 is Rs. 40,000. Find out the net income and tax liability of X for the assessment year 2020-21. X has never
gone out of India.
Solution : For the assessment year 2018-19, X has availed of an exemption of Rs. 29,90,000 under section 54F. This exemption
was given to X on the basis of his investment in a residential property at Ranchi. This property was purchased on June 1,
2018. Under section 54F, the new property should not be transferred within 3 years (otherwise exemption would be taken
back). In this case, X was supposed to retain Ranchi property up to May 31, 2021. However, he has transferred Ranchi
property on September 17, 2019. Consequently, the exemption under section 54F will be taken back and the quantum of
exemption will become long-term capital gain chargeable to tax for the previous year 2019-20.
Income of X for the assessment year 2020-21 shall be calculated as follows –
exceed Rs. 50 lakh.
Rs.
Short-term capital gain on transfer of Ranchi property
Full value of consideration (stamp duty value is taken, as it exceeds 105% of sale consideration) 46,30,000
Less: Cost of acquisition 45,00,000
Long-term capital gain (Ranchi property is transferred within 3 years and exemption under section 54F
will be taken back) 29,90,000
Tax liability - X is resident in India. His net income is Rs. 31,60,000. Long-term capital gain is Rs. 29,90,000. Income other than
long-term capital gain is Rs. 1,70,000. Exemption limit is Rs. 2,50,000. In this case, he cannot avail of full exemption limit from
other incomes. The deficiency of Rs. 80,000 shall be deducted from long-term capital gain and, consequently, on long-term
capital gain of Rs. 29,10,000 X will have to pay tax at the rate of 20%†. Tax liability including health and education cess comes
to Rs. 6,05,280.
105-E7 Assume in Problem 105-P7 that X was born on March 1, 1960. There is no other change in data. Recalculate the net income
and tax liability of X.
105-P8 Suppose in Problem 105-P7, taxpayer is X, his age is 55 years, the asset which is transferred on July 10, 2017 is a residential
house property (and not jewellery). By purchasing Ranchi property X has availed of full exemption under section 54 (and not under
section 54F). Other information and data given in the problem remain same. Find out the amount of income and tax liability of X for
Solution : X has availed of exemption under section 54 by purchasing Ranchi property. Ranchi property is transferred within
3 years. Exemption under section 54 will be taken back. The quantum of exemption will become short-term capital gain in
the year in which Ranchi property is transferred (it may be noted that in a similar situation under section 54F the quantum
of exemption becomes long-term capital gain of the year in which default is committed). Income of X will be calculated as
follows –
Rs.
Short-term capital gain on transfer of Ranchi property
Full value of consideration (stamp duty value is taken, as it exceeds 105% of sale consideration) 46,30,000
Less: Cost of acquisition (Rs. 45,00,000 – exemption under section 54 which has to be taken back,
i.e., Rs. 29,90,000) 15,10,000
Tax on net income
Income-tax (i.e., normal tax on Rs. 31,60,000)† 7,60,500
105-E8 Assume in Problem 105-P8 that X was born on March 1, 1940. There is no other change in data. Recalculate the tax liability
of X.
105-P9 X (29 years) purchases 20,000 shares in MS Ltd. on August 6, 2017 at the rate of Rs. 80 per share (securities transaction tax
paid). Fair market value on January 31, 2018 is Rs. 320 per share (being highest quotation on January 31, 2018 in Bombay Stock
Exchange/National Stock Exchange). He transfers 18,000 shares on March 3, 2020 at the rate of Rs. 470 per share. Securities transaction
tax is paid at the time of transfer.
Besides, X owns 5,000 shares in DJ Ltd. (cost of acquisition : Rs. 1,60,000, date of acquisition : June 3, 2018, securities transaction tax
is paid). These shares are transferred in the National Stock Exchange on April 10, 2019 for Rs. 3,30,000 (securities transaction tax is
paid).
Income of X from other sources is Rs. 30,000 for the previous year 2019-20. X invests Rs. 10,00,000 in REC bonds on March 10, 2020
and deposits Rs. 35,00,000 in capital gains deposit account scheme on April 30, 2020 for availing exemption under section 54F (he does
not own a house property). Find out the tax liability of X.
exceed Rs. 50 lakh.
Solution :
2,000 shares 18,000 shares
Rs. Rs.
Full value of consideration (Rs. 3,30,000, Rs. 470 × 18,000) 3,30,000 84,60,000
Less: Cost of acquisition [Rs. 1,60,000, Rs. 320 (being fair market value on January
31, 2018) × 18,000] 1,60,000 57,60,000
Balance 1,70,000 27,00,000
Less: Exemption under section 54F (Rs. 35,00,000 ÷ Rs. 84,60,000 × Rs. 27,00,000) – 11,17,021
Less: Exemption under section 54EC – –
Short-term capital gain/long-term capital gain 1,70,000 15,82,979
Computation of income and tax liability –
Rs.
Short-term capital gain taxable under section 111A 1,70,000
Long-term capital gain taxable under section 112A 15,82,979
Other incomes 30,000
Computation of tax
Income-tax under section 111A (income other than capital gain is Rs. 30,000, exemption limit is Rs. 2,50,000,
unutilised exemption limit is Rs. 2,20,000, unutilised amount can be adjusted against short-term capital gain
of Rs. 1,70,000, still exemption limit of Rs. 50,000 remains unutilised) (no tax as Rs. 1,70,000 is adjusted against
unutilised exemption limit) Nil
Income-tax under section 112A [10% of (Rs. 15,82,979 – unutilised exemption limit : Rs. 50,000 – Rs. 1,00,000,
being threshold amount under section 112A)] 1,43,298
Income-tax on other income Nil
Income-tax 1,43,298
105-E9 Recalculate the tax liability of X in the above problem on the assumption that income of X from other sources is Rs. 3,00,000
(and not Rs. 30,000).
105-P10 During the previous year 2019-20, X (40 years) transfers unlisted debentures for Rs. 14,00,000 and residential house property
for Rs. 8,00,000. These two assets were purchased in 2008-09 and indexed cost of acquisition is Rs. 8,71,251 (debentures) and Rs.
4,72,913 (house property). These figures have been calculated by X by using cost inflation index of 2008-09 (i.e., 137) and 2019-20 (i.e.,
289). Apart from these two assets, X owns 3 residential flats in Mumbai. To avail of the benefit of exemption, X purchases a residential
flat in Chennai on March 1, 2020 for Rs. 10,00,000. Income of X from other sources is Rs. 6,00,000 and X can claim a deduction of Rs.
1,50,000 under section 80C. Find out the net income and tax liability of X for the assessment year 2020-21.
Solution : In the case of debentures, indexation benefit is not available, even if the asset is long-term capital asset. From the
indexed cost of acquisition given in the problem, one will have to find out cost of acquisition by reverse calculation. It will
come to Rs. 4,13,015 (i.e., Rs. 8,71,251 × 137 ÷ 289). X owns more than one residential properties and, consequently, he is not
eligible for any exemption under section 54F. However, he can claim exemption under section 54.
Debentures House
Rs. Rs.
Full value of consideration 14,00,000 8,00,000
Less: Indexed cost of acquisition – 4,72,913
Less: Cost of acquisition 4,13,015 –
Less: Exemption under section 54 – 3,27,087
Long-term capital gain chargeable to tax 9,86,985 Nil
Computation of income and tax liability –
Rs.
Tax on net income
Income-tax (i.e., 20% of Rs. 9,86,985 and normal tax on Rs. 4,50,000)† 2,07,396
Note - In this case, debentures are not listed in any stock exchange in India. Consequently, long-term capital gain on transfer
of such debentures is taxable at the rate of 20%.
105-E10 Assume in Problem 105-P10 that X was born on May 1, 1940. Debentures are transferred on April 10, 2019. Debentures
were not listed in any stock exchange in India till April 5, 2019. However, the Bombay Stock Exchange provides listing facility to
these debentures with effect from April 6, 2019. There is no other change in data. Recalculate the taxable income and tax liability of
X for the assessment year 2020-21.
105-P11 X (48 years) transfers the following assets during the previous year 2019-20 –
Gold Equity oriented House
mutual fund units property
Rs. Rs. Rs.
Full value of consideration 7,00,000 10,00,000 80,00,000
Stamp duty value – – 84,00,000
Cost of acquisition (all assets were acquired during 2001-02) 2,00,000 3,00,000 20,00,000
Market quotation on January 31, 2018 in stock exchange – Not available –
NAV on January 31, 2018 – 5,00,000 –
Securities transaction tax is paid at the time of transfer of mutual fund units. X purchases a residential house property for Rs. 30,00,000
on April 10, 2020 (he does not own any house property). Income of X from other sources is Rs. 27,00,000.
Solution :
Gold Equity oriented House

mutual fund units property
Rs. Rs. Rs.
Full value of consideration 7,00,000 10,00,000 80,00,000
Less: Cost of acquisition (being NAV on January 31, 2018 in the absence
of market quotation) – 5,00,000 –
Less: Indexed cost of acquisition [Rs. 2,00,000 × 289 ÷ 100, Rs. 20,00,000
× 289 ÷ 100] 5,78,000 57,80,000
Capital gain before exemption 1,22,000 5,00,000 22,20,000
Less: Exemption under section 54 – – 22,20,000
Less: Exemption under section 54F [investment in house property :
Rs. 6,00,000 (i.e., Rs. 30,00,000 – Rs. 22,20,000) ÷ Rs. 10,00,000 ×
Rs. 5,00,000] – 3,90,000 –
Long-term capital gain 1,22,000 1,10,000 Nil
Computation of income and tax –

Rs.
Long-term capital gain taxable under section 112 1,22,000
Long-term capital gain taxable under section 112A 1,10,000
Computation of tax
Income-tax on long-term capital gain under section 112A [10% of (Rs. 1,10,000 – Rs. 1,00,000)] 1,000
Income-tax on long-term capital gain under section 112 (20% of Rs. 1,22,000) 24,400
Income-tax on other income of Rs. 27,00,000 6,22,500
exceed Rs. 50 lakh.
353 Theoretical Problems on capital gains Problem 106-P1
Rs.
Income-tax 6,47,900
105-E11 Recalculate the tax liability of X in the above problem on the assumption that income of X from other sources is Rs. 2,00,000
(and not Rs. 27,00,000).
105-P12 X Ltd. is a manufacturing company. On April 1, 2019, it owns Plant A and Plant B (rate of depreciation 15 per cent).
Depreciated value of the block on April 1, 2019 is Rs. 8,00,000. Plant B is transferred on October 15, 2019 for Rs. 26,00,000. Expenditure
on transfer of Plant B is Rs. 24,000. Plant C is purchased on March 10, 2020 for Rs. 20,00,000. However, Plant C is put to use for the
first time on September 2, 2020. Business income of X Ltd. before claiming any depreciation is Rs. 12,00,000.
On March 1, 2020, X Ltd. transfers 900 equity shares in A Ltd. (unlisted) for Rs. 23,50,000. X Ltd. does not own any residential house
property. These shares were purchased on February 2, 2019 for Rs. 2,00,000. To avail of the benefit of exemption under different sections,
it makes the following investments on May 1, 2020 –
1. A residential house property at Kolkata for the residence of general manager of X Ltd. : Rs. 21,15,000 (out of which stamp duty
expenditure is Rs. 30,000).
2. NHAI bonds : Rs. 3,00,000.
Find out the net income of X Ltd. for the assessment year 2020-21.
Solution : Computation of business income –
Business income of X Ltd. is Rs. 12,00,000. Depreciation will be calculated as follows –
Rs.
Add: “Actual cost” of Plant C acquired on March 10, 2020 20,00,000
Less: Sale consideration of Plant B (–)26,00,000
Normal depreciation (not available as Plant C is not put to use during 2019-20) Nil
Additional depreciation (not available as Plant C is not put to use during 2019-20) Nil
Aggregate depreciation (expenditure on transfer of Plant B is not deductible) Nil
Opening balance of the block on April 1, 2020 2,00,000
As can be seen from the above calculation, depreciation is not available and business income will be Rs. 12,00,000.
Computation of capital gain on transfer of Plant B - On transfer of Plant B for Rs. 26,00,000, nothing is chargeable to tax under
the head, “Capital gains”. Under section 50, capital gain on transfer of a depreciable asset is taxable only if the written down
value of the block is zero or the block is empty on the last day of the previous year. In this case, as can be seen from the above
calculations, the block has Plants A and C on March 31, 2020. The written down value of the block on March 31, 2020 is
Rs. 2,00,000 (Plant C is part of the block even if it is not put to use during the current year). Consequently, nothing is taxable
on transfer of Plant B.
Computation of capital gain on transfer of equity shares - Sale consideration is Rs. 23,50,000. Shares are short-term capital assets
(period of holding not being more than 2 years, the rule of 1 year is applicable only if shares are listed). Short-term capital
gain comes to Rs. 21,50,000.
Net income of X Ltd. will be calculated as follows –
Rs.
Capital gain on transfer of shares 21,50,000
105-E12 Make the following changes in Problem 105-P12 and calculate tax liability –
1. Taxpayer is X (not X Ltd.). He was born in Surat on July 1, 1940.
2. The Kolkata property which is purchased for Rs. 21,15,000 is utilised by X for the residence of his parents. However, it is let out
for residential purposes with effect from April 1, 2020 (monthly rent being Rs. 80,000).
3. Shares in A Ltd. are listed shares but transferred outside stock exchange.
 Theoretical Problems on capital gains

106-P1 What is “transfer” of a capital asset as per section 2(47) of the Act ?
Solution : Transfer, in relation to a capital asset by virtue of section 2(47) includes sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.
The definition of “transfer” under section 2(47) is merely inclusive and does not exhaust other kinds of transfer. In other
words the expression “transfer” in section 2(47) must be read widely and not narrowly. The definition denotes extension
and cannot be treated as restricted.
 DEFINITION IS APPLICABLE ONLY IN THE CASE OF CAPITAL ASSET - The definition of “transfer” under section 2(47) is applicable
only in relation to a “capital asset”. In other words, the definition is not applicable when an asset (other than capital asset)
is transferred.
 TRANSFER INCLUDES SALE OF CAPITAL ASSET [SEC. 2(47)(i)] - Transfer includes sale. A sale may be defined as a contract founded
on money consideration by which the absolute or general property in the subject of sale is transferred from the seller to the
buyer. The essentials of a sale are : (1) mutual agreement ; (2) competent parties ; (3) a money consideration ; (4) a transfer
of the absolute or general property from the seller to the buyer. If any of these ingredients be wanting, there is no sale.
 TRANSFER INCLUDES EXCHANGE - Transfer includes exchange of capital assets, i.e., when two persons mutually transfer the
ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction is called
an “exchange”.
Lending of securities is not “transfer” - The transaction of lending shares of some distinctive numbers and receiving back shares
of some other numbers is not “exchange” of assets within the meaning of “transfer” as defined in section 2(47)— Circular
No. 751, dated February 10, 1997.
Extension of duration of Fixed Maturity Plans (FMPs) - FMPs are closed ended mutual funds having a fixed maturity date
wherein the duration of investment is decided upfront. To enable the FMPs to qualify as a long-term capital asset, some Asset
Management Companies (AMCs) administering mutual funds have offered extension of the duration of the FMPs to a date
beyond 36 months from the date of the original investment by providing to the investor an option of roll-over of FMPs in
accordance with the provisions of Regulation 33(4) of the SEBI (Mutual Funds) Regulations, 1996. The Board has clarified
that the roll over in accordance with the aforesaid regulation will not amount to transfer as the scheme remains the same.
No capital gains will arise at the time of exercise of the option by the investor to continue in the same scheme. The capital
gains will, however, arise at the time of redemption of the units or opting out of the scheme, as the case may be – Circular
No. 6/2015, dated April 9, 2015.
 TRANSFER INCLUDES RELINQUISHMENT - Under section 2(47), the word “transfer” includes relinquishment of the asset or
the extinguishment of any right thereon. A relinquishment takes place when the owner withdraws himself from the
property and abandons his rights thereto. It presumes that the property continues to exist after the relinquishment.
Amount received from insurance on account of destruction of asset - Whether amounts be treated as extinguishment of right - See para
10.15.
Whether redemption of preference shares is transfer - In the case of redemption, the shareholder gives up shares and receives in
lieu thereof a sum of money. This comes clearly within the mischief of section 2(47)(i) and treated as transfer.
Whether reduction of share capital amounts to “transfer” within section 2(47) - If there is a reduction of share capital by a company
by paying a part of capital to its shareholders, it would result in “extinguishment” of proportionate right in shares held by
shareholders and chargeable to capital gain’s tax in the hands of shareholders.
When a partner brings his capital asset into partnership as capital contribution - See para 101.6.
Supreme Court’s ruling in Vodafone and subsequent amendment by Finance Act, 2012 - After the amendment made by the Finance
Act, 2012, transfer includes –
a. disposing of or parting with an asset or any interest therein, or
b. creating any interest in any asset in any manner whatsoever.
The aforesaid disposing of asset or creating any interest in any asset may be done directly or indirectly, absolutely or
conditionally, voluntarily or involuntarily. It can be done by way of an agreement which can be entered into in India or
outside India. This rule will be applicable even if such transfer of rights has been characterized as being effected or dependent
upon or flowing from the transfer of a share (or shares) in a company incorporated outside India.
 TRANSFER INCLUDES COMPULSORY ACQUISITION OF AN ASSET [SEC. 2(47)(iii)] - Transfer of capital asset by way of compulsory
acquisition is a transfer [see also para 101.8].
 TRANSFER INCLUDES CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE [SEC. 2(47)(iv)] - See para 101.5.
 TRANSFER INCLUDES REDEMPTION OF ZERO COUPON BONDS - From the assessment year 2006-07, redemption of zero coupon
bonds will be treated as “transfer”.
 TRANSFER INCLUDES GIVING POSSESSION OF IMMOVABLE PROPERTIES UNDER PART PERFORMANCE OF A CONTRACT [SEC. 2(47)(v)]
- Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part
performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, amounts to transfer
from the assessment year 1988-89 onwards [see para 94.2 for provisions of section 53A of the Transfer of Property Act].
 TRANSFER INCLUDES ANY TRANSACTION WHICH HAS THE EFFECT OF TRANSFERRING AN IMMOVABLE PROPERTY [SEC. 2(47)(vi)] -
Under section 2(47)(vi), if the following conditions are satisfied, the transaction is treated as “transfer”—
Condition 1 The transferor is a member of co-operative society/company/AOP.
Condition 2 By virtue of his membership, he has been allotted an immovable property or he will be allotted an
immovable property.
Condition 3 The membership right is transferred which has the effect of transferring, or enabling the enjoyment, of
the aforesaid immovable property.
355 Theoretical problems on capital gains Problem 106-P2
106-E1 State, giving reasons, whether the following are correct or incorrect :
1. The definition of transfer under section 2(47) is applicable only in the case of a capital asset.
2. X, a grain merchant, transfers 10 bags of wheat in exchange of 10 gms. of gold to a gold merchant. It is “exchange”. Since transfers
includes exchange, it is chargeable to tax under the head “Capital gains”.
3. Compulsory acquisition of a property by the Punjab Government is transfer.
4. Redemption of share capital is transfer.
5. Reduction of share capital is not “transfer”.
6. A taxpayer converts his capital asset into stock-in-trade. There is no “transfer” since the person who holds the asset before and after
this transaction is the same.
7. Y sells a residential house property. He has received the entire sale consideration and possession of the property has been transferred
to the buyer as per agreement to sell. But since the sale deed is not registered in favour of seller, there is no “transfer”.
8. If a property continues to exist after “relinquishment” there is “transfer”. But if a property disappears at the time of relinquishment,
there is no transfer.
106-P2 Make a comparative study of the provisions of sections 54, 54B, 54D, 54EC, 54F, 54G and 54GA
Solution :
Different Section 54 Section 54B Section 54D Section 54EC Section 54F Section 54G Section 54GA
questions
1. Who can Individual/ Individual Any person Any person Individual/ Any person Any person
claim exemp- Hindu undi- (or w.e.f. the Hindu undivi-
tion under vided family AY 2013-14, ded family
these HUF)
sections
2. Which capi- Long-term Short-term/ Short-term/ Long-term Long-term Short-term/ Short-term/
tal asset-short- long-term long-term long-term long-term
term or long-
term is eligible
for exemption
3. Which spe- A residential Agricultural Land or build- Long-term land Any long-term Land, building, Land, building,
cific asset is house land if it was ing forming or building capital asset plant or machi- plant or machi-
eligible for property used by the part of an or both (other than a nery in order to nery in order to
exemption individual or industrial residential shift an indus- shift an indus-
his parents undertaking house property) trial undertak- trial undertak-
(or w.e.f. the which is com- provided on the ing from urban ing from urban
AY 2013-14, pulsorily acq- date of transfer area to rural area to any
HUF) uired by the the taxpayer area. special econo-
for agricultural Government does not own mic zone.
purpose dur- and which is more than one
ing at least 2 used during residential
years immedi- 2 years for house property
ately prior industrial (except the new
to transfer purposes prior house as stated
to its acqui- in 4 infra)
sition
4. Which asset One residential Agricultural Land or build- Bonds of One residential Land, building Land, building
the taxpayer house pro- land (maybe ing for indus- National High- house property plant or machi- plant or machi-
should acquire perty in India in rural area trial purposes ways Authority in India nery in order nery in order
to get the bene- or urban area) of India or to shift under- to shift under-
fit of exem- Rural Electrifi- taking to rural taking to any
ption cation Corpn. area special econo-
mic zone
4.1 What is Purchase : 1 2 years for- 3 years for- 6 months for- Purchase : 1 year 1 year back- 1 year back-
time limit for year backward ward ward backward or 2 ward or 3 years ward or 3 years
acquiring the ward or 2 years forward forward forward
new asset years forward Construction:
Construction: 3 years forward
3 years for-
ward
4.2 From which From transfer From the date From the date From the date From the date From the date From the date
date the time- of house proof transfer of of receipt of of transfer of of transfer of of transfer of transfer
limit shall be perty but in agricultural compensation long-term capital asset but
determined case of com- land but in the capital asset in case of com-
pulsory acqui- case of com- but in the case pulsory acqui-
sition from the pulsory acqui- of compulsory sition from the
date of receipt sition from the acquisition from date of receipt
of compensa- date of receipt the date of of compensation
tion of compen- receipt of com-
sation pensation
Different Section 54 Section 54B Section 54D Section 54EC Section 54F Section 54G Section 54GA
questions
5. How much Investment in Investment in Investment in Investment in Investment in Investment in Investment in

is exempt the new asset the new asset the new asset the new asset or the new asset/ the new asset the new asset
or capital gain, or capital gain, or capital gain, capital gain, Net sale consi- or capital gain, or capital gain,
whichever is whichever whichever is whichever is deration × whichever is whichever is
lower is lower lower lower capital gain lower lower
6. Is it possible If the new If the new If the new If the new asset (a) If the new If the new asset If the new asset
to revoke the asset is trans- asset is trans- asset is trans- is transferred or asset is trans- is transferred is transferred
exemption in a ferred within ferred within ferred within it is converted ferred within 3 within 3 years within 3 years
subsequent 3 years of its 3 years of its 3 years of its into money or a years of its of its acquisi- of its acquisi-
year acquisition acquisition acquisition loan is taken on acquisition, (b) if tion tion
security of the another residen-
new asset within tial house is pur-
3 years of its chased within 2
acquisition years of transfer
of original asset,
or (c) if another
residential house
is constructed
within 3 years of
the transfer of
original asset
6.1 When the Short-term Short-term Short-term Long-term Long-term Short-term Short-term
exemption is capital gain capital gain capital gain capital gain capital gain capital gain capital gain
revoked it is
taxable in the
year in which
the default is
committed.
What will be
status of the
notional
income
7. Whether Yes Yes Yes No Yes Yes Yes
scheme of
deposit is
applicable
7.1 What is the See Note infra See Note infra See Note infra — See Note infra See Note infra See Note infra
scheme of
deposit
Note - Scheme of deposit - If the new asset is not acquired up to the due date of submission of return of income, then the taxpayer
will have to deposit the money in “Capital gain deposit account scheme” with a nationalised bank. On the basis of actual
investment and the amount deposited in the deposit account, exemption will be given to the taxpayer.
The taxpayer can acquire a new asset by withdrawing from the deposit account. But the new asset should be acquired within
the time-limit mentioned in 4.1 supra. If the deposit account is not fully utilised for acquiring the new asset, the unutilised
amount [but in case of section 54F it is unutilised amount/net sale consideration × capital gain] will become chargeable to
tax in the previous year in which the specified time-limit [as mentioned in para 4.1 supra] expires [in case of sections 54 and
54F when the 3 year time limit expires]. It will be taxable as short-term/long-term capital gain depending upon the original
capital gain. The unutilised amount can be withdrawn by the taxpayer after the expiry of the aforesaid time limit. If before
the expiry of specified time (as given in 4.1 supra) the taxpayer dies, then unutilised amount paid to the legal heirs is not
taxable in the hands of recipient — Circular No. 743, dated May 6, 1996.
106-E2 Discuss, giving reasons, whether the following are correct.

1. A firm can claim exemption under sections 54, 54B and 54F.
2. An individual can claim exemption under sections 54 to 54G.
3. A company can claim exemption under sections 54D, 54EC, 54G and 54GA.
4. A long-term capital asset is qualified for exemption under sections 54 to 54GB but short-term capital asset is qualified for exemption
only under sections 54B, 54D, 54G and 54GA.
5. Multiple exemption is possible but aggregate exemption under sections 54 to 54GB cannot exceed the amount of capital gain.
6. An individual who owns two residential houses cannot claim exemption under section 54F on transfer of gold.
7. An individual who owns a residential house and a plot of land in a residential area can claim exemption under section 54F if he
sells gold and constructs a residential house on the plot already owned by him.
8. X purchases 1,000 shares on April 6, 2001 at the rate of Rs. 10 per share. On June 30, 2006, he converts the capital asset into stock-
in-trade (market value : Rs. 80 per share). The stock-in-trade (700 shares) is transferred on March 31, 2020 at rate of Rs.140 per share.
Income in this case for the previous year 2019-20 is determined as follows —
Rs.
Business income [(Rs. 140—Rs. 80) × 700] 42,000
Long-term capital gain
Sale consideration [Rs. 80 × 700] 56,000
Less : Indexed cost of acquisition [Rs. 10 × 700 × 122 ÷ 100] 8,540
X purchases a residential house property for Rs. 40,000 and Bonds of REC of Rs. 20,000 on April 1, 2020 to get exemption under
sections 54F and 54EC. He does not own a residential house. The Assessing Officer is of the view that “transfer” in this case takes
place on June 30, 2006. X should purchase a residential house property within 2 years from June 30, 2006. Accordingly, the Assessing
Officer does not want to give any exemption under section 54F. Likewise, he does not want to give exemption under section 54EC
as investment is not made within 6 months from June 30, 2006.
Let us recapitulate
Particulars Treatment (for the assessment year 2020-21)
Basis of charge While any profit or gain on sale or transfer of immovable capital asset is taxable in the year
in which transfer deed is registered, capital gain arising on sale or transfer of movable
asset is taxable in the previous year in which property is delivered. When an immovable
property is transferred under part performance of a contract, capital gain is taxable when
possession is transferred and agreement to sell is made.
Meaning of capital asset It means any property except : (a) stock-in-trade, (b) personal effects (excluding jewellery,
archaeological collection, drawing, painting, sculptures, or any work of art), (c) rural
agricultural land, (d) Gold Bonds, (e) Special Bearer Bonds, 1991, (f) Gold Deposit Bonds,
1999, and (g) deposit certificates issued under the Gold Monetisation Scheme, 2015.
Transfer of capital asset It includes any sale, exchange or relinquishment of the asset except some cases specified
in sections 46 and 47 [see para 94]
Capital gain - How to From the full consideration, deduct :
ascertain  expenditure incurred in connection with the transfer;
 cost of acquisition or indexed cost of acquisition; and
 cost of improvement or indexed cost of improvement.
Cost of acquisition It is the value for which property was acquired by the assessee. Notional figure is,
however, taken in certain cases [see para 98].
Capital gain arising on sale It is exempt from tax if : (a) the property was a long-term capital asset, (b) the assessee
of residential house pro- has purchased within one year before or two years after sale (constructed within 3 years
perties [exemption under after sale) one residential house in India and (c) the property so purchased/constructed
section 54] is not sold within 3 years.
Capital gain arising on sale It is exempt from tax if : (a) agricultural land was being used by the assessee/or his parents
of agricultural land [ex- for agricultural purposes for a period of 2 years, and (b) he purchased another agricultural
emption under section 54B] land within 2 years from the date of transfer.
Capital gains on compul- It is exempt from tax if : (a) land and building was used by the assessee for the purpose of
sory acquisition of land industrial undertaking for at least 2 years preceding the date of compulsory acquisition,
and building forming part and (b) the assessee purchased another land or building or constructed a building within
of industrial undertaking a period of three years from the date of acquisition.
[exemption under section
54D]
Capital gains not to be It is exempt from tax if capital gain is invested in specified assets within 6 months.
charged on investment in
certain bonds [exemption
under section 54EC]
Capital gains on transfer of It is exempt from tax if net consideration is received as a result of transfer of capital asset
a long-term capital asset is invested in one residential house in India within specified period.
(other than a residential
house) [exemption under
section 54F]
Capital gain on transfer of It is exempt from tax if the assessee has within the stipulated period, purchased a new
assets in the case of shift- machinery/plant, etc., for the purpose of industrial undertaking in an area to which the
ing of industrial under- said undertaking is shifted.
Income under the head ‘Capital gains’ and its computation 358
Particulars Treatment (for the assessment year 2020-21)

taking from urban area
to rural area [exemption
under section 54G]
Capital gain on transfer of It is exempt from tax if the assessee has within the stipulated period, purchased a new
assets in the case of shift- machinery/plant, etc. for the purpose of industrial undertaking in an area to which the
ing of industrial under- said, etc. undertaking is shifted.
taking from urban area to
any special economic zone
[exemption under section
54GA]
Capital gain on transfer of It is exempt if the assessee acquires equity shares in any eligible company
residential property [exemp-
tion under section 54GB]
●
Test your knowledge

For answer see relevant paras indicated at the end of each question.
1. Distinguish between “short-term capital gain” and “long-term capital gain”. [para 93.1]
2. Discuss the procedure for computation of capital gains. [para 95]
3. How would you determine cost of acquisition? [para 98]
4. Write notes on “capital assets” and “transfer”. [paras 93 and 94]
5. Discuss the exemptions provided by sections 54 and 54F. [para 103]
6. Discuss the cases when fair market value on April 1, 2001 can be adopted in place of cost of acquisition while computing
amount of capital gains? Is this option available to depreciable assets? [para 101.2].
CHAPTER 8 “Income from other sources”
and its computation
I
“ ncome from other sources” is the last head of income specified under section 14. While
section 56 defines the scope of income chargeable under this head, sections 57 and 58
specify the basis of computation of such income. Besides the study of these sections,
this Chapter deals with all the other provisions of the Act which have a bearing on the
computation of income taxable as income from other sources.
 WHAT IS BASIS OF CHARGE [SEC. 56]

107. Income from other sources is the last and residual head of income. Sub-section (1) of section 56 covers any
income which does not fall under any other head of income. However, sub-section (2) of section 56 specifies nine
incomes which are always taxable under the head “Income from other sources”.
107.1 Special provisions - The following eleven incomes are always taxable under the head “Income from other
sources”—
1. Dividend Dividend is defined by section 2(22) [for definition see para 109]. Dividend received
from an Indian company is not chargeable to tax in the hands of shareholders (this
rule is subject to a few exceptions‡).
2. Winning from lotteries, etc. It includes any winnings from lotteries, crossword puzzles, races including horse
races, card games and other games of any sort or from gambling or betting of any form
or nature whatsoever. These receipts are chargeable to tax under the head “Income
from other sources”. For detailed discussion, refer to para 110.
3. Employees’ contribution to- Any sum received by the assessee from his employees as contributions to any staff
wards staff welfare scheme welfare scheme is taxable in the hands of the employer under the head “Income from
other sources” (if it is not taxable as business income under section 28).
4. Interest on securities Interest on debentures, Government securities/bonds is taxable under the head
“Income from other sources” (if the same is not taxed as business income under section
28). For detailed discussion, refer to para 111.
5. Rental income of machinery, Rental income from machinery, plant or furniture let on hire is taxable as income from
plant or furniture other sources (if the same is not taxed as business income under section 28).
6. Rental income of letting Such rental income is taxable under the head “Income from other sources” (if the same
out of plant, machinery or is not taxed as business income under section 28). For detailed discussion, refer to
furniture along with letting para 113.
out of building and the two
lettings are not separable
‡ Dividend income from a domestic company is generally exempt in the hands of recipient shareholders. However, the exemption is not available
359
Para 107.2 Income under the head “Income from other sources” and its computation 360
7. Sum received under Any sum received under a Keyman insurance policy (including bonus) is taxable as
Keyman insurance policy income from other sources (if the same is not taxable as salary income or business
income).
8. Gift If any sum of money or property is received during a previous year without consider-
ation or with inadequate consideration by an individual or a Hindu undivided family
from any person or persons exceeds Rs. 50,000, the whole of such amount is taxable in
the hands of the recipient as income from other sources [see para 114 for detailed
discussion].
9. Interest on compensation Income by way of interest received on compensation or on enhanced compensation
or enhanced compensation shall be assessed under the head “Income from other sources” in the year in which it
is received. However, 50 per cent of such interest is deductible under section 57(iv).
Consequently, only 50 per cent of such interest is taxable.
10. Advance money received Where any sum of money, received as an advance or otherwise in the course of the
in the course of negotiations negotiations for transfer of a capital asset, is forfeited and the negotiations do not result
for transfer of a capital asset in transfer of such capital asset, then, such sum shall be chargeable to income-tax under
the head “Income from other sources”.
11. Compensation on termina- Any compensation or other payment referred to in section 56(2)(xi) [i.e., compensation
tion of employment or modifi- on termination of employment or modification of terms of employment] is treated as
cation of terms of employment income.
107.2 General provisions [Sec. 56(1)] - Income from other sources is the last and residual head of income. A
source of income which does not specifically fall under any one of the other four heads of income (viz., “Salaries”,
“Income from house property”, “Profits and gains of business or profession” or “Capital gains”) is to be
computed and brought to charge under section 56 under the head “Income from other sources”. In other words,
it can be said that the residuary head of income can be resorted to only if none of the specific heads is applicable
to the income in question and that it comes into operation only if the preceding heads are excluded.
107.2-1 BROAD CONCLUSIONS - To put the aforesaid matter differently, the residuary head of income can be invoked
only if all the following conditions are satisfied —
 Income - There is an “income”.
 Income shall not be exempt - That income is not exempt from tax under sections 10 to 13A.
 Not covered by other heads - That income is neither salary income, nor rental income from house property, nor
income from business/profession, nor capital gains. These four categories of incomes are not chargeable to tax
under the head “Income from other sources”, even if such incomes, or a part thereof, cannot be brought to tax
under their respective heads.
If the above three conditions are satisfied, income is taxable under section 56(1) under the head “Income from
other sources”.
107.2-2 EXAMPLES - The following income is generally chargeable under the head “Income from other sources”:
a. income from subletting ;
b. interest on bank deposits and loans ;
c. income from royalty (if it is not an income from business/profession) ;
d. director’s fee ;
e. ground rent ;
f. agricultural income from a place outside India ;
g. director’s commission for standing as a guarantor to bankers ;
h. director’s commission for underwriting shares of new company ;
i. examination fees received by a teacher from a person other than his employer ;
j. rent of plot of land ;
k. insurance commission ;
l. mining rent and royalties ;
m. casual income ;
n. annuity payable under a will, contract, trust deed (excluding annuity payable by employer which is
chargeable under the head “Salaries”) ;
o. salaries payable to a Member of Parliament ;
p. interest on securities issued by a foreign Government ;
361 Dividend under IT Act Para 109.2
q. family pension received by family members of a deceased employee ;

r. in case of retirement, interest on employee’s contribution if provident fund is unrecognised;
s. income from undisclosed sources ;
t. gratuity paid to a director who is not an employee of the company ;
u. income from racing establishments ;
v. compensation received for use of business assets ;
w. annuity payable to the lender of a trade mark.
 RELEVANCE OF METHOD OF ACCOUNTANCY

108. Income chargeable under this head is computed in accordance with the method of accounting regularly
employed by the assessee. For instance, if books of account are kept on the basis of mercantile system, income
is taxable and expenditure is deductible on “due” basis, whereas if books of account are kept on the basis of cash
system, income is taxable on “receipt” basis and expenditure is deductible on “payment” basis.
 WHAT IS REGARDED AS DIVIDEND AND HOW IS IT CHARGED TO TAX

109. Dividend from an Indian company is generally not taxable in the hands of shareholders (this rule is subject
to a few exceptions which are discussed in para 109.3).
109.1 Dividend in common parlance - Dividend in its ordinary connotation means the amount paid to or
received by a shareholder in proportion to his shareholding in a company out of the total sum so distributed.
109.2 Dividend under the Income-tax Act - Section 2(22) gives definition of “dividend”. The definition laid
down by section 2(22) is inclusive and not exhaustive. If, therefore, a particular distribution is not regarded as
dividend within the extended meaning of the expression in section 2(22), it may still be dividend, provided it is
“dividend” under the ordinary meaning of the expression. Under section 2(22), the following payments or
distribution by a company to its shareholders are deemed as dividend to the extent of accumulated profits of
the company (it may be noted that these payments may not be “dividend” under the Companies Act) :
a. any distribution entailing the release of company’s assets [see para 109.2-2] ;
b. any distribution of debentures, debenture-stock, deposit certificates and bonus to preference shareholders
[see para 109.2-3] ;
c. distribution on liquidation of company [see para 109.2-4] ;
d. distribution on reduction of capital [see para 109.2-5] ; and
e. any payment by way of loan or advance by a closely-held company to a shareholder, holding substantial
interest, provided the loan should not have been made in the ordinary course of business and money-lending
should not be substantial part of the company’s business [see para 109.2-6].
109.2-1 ACCUMULATED PROFITS - Any payment or distribution of the aforesaid nature is treated as dividend. There
is, however, a maximum limit, viz., the amount of accumulated profits. In other words, payment or distribution
under the aforesaid nature can be treated as dividend only to the extent of accumulated profits of the company.
It is, therefore, essential to discuss meaning and scope of the expression “accumulated profits”.
 Does it include current profit - Accumulated profit means profit available to the company, on the date of
distribution, after deducting all expenses including income-tax expenses. In case of a company, which is not in
liquidation, it includes all profits of the company up to the date of distribution or payment. In the case of a
company in liquidation, it includes all profits of the company up to the date of liquidation. Where, however, the
liquidation is consequent on the compulsory acquisition of a company’s undertaking by the Government or a
Government company, accumulated profits do not include any profits of the company prior to the three
successive years immediately preceding the previous year in which such acquisition took place. For instance, if
accounting year of a company is financial year and compulsory acquisition takes place on March 13, 2019,
accumulated profits will exclude profits accumulated up to March 31, 2015.
 What is basis of computing accumulated profit - Accumulated profits are computed on the basis of commercial
profits and not on the basis of assessed income.
 Depreciation - While calculating “accumulated profits” an allowance for depreciation at the rates provided by
the Income-tax Act itself has to be made by way of deduction.
 Balancing charge - Balancing charge assessable under section 41(2) does not form part of accumulated profits
as it is not commercial profit but it is withdrawal of depreciation when the asset is sold for a price higher than
the written down value.
 Tax-free income - Accumulated profits include tax-free income, e.g., agricultural income. However, receipts of
capital nature are included in accumulated profits only if such receipts are chargeable to tax under the head
“Capital gains” in the hands of recipient company.
 General reserves - Accumulated profits include general reserve.
 Provisions - Provisions for taxation and dividends do not form part of accumulated reserve.
 Addition made by Assessing Officer - Addition made by the Assessing Officer on account of concealed income
forms part of accumulated profit.
 Accumulated profits of amalgamating company - In the case of an amalgamated company, accumulated profits or
loss in the hands of the amalgamated company shall be increased by the accumulated profits of the amalgam-
ating company (whether capitalised or not) on the date of amalgamation.
109.2-2 DISTRIBUTION OF ACCUMULATED PROFITS ENTAILING RELEASE OF COMPANY’S ASSETS [SEC. 2(22)(a)] - Under sub-clause
(a) of section 2(22), any distribution by a company of its accumulated profits (whether capitalised or not) is
dividend, if it entails the release of company’s assets. In other words, there are two conditions prescribed by this
clause — first distribution should be from accumulated profits (not from capital) and secondly, such distribution
must result in the release of the assets by the company. When a company distributes bonus shares to equity
shareholders by capitalising its profits, then there is no release of assets and consequently, bonus shares are not
treated as dividend.
109.2-3 DISTRIBUTION OF ACCUMULATED PROFITS IN THE FORM OF DEBENTURES, DEBENTURE STOCK [SEC. 2(22)(b)] - Under this
clause, the following two distributions are treated as dividend to the extent of accumulated profits (whether
capitalised or not) of the company :
a. distribution by a company to its shareholders (whether equity shareholder or preference shareholder) of
debentures, debenture stock, or deposit certificates in any form, whether with or without interest ; and
b. distribution by a company to its preference shareholders of bonus share.
It is worthwhile to note that under the aforesaid circumstances, distribution amounts to dividend even if there
is no release of assets at the time of distribution.
109.2-4 DISTRIBUTION OF ACCUMULATED PROFITS AT THE TIME OF LIQUIDATION [SEC. 2(22)(c)] - Under sub-clause (c), any
distribution made by a company to its shareholders on its liquidation is treated as dividend to the extent to which
such distribution is attributable to the accumulated profits (whether capitalised or not) of the company
immediately before its liquidation.
Under sub-clause (c), the following are, however, not treated as dividend :
a. any distribution in respect of preference shares issued for full cash consideration ; and
b. any distribution insofar as such distribution is attributable to the capitalised profits of the company
representing bonus shares allotted to its equity shareholders during 1964-65.
109.2-5 DISTRIBUTION OF ACCUMULATED PROFITS ON THE REDUCTION OF ITS CAPITAL [SEC. 2(22)(d)] - Any distribution by a
company to its shareholders on the reduction of capital is treated as dividend to the extent the company possesses
accumulated profits (whether capitalised or not). However, the following are not treated as dividend under this
clause :
a. any distribution out of accumulated profits which arose up to the previous year 1932-33;
b. any distribution in respect of preference shares issued for full cash consideration ; and
c. any distribution insofar as such distribution is attributable to the capitalised profits of the company
representing bonus shares allotted to its equity shareholders during 1964-65.
109.2-6 DISTRIBUTION OF ACCUMULATED PROFITS BY WAY OF ADVANCE OR LOAN [SEC. 2(22)(e)] - Payment by way of loan/
advance to the extent of accumulated profit by a closely-held company is treated as dividend in the following
two cases :
Case 1 Case 2
1. Loan or advance is given by a closely-held company. 1. Loan or advance is given by a closely-held company (say
X Ltd.).
2. Such loan is given to a shareholder. 2. Such loan is given to a “concern” (say Y) [see Note 3].
3. The shareholder (getting the loan) beneficially holds 3. One of the shareholders, beneficially holding 10 per cent
10 per cent or more of equity shares in the company equity shares capital in X Ltd., has a substantial interest
(giving the loan). [see Note 4] in Y.
4. Such loan or advance is treated as dividend in the 4. Such loan or advance is treated as dividend in the hands
hands of shareholder. of Y.
363 Tax treatment of dividend Para 109.3
Notes :
1. Such loan or advance is treated as dividend to the extent of accumulated profit (excluding capitalized profit).
2. Loan or advance for the above purpose may be given to a shareholder (in Case 1) directly or it may be given for the benefit
of shareholder or on behalf of shareholder.
3. “Concern” for this purpose may be a HUF, sole proprietor, firm, AOP, BOI or a company.
4. A person shall be deemed to have a substantial interest in a concern, if he is at any time during the previous year, beneficially
entitled to at least 20 per cent of income of such concern (if such concern is a company, then he should beneficially hold at
least 20 per cent equity share capital of the company).
5. Where money-lending is a substantial* part of the business of the company (giving loan), the above provisions are not
applicable.
6. If after giving loan or advance to a shareholder, the company declares normal dividend and such dividend is set off against
outstanding loan/advance, the amount so set off will not be taken as “dividend”.
7. CBDT has clarified that trade advances which are in the nature of commercial transactions would not fall within the ambit
of the word ‘advance’ in section 2(22)(e) – Circular No. 19/2017, dated June 12, 2017.
109.2-7 OTHER POINTS - The following points should be noted—
1. Dividend does not include any payment made by a company on purchase of its own shares in accordance with
the provisions contained in section 77A of the Companies Act, 1956.
2. Dividend does not include any distribution of shares made in accordance with the scheme of demerger by the
resulting company to the shareholders of the demerged company whether or not there is a reduction of capital
in the demerged company.
109.3 Tax treatment of dividend in the hands of shareholders - Tax treatment of dividend in the hands of
shareholders is as follows —
Status of the company which Taxability in the hands of shareholders Dividend distribution tax payable by
declares dividend company which declares dividend
A : Non-domestic company It is taxable in the hands of a shareholder (if No dividend distribution tax
it is received in India or if the shareholder is
resident and ordinarily resident in India)
B : Domestic company [not General rule - In the hands of shareholder, The company (which declares divi-
being dividend under such dividend is exempt under section 10(34). dend) is required to pay dividend
section 2(22)(e)] Exception - From the assessment year 2017-18, distribution tax under section 115-O.
dividend income is taxable in the hands of It is applicable even if the share-
shareholders under section 115BBDA, if a holder is subject to tax under section
few conditions are satisfied (provisions of 115BBDA
section 115BBDA are given below)
C : Domestic company [being
loan or advance deemed as
dividend under section
2(22)(e)]
 Deemed dividend distri- Taxable in the hands of recipient under sec- No dividend distribution tax under
bution up to March 31, tion 56 under the head “Income from other section 115-O
2018 sources”
 Deemed dividend distri- Not taxable in the hands of recipient by virtue The company (which distributes
bution on or after April 1, of exemption given by section 10(34) deemed dividend as loan or advance)
2018 is liable for dividend distribution tax
under section 115-O at the rate of 30
per cent (+ SC + HEC, effective rate is
34.944 per cent).
109.3-1 DIVIDEND TAXABLE UNDER SECTION 115BBDA - Section 115BBDA is applicable if the following two conditions
are satisfied –
1. The assessee (i.e., shareholder who gets dividend from domestic company/companies) is resident in India.
He is any resident person [but not being a domestic company, or a fund/institution/trust/university/
educational institution/hospital/other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via), or a
trust/institution registered under section 12A/12AA].
*In CIT v. Parle Plastic Ltd. [2011] 196 Taxman 62, the Bombay High Court explained the expression “substantial part of the business”. It pointed
out that the term ‘substantial’ does not mean major and there is nothing in law that suggests that in order to show that a part of the whole to be
treated as “substantial part”, the part must exceed 50 per cent of the whole.
2. Total income of the assessee includes any income in aggregate exceeding Rs. 10 lakh by way of dividend [not
being deemed dividend under section 2(22)(e)] declared/distributed or paid by a domestic company or
companies.
If the above two conditions are satisfied, dividend income from domestic companies in excess of Rs. 10 lakh is
chargeable to tax at the rate of 10 per cent [+ SC + HEC]. Taxation of dividend income in excess of Rs. 10 lakh
shall be on gross basis. However, tax under section 115BBDA is not applicable in the case of deemed dividend
under section 2(22)(e).
Problem
109-P1 Find out the tax liability for the assessment year 2020-21 in the following cases (B is non-resident, all other taxpayers are
resident) –
X (40 years) Y (45 years) Z (firm) A Ltd. B (61 years)
Rs. Rs. Rs. Rs. Rs.
Business income of the previous year 3,00,000 40,00,000 40,00,000 40,00,000 23,00,000
2019-20
Dividend [not being deemed dividend under
section 2(22)(e)] from different domestic
companies (dividend tax is paid by these
companies) –
- from D Ltd. 40,00,000 9,60,000 15,000 11,00,000 40,00,000
- from E Ltd. 10,000 Nil 3,000 18,00,000 10,000
- from F Ltd. 8,90,000 Nil 29,82,000 21,00,000 8,90,000
Expenditure for earning above dividend 2,60,000 90,000 80,000 12,00,000 2,60,000
income
Deemed dividend [under section 2(22)(e)]
received from G Ltd. (dividend tax is paid
by G Ltd.) 7,00,000 17,00,000 80,000 11,85,000 20,10,000
Deduction under sections 80C to 80U 4,10,000 2,15,000 7,00,000 8,18,000 4,10,000
Solution :
Aggregate dividend [not being deemed

dividend under section 2(22)(e)] from all
domestic companies 49,00,000 9,60,000 30,00,000 50,00,000 49,00,000
Less: Expenses (not deductible) Nil Nil Nil Nil Nil
Balance 49,00,000 9,60,000 30,00,000 50,00,000 49,00,000
Less: Dividend income exempt under
section 10(34) 10,00,000 9,60,000 10,00,000 50,00,000 49,00,000
Dividend (taxable under section
115BBDA) (no deduction is allowed) (a) 39,00,000 Nil 20,00,000 Nil Nil
Other incomes –
Deemed dividend under section 2(22)(e)
[exempt under section 10(34)] Nil Nil Nil Nil Nil
Business income 3,00,000 40,00,000 40,00,000 40,00,000 23,00,000
Total of other incomes 3,00,000 40,00,000 40,00,000 40,00,000 23,00,000
Less: Deduction under sections 80C
to 80U 4,10,000 2,15,000 7,00,000 8,18,000 4,10,000
Income (other than dividend income
taxable under section 115BBDA) (b) Nil 37,85,000 33,00,000 31,82,000 18,90,000
Net income/total income [(a) + (b)] 39,00,000 37,85,000 53,00,000 31,82,000 18,90,000
Tax on net income
Tax on dividend income under section
115BBDA [i.e., 10% of (a)] 3,90,000 Nil 2,00,000 Nil Nil
Tax on balance Nil 9,48,000 9,90,000 9,54,600† 3,79,500
Total 3,90,000 9,48,000 11,90,000 9,54,600 3,79,500
† It is assumed that applicable tax rate in the case of A Ltd. is 30%.

365 How to gross up if net winning is given Para 110.3
X (40 years) Y (45 years) Z (firm) A Ltd. B (61 years)

Rs. Rs. Rs. Rs. Rs.
Add : Health and education cess 15,600 37,920 47,600 38,184 15,180
Tax liability (rounded off) 4,05,600 9,85,920 12,37,600 9,92,780 3,94,680
109-E1 In problem 109-P1, recalculate the amount of net income and tax liability of X on the assumption that he has an additional
income (i.e., income from let out property) of Rs. 80,00,000.
109.4 Basis of charge [Sec. 8] - Method of accounting regularly employed by the assessee does not affect basis
of charge of dividend income fixed by section 8 :
 Normal dividend - Normal dividend declared at annual general meeting is deemed to be the income of the
previous year in which it is declared.
 Deemed dividend - Notional dividend under section 2(22) is treated as the income of the previous year in which
it is so distributed or paid.
 Interim dividend - Interim dividend is deemed to be the income of the previous year in which the amount of such
dividend is unconditionally made available by the company to a shareholder.
109.5 Place of accrual [Sec. 9(1)(iv)] - Dividend paid by an Indian company is deemed to accrue or arise in
India.
109.6 Other points for consideration - Apart from what is discussed earlier, the following points merit
consideration in respect of tax incidence on dividend income :
 The aforesaid rules are applicable even if dividend is declared by a company out of income which is not
chargeable to tax.
 A shareholder does not get any credit for the tax paid by the company on its income.
 WINNINGS FROM LOTTERIES, CROSSWORD PUZZLES, HORSE RACES AND CARD GAMES,
ETC. - HOW TO COMPUTE [SEC. 56(2)(ib)]
110. Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of
any sort or from gambling or betting of any form or nature whatsoever, is taxable under section 56 under the head
“Income from other sources”.
110.1 Only “winning” from lottery, races, gambling, etc., is chargeable to tax - Under section 56(2)(ib)
amount taxable is “winning” from lotteries, crossword puzzles, races, etc. The crucial word is “winning”. Only
winnings from lotteries, winnings from races, winnings from betting, etc., are chargeable to tax. If a receipt is not
“winnings”, then it is not taxable under section 56(2)(ib).
The expression “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 and “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.
110.2 Tax incidence on winnings from lotteries, etc. - Gross winnings from lotteries, crossword puzzles, races
including horse races (other than income from the activity of owning and maintaining race horses), card games
and other games of any sort or from gambling or betting of any nature whatsoever are chargeable to income-tax
at a flat rate of 30 per cent [+ SC + HEC]** on the gross winnings (without claiming any allowance or expenditure).
110.3 How to “gross up” if net winning is given - Under sections 194B and 194BB, tax is deductible @ 30 per
cent† on payments in respect of winnings from lotteries or crossword puzzle or card games or other games
exceeding Rs. 10,000. In case of winnings from horse races, payments exceeding Rs. 5,000 are subject to tax
deduction at source at the rate of 30 per cent†.
If the net amount received is given, then the net amount shall be grossed up to find out the amount chargeable
to tax. An example is given below for the assessment year 2020-21 to make the aforesaid position clear —
Rs.
Winnings from lottery or horse race in case of X on December 15, 2019 11,00,000
Tax deduction at source by the payer @ 30 per cent 3,30,000
Net amount received by X 7,70,000
**See Foot Note, para 104.
†For surcharge, and health and education cess, see para 269.2.
Para 111 Income under the head “Income from other sources” and its computation 366
If it is given that X has received Rs. 7,70,000 on account of winnings from lotteries (or winnings from horse race),
then net receipt shall be converted into gross amount as follows—
Source Mode of conversion
 Net winnings from lotteries or crossword puzzle or horse race or Net amount
card games or other games [1 – (0.30)]†
 Winnings from other races, gambling or betting As no tax is required to be deducted, there is no
difference between net and gross amounts.
 WHAT IS REGARDED AS INTEREST ON SECURITIES [SEC. 56(2)(id)]

111. Income by way of interest on securities is taxable under the head “Income from other sources”, if the same
is not taxable as business income under section 28.
111.1 Meaning of securities - The word “security” is not defined under the Act. One has, therefore, to depend
upon its natural meaning and the meaning ascribed to it under various judicial pronouncements. The Shorter
Oxford English Dictionary defines the word “security” as “a document held by a creditor as guarantee of his right
to payment”. In other words, unless the payment of debt is secured in some way, a mere debt is not a “security”.
111.2 Interest on securities [Sec. 2(28B)] - Interest on securities means—
a. interest on any security of the Central Government or a State Government ;
b. interest on debentures or other securities for money issued by or on behalf of a local authority or a company
or a corporation established by a Central, State or Provincial Act.
111.3 Basis of charge - Income by way of interest on securities is taxable on “receipt” basis, if the assessee
maintains books of account on “cash basis”. It is taxable on “due” basis when books of account are maintained
on mercantile system. Interest is taxable on “receipt” basis, if such interest had not been charged to tax on due
basis for any earlier previous year.
111.4 Due date of interest - Interest on securities does not accrue everyday or according to the period of holding
of investment. For instance, if one holds 7 per cent securities from January 1, 2020 to February 28, 2020, it cannot
be said that interest of two months has accrued to the security holder. Generally, interest becomes due on due
dates specified on securities. For instance, if specified due dates of interest of particular securities are March 1
and September 1 every year, interest of six months falls due on each such date and holder of securities on these
dates will be entitled to interest of six months on each such date.
For instance, if X purchases 7 per cent Rs. 20,000 securities (specified due dates: March 1 and September 1) on
February 25, 2020 and sells the same on March 2, 2020, he will become entitled for interest of 6 months (i.e., Rs.
20,000 × ½ × 7 ÷ 100 = Rs. 700), irrespective of the fact that he holds securities just for 6 days. As, in this case, interest
of 6 months has become due to X on March 1, 2020, he will be liable to pay tax on the entire interest of Rs. 700
in the previous year 2019-20 if he maintains books of account on “mercantile system”. If, however, X maintains
books of account on “cash” system, then Rs. 700 is taxable in the previous year in which it is received.
111.5 Interest exempt from tax [Sec. 10(15)] - Interest on notified securities (as well as notified bonds and
certificates) is exempt under section 10(15). Section 10(15) also provides exemption in respect of interest on Post
Office savings bank account (to the extent of Rs. 3,500 in case of an individual account and Rs. 7,000 in the case
of a joint account).
111.6 Grossing up of interest - Gross interest [i.e., net interest plus tax deducted at source] is taxable. Net interest
is grossed up in the hands of recipient if tax is deducted at source by the payer.
Net interest (if tax is deducted at source) in the hands of the recipient should be grossed up by multiplying it by
the following fraction : 100÷(100—Rate of tax deduction at source**).
➠ 111.7 Avoidance of tax [Sec. 94] - Interest on securities does not accrue from day to day but on certain fixed
dates. If, on the eve of due date of payment of interest, a person transfers securities to another person and
reacquires the same or similar securities after interest has been received by the transferee, the transferor would
be able to evade tax in respect of such interest. To prevent this malpractice, section 94 provides certain checks
under sub-sections (1) and (2).
111.7-1 BOND WASHING TRANSACTIONS [SEC. 94(1)] - A bond washing transaction is narrated as a transaction which
consists of selling securities (to a friend or relative) some time before the due date and acquiring back the same
(or similar) securities after the due date of interest is over. This practice is generally adopted by high-income class
assessees to evade the tax while transferring securities to low-income class assessees on the eve of due date of
**For rate of deduction, see Appendix 1. Tax is deducted at the rate of 10 per cent. No tax is deductible in the case of Government securities. See
also para 269.2.
367 How to find out income Para 113
payment of interest. If this practice is not checked, interest is includible in the total income of the transferee, as
interest is chargeable in the hands of the person who is legal owner of securities on the due date of payment of
interest.
To prevent the avoidance of tax in this manner, section 94(1) provides that where a security owner transfers the
securities on the eve of due date of interest and reacquires them, the interest received by the transferee will be
deemed as income of the transferor and, accordingly, it will be included in the total income of the transferor and
not of the transferee.
111.7-2 SALES CUM-INTEREST [SEC. 94(2)] - Another method of avoiding tax is sale of securities cum-interest. Section
94(2) provides that if an assessee, having beneficial interest in securities during the previous year, sells them in
such a way that either no income is received or income received is less than the sum he would have received if
interest had accrued from day to day, then income from such securities for such year would be deemed as income
of such person.
111.7-3 EXCEPTIONS - Deeming provisions of section 94(1)/(2), discussed above, are not applicable if the security
owner proves to the satisfaction of the Assessing Officer that —
a. there has been no avoidance of income-tax ; or
b. the avoidance of income-tax was exceptional and not systematic and there was not any avoidance of income-
tax under section 94(1)/(2) in his case, during three years preceding the previous year.
 HOW TO FIND OUT INCOME FROM MACHINERY, PLANT OR FURNITURE LET ON HIRE
[SEC. 56(2)(ii)]
112. Income from machinery, plant or furniture, belonging to the assessee and let on hire, is taxable as income
from other sources if the same is not chargeable to tax under the head “Profits and gains of business or
profession”.
 HOW TO FIND OUT INCOME FROM COMPOSITE LETTING OF BUILDING, MACHINERY,

PLANT OR FURNITURE [SEC. 56(2)(iii)]
113. If an assessee lets on hire machinery, plant or furniture and also building and letting of building is
inseparable from letting of machinery, plant or furniture, income from such letting is taxable as income from
other sources, if the same is not chargeable to tax under the head “Profits and gains of business or profession”.
On the basis of the judicial pronouncements, the following broad conclusions can be drawn:
1. If there is letting of machinery, plant and furniture and also letting of the building and the two lettings form
part and parcel of the same transaction or the two lettings are inseparable (in the sense that letting of one is not
acceptable to the other party without letting of the other; for instance, letting of cinema house along with letting
of furniture) then such income is taxable under section 56(2)(iii) under the head “Income from other sources” (if
it is not taxable as business income). This rule is applicable even if sum receivable for the two lettings is fixed
separately.
2. If a building is let out but other assets like machinery, plant or furniture are not given on rent. However, certain
amenities like lift services, air-conditioning, fire fighting facilities, etc., are provided, then section 56(2)(iii) is not
applicable. The essential requirement of section 56(2)(iii) is that there should be letting of plant, machinery or
furniture and also letting of building.
For instance, if the owner of a building only undertakes to instal and operate an air-conditioning plant and to
instal, and maintain a lift in the building for the benefit of all the tenants at specified charges (maybe on “no profit
no loss basis” or some other basis), there is no letting of air-conditioning plant and lifts to the tenants.
Consequently, in such case incomes from letting of building is taxable under section 22 under the head “Income
from house property” and amount collected for providing different amenities shall be taxable under section
56(1).
The aforesaid rule is applicable even if the assessee receives composite rent from his tenant towards building as
well as services/amenities. The portion of rent attributable to the building should only be assessed as “Income
from house property” and balance portion attributable to amenities must be assessed as “Income from other
sources”.
 MONEY/PROPERTY RECEIVED WITHOUT CONSIDERATION OR FOR INADEQUATE CON-

SIDERATION [SEC. 56(2)]
114. These provisions are regulated by different clauses of section 56(2) as follows –
Section Recipient of property Property covered Period during which property Para
(who is chargeable is received No.
to tax)
56(2)(vii) Individual/HUF Money/property* under 5 On or after October 1, 2009 but 114.1
different categories before April 1, 2017
56(2)(viia) Firm/closely held Shares of a closely held On or after June 1, 2010 but before 114.2
company company April 1, 2017
56(2)(x) Any person Money/property* under 5 On or after April 1, 2017 114.1
different categories
114.1 Money/property* received without consideration or inadequate consideration [Sec. 56(2)(vii)/(x)] -

Section 56(2)(vii) is applicable when sum of money/property* is received by an individual/HUF (on or after
October 1, 2009 but before April 1, 2017) and money/property* falls in any of the following 5 categories. The
scope of this provision has been extended by section 56(2)(x). The extended version is applicable when a sum
of money/property* is received by any person on or after April 1, 2017 and money/property* falls in any of the
following 5 categories.
 Five categories - Receipt of sum of money/property* without consideration or with inadequate consideration
should fall in any of the following five categories—
Different categories Tax treatment For the ceiling of Rs. 50,000
whether a single transaction
would be examined or all
transactions of the previous
year will be considered
Category 1 - Any sum of If aggregate amount of sum of money received without any All transactions
money (gift in cash or consideration from one or more persons during a previous
by cheque or draft†). year exceeds Rs. 50,000, the whole of such aggregate value
will be chargeable to tax. For deemed accrual of gift of money
to a non-resident/foreign company, see para 27.9.
Category 2 - Immovable If any immovable property (without any consideration) is Single transaction
property without received and the stamp duty value of which exceeds Rs.
consideration 50,000, stamp duty value will be chargeable to tax.
Category 3 - Immovable An immovable property is received for a consideration. The Single transaction
property for a considera- transaction satisfies the following conditions –
tion which is less than the a. stamp duty value exceeds 105 per cent of consideration;
stamp duty value and
b. the difference between stamp duty value and consider-
ation is more than Rs. 50,000.
If the above two conditions are satisfied, the difference be-
tween stamp duty value and consideration is chargeable to
tax.
Category 4 - Movable If aggregate fair market value of movable properties** recei- All transactions
property** without ved without consideration during a previous year exceeds
consideration Rs. 50,000, the whole of aggregate fair market value of mov-
able property** or properties will be chargeable to tax.
†A loan transaction is not covered under section 56(2).

**“Movable property” for this purpose means the following capital asset of the assessee (i.e., recipient) : shares and securities; jewellery;
archaeological collections; drawings; paintings; sculptures; or any work of art, or bullion.
*“Property” for this purpose means the following capital asset of the assessee (i.e., recipient) : (i) immovable property being land or building or
both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art, or
(ix) bullion.
369 Money/property received without consideration Para 114.1
Different categories Tax treatment For the ceiling of Rs. 50,000

whether a single transaction
would be examined or all
transactions of the previous
year will be considered
Category 5 - Movable If movable property or properties** is received for a consi- All transactions
property** for a consideration which is less than the aggregate fair market value
deration which is less of the property or properties** by an amount exceeding
than fair market value Rs. 50,000, then the difference between aggregate fair market
value and the consideration is chargeable to tax.
 Exempted categories - While calculating the above monetary limit of Rs. 50,000 in any of the five categories, any
sum of money or property* received from the following shall not be considered—
1. Money/property* received from a relative.
2. Money/property* received on the occasion of the marriage of the individual.***
3. Money/property* received by way of will/inheritance.
4. Money/property* received in contemplation of death of the payer.
5. Money/property* received from a local authority.
6. Money/property* received from any fund, foundation, university, other educational institution, hospital,
medical institution, any trust or institution referred to in section 10(23C).
7. Money/property* received from a charitable institute registered under section 12A/12AA.
8. Money/property received by any fund/trust/university/other educational institutions/hospital/other
medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via) (applicable if money/property is received on
or after April 1, 2017).
9. Money/property received by way of the following transactions which are not regarded as transfer under
section 47 –
Received on or after April 1, 2016 –
- Shares received at the time of business re-organisation of a co-operative bank [sec. 47(vicb)]
- Shares received at the time of demerger [sec. 47(vid)]
- Shares received at the time of amalgamation [sec. 47(vii)]
Received on or after April 1, 2017 –
- Money/property received by way of distribution at the time of total or partial partition of HUF [sec. 47(i)]
- Property received by an Indian holding company from its 100 per cent subsidiary company or property received
by an Indian subsidiary company from its 100 per cent holding company [sec. 47(iv)/(v)]
- Money/property received in a scheme of amalgamation/demerger [sec. 47(vi)/(vib)]
- Shares received at the time of amalgamation/demerger of foreign companies [sec. 47(via)/(vic)]
- Money/property received in a scheme of amalgamation of banking company [sec. 47(viaa)]
- Money/property received at the time of business re-organisation of co-operative bank [sec. 47(vica)].
10. Money/property* received from an individual by a trust created or established solely for the benefit of
relative of the individual (applicable if money/property is received on or after April 1, 2017).
11. Money or property* received from such class of persons and subject to such conditions, as may be prescribed
[i.e., any immovable property (being land or building) received by a resident† of an unauthorised colony in NCR,
where the Central Government (by notification in the Official Gazettee) regularised the transactions of such
immovable property based on the latest power of attorney, agreement to sale, will, possession letter and other
documents including documents evidencing payment of consideration for conferring or recognising right of
ownership or transfer or mortgage in regard to such immovable property in favour of such resident].
*“Property” for this purpose means the following capital asset of the assessee (i.e., recipient) : (i) immovable property being land or building or
both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art, or
(ix) bullion.
***The word ‘individual’ includes only the specific individual, whose marriage is solemnized.
† For this purpose, “resident” means a person having physical possession of property on the basis of a registered sale deed or latest set of power
of attorney, agreement to sale, will, possession letter and other documents including documents evidencing payment of consideration in respect
of a property in unauthorised colonies and includes their legal heirs but does not include tenant, licensee or permissive user.
114.1-1 OTHER RELEVANT POINTS - The following points should be noted—

1. The value of movable property** shall be the fair market value as on the date of receipt in accordance with the
method prescribed [see para 114.1-2]. In the case of immovable property, the value of the property shall be the
stamp duty value of the property.
Where the date of an agreement fixing the value of consideration for the transfer of immovable property and the
date of registration are not same, the stamp duty value may be taken as on the date of the agreement for transfer
(and not as on the date of registration for such transfer). However, this exception shall apply only in those cases
where amount of consideration (or a part thereof) for the transfer has been received by any mode other than cash
on or before the date of the agreement.
2. For the aforesaid purpose, the term “relative” means—
If taxpayer is X,
1. Spouse of the individual Mrs. X
2. Brother or sister of the individual Brothers/sisters of X
3. Brother or sister of the spouse of the individual Brothers/sisters of Mrs. X
4. Brother or sister of either of the parents of the individual Brothers/sisters of father/mother of X
5. Any lineal ascendant or descendant of the individual Lineal ascendant or descendant of X
6. Any lineal ascendant or descendant of the spouse of the Lineal ascendant or descendant of Mrs. X
individual
7. Spouse of the person referred to in (2) to (6) Spouse of the aforesaid persons
Note - If the taxpayer is X and he receives gifts from any of his relatives (given in column 2 of the table), such gifts will not
be chargeable to tax. The Rajkot bench of the Tribunal has held that gifts received from a group of relatives (like HUF) is also
exempt from tax – Vineetkumar Raghavjibhai Bhalodia v. ITO [2011] 46 SOT 97. Moreover, gift received by a Hindu undivided
family from its members is treated as gift received from a “relative”.
3. The above provisions cover –
- a receipt of money/property by an individual/HUF (if it is received up to March 31, 2017);
- a receipt of money/property by any person (if it is received on or after April 1, 2017).
4. Gift on the occasion of marriage is not chargeable to tax. Gifts on other occasions (e.g., gifts on birthday, etc.)
will, however, be chargeable to tax. Further, marriage gift may be received from relatives, friends or any other
person.
5. The above provision is applicable whether the recipient is a resident or non-resident. Even a gift received by
a non-resident in India is chargeable to tax.
6. The above provision is applicable whether the donor is a resident or a non-resident.
7. “Property” for the aforesaid purpose means the following capital asset of the assessee (i.e., recipient): (i)
immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological
collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art, or (ix) bullion. It may be noted that
the above provision will have application to the ‘property’ which is in the nature of a capital asset of the recipient.
In other words, the above provision will not apply to stock-in-trade, raw material and consumable stores of any
business of such recipient. Further, if an assessee gets a gift of agricultural land situated in a rural area in India,
it is not chargeable to tax in the hands of recipient, as rural agricultural land is not treated as a “capital asset”
under section 2(14).
8. “Jewellery” for this purpose means—
a. ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of
such precious metals, whether or not containing any precious or semi-precious stone, and whether or not
worked or sewn into any wearing apparel;
b. precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn
into any wearing apparel.
9. Bonus shares can never be considered as received without consideration or for inadequate consideration
calling for application of section 56(2)(vii)(c)/56(2)(x)(c) – CIT v. Rajan Pai [2016] 48 ITR (Trib.) 170 (Bang.).
114.1-2 VALUATION RULES - Movable and immovable properties for the above purpose shall be valued as follows—
Different properties Valuation of property
1. Immovable property Stamp duty value of the property
2. Jewellery, archaeological collections,  If purchased from a registered dealer
- If jewellery, archaeological collections,
drawings, paintings, sculptures or any etc., are received by the way of purchase on the valuation date, from a
work of art registered dealer (under GST), the invoice value of these properties shall be
the fair market value
Different properties Valuation of property

 In any other case - The price which such jewellery, archaeological collec-
tions, etc., would fetch if sold in the open market on the valuation date [see
Note 1]
3. Quoted shares and securities The transaction value as recorded in such stock exchange
(received by way of a transaction
carried out through a recognized stock
exchange in India)
4. Quoted shares and securities (not The lowest price of such shares and securities quoted on any recognized
being received by way of a transaction stock exchange in India on the valuation date. If, however, on the valuation
carried out through a recognized stock date such shares and securities are not traded on any recognized stock
exchange in India) exchange, the lowest price of such shares and securities on a date immedi-
ately preceding the valuation date (when such shares/securities are traded)
shall be the fair market value
5. Unquoted equity shares (Option 1) Assets [Note 2] xxxx
Less: Liabilities [Note 3] xxxx
Net worth xxxx
Value of one share = Net worth × paid up value of one share ÷ Total amount
of paid up equity share capital as shown in balance sheet
5. Unquoted equity shares (Option 2) The fair market value of the unquoted equity shares shall be determined
[applicable only in the case of section (at the option of the assessee) by a merchant banker or an accountant as
56(2)(viib)] per the Discounted Free Cash Flow method
6. Other unquoted shares and securities The fair market value shall be estimated to be the price it would fetch if sold
in the open market on the valuation date and the assessee may obtain a
report from a Category I merchant banker (registered with SEBI) or a
chartered accountant in respect of such valuation
Notes—
1. If jewellery, archaeological collections, etc., are received by the way of a purchase on the valuation date, from
a registered dealer (under sales tax or GST), the invoice value of these properties shall be the fair market value.
In case these properties are received by any other mode and the value of the properties exceeds Rs. 50,000, then
the assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open
market on the valuation date.
2. Amount of asset† shall be calculated as follows –
- Jewellery and artistic work - The price which these assets would fetch if sold in the open market based on the
valuation report obtained from a registered valuer.
- Shares and securities - Fair market value of shares and securities as determined in the manner provided in Points
3, 4 and 5 above.
- Immovable property - Stamp duty value adopted/assessed/assessable.
- Any other asset - Book value in the balance sheet.
The amount calculated above shall be reduced by any amount of tax paid as TDS/TCS/advance tax (excluding
refund claimed) and any amount shown in the balance sheet as asset (including the unamortised amount of
deferred expenditure) which does not represent the value of any asset.
3. Book value of liabilities shown in the balance sheet, but not including the following amounts, namely—
a. the paid-up capital in respect of equity shares;
b. the amount set apart for payment of dividends on preference shares and equity shares where such dividends
have not been declared before the date of transfer at a general body meeting of the company;
c. reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set
apart towards depreciation;
d. any amount representing provision for taxation, other than amount of tax paid as deduction or collection at
source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax
Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the
law applicable thereto;
e. any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
† For the purpose of section 56(2)(viib), amount of the asset shall be calculated on the basis of book value of the assets in the balance sheet.
f. any amount representing contingent liabilities other than arrears of dividends payable in respect of
cumulative preference shares.
114.1-3 PROVISIONS ILLUSTRATED - Consider the following cases—
1. Property received by gift before October 1, 2009 - X gets a gift of a house property from his friend A on September
30, 2009. Stamp duty value of the property on the date of gift is Rs. 40,00,000. In the hands of X, nothing is
chargeable to tax, as gift of property is received before October 1, 2009. The same rule is applicable if a movable
property is received by way of gift before October 1, 2009. The provisions of section 56(2)(vii) are applicable only
with effect from October 1, 2009.
In the hands of transferor A, it is not treated as transfer because of section 47(iii) and the transferor will not be
chargeable to tax under section 45. Section 50C will not have any role to play.
If X transfers this property, cost of acquisition will be the cost to the previous owner A.
2. Immovable property received by gift on or after October 1, 2009 but stamp duty value is up to Rs. 50,000 - X gets a gift
of a house property from his friend A on April 10, 2019. Stamp duty value of the property on the date of gift is
Rs. 50,000. In the hands of X, nothing is chargeable of tax, as stamp duty value of the immovable property does
not exceed Rs. 50,000.
In the hands of transferor A, it is not treated as transfer [transfer of an asset by gift is not treated as “transfer”
under section 47(iii)] and the transferor will not be chargeable to tax under section 45. Section 50C will not have
any role to play.
If X transfers this property, the cost to the previous owner A will be taken as cost of acquisition of this property
in the hands of X.
3. Immovable property received as capital asset by gift and the stamp duty value is more than Rs. 50,000 - X gets a gift of
a house property from his friend A on May 20, 2019. X is not a dealer in properties and the house property is
received as a capital asset. Stamp duty value of the property on the date of gift is Rs. 45,00,000. In the hands of
X, Rs. 45,00,000 will be taxable as income under section 56(2)(x) under the head “Income from other sources” for
any role to play.
If X transfers this property, Rs. 45,00,000 will be taken as the cost of acquisition of this property in the hands of
X.
4. Immovable properties received as capital asset by gift - X is a salaried employee (or X is a businessman, but not a
dealer in properties, or recipient is X Ltd., not a property dealer). On June 1, 2019, he gets a gift of house property
situated in Delhi (stamp duty value : Rs. 70,00,000) from A. On July 1, 2019, he gets gift of a property in Pune
(stamp duty value : Rs. 50,000) from B. In the hands of X, stamp duty value of Delhi property of Rs. 70,00,000 will
be taxable as income under the head “Income from other sources”. However, nothing is taxable in respect of Pune
property, as the stamp duty value does not exceed Rs. 50,000.
In the hands of transferors (i.e., A and B), nothing will be taxable under the head “Capital gains”, as gift is not
treated as transfer. Section 50C will not have any role to play.
If X transfers Delhi property, Rs. 70,00,000 will be taken as cost of acquisition. In the case of transfer of Pune
property by X, the cost of acquisition will be cost to the previous owner B.
5. Purchase of immovable property (or properties) for a consideration which is lower than stamp duty value - X purchases
a house property situated in Nagpur from A on March 31, 2020 for a consideration which is less than stamp duty
value. The difference between stamp duty value and actual consideration will be taxable in the hands of X under
section 56(2)(x), if the following two conditions are satisfied –
a. stamp duty value exceeds 105 per cent of consideration; and
b. different between stamp duty value and consideration is more than Rs. 50,000.
The data pertaining to stamp duty and actual purchase consideration paid by X is given below –
Situation 1 Situation 2 Situation 3 Situation 4
Rs. Rs. Rs. Rs.
Stamp duty value 32,00,000 8,80,000 1,39,000 30,90,000
Purchase consideration 30,00,000 8,30,000 1,30,000 30,00,000
105% of purchase consideration 31,50,000 8,71,500 1,36,500 31,50,000
Whether stamp duty value exceeds 105% of purchase consideration Yes Yes Yes No

Rs. Rs. Rs. Rs.
Stamp duty value minus purchase consideration 2,00,000 50,000 9,000 90,000
Amount taxable in the hands of X under section 56(2)(x) 2,00,000 Nil Nil Nil
Cost of acquisition in the hands of X for calculating capital gain
(in future) 32,00,000 8,30,000 1,30,000 30,00,000
Full value of consideration in the hands of transferor A under
section 50C 32,00,000 8,80,000 1,39,000 30,00,000
6. Immovable property received as stock-in-trade by gift - X or X Ltd. is a dealer in properties. On June 20, 2019, he/
it gets a house property by gift for business purposes from A. Stamp duty value of the property is Rs. 83,00,000.
Section 56(2)(x) is applicable only when a property is received as a capital asset. Since house property in the hands
of X or X Ltd. is stock-in-trade, nothing will be taxable under section 56(2)(x) under the head “Income from other
sources”.
any role to play.
If X or X Ltd. transfers this property as stock-in-trade, the cost to the previous owner A will be taken as cost of
acquisition of stock-in-trade.
7. Rural agricultural land - X gets a gift of a plot of land (being agricultural land) situated in a rural area in India
from A on September 1, 2019. Stamp duty value is Rs. 6,70,000. Agricultural land situated in a rural area in India,
is not a “capital asset” under section 2(14). Section 56(2)(x) is applicable only if a “capital asset” is received by
gift. Consequently, nothing will be taxable in the hands of X under the head “Income from other sources”.
There will be no capital gain in the hands of A at the time of gift. If X transfers the agricultural land, he will not
be subject to tax under the head “Capital gains”.
8. Motor car is received by gift - On September 2, 2019, X gets a gift of motor car from A. Fair market value of the
car is Rs. 2,10,000. Nothing is taxable in the hands of X under section 56(2)(x). This section is applicable if gift is
received of land or building. This section is also applicable if movable property (being shares and securities,
jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or bullion) is received by
gift or purchased for a consideration which is lesser than fair market value. If a car is received by gift or purchased
for a consideration which is lower than fair market value, section 56(2)(x) is not applicable.
9. Purchase of painting from a registered dealer - On July 25, 2019, X purchases a Tagore painting from Shyam Art
Gallery, Andheri West, Mumbai vide Bill No. 426/2019. Painting is purchased at the invoice price of Rs. 5,25,000.
Shyam Art Gallery is a registered dealer under GST. This painting can be easily sold in market for Rs. 9,00,000.
In the case of purchase of a movable property from a registered dealer (under sales tax/VAT/GST), the “invoice
value” is taken as fair market value of the property for the purpose of section 56(2)(x). If such property is
purchased at the “invoice value” from a registered dealer, nothing will be taxable under section 56(2)(x). In the
above case, invoice value is Rs. 5,25,000. X has purchased the painting for Rs. 5,25,000. He will not be chargeable
to tax under section 56(2)(x), even if it is possible to sell the same property in market for Rs. 9,00,000. The same
rule is applicable if other properties (like jewellery, archaeological collections, drawings, sculptures, etc.) are
purchased from a registered dealer at the “invoice value”.
10. Purchase of painting from a person other than registered dealer - On September 20, 2019, X purchases a Tagore
painting (as a capital asset) for Rs. 8,00,000 from A (A is not a dealer in paintings). The fair market value of the
painting is Rs. 11,00,000 (it can be easily sold in market for Rs. 11,00,000). The difference of Rs. 3,00,000 is taxable
in the hands of X under section 56(2)(x) under the head “Income from other sources”. If X transfers this painting,
the cost of acquisition for the purpose of calculating capital gain will be Rs. 11,00,000.
In the hands of A for the purpose of calculating capital gains, the full value of consideration will be Rs. 8,00,000
(section 50C is not applicable in the case of movable properties).
11. Painting/jewellery received by gift or purchased for inadequate consideration - X gives the following information
about movable properties (being capital assets)—
Movable properties Fair market value Purchase price Difference

(1) (2) (3) (4) [i.e., the excess of
(2) over (3)]
Rs. Rs. Rs.
Received by gift—
Gold chain from A 32,000 Nil 32,000
Painting from B 18,000 Nil 18,000
Total 50,000 Nil 50,000
Purchase for inadequate consideration—
Work of art from C 1,00,000 90,000 10,000
Gold ring from D 85,000 45,000 40,000
Total 1,85,000 1,35,000 50,000
In this case, the aggregate fair market value of movable properties received by gift is not more than Rs. 50,000.
Consequently, nothing is taxable in respect of movable properties received by gift.
The aggregate fair market value of movable properties purchased is Rs. 1,85,000 and the aggregate purchase
price is Rs. 1,35,000. The difference is not more than Rs. 50,000. Nothing is taxable under section 56(2)(x) on
account of purchase of movable properties for inadequate consideration.
If, however, the fair market value of gold chain is Rs. 32,001 and gold ring is Rs. 85,001, Rs. 1,00,002 will be taxable
under the head “Income from other sources” in the hands of X.
Problems
114.1-P1 X receives the following gifts during the previous year 2019-20—
1. On the occasion of marriage of X, he gets Rs. 2,90,000 as gift on April 2, 2019 (out of which Rs. 2,00,000 is received from friends of
X and Mrs. X and remaining amount is received from close relatives of X and Mrs. X).
2. On June 22, 2019, he gets a gift of Rs. 23,000 from C, who is cousin of his father.
3. On August 18, 2019, he gets a gift of Rs. 15,000 from D, who is elder brother of his grandfather.
4. On September 20, 2019, he gets a gift of Rs. 7,00,000 from his grandmother.
5. A computer received from his employer (it was purchased for Rs. 65,000 by the employer on May 1, 2019 and given as gift to X on
October 20, 2019).
6. On November 2, 2019, X purchases a house property from his friend D for Rs. 65,000 (stamp duty value of the property is
Rs. 10,00,000).
7. On November 30, 2019, X gets a gift of a plot of land from his grandfather (stamp duty value is Rs. 15,00,000).
8. On December 30, 2019, X gets by gift a commercial flat from the elder brother of his father-in-law (stamp duty value is Rs. 25,00,000).
9. On January 6, 2020, he gets a gift of Rs. 2,00,000 (cash gift of Rs. 25,000 and gift of a work of art whose market value is Rs. 1,75,000)
from a notified public charitable institution.
10. X receives on January 11, 2020 a house property under will of a person known to him. The stamp duty value is Rs. 15,40,000.
11. On January 20, 2020, he gets a wrist watch by gift (fair market value : Rs. 40,000) from his friend B.
12. On January 25, 2020, he purchases a work of art for Rs. 16,00,000 from an exhibition in New York (the fair market value of the work
of art on the date of purchase is Rs. 17,00,000).
13. On February 1, 2020, he purchases a commercial property for Rs. 16,00,000 (stamp duty value is Rs. 16,75,000).
14. On February 5, 2020, he gets a birthday gift of a gold chain (fair market value : Rs. 11,000) from his friend.
15. On February 10, 2020, X gets by way of gift a plot of land in Pune from a partnership firm. The partnership firm has only two
partners—father of X and Mrs. X. The stamp duty value of the plot of land is Rs. 19,00,000.
16. On February 16, 2020, X purchases 500 shares in Tata Chemicals from his friend D at Rs. 90 per share (outside stock exchange).
The lowest market quotation in the Bombay Stock Exchange and the National Stock Exchange on the date of purchase is Rs. 300 and 310
respectively.
17. On March 1, 2020, X gets a gift of gold ring from a cousin of his mother-in-law. The fair market value is Rs. 20,000.
18. On March 20, 2020, X gets a painting by way of gift from C Ltd. Mrs. X holds 70 per cent shares in C Ltd. The fair market value
of painting is Rs. 19,000.
19. On March 25, 2020, X gets a small plot of land by way of gift from a cousin of Mrs. X (stamp duty value is Rs. 44,000).
20. On March 31, 2020, X receives a shop (situated in Jammu) by way of gift from a friend (stamp duty value is Rs. 50,000).
Compute the amount chargeable to tax in the hands of X under the head “Income from other sources” for the assessment year 2020-21.
Solution:
Cash Gift of Gift of Purchase of Purchase of
gift immovable movable movable immovable
property property property for property
inadequate for
consideration inadequate
consideration
Rs. Rs. Rs. Rs.
1. Gift on occasion of marriage of X (not taxable) Nil — — — —
2. Cash gift from C (C is not “relative”) 23,000 — — — —
3. Cash gift from D (elder brother of grandfather is not
“relative”) 15,000 — — — —
4. Cash gift from grandmother (gift from a “relative” is not
taxable) Nil — — — —
5. Gift from employer (it is taxable under the head “Salaries”) — — — — —
6. Purchase of immovable property for inadequate considera-
tion — — — — 9,35,000
7. Gift of immovable property from grandfather (gift from
“relative” is not taxable) — Nil — — —
8. Gift of commercial property (elder brother of father-in-law
is not “relative”) — 25,00,000 — — —
9. Gift from notified public charitable institute (not taxable) Nil — Nil — —
10. Gift under a will (not taxable even if received from a non-
relative) — Nil — — —
11. Gift of a wrist watch [wrist watch is not “property” for the
purpose of section 56(2)(x) and not taxable] — — — — —
12. Purchase of a work of art for inadequate consideration — — — 1,00,000 —
13. Purchase of immovable property for inadequate conside-
ration (as the difference between stamp duty value and pur-
chase price exceeds Rs. 50,000 but stamp duty value does not
exceed 105% of purchase price, nothing is chargeable to tax) — — — — —
14. Gift of gold chain — — 11,000 — —
15. Gift from a partnership firm (partnership firm is not
“relative” even if relatives of X are partners) — 19,00,000 — — —
16. Purchase of shares for inadequate consideration [(Rs. 300 -
Rs. 90) x 500] — — — 1,05,000 —
17. Gift of gold ring (cousin of mother-in-law is not “relative”
of X) — — 20,000 — —
18. Gift from a company (company is not a “relative” even if
Mrs. X is a major shareholder) — — 19,000 — —
19. Gift of plot of land (not taxable as stamp duty value does
not exceed Rs. 50,000) — Nil — — —
20. Gift of shop (not taxable as stamp duty value does not
exceed Rs. 50,000) — Nil — — —
Total 38,000 44,00,000 50,000 2,05,000 9,35,000
Amount taxable under section 56(2)(x) under the head “Income from other sources” will be calculated as follows—
Rs.
Cash gift (not taxable as the aggregate amount of cash gift does not exceed Rs. 50,000) Nil
Gift of immovable properties 44,00,000
Gift of movable properties (not taxable as the aggregate amount does not exceed Rs. 50,000) Nil
Purchase of immovable property for inadequate consideration 9,35,000
Purchase of movable properties for inadequate consideration 2,05,000
Amount taxable 55,40,000
114.1-E1 X receives the following gifts during the previous year 2019-20—
September 1, 2019 Cash gift of Rs. 51,000 from a friend on marriage anniversary
September 30, 2019 Purchase of a house property from a friend for Rs. 10,00,000 (stamp duty value is Rs. 40,00,000)
December 1, 2019 Purchase of a house property from Mrs. X for Rs. 15,00,000 (stamp duty value is Rs. 80,00,000)
December 29, 2019 Purchase of a painting from an art gallery (being registered dealer under Maharashtra GST) for a
concessional price of Rs. 80,000 (invoice value is Rs. 80,000, however, this painting can be easily sold for
Rs. 2,00,000)
March 10, 2020 Cash gift of Rs. 40,000 from a colleague
March 15, 2020 Purchase of a second hand car for Rs. 2,00,000 (fair market value is Rs. 3,50,000)
March 31, 2020 Cash gift of Rs. 30,000 from a non-resident friend
Find out the amount chargeable to tax under the head “Income from other sources” for the assessment year 2020-21. Does it make
any difference if X is a dealer in second hand cars and on March 15, 2020 the car is purchased as stock-in-trade?
114.2 Receipt of shares by a firm or a closely held company - Clause (viia) of section 56(2) is applicable, if shares
are received before April 1, 2017*—
1. Recipient is a firm or a closely held company (i.e., a company in which the public are not substantially
interested).
2. The asset (which is received) is in the form of shares in a closely held company (i.e., a company in which the
public are not substantially interested).
3. These shares are received from any person.
4. Such shares are received on or after June 1, 2010 but before April 1, 2017*.
5. Such shares are received without consideration or for an inadequate consideration.
 SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE [SEC. 56(2)(viib)]

115. Section 56(2)(viib) is applicable as follows –
1. Recipient is a company (not being a company in which the public are substantially interested).
2. It receives consideration for issue of shares (preference shares or equity shares) from a resident person.
3. The consideration received for issue of shares exceeds the face value of such shares. In other words, shares are
issued at a premium.
If the above conditions are satisfied, the aggregate consideration received for such shares as exceeds the fair
market value of the shares, shall be chargeable to income-tax in the hands of recipient-company under section
56(2)(viib) under the head “Income from other sources”.
 The above provisions are not applicable in the following two cases –
a. where the consideration for issue of shares is received by a venture capital undertaking from a venture capital
company or a venture capital fund or a specified fund having Category I or Category II Alternative Investment
Fund Certificate; or
b. where the consideration for issue of shares is received by a company from a class or classes of person as
notified† by the Central Government.
 The fair market value of the shares shall be the higher of the value—
a. as may be determined in accordance with the method given in rules 11U and 11UA [see para 114.1-2]; or
b. as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its
assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of similar nature.
X Ltd. is a public limited company but its shares are not listed in any stock exchange in India on April 6, 2019. On April 6,
2019, 5,000 shares are issued to A, 10,000 shares are issued to B and 20,000 shares are issued to C. These shares are issued
in one of the following situations –
Different situations
1 2 3 4
Face value per share (in Rs.) 10 10 10 10
Issue price per share (in Rs.) 10 9 40 40
Fair market value of each share determined under section 56(2)(viib) (in Rs.) 3 4 42 31
*Share received on or after April 1, 2017 will be covered by section 56(2)(x) [see para 114.1].
†For this purpose, the Central Government has specified that the above provisions of section 56(2)(viib) will not be applicable when consideration
is received by a company from a resident for issue of shares of a “startup” company.
377 Position after issue of Circular No. 2/2002 Para 116A.2

1. In Situation 1, shares are issued at par. In Situation 2 shares are issued at a discount. The provisions of section 56(2)(viib)
are applicable only when shares are issued at premium. Consequently, nothing is taxable under the head “Income from other
sources” under section 56(2)(viib) in Situations 1 and 2.
2. In Situation 3, shares are issued at premium. The total consideration per share (i.e., face value plus premium) is Rs. 40. Fair
market value of shares as determined under section 56(2)(viib) is Rs. 42. As fair market value is more than the consideration
received, nothing will be taxable under the above provisions.
3. In Situation 4, fair market value per share is Rs. 31. Consideration received from shareholders is Rs. 40 per share. The excess
consideration of Rs. 9 per share will be taxable if the following two conditions are satisfied –
a. X Ltd. is a company in which the public are not substantially interested under section 2(18) for the previous year
2019-20; and
b. shareholders are resident in India for the previous year 2019-20.
Suppose, shares of X Ltd. are not listed in any recognized stock exchange in India up to March 31, 2020 and during the
previous year 2019-20 A and B are resident in India (C is non-resident), the amount taxable under section 56(2)(viib) will be
Rs. 1,35,000 in the hands of X Ltd. [i.e., Rs. 9 × (5,000 shares to A + 10,000 shares to B)].
4. Suppose, C was never in India up to April 6, 2019, but he comes to India on September 3, 2019 (i.e., after issue of shares
to him) for 182 days. He will be resident in India. Amount taxable in the hands of X Ltd. under section 56(2)(viib) will be
increased to Rs. 3,15,000.
5. Suppose, shares of X Ltd. are listed in the Bombay Stock Exchange with effect from March 7, 2020. X Ltd. will be a company
in which the public are substantially interested within the parameters of section 2(18) for the previous year 2019-20.
Consequently, nothing will be taxable under section 56(2)(viib) even in Situation 4.
 ADVANCE MONEY RECEIVED IN COURSE OF NEGOTIATIONS FOR TRANSFER OF A

CAPITAL ASSET - WHEN CHARGEABLE TO TAX [SEC. 56(2)(ix)]
116. Where any sum of money, received as an advance or otherwise in the course of the negotiations for transfer
of a capital asset, is forfeited and the negotiations do not result in transfer of such capital asset, then, such sum
shall be chargeable to income-tax under the head “Income from other sources”. The following points should be
noted –
1. The above rule is applicable only when advance money is forfeited during the previous year 2015-16 (or any
subsequent year). If advance money is forfeited during the previous year 2014-15 (or earlier), then such advance
money is deducted from cost of acquisition (by virtue of section 51) for calculating capital gain whenever the asset
is transferred.
2. Advance money received in the course of negotiation for transfer and later on forfeited by the recipient is
taxable (as stated above) under the head “Income from other sources” only if the asset involved is a “capital
asset”. If the asset is not a “capital asset” [as per section 2(14)], forfeiture of advance money will not be taxable
under section 56(2)(ix). For instance, X receives Rs. 2,00,000 as advance money in the course of negotiation for
transfer of rural agricultural land situated in India. Agricultural land is not transferred and advance money is
forfeited by X. In this case, section 56(2)(ix) is not applicable as rural agricultural land in India is not a “capital
asset” under section 2(14). Consequently, in the hands of X, Rs. 2,00,000 is not chargeable to tax at all.
 HOW TO FIND OUT INTEREST ON DEEP DISCOUNT BONDS

➠ 116A. Vide Circular No. 2/2002, dated February 15, 2002, the Board has issued certain clarifications.
116A.1 Position before issue of Circular No. 2/2002 - The Board had earlier clarified that the difference
between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated
as interest income assessable under the Income-tax Act. On transfer of the bonds before maturity, the difference
between the sale consideration and the cost of acquisition would be taxed as income from capital gains where
the bonds were held as investment, and as business income where the bonds were held as trading assets. On final
redemption, however, no capital gains will arise.
116A.2 Position after issue of Circular No. 2/2002 - Substantial changes has been made vide Circular No. 2/
2002 which are given below. These are applicable only in respect of bonds issued after February 15, 2002—
1. Every person holding a Deep Discount Bond will make a market valuation of the bond as on March 31 of each
financial year.
2. The difference between the market valuations as on two successive valuation dates will represent the accretion
to the value of the bond during the relevant financial year and will be taxable as interest income (where the bonds
are held as investments) or business income (where the bonds are held as trading assets).
3. Where the bond is transferred at any time before the maturity date, the difference between the sale price and
the cost of the bond will be taxable as short-term capital gains in the hands of an investor or as business income
in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the
cost for which the bond was acquired by the transferor and the income, if any, already offered to tax by such
transferor up to the date of transfer.
4. Where the bond is redeemed by the original subscriber, the difference between the redemption price and the
value as on the last valuation date immediately preceding the maturity date will be taxed as interest income in
the case of investors, or business income in the case of traders.
5. Investors holding Deep Discount Bonds up to an aggregate face value of Rs. 1,00,000 may, at their option,
continue to offer income for tax in accordance with the earlier clarifications issued by the Board referred to in
para 116A.1 above.
 WHAT DEDUCTIONS ARE PERMISSIBLE FROM INCOME FROM OTHER SOURCES

117. The income chargeable to tax under this head is computed after making the following deductions :
117.1 Commission or remuneration for realising dividend or interest on securities [Sec. 57(i)] - Any
reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of
realising dividend (from a non-domestic company) or interest on securities on behalf of the assessee, is
deductible.
117.2 Deduction in respect of employee’s contribution towards staff welfare schemes [Sec. 57(ia)] -
Deduction in respect of any sum received by a taxpayer as contribution from his employees towards any welfare
fund of such employees is allowable only if such sum is credited by the taxpayer to the employee’s account in
the relevant fund before the due date. For this purpose “due date” is the date by which the assessee is required
as an employer to credit such contribution to the employees’ account in the relevant fund under the provisions
of any law or terms of contract of service or otherwise [see problem 81.27-P1].
117.3 Repairs, depreciation in the case of letting out of plant, machinery, furniture, building - Expenditure
on repair and insurance is deductible from rental income of letting out machinery, plant, etc. Besides,
depreciation on machinery, plant and furniture is deductible. The mode of computation of depreciation is the
same which is applicable for calculating business income.
117.4 Standard deduction in the case of family pension [Sec. 57(iia)] - In the case of income in the nature of
family pension, the amount deductible is Rs. 15,000 or 331/3 per cent of such income, whichever is less.
For this purpose, “family pension” means a regular monthly amount payable by the employer to a person
belonging to the family of an employee in the event of his death.
117.5 Any other expenses for earning income [Sec. 57(iii)] - Any other expenditure is deductible under section
57(iii) if the following four basic conditions are satisfied:
a. the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning
the income ;
b. the expenditure must not be in the nature of capital expenditure ;
c. it must not be in the nature of personal expenses of the assessee ;
d. it must be laid out or expended in the relevant previous year and not in any prior or subsequent year.
117.5-1 DEDUCTION ALLOWABLE FROM DIVIDEND INCOME - These provisions are given below –
 Dividend from domestic company - Any expenditure incurred for earning dividend from a domestic company
is not deductible.
 Dividend from non-domestic company - Expenditure for earning dividend from a non-domestic company is
deductible under section 57(iii). There was a conflict of opinion whether interest on money borrowed for
investing in shares in a foreign company was allowable as deduction if shares had not yielded income. The
controversy was, however, laid to rest by the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519,
wherein the Court held that interest paid was allowable as deduction even if the shares had not yielded any
income during the previous year.
The following illustrations are given to have a better understanding -
1. X purchases shares in a foreign company by investing borrowed capital. Dividend from foreign company is chargeable
to tax. During the previous year 2019-20 while income of X from dividend from the foreign company is Rs. 80,000, interest
379 Amount not deductible under section 58 Para 118.1
on borrowed capital is Rs. 90,000. In this case, income from other sources is (-) Rs. 10,000, after deducting the entire interest
liability of Rs. 90,000.
2. Suppose, in the above case dividend income is zero, then income from other sources would be (-) Rs. 90,000.
3. X (resident in India) purchases shares in Indian companies by investing borrowed capital. Aggregate dividend from
these companies during the previous year is Rs. 8,40,000, while interest liability on borrowed capital is Rs. 2,30,000. Since
dividend income is less than Rs. 10,00,000, the entire amount is exempt under section 10(34). By virtue of section 14A,
interest liability pertaining to exempt income is not deductible.
4. Y (resident in India) purchases shares in Indian companies by investing borrowed capital. Aggregate dividend from
these companies during the previous year is Rs. 24,00,000, while interest liability on borrowed capital is Rs. 6,00,000. Since
dividend income is more than Rs. 10,00,000, only Rs. 10,00,000 is exempt under section 10(34). The balance of Rs. 14,00,000
is taxable in the hands of Y under section 115BBDA at the rate of 10 per cent (+SC+EC+HEC). Expenditure of Rs. 6,00,000
is incurred partly for earning exempt income and partly for earning taxable income (i.e., income taxable under section
115BBDA). Expenditure pertaining to exempt income is not deductible by virtue of section 14A. Even expenditure
pertaining to taxable income is not deductible (under section 115BBDA gross income is taxable, expenditure is not
deductible).
117.6 Amount deductible from interest on compensation [Sec. 57(iv)] - Income by way of interest received
on compensation or on enhanced compensation, shall be assessed under the head “Income from other sources”
in the year in which it is received. Under section 57(iv), 50 per cent of such interest is deductible. However, no
other deduction is permitted.
X owned a house property at Chennai. It was acquired by the Government in 2010-11. Compensation is awarded during
2018-19. Along with compensation, a sum of Rs. 1,70,000 is payable by the Government for late payment of compensation
(expenditure incurred by X for getting interest sanctioned is Rs. 14,000). The interest belongs to the previous years 2010-11
to 2018-19. Out of this interest, Rs. 1,50,000 is received by X on March 31, 2020 and Rs. 20,000 is received on April 10, 2020.
The following income will be taxable under the head “Income from other sources”.
Assessment Assessment
year 2020-21 year 2021-22
Rs. Rs.
Interest received 1,50,000 20,000
Less: Amount deductible under section 57(iv) [50% of interest] 75,000 10,000
Less: Actual expenditure of Rs. 14,000 Nil Nil
Income taxable under the head “Income from other sources” 75,000 10,000
 WHAT ARE OTHER PROVISIONS

118. The following propositions should be noted—
118.1 Amount not deductible under section 58 - The following expenses are not deductible by virtue of section
58 :
118.1-1 PERSONAL EXPENSES [SEC. 58(1)(a)(i)] - Any personal expenses of the assessee is not deductible.
118.1-2 INTEREST [SEC. 58(1)(a)(ii)] - Any interest (which is chargeable under the Act in the hands of recipient) which
is payable outside India on which tax has not been paid or deducted at source, is not deductible.
118.1-3 SALARY [SEC. 58(1)(a)(iii)] - Any payment (which is chargeable under the head “Salaries” in the hands of
recipient and payable outside India), is not deductible if tax has not been paid or deducted therefrom [see para
82.3].
118.1-4 WEALTH TAX [SEC. 58(1)] - Any sum paid on account of wealth-tax is not deductible.
118.1-5 TDS DEFAULT [SEC. 58(1A)] - Disallowance provisions pertaining to TDS defaults covered by section 40(a)(ia)
are applicable [see para 82.2].
118.1-6 AMOUNT SPECIFIED BY SECTION 40A [SEC. 58(2)] - Any amount specified by section 40A is not deductible while
calculating income under the head “Income from other sources” [see paras 82.5 to 82.8].
118.1-7 EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES RECEIVED BY A FOREIGN COMPANY [SEC. 58(3)] - In the case
of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D
is not deductible.
118.1-8 EXPENDITURE IN RESPECT OF WINNINGS FROM LOTTERY [SEC. 58(4)] - No deduction shall be allowed under any
provision of the Act in computing the income by way of any winnings from lotteries*, crossword puzzles, races
including horse races*, card games and other games of any sort or from gambling or betting of any form or nature.
Consequently, while computing the aforesaid incomes the following are not deductible :
1. No deduction is permissible under section 57.
2. Losses cannot be set off under sections 70, 71 and 72 against the aforesaid incomes. Under section 58(4), an
allowance in connection with income under the head “Income from other sources” is not deductible under any
provision of the Act including sections 70, 71 and 72 in computing income by way of winnings from lotteries,
crossword puzzles, etc. ; an allowance is an appropriation for any purpose — De Roche v. De Roche 94 NW 767,
770.
3. No deduction is permissible under sections 80C to 80U.
Where, however, a certain percentage has to be foregone by the winner to the Government/agency conducting
the lotteries, it is deductible (as it amounts to diversion by overriding title)—Circular No. 461, dated July 9, 1986.
➠ 118.2 Amounts not deductible by virtue of sections 115A, 115AB, 115AC, 115AD, 115BBA and 115D -
No deduction is available under section 57 in the case of income referred to in sections 115A, 115AB, 115AC,
115AD, 115BBA and 115D.
➠ 118.3 Deemed profit chargeable to tax - The provisions of section 41(1) is applicable for computing income
under the head “Income from other sources” [see para 83.1].
 Problems on computation of income from other sources
119-P1 X, a resident individual, submits the following particulars of his income for the previous year ending March 31, 2020 :
Dividend —
Name of payer company Is it dividend Date of declaration Amount Interest paid by
under section of dividend paid to X X on capital
2(22)(e) borrowed to
invest in shares
Rs. Rs.
A Ltd., a foreign company No July 15, 2019 90,000 14,000
B Ltd., a foreign company No April 1, 2019 43,000 50,000
C Ltd., an Indian company No October 31, 2019 14,00,000 2,000
D Ltd., an Indian company Yes May 1, 2019 12,40,000 11,000
Rent from letting a factory along with plant and machinery (letting out of factory cannot be separated from letting out of plant and
machinery) : Rs. 30,600. Collection charges in respect of rent : Rs. 400. Fire insurance premium in respect of building : Rs. 600. Fire
insurance premium in respect of plant and machinery : Rs. 750. Repairs in respect of building : Rs. 4,600. Depreciation of building, plant
and machinery : Rs. 18,600.
Winnings from lottery on December 1, 2019 : net amount : Rs. 70,000 ; tax deducted at source: Rs. 30,000.
Winnings from card games : Rs. 13,500 (gross) (tax not deducted by the payer)
Interest on securities issued by the Government of Japan : Rs. 30,670.
During the previous year, X has received the following gifts—
Gift from whom Date of gift Amount Rs.
Gift from a friend August 20, 2019 1,00,000
Gift from a friend September 10, 2019 60,000
Gift from brother December 30, 2019 90,000
Gift from grandfather received by will October 1, 2019 1,40,000
Gift from friends at the time of marriage of X October 10, 2019 1,35,000
Gift from a friend September 20, 2019 20,000
Determine the income chargeable under the head “Income from other sources” for the assessment year 2020-21.
Solution :
Dividend Rs. Rs.
A Ltd. 90,000
B Ltd. 43,000
C Ltd. [exempt up to Rs. 10,00,000 under section 10(34), balance is taxable at the rate of
10% under section 115BBDA, expenditure not deductible] 4,00,000
D Ltd. [deemed dividend under section 2(22)(e) is exempt by virtue of section 10(34)] Nil
Total 5,33,000
*It covers winnings from races, etc. This provision is not applicable in the case of income from the activity of owning and maintaining race horses.
381 Problems on computation of income from other sources Problem 119-P2
Rs. Rs.
Less : Interest on borrowed capital (Rs. 14,000 + Rs. 50,000 + Nil + Nil) 64,000 4,69,000
Rent received 30,600
Less : Expenses
Collection charges 400
Insurance (i.e., Rs. 600 + Rs. 750) 1,350
Repairs 4,600
Depreciation 18,600 5,650
Winnings from lottery
Rs.
Net amount 70,000
Add : Tax deducted at source 30,000 1,00,000
Winnings from card games 13,500 1,13,500
Interest on securities of a foreign Government 30,670
Gift
Gift received on August 20, 2019 1,00,000
Gift received from a friend on September 10, 2019 60,000
Gift from brother (gift from a relative is not taxable) Nil
Gift by will (gift received by will is not taxable) Nil
Gift received at the time of marriage (it is not taxable) Nil
Gift from a friend 20,000
Total 1,80,000
As the amount exceeds Rs. 50,000, it is chargeable to tax 1,80,000
119-E1 [P8.8]* X, a resident and ordinarily resident in India, gives the following particulars of his income and expenditure for the
previous year ending March 31, 2020 :
Rent of a house situated in Delhi: Rs. 30,000; rent from letting a building (in Bombay) along with plant and machinery (letting out
of building cannot be separated from letting out of plant and machinery) : Rs. 60,000 ; depreciation of building in Bombay : Rs. 3,000 ;
depreciation of building in Delhi: Rs. 2,000; repairs and insurance of building (in Bombay) and plant and machinery : Rs. 6,000.
Dividends on preference shares from an Indian company declared on August 3, 2019 : Rs. 9,000.
Loan from another Indian company which is deemed as dividend under section 2(22)(e) is given on April 3, 2019 [amount received :
Rs. 18,000].
Royalty income : Rs. 7,000.
Winnings from camel races on September 25, 2019 [net amount received : Rs. 13,000, tax deducted at source : Nil].
Interest on 6.5 per cent (tax-free) National Relief Bonds : Rs. 42,000.
Gift received on January 20, 2020 in foreign currency from a school friend : Rs. 1,80,000. Gift from another friend on March 31, 2020 :
Rs. 20,000.
Determine the income chargeable under the head “Income from other sources” for the assessment year 2020-21.
119-P2 X holds the following securities on April 1, 2019 :

Rs. 10,00,000 5% UP Government loan (date of payment of interest : January 1).
Rs. 40,000 6% Non-listed debentures of ABC Ltd. (dates of payment of interest : June 11 and December 11 every year).
Rs. 25,000 8% debentures of PQR Ltd. (dates of payment of interest : June 15 and December 15 every year).
On December 1, 2019, X sells Rs. 25,000 8% debentures of PQR Ltd. Calculate the taxable income of X for the assessment year
2020-21. His business income is Rs. 5,64,000, Post Office Savings Bank interest is Rs. 4,300, SBI savings bank interest is Rs. 9,500 and
he has received a gift of Rs. 1 lakh in foreign currency from a friend on December 1, 2019 on his marriage anniversary.
Solution : Rs.
UP Government loan (Rs. 10,00,000 × 5/100) 50,000
Debentures of ABC Ltd. 2,400
Debentures of PQR Ltd. [interest accrued on June 15, 2019 (Rs. 25,000 × 8/100 × ½)] 1,000
Post Office Savings bank interest (up to Rs. 3,500 is exempt and balance is chargeable to tax) 800
SBI savings account interest 9,500
Gift 1,00,000
Amount taxable under the head “Income from other sources” 1,63,700
Problem 119-P3 Income under the head “Income from other sources” and its computation 382
Rs.
Less : Deduction under section 80TTA (i.e. savings account interest : Post office : Rs. 800 + SBI : Rs. 9,500,
subject to a maximum of Rs. 10,000) 10,000
Net income 7,17,700
119-E2 [P8.9]* Mrs. X (age : 42 years) holds the following securities on April 1, 2019 :
Rs. 20,000 10% (Non-listed) debentures of ABC Ltd. (dates of payment of interest : June 1 and December 1 every year) ;
Rs. 1,70,000 10% Central Government securities (date of payment of interest : February 28 every year);
Rs. 1,30,000 11% debentures of PQR Ltd. (dates of payment of interest : March 1 and September 1 every year).
On October 31, 2019, Mrs. X sells Rs. 1,30,000 11% debentures of PQR Ltd. Determine the taxable income and tax liability of Mrs.
X for the assessment year 2020-21 on the assumption that her salary income (after standard deduction) is Rs. 11,83,860 and she
contributes Rs. 1,32,270 towards unrecognised provident fund. Mrs. X gets a gift of Rs. 1.50 lakh from her husband on March 31,
2020.
Rs. 10,000 6.5% Central Government Loan (date of payment of interest : July 10 every year).
Rs. 40,000 8% debentures (non-listed) of PQR Ltd. (dates of payment of interest : May 15 and November 15 every year).
Rs. 10,000 9% Relief Bonds (tax-free).
Apart from the aforesaid securities, X invests in (non-listed) UP Government loan, Bihar Government loan and debentures of ABC Ltd.
(non-listed) on June 30, 2019 and receives Rs. 4,000, Rs. 8,000 and Rs. 18,000, respectively, as interest on December 31, 2019. His rental
(taxable) income is Rs. 11,52,000. He pays 2 per cent commission to bank for collecting interest (net) on securities. Determine the taxable
income of X for the assessment year 2020-21.
Solution : Amount Amount
received in taxable
cash
Rs. Rs.
Securities of the Central Government (i.e., Rs. 10,000 × 6.5/100) 650 650
Debentures of PQR Ltd. (i.e., Rs. 40,000 × 8/100) 2,8802 3,200
UP Government securities 4,000 4,000
Bihar Government loan 8,000 8,000
Debentures of ABC Ltd. (gross amount = Rs. 18,000 × 100/90) 18,000 20,000
Total 33,530 35,850
Less : Bank charges @ 2% of Rs. 33,530 671
Rs.
Rental income 11,52,000
Less : Deduction Nil
Notes :
1. In the case of Government securities, tax is not deductible at source under section 193.
2. In the case of non-listed non-Government securities, tax is deducted at source @ 10%. Therefore, amount realised is Rs.
2,880 (i.e., Rs. 3,200—10% of Rs. 3,200).
3. Interest on (tax-free) National Relief Bonds is exempt from tax under section 10(15).
119-E3 [P8.10]* X, maintaining books of account on the basis of financial year, holds the following securities on April 1, 2019 :
Rs. 60,000 7% MP Government loan (date of payment of interest : July 15 every year).
Rs. 30,000 11% debentures (non-listed) of ABC Ltd. (date of payment of interest : June 30 every year).
Apart from the aforesaid securities, X invests in UP Government Loan, Central Government securities and (listed) debentures of PQR
Ltd. and receives on December 1, 2019, Rs. 3,000, Rs. 9,000 and Rs. 2,700 (net of tax deducted—rate of tax 10%), respectively, as
interest. His business income is Rs. 11,86,000. He pays Rs. 200 as commission to his bank for collecting interest on securities.
Determine the taxable income of X for the assessment year 2020-21.

Rs. 1,48,000 10% securities of the Tamil Nadu Government and Rs. 40,000 5% less-tax non-listed debentures of ABC Ltd.
Interest in both the cases is payable on December 11 every year. On August 1, 2019, X borrows Rs. 20,000 at 7 per cent per annum and
invests it in purchasing Rs. 20,000, 7.5 per cent securities of the Central Government (due date of interest : March 15 every year; interest
due on March 15, 2020 is received on April 2, 2020). Interest on borrowing for the period ending March 31, 2020 is, however, paid by
X on April 15, 2020. His business income is Rs. 7,86,000. Determine the taxable income of X for the assessment year 2020-21 under
the following situations :
a. X maintains books of account on “cash” basis; and
b. X maintains books of account on “mercantile” system.
Solution : In situation (a) interest on securities is taxable on “receipt” basis. In situation (b), however, it is taxable on “due”
basis, as follows :
Situation Situation
(a) (b)
Rs. Rs.
Securities of Tamil Nadu Government (i.e., Rs. 1,48,000 × 10/100) 14,800 14,800
Less-tax non-listed debentures of ABC Ltd. (i.e., Rs. 40,000 × 5/100) 2,000 2,000
Central Government securities (i.e., *instalment of interest due on March 15, 2020, **not
taxable in situation (a) as interest is not actually received) —** 1,500*
Gross interest 16,800 18,300
Less : Interest due* on Rs. 20,000 @ 7% per annum from August 1, 2019 to March 31, 2020,
**not deductible as it is not paid in the previous year 2019-20 —** 933*
Interest 16,800 17,367
Less : Deductions under sections 80C to 80U Nil Nil
Net income (rounded off) 8,02,800 8,03,370
119-E4 [P8.11]* X holds the following securities on April 1, 2019 :

Rs. 24,000 8% non-listed debentures of ABC Ltd. ; and
Rs. 1,35,000 15% securities of the Punjab Government.
Interest on both the cases is payable on October 31 every year. On September 1, 2019, X borrows Rs. 30,000 at 7 per cent per annum
and invests in purchasing Rs. 30,000, 7.5 per cent securities of the UP Government (due dates of interest : January 15 and July 15
every year). Interest which becomes due on January 15, 2020 is actually received by March 31, 2020. However, interest on borrowing
for the period ending March 31, 2020 is still unpaid. His business income is Rs. 14,69,000. Determine the taxable income of X for
the assessment year 2020-21 on the assumption that (a) he maintains books of account on mercantile basis (b) books of account are
maintained on cash basis.
119-P5 Find out the income chargeable to tax in the following cases for the assessment years 2020-21 and 2021-22—
1. On May 5, 2019, X borrows Rs. 1,00,000 at the rate of 9 per cent per annum from a bank to invest in public issue of 10 per cent
debentures of A Ltd. A Ltd. allots debentures on May 10, 2019 (as per terms of allotment, interest is payable every year on November
30. However, the first interest on November 30, 2019 would be for the period commencing May 10, 2019 to November 30, 2019).
2. On April 18, 2019, Y borrows Rs. 2,00,000 at the rate of 8 per cent per annum from a bank to invest in public issue of 9.5 per cent
debentures of B Ltd. B Ltd. allots debentures on April 30, 2019 (as per terms of allotment, interest is payable every year on May 15;
however, the first interest would be payable only on May 15, 2020 for the period commencing April 30, 2019 to May 15, 2020).
3. On June 6, 2019, Z borrows Rs. 4,00,000 at the rate of 10 per cent per annum from a bank to purchase (ex-interest) 11 per cent
debentures of C Ltd. from B (purchase consideration being Rs. 4,00,000 + interest payable by C Ltd. on June 30, 2019). Interest is payable
by C Ltd. every year on June 30. However, at the time of purchase of debentures from B, Z has agreed that interest received by him on
June 30, 2019 would be given to B. Cost of acquisition of these debentures in the hands of B was Rs. 3,80,000 (date of acquisition being
June 17, 1986).
Solution : Computation of income for the assessment year 2020-21

X Y Z
Rs. Rs. Rs.
Due date of interest falling in the previous year 2019-20 November May June
30, 2019 15, 2019 30, 2019
Amount of interest income [see Notes 1, 2 and 3] 5,574 Nil 44,000
Less: Interest on borrowed capital [see Note 4] 8,139 15,213 32,678
Income from other sources (-) 2,565 (-) 15,213 11,322
Computation of income for the assessment year 2021-22
Due date of interest falling in the previous year 2020-21 November May June
30, 2020 15, 2020 30, 2020
Amount of interest income [see Note 2] 10,000 19,779 44,000
Less: Interest on borrowed capital 9,000 16,000 40,000
Income from other sources 1,000 3,779 4,000
Notes:
1. Normally, interest is payable on the due date specified in terms of allotment for the full period. For instance, if interest
is payable once in a year, then interest of the full year is payable to the person who is the owner of debentures on that date.
Likewise, if interest is payable twice in a year, then whosoever is the registered holder of these debentures will get half yearly
interest on each of the due dates. However, in the case of public issue, the first interest is payable from the date of allotment
till the first due date as per the terms of allotment. X has been allotted debentures of A Ltd. at the time of public issue.
According to the terms of allotment, he has been paid interest by A Ltd. on November 30, 2019 for the broken period
commencing on May 10, 2019 to November 30, 2019 (204 days ÷ 366 days × Rs. 10,000).
2. Y has also acquired debentures at the time of public issue of B Ltd. As per terms of allotment, no interest is paid by B Ltd.
on May 15, 2019. Consequently, nothing is taxable in the hands of Y for the previous year 2019-20. For the next year, income
of Y will include interest for the period commencing from April 30, 2019 to May 15, 2020.
3. Z has purchased debentures from B on ex-interest basis. In simple words, the term “ex-interest” means the next interest
immediately after this transaction will be given to the seller. Consequently, the interest received by Z on June 30, 2019 is given
to the seller B. However, under the Income-tax Act, Z is chargeable to tax in respect of interest of Rs. 44,000 received by him
on June 30, 2019, since he is the registered owner of the debentures on the said date. The cost of acquisition of these debentures
in the hands of Z would be Rs. 4,44,000 (i.e., Rs. 4,00,000 + Rs. 44,000). To put it differently, B, the seller, is not chargeable
to tax in respect of interest of Rs. 44,000, since he is not the registered holder of these debentures on June 30, 2019. Rs. 44,000
received by B would be part of sale consideration. The capital gain in the hands of B would be calculated as follows:
Rs.
Sale consideration (Rs. 4,00,000 + Rs. 44,000) 4,44,000
Less: Cost of acquisition (indexation benefit is not available in case of debentures) 3,80,000
4. Interest on borrowed capital is calculated from the date of borrowing till the end of the previous year.
119-E5 Recalculate the income chargeable to tax under the head, “Income from other sources” in the hands of X, Y and Z for the
assessment years 2020-21 and 2021-22, if they transfer their entire holding on March 31, 2021.
119-P6 X (44 years) is a businessman. For the previous year 2019-20, his business income is Rs. 18,00,000. During 2009-10, a plot
of land owned by X was compulsorily acquired by the Gujarat Government. Initial compensation of Rs. 16,00,000 was received by X
in 2012-13. On X’s appeal, the Gujarat High Court has increased the compensation from Rs. 16,00,000 to Rs. 20,00,000. On July 1,
2019, he has received the additional compensation of Rs. 4,00,000 along with interest of Rs. 70,000 (as directed by the High Court and
it is calculated from 2009-10 onwards). To get compensation enhanced, X has spent a sum of Rs. 45,000 (it includes advocate fees as well
as other incidental expenses).
On March 1, 2020, X purchases a Raja Ravi Ram painting from a friend for Rs. 1,00,000. However, its market value is not less than
Rs. 4,00,000. On the same day, he purchases a second hand car for Rs. 80,000. Its market value is not less than Rs. 1,40,000.
X deposits Rs. 1,30,000 in public provident fund. Find out the net income and tax liability of X for the assessment year 2020-21.
Solution : During the year X has collected enhanced compensation of Rs. 4,00,000 and interest of Rs. 70,000 on such
compensation. Total collection is Rs. 4,70,000. Against receipt of Rs. 4,70,000, he has spent a sum of Rs. 45,000. Collection
charges for getting enhanced compensation comes to Rs. 38,298 (i.e., Rs. 45,000 × Rs. 4,00,000 ÷ Rs. 4,70,000). Remaining
amount of Rs. 6,702 pertains to collection of interest on compensation. Income of X will be calculated as follows –
Rs. Rs.
Capital gains
Full value of consideration (i.e., enhanced compensation) 4,00,000
Less: Cost of acquisition and improvement Nil
Less: Expenses (as calculated earlier) 38,298
Interest on compensation (i.e., Rs. 70,000 – 50%) 35,000
Purchase of painting for inadequate consideration (Rs. 4,00,000 – Rs. 1,00,000) 3,00,000
Purchase of second hand car for inadequate consideration [car is not “property” for the purpose
of section 56(2)(x)] Nil 3,35,000
Tax on net income
Income-tax (i.e., 20% of Rs. 3,61,702 + normal tax on the remaining income)† 4,86,340
Note - Interest on compensation or enhanced compensation is always taxable in the year of receipt and under the head
“Income from other sources”. From such interest, 50% deduction is allowed, irrespective of actual expenditure. In this
problem, actual expenditure for getting interest fixed is Rs. 6,702. However, 50% of Rs. 70,000 is deductible.
119-E6 Assume in Problem 119-P6 that Raja Ravi Ram painting is purchased from Jain Art Gallery, Andheri West, Mumbai (being
a registered VAT or GST dealer). Painting is purchased at the invoice price of Rs. 1,00,000, whereas market value of the same is
Rs. 4,00,000. Recalculate the tax liability of X.
119-P7 X (63 years) is in the business of software development. His business income for the previous year 2019-20 is Rs. 7,20,000. He
owns a car, residential house and a cinema house. These properties are given on rent. Residential house and car are let out to A Ltd. on
monthly rent of Rs. 60,000 (out of which Rs. 5,000 per month is rent of car). Letting out of car and letting out of residential house are
not interconnected (the two lettings are separable in the sense that these can be separately let out without any problem to two different
persons). Municipal tax of residential house is paid by X is Rs. 18,000. Besides, he wants to claim depreciation of house : Rs. 70,000 and
depreciation of car : Rs. 8,000 (these depreciation calculations have been made according to mode of depreciation given under section 32).
Cinema house (along with projector and furniture) is given on rent to B Ltd. (monthly rent being Rs. 2,10,000 out of which Rs. 1,70,000
is rent of building). He has incurred the following expenditure pertaining to cinema house – municipal tax : Rs. 26,000, depreciation
of building : Rs. 76,000, depreciation of projector and furniture : Rs. 28,000, salary of caretaker : Rs. 3,00,000. Depreciation has been
calculated under section 32. Salary to caretaker is paid by an account payee cheque. However, one month salary (i.e., Rs. 25,000) is paid
in cash.
X contributes Rs. 1,40,000 in his public provident fund account and pays Rs. 10,000 as insurance premium on the life of his major
independent son (sum assured Rs. 80,000 and policy is taken on May 1, 2019). Find out the net income of X for the assessment year
2020-21.
Solution : Letting out of residential house and letting out of car to A Ltd. are separable. Income from letting out of residential
house is taxable under the head “Income from house property” and rental income of car is taxable under the head “Income
from other sources”. Letting out of cinema house and letting out of projector/furniture are inseparable. Consequently,
nothing is taxable under the head “Income from house property” and the entire income is taxable under the head “Income
from other sources”. Taxable income of X will be calculated as follows –
Rs. Rs.
Gross annual value of residential house (Rs. 55,000 × 12) 6,60,000
Less: Municipal taxes 18,000
Less: Standard deduction (i.e., 30% of Rs. 6,42,000) 1,92,600 4,49,400
Rs. Rs.
Car [(Rs. 5,000 × 12) – car depreciation : Rs. 8,000] 52,000
Cinema house [(Rs. 2,10,000 × 12) – Rs. 26,000 – Rs. 76,000 – Rs. 28,000 – Rs. 3,00,000 +
disallowance of cash salary of Rs. 25,000] 21,15,000 21,67,000
Less: Deduction under section 80C [Rs. 1,40,000 + (Rs. 10,000 or 10% of Rs. 80,000,
whichever is lower)] 1,48,000
119-E7 Assume in Problem 119-P7 that X is non-resident and he also get a lottery prize of Rs. 3,000 (cost of lottery ticket Rs. 50).
Calculate tax liability of X for the assessment year 2020-21.
119-P8 X (32 years) is resident in India. Find out the net income and tax liability for the information given below for the assessment
year 2020-21 –
Winnings from races : Rs. 10,000 (expenditure incurred : Rs. 200), short-term capital gain (securities transaction tax is applicable) :
Rs. 3,65,000, bank interest (fixed deposit) : Rs. 2,31,000, public provident fund contribution: Rs. 1,14,000.
Solution :
Rs. Rs.
Winnings from races (expenses not deductible) 10,000
Bank interest 2,31,000 2,41,000
Net income 4,92,000
Tax liability - Net income is Rs. 4,92,000. It includes the following –
Income taxable at special rate (rates) –
- Winnings from races (taxable at the rate of 30% under section 115BB) 10,000
- Short-term capital gain (taxable at the rate of 15% under section 111A) 3,65,000
Income taxable at normal rate (i.e., Rs. 4,92,000 – Rs. 10,000 – Rs. 3,65,000) 1,17,000
X is a resident individual. His income taxable at normal rate is less than the exemption limit of Rs. 2,50,000. In other words,
he is unable to utilise exemption limit to the extent of Rs. 1,33,000 (i.e., Rs. 2,50,000 – Rs. 1,17,000). The unutilised exemption
limit shall be deducted from short-term capital gains. Short-term capital gain chargeable to tax at the rate of 15% under
section 111A will be Rs. 2,32,000 (i.e., Rs. 3,65,000 – Rs. 1,33,000). Tax liability will be calculated as follows –
Rs.
Winning from races (30% of Rs. 10,000) 3,000
Short-term capital gain under section 111A (15% of Rs. 2,32,000) 34,800
Remaining income of Rs. 2,50,000 Nil 37,800
Less: Rebate under section 87A (100% of tax or Rs. 12,500, whichever is lower) 12,500
Balance 25,300
119-E8 Assume in Problem 119-P8 that X is non-resident. Find out the tax liability of X for the assessment year 2020-21
119-P9 Mrs. X (27 years) is resident in India. Find out the net income and tax liability for the information given below for the assessment
year 2020-21 –
Winnings from lottery : Rs. 35,000 (expenditure incurred : Rs. 500), long-term capital gain (on transfer of gold) : Rs. 2,25,000, salary
income (after standard deduction) : Rs. 2,90,000, interest on debentures : Rs. 82,000, public provident fund contribution : Rs. 1,50,000.
Solution :
Rs. Rs.
Salary 2,90,000
Rs. Rs.
Winnings from lottery (expenses not deductible) 35,000
Debenture interest 82,000 1,17,000
Net income 4,82,000
Tax liability - Net income is Rs. 4,82,000. It includes the following –
Income taxable at special rate (rates) –
- Winnings from lottery (taxable at the rate of 30% under section 115BB) 35,000
- Long-term capital gain (taxable at the rate of 20% under section 112) 2,25,000
Income taxable at normal rate (i.e., Rs. 4,82,000 – Rs. 35,000 – Rs. 2,25,000) 2,22,000
Mrs. X is a resident individual. Her income taxable at normal rate is less than the exemption limit of Rs. 2,50,000. In other
words, she is unable to utilise exemption limit to the extent of Rs. 28,000 (i.e., Rs. 2,50,000 – Rs. 2,22,000). The unutilised
exemption limit shall be deducted from long-term capital gains. Long-term capital gain chargeable to tax at the rate of 20%
under section 112 will be Rs. 1,97,000 (i.e., Rs. 2,25,000 – Rs. 28,000). Tax liability will be calculated as follows –
Rs.
Winning from lottery (30% of Rs. 35,000) 10,500
Long-term capital gain under section 112 (20% of Rs. 1,97,000) 39,400
Remaining income of Rs. 2,50,000 Nil 49,900
Less: Rebate under section 87A (net income does not Rs. 5,00,000, rebate under section 87A is
the amount of income-tax or Rs. 12,500, whichever is lower) 12,500
Balance 37,400
119-E9 Recalculate the tax liability of Mrs. X in Problem 119-P9 in the following two different situations–
1. Mrs. X is non-resident and her date of birth is April 10, 1946.
2. Mrs. X is resident and her date of birth is April 1, 1940.
119-P10 X (31 years) and Y (61 years) are resident in India. From the data given below, find out tax liability for the assessment year
2020-21.
X Y
Rs. Rs.
Short-term capital gain taxable at the rate of 15 per cent under section 111A 4,82,000 2,10,000
Long-term capital gain taxable at the rate of 20 per cent under section 112 8,00,000 30,000
Winnings from lottery taxable at the rate of 30 per cent under section 115BB 2,000 70,000
Other income taxable at normal rate (consisting of salary income, bank interest, short-term capital
gain on sale of land) 6,000 2,000
Net income 12,90,000 3,12,000
Solution :
Exemption limit 2,50,000 3,00,000
Less: Income taxable at normal rate 6,000 2,000
Unutilized exemption limit 2,44,000 2,98,000
Less: Unutilized exemption limit to be adjusted against long-term capital gain taxable at
the rate of 20% 2,44,000 30,000
Balance unutilized exemption Nil 2,68,000
Less: Unutilized exemption limit to be adjusted against short-term capital gain taxable at
the rate of 15% Nil 2,10,000
Balance unutilized exemption (it cannot be utilised against winnings from lottery) Nil 58,000
Computation of tax liability –
Long-term capital gain taxable under section 112 [20% of (Rs. 8,00,000 – Rs. 2,44,000)]
[20% of Rs. 30,000 – Rs. 30,000] 1,11,200 Nil
Income under the head “Income from other sources” and its computation 388
X Y
Rs. Rs.
Short-term capital gain taxable under section 111A [15% of (Rs. 4,82,000 – nil)] [15% of
Rs. 2,10,000 – Rs. 2,10,000] 72,300 Nil
Winnings from lottery taxable under section 115BB (30% of Rs. 2,000) (30% of Rs. 70,000) 600 21,000
Total 1,84,100 21,000
Less: Rebate under section 87A Nil 12,500
Balance 1,84,100 8,500
Add: Health and education cess 7,364 340
Tax liability (rounded off) 1,91,460 8,840
119-E10 Recalculate the tax liability in the above case if X and Y are non-resident in India.
Test your knowledge

1. Enumerate at least five items of incomes which can be included under the head “Income from other sources”. [para
108]
2. What is meant by income from other sources? Give eight examples of income chargeable to tax under the head “Income
from other sources”. [paras 107 and 108]
3. Mention the different types of income specifically mentioned as chargeable to tax under the head “Income from other
sources”. [paras 107 and 108]
4. Mention the various deductions allowed under the Act in computing income under the head “Income from other
sources”. [para 118]
5. Enumerate the items of deductions allowable in computing income under the head “Income from other sources”. [para
118]
6. Define “dividend”. Also discuss chargeability of different types of dividends. [para 109].
CHAPTER 9 Clubbing of income
Generally, an assessee is taxed in respect of his own income. In some cases, however, the
Income-tax Act deviates from this principle and the assessee may be taxed, under sections
60 to 64, in respect of income which legally belongs to some other person. Provisions
incorporated in these sections deal with cases where taxpayers make an attempt to reduce
their tax bill by transferring their assets in favour of their family members or by arranging their
sources of income in such a manner that tax incidence falls on others, whereas benefit of
income, directly or indirectly, is derived by them. In order to counteract these practices of tax
avoidance, necessary provisions have been made in sections 60 to 64 to tax the incomes
(discussed in this Chapter) in the hands of an individual, even though such incomes belong
to other persons.
 TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET - WHEN INCOME THEREFROM IS

REGARDED AS THAT OF TRANSFEROR [SEC. 60]
120. Section 60 is applicable if the following conditions are satisfied—
Condition 1 The taxpayer owns an asset.
Condition 2 The ownership of asset is not transferred by him. In other words, he has retained the ownership of the
asset.
Condition 3 The income from the asset is transferred to any person under a settlement, trust, covenant, agreement or
arrangement.
Condition 4 The above transfer may be revocable or may not be revocable.
Condition 5 The above transfer may be effected at any time (maybe before the commencement of the Income-tax Act
or after the commencement of the Act, i.e., before or on or after April 1, 1962).
If the above conditions are satisfied, the income from the asset would be taxable in the hands of the transferor.
X owns 4,000 14 per cent debentures of A Ltd. of Rs.100 each (annual interest being Rs. 56,000). On April 1, 2019, he transfers
interest income to Y, his friend, without transferring the ownership of these debentures. Although, during 2019-20, interest
of Rs. 56,000 is received by Y, it is taxable in the hands of X, as he has transferred income without transferring the ownership
of the asset.
 REVOCABLE TRANSFER OF ASSETS - WHEN INCOME THEREFROM IS REGARDED AS THAT

OF TRANSFEROR
121. By virtue of section 61, if an asset is transferred under a “revocable transfer”, income from such asset is
taxable in the hands of the transferor. The transfer for this purpose includes any settlement, trust, covenant,
agreement or arrangement.
121.1 What is revocable transfer - In any of the following cases, a transfer is a revocable transfer—
389
Para 122 Clubbing of income 390
Situations Example
Situation 1 - If an asset is transferred X transfers a house property to a trust for the benefit of A and B. However,
under a trust and it is revocable dur- X has a right to revoke the trust during the lifetime of A and/or B. It is a
ing the lifetime of the beneficiary. revocable transfer and income arising from the house property is taxable in the
hands of X.
Situation 2 - If an asset is transferred X transfers a house property to A. However, X has a right to revoke the transfer
to a person and it is revocable during during the lifetime of A. It is a revocable transfer and income arising from the
the lifetime of transferee. house property is taxable in the hands of X.
Situation 3 - If an asset is transferred X transfers an asset on March 31, 1961. It is revocable on or before June 6, 1963.
before April 1, 1961 and it is revoca- It is a revocable transfer. Income arising from the asset is taxable in the hands
ble within six years. of X. Conversely, if X transfers an asset before April 1, 1961 and it is revocable
after 6 years (say, on April 10, 1967), it is not taken as a revocable transfer.
Situation 4 - If the transfer contains X transfers an asset. Under the terms of transfer, on or after April 1, 1998, he
any provision to re-transfer the asset has a right to utilize the income of the asset for his benefit. However, he has
(or income therefrom) to the trans- not exercised this right as yet. On or after April 1, 1998, income of the asset
feror directly or indirectly, wholly would be taxable in the hands of X, even if he has not exercised the aforesaid
or partly. right.
Situation 5 - If the transferor has any X transfers an asset. Under the terms of transfer, he has a right to use the asset
right to reassume power over the for the personal benefits of his family members whenever he wants. Till date,
asset (or income therefrom) directly he has not exercised this right. It is a revocable transfer. The entire income from
or indirectly, wholly or partly. the asset would be taxable in the hands of X.
Conclusions - The following conclusions can be drawn—

1. There is an asset which is transferred under a “revocable transfer” (i.e., in one of the situations given in the table
above).
2. Income from the aforesaid asset is taxable in the hands of transferor.
3. Such income is taxable as and when the power to revoke arises.
4. The above rule is applicable even if the power to revoke has not been exercised so far.
 WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF REMUNERATION OF SPOUSE

[SEC. 64(1)(ii)]
122. The provisions of section 64(1)(ii) are given below—
122.1 Conditions - Section 64(1)(ii) is applicable if the following conditions are satisfied—
Condition 1 The taxpayer is an individual.
Condition 2 He/she has a substantial interest in a concern.
Condition 3 Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-mentioned concern.
Condition 4 Spouse is employed in the concern without any technical or professional knowledge or experience.
122.2 Consequences if the above conditions are satisfied - If the aforesaid conditions are satisfied, then salary
income of the spouse will be taxable in the hands of the taxpayer.
X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical or professional qualification
to justify the remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X.
122.3 Other points - One has to keep in view the following points—
122.3-1 SALARY - HOW COMPUTED - For the purpose of clubbing under section 64(1)(ii), salary has to be computed
in accordance with the provisions of sections 15 to 17 [given in Chapter 4 of this book].
122.3-2 CONCERN - The expression “concern” covers both business concern and professional concern and both
proprietary and non-proprietary concerns.
122.3-3 SUBSTANTIAL INTEREST - MEANING OF - An individual has a “substantial interest” in any of the following two
situations—
1. In the case of a company - If an individual beneficially holds (individually or along with his relatives) 20 per cent
(or more) of equity shares in the company at any time during the previous year.
391 Other points Para 122.3
2. In the case of a concern other than company - If an individual is entitled to 20 per cent (or more) share in profit in
the concern (individually or along with his relatives) at any time during the previous year.
122.3-4 RELATIVE - MEANING OF - Relative in relation to an individual means the husband, wife, brother or sister or
any lineal ascendant or descendant of that individual.
122.3-5 WHEN BOTH HUSBAND AND WIFE HAVE SUBSTANTIAL INTEREST - The provisions are given below—
Provision Illustration
1. Both husband and wife have a substantial interest in X (and his relatives) holds 20 per cent equity share capital in
a concern A Ltd. Mrs. X (and her relatives) holds 20 per cent equity
share capital in A Ltd.
2. Both are in receipt of the remuneration from such X and Mrs. X are employed by A Ltd.
concern
3. Remuneration is received without any technical and They are employed in A Ltd. without any technical profes-
professional qualification. sional qualification.
4. Remuneration will be included in the total income of Salary income of X and Mrs. X will be included in the income
husband or wife whose total income, excluding such of X (if income of X before this clubbing is higher than that
remuneration, is greater. of Mrs. X).
If once clubbing is done in the hands of X, salary of X and Mrs. X will be included in the income of X (in the
subsequent years), even if income of X is lower than that of Mrs. X in that year. In such a case, the Assessing Officer
can club the income of X and Mrs. X in the hands of Mrs. X only if the Assessing Officer is satisfied that it is
necessary to do so. The Assessing Officer can take such action only after giving Mrs. X an opportunity of being
heard.
Problems
122-P1 X holds 20 per cent equity share capital in Y Ltd. Mrs. X is employed by Y Ltd. (salary being Rs. 1,40,000 per month) as general
manager (finance). She does not have any professional qualification to justify the remuneration. Ascertain in whose hands salary income
is chargeable to tax. Does it make any difference if Mrs. X was employed by Y Ltd. even prior to her marriage ?
Solution : In this case, X has substantial interest in Y Ltd. where Mrs. X is employed. Mrs. X does not have any professional
qualification to justify the remuneration of Rs. 1,40,000 per month. Her salary income of Rs. 16,30,000 (i.e., Rs. 1,40,000 × 12
– standard deduction : Rs. 50,000) will be taxable in the hands of X. It does not make any difference even if Mrs. X was
employed by Y Ltd. prior to her marriage.
122-E1 Mrs. X holds 5 per cent equity share capital in A Ltd. Her brother and sister hold about 18 per cent equity share capital in
A Ltd. with effect from January 31, 2019. X is employed by A Ltd. during 2019-20 on monthly salary of Rs. 95,000 as a deputy
accountant. He does not have any professional qualification. Ascertain in whose hands salary income is chargeable to tax.
122-P2 Income of X (age : 31 years) and Mrs. X (age : 30 years) for the previous year 2019-20 is as follows —
X Mrs. X
Rs. Rs.
Salary of X from B Ltd. (Rs. 5,70,000 – standard deduction : Rs. 50,000) 5,20,000 Nil
Business income 10,00,000 160,000
Bank interest (fixed deposit) 3,70,000 90,000
Total income 18,90,000 2,50,000
Tax 3,94,680 Nil
X is employed by B Ltd. (salary being Rs. 5,70,000) without any technical or professional or educational qualification. Mrs. X holds 20
per cent equity share capital in B Ltd. from March 20, 2020. Find out the net income of X and Mrs. X for the assessment year 2020-21.
Solution : In this case, Mrs. X has substantial interest in B Ltd. for sometime during the previous year 2019-20. Her husband
X is employed by B Ltd. during 2019-20 on salary of Rs. 5,70,000 without any professional qualification. Salary income shall
be included in income of Mrs. X. It may be noted that this rule of clubbing is applicable even if it is beneficial to the taxpayer.
Before clubbing, the tax liability of X and Mrs. X is Rs. 3,94,680. After applying the aforesaid rule of the clubbing, the tax
liability of X and Mrs. X will be Rs. 3,01,600 as shown below—
X Mrs. X
Rs. Rs.
Salary of X from B Ltd. (Rs. 5,70,000 – standard deduction : Rs. 50,000) — 5,20,000
X Mrs. X
Rs. Rs.
Bank interest 3,70,000 90,000
Less : Deduction Nil Nil
Net income 13,70,000 7,70,000
Tax† 2,23,500 66,500
Add : Surcharge (applicable if net income exceeds Rs. 50 lakh) Nil Nil
Tax and surcharge 2,23,500 66,500
Add : Health and education cess (4% of tax and surcharge) 8,940 2,660
Tax liability (total : Rs. 3,01,600) 2,32,440 69,160
If X has technical or professional qualification to justify the remuneration, then the above clubbing provisions are not
applicable. If X does not have technical/professional qualification, then his salary shall be included in the income of Mrs.
X (who has substantial shareholding in the employer-company for a few days during the previous year) even if the resulting
tax liability is lower. In such a case, it is incorrect to state that the clubbing is applicable only if it is beneficial to the revenue
or income will be clubbed in the hands of that spouse whose income is higher—see Circular No. 258, dated June 14, 1979.
122-E2 Assume in problem 122-P2 that Mrs. X acquires, for the first time, 18 per cent equity shares and 25 per cent preference shares
in B Ltd. on March 20, 2020. Her brother purchases 10 per cent equity shares in B Ltd. from the market on April 1, 2020. None of
other relatives of Mrs. X holds shares in B Ltd. Find out the tax liability of X and Mrs. X for the assessment year 2020-21.
122-P3 X and Mrs. X hold 20 per cent and 30 per cent equity shares in C Ltd. respectively. They are also employed from April 1, 2019
in Bombay branch of C Ltd. (monthly salary being Rs. 80,000 and Rs. 40,000 respectively) without any technical/professional
qualification.
Other incomes of X and Mrs. X are Rs. 1,60,000 and Rs. 1,90,000 respectively. Find out the net income of X and Mrs. X for the assessment
year 2020-21.
Solution : X and Mrs. X have substantial interest in C Ltd. which employs them without any professional/technical
qualification. In this case, the salary of husband and wife shall be included in the income of Mrs. X whose other income is
higher as explained under —
X Mrs. X
Rs. Rs.
Salary of X (i.e., Rs. 80,000 × 12 – standard deduction : Rs. 50,000) — 9,10,000
Salary of Mrs. X (i.e., Rs. 40,000 × 12 – standard deduction : Rs. 50,000) — 4,30,000
Other income 1,60,000 1,90,000
Net income 1,60,000 15,30,000
122-E3 Find out the net income of X and Mrs. X in problem 122-P3 if their respective shareholding in C Ltd. is as under —
a. 5 per cent and 15 per cent equity shares ;
b. 15 per cent and 5 per cent equity shares ; or
c. 2 per cent and 17.5 per cent equity shares.
No other relatives of X and Mrs. X is a shareholder in C Ltd.
 WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME FROM ASSETS TRANS-

FERRED TO SPOUSE [SEC. 64(1)(iv)]
123. The provisions of section 64(1)(iv) are given below—
123.1 Conditions - The following conditions should be satisfied—
Condition 2 He/she has transferred an asset (other than a house property).
Condition 3 The asset is transferred to his/her spouse.
Condition 4 The transfer may be direct or indirect.
393 Condition six Para 123.7
Condition 5 The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an
agreement to live apart.
Condition 6 The asset may be held by the transferee-spouse in the same form or in a different form.
 If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the
taxpayer who has transferred the asset.
X transfers 100 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be
included in the income of X.
 The income from asset transferred must be calculated in the same way as it would be if the asset has not been
transferred. Exemption, deduction or tax incentives in respect of such income can be claimed by the transferor.
123.2 Condition one - Asset is transferred by an individual - The above noted rule of clubbing is applicable
if the transferor is an individual (i.e., husband or wife). If the transferor is a person other than an individual then
the above provisions are not applicable.
123.3 Condition two - An asset other than a house property is transferred - To attract the above noted
provisions, an asset other than a house property should be transferred. If a house property is transferred and the
above noted conditions are satisfied, then the transferor is “deemed” as owner of the property under section 27
[see para 66.2-2a].
123.4 Condition three - Relationship of husband and wife - The relationship of husband and wife should
subsist both at the time of transfer of asset and at the time when income is accrued. It means that transfer of asset
before marriage is outside the scope of this section.
For instance, X transfers 1,000 debentures of IFCI without adequate consideration to his would be wife Miss Y on April 10,
2019. Interest income from these debentures will not be taxable in the hands of X even after their marriage.
Similarly, if transferor-spouse dies, income, though continued to be enjoyed by the transferee, cannot be
included in the income of deceased transferor’s heir, as a widow or widower is not a spouse.
123.5 Condition four - Transfer includes indirect transfer - If the two or more transfers are inter-connected and
are parts of the same transaction, the aforesaid rule of clubbing is applicable.
For instance, if X gifts or cross transfers Rs.10,000 to Mrs. A and A gifts property worth Rs.10,000 to Mrs. X, the transaction
would be indirect transfer without consideration by X to Mrs. X and by A to Mrs. A.
123.6 Condition five - Consideration - Natural love and affection may be good consideration but that would
not be adequate consideration for the purpose of section 64(1). The consideration that supports the transfer
should be one, the value of which can be measured in terms of money or money’s worth. Therefore, religious or
spiritual benefits are not consideration which cannot be measured in terms of money or money’s worth.
 Payment of consideration in part - If consideration is payable in part, only the part of income referable to transfer
for inadequate consideration is assessable in the hands of transferor.

123.7 Condition six - There may be change in identity of transferred asset - Where cash is gifted by an assessee
to his wife and the latter deposits the same in a bank, interest income is included in the assessee’s total income.
123.7-1 CAPITAL GAIN ON SALE OF TRANSFERRED ASSETS - If an individual transfers an asset without consideration to
his wife who sells it at a profit, capital gain arising to wife on sale of asset is chargeable to tax in the hands of the
transferor.
123.7-2 APPROPRIATION WHEN TRANSFERRED ASSET IS INVESTED IN A BUSINESS - An asset (maybe in cash or kind) is
transferred by husband to his wife (or vice versa) (directly or indirectly) without adequate consideration. She
invests the asset in a business. The amount of income that will be clubbed in the hands of husband will be
determined as follows—
Step one Find out total investment of transferee-spouse in the business on the first day of the previous year.
Step two Find out the amount invested by the transferee-spouse out of the assets transferred to her without adequate
consideration by her husband on the first day of the previous year in the said business.
Step three Find out the taxable income (exempt income is not included) of the transferee-spouse from the business.
If the transferee-spouse becomes a partner of a firm by investing the aforesaid asset then only interest
income from the firm is considered under Step three. Share of profit from the firm is not considered under
Step three as it is exempt under section 10(2A).
Para 123.7 Clubbing of income 394
Step four The amount which shall be included in the hands of transferor is determined as follows—Step three × Step
two ÷ Step one.
Problems
123.7-2P1 On December 27, 2018, X gifts Rs. 2,50,000 to Mrs. X. Mrs. X starts a business on January 20, 2019 by investing
Rs. 8,50,000 which she has arranged as follows —
Rs.
Gift on December 27, 2018 from husband 2,50,000
Gift from grandfather of Mrs X 1,50,000
Gift from Mrs. A on December 20, 2018 2,00,000
Gift from father of Mrs. X 1,00,000
Gift from brother of Mrs. X 1,10,000
Her own funds 40,000
The following information is taken from the capital account by Mrs. X in the books of the business.
Dr Cr
Capital on January 20, 2019 — 8,50,000
Profit of the year ending March 31, 2019 — 2,00,000
Drawings up to March 31, 2019 70,000 —
Balance as on April 1, 2019 — 9,80,000
Fresh capital (gift is given by X) on April 10, 2019 — 1,00,000
Profit of the year ending March 31, 2020 — 6,00,000
Drawings for 2019-20 2,15,000 —
Profit of the year 2020-21 — 9,00,000
Drawings of the year 2020-21 3,70,000 —
Find out the amount taxable in the hands of X for different assessment years on the assumption that profit credited in the capital account
of Mrs. X is as per audited profit and loss account. However, for the previous year 2019-20, Rs. 28,000 is not deductible (being 100 per
cent of payment of Rs. 28,000 to a supplier by a crossed cheque). Other expenses debited to profit and loss account are as per the income-
tax law.
Solution :
Assessment years
2019-20 2020-21 2021-22
Rs. Rs. Rs.
First day of the previous year [*in the case of newly set up business, previous January 20, April 1, April 1,
year commences on the date of setting up of the business] (a) 2019* 2019 2020
Total investment of Mrs. X in the business on the first day of the previous 8,50,000 9,80,000 14,65,000
year (b)
How much of the amount given in (b) has been gifted by X (c) 2,50,000 2,50,000 3,50,000
Income of Mrs. X from business (*i.e., Rs. 6,00,000 + disallowance of Rs. 2,00,000 6,28,000* 9,00,000
28,000) (d)
Income to be included in the hands of X [(d) × (c) ÷ (b)] 58,824 1,60,204 2,15,017
Note - There is no provision to club proportionate income in respect of gift from Mrs. X’s father in the hands of latter.
123.7-2E1 Determine the amount of income chargeable to tax in the hands of Mrs. X in problem 123.7-2P1.
123.7-2P2 Suppose in problem 123.7-2P1, business is started by Mrs. X on January 20, 2019 by investing Rs. 6,00,000 (arranged from
sources given in that problem but except gift from X). X gifts Rs. 2,50,000 to Mrs. X on February 1, 2019 which is invested by her in
the business on the same day. Other data in the problem remaining the same, find out the amount taxable in the hands of X for the
Solution : The business is newly started on January 20, 2019. The first day of the previous year is January 20, 2019. On this
date, the amount invested in the business by Mrs. X out of assets transferred without consideration from X is zero. Therefore,
nothing will be included in the income of X. The amount invested after the first day of the previous year will be considered
only in the next year.
395 Conditions Para 124.1
123.7-2E2 What is taxable income of Mrs. X for the assessment year 2019-20 in problem 123.7-2P2.
123.7-3 WHEN TRANSFERRED ASSET IS INVESTED IN A FIRM - The aforesaid rule is also applicable in case transferred asset
is invested by the spouse to become partner in a firm. Share of profit is not taxable in the hands of partners.
Consequently, clubbing provisions are not attracted in respect of share of profit from a firm where the transferred
assets are invested by way of contribution towards capital. Proportionate interest on capital will, however, be
clubbed if transferred asset is invested in a firm.
Problems
123.7-3P1 X and Y form a partnership firm on April 1, 2019 (profit sharing ratio : 2: 3) by investing Rs. 10 lakh and Rs. 15 lakh
respectively. The investment has been financed from the following sources—
X Y
Rs. Rs.
Gift from Mrs. X 6,60,000 —
Gift from Mrs. Y — 8,00,000
Past savings of X and Y 3,40,000 7,00,000
For the year ending March 31, 2020, share of profit from the firm is as follows—
Interest on capital @ 12 per cent 1,20,000 1,80,000
Salary as working partner 24,000 24,000
Share of profit 1,08,000 1,62,000
Find out the income chargeable to tax in the hands of X and Mrs. X. X Mrs. X
Solution :
Share of profit [exempt under section 10(2A)] Nil —
Salary from the firm 24,000 —
Interest on capital [*Rs. 1,20,000 × Rs. 6.6 lakh ÷ Rs. 10 lakh) 40,800 79,200*
Business income 64,800 79,200
123.7-3E1 In problem 123.7-3P1, find out the amount taxable in the hands of Y and Mrs. Y.
123.7-4 INCOME ARISING FROM ACCRETIONS TO TRANSFERRED ASSETS - If an assessee gifts debentures of a company to the
spouse and, subsequently, the company issues bonus debentures to the spouse, interest on bonus debentures will
not be includible in the hands of the assessee under section 64(1)(iv) as there is no transfer of bonus debentures
by the assessee to the spouse.
123.8 When clubbing is not applicable - On the basis of the aforesaid discussion and judicial pronouncements,
section 64(1)(iv) is not applicable in the following cases :
 If assets are transferred before marriage.
 If assets are transferred for adequate consideration.
 If assets are transferred in connection with an agreement to live apart.
 If on the date of accrual of income, transferee is not spouse of the transferor.
 If property is acquired by the spouse out of pin money (i.e., an allowance given to the wife by her husband for
her dress and usual household expenses)—R.B.N.J. Naidu v. CIT [1956] 29 ITR 194 (Nag.).
In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the hands of the
transferor.
FERRED TO SON’S WIFE [SEC. 64(1)(vi)]
124. The provisions of section 64(1)(vi) are given below—
124.1 Conditions - One has to satisfy the following conditions—
Condition 2 He/she has transferred an asset after May 31, 1973.
Condition 3 The asset is transferred to his/her son’s wife.
Condition 4 Transfer may be direct or indirect.
Condition 5 The asset is transferred otherwise than for adequate consideration.
Condition 6 The asset may be held by the transferee in the same form or in a different form.
If the above conditions are satisfied, then income from the asset is included in the income of the taxpayer who
has transferred the asset.
X (or Mrs. X) transfers a bank deposit of Rs. 20,000 in favour of his (or her) son’s wife, without adequate consideration.
Income accrued to son’s wife shall be included in the income of X (or Mrs. X).
124.2 Other points - The following points should be noted—

1. The relationship of father-in-law (or mother-in-law) and daughter-in-law should subsist both at the time of
transfer of asset and at the time of accrual of income. It means transfer of asset before son’s marriage by an
individual to his prospective daughter-in-law is outside the scope of clubbing even if income is accrued after
son’s marriage.
2. Transfer includes indirect transfer, see para 123.5.
3. For computation of income from transferred asset, see para 123.1-2.
4. For consequences when the identity of transferred asset is changed see paras 123.7, 123.7-1, 123.7-2, 123.7-3 and
123.7-4.
Problems
124.2-P1 In problem 123.7-2P1, assume that Mrs. A is the mother of X, find out the amount taxable in the hands of Mrs. A for the
different assessment years.
Solution : Since Mrs. A is mother-in-law of Mrs. X, the provisions of section 64(1)(vi) will be applicable. Consequently,
proportionate income will be taxable in the hands of Mrs. A as follows—
Assessment years
2019-20 2020-21 2021-22
Rs. Rs. Rs.
(b) [taken from problem 123.7-2P1] 8,50,000 9,80,000 14,65,000
How much is given by Mrs. A, the mother-in-law (c) 2,00,000 2,00,000 2,00,000
(d) [taken from problem 123.7-2P1] 2,00,000 6,28,000 9,00,000
Amount taxable in the hands of Mrs. A [(d) × (c) ÷ (b)] 47,059 1,28,163 1,22,867
124.2-E1 Find out the amount taxable in the hands of Mrs. X in problem 124.2-P1.

FERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64(1)(vii)]
125. The provisions of section 64(1)(vii) are given below—
Condition 2 He/she has transferred an asset.
Condition 3 The transfer may be direct or indirect.
Condition 4 The asset is transferred to a person or an association of persons.
Condition 5 It is transferred for the immediate or deferred benefit of his/her spouse.
Condition 6 The transfer is without adequate consideration.
 If the aforesaid conditions are satisfied then income from such asset to the extent of such benefit is taxable in
the hands of the taxpayer who has transferred the asset.
X transfers Government bonds without consideration to an association of persons subject to the condition that the interest
income from these bonds will be utilised for the benefit of Mrs. X. Interest from bonds shall be included in the income of X.

FERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64(1)(viii)]
126. The provisions of section 64(1)(viii) are given below—
397 Exemption under section 10(32) Para 127.3

Condition 2 He/she has transferred an asset after May 31, 1973.
Condition 3 The asset is transferred to any person or an association of persons.
Condition 4 Transfer may be direct or indirect.
Condition 5 The asset is transferred for the immediate or deferred benefit of his/her son’s wife.
Condition 6 The asset is transferred otherwise than for adequate consideration.
 If the above conditions are satisfied, then income from the asset to the extent of such benefit is included in the
income of the taxpayer who has transferred the asset.
X (or Mrs. X) transfers an industrial undertaking to an association of persons subject to the condition that out of the annual
income (i.e., Rs. 30,00,000), a sum of Rs. 5,00,000 shall be utilised for the benefit of daughter-in-law of X (or Mrs. X). In this
case, Rs. 5,00,000 shall be included in the income of X (or Mrs. X).
 WHEN AN INDIVIDUAL IS ASSESSABLE IN RESPECT OF INCOME OF HIS MINOR CHILD

[SEC. 64(1A)]
127. All income which arises or accrues to the minor child shall be clubbed in the income of his parent [sec.
64(1A)].
127.1 Clubbing in the hands of father or mother - The income of minor will be included in the income of that
parent whose total income [excluding the income includible under section 64(1A)] is greater.
1. A is minor child of X and Mrs. X. During the previous year 2019-20, income of A is Rs. 2,500 (this is the first
income of A during his life time). During the previous year 2019-20, income of X is higher than that of Mrs. X.
Consequently, income of A will be included in the income of X for the previous year 2019-20. In the subsequent
years (during the minority of A), income of A will be included in the income of X, even if income of Mrs. X is higher
than that of X in any of the subsequent years. However, there is one exception. If in the subsequent year, the
Assessing Officer wants to include the income of minor child A in the hands of Mrs. X, it can be done only if it
is necessary to do so and that too after giving an opportunity of being heard to Mrs. X.
2. Where the marriage of the parents does not subsist, the income of minor will be includible in the income of that
parent who maintains the minor child in the relevant previous year.
3. The minor’s income, in case both the parents are not alive, cannot be assessed in the hands of the grandparents
or any other relatives or even in the hands of minor.
127.2 When clubbing is not attracted - In the cases given below, clubbing provisions of section 64(1A) are not
applicable —
1. Income of minor child (from all sources) suffering from any disability of the nature specified under section 80U
[see para 167] is not subject to clubbing provision given above.
2. Income of minor child on account of any manual work.
3. Income of minor child on account of any activity involving application of his skill, talent or specialised
knowledge and experience.
127.3 Exemption under section 10(32) - In case the income of an individual includes an income of his or her
minor child in terms of section 64(1A), such individual shall be entitled to exemption of Rs. 1,500 in respect of
each minor child. Where, however, the income of any minor so includible is less than Rs. 1,500, the aforesaid
exemption shall be restricted to the income so included in the total income of the individual.
Problems
127-P1 A and B are minor sons of X and Mrs. X. Business income of X is Rs. 3,40,000. Income from house property of Mrs. X is
Rs. 1,90,000. Income of A and B from stage acting is Rs. 60,000 and Rs. 70,000 respectively. Besides interest on company deposits of
A and B (deposit was made out of income from acting) is Rs. 30,000 and Rs. 1,000, respectively. A and B have received the following
birthday gifts - on May 20, 2019, gift received by B from his grandfather : Rs. 80,000; on September 14, 2019, gift received by A —
Rs. 60,000 from X’s friend and Rs. 35,000 from a relative. Find out the income of X, A and B for the assessment year 2020-21.
Solution : X Mrs. X A B
Rs. Rs. Rs. Rs.
Income from house property - 1,90,000 - -
Business income 3,40,000 - - -
Income from stage acting - - 60,000 70,000
- Gift received by B on May 20, 2019 from grandfather (gift from a
relative is not taxable) - - - -
- Gift received by A on September 14, 2019 from X’s friend (to be clubbed
in the hands of X after giving exemption of Rs. 1,500) 58,500
- Gift received by A on September 14, 2019 from relatives (gift from a
relative is not taxable) -
- Interest from company deposit received by A (to be clubbed in the
hands of X) 30,000
- Interest from company deposit received by B (to be clubbed in the
hands of X after giving exemption of Rs. 1,500, amount to be clubbed is
Rs. 1,000 - Rs. 1,000) Nil
Net income 4,28,500 1,90,000 60,000 70,000
127-E1 In problem 127-P1, re-calculate the net income if a gift of Rs. 80,000 is received by B from a friend.
127-P2 A is minor son of X and Mrs. X. Taxable business income of X is Rs. 10,00,000. Taxable salary income of Mrs. X (after standard
deduction) is Rs. 13,80,000. A transfers a residential house property on April 10, 2019 (gifted about 4 years ago by his maternal
grandfather) for Rs. 60,00,000 (indexed cost of acquisition : Rs. 3,00,000). X transfers a plot of land on May 10, 2019 (long-term capital
gain being Rs. 54,00,000). A invests Rs. 50,00,000 in NHAI bonds on May 20, 2019. X invests Rs. 50,00,000 in NHAI bonds on June
1, 2019. Find out the income of X, Mrs. X and A for the assessment year 2020-21.
Solution :
Capital gain of X - Capital gain taxable in the hands of X will be Rs. 4,00,000 (after claiming exemption of Rs. 50,00,000 under
section 54EC).
Capital gain of A - Capital gain generated by A before exemption under section 54EC is Rs. 57,00,000. He has invested Rs.
50,00,000 in NHAI bonds within 6 months from the transfer of house property. He can claim exemption of Rs. 50,00,000
separately. Taxable capital gain generated by A is Rs. 7,00,000 which will be clubbed in the hands of X [income of X (after
including long-term capital gain of Rs. 4,00,000) is higher than that of Mrs. X].
Computation of income of X, Mrs. X and A –
X Mrs. X A
Rs. Rs. Rs.
Salary – 13,80,000 –
Business income 10,00,000 – –
Capital gain
Residential house property transferred by A [Rs. 7,00,000 – Rs. 1,500 being
exemption under section 10(32)] 6,98,500 – –
Plot transferred by X 4,00,000 – –
Net income 20,98,500 13,80,000 –
127-E2 Recalculate the income of X, Mrs. X and A for the assessment year 2020-21, if X deposits Rs. 90,000 in public provident
fund on March 31, 2020 and Mrs. X deposits Rs. 1,00,000 in public provident fund on April 1, 2021.
 WHAT IS TAX IMPLICATION OF CONVERSION OF SELF-ACQUIRED PROPERTY INTO

JOINT FAMILY PROPERTY AND SUBSEQUENT PARTITION [SEC. 64(2)]
128. The following transactions are covered by section 64(2) —
Case 1 Where an individual (being member of a Hindu undivided family) converts (after December 31, 1969) his self-
acquired property into property belonging to the family. It is done by impressing such property with the
character of joint family property or throwing such property into common stock of the family.
Case 2 When such an individual transfers his self-acquired property, directly or indirectly, to the family otherwise
than for adequate consideration.
399 Recovery of tax Para 129.3
128.1 Clubbing before partition - Income from the converted property or property transferred for less than
adequate consideration is chargeable to tax in the hands of the transferor (before partition of the family).
X transfers his self-acquired property yielding an annual income of Rs. 60,000 to his Hindu undivided family, consisting of
X, Mrs. X, his major son Y and minor son Z. Income of Rs. 60,000 will be included in the income of X (and not of the HUF)
by virtue of this section.
128.2 Clubbing after partition - If the property converted or transferred by an individual is subsequently
transferred amongst the members of the family, the income derived from such converted property, as is received
by the spouse of the transferor will be included in the income of the transferor.
Assume in the example given in para 128.1 that the property is partitioned equally among the family members, income
derived from converted property by Mrs. X (i.e., 1/4 of Rs. 60,000) will be included in the income of X under section 64(2).
Share of minor Z (i.e., 1/4 of Rs. 60,000) will be included in the income of X by virtue of section 64(1A) after claiming
exemption of Rs. 1,500. Income out of converted property will be taxable as under —
X Mrs. X Y (major Z
son) (minor son)
Rs. Rs. Rs. Rs.
Own share out of converted property 15,000 — 15,000 —
Share of Mrs. X [under section 64(2)] 15,000 — — —
Share of minor child under section 64(1A) after exemption
of Rs. 1,500* 13,500 — — —
Total 43,500 — 15,000 —
 OTHER POINTS
129. One should also keep in view the following points—
129.1 Income from accretion of property transferred or accumulated income of such property - Whether
included in the hands of transferor - In the aforesaid cases, income arising to the transferee from the property
transferred is taxable in the hands of transferor. Income arising to the transferee from the accretion of such
property or from accumulated income of such property is, however, not includible in the total income of the
transferor.
X transfers a sum of Rs. 10,00,000 to his wife without any consideration. Mrs. X deposits the money in a bank. Interest
received from the bank on such deposit is taxable in the hands of X. If, however, Mrs. X purchases a house from the
accumulated interest income, rental income received by Mrs. X is taxable in her hands and will not be clubbed with the
income of X.
129.2 Can negative income be clubbed - Under section 64, the income of the specified person is liable to be
included in the total income of the individual in the circumstances mentioned in paras 120 to 128. For the
purposes of including the income of the specified persons in the income of the individual, the word “income”
includes a loss.
In other words, if income is negative and clubbing provisions are applicable, then negative income would be
clubbed.
Consider the following cases —
1. X transfers Rs. 1,00,000 to Mrs. X. By investing Rs. 1,00,000, Mrs. X sets up a business (total investment only Rs. 1,00,000).
For the previous year, income from business is (-) Rs. 40,000. The loss of Rs. 40,000 will be included in the income of X.
2. Minor son of Y has a business. For the previous year 2019-20, loss from business is Rs. 20,000. The loss of Rs. 20,000 will
be included in the income of Y or Mrs. Y whosoever has higher income.
129.3 Recovery of tax [Sec. 65] - The Assessing Officer has the power for the recovery of tax from the person
to whom the income actually accrued if the Assessing Officer so desires.
*On the assumption that income of Mrs. X is lower.

129.4 Head of income under which the clubbed income will be included - First compute the income in the
hands of the actual recipient under the relevant head of income as if the actual recipient of income is liable to pay
tax. After computing the income in the hands of recipient, it will be included under the same head of income in
the hands of other person.
Problems
129.4-P1 X (age : 35 years, resident) gifts Rs. 10 lakh to Mrs. X (age : 31 years, resident). She deposits the same in a bank @ 8 per cent
per annum. Y is minor child of X and Mrs. X. Y has a bank deposit of Rs. 70,000 (rate of interest 8.25 per cent) which was gifted to him
by his grandfather. Other income of X and Mrs. X is as follows - X: Rs. 4,60,000 [salary (after standard deduction): Rs. 3,70,000, bank
interest: Rs. 90,000], Mrs. X: Rs. 2,60,000 (interest on company deposits). Out of interest income, Mrs. X deposits Rs. 1,000 in Public
Provident Fund. X’s contribution to the recognized provident fund is Rs. 40,000.
Find out the income chargeable to tax and tax thereon for the assessment year 2020-21.
Solution : X Mrs. X Y
Rs. Rs. Rs.
Salary 3,70,000 - -
- Bank interest of Mrs. X (8% of Rs. 10 lakh) 80,000 - -
- Bank interest of Y [8.25% of Rs. 70,000 (–) Rs. 1,500] 4,275 - -
- Bank interest of X 90,000 - -
- Interest of company deposit - 2,60,000 -
Gross total income 5,44,275 2,60,000 -
Less: Deduction under section 80C 40,000 1,000 -
Net income (rounded off) 5,04,280 2,59,000 -
Income-tax 13,356 450 -
Less: Rebate under section 87A (100% of tax or Rs. 12,500, whichever is lower, in
the case of Mrs. X) Nil 450 –
Balance 13,356 Nil –
Add: Surcharge (not applicable as taxable income does not exceed Rs. 50 lakh) Nil Nil –
Tax 13,356 Nil –
Add: Health and education cess 534 Nil –
Tax liability (rounded off) 13,890 Nil –
129.4-E1 Recalculate the tax liability in problem 129.4-P1 on the assumption that interest on company deposit of Mrs. X is
Rs. 5,56,000 (and not Rs. 2,60,000).
 Problems on clubbing of income

130-P1 From the following information, find out the net income of X, Mrs. X and their minor child Z for the assessment year
2020-21—
1. X owns three houses —
House 1 - It is let out on monthly rent of Rs.10,000. It is transferred for an adequate consideration to Mrs. X on December 1, 2019. No
capital gain generated.
House 2 - It is let out on monthly rent of Rs.15,000. X gifts this house to Mrs. X on June 30, 2019.
House 3 - It is self-occupied. X gifts this house to Mrs. X on January 1, 2020. The house was constructed out of money borrowed on
June 1, 1998 and the interest liability for the previous year 2019-20 is Rs. 48,000.
2. On January 1, 1996, X transfers 1,000, 14 per cent debentures of Rs.100 each of A Ltd. without any consideration to Mrs. X (interest
is annually payable on December 31). Out of accumulated debenture interest, Mrs. X gives a loan to a friend and during 2019-20, she
gets a sum of Rs. 5,600 as interest.
3. On January 10, 2020, 1,000 debentures of A Ltd. are transferred by Mrs. X (capital gain Rs. 40,000 which is used for purchasing
kitchen appliances) and the sale proceeds (i.e., Rs. 1,00,000) are invested in Government bonds (term : 2 years) and during the period
ending March 31, 2020, she gets interest of Rs.16,000.
4. Mrs. X holds 25 per cent equity shares in B Ltd. On May 31, 2019, she gets Rs. 35,800 as dividend.
5. X is employed by B Ltd. without any technical/professional qualification on salary of Rs.17,000 per month.
6. X and Mrs. X are partners in a firm (other partners being C, D and E). Z is admitted to the benefits of the firm. During 2019-20, the
following payments are received from the firm —
401 Problems on clubbing of income Problem 130-P1
X Mrs. X Z
Rs. Rs. Rs.
Share of profit 60,000 90,000 20,000
Interest on capital (Mrs. X has invested half of her capital out of gifts made by X) 70,000 80,000 26,000
Salary of working partner 15,000 20,000 —
7. During 2016-17, Mrs. X transfers a sum of Rs. 2 lakh to a trust subject to the condition that the trust will annually pay Rs. 5,000
to X and Rs. 6,000 to her father-in-law.
8. X holds 20 per cent preference share capital in D Ltd. [dividend of Rs. 80,000 is received on January 16, 2020] where Mrs. X is employed
(salary being Rs. 30,000 per month). Mrs. X does not have any professional qualification.
9. Z, the minor son, holds debentures of Tata Sons which are purchased on September 20, 2019 out of monetary gift of Rs. 4,00,000 given
to Z by X’s friend in foreign currency on September 4, 2019. During the year 2019-20, Z gets Rs. 20,000 as interest on debentures.
10. Z is a professional singer. His income from the profession of singing is Rs. 45,000 for the previous year 2019-20.
11. Out of accumulated income from singing, Z makes a fixed deposit with SBI and interest of Rs. 10,000 is received during 2019-20.
Solution :
1. House 1 - As House 1 is transferred for adequate consideration, X is the owner of the house up to December 1, 2019 and
Mrs. X is owner with effect from December 1, 2019. Income of the house will be determined as under—
X Mrs. X
Rs. Rs.
Annual value 80,000 40,000
Less : Standard deduction (30% of annual value) 24,000 12,000
Income from House 1 56,000 28,000
House 2 - House 2 is transferred by X to Mrs. X without any consideration. By virtue of section 27(i) [see para 66.2-2a] X will
be deemed as owner of House 2 although after transfer Mrs. X will get rental income. Rs. 1,26,000 (being income of House
2, i.e., Rs. 15,000 × 12 – 30% of Rs. 1,80,000) shall be taxable in the hands of X.
House 3 - By virtue of section 27(i) [see para 66.2-2a] X will be deemed as owner of House 3, although it has been transferred
to Mrs. X with effect from January 1, 2020. Income of the house [i.e., (–) Rs. 30,000] will be included in the income of X.
2. Annual interest on debentures (i.e., Rs. 14,000) shall be included in the income of X as debentures were transferred by X
to Mrs. X without consideration. Rs. 5,600, being interest earned by Mrs. X on accumulated debenture interest, is, however,
taxable in the hands of Mrs. X.
3. Capital gain of Rs. 40,000 on transfer of debentures by Mrs. X is taxable in the hands of X. Likewise, interest of Rs. 16,000
on Government bonds will be taxable as income of X as sale proceeds of debentures are invested.
4. Dividend income of Mrs. X is exempt from tax.
5. X is employed by B Ltd. in which Mrs. X has a substantial interest. Salary income of X of Rs. 1,54,000 (i.e., Rs. 17,000 × 12
– standard deduction : Rs. 50,000) is taxable as income of Mrs. X.
6. Share of profit from a firm is exempt. One-half of interest of Rs. 80,000 received by Mrs. X will be included in the income
of X. Interest received by Z, the minor son, shall be included in the income of X or Mrs. X whosoever has higher income.
7. Rs. 5,000 received by X will be included in the income of Mrs. X. However, Rs. 6,000 will be the income of her father-in-
law.
8. Dividend income of Rs. 80,000 of X is exempt from tax. As X holds preference share capital (not equity share capital), he
does not have substantial interest in D Ltd. Salary income of Mrs. X is not taxable as income of X.
9. Gift received by Z on September 4, 2019 from X’s friend is taxable as income. Rs. 20,000, being interest on debentures of
Tata Sons along with gift of Rs. 4,00,000 will be included in the income of X or Mrs. X whose other income is higher.
10. Rs. 45,000, being professional income of Z, is taxable as his own income.
11. Interest received on accumulated professional earning is taxable as income of X or Mrs. X who has higher income. The
source of income is bank deposit and not his professional skill of singing.
X Mrs. X Z
Rs. Rs. Rs.
Income from salaries
Salary of X from B Ltd. (Rs. 17,000 × 12 – standard deduction : Rs. 50,000) — 1,54,000 —
Salary of Mrs. X (Rs. 30,000 × 12 – standard deduction : Rs. 50,000) — 3,10,000 —
Income from house property —
House 1 56,000 28,000 —
House 2 1,26,000 — —
Problem 130-P2 Clubbing of income 402
X Mrs. X Z
Rs. Rs. Rs.
House 3 (-)30,000 — —
Profits and gains of business or profession
Interest from firm 70,000 40,000 —
Interest of Mrs. X 40,000 — —
Interest of Z [i.e., Rs. 26,000—Rs.1,500 being exemption under section 10(32)] — 24,500 —
Salary from firm 15,000 20,000 —
Professional income of Z — — 45,000
Capital gains
Long-term capital gain on transfer of debentures 40,000 — —
Dividend income — — —
Interest on debentures 14,000 — —
Interest on accumulated interest — 5,600 —
Interest on Government bonds 16,000 — —
Income of X from trust — 5,000 —
Gift to Z — 4,00,000 —
Interest from Tata Sons — 20,000 —
Interest of Z from bank deposit made out of
professional earning — 10,000 —
Gross total income 3,47,000 10,17,100 45,000
Less : Deductions Nil Nil —
Net income 3,47,000 10,17,100 45,000
130-E1 Find out the income in the following cases for the assessment year 2020-21—
1. X is employed by A Ltd. (salary being Rs. 20,000 per month) in which his father-in-law has a substantial interest. X does not have
any technical or professional qualification to justify the remuneration. Mrs. X is not a shareholder in A Ltd.
2. In (1) supra, Mrs. X holds 10 shares for a few days during the previous year 2019-20.
3. Y gives a loan of Rs.1,00,000 to Mrs. Y at the rate of 4 per cent per annum. Mrs. Y gives the same as loan to Z Ltd. at the rate of
24 per cent per annum.
4. A Ltd. is a subsidiary of B Ltd. C holds 20 per cent equity share capital in B Ltd. and Mrs. C is employed by A Ltd. on monthly
salary of Rs. 50,000 without any qualification. C and Mrs. C do not have any shareholding in A Ltd.
5. Suppose C and Mrs. C hold 1 per cent and 19 per cent equity share capital in A Ltd.
6. Minor child of X and Mrs. X gets a birthday gift from X’s friend on September 30, 2019 : Rs. 50,010. Income of X and Mrs. X :
Rs. 6 lakh and Rs. 2 lakh.
➠ 130-P2 Under section 61, income arising by virtue of a revocable transfer of asset is taxable in the hands of the transferor. Is there
any exception to this rule ?
Solution : There is only one exception to the aforesaid rule. Income arising by virtue of transfer of an asset to any person
is not taxable in the hands of the transferor if the following conditions are satisfied :
1. If the transfer is by way of trust which is not revocable during the lifetime of the beneficiary or, in the case of any other
transfer, is not revocable during the lifetime of the transferee or, if transfer is made prior to April 1, 1961, is not revocable
for a period exceeding 6 years [sec. 62(1)].
2. It should not contain any provision for the retransfer (directly or indirectly) of the whole or any part of the income or the
asset to the transferor [sec. 63(a)(i)].
3. It should not in any way give the transferor a right to reassume power, directly or indirectly, over the whole or any part
of the asset/income [sec. 63(a)(ii)].
4. The transferor should not derive any direct or indirect benefit from the income.
If all the above-mentioned conditions are satisfied, then section 61 is not applicable or income is not taxable in the hands of
transferor. When, however, the power to revoke arises to the transferor (though it may not be actually exercised) the
application of section 61 would be attracted.
➠ 130-E2 Find out who will pay tax in the following cases—
1. X transfers an asset to a trust. Under the trust, X has power to revoke the trust at any time after April 1, 1999. The power is yet
to be exercised.
2. Y and Mrs. Y create a trust for the benefit of public by transferring a few assets. The trust provides that Y can revoke the deed with
consent of Mrs. Y and one of the members of Parliament from Kerala.
➠ 130-P3 Explain the term “technical or professional qualification” relevant for clubbing under section 64(1)(ii).
Solution : Technical qualification may take within its fold everything connected with specialisation in particular subject,
be it science, technology or commerce or business management. The words “technical or professional qualifications” do not
necessarily relate to technical or professional qualifications acquired by obtaining a certificate, diploma or a degree or in any
other form from a recognised body like a university or an institute—Batta Kalyani v. CIT [1985] 20 Taxman 378 (AP).
130-E3 X is employed by A Ltd. in its tax department since 1968 (present salary being Rs. 14,000 per month). On July 1, 2019,
he joins B Ltd. as Director (Taxation) on salary of Rs. 14,000 per month. X is a commerce graduate (he does have any other
qualification). Mrs. X and her brothers hold more than 30 equity share capital in B Ltd. Discuss whether salary of X will be clubbed
in income of Mrs. X.
130-P4 Who is liable to pay tax in respect of income of other persons included in taxable income ?
Solution : Under sections 60 to 64, incomes belonging to other persons are included in the total income of the assessee. In
such cases, by virtue of section 65, the actual recipient of income is liable, on service of notice of demand, to pay tax assessed
in respect of income included in the income of other person. To put it differently, the provisions of this section provide for
the proportionate recovery of tax from the person to whom the income actually accrued if the Assessing Officer so desires.
The same rule is applicable when a person is deemed as owner of a house property.
130-E4 X transfers an asset without consideration to Y Ltd. in which he holds 20 per cent equity share capital (annual income from
the asset being Rs. 5 lakh). Is it possible to recover income-tax on Rs. 5 lakh from X and/or his family members ?
Test your knowledge

For answer, refer the relevant paras indicated at the end of each question.
1. Mention the various categories of incomes of other persons deemed to be the income of persons sought to be taxed
under the provisions of the Income-tax Act, 1961. [paras 120 to 129]
2. “An assessee is not only liable in respect of his own incomes for tax purposes but his liability may extend to some other
incomes also”. Comment on this statement. [paras 120 to 129]
3. What are the provisions of inclusion of the income of a minor child and the wife of assessee in his total income? [paras
122, 123, 125 and 127]
4. a. What is the significance of clubbing of income? [write up before para 120]
b. “It is said that clubbing is not applicable in the case of negative income”, explain. [para 130]
5. Can a person transfer his personal property to his Hindu undivided family without attracting provisions of section
64(2)? [para 128]
Set off and carry forward
CHAPTER 10
of losses
Income is computed under five different heads of income. One can easily find out gross total
income if income, under each head from each source is positive. Problems, however, arise
if there is a loss from one or more sources under one or more heads of income. The rules
of setting off of losses and their carry forward [sections 70 to 80] are discussed in this Chapter.
 WHAT IS THE MODE OF SET OFF AND CARRY FORWARD

132. The process of setting off of losses and their carry forward may be covered in the following steps:
Step 1 Inter-source adjustment under the same head of income [see para 133].
Step 2 Inter-head adjustment in the same assessment year [see para 134]. Step 2 is applied only if a loss cannot be set
off under Step 1.
Step 3 Carry forward of a loss [see para 135]. Step 3 is applied only if a loss cannot be set off under Steps 1 and 2.
 INTER-SOURCE ADJUSTMENT - HOW MADE [SEC. 70]

133. The provisions of section 70 are given below—
133.1 General rule - If the net result for any assessment year, in respect of any source under any head of income,
is a loss, the assessee is entitled to have the amount of such loss set off against his income from any other source
under the same head of income for the same assessment year.
X has two businesses—Business A and Business B. While Business A returns an income of Rs. 3.5 lakh, Business B results
in a loss of Rs. 1 lakh. In this case, loss of Rs. 1 lakh from Business B can be set off against income of Rs. 3.5 lakh from Business
A. It may be noted that X does not have any option to set off (or not to set off) the loss of Business B.
133.2 Exceptions - The following are the exceptions to the aforesaid rule—
 Loss from speculation business - Loss in a speculation business can be set off only against the profit in a speculation
business.
 Loss from a specified business - Any loss, computed in respect of any specified business referred to in section 35AD
[see para 81.12], shall not be set off except against profits and gains, if any, of any other specified business.
 Long-term capital loss - Long-term capital loss can be set off only against long-term capital gain.
 Loss from the activity of owning and maintaining race horses - Loss incurred in the business of owning and
maintaining race horses cannot be set off against income, if any, from any other source except income from such
business.
 Loss cannot be set off against winnings from lotteries, crossword puzzles, etc. - By virtue of section 58(4) [see para
118.1-8], a loss cannot be set off against winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of any form or nature.
 Loss from sale of securities - see paras 135.6 and 135.7.
133.3 Other points - One should note the following points :

1. Barring the aforesaid cases, any other loss can be set off against any other income within the same head of
income. For instance,—
404
a. loss from a house property can be set off against income from any other house property ;
b. loss from a non-speculation business can be set off against income from speculation or non-speculation
business ;
c. loss from a non-speculative business can be set off against income from business specified under section
35AD;
d. short-term capital loss can be set off against any capital gain (whether long-term or short-term) ;
e. under the head “Income from other sources” loss from an activity (other than the business of owning and
maintaining race horses) can be set off against any income but other than winnings from lotteries, crossword
puzzles, etc.
2. If income from a particular source is exempt from tax, e.g., income exempt from tax under section 10, loss from
such source cannot be set off against income chargeable to tax.
3. If there is income from one source and loss from another source within the same head of income, one has to
set off the loss against the income. Barring cases given in para 133.2 supra, in all other cases loss has to be first
set off (no option is available) against income within the same head of income. For instance, loss from a
speculative business can be set off only against income from a speculative business. However, loss from non-
speculative business can be set off against any business income (whether speculative or otherwise). Similarly,
long-term capital loss can be set off only against long-term capital gains. However, short-term capital loss can
be set off against any capital gains (short-term or long-term).
 INTER-HEAD ADJUSTMENT - HOW MADE [SEC. 71]

134.1 General rule - Where the net result of computation made for any assessment year in respect of any head
of income is a loss, the same can be set off against the income from other heads.
Provisions illustrated - X has two non-speculative businesses - Business A and Business B. Besides he has income from house
property. The result of the three sources of income is given below—
Business income Property income
Rs. Rs.
Business A (-) 2,90,000
Business B 70,000
Total (-) 2,20,000 5,10,000
In this case, business loss of Rs. 2,20,000 can be adjusted against property income of Rs. 5,10,000. Consequently, the property
income is reduced to Rs. 2,90,000. It may be noted that X does not have any option to set off (or not to set off) the business
loss against property income.
134.2 Exceptions - The following are the exceptions to the aforesaid rule—
 Loss in a speculation business - Loss in a speculation business cannot be set off against any other income.
 Loss in a business specified under section 35AD - Loss, computed in respect of any specified business referred to
in section 35AD [see para 81.12], cannot be set off against any other income.
 Loss under the head “Capital gains” - Losses under the head “Capital gains” cannot be set off against any income
except income under the head “Capital gains”.
 Loss from the activity of owning and maintaining race horses - Losses from the activity of owning and maintaining
race horses cannot be set off against any other income.
 Business loss cannot be set off against salary income - Loss from business or profession (including depreciation)
cannot be set off against income under the head “Salaries”.
 House property loss exceeding Rs. 2,00,000 [Sec. 71(3A)] - House property loss (in excess of Rs. 2 lakh) cannot be
set off against income under other heads of income (applicable from the assessment year 2018-19).
 Loss cannot be set off against winnings from lotteries, etc. - By virtue of section 58(4) [see para 118.1-8] a loss cannot
be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games and other
games of any sort or from gambling or betting of any form or nature.
 Loss from purchase of securities - See paras 135.6 and 135.7.
134.3 Other points - The following points should be considered —

1. Before adjusting loss under section 71, one has to set off the loss under section 70 [see para 133].
Para 135 Set off and carry forward of losses 406
2. Barring the aforesaid cases, any loss can be set off against income under other heads of income for the same
year. For instance,
a. loss under the head “Income from house property” can be set off against business income, capital gains, salary
income or income from other sources ;
b. business loss can be set off against property income, capital gains or other income ;
c. a loss under the head “Income from other sources” [not being from the activity of owning and maintaining
race horses] can be set off against salary income, property income, business income or capital gains.
3. No order of priority is given in the Act. One should try to first set off those losses which cannot be carried
forward to the next year.
4. Barring the cases discussed in para 134.2, in all other cases a loss has to be first adjusted against available
income under other heads of income. No option is available to set off a loss or not to set off a loss.
A taxpayer has following income/loss —
Current year Next year
Rs. Rs.
Business income (-)1,00,000 8,00,000
Long-term capital gain is taxable at lower rate. Even then, the assessee cannot avoid set off of business loss in the current
year under section 71 against capital gain and carry forward the business loss to the next year. In other words, business loss
has to be set off against capital gain. There is no option. After adjusting business loss of Rs. 1,00,000, on remaining long-term
capital gain of Rs. 1,30,000, he will have to pay tax during the current year.
Moreover, partial set off is not permissible when full loss can be otherwise set off. For instance, if an individual has property
income of Rs. 2,60,000 and business loss of Rs. 1,90,000, he can set off the entire loss and taxable income will be Rs. 70,000
on which no tax is payable. He cannot claim the set off of business loss of only Rs. 10,000 to reduce taxable income to
Rs. 2,50,000 (on which no tax is payable) and claim carry forward of remaining amount.
5. Where income from a particular source is exempt from tax, e.g., incomes exempt under section 10, loss from
such source cannot be set off against income chargeable to tax. For the purpose of section 71, loss of profits must
be a loss of taxable profits.
 CARRY FORWARD OF LOSS - HOW TO SET OFF

135. If a loss cannot be set off either under the same head or under the different heads, because of absence or
inadequacy of the income of the same year, it may be carried forward and set off against the income of the
subsequent year. Under the Act, the following losses can be carried forward :
a. loss under the head “Income from house property” [sec. 71B, see para 135.5] ;
b. loss under the head “Profits and gains of business or profession” (i.e., loss from speculative or non-speculative
business) [secs. 72 and 73, see paras 135.1 and 135.2] ;
c. loss under the head “Capital gains” (i.e., short-term or long-term capital loss) [sec. 74, see para 135.3] ;
d. loss from the activity of owning and maintaining race horses [sec. 74A, see para 135.4].
Other remaining losses cannot be carried forward.
135.1 Carry forward and set off of business loss other than speculation loss [Sec. 72] - The right of carry
forward and set off of loss arising in a business or profession is subject to the following restrictions :
135.1-1 LOSS CAN BE SET OFF ONLY AGAINST BUSINESS INCOME - The following points should be noted:
1. Can be set off only against business income - A loss under the head, “Profits and gains of business or profession”
can be set off against profits of any business1 in the subsequent year. For this purpose, business profits would also
include profits derived from a business activity but assessable under a head other than “Profits and gains of
business or profession”.
For instance, where shares are held by an assessee as a part of his trading assets, dividend from a foreign company on such
shares would form part of business income† and, consequently, he will be entitled to claim set off of business loss brought
1. In some cases income from a business activity is taxable under other heads of income—see para 77.2.
†Such dividend is taxable under the head “Income from other sources.”
407 Carry forward and set-off of business loss Para 135.1
forward from earlier years against dividend of the current year—Western States Trading Co. (P.) Ltd. v. CIT [1971] 80 ITR 21
(SC).
2. Not necessarily the same business - It is not necessary that business loss of year 1 should be set off against income
from the same business in year 2. In other words, loss of Business A of year 1 can be set off against profit of
business A or some other business in year 2.
3. Loss from a specified business - Brought forward loss of a business referred to in section 35AD can be set off in
a subsequent year only against income from the business referred to in section 35AD. For section 35AD, refer to
para 81.12.
135.1-2 LOSSES CAN BE CARRIED FORWARD BY THE PERSON WHO INCURRED THE LOSS - The loss can be carried forward and
set off against the profits of the assessee who incurred the loss. However, this rule has the following exceptions :
 Accumulated business loss of an amalgamating company under section 72A or 72AA [see paras 136.1 and
136.4].
 Accumulated business loss of a demerged company [see para 136.2].
 Accumulated business loss of a proprietary concern or a firm when its business is taken over by a company
by satisfying conditions of section 47(xiii)/(xiv) [see para 136.3].
 Loss of business acquired by inheritance—CIT v. Bai Maniben [1960] 38 ITR 80 (Bom.).
135.1-3 LOSS CAN BE CARRIED FORWARD FOR 8 YEARS - The loss cannot be carried forward for more than eight
assessment years. However, loss of a “specified business” under section 35AD can be carried forward without
any limit.
135.1-4 RETURN OF LOSS SHOULD BE SUBMITTED IN TIME [SEC. 80] - The following losses cannot be carried forward unless
the return of income (for the year in which the loss is incurred) is submitted within the due date [of submission
of return as given in section 139(1)].
a. loss of a speculative or non-speculative business (not being unabsorbed depreciation etc., given in para 135.1-
6);
b. short or long-term capital loss ; and
c. loss (not being unabsorbed depreciation etc., given in para 135.1-6) from the activity of owning and
maintaining race horses.
 The delay in submission of return of loss may be condoned if a few conditions are satisfied —Circular No. 9/
2015, dated June 9, 2015. CBDT has power under section 119(2) to condone delay in case of a return which is filed
late and where a claim for carry forward of losses is made.
135.1-5 CONTINUITY OF BUSINESS NOT NECESSARY - The business or profession in which the loss was originally
suffered may or may not continue to be carried on by the assessee during the year in which brought forward
loss is sought to be set off.
135.1-6 CARRY FORWARD OF UNABSORBED DEPRECIATION, CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH AND FAMILY PLANNING
EXPENDITURE - The above rules are not applicable in the case of carry forward of depreciation which is not absorbed
during the current year, unabsorbed capital expenditure on scientific research and family planning expenditure.
These losses are governed by section 32(2) and not by section 72. In other words, the rules discussed above [paras
135.1-1, 135.1-3 and 135.1-4] are not applicable in the case of carry forward of unabsorbed depreciation, capital
expenditure on scientific research and capital expenditure on family planning. These losses are governed by
section 32(2) which is discussed in para 81.3-8.
Income of X for the previous year 2019-20 is as follows —
Rs.
Business income before depreciation 1,36,000
Less : Depreciation for the current year (-) 20,000
Business income after depreciation 1,16,000
He wants to adjust the following brought forward losses—
Business loss Depreciation
Rs. Rs.
For the assessment year 1990-91 2,00,000 36,000
For the assessment year 2013-14 1,25,000 40,000
Para 135.2 Set off and carry forward of losses 408
In this case, business loss pertaining to the assessment year 1990-91 cannot be adjusted (it can be adjusted before the expiry
of 8 years, i.e., up to the assessment year 1998-99). The business loss pertaining to the assessment year 2013-14 can be adjusted
against the business income of Rs. 1,16,000 and the balancing amount of Rs. 9,000 will be carried forward for being set off
against business income up to the assessment year 2021-22 (it cannot be adjusted against other incomes). On the other hand,
unabsorbed depreciation can be carried forward without any time-limit and it can be set off against any income. The
unabsorbed depreciation pertaining to assessment years 1990-91 and 2013-14 can be set off against business income as well
as other income (but not salary income). In this case, the brought forward unabsorbed depreciation of Rs. 76,000 (i.e.,
Rs. 36,000 + Rs. 40,000) can be adjusted against other income.
135.2 Carry forward and set off of speculation loss [Sec. 73] - The impact of section 73 and other related
provisions are given below —
135.2-1 WHAT IS A SPECULATION BUSINESS [EXPLN. 2 TO SEC. 28] - If a contract for purchase or sale of any commodity,
stocks or shares is periodically (or ultimately) settled, otherwise than by the actual delivery, it is known as a
speculative transaction. To put it differently, a contract for purchase or sale of any other article (not being shares,
stocks or commodities) can never be a speculative transaction.
If a contract for purchase/sale of share, stock or commodity is ultimately settled otherwise than by actual
delivery or transfer of commodity, it would be a speculative transaction even if at the time of entering into the
contract there was no intention to gamble. On the other hand, if actual delivery of commodity takes place, the
transaction would be a non-speculative transaction even if it is highly speculative otherwise.
For detailed discussion, see problem 137-P8.
 Speculative business in the case of a company [Expln. to sec. 73] - This provision is applicable if the following
conditions are satisfied—

1. Taxpayer is a company.
2. It is not a company whose gross total income consists mainly of income which is chargeable under the heads
“Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”.
Alternatively, it is a company whose principal business is other than that of trading in shares or banking or the
granting of loans and advances.
3. The business of the company consists of the purchase and sale of shares of other companies.
If the above conditions are satisfied, such company shall be deemed to be carrying on a speculation business to
the extent to which the business consists of purchase/sale of such shares. This rule is applicable even if there is
no avoidance of tax by the assessee.
135.2-2 SPECULATIVE LOSS CAN BE SET OFF ONLY AGAINST SPECULATIVE INCOME [SEC. 73] - Loss in a speculation business can
be carried forward to the subsequent year and set off only against the profits of a speculation business carried
on in that year.
135.2-3 CAN BE CARRIED FORWARD FOR 4 YEARS* - Such loss can be carried forward for four assessment years*,
immediately succeeding the assessment year for which the loss was first computed.
135.2-4 CONTINUITY OF BUSINESS NOT NECESSARY - It is not necessary that the speculation business in which the loss
was incurred should continue to be carried on in the subsequent year in which the assessee wants to set off of
the loss but the assessee should be the same.
135.2-5 RETURN OF LOSS SHOULD BE SUBMITTED IN TIME - See para 135.1-4.
135.2-6 DIFFERENT RULES FOR UNABSORBED DEPRECIATION - See para 81.3-8.
135.2-7 OTHER POINTS - The following other points one should note —
1. Loss incurred in speculative business in banned items cannot be carried forward to the next year—CIT v. Kurji
Jinabhai Kotecha [1977] 107 ITR 101 (SC).
2. Loss in a speculative transaction entered into on behalf of principal, is non-speculative loss of agent—CIT v.
Shah Pratapchand Nowpaji [1983] 139 ITR 149 (AP).
3. Income from forward transactions entered into on behalf of constituents is not income from speculative
business carried on by the assessee—CIT v. Pangal Vittal Nayak & Co. (P.) Ltd. [1969] 74 ITR 754 (SC).
135.3 Carry forward and set-off of capital loss - If the net result of the computation under the head “Capital
gains” is a loss, the whole of the loss shall be carried forward to the following assessment year as follows—
*8 years up to the assessment year 2005-06.

409 Carry forward and set-off of loss from house property Para 135.5
1. Long-term capital loss can be set off only against long-term capital gains. Short-term capital loss can be set off
against short-term or long-term capital gains.
2. Such loss can be carried forward for eight assessment years immediately succeeding the assessment year in
which the loss was first computed.
3. Such loss cannot be carried forward unless return is filed within the time limit of section 139(1) [see para
135.1-4].
135.4 Carry forward and set-off of loss from activity of owning and maintaining race horses [Sec. 74A] -
Loss from the activity of owning and maintaining race horses can be carried forward to a subsequent year and
set off only against income from the business of owning and maintaining race horses.
The following points one should keep in view —
1. Such loss can be carried forward only if the activity of owning and maintaining race horses is carried on by
the assessee in the previous year in which the brought forward loss is sought to be set off.
2. Loss can be carried forward for four assessment years immediately succeeding the assessment year in which
the loss was first computed.
3. Such loss cannot be carried forward unless return is filed within the time limit of section 139(1) [see para
135.1-4].
4. For this purpose, loss shall be calculated as follows—
Amount of stake money xxxx
Less: Revenue expenditure incurred by the taxpayer wholly and exclusively for the purposes of
maintaining such horses xxxx
Balance (if it is negative, it is taken as loss from the activity of owning and maintaining race horses) xxxx
5. The aforesaid provisions of section 74A are applicable only in the case of loss from the activity of owning and
maintaining race horses. Loss from the activity of owning and maintaining other race animals is governed by
section 72 and not by section 74A.
135.5 Carry forward and set-off of loss from house property [Sec. 71B] - If the assessee incurs any loss under
the head “Income from house property” and such loss is not fully adjusted under other heads of income in the
same assessment year, then the balance loss shall be allowed to be carried forward and set off in subsequent years
subject to a limit of 8 assessment years against income from house property.
Problems
135.5-P1 The following information is given by X for the assessment year 2020-21 –
Expenditure incurred to earn income in Rs.

Income in Rs. Municipal tax Interest on borrowed capital Other expenses
Salary 50,00,000 – – 4,000
Bank interest 4,10,000 – – Nil
Property 1 (let out) 11,46,000 1,000 2,05,000 –
Property 2 (self-occupied) Nil 4,000 3,65,000 –
Property 3 (let out) 1,00,000 2,000 7,00,000 –
Determine the amount of net income for the assessment year 2020-21. He is eligible for deduction of Rs. 1,30,000 under section 80C.
Solution :
Computation of house property income –
Property 1 Property 2 Property 3

Rs. Rs. Rs.
Gross annual value 11,46,000 Nil 1,00,000
Less: Municipal tax 1,000 Nil 2,000
Net annual value 11,45,000 Nil 98,000
Less: Standard deduction 3,43,500 Nil 29,400
Property 1 Property 2 Property 3

Rs. Rs. Rs.
Less: Interest on borrowed capital (in the case of self-occupied

property, it cannot exceed Rs. 2,00,000) 2,05,000 2,00,000 7,00,000
Income from property [total : (–) Rs. 2,34,900] 5,96,500 (–) 2,00,000 (–) 6,31,400
Computation of net income –

Rs.
Salary (Rs. 50,00,000 – standard deduction : Rs. 50,000) 49,50,000
Bank interest 4,10,000
Total 53,60,000
Less: House property loss (house property loss is Rs. 2,34,900, amount deductible is limited to Rs. 2,00,000) 2,00,000
Deduction under section 80C 1,30,000
Note - Unadjusted house property loss of Rs. 34,900 will be carried forward.
135.5-E1 Recalculate net income of X if interest liability pertaining to Property 1 is Rs. 3,00,000.
135.6 Loss on sale of shares, securities or units [Sec. 94(7)] - The provisions of section 94(7) are given
below –
 Record date - To understand the impact of section 94(7), one must first know the meaning of “record date.”
“Record date” means such a date as may be fixed by a company/a mutual fund/UTI for the purposes of
entitlement of the holder of the securities/shares/units to receive dividend (or income).
 Conditions - If the three conditions given below are satisfied, section 94(7) is applicable—
1. Any person buys or acquires shares/units within a period of 3 months before the record date. “Record date”
means such a date as may be fixed by a company/a mutual fund/UTI for the purposes of entitlement of the
holder of the shares/units to receive dividend (or income).
2. Such person sells or transfers such shares/units within a period of 3 months (9 months in the case of units) after
the record date.
3. The dividend or income on such shares/units received (or receivable) by such person is exempt from tax.
 Consequences if the above conditions are satisfied - If the above conditions are satisfied, then the provisions of section
94(7) shall be applicable as follows—

a. find out the amount of loss from a transaction which satisfies the above conditions;
b. find out the amount of dividend /income received or receivable on the record date which is exempt from tax.
If (a) is less than or equal to (b), then loss cannot be adjusted. Conversely, if (a) is more than (b), then (a) minus
(b) can be set off against income under the head “Capital gains”.
 Judicial rulings - The following propositions have been taken from different judicial rulings—
1. Redemption of units by mutual funds would definitely constitute “transfer” for the purpose of section 94(7).
2. Section 94(7) does not permit segregation of loss into loss on account of declaration of dividend and loss on
account of fall in market conditions, etc., but only considers loss on account of purchase and sale of securities/
unit.
3. Section 94(7) deals with only loss on account of purchase and sale of units or shares and is not concerned with
entries or treatment of the same in the books of account of an assessee.
4. Section 94(7) does not provide time-limit of 90 days and it provides time-limit of three months.
Problems
135.6-P1 X purchases on May 10, 2019, 1,000 preference shares of Rs. 10 each in A Ltd. @ Rs. 55.55. On October 20, 2019, he transfers
800 shares @ Rs. 37 per share and remaining 200 shares are transferred on December 20, 2019 @ Rs. 20 per share. A Ltd. declares 50
per cent dividend (record date : August 3, 2019). During previous year 2019-20, he has generated long term capital gain of Rs. 76,000
on sale of gold.
411 Loss arising in case of bonus stripping Para 135.7
Solution : 800 shares 200 shares

Rs. Rs.
Sale consideration 29,600 4,000
Less : Cost of acquisition 44,440 11,110
Short-term capital gain (-) 14,840 (-) 7,110
Dividend 4,000 1,000
Whether section 94(7) is applicable Yes No
Long-term capital gain on sale of gold 76,000
Less :
Short-term capital loss on sale of 800 shares [Rs. 14,840 – Rs. 4,000] (-) 10,840
Short-term capital loss on sale of 200 shares (-) 7,110
135.6-E1 Does it make any difference if in problem 135.6-P1, 800 shares are transferred on November 4, 2019 ?
135.7 Loss arising in the case of bonus stripping [Sec. 94(8)] - To prevent the practice of bonus stripping,
section 94(8) has been inserted. The detailed provisions are given below—
135.7-1 CONDITIONS - Section 94(8) is applicable if the following conditions are satisfied—
1. The taxpayer buys or acquires any unit (hereinafter referred to as “original unit”) within a period of 3 months
prior to the record date.
2. Such person is allotted additional units without any payment on the basis of holding of such units (hereinafter
referred to as “bonus units”) on such record date.
3. Such person sells or transfers all (or any) of the original units within a period of 9 months after such record
date.
4. But he continues to hold all (or any) of the bonus units.
135.7-2 CONSEQUENCES IF THE ABOVE CONDITIONS ARE SATISFIED - Section 94(8) imposes the following restrictions if the
above conditions are satisfied—
1. The loss (if any) arising to the taxpayer on account of purchase and sale of all (or any) of the aforesaid original
units shall be ignored for the purposes of computing his income chargeable to tax.
2. The amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of bonus units as are
held by him on the date of such sale or transfer.
Problems
135.7-P1 Compute capital gains in the following cases for the assessment year 2020-21 :
Name of the units - Growth units of PNI Mutual Fund (debt based) (face value: Rs. 10)
Record date for allotment of bonus unit - December 5, 2019 (a person holding 2 units will get 1 bonus unit).
X purchases 1,000 above-mentioned units on October 1, 2019 at the rate of Rs. 23 per unit. On December 5, 2019, he gets 500 bonus
units. Find out the tax consequences in the following different situations—
1. He transfers 800 original units on March 10, 2020 at the rate of Rs. 26 per unit. He does not transfer remaining original units and
bonus units till the expiry of 9 months from the record date (i.e., September 5, 2020).
2. He transfers 800 original units on March 10, 2020 at the rate of Rs. 17 per unit. He does not transfer remaining original units and
bonus units.
3. He transfers 900 original units on March 10, 2020 at the rate of Rs. 18 per unit. He does not transfer remaining original units till
the expiry of 9 months from the record date (i.e., September 5, 2020). On May 1, 2020, he transfers 100 bonus units at the rate of Rs.
17 per unit.
4. He transfers 700 original units on March 10, 2020 at the rate of Rs. 14 per unit. He does not transfer remaining original units till
the expiry of 9 months from the record date (i.e., September 5, 2020). On May 1, 2020, he transfers 400 bonus units at the rate of Rs.
13 per unit.
5. He transfers 400 original units on January 1, 2020 at the rate of Rs. 24 per unit. On March 1, 2020, he further transfers 200 original
units at the rate of Rs. 19 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e.,
September 5, 2020). However, 200 bonus units are transferred on September 10, 2020 at the rate of Rs. 15 per unit.
Solution : Case 1 Case 2 Case 3 Case 4 Case 5

Rs. Rs. Rs. Rs. Rs.
Original units (case of loss)
Sale consideration - 13,600 16,200 9,800 3,800
Less: Cost of acquisition - 18,400 20,700 16,100 4,600
Short-term capital gain - (-)4,800 (-)4,500 (-)6,300 (-)800
Short-term capital loss which cannot be adjusted against any
other capital gain (a) NA 4,800 4,500 6,300 800
Original units (case of gain)
Sale consideration 20,800 - - - 9,600
Less: Cost of acquisition 18,400 - - - 9,200
Short-term capital gain 2,400 - - - 400
Units held by X after the aforesaid transactions
Bonus units(b) 500 500 500 500 500
Cost of acquisition of bonus units (per unit) [(a) ÷ (b)] Nil 9.6 9.0 12.6 1.6
Bonus units
Sale consideration - - 1,700 5,200 3,000
Less: Cost of acquisition - - 900 5,040 320
Short-term capital gain - - 800 160 2,680
135.7-E1 [P10.9]* The following information is given—

Name of the units - Units of ITD Mutual Fund (debt based) (face value : Rs. 10).
Record date for allotment of bonus unit - November 3, 2019 (a person holding 3 units will get 1 bonus unit).
X purchases 6,000 above-mentioned units on August 26, 2019 at the rate of Rs. 70 per unit. On November 3, 2019, he gets 2,000
bonus units. After November 3, 2019, the following transactions take place—
Transaction 1 - On January 10, 2020, he transfers 500 original units at the rate of Rs. 75 per unit.
Transaction 2 - On February 12, 2020, he transfers 1,000 original units at the rate of Rs. 55 per unit.
Transaction 3 - On February 26, 2020, he transfers 800 bonus units at the rate of Rs. 45 per unit.
Transaction 4 - On February 28, 2020, he transfers 700 original units at the rate of Rs. 46 per unit.
Transaction 5 - On March 3, 2020, he transfers 600 bonus units at the rate of Rs. 30 per unit.
135.8 Provisions in brief - The table given below highlights the rule of carry forward of loss—
Type of loss to be carried forward to Income against which For how many Should the business Is it necessary
next year(s) carried forward loss years loss be continued to submit
can be set off in next can be carri- return of loss
year(s) ed forward in time
1. House property loss Income under the head 8 years NA No
“Income from house
property”
2. Speculation loss (not being un- Speculation profits 4 years Not necessary Yes
absorbed depreciation etc.—see 3.1
below for tax treatment)
3. Non-speculation business loss
3.1 On account of unabsorbed Any income but other No time-limit Not necessary No
depreciation, capital expenditure than income under the
on scientific research and family head “Salaries”
planning
413 Amalgamation Para 136.1
Type of loss to be carried forward to Income against which For how many Should the business Is it necessary
next year(s) carried forward loss years loss be continued to submit
can be set off in next can be carri- return of loss
year(s) ed forward in time
3.2 Loss from a specified business Income from a specified No time-limit Not necessary Yes
under section 35AD [see para 81.12] business under section
35AD
3.3 Other remaining business loss Any business profit 8 years Not necessary Yes
(whether from specu-
lation or otherwise)
4. Capital loss
4.1 Short-term capital loss Any income under the 8 years Not necessary Yes
head “Capital gains”
4.2 Long-term capital loss Long-term capital gains 8 years Not necessary Yes
5. Loss from the activity of owning Income from the 4 years Yes Yes
and maintaining race horses activity of owning and
maintaining race horses
 CARRY FORWARD AND SET-OFF OF BUSINESS LOSS AND DEPRECIATION - WHEN

PERMISSIBLE IN THE HANDS OF AMALGAMATED AND DEMERGED COMPANY OR CO-
OPERATIVE BANK [SECS. 72A, 72AA AND 72AB]
136. Generally, depreciation and business loss can be carried forward by a person who has incurred the loss.
Sections 72A and 72AA provide a few exceptions to this rule. These sections are applicable in the case of
amalgamation, demerger, conversion of firm/proprietary concern into company, conversion of a company into
LLP, amalgamation of banking companies, demerger of co-operative banks.
136.1 Amalgamation - If the following conditions are satisfied, then the accumulated business loss and the
unabsorbed depreciation of the amalgamating company shall be deemed to be business loss/depreciation of the
amalgamated company for the previous year in which the amalgamation is effected—
 Condition one - There has been—
a. an amalgamation of a company owning an industrial undertaking† or a ship or a hotel with another company;
or
b. an amalgamation of a banking company with SBI or any subsidiary of SBI; or
c. an amalgamation of a public sector airlines with another public sector airlines.
 Condition two - The amalgamating company has been engaged in the business in which the accumulated loss
occurred or depreciation remains unabsorbed for 3 years or more years.
 Condition three - The amalgamating company has held continuously as on the date of the amalgamation at least
three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation.
 Condition four - The amalgamated company continues to hold at least three-fourths in the book value of fixed
assets of the amalgamating company which it has acquired as a result of amalgamation for five years from the
effective date of amalgamation.
 Condition five - The amalgamated company continues the business of the amalgamating company for a
minimum period of 5 years.
 Condition six - The amalgamated company, which has acquired an industrial undertaking of the amalgamating
company by way of amalgamation, shall achieve the level of production of at least 50 per cent of the installed
capacity of the said undertaking before the end of 4 years from the date of amalgamation and continue to
maintain the said minimum level of production till the end of 5 years from the date of amalgamation.
However, the Central Government, on an application made by the amalgamated company, may relax the
condition.
†Hospital is not an industrial undertaking.

 Condition seven - The amalgamated company shall electronically furnish to the Assessing Officer a certificate
in Form No. 62, from a chartered accountant, with reference to the books of account and other documents
showing particulars of production. This certificate should be submitted along with the return of income for the
assessment year relevant to the previous year during which the prescribed level of production is achieved and
for subsequent assessment years relevant to the previous years falling within 5 years from the date of
amalgamation.
136.1-1 CONSEQUENCES WHEN THE ABOVE CONDITIONS ARE SATISFIED - If the above conditions are satisfied, then
accumulated business loss and unabsorbed depreciation (including unabsorbed capital expenditure on scien-
tific research/family planning) of the amalgamating company shall be deemed to be loss and depreciation of the
amalgamated company for the previous year in which amalgamation is effected.
136.2 Demerger - In the case of demerger, the accumulated business loss and unabsorbed depreciation of the
demerged company will be allowed to be carried forward and set off in the hands of the resulting company.
The Central Government may, for this purpose, by notification in the Official Gazette, specify such conditions
as it considers necessary to ensure that the demerger is for genuine business purposes.
136.3 Loss of proprietary concern/firm [Sec. 72A(4)] - In cases of succession of business, whereby a firm is
succeeded by a company fulfilling the conditions laid down in section 47(xiii) or a proprietary concern is
succeeded by a company fulfilling the conditions laid down in section 47(xiv), the accumulated business loss and
the unabsorbed depreciation (including unadjusted capital expenditure on scientific research) of the predeces-
sor firm or proprietary concern, as the case may be, shall be deemed to be the business loss or as the case may
be, allowance for depreciation of the successor company for the previous year in which business reorganisation
was effected and the other provisions of the Act relating to set off and carry forward of loss and allowance for
depreciation shall apply accordingly.
136.4 Carry forward of loss/depreciation in the case of conversion of a company into LLP [Sec. 72A(6A) -
In the case of succession of business, whereby a company (i.e., a private limited company or unlisted public
limited company) is succeeded by a limited liability partnership fulfilling the conditions laid down in section
47(xiiib), the accumulated business loss and the unabsorbed depreciation (including unadjusted capital
expenditure on scientific research) of the predecessor company, shall be deemed to be the business loss or as the
case may be, allowance for depreciation of the successor limited liability partnership for the previous year in
which business reorganisation was effected and the other provisions of the Act relating to set off and carry
forward of loss and allowance for depreciation shall apply accordingly.
136.5 Set off of losses of a banking company against the profit of a banking institution under a scheme
of amalgamation [Sec. 72AA] - Section 72AA permits set off of business losses of banking company in the case
of amalgamation if a few conditions are satisfied.
136.6 Carry forward and set off of accumulated loss and unabsorbed depreciation allowance in business
reorganization of co-operative banks [Sec. 72AB] - The successor co-operative bank can set off and carry
forward business loss and depreciation allowance of the predecessor co-operative bank if a few conditions are
satisfied.
 Problems on set off and carry forward of losses

137-P1 X, an individual, submits the following information relevant for the assessment year 2020-21 :
Profit Loss
Rs. Rs.
Income from house property (after standard deduction) :
House A 1,15,000
House B 1,17,000
House C 3,21,000
Business A 1,08,000
Business B 1,18,000
Business C (speculative) 1,11,000
Business D (speculative) 1,23,000
415 Problems on set off and carry forward of losses Problem 137-P1
Profit Loss
Rs. Rs.
Capital gains :
Short-term capital gains 1,06,000
Short-term capital loss 1,28,000
Long-term capital gains on sale of building 12,500
Income from card games 1,08,000
Loss from card games 1,07,010
Loss on maintenance of race horses 1,06,000
Interest on securities 1,04,000 —
Determine the net income of X for the assessment year 2020-21.
Solution : STEP 1 : INTRA-HEAD ADJUSTMENT Rs. Rs.
House A (+)1,15,000
House B (–)1,17,000
House C (–)3,21,000
(–)3,23,000
Non-speculative
Business A (+)1,08,000
Business B (–)1,18,000
Non-speculative loss (–)10,000
Speculative
Business C (+)1,11,000
Business D (–)1,23,000
*It will be carried forward to the next year (–)12,000*
Capital gains
Short-term capital loss (–)22,000
*It will be carried forward to the next year (–)9,500*
Income from other sources:
Income from card games [loss from card games cannot be deducted by virtue of
section 58—see para 118.1-8] 1,08,000
Interest on securities 1,04,000 2,12,000
Loss on maintenance of race horses (–)1,06,000 [See Note]
Note : Loss on maintenance of race horses can be set off only against income from the business of owning and maintaining
race horses. In the absence of such income, it cannot be set off. However, it can be carried forward to next year for claiming
set off against income from such business.
STEP 2 : INTER-HEAD ADJUSTMENTS - The following position emerges after inter-source adjustment :
Income Loss which can be Loss which cannot Loss which cannot
set off against be set off against be set off against
other incomes other incomes but other income, nor
[see Note] which can be carried can it be carried
forward forward
Rs. Rs. Rs. Rs.
Salary 1,42,000 — — —
Income from house property — 2,00,000 1,23,000 —
Profits and gains of business or profession — 10,000 12,000 —
Capital gains — — 9,500 —
Income from other sources* (income from
card games : Rs. 1,08,000 + interest on
securities : Rs. 1,04,000) 2,12,000* — 1,06,000 1,07,010
Total 3,54,000 2,10,000 2,50,500 1,07,010
Problem 137-P2 Set off and carry forward of losses 416
Note : The house property loss (up to Rs. 2,00,000) can be set off against salary income and/or interest on securities. It cannot
be set off against income from card games. Business loss (non-speculative) can be set off against interest on securities. It
cannot be set off against salary income and income from card games. Consequently, income of X for the assessment year
2020-21, shall be calculated as follows—
Salary Income from Interest
card games on securities
Rs. Rs. Rs.
Income 1,42,000 1,08,000 1,04,000
Less: Loss from house property (-)1,42,000 - (-)58,000
Less: Business loss (non-speculative) - - (-)10,000
Balance Nil 1,08,000 36,000
Net income (Rs. 1,08,000 + 36,000) 1,44,000
Loss to be carried forward
House property 1,23,000
Speculative business loss 12,000
Short-term capital loss 9,500
Loss from the activity of owning and maintaining race horses 1,06,000
137-E1 [P10.10]* X, a resident individual, submits the following information, relevant for the previous year ending March 31,
2020 : Rs.
Income from salary (after standard deduction) 1,30,000
Income from house property (after standard deduction)
House I 1,06,000
House II (–)1,25,000
House III (self-occupied) (–)1,05,000
Business I 1,08,000
Business II (–)1,06,000
Business III (speculative) (–)1,32,000
Business IV (speculative) 1,18,000
Capital gains
Long-term capital gains on transfer of preference shares 1,27,000
Income from betting 1,12,000
Loss on maintenance of race horses (–)1,23,000
Income from owning and maintaining race camels 1,90,000
Determine the net income for the assessment year 2020-21.
137-P2 X, a resident individual submits the following information for the assessment year 2020-21 :
BUSINESS A Rs.
Loss of the previous year 2019-20 (–)1,20,000
Brought forward loss of the previous year 2018-19 (–)1,45,000
BUSINESS B
Profit of previous year 2019-20 1,35,000
BUSINESS C (previous year ends on March 31, business discontinued on April 10, 2019)
Profits of the period April 1, 2019 to April 10, 2019 Nil
Brought forward loss of previous year 2018-19 (–)1,16,000
BUSINESS D (previous year ends on March 31, business discontinued on March 31, 2019)
OTHER INCOME
Interest on debentures held as stock-in-trade 1,48,000
Interest on bonds held as investments 1,60,000
Rs.
Long-term capital loss on sale of shares (–)1,46,400
Dividend from a foreign company (shares are held as investment) 1,80,000
Determine the net income of X for the assessment year 2020-21. Also calculate the amount of loss which can be carried forward for being
set off to the next assessment year.
Solution : Rs.
Loss of Business A for the previous year 2019-20 (–)1,20,000
Profit of Business B for the previous year 2019-20 1,35,000
Profit of Business C for the period April 1, 2019 to April 10, 2019 Nil
Interest on debentures held as stock-in-trade 1,48,000
Current business profit 1,63,000
Less : Brought forward loss of Business A, Business C and Business D [i.e., (Rs. 1,45,000 +
Rs. 1,16,000 + Rs. 1,04,000) subject to the maximum of Rs. 1,63,000]† 1,63,000
Income under the head “Profits and gains of business or profession” Nil
Profits and gains of business or profession Nil
Capital gains (Loss of Rs. 1,46,400 will be carried forward for set off against long-term capital Nil
gain)
Interest on bonds held as investment 1,60,000
Dividend from foreign company 1,80,000
Less : Deduction under sections 80C to 80U
Nil
Net income 4,57,000
Notes :
1. As debentures are held by X as stock-in-trade, interest income is a part of business profits. Interest income can, therefore,
be utilised for claiming set off of brought forward business losses. This rule is, however, not applicable in the case of interest
on bonds as bonds are held by X as investment.
2. Though Business D was not in existence during the previous year 2019-20, yet the brought forward business loss of the
year 2018-19 can be set off against the income of the assessment year 2020-21.
137-E2 [P10.11]* X, a resident individual, submits the following information for the assessment year 2020-21 :
Business I (discontinued on April 15, 2019) Rs.
Loss of the period April 1, 2019 to April 15, 2019 (–) 1,01,000
Business II (not in existence during 2019-20)
Business III
Loss of the previous year 2019-20 (–)1,08,000
Business IV
Profit of previous year 2019-20 2,30,000
Other incomes/losses
Interest on securities held as stock-in-trade 1,50,000
Interest on debentures held as investments 1,55,000
Dividend from a foreign company (shares are held as stock-in-trade) 4,40,000
Long-term capital loss in respect of shares (–)1,15,100
Determine the net income for the assessment year 2020-21 and also calculate the amount of loss which can (or which cannot) be carried
forward.
†The remaining amount of Rs. 2,02,000 will be carried forward.

137-P3 X, a businessman of Delhi, furnishes the following information relevant for the assessment year 2020-21 :
Rs.
Income from house property (computed) 2,60,000
Business profits (before claiming the following deductions) 2,34,000
Current depreciation allowance 1,08,000
Unabsorbed depreciation allowance of the previous year :
 2013-14 13,000
 1995-96 3,500
Unabsorbed business loss of the previous years :
 2013-14 9,000
 1995-96 4,000
Current scientific research expenditure 1,06,000
Solution : Business profits 2,34,000
Less : Current scientific research expenditure 1,06,000
1,28,000
Less : Current depreciation allowance 1,08,000
20,000
Less : Brought forward business loss of the previous years : Rs.
 1995-96 Nil*
 2013-14 Rs. 9,000 9,000
11,000
(*not admissible beyond 8 assessment years)
Less : Unabsorbed depreciation of the previous years 1995-96 and 2013-14 to the extent of
business profits 11,000
Business profits Nil
Less : Unabsorbed depreciation of 1995-96 and 2013-14 to the extent not adjusted against
business profits (i.e., Rs. 13,000 + Rs. 3,500 — Rs. 11,000) 5,500
Net income 2,54,500
Note : While brought forward business loss cannot be set off against current non-business incomes, unabsorbed depreciation
can be set off against current business as well as non-business income—see para 81.3-8.
137-E3 [P10.12]* X submits the following information relevant for the assessment year 2020-21 :
Rs.
Interest on non-Government securities (held as investments) 11,50,000
Business profits (before claiming the following deductions) 2,28,000
Current depreciation allowance 58,000
Current scientific research expenditure 24,000
Unabsorbed business loss of the previous years :
 1983-84 11,000
 2010-11 9,000
 2013-14 15,000
Dividend on equity shares in A Ltd., an Indian company 1,30,000
Dividend on preference shares in B Ltd., an Indian company 1,40,000
Dividend from a foreign company 1,20,000
Long-term capital loss brought forward from the assessment year 2017-18 40,700
137-P4 X submits the following information relevant for the previous year ending March 31, 2020 :
Rs.
Profit of Business A carried on in India 1,80,000
Loss of Business B carried on in India (–)1,30,000
Profits of business C carried on in Canada (income is earned and received in Canada and business is controlled from
Canada) 21,40,000
Loss of Business D carried on in Canada (though profits are not received in India, business is controlled from Delhi) (–)1,70,000
Unabsorbed depreciation of Business D 1,52,000
Income from property situated in India 1,12,000
Income from property situated in Canada (rent is received in Canada) 1,17,000
Determine the net income of X for the assessment year 2020-21 on the assumption that he is (a) resident and ordinarily resident in India,
(b) resident and not ordinarily resident in India, and (c) non-resident in India.
Solution : Resident and Resident and Non-
ordinarily not ordinarily resident
resident resident
Rs. Rs. Rs.
Business income
Business A 1,80,000 1,80,000 1,80,000
Business B (–) 1,30,000 (–)1,30,000 (–)1,30,000
Business C [*income is not taxable—see para 24] 21,40,000 Nil* Nil*
Business D [*business income earned and received out of India is not
taxable in the hands of non-resident; loss arising from such business is,
therefore, not deductible] (–)1,70,000 (–)1,70,000 Nil*
Unabsorbed depreciation of Business D (–)1,52,000 (–)1,52,000 Nil
Business income/loss 18,68,000 (–)2,72,000 50,000
Income from property situated in India 1,12,000 1,12,000 1,12,000
Income from property situated in Canada 1,17,000 — —
Gross total income 20,97,000 (–)1,60,000 1,62,000
Less : Deductions under sections 80C to 80U Nil Nil Nil
Net income/loss 20,97,000 (–)1,60,000 1,62,000
137-E4 [P10.13]* X submits the following particulars of income/loss for the assessment year 2020-21 : Rs.
Profits of Business I carried on in India 2,42,000
Loss of Business II carried on in India (–)1,26,000
Profits of Business III carried on in Germany (though income is earned and received in Germany, business is
controlled from Bombay) 2,17,000
Loss of Business IV carried on in Germany (though income is earned and received in Germany, business is
partly controlled from Germany and partly from Canada) (–)1,56,000
Unabsorbed depreciation of the assessment year 2010-11 :
Business I (–)1,07,000
Business III (–)1,08,000
Business IV (–)2,15,000
Income from property situated in India 1,18,000
Income from property situated in Germany (rent is received in Germany) 31,20,000
Determine the net income of X for the assessment year 2020-21 on the assumption that he is (a) resident and ordinarily resident
in India, (b) resident and not ordinarily resident in India, and (c) non-resident in India.
137-P5 For the assessment year 2020-21, X (age : 38 years), a non-resident individual, furnishes the following information :
Rs.
Income from owning and maintaining race horses 1,15,000
Rs.
Besides, X has the following brought forward losses/allowances :
Brought forward business loss of the assessment year 2015-16 1,12,000
Unabsorbed depreciation allowance of the assessment year 2013-14 2,06,000
Long-term capital loss in respect of the assessment year 2018-19 2,47,200
Brought forward loss from the activity of owning and maintaining race horses of the assessment year 2017-18 1,25,000
Speculation losses of the assessment year 2016-17 30,000
Determine the net income and tax liability of X for the assessment year 2020-21.
Solution : Rs.
Less : Brought forward business loss of the assessment year 2015-16 (–)1,12,000 Nil
Business loss to be carried forward to next assessment year (–)7,000
Less: Brought forward long-term capital loss (–) 2,02,500 Nil
Income from owning and maintaining race horses 1,15,000
Less : Loss from owning and maintaining race horses of the assessment year 2017-18 (–)1,15,000 Nil
Total 8,56,500
Less : Unabsorbed depreciation allowance 2,06,000
Net income 6,50,500
Notes :
1. In the absence of speculation income, brought forward speculation loss of the assessment year 2016-17 cannot be set off.
As four-year time-limit expires with the assessment year 2020-21, the loss cannot be carried forward to the next assessment
year.
2. Long-term capital loss of Rs. 44,700 will be carried forward (it cannot be carried forward beyond the assessment year
2026-27).
3. Loss from the activity of owning and maintaining race horses of Rs. 10,000 will be carried forward to assessment year
2021-22 (however, it cannot be carried forward after the assessment year 2021-22).
4. Computation of tax liability : Rs.
Tax on income from card games (i.e., Rs. 2,16,000 @ 30%) 64,800
Tax on the remaining income [as the remaining income (Rs. 4,34,500)] 9,225
Tax 74,025†
➠ 137-E5 [P10.14]* For the assessment year 2020-21, X, a non-resident individual, furnishes the following particulars of his
income : Rs.
Income from speculative business 1,03,000
Short-term capital gains 55,000
Loss from betting (–)20,000
Winnings from betting 2,13,000
Winnings from horse races 4,23,000
Besides, X wants to set off the following allowances/losses of earlier years :
Business loss of the assessment year 2013-14 2,14,000
† Rebate under section 87A is not available as X is non-resident.

Rs.
Unabsorbed depreciation allowance of the assessment year 1995-96 2,000
Short-term capital loss of the assessment year 2017-18 1,74,000
Long-term capital loss of the assessment year 2015-16 8,000
Loss from betting of the assessment year 2018-19 1,26,000
Loss from the business of owning and maintaining race horses of the assessment year 2016-17 2,38,000
137-P6 X (29 years) submits the following information for the year ending March 31, 2020 –
1. Income of Business A (non-speculative) : Rs. (–)5,00,000.
2. Income of Business B (speculative) : Rs. 6,00,000.
3. Income from house property : Rs. 5,10,000.
4. Winnings from lottery : Rs. 4,30,000.
5. Deduction available under section 80C : Rs. 45,000.
6. Donation to political party : Rs. 10,000.
Determine the net income and tax liability of X for the assessment year 2020-21 taking into consideration the following additional
information –
1. Brought forward loss of Business B (speculative) is Rs. 5,80,000. This loss pertains to the assessment year 2016-17.
2. Brought forward house property loss of the assessment year 2011-12 is Rs. 75,000.
3. X wants to set off loss of Business A of the current year against winnings from lotteries and the remaining loss against house property
income. X wants to adopt this strategy to avail set off of brought forward speculative loss against speculative income of the current year.
Solution : The planning proposed by X is not legally tenable. One has to first adjust loss under section 70. Under this section,
loss from one activity should be set off against income from another activity within the same head of income. This rule is
applicable in all cases barring a few exceptions. In this case, X has two businesses. Business A is non-speculative and income
therefrom is Rs. (–)5,00,000. Loss from non-speculative business can be set off against profit from speculative business. This
rule does not have any exception. Without adjusting loss under section 70 within the same head of income, one cannot go
to section 71 for the purpose of inter-head adjustments.
Income of X after adjusting loss under section 70 is as follows –
Rs.
Business income [Business B : Rs. 6,00,000 – Loss of Business A : Rs. 5,00,000] 1,00,000
Under section 71, loss under one head of income will be adjusted against income under another head of income. In this case,
there is no loss under any head of income.
After adjusting losses under sections 70 and 71, brought forward losses will be adjusted. In this case, X has brought forward
speculative loss of Rs. 5,80,000. It can be set off only against income from speculative business which is Rs. 1,00,000. Brought
forward house property loss can be carried forward only up to 8 years which expires with the assessment year 2019-20.
Brought forward house property loss of the assessment year 2010-11 cannot be adjusted against house property income of
Computation of income of X –
Rs. Rs.
Speculative business income from Business B 1,00,000
Less: Brought forward speculative loss 1,00,000 Nil
Under section 80C 45,000
Under section 80GGC (donation to political party) 10,000 55,000
Net income 8,85,000
Tax on net income
Income-tax (30% of Rs. 4,30,000 and normal tax on the balance)† 1,39,250
exceed Rs. 50 lakh.
1. X was born on January 1, 1960.
2. Business B is non-speculative, whereas Business A is speculative.
137-P7 Mrs. X (64 years) submits the following information for the previous year 2019-20 –
1. Business income : Rs. 11,32,000 (speculative).
2. Short-term capital gain on transfer of gold : Rs. 6,000.
3. Long-term capital gain on transfer of silver : Rs. 10,000.
4. Short-term capital gain on transfer of equity shares in a stock exchange : Rs. 45,000 (it is calculated after deducting securities
transaction tax of Rs. 160).
5. Short-term capital loss on transfer of painting : Rs. 17,800.
6. Brought forward non-speculative business loss of the assessment year 2016-17 : Rs. 1,40,000.
7. Brought forward short-term capital loss of Rs. 10,000 of the assessment year 2017-18.
8. Brought forward loss (assessment year 2018-19) from the activity of owning and maintaining camel races : Rs. 6,000.
9. Life insurance premium on the life of her dependent mother : Rs. 10,000.
Find out the net income and tax liability of Mrs. X for the assessment year 2020-21. Assume that in past 10 years, she has always
submitted her return of income in time (except for the assessment year 2017-18, when return was late by 5 days).
Solution :
Mrs. X has generated long-term capital gain on transfer of silver which is taxable @ 20%. She has also earned short-term
capital gain on transfer of shares (subject to securities transaction tax) which is taxable @ 15% under section 111A. However,
such short-term capital gain given in the problem is Rs. 45,000, which is calculated after deducting securities transaction tax
of Rs. 160. Securities transaction tax is not deductible under the head “Capital gain”. Consequently, taxable short-term
capital gain is Rs. 45,160. Short-term capital gain on gold is taxable @ 30%. Income under the head “Capital gain” will be
calculated as follows–
Short-term Long-term Short-term
gold (30%) silver (20%) shares (15%)
Rs. Rs. Rs.
Capital gain 6,000 10,000 45,160
Less: Short-term capital loss on transfer of painting : Rs. 17,800 6,000 10,000 1,800
Less: Brought forward capital loss (cannot be adjusted as return was
submitted after due date) – – –
Balance Nil Nil 43,360
Rs. Rs.
Speculative business income 11,32,000
Less: Brought forward non-speculative loss 1,40,000
Less: Brought forward loss from the activity of owning and maintaining camel races 6,000 9,86,000
Short-term capital gain under section 111A 43,360
Less: Deduction under section 80C (not available) Nil
Tax on net income
Income-tax (15% of Rs. 43,360 and normal tax on the balance)† 1,13,704
1. Mrs. X was born on October 5, 1945.
2. The brought forward loss of Rs. 6,000 pertains to the activity of owning and maintaining race horses.
➠ 137-P8 A transaction is considered to be speculative if it is settled without actual delivery. Does it mean that loss arising from any
contract settled without delivery is speculative loss ?
exceed Rs. 50 lakh.
Solution :
 Settlement through cross contract - The definition of “speculative transaction” is given under section 43(5). What the section
visualises is a contract which is settled by means of a cross-contract, i.e., there is a purchase contract which is settled by a
sale contract.
 Not always settlement without delivery is a speculative transaction - If the contract is settled, for some other reasons, by payment
of damages, or even without payment of damages, it may or may not be a speculative transaction depending on the
circumstances of the case. If the contract is broken, i.e., for any reason one party is unable to give delivery or the other party
is unable to take delivery, it is a case of breach of contract. It depends, therefore, on the facts and circumstances of the case
as to whether there has actually been a “breach” of the contract or a “settlement” of the contract. A breach takes place on
account of repudiation of the contract or failure to perform it or a contract may be terminated through frustration,
impossibility or through any other cause which ends the contract under the Contract Act or the Sale of Goods Act. When
the obligation to supply or take delivery, as the case may be, comes to an end by operation of law, it does not make the
transaction speculative.
 Settlement to avoid delivery is a speculative transaction - If the parties mutually settle the contract without any intervening
circumstances, then it may be a speculative transaction if all the other conditions of section 43(5) are satisfied. The material
question is : why is the contract settled? If it is settled by mutual consent to avoid delivery, then it will be speculative. If it
is settled because of inability of the assessee to supply or on account of the fact that he does not have the necessary resources
to give the delivery, then it will be a breach of contract.
 Hedging contracts are excluded - The following hedging contracts, entered into by merchants in the course of business to
guard against future business losses through price fluctuations are not speculative transactions—
1. A contract in respect of raw material or merchandise entered into by a person in the course of his manufacturing or
merchanting business to guard against loss through future price fluctuations in respect of his contract for actual delivery
of goods, manufactured by him, or merchandise sold by him.
2. A contract in respect of stock and shares entered into by a dealer or investor therein to guard against loss in the holdings
of stocks and shares through price fluctuations.
3. 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 loss which may arise in the ordinary course of his business as such member.
The burden of proof is upon the assessee to show that transactions are merely hedging transactions.
 Trading in derivatives - From the assessment year 2006-07, trading in derivative will not be taken as speculative in nature.
➠ 137-E8 Discuss whether the following are speculative losses —

1. X sells goods to Y which are to be imported by X. Due to the change in import policy of the Government, the goods could not be
imported and finally X agrees to pay Y damages of Rs. 5 lakh for non-fulfilment of the contract.
2. On April 1, 2019, A agrees to supply 1,000 ton of rice to B at the rate of Rs. 30,000 per ton which will be delivered on November
1, 2019. At the time of entering into the contract A does not have rice in his stock. Nor does he take any step to procure the same from
the market. The bank balance and the overdraft limits of B do not permit a payment of Rs. 3 crore to A at the time of delivery. The
market rate of rice on November 1, 2019 is Rs. 32,000 per ton. A pays Rs. 20 lakh (i.e., the difference in price) to B to settle the contract.
Permissible deductions
CHAPTER 11
from gross total income
D
eductions available under sections 80C to 80U are of special nature and are allowed
to certain specified categories of taxpayers. Deductions under sections 80C to
80GGC are in relation to various investments and payments, whereas sections
80-IA to 80U cover deduction in respect of certain income. The purpose of these deductions
is to encourage savings, industrialisation, and to assist the taxpayers in meeting their
essential expenditures. These deductions have to be made from the gross total income in
order to arrive at net income. This Chapter explains the basis of allowance and calculation
of these deductions.
 WHAT ARE THE BASIC RULES GOVERNING DEDUCTIONS UNDER SECTIONS 80C TO 80U
137A. The following essential rules have to be kept in mind while calculating deductions under sections 80C to
80U :
 Deductible from gross total income - These deductions are allowed from gross total income.
 Aggregate deduction not to exceed GTI - The aggregate amount of deductions under sections 80C to 80U cannot
exceed gross total income (i.e., gross total income after excluding long-term capital gains, short-term capital gain
taxable under section 111A, winning from lotteries, races, etc., and income referred to in sections 115A, 115AB,
115AC, 115AD, 115BBA and 115D). For instance, if gross total income is nil, deductions under these sections
cannot be claimed.
 “Net income” - Deduction under sections 80-IA to 80U is admissible in respect of “net income” computed under
the provisions of the Act (i.e., income arrived at after deducting permissible deductions and adjusting current
or brought forward losses).
 Restrictions applicable in the case of deduction under sections 10A, 10AA, 10B, 10BA and 80H to 80RRB - The following
restrictions and special provisions are applicable in the case of deduction under sections 10A, 10AA, 10B, 10BA
and 80H to 80RRB—
1. Double deduction is not possible in respect of the same business income under any of the above sections.
2. The aggregate deductions under the various provisions referred to above, shall not exceed the profits and gains
of the undertaking or unit or enterprise or eligible business, as the case may be.
3. No deductions under the above provisions shall be allowed if the deduction has not been claimed in the return
of income.
4. Deduction under sections 80HH to 80RRB is not available, if return of income is not submitted on or before
due date under section 139(1).
5. For the purpose of claiming deduction under the above sections, the transfer price of goods and services
between the undertaking (i.e., unit or enterprise eligible for these deductions) and any other undertaking or unit
or enterprise or business of the assessee, shall be determined at the market value (or arm’s length price) of such
goods or services as on the date of transfer.
6. Revenue subsidies (e.g., transport subsidy, power subsidy, interest subsidy, etc.) received from the
Government towards reimbursement of cost of production/manufacture or for sale of the manufactured goods
are part of profits and gains of business derived from an industrial undertaking/eligible business, for the
424
425 Deduction in respect of life insurance premia, etc. Para 138
purpose of computing deduction available under sections 80-IA, 80-IB, etc. – Circular No. 39/2016, dated
November 29, 2016.
7. Disallowances under sections 32, 40(a)(ia), 40A(3), 43B, etc. (and other specific disallowances) related to the
business activity against which the Chapter VI-A deduction (i.e., sections 80C to 80U) has been claimed, result
in enhancement of the profits of the eligible business, and deduction under Chapter VI-A is admissible on the
profits so enhanced by the disallowance – Circular No.37/2016, dated November 2, 2016.
 DEDUCTION IN RESPECT OF LIFE INSURANCE PREMIA, DEFERRED ANNUITY, CONTRI-

BUTIONS TO PROVIDENT FUND, SUBSCRIPTION TO CERTAIN EQUITY SHARES OR
DEBENTURES, ETC. [SEC. 80C]
138. Section 80C provides deduction in respect of specified qualifying amounts paid or deposited by the assessee
in the previous year. The complete list of such investment is given in para 50.2-1. The following are salient
features of section 80C—
 Who can claim deduction under section 80C - Deduction under section 80C is available only to an individual or
a Hindu undivided family.
 What is the qualifying investment to avail deduction - Deduction is available on the basis of specified qualifying
investments/contributions/deposits/payments made by the taxpayer during the previous year. Such invest-
ment, deposit, etc., can be made out of taxable income or otherwise. The complete list of such investment is given
in para 50.2-1.
 What is the basis of deduction - Deduction is available on actual payment basis. For instance, if insurance premium
becomes due on March 24, 2020 and actually paid on April 1, 2020, such premium is qualified for deduction
under section 80C for the previous year 2020-21.
 How much deduction available under section 80C - The maximum amount deductible under section 80C is
Rs. 1,50,000.
 Is there any combined maximum ceiling - The aggregate amount of deduction under sections 80C, 80CCC and
80CCD(1) [i.e., contribution by an employee (or any other individual) towards National Pension Scheme (NPS)]
cannot exceed Rs. 1,50,000. However, employer’s contribution towards NPS shall not be considered for the
ceiling of Rs. 1,50,000 (for illustration, refer to para 41.4).
 Is there any deduction in respect of accrued interest of National Saving Certificates - Amount invested in National
Saving Certificates VIII Issue or IX Issue (NSC) is eligible for deduction under section 80C within the overall limit
given above. This investment is for 5 years or 10 years and the amount invested along with interest is paid back
to the investor at the time of maturity. However, interest is taxable annually on accrual basis. The accrued interest
for any year (except for last year) is deemed as reinvestment and the same is entitled for deduction under section
80C. This provision is explained in problem 138-P2.
 Is there any minimum period of holding - In respect of the investments/deposits/contributions eligible for tax
deduction under section 80C in some cases, the law provides a minimum period of holding. Such cases are given
below—
Nature of investments/deposits Number of item as per table Minimum period
given in para 50.2-1 of holding
Unit-linked insurance plan (ULIP) 8 and 9 5 years
Life insurance premium 1 2 years
Cost of purchase/construction of a residential 16 5 years
house property including repayment of loan
Deposit under Senior Citizen Saving Scheme 20 5 years
Time deposit in Post Office 21 5 years
ULIP terminated before 5 years - Where a member participating in Unit-linked insurance plan, terminates his
participation before making contribution for 5 years, then the following consequences should be noted—
Whether any deduction would be available in respect of any Any contribution made towards the above plan in the said
contribution towards ULIP plan in the previous year in previous year will not be qualified for deduction under
which the taxpayer terminates participation in ULIP before section 80C.
completing 5 years
What will be the tax treatment in respect of deduction The quantum of deduction already allowed in the preceding
already taken in the preceding years years would be deemed as income of the taxpayer for the
year in which the contribution to the plan is terminated.
Para 138 Permissible deductions from gross total income 426
Other cases - A similar rule is applicable in respect of termination of life insurance policy before 2 years and
transfer of residential house property before 5 years.
In the case of withdrawal before 5 years by the depositor during his lifetime from amount deposited under Senior
Citizen Saving Scheme or time deposit in Post Office, the amount withdrawn (excluding interest which has
already been taxed in earlier years) will be taxable in the year of withdrawal.
Problems
138-P1 X (age : 52 years), posted at Bombay, receives a salary of Rs. 36,000 per month during 2019-20 from A Ltd. His employer
contributes Rs. 53,000 towards provident fund. His other allowances are : special allowance : Rs. 2,28,000 and medical allowance :
Rs. 22,200 and 0.5 per cent commission on sales achieved by him. During the year, turnover achieved by X is Rs. 9,60,000. Employer
provides a Maruti-800 car with a chauffeur for his private and official purposes with effect from April 1, 2020. The amount of interest
credited to provident fund on May 10, 2019 @ 11 per cent per annum comes to Rs. 25,660.
Income of X from other sources is Rs. 8,04,000.
Payments/contributions :
Rs.
 Insurance premium paid on own life (sum assured : Rs. 22,500) (policy taken in 2008) 6,500
 Insurance premium paid on the life of mother 3,800
 Insurance premium paid on the life of father 500
 Insurance premium paid on the life of Mrs. X (sum assured : Rs. 1,00,000) 4,000
 Insurance premium paid on the life of his major son (since 2013) (sum assured : Rs. 40,000) 3,100
 Insurance premium due before March 31, 2020 but paid on April 4, 2020 on own life 1,000
 Contribution towards employees’ provident fund 50,000
 Contribution towards public provident fund 51,000
 Contribution made for participating in unit-linked insurance plan 2,000
 Repayment of loan taken from LIC for purchase of a house (whose construction is completed on March 10,
1987 and used by him for his residence) 22,000
 Tuition fee of X’s son 12,500
 Investments in units of a notified Mutual Fund for financing infrastructural facility 2,000
Determine the amount of tax liability on the assumption that provident fund is (a) statutory provident fund, (b) recognised provident
fund, (c) unrecognised provident fund.
Solution : SPF RPF UPF
Rs. Rs. Rs.
Salary (i.e., Rs. 36,000 × 12) 4,32,000 4,32,000 4,32,000
Special allowance 2,28,000 2,28,000 2,28,000
Medical allowance 22,200 22,200 22,200
Commission ½% of Rs. 9,60,000 4,800 4,800 4,800
Free motor car — — —
Free chauffeur — — —
Employer’s contribution towards provident fund in excess of 12% of salary
[i.e., Rs. 53,000 – 12% of (Rs. 4,32,000 + Rs. 4,800)] — 584 —
Interest credited in provident fund in excess of 9.5% per annum — 3,500 —
Gross salary 6,87,000 6,91,084 6,87,000
Salary income 6,37,000 6,41,084 6,37,000
Income from other sources 8,04,000 8,04,000 8,04,000
Less : Deduction under section 80C [see Note] 1,50,000 1,50,000 1,01,100
Tax on net income† [see Appendix 1 for tax rates] 1,99,800 2,01,024 2,14,470
Add : Surcharge (not applicable) Nil Nil Nil
Tax and surcharge 1,99,800 2,01,024 2,14,470
Add : Health and education cess (4% of tax and surcharge) 7,992 8,041 8,579
Tax liability (rounded off) 2,07,790 2,09,070 2,23,050
Note - Computation of deduction under section 80C—
Step 1 : Gross qualifying amount
Insurance premium on own life [limited to 20% of sum assured] 4,500 4,500 4,500
427 Deduction in respect of life insurance premia, etc. Para 138
SPF RPF UPF

Rs. Rs. Rs.
Insurance premium on the life of mother (*premium on the life of mother
is not eligible) Nil* Nil* Nil*
Insurance premium on the life of father (*premium on the life of father
is not eligible) Nil* Nil* Nil*
Insurance premium on the life of wife 4,000 4,000 4,000
Insurance premium on the life of major son 3,100 3,100 3,100
Insurance premium due but unpaid (*not eligible) Nil* Nil* Nil*
Contribution towards provident fund 50,000 50,000 Nil
Contribution towards public provident fund 51,000 51,000 51,000
Tuition fee of X’s son 12,500 12,500 12,500
Contribution towards unit-linked insurance plan 2,000 2,000 2,000
Repayment of loan to LIC 22,000 22,000 22,000
Investments in notified mutual fund for financing infrastructural facility 2,000 2,000 2,000
Gross qualifying amount 1,51,100 1,51,100 1,01,100
Step 2 - Amount deductible 1,50,000 1,50,000 1,01,100
138-E1 [P 11.6]* X (45 years), a salaried employee, wants to know the amount of tax liability in respect of his following income and
investments :
Rs.
Income
Dearness allowance (forming part of salary) 1,06,000
Conveyance allowance (fully utilised for official purposes) 1,06,500
Interest on non-Government securities (computed) 1,07,500
Investment
Insurance premium paid on the life of major daughter (policy taken in 2010) (sum assured : Rs. 3,00,000) 30,000
Insurance premium on the life of father dependent upon X (policy since 2011) 15,000
Insurance premium (due but unpaid on March 31, 2020) on own life (policy since 2006) 18,500
Investments in shares of an infrastructural facility companies 30,000
Contribution towards recognised provident fund 22,000
Part payment of cost of construction of a house to the Delhi Development Authority 1,80,000
Also determine the net income and tax liability for the assessment year 2020-21.
138-P2 X (44 years) is a businessman. His business income for the previous year 2019-20 is Rs. 7,40,000. He owns a commercial property
in Mumbai which is let out on monthly rent of Rs. 40,000 (municipal tax paid by tenant : Rs. 7,000, repair expenses paid by X : Rs. 2,000
and interest on borrowed capital : Rs. 1,60,000). Another property is owned by him in Aurangabad which is used for his residential
purposes (municipal tax : Rs. 18,000, interest of Rs. 1,80,000 paid on borrowed capital and part repayment of housing loan which was
originally taken in 1997 : Rs. 18,000). Bank fixed deposit interest of X is Rs. 17,000. During the previous year 2019-20, X has paid life
insurance premium on the life of his mother (insurance premium : Rs. 12,000). Another premium is paid on his own life (premium since
2011 : Rs. 6,000, sum assured Rs. 25,000). He has paid Rs. 24,000 as tuition fees of his son. On March 1, 2020, he has invested Rs. 20,000
in National Saving Certificates VIII Issue. In earlier years he invested in National Saving Certificates VIII Issue only on two occasions
– Rs. 30,000 on January 1, 2018 and Rs. 40,000 on February 10, 2019.
Find out the net income of X for the assessment year 2020-21. NSC interest is accrued at the rate of 8 per cent at the end of 1st year and
8.18 per cent at the end of 2nd year.
Solution : NSC interest taxable during the previous year 2019-20 on accrual basis - Amount invested on January 1, 2018 is
Rs. 30,000. 1st year’s interest became due on January 1, 2019 (taxable in the previous year 2018-19). 2nd year’s interest
becomes due @ 8.18% on January 1, 2020 (which comes to Rs. 2,454). It is taxable during the previous year 2019-20 on accrual
basis and the same is deemed as reinvestment in NSC on January 1, 2020. Amount invested on February 10, 2019 is Rs. 40,000.
1st year’s interest becomes due @ 8% on February 10, 2020 (which comes to Rs. 3,200). It is taxable during the previous year
2019-20 on accrual basis and the same is deemed as reinvestment in NSC on February 10, 2020. Similar rules are applicable
when interest of subsequent years become due (i.e., taxable on accrual basis and at the same time deemed as reinvestment
in NSC). The last year’s interest is paid on maturity. Last year’s interest is taxable on receipt basis and it is not treated as
deemed reinvestment.
Qualifying investment for the purpose of section 80C deduction for the previous year 2019-20 –
Rs.
Repayment of housing loan 18,000
Life insurance premium on the life of X’s mother (not qualified for deduction) Nil
Life insurance premium on the life of X (Rs. 6,000 or 20% of sum assured of Rs. 25,000, whichever is lower) 5,000
Tuition fees 24,000
Fresh NSC investment on March 1, 2020 20,000
Deemed investment in NSC on January 1, 2020 2,454
Deemed reinvestment in NSC on February 10, 2020 3,200
Total 72,654
Amount deductible under section 80C (total investment : Rs. 72,654 or Rs. 1,50,000, whichever is lower) 72,654
Computation of net income and tax liability –
Rs.
Commercial property [(Rs. 40,000 × 12) – 30% of it – Rs. 1,60,000] 1,76,000
Self-occupied property (interest is deductible up to Rs. 30,000 as loan was taken in 1997) (–)30,000 1,46,000
NSC interest accrued on January 1, 2020 2,454
NSC interest accrued on February 10, 2020 3,200 22,654
Less: Deduction under section 80C (as calculated earlier) 72,654
Net income 8,36,000
138-E2 Recalculate the net income of X in Problem 138-P2 after taking into consideration the following additional investment made
by him in earlier years –
1. Investment of Rs. 10,000 in NSC on January 3, 2017.
2. Investment of Rs. 2,40,000 in NSC on January 20, 2016.
3. Investment of Rs. 30,000 in NSC on January 6, 2015.
NSC interest is accrued in the above cases at the rate of 9.33 per cent at the end of 3rd year, 11.14 per cent at the end of 4th year, 12.11
per cent at the end of 5th year. Interest on investment made on January 6, 2015 is paid on January 6, 2020. Interest on other
investments in NSC is reinvested.
 DEDUCTION IN RESPECT OF NATIONAL SAVINGS SCHEME - TO WHAT EXTENT AVAIL-

ABLE [SEC. 80CCA]
139. Deduction was available under section 80CCA only for the assessment years 1988-89 to 1992-93 in the case
of an individual, and a Hindu undivided family.
 EQUITY LINKED SAVINGS SCHEME - WHEN DEDUCTION IS AVAILABLE [SEC. 80CCB]

140. Section 80CCB relating to deduction in respect of investment made in accordance with the notified Equity
Linked Savings Scheme was inserted for the assessment years 1991-92 and 1992-93. No deduction is available
from the assessment year 1993-94.
 DEDUCTION IN RESPECT OF PENSION FUND - WHEN AVAILABLE [SEC. 80CCC]

141. The following are salient features of section 80CCC –
 Who can claim deduction under section 80CCC - Deduction under section 80CCC is available only to an individual.
 What is the qualifying payment to avail deduction - Amount should be paid or deposited under an annuity plan
of the LIC of India or any other insurer for receiving pension. Amount should be paid or deposited out of income
chargeable to tax.
 How much deduction available under section 80CCC - The maximum amount deductible under section 80CCC is
Rs. 1,50,000.
80CCD(1) [i.e., contribution by an employee (or any other individual) towards National Pension Scheme (NPS)]
cannot exceed Rs. 1,50,000. However, employer’s contribution towards NPS (to the extent of 10 per cent of
employee’s salary) shall not be considered for the ceiling of Rs. 1,50,000.
429 Deduction in respect of national pension system Para 142
What is tax treatment of pension - If deduction is claimed under section 80CCC and later on pension is received
by the assessee (or his nominee), such pension will be taxable in the hands of recipients in the year of receipt.
Likewise, where (after claiming deduction under section 80CCC) the assessee or his nominee surrenders the
annuity before maturity date of such annuity, the surrender value shall be taxable in the hands of the assessee
or his nominee, as the case may be, in the year of the receipt.
 DEDUCTION IN RESPECT OF CONTRIBUTION TO A NATIONAL PENSION SYSTEM (NPS)

[SEC. 80CCD]
142. The following are salient features of section 80CCD –
 What is NPS - NPS covers New Pension Scheme (notified under Notification No. F.No. 5/7/2003-ECB & PR,
dated December 22, 2003) and Atal Pension Yojana (as per Notification No. SO 529(E), dated February 19, 2016).
 Who can join NPS - An individual who is employed by the Central Government (on or after January 1, 2004)
will have to join NPS on compulsory basis. Any other employee (irrespective of date of joining employment) may
become member of NPS (it is optional). Even a self-employed person may join NPS.
 Employer’s contribution to NPS - Is it income - Employer’s contribution to NPS is taxable as salary income in the
year of contribution.
 Deduction available under section 80CCD(2) in respect of employer’s contribution to NPS - Contribution by the
employer to NPS is deductible in the hands of the concerned employee in the year in which contribution is made.
However, no deduction is available in respect of employer’s contribution, which is in excess of 10 per cent (14
per cent, if employer is the Central Government) of the salary of the employee.
 Deduction available under section 80CCD(1) in respect of employee’s contribution to NPS - Employee’s contribution
to NPS is deductible in the year in which contribution is made. However, deduction on account of employee’s
contribution to NPS is limited to 10 per cent of the salary of employee. If contribution is made by a person (other
than an employee), deduction is limited to 20 per cent of gross total income.
80CCD(1) cannot exceed Rs. 1,50,000. However, employer’s contribution towards NPS (to the extent of 10 per
cent of employee’s salary) shall not be considered for the ceiling of Rs. 1,50,000.
 Additional deduction of Rs. 50,000 under section 80CCD(1B) - From the assessment year 2016-17, sub-section (1B)
has been inserted in section 80CCD so as to provide for an additional deduction in respect of any amount paid
(up to Rs. 50,000) for contributions made by any individual assessee under the NPS. On this additional
contribution, the ceiling of Rs. 1,50,000 (as given above) is not applicable.
 What is tax treatment of pension - The amounts standing to the credit of an assessee in NPS, for which a deduction
has already been claimed by the assessee, and accretions to such account, shall be taxed as follows –
1. Partial withdrawal from NPS (to the extent it does not exceed 25% of an employee’s contribution) Exempt
2. Amount received by an employee (or a non-employee) on closure of his account or on his
opting out of the NPS 60% exempt
3. In (2), amount is received by a nominee on the death of the assessee Exempt
4. Pension received out of NPS Taxable
5. Amount received in (2), (3), (4) is utilized for purchasing an annuity plan in the same previous
year Exempt
6. Pension received out of annuity plan purchased in (5) Taxable
 What is “salary” - For calculating 10 per cent limit for the above purpose, “salary” includes dearness allowance,
if the terms of employment so provide and commission (if commission is calculated at a percentage of turnover
achieved by an employee). However, it excludes all other allowances and perquisites (in other words, “salary”
for this purpose has the same meaning which is applicable in the case of house rent allowance).
Problems
142-P1 Find out net income in the following cases for the assessment year 2020-21 (age of the taxpayer in each case is 55 years) –
Situation 1 - X is employed by the Central Government since 2009. For the previous year 2019-20, his basic salary is Rs. 5,00,000 per
annum. Besides, he gets dearness allowance of Rs. 50,000 per annum and special allowance of Rs. 1,00,000 per annum. His income of
other sources is Rs. 2,10,000. The Central Government contributes 13 per cent of salary (including dearness allowance) towards NPS.
The contribution of X towards NPS is Rs. 1,04,000. Besides, X deposits Rs. 96,000 in public provident fund, Rs. 5,000 in notified (section
80CCC) annuity plan of LIC, and pays mediclaim insurance premium of Rs. 35,000 (policy covers medical benefits for X and Mrs. X).
Situation 2 - X in the aforesaid case is employed by a private sector company and the employer has opted for NPS.
Para 142A Permissible deductions from gross total income 430
Situation 3 - X in the aforesaid case is employed by a private sector company and the employer has recognized provident fund.
Contributions given in Situation 1 are towards recognized provident fund. Besides, X contributes an additional sum of Rs. 40,000
towards NPS.
Situation 4 - X is a self-employed person. His business income is Rs. 8,10,000 and income from other sources is Rs. 2,10,000. He annually
contributes Rs. 2,60,000 towards NPS. Besides, X deposits Rs. 30,000 in public provident fund, deposits Rs. 5,000 in notified (section
80CCC) annuity plan of LIC, and pays mediclaim insurance premium of Rs. 35,000 (policy covers medical benefits for X and Mrs. X).
Solution : Situation 1 Situations 2 Situation 3 Situation 4
Rs. Rs. Rs. Rs.
Basic salary and dearness allowance 5,50,000 5,50,000 5,50,000 Nil
Special allowance 1,00,000 1,00,000 1,00,000 Nil
Employer’s contribution towards NPS (13% of Rs. 5,50,000) 71,500 71,500 Nil Nil
Employer’s contribution towards RPF (in excess of 12% of salary) Nil Nil 5,500 Nil
Gross salary 7,21,500 7,21,500 6,55,500 Nil
Less: Standard deduction 50,000 50,000 50,000 Nil
Income under the head “Salaries” 6,71,500 6,71,500 6,05,500 Nil
Business income Nil Nil Nil 8,10,000
Income from other sources 2,10,000 2,10,000 2,10,000 2,10,000
Gross total income (GTI) 8,81,500 8,81,500 8,15,500 10,20,000
Less: Deductions
DEDUCTIONS NOT COVERED BY CUMULATIVE CEILING –
Under section 80CCD(1B) (contribution by the assessee towards NPS
up to Rs. 50,000) (a) 50,000 50,000 40,000 50,000
Under section 80CCD(2) [contribution by employer towards NPS,
subject to maximum of 14% of salary in the case of Central Govern-
ment employee or 10% of salary in the case of any other employee] (b) 71,500 55,000 Nil Nil
Under section 80D (mediclaim insurance premium) (limited to Rs. 25,000
in the case of a person who is not a senior citizen) (c) 25,000 25,000 25,000 25,000
DEDUCTIONS COVERED BY CUMULATIVE CEILING OF RS. 1,50,000 –
Under section 80C (PPF and contribution towards recognized provident
fund) (d) (96,000) (96,000) (1,50,000) (30,000)
Under section 80CCC (annuity plan of LIC) (e) (5,000) (5,000) (5,000) (5,000)
Under section 80CCD(1) [contribution of X towards NPS (excluding
the contribution considered above in section 80CCD(1B)), subject to a
maximum of 10% of salary in the case of an employee or 20% of GTI in
the case of a person other than employee] (f) (54,000) (54,000) Nil (2,04,000)
Maximum deductible amount [i.e., (d) + (e) + (f), subject to a maximum
of Rs. 1,50,000] (g) 1,50,000 1,50,000 1,50,000 1,50,000
Net income [GTI – (a) – (b) – (c) – (g)] 5,85,000 6,01,500 6,00,500 7,95,000
142-E1 Make the following changes in Problem 142-P1 and calculate the net income in Situations 1, 2, 3 and 4 –
1. Basic salary is Rs. 6,00,000 per annum (not Rs. 5,00,000 per annum).
2. Income from other sources is Rs. 1,10,000 (not Rs. 2,10,000).
3. Mediclaim insurance premium of Rs. 35,000 given in the problem is for the medical benefits of parents of X.
 DEDUCTION IN RESPECT OF INVESTMENT MADE UNDER ANY EQUITY SAVING SCHEME

[SEC. 80CCG]
142A. The provisions of section 80CCG are given below—
 Conditions - Deduction under this section is available if the following conditions are satisfied –
1. The assessee is a resident individual (maybe ordinarily resident or not ordinarily resident).
2. His gross total income does not exceed Rs. 12 lakh.
3. He has acquired listed shares or listed units in accordance with a notified scheme.
4. The assessee is a new retail investor as specified in the above notified scheme.
5. The investment is locked-in for a period of 3 years from the date of acquisition in accordance with the above
scheme.
6. The assessee satisfies any other condition as may be prescribed.
431 Maximum deductible amount Para 143.1
 Amount and period of deduction - If the above conditions are satisfied, deduction under section 80CCG is 50 per
cent of amount invested during the previous year or Rs. 25,000, whichever is less. Deduction is available for
three consecutive assessment years, beginning with the assessment year relevant to the previous year in which
the listed equity shares or listed units of equity oriented fund are first acquired. Moreover, deduction is
available up to the assessment year 2017-18†.
 DEDUCTION IN RESPECT OF MEDICAL INSURANCE PREMIA - WHEN AND TO WHAT

EXTENT AVAILABLE [SEC. 80D]
143. Deduction under section 80D is available if the following conditions are satisfied –
1. The taxpayer is an individual (maybe resident/non-resident or Indian citizen/foreign citizen) or a Hindu
undivided family (maybe resident or non-resident).
2. Payment should be made out of income chargeable to tax.
3. Payment should be made by any mode other than cash. However, payment on account of preventive health
check-up can be made by any mode (including cash).
143.1 Maximum deductible amount - The maximum deductible amount and other relevant points are given
below –
Deduction in the case of Deduction in the
individual case of HUF
For whose benefit payment can be made Family Parents Any member
of HUF
A. a. Medi-claim insurance premium Eligible Eligible Eligible
b. Contribution to CGHS/notified scheme Eligible – –
c. Preventive health check-up payment Eligible Eligible –
Maximum deduction –
- General deduction [applicable in respect of (a), (b) and (c)] Rs. 25,000 Rs. 25,000 Rs. 25,000
- Additional deduction [applicable only in case of (a) when
medi-claim policy is taken on the life of a senior citizen] Rs. 25,000 Rs. 25,000 Rs. 25,000
B. Medical expenditure on the health of a person who is a senior
citizen if medi-claim insurance is not paid on the health of
such person Eligible Eligible Eligible
Maximum deduction in respect of (B) Rs. 50,000 Rs. 50,000 Rs. 50,000
C. Maximum deduction in respect of (A) and (B) Rs. 50,000 Rs. 50,000 Rs. 50,000
Notes –
1. Family includes individual, spouse of the individual and dependent children of the individual.
2. Parents include father and mother (dependent or otherwise). Father-in-law and mother-in-law are not included.
3. The aggregate payment on account of preventive health check-up of self, spouse, dependent children, father and mother
cannot exceed Rs. 5,000.
4. The above payments [given under (A) and (B)] should be made by any mode other than cash. However, payment on
account of preventive health check-up can be made by any mode (including cash).
5. “Senior citizen” is a resident individual who is at least 60 years of age at any time during the previous year.
6. In case of single premium health insurance policies having cover of more than one year, the aforesaid deduction shall be
allowed on proportionate basis for the number of years for which health insurance cover is provided.
† However, an assessee who has claimed deduction under this section for assessment year 2017-18 and earlier assessment years shall be allowed
deduction under this section till the assessment year 2019-20 if he is otherwise eligible to claim the deduction as per the provisions of this section.
Para 143.1 Permissible deductions from gross total income 432
Problems
143-P1 For the previous year 2019-20, the business income of X (age : 29 years) is Rs. 11,53,000. During the year, he pays the following
by cheque to get tax benefit—
Insured person Mediclaim Life insurance premium
insurance premium (policies taken during 2010-11)
Rs. Rs.
Taxpayer, spouse and children—
X 22,000 15,000†
Mrs. X (not dependent upon X) [*sum assured is Rs. 80,000] 4,500 20,000*
Son (not dependent upon X) 800 2,000†
Daughter (dependent upon X) 2,500 700†
Parents of the taxpayer—
Father (age: 62 years, resident in India, not dependent upon X) 11,000 1,200†
Mother (age: 59 years, dependent upon X) 37,000 6,000†
Others—
Grand parents (dependent upon X) 500 2,000†
Father of Mrs. X (dependent upon X) 800 7,000†
Brother (dependent upon X) 900 4,500†
†Less than 20 per cent of sum assured.
Besides, X pays Rs. 1,16,000 towards pension fund of LIC.
Solution : Rs.
Less: Deductions under sections 80C to 80U
Under section 80C [see Note] 33,700
Under section 80CCC (being payment towards pension fund of LIC) 1,16,000
Under section 80D [see Note] 61,000
Net income 9,42,300
Tax‡ [see Appendix 1] 1,00,960
Note - Computation of deduction under sections 80C and 80D—
Insured person Life insurance for Mediclaim insurance
the purpose of for the purpose of
section 80C section 80D
Rs. Rs.
Taxpayer, spouse and dependent children –
X 15,000 22,000
Mrs. X [limited to 20% sum assured] 16,000 4,500
Son (not dependent upon X) 2,000 —
Dependent daughter 700 2,500
Total — 29,000
Amount deductible under section 80D (maximum: Rs. 25,000, extra
deduction of Rs. 25,000 is not available as X, Mrs. X and dependent
children are not senior citizens) (a) — 25,000
Parents of X –
Father (not dependent) — 11,000
Dependent mother — 37,000
Grand parent, father-in-law, dependent brother — —
Total — 48,000
Amount deductible under section 80D (maximum: Rs. 25,000, extra
deduction of Rs. 11,000 is available as father of X is resident in India
and senior citizen) (b) — 36,000
Amount deductible under sections 80C and 80D [*(a) + (b)] 33,700 61,000*
‡Rebate under section 87A is available only in the case of a resident individual if his/her taxable income is Rs. 5,00,000 or less.
433 Deduction in respect of medical treatment Para 144
143-E1 Find out the tax liability in problem 143-P1, if insurance premia are paid in cash.
143-P2 X (58 years) is the assessee. Other members of his family are Mrs. X (55 years) and dependent children Y and Z. Parents of X
are resident in India but they have annual income of more than Rs. 25 lakh from business, rent and interest. The following expenditure
is incurred by X during the previous year 2019-20 for the purpose of claiming deduction under section 80D –
For X, Mrs. X, Y and Z For parents of X
Mediclaim insurance premium payment by cheque A = Rs. 2,000 D = Rs. 70,000
Contribution by cheque to Central Govt. Health Scheme B = Rs. 6,000 E=0
Cash payment for preventive health check-up C = Rs. 8,000 F = Rs. 7,000
Find out the amount deductible under section 80D for the assessment year 2020-21.
Solution : The aggregate of C and F cannot exceed Rs. 5,000. To get maximum deduction, it is better in this case if C is taken
as equal to Rs. 5,000 and F is taken as zero. Now total of A, B and C is Rs. 13,000 which is not more than Rs. 25,000. The amount
deductible for X, Mrs. X and children will be Rs. 13,000. For parents (being senior citizens) the amount deductible will be
Rs. 50,000. The aggregate deduction under section 80D will be Rs. 63,000.
143-E2 Suppose in Problem 143-P2, A = Rs. 13,000, B = 0, C = Rs. 20,000, D = Rs. 64,000, E = 0 and F = Rs. 40,000. Recalculate
amount deductible in the hands of X under section 80D.
143-P3 Suppose in Problem 143-P2, A = 0, B = 0, C = Rs. 17,000, D = 0, E = 0 and F = Rs. 2,000.
Solution : The aggregate of C and F cannot exceed Rs. 5,000. In this case, mediclaim insurance premium (i.e., A and D) and
contribution to Central Government Health Scheme (i.e., B and E) is zero. Therefore, only Rs. 5,000 is deductible under section
80D.
143-E3 Suppose in Problem 143-P2, A = Rs. 600, B = Rs. 13,000, C = Rs. 7,000, D = Rs. 42,000, E = 0 and F = Rs. 26,000. Recalculate
amount deductible in the hands of X under section 80D.
 DEDUCTION IN RESPECT OF MAINTENANCE INCLUDING MEDICAL TREATMENT OF A

DEPENDENT BEING A PERSON WITH DISABILITY - WHEN AND TO WHAT EXTENT
AVAILABLE [SEC. 80DD]
144. The provisions of section 80DD are given below—
 Who can claim deduction - A resident individual or a resident HUF can claim deduction under section 80DD.
 What is the qualifying expenditure - A resident individual/HUF can claim deduction under section 80DD, if he/
it has incurred an expenditure for the medical treatment (including nursing), training and rehabilitation of a
dependent relative (being a person with a disability). Deduction can also be claimed, if the resident individual/
HUF has paid or deposited under any approved scheme of LIC (or any other insurer) or UTI for the maintenance
of such dependent relative.
 Who is dependent relative suffering from disability - In the case of an individual, “dependant” means spouse,
children, parents, brothers and sisters, who is wholly and mainly dependent upon the individual. In the case of
Hindu undivided family, “dependant” means any member (of the family) who is wholly and mainly dependent
upon the family. “Person with disability” means a person who suffers 40 per cent or more of any of the following
– blindness, low vision, leprosy-cured, hearing impairment, locomotor disability, mental retardation and mental
illness.
 How much is deductible under section 80DD - A fixed deduction of Rs. 75,000 is available. A higher deduction of
Rs. 1,25,000 is available if such dependent relative is suffering from a severe disability (i.e., having disability of
80 per cent or above). Deduction under this section is available regardless of actual expenditure.
 Certificate if any required - For claiming the above deduction, the assessee should have a certificate issued by the
medical authority. This may be furnished to the Assessing Officer whenever he wants to examine it. Where the
condition of disability requires reassessment, a fresh certificate from the medical authority shall have to be
obtained after the expiry of the period mentioned on the original certificate in order to continue to claim the
deduction.
Problems
144-P1 X (age : 36 years), a resident individual, has income of Rs. 7,40,000 (i.e., Rs. 4,45,000 from a business in Delhi and Rs. 2,95,000
from a property in Bombay) during the previous year 2019-20. Find out his net income and tax liability for the assessment year
2020-21 taking into consideration the following payments —
Rs.
1. Life insurance premium on own life (policy since 2011) paid by X in cash on March 31, 2020 (sum
assured Rs. 2,00,000) 33,334
2. Contribution towards pension fund of LIC 11,000
3. Mediclaim insurance premium on the life of dependent father (age : 64 years and last foreign travel : during
1996-97) paid by cheque on April 20, 2019 39,000
4. Mediclaim insurance premium on the life of dependent handicapped brother paid by cheque on April 26, 2019 7,000
5. Medical treatment of dependent brother (being a person with disability) 5,000
6. Deposit with LIC for the maintenance of the dependent brother (being a person with disability) 20,000
Solution :
Property income 2,95,000
Less : Deductions under sections 80C to 80U
Under section 80C [payment of life insurance] 33,334
Under section 80CCC [contribution towards pension fund of LIC] 11,000
Under section 80D [mediclaim insurance premium on the health of dependent father ; mediclaim
premium on the health of dependent brother is not qualified for deduction] 39,000
Under section 80DD [the amount of deduction is Rs. 75,000 irrespective of the amount incurred or
deposited] 75,000
Tax† on net income 28,834
144-E1 Find out the amount of tax liability if X in problem 144-P1 is a non-resident.
144-P2 X is a resident individual. He annually deposits a sum of Rs. 15,000 with LIC for the maintenance of his handicapped grandfather
who is wholly dependent upon him. The disability is one which comes under section 2(i) of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995. A copy of certificate from medical authority is submitted.
Determine the amount of deduction available under section 80DD for the assessment year 2020-21.
Solution : As grandfather does not come within the definition of “dependent” in section 80DD, nothing shall be deducted
under section 80DD.
144-E2 Suppose in 144-P2, the person with disability is dependent brother (disability to the extent of 40 per cent).
 DEDUCTION IN RESPECT OF MEDICAL TREATMENT, ETC. - TO WHAT EXTENT AVAILABLE

[SEC. 80DDB]
145. The provisions of section 80DDB are given below—
 Who can claim deduction - A resident individual or a resident HUF can claim deduction under section 80DDB.
 What is the qualifying expenditure - A resident individual/HUF can claim a deduction under section 80DDB, if
he/it has actually incurred expenditure for the medical treatment of a specified disease or ailment as prescribed
by the Board††. Expenditure should be incurred for medical treatment of the assessee himself or wholly/mainly
dependent husband/wife, children, parents, brothers and sisters of the individual (any member of the family
in the case of HUF).
 How much is deductible under section 80DDB - Actual expenditure on medical treatment or Rs. 40,000 (Rs. 1,00,000
in the case of a senior citizen*), whichever is lower, is deductible. Deduction under this section shall be reduced
by the amount received, if any, under insurance from an insurer, or reimbursed by an employer, for the medical
treatment of the person referred to above.
 Certificate if any required - The assessee is required to obtain a prescription from a specialist doctor for the
purpose of availing this deduction.
††Rule 11DD.
*Senior citizen is a resident individual who is 60 years of age at any time during the previous year.
435 Deduction in respect of medical treatment Para 145
Problems
145-P1 X (35 years) is a resident individual. During the previous year 2019-20, he incurs the following expenditure—
Actual Amount reimbursed Amount reimbursed

expenditure by insurance by employer
company of X
Rs. Rs. Rs.
Medical treatment (specified disease) of X in a Government 30,000 Nil 28,000
hospital
Medical treatment (specified disease) of Mrs. X in a 14,000 3,000 6,000
hospital recognised by Chief Commissioner
Salary of X is Rs. 4,00,000. In the two cases, disease is specified in the rules made by the Board. Find out the net income of X for the
Solution : Rs.
Salary 4,00,000
Perquisite in respect of medical treatment of X and his spouse Nil
Less : Deduction under section 80DDB [see Note] 3,000
Net income 3,47,000
Note - The amount deductible is as follows—
a. actual expenditure (i.e., Rs. 30,000 + Rs. 14,000); or
b. Rs. 40,000 (Rs. 1,00,000 in the case of senior citizen),
whichever is less.
Rs. 40,000 is deductible if nothing is recovered from the insurance company or employer. From the amount deductible (i.e.,
Rs. 40,000 in this case), the amount received from insurance company as well as employer shall be deducted. Therefore,
Rs. 40,000 – Rs. 3,000 – Rs. 28,000 – Rs. 6,000, i.e., Rs. 3,000 is deductible.
145-E1 Suppose in problem 145-P1, X is a foreign citizen who is resident in India
145-P2 Find out the amount of deduction under section 80DDB in the following cases for the assessment year 2020-21—
Name of the taxpayer X Y Z A B
Residential status of the taxpayer Resident Resident Resident Resident Non-
resident
Expenditure incurred on medical treatment of dependent mother in a 90,000 26,000 70,000 1,00,000 34,000
hospital recognised by the Chief Commissioner (amount in rupees)
Age of mother 89 years 59 years 64 years 63 years 65 years
Residential status of dependent mother Resident Non- Resident Non- Resident
resident resident
Whether the disease is specified under rule made by the Board Yes Yes Yes Yes Yes
Amount received from insurance company (amount in rupees) 4,000 14,000 80,000 15,000 7,000
Amount received from the employer of the taxpayer (amount in 2,000 3,000 4,000 20,000 16,000
rupees)
Solution :
Amount of deduction under section 80DDB X Y Z A B
Rs. Rs. Rs. Rs. Rs.
Deduction under section 80DDB if no money is recovered from 90,000 26,000 70,000 40,000 Nil
insurance company and employer
Less : Amount received from insurance company and employer 6,000 17,000 84,000 35,000 23,000
Amount of deduction under section 80DDB 84,000 9,000 Nil 5,000 Nil
Note - The perquisite in respect of reimbursement of medical expenditure by employer is not chargeable to tax.
145-E2 Suppose in problem 145-P2, the expenditure is incurred on medical treatment of dependent grandmother, find out (a) amount
of deduction under section 80DDB, and (b) whether perquisite in respect of reimbursement of medical expenditure is chargeable to
tax.
145-P3 X is a resident individual. His income from a business in Delhi is Rs. 7,96,000 for the assessment year 2020-21. During the
previous year 2019-20, he makes the following payments—
Rs.
Amount deposited on April 10, 2019 in an annuity plan of LIC 11,000
Mediclaim insurance premium paid on April 15, 2019 to National Insurance Co. on the life of his dependent resident
father (age : 64 years) 42,000
Cash expenditure on preventive health check up of mother (50 years) 9,200
Mediclaim insurance premium paid on April 20, 2019 to New India Insurance Co. on the life of his dependent grand father
and grand mother (both are resident in India) 3,000
Expenditure incurred during the previous year 2019-20 on medical treatment of his dependent grand mother being a
person with disability (expenditure is recovered from New India Insurance Company) 3,200
Expenditure incurred during September 2019 on medical treatment of his father who is suffering from a disease specified
in rule 11DD (as certified by the doctor) (Rs. 97,000 is, however, recovered from the New India Insurance Company) 98,000
Find out the net income of X for the assessment year 2020-21.
Solution :
Under section 80CCC (being contribution towards annuity plan of LIC) 11,000
Under section 80D (preventive health check up expenditure up to Rs. 5,000 is deductible) (Rs. 42,000 +
Rs. 5,000) (insurance premium on the life of grand father and grand mother is not eligible for deduction) 47,000
Under section 80DD (grand mother does not come within the definition of “dependent”, nothing is
deductible) Nil
Under section 80DDB (amount deductible is Rs. 98,000 – Rs. 97,000) 1,000
Net income 7,37,000
145-E3 Find out the net income in problem 145-P3, if (a) X is a non-resident but his parents and grand-parents are resident in India
(b) X is resident but his parents and grand-parents are non-resident in India.
 DEDUCTION IN RESPECT OF PAYMENT OF INTEREST ON LOAN TAKEN FOR HIGHER

EDUCATION - WHEN AND TO WHAT EXTENT AVAILABLE [SEC. 80E]
146. The following are salient features of section 80E –
 Who can claim deduction - Only an individual can claim deduction under section 80E.
 What is the qualifying expenditure - If loan is taken by an individual for any study in India or outside India (i.e.,
any study after passing senior secondary examination or its equivalent) from a bank, financial institution or an
approved charitable institution, interest is deductible in the year in which interest is paid.
 For whose education loan should be taken - Interest is deductible if loan is taken for pursuing assessee’s own
education or for the education of his relatives (i.e., spouse, children or any student for whom the individual is
the legal guardian).
 Maximum monetary ceiling - Entire interest is deductible in the year in which the assessee starts paying interest
on loan and subsequent 7 years or until interest is paid in full. However, interest should be paid out of income
chargeable to tax.
Problems
146-P1 X has taken three education loans on March 1, 2019. The details of which are given below—
Loan 1 Loan 2 Loan 3
For whose education loan was taken X X Daughter of X
Purpose of loan Full time MBA Part time MCA Full time MBA
Rs. Rs. Rs.
Amount of loan 6,00,000 3,00,000 5,00,000
437 Deduction in respect of interest on loan Para 146B
Rs. Rs. Rs.

Annual repayment of loan during the previous year 2019-20 1,00,000 50,000 1,00,000
Annual payment of interest during the previous year 2019-20 60,000 40,000 55,000
Find out the amount deductible under section 80E for the assessment year 2020-21.
Solution : The amount deductible under section 80E would be as follows—
Rs.
Repayment of loan Nil
Payment of interest 1,55,000
Total 1,55,000
Amount deductible under section 80E 1,55,000
146-E1 What will be the amount of deduction in Problem 146-P1 if loan is taken from a friend ?
 DEDUCTION IN RESPECT OF INTEREST ON LOAN TAKEN FOR RESIDENTIAL HOUSE

PROPERTY [SEC. 80EE]
146A. The provisions of section 80EE are given below—
 Conditions - The following conditions should be satisfied in order to claim deduction under section 80EE –
1. The assessee is an individual. He may be resident or non-resident.
2. He has taken a loan.
3. Loan is taken for acquisition of residential house property.
4. Loan is taken from a bank or a housing finance company. A housing finance company means a public company
formed or registered in India with the main object of carrying on the business of providing long-term finance for
construction or purchase of residential houses in India.
5. Loan has been sanctioned by the bank/housing finance company during April 1, 2016 and March 31, 2017.
6. The amount of loan sanctioned for residential house property does not exceed Rs. 35 lakh.
7. The value of residential house property does not exceed Rs. 50 lakh.
8. The assessee does not own any residential house property on the date of sanction of loan.
 Amount of deduction - If the above conditions are satisfied, the assessee can claim deduction under section 80EE.
Deduction is available in respect of interest payable on the above loan or Rs. 50,000, whichever is less. Deduction
is available for the assessment year 2017-18 and subsequent assessment years.
 Double deduction not possible - If deduction is claimed under section 80EE, no deduction will be allowed in respect
of such interest under any other provision of the Act for the same or any other assessment year.
 DEDUCTION IN RESPECT OF INTEREST ON LOAN TAKEN FOR CERTAIN HOUSE PROPERTY

- WHEN AVAILABLE [SEC. 80EEA]
146B. Section 80EEA has been inserted with effect from the assessment year 2020-21. Deduction under this
section is available if the following conditions are satisfied –
1. The assessee is an individual.
2. He is not eligible to claim any deduction under section 80EE.
3. He has taken a loan for the purpose of acquisition of residential house property.
4. The loan is sanctioned by a financial institution (i.e., a bank or banking institution or a housing finance
company) during April 1, 2019 and March 31, 2020.
5. The stamp duty value of the residential house property does not exceed Rs. 45 lakh.
6. The assessee does not own any residential house property on the date of sanction of loan.
 Amount of deduction - If the above conditions are satisfied, the assessee can claim deduction under section
80EEA. Deduction is available in respect of interest payable on the above loan or Rs. 1,50,000, whichever is less.
Deduction is available for the assessment year 2020-21 and subsequent assessment years.
Para 146C Permissible deductions from gross total income 438
 Same interest is not deductible twice - If interest is claimed as deduction under section 80EEA, such interest (or
such portion of interest) is not again deductible under section 24(b) or under any other provision of the Act for
the same or any other assessment year.
 DEDUCTION IN RESPECT OF INTEREST ON LOAN TAKEN FOR PURCHASE OF ELECTRIC

VEHICLE - WHEN AVAILABLE [SEC. 80EEB]
146C. Section 80EEB has been inserted from the assessment year 2020-21. Under this section, deduction is
available if the following conditions are satisfied –
1. The assessee is an individual.
2. He has taken a loan for the purpose of purchase of an electric vehicle.
3. Loan is taken from a financial institution (i.e., a bank or any deposit taking NBFC or a systematically important
non-deposit taking NBFC).
4. Loan is sanctioned during April 1, 2019 and March 31, 2023.
 Amount of deduction - If the above conditions are satisfied, the assessee can claim deduction under section
80EEB. Deduction is available in respect of interest payable on the above loan or Rs. 1,50,000, whichever is less.
Deduction is available for the assessment year 2020-21 and subsequent assessment years.
 Same interest is not deductible twice - If interest is claimed as deduction under section 80EEB, such interest (or such
portion of interest) is not again deductible under any other provision of the Act for the same or any other
assessment year.
 DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE INSTITU-

TIONS, ETC. - HOW ARRIVED AT [SEC. 80G]
147. Deduction under this section is available to any taxpayer (maybe resident or non-resident† individual,
company, firm or any other person) and calculated under the following three steps :
Step 1 Gross qualifying amount [see para 147.1]
Step 2 Net qualifying amount [see para 147.2]
Step 3 Amount deductible [see para 147.3]
147.1 Step 1 - Gross qualifying amount - Gross qualifying amount is the aggregate of the donations made to
any of the institutions/fund given in column 1 of the table given in para 147.3. Donation made in kind shall not
be included.
147.2 Step 2 - Net qualifying amount - Net qualifying amount is limited to 10 per cent of adjusted gross total
income of the assessee.
 Adjusted gross total income - The following shall be deducted from gross total income to find out adjusted gross
total income—
a. amount deductible under sections 80C to 80U (but not section 80G) ;
b. such incomes on which income-tax is not payable ;
c. long-term capital gains ;
d. short-term capital gain which is taxable under section 111A at the rate of 15 per cent; and
e. incomes referred to in section 115A, 115AB, 115AC, 115ACA or 115AD.
 When the above ceiling is not applicable - The aforesaid ceiling does not apply in relation to donations made to
funds specified in (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (l) (m), (n), (o), (p), (q), (r), (s), (t), (u), (zc), (zd), (ze), (zf)
or (zg) of column 1, of the table given in para 147.3.
147.3 Step 3 - Amount deductible - Net qualifying amount is eligible for deduction on the basis given below
in column 3 of table infra —
† Donation to Clean Ganga Fund by a non-resident is not eligible for deduction under section 80G.
439 Step 3 - Amount deductible Para 147.3
Donee Maximum limit Deduction (as a

percentage of net
qualifying amount)
(1) (2) (3)
a. National Defence Fund set up by the Central Government Not applicable 100 per cent
b. Jawaharlal Nehru Memorial Fund Not applicable 50 per cent
c. Prime Minister’s Drought Relief Fund Not applicable 50 per cent
d. Prime Minister’s National Relief Fund Not applicable 100 per cent
e. Prime Minister’s Armenia Earthquake Relief Fund Not applicable 100 per cent
f. Africa (Public Contributions - India) Fund Not applicable 100 per cent
g. National Children’s Fund Not applicable 100 per cent
h. Indira Gandhi Memorial Trust Not applicable 50 per cent
i. Rajiv Gandhi Foundation Not applicable 50 per cent
j. National Foundation for Communal Harmony Not applicable 100 per cent
k. An approved university/educational institution Not applicable 100 per cent
l. The Maharashtra Chief Minister’s Relief Fund during October 1, 1993
and October 6, 1993 and the Chief Minister’s Earthquake Relief Fund Not applicable 100 per cent
m. Any fund set up by the Government of Gujarat for providing relief
to victims of earthquake in Gujarat Not applicable 100 per cent
n. Zila Saksharta Samiti Not applicable 100 per cent
o. National Blood Transfusion Council and State Council for Blood
Transfusion Not applicable 100 per cent
p. Fund set up by a State Government for the medical relief to the poor Not applicable 100 per cent
q. Central Welfare Fund of the Army and Air Force and the Indian
Naval Benevolent Fund Not applicable 100 per cent
r. Andhra Pradesh Chief Minister’s Cyclone Relief Fund Not applicable 100 per cent
s. National Illness Assistance Fund Not applicable 100 per cent
t. Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund Not applicable 100 per cent
u. National Sports Fund or National Cultural Fund or Fund for
Technology Development and Application Not applicable 100 per cent
v. Any other approved fund or any institution which satisfies conditions
mentioned in section 80G(5) As given below 50 per cent
w. Government or any local authority to be utilised for any charitable
purpose other than the purpose of promoting family planning As given below 50 per cent
x. Any authority constituted in India by (or under) any law enacted
either for the purpose of dealing with and satisfying the need for
housing accommodation or for the purpose of planning, deve-
lopment or improvement of cities, towns and villages, or for both As given below 50 per cent
y. Any corporation specified in section 10(26BB) for promoting interest
of minority community As given below 50 per cent
z. Government or any approved local authority, institution or associa-
tion to be utilised for the purpose of promoting family planning As given below 100 per cent
za. Any notified temple, mosque, gurudwara, church or other place (for
renovation or repair) As given below 50 per cent
zb. The Indian Olympic Association or to an institute notified by the
Central Government for the development of infrastructure for sports
and games in India; or the sponsorship of sports and games in
India (only donation by a company) As given below 100 per cent
zc. Any trust, institution or fund to which section 80G(5C) applies for
providing relief for victims of earthquake in Gujarat (contribution
could be made during January 26, 2001 and September 30, 2001) Not applicable 100 per cent
zd. National Trust for Welfare of Persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities Not applicable 100 per cent
Donee Maximum limit Deduction (as a

percentage of net
qualifying amount)
(1) (2) (3)
ze. Swachh Bharat Kosh† Not applicable 100 per cent
zf. Clean Ganga Fund (amount donated by residents only)† Not applicable 100 per cent
zg. National Fund for Control of Drug Abuse Not applicable 100 per cent
Maximum amount - Where the aggregate of the sums mentioned in (v), (w), (x), (y), (z), (za), or (zb) supra exceeds
10 per cent of the adjusted gross total income, then the amount in excess of 10 per cent of the adjusted gross total
income will be ignored while computing the aggregate of the sums in respect of which deduction is to be allowed.
147.3-1 MODE OF PAYMENT - Donation can be given in cash or by cheque or draft. However, no deduction shall be
allowed under section 80G in respect of donation in cash of an amount exceeding Rs. 2,000.
Problems
147-P1 X (34 years), a resident individual, submits the following particulars of his income for the previous year 2019-20 :
Rs.
Long-term capital gains on transfer of gold 4,10,000
Short-term capital gain on sale of shares taxable under section 111A 20,000
Other short-term capital gain 10,000
Payment of medical insurance premium on own life 3,000
Donation by cheque to Clean Ganga Fund 4,000
Donation by cheque to Swachh Bharat Kosh 3,000
Donation by cheque to Rajiv Gandhi Foundation 1,000
Donation by cheque to the Prime Minister’s Drought Relief Fund 5,000
Donation by cheque to approved public charitable institution 11,000
Donation by cheque to a poor boy for higher education 5,000
Donation by cheque of clothes to an approved institution 12,000
Donation by cheque to a charitable institution for construction of a rest house only for a particular religious community 8,000
Donation in cash to National Children Fund 40,000
Solution :
Short-term capital gain under section 111A 20,000
Other short-term capital gain 10,000
Under section 80C in respect of public provident fund 40,000
Under section 80D in respect of medical insurance premium 3,000
Under section 80G in respect of donations [see Note 1] 14,950
Net income 5,14,050
Note 1 - COMPUTATION OF DEDUCTION UNDER SECTION 80G IN RESPECT OF DONATIONS
Step 1 - Gross qualifying amount :
Donation to Clean Ganga Fund 4,000
Donation to Swachh Bharat Kosh 3,000
† Donations to Swachh Bharat Kosh and Clean Ganga Fund is eligible for deduction under section 80G only if the amount is not spent by the
assessee in pursuance of Corporate Social Responsibility (CSR) under section 135(5) of the Companies Act, 2013.
441 Step 3 - Amount deductible Para 147.3
Rs.
Donation to Rajiv Gandhi Foundation 1,000
Donation to the Prime Minister’s Drought Relief Fund 5,000
Donation to public charitable institutions 11,000
Amount given to a poor student (*not eligible as the donee is not a public charitable institution) —*
Clothes to an institution (*donation in kind is not eligible) —*
Amount for construction of rest house (*not eligible as amount will be utilised for the benefit of a particular
community) —*
Donation in cash to National Children Fund (cash donation exceeding Rs. 2,000, not deducible) Nil
Gross qualifying amount 24,000
Step 2 - Net qualifying amount
Donation to Clean Ganga Fund (*without any maximum limit) 4,000*
Donation to Swachh Bharat Kosh (*without any maximum limit) 3,000*
Donation to Rajiv Gandhi Foundation (*without any maximum limit) 1,000*
Donation to the Prime Minister’s Drought Relief Fund (*without any maximum limit) 5,000*
Donation to the public charitable institutions :
It is :
a. Rs. 11,000 (being amount of donation) ; or
b. Rs. 9,900 (being 10% of adjusted gross total income calculated under Note 2), whichever is lower.
Rs. 9,900 is, therefore, eligible for net qualifying amount 9,900
Net qualifying amount 22,900
Step 3 - Amount deductible :
50% of Rs. 15,900 + 100% of Rs. 7,000 14,950
Note 2 - ADJUSTED GROSS TOTAL INCOME IS CALCULATED AS UNDER :
Less : Long-term capital gains 4,10,000
Less: Short-term capital gain under section 111A 20,000
Less : Amount of deduction under sections 80C to 80U except section 80G 43,000
Adjusted gross total income 99,000
147-E1 [P.11.8]* Mrs. X, a salaried employee, furnishes the following information in respect of the previous year ending March
31, 2020 :
Rs.
Salary income (before standard deduction) 3,14,000
Interest on debentures 1,50,000
Payment of medical insurance premium on the life of her grandfather 12,800
Donation by cheque to the Prime Minister’s Drought Relief Fund 17,000
Donation by cheque to a public charitable institution 98,000
Determine the net income of Mrs. X for the assessment year 2020-21, assuming that her income from long-term capital gains is
Rs. 90,000 and she deposit Rs. 1,10,000 in PPF a/c.
147-P2 X, an Indian citizen, gives the following particulars of his income and expenditure of the previous year 2019-20 :
Rs.
Contribution towards public provident fund 1,30,000
Donation by cheque to the Prime Minister’s National Relief Fund 51,000
Donation by cheque to the Government of India for promotion of family planning 33,000
Donation by cheque to a public charitable institute (being an approved institution for section 80G) 1,12,000
Rs.
Solution :
Less : Deductions
Under section 80C 1,30,000
Under section 80G [see Note 1] 1,24,500
Notes :
1. COMPUTATION OF DEDUCTION UNDER SECTION 80G
Step 1 – Gross qualifying amount
Donation to the Prime Minister’s National Relief Fund 51,000
Donation for family planning 33,000
Donation to the public charitable institute 1,12,000
Gross qualifying amount 1,96,000
Step 2 – Net qualifying amount
Donation to the Prime Minister’s National Relief Fund (*no maximum limit is prescribed) 51,000*
Donation for family planning and to public charitable institute, amount to be included in net qualifying
amount, is the lower of :
a. Rs. 1,45,000 (being amount of donation) ; or
b. Rs. 1,14,000 (being 10% of adjusted gross total income computed under Note 2),
Rs. 1,14,000, being the least, is to be included.
As amount of Rs. 1,14,000 represents aggregate amount of net qualifying donation in respect of donation
for family planning and to public charitable institute, separate amount in respect of these will be as follows :
Donation to the Government for promoting family planning 33,000
Donation to the public charitable institute (i.e., Rs. 1,14,000–Rs. 33,000) 81,000
Net qualifying amount 1,65,000
Step 3 – Amount deductible
100% of amount qualified in respect of donation to the Prime Minister’s National Relief Fund and the
Government for family planning 84,000
50% of remaining portion 40,500
Amount deductible under section 80G 1,24,500
2. ADJUSTED GROSS TOTAL INCOME is calculated as under :
Less: Amount of deductions under sections 80C to 80U (except section 80G) 1,30,000
Adjusted gross total income 11,40,000
147-E2 [P11.9]* X, a resident individual, furnishes the following information of his income/expenditure relevant for the previous
year ending March 31, 2020 :
Rs.
Short-term capital gain (not covered by section 111A) 1,02,000
Long-term capital gain under section 112 7,40,000
Winnings from races 1,11,500
Payment by cheque of mediclaim insurance premium on own life 12,000
Donation by cheque to the Prime Minister’s National Relief Fund 49,000
Donation by cheque to an approved charitable institution 48,000
Donation by cheque to the Central Government for the purpose of promoting family planning 24,000
Donation in cash to National Defence Fund 1,01,000
443 Deduction in respect of rent paid Para 148
 DEDUCTION IN RESPECT OF RENT PAID - TO WHOM AND TO WHAT EXTENT AVAILABLE

[SEC. 80GG]
148. The following are salient features of section 80GG —
 Who can claim deduction - Only an individual can claim deduction under section 80GG. He can be a self-
employed person. Alternatively, he can be an employee who does not get house rent allowance from the
employer.
 What is the qualifying expenditure - Only an individual who pays rent for a residential accommodation for himself
(and family) can avail deduction under section 80GG provided he gives a declaration electronically in Form
No. 10BA.
 Can a person who pays rent to avail this deduction own a house - The following persons should not own any
residential accommodation at the place where the taxpayer resides, performs the duties of his office, or
employment or carries on his business or profession—
a. the taxpayer;
b. his/her spouse;
c. his/her minor child (including minor step child and minor adopted child); and
d. the Hindu undivided family of which the taxpayer is a member.
If the taxpayer owns a residential accommodation at a place other than the place noted above, then in respect
of that house the concession in respect of self-occupied property is not claimed by him.
 What is amount of deduction - The amount deductible under section 80GG is the least of the following—
a. Rs. 5,000 per month;

b. 25 per cent of “total income”; or
c. the excess of actual rent paid over 10 per cent of “total income”.
“Total income”, for this purpose, is gross total income minus long-term capital gains, short-term capital gains
under section 111A, deductions under sections 80C to 80U (not being section 80GG) and income under section
115A.
Problems
148-P1 X, a professional tax consultant, based at New Delhi furnishes the following particulars of his income/expenditure relevant for
Rs.
Short-term capital gain (covered by section 111A) 4,000
Long-term capital gain under section 112 10,000
Winning from a camel race 1,700
Winning from a horse race 2,000
Winning from lottery 1,600
Preventive health check up expenditure of father 28,000
Payment of rent 80,000
Contributions towards public provident fund 70,000
Determine the amount deductible under section 80GG and the net income for the assessment year 2020-21.
Solution : Rs. Rs.
Professional income 6,80,000
Winnings from races including horse races 3,700
Winning from lottery 1,600
Other income 10,000 15,300
Under section 80D in respect of medical insurance premium and Rs. 5,000 preventive health
check up expenditure 13,000
Rs.
Under section 80GG in respect of rent paid being the least of the following :
a. Rs. 60,000 (being Rs. 5,000 × 12);
b. Rs. 1,53,075 (being 25% of Rs. 6,12,300);
c. Rs. 18,770 (being excess of rent paid over 10% of total income, i.e., Rs. 80,000 – 10% of
Rs. 6,12,300)
Rs. 18,770, being the least, is, therefore, deductible 18,770
Net income 6,07,530
Note - “Total income” for the purpose of section 80GG is, Rs. 6,12,300, i.e., Rs. 7,09,300 – Rs. 4,000 – Rs. 10,000 – Rs. 70,000
– Rs. 13,000.
148-E1 [P11.11]* X, a professional tax consultant, based at Poona, furnishes the following particulars of his income/expenditure
relevant for the assessment year 2020-21 : Rs.
Short-term capital gain (not covered by section 111A) 1,06,000
Commission on sale of lottery tickets 2,04,000
Long-term capital gain under section 112 1,80,000
Payment of rent 1,17,380
Determine the amount deductible under section 80GG and the net income for the assessment year 2020-21.
148-P2 X, a salaried employee, receives Rs. 6,48,000 as salary and Rs. 42,000 as project allowance. His employer provides an
unfurnished house at concessional rent of Rs. 1,00,000. The house is situated in Delhi and rent of the house paid by the employer is
Rs. 1,92,000. His income from other sources is Rs. 77,860. He pays Rs. 20,000 as medical insurance premium and deposits Rs. 5,500
in public provident fund. Can he claim deduction under section 80GG ? Also determine the net income of X for the assessment year
2020-21.
Solution : An assessee can claim deduction under section 80GG if he satisfies all the conditions mentioned in para 148. Since
X satisfies all the conditions, he can claim deduction under section 80GG. For the purpose of this section, it is immaterial
whether rent is paid to landlord or to employer.
Net income of X will be computed as under : Rs.
Salary 6,48,000
Project allowance 42,000
Perquisite in respect of house [see para 44.1-2]. Rent of the house, i.e., Rs. 1,92,000, or 15% of salary, (i.e.,
Rs. 6,48,000 + Rs. 42,000), whichever is lower, is taxable value of the tax-free perquisite; since the
employer charges Rs. 1,00,000 as rent, valuation of the concession is Rs. 3,500 (i.e., Rs. 1,03,500 –
Rs. 1,00,000) 3,500
Under section 80GG in respect of rent paid, being the least of the following :
a. Rs. 60,000 (being Rs. 5,000 × 12); or
b. Rs. 1,73,965 (being 25% of total income, i.e., 25% of Rs. 6,95,860);
c. Rs. 30,414 (being excess of rent paid over 10% of total income, i.e., Rs. 1,00,000 – 10% of Rs. 6,95,860).
Rs. 30,414, being the least, is therefore deductible 30,414
Note - “Total income” for the purpose of section 80GG is Rs. 6,95,860, i.e., Rs. 7,21,360 - Rs. 5,500 - Rs. 20,000.
445 Deduction in respect of contributions to political parties Para 150
148-E2 [P11.12]* Mrs. X, a salaried employee, gets Rs. 54,000 per month as basic salary and Rs. 9,000 per month as special
allowance. Her employer provides an unfurnished house at concessional rent in Bombay (house is owned by the employer, rent paid
by Mrs. X : Rs. 9,000 per month). Income of Mrs. X from other sources is Rs. 1,70,000. Mrs. X has claimed Rs. 9,000 per month (being
the amount of rent) as deduction under section 80GG, while the Assessing Officer desires that deduction under section 80GG cannot
be claimed by a salaried employee. Is the Assessing Officer legally correct? Also determine the net income of Mrs. X for the assessment
year 2020-21 on the assumption that Mrs. X pays tuition fees of Rs. 74,000 of her daughter who is a student of IIT, Delhi.
 DEDUCTION IN RESPECT OF CERTAIN DONATIONS FOR SCIENTIFIC RESEARCH OR

RURAL DEVELOPMENT - WHEN ELIGIBLE [SEC. 80GGA]
149. The following are salient features of section 80GGA –
 Who can claim deduction - An assessee (other than an assessee whose gross total income includes income
chargeable under the head “Profits and gains of business or profession”) can claim deduction under section
80GGA.
 What is the qualifying expenditure - Donation/contribution should be given to an approved research association,
university, college or other institution to be used for scientific research or rural development. A contribution can
also be given for the purpose of eligible project/scheme under section 35AC or for the purpose of notified
National Fund for Rural Development or notified National Urban Poverty Eradication Fund.
149.1 Amount of deduction - 100 per cent for the aforesaid donation or contribution is deductible. Donation
can be given in cash or by cheque or draft. However, no deduction shall be allowed under section 80GGA in
respect of a cash contribution (exceeding Rs. 10,000).
Problems
149-P1 During the previous year 2019-20, X makes the following contributions : (a) contribution to an approved scientific research
association for carrying out research in natural science : Rs. 3,000 ; and (b) contribution to National Fund for Rural Development :
Rs. 5,000. Determine the taxable income of X if he is (a) salaried employee, drawing Rs. 9,00,000 as taxable salary (i,e., after standard
deduction); or (b) a businessman whose income from business (without deducting the aforesaid payment) is Rs. 9,00,000.
Solution : Salaried Businessman
employee
Rs. Rs.
Salary 9,00,000 —
Income from business : — 9,00,000
Less : Deductions
Under section 35 [see para 81.9] : Rs. 3,000 × 1.75 — 5,250
Under section 35CCA [see para 81.14] — 5,000
Less : Deduction under section 80GGA (*Rs. 3,000+Rs. 5,000, **Not available
in the case of an assessee where income includes income chargeable under the
head “Profits and gains of business or profession”) 8,000* Nil**
Net income 8,92,000 8,89,750
149-E1 X is an income-tax practitioner. His income from the previous year ending March 31, 2020 chargeable under the head “Profits
and gains of business or profession” is Rs. 27,20,000. He makes a contribution of Rs. 3,000 towards the National Fund for Rural
Development. Determine the amount of deduction under section 80GGA.
 DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN TO POLITICAL PARTIES OR ELEC-

TORAL TRUST - TO WHAT EXTENT DEDUCTIBLE [SECS. 80GGB AND 80GGC]
150. While computing the total income of an assessee (including an Indian company), any sum contributed
during previous year to any political party or electoral trust shall qualify for deduction.
However, the deduction is not available to a local authority and every artificial juridical person wholly or partly
funded by the Government.
 For advertisement expenditure in a souvenir/brochure owned by a political party, see para 81.38.
 No deduction shall be allowed in respect of any sum contributed by way of cash.
 DEDUCTION IN RESPECT OF EARNINGS IN CONVERTIBLE FOREIGN EXCHANGE - HOW TO

FIND OUT [SECS. 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE AND 80HHF]
151. No deduction under these sections is available from the assessment year 2005-06 onwards.
 DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKING OR

ENTERPRISES ENGAGED IN INFRASTRUCTURE DEVELOPMENT, ETC. - HOW TO FIND OUT
[SEC. 80-IA]
152. Deduction under section 80-IA is available only to the following businesses carried on by an undertaking—
Case 1 Provision of infrastructure facility See para 152.1
Case 2 Telecommunication services See para 152.2
Case 3 Industrial parks See para 152.3
Case 4 Power generation, transmission and distribution or substantial renovation and moder-
nisation of existing distribution lines See para 152.4
Case 5 Undertaking set up for reconstruction of a power unit See para 152.5
In these cases, deduction is available only when it is claimed in the return of income and the return of income
is submitted on or before the due date of submission of return of income. Moreover, books of account should be
audited and audit report should be submitted electronically. These provisions in brief are given below –
152.1 Infrastructure facility - An Indian company can claim this deduction.
 Conditions - The following conditions should be satisfied –
1. An Indian company should provide infrastructure facility. The enterprise must carry on the business of
(a) developing, or (b) maintaining and operating, or (c) developing, maintaining and operating any infrastructure
facility.
2. There should be an agreement with the Central Government.
3. It should start operation on or after April 1, 1995. However, no deduction under this section will be available
to any enterprise which starts the development or operation and maintenance of the infrastructure facility on or
after April 1, 2017.
 Amount of deduction - 100 per cent of the profit is deductible for 10 years. The deduction commences from the
initial assessment year.

 What is initial assessment year - Initial assessment year, for this purpose, means the assessment year specified
by the assessee at his option to be the initial year. But it should not fall beyond the fifteenth* of assessment year
starting from the previous year in which the enterprise begins operating and maintaining the infrastructure
facility.
However, the benefit of deduction is available only for 10 consecutive assessment years falling within a period
of fifteenth* assessment years beginning with the assessment year in which an assessee begins operating and
maintaining infrastructure facility.
 Infrastructure facility - It means —
a. a road including toll road, a bridge or a rail system;

b. a highway project including housing or other activities being an integral part of the highway project;
c. a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid
waste management system; and
d. a port, airport, inland waterway or inland port or navigational channel in the sea.
152.2 Telecommunication services - The provisions are given below –
 Conditions - The following conditions should be satisfied by the undertaking—
1. It should be a new undertaking.

2. It should not be formed by transfer of old plant and machinery.
3. The undertaking should be engaged in providing telecommunication services. It should start providing
telecommunication services (whether basic or cellular including radio paging, domestic satellite service or
*Twentieth if the “infrastructure facility” is a highway project including housing or other activities being an integral part of the highway project
and road including toll road, a bridge or a rail system, a water supply project, water treatment system, irrigation project, sanitation and sewerage
system or solid waste management system.
447 Deduction in respect of profits & gains by an undertaking Para 153
network of broadband network and internet services and electronic data interchange service) at any time after
March 31, 1995 but before March 31, 2005. “Domestic satellite” for this purpose means a satellite owned and
operated by an Indian company for providing telecommunication service.
 Amount of deduction - 100 per cent of the profit is deductible in the first 5 years and 30 per cent of the profit is
deductible in the next 5 years. Deduction starts from the initial assessment year. Initial assessment year means
the assessment year specified by the assessee at his option to be the initial year not falling beyond the fifteenth
assessment year starting from the previous year in which the undertaking begins providing telecommunication
services.
152.3 Industrial park or special economic zone - The provisions are given below—
 Conditions - The following conditions should be satisfied by the undertaking —
1. It develops, develops and operates or maintains and operates an industrial park or a special economic zone.
2. The industrial park must start operating during April 1, 2007 and March 31, 2011 or the special economic zone
must start operating during April 1, 1997 and March 31, 2005.
 Amount of deduction - If all the aforesaid conditions are satisfied 100 per cent of profit is deductible for 10 years
commencing from the initial assessment year. Initial assessment year means the assessment year specified by the
assessee at his option to be the initial year not falling beyond the fifteenth assessment year starting from the
previous year in which the undertaking begins operating/developing an industrial park.
152.4 Power generation/distribution - The provisions are given below—
1. It should be a new undertaking. It should not be formed by transfer of old plant and machinery.
2. The undertaking must be set up in any part of India for the generation or generation and distribution of power
during April 1, 1993 and March 31, 2017. Alternatively, the undertaking should start transmission or distribution
at any time between April 1, 1999 and March 31, 2017. Alternatively, it undertakes substantial renovation and
modernization of the existing transmission/distribution lines between April 1, 2004 and March 31, 2017.
 Amount of deduction - If all the aforesaid conditions are satisfied, 100 per cent of the profit is deductible for 10
years commencing from the initial assessment year. Initial assessment year means the assessment year specified
by the assessee at his option to be the initial year not falling beyond the fifteenth assessment year starting from
the previous year in which the undertaking generates power or commences transmission or distribution of
power.
152.5 Reconstruction of power unit - The provisions are given below—
1. It should be owned by an Indian company and set up for reconstruction or revival of a power generating plant.
2. It should be formed before November 30, 2005 with majority equity participation by public sector companies
for the purposes of enforcing the security interest of the lenders to the company owning the power generating
plant and such Indian company is notified before December 31, 2005 by the Central Government.
3. Such undertaking begins to generate or transmit or distribute power before March 31, 2011.
 Amount of deduction - See para 152.1.
 DEDUCTION IN RESPECT OF PROFITS AND GAINS BY AN UNDERTAKING OR ENTERPRISE

ENGAGED IN DEVELOPMENT OF SPECIAL ECONOMIC ZONE [SEC. 80-IAB]
153. The provisions are given below –
 Conditions - The following conditions should be satisfied—
1. The taxpayer is a developer of a special economic zone.

2. The gross total income of the taxpayer includes profits and gains derived by an undertaking from any business
of developing a special economic zone.
3. Such special economic zone is notified on or after April 1, 2005 and the development of special economic zone
should begin on or before March 31, 2017.
4. Deduction should be claimed in the return of income. Return of income should be submitted on or before the
due date of submission of return of income. Books of account should be audited and audit report should be
Para 153A Permissible deductions from gross total income 448
 Amount of deduction - 100 per cent deduction is available in respect of the aforesaid profit. Deduction is available
for 10 consecutive assessment years. The deduction may be claimed, at the option of the taxpayer, for any 10
consecutive assessment years out of 15 years beginning from the year in which the special economic zone has
been notified by the Central Government.
 DEDUCTION IN RESPECT OF ELIGIBLE START-UP [SEC. 80-IAC]

153A. The provisions of section 80-IAC are given below –
1. The assessee is a company or a limited liability partnership (LLP) and engaged in an eligible business (“eligible
business” means a business carried out by an eligible start up engaged in innovation, development or
improvement of products or processes or services or a scalable business model with a high potential of
employment generation or wealth creation).
2. The above company or LLP is incorporated after March 31, 2016 but before April 1, 2021.
3. Annual business turnover of the company or LLP does not exceed Rs. 25 crore in the previous year relevant
to the assessment year for which deduction is claimed under section 80-IAC.
4. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the
Official Gazette by the Central Government.
5. The above company or LLP is not formed by splitting up, or the reconstruction, of a business already in
existence. However, this condition is not applicable in respect of a start-up which is formed as a result of the re-
establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to
in section 33B.
6. It is not formed by the transfer to a new business of machinery or plant previously used for any purpose [it
is subject to a few exception].
 Amount of deduction - If the above conditions are satisfied, 100 per cent of the profits and gains derived from
eligible business is deductible for 3 consecutive assessment years. However, this deduction may, at the option
of the assessee, be claimed by it for any 3 consecutive assessment years out of 5 years (7 years, from the
assessment year 2018-19) beginning from the year in which the eligible start-up is incorporated. The following
points should be noted –
1. The profits and gains from the eligible business shall be calculated as if such eligible business is the only source
of income of the assessee during the previous year relevant for the assessment year in which deduction is claimed
for the first time and in the next 2 assessment years.
2. Books of account should be audited and audit report should be submitted along with the return of income.
3. If the assessee fails to make a claim of deduction available under this section in its return of income, the same
will not be allowed as deduction.
 DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM CERTAIN INDUSTRIAL UNDER-

TAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS - HOW TO
AVAIL [SEC. 80-IB]
154. Deduction under section 80-IB is available to different industrial undertakings as follows —
Case 1 Business of an industrial undertaking See para 154.1
Case 2 Operation of ship —
Case 3 Hotels See para 154.3
Case 4 Industrial research See para 154.4
Case 5 Production of mineral oil See para 154.5
Case 6 Developing and building housing projects See para 154.6
Case 7 The business of processing, preservation and packaging of fruits or vegetables or
integrated, handling, storage and transportation of food grain units See para 154.7
Case 8 Multiplex theatres —
Case 9 Convention centre —
Case 10 Operating and maintaining a hospital in rural area See para 154.10
Case 11 Hospital located in certain areas See para 154.11
In these cases, deduction is available only when it is claimed in the return of income and the return of income
is submitted on or before the due date of submission of return of income. Moreover, books of account should be
audited and audit report should be submitted electronically. These provisions in brief are given below –
449 Developing and building housing projects Para 154.6
154.1 Business of an industrial undertaking - The provisions are given below –

1. It should be a new undertaking. It should not be formed by transfer of old plant and machinery.
2. It should manufacture or produce articles other than non-priority sector items given in the Eleventh Schedule.
This condition is, however, not applicable in the case of small scale industrial undertaking or an undertaking in
a backward State.
3. Manufacture or production should be started within a stipulated time-limit—small scale industrial undertak-
ing during April 1, 1991 and March 31, 2002, industrial undertaking in a backward State during April 1, 1993 and
March 31, 2004, in the case of State of Jammu & Kashmir during April 1, 1993 and March 31, 2012, industrial
undertaking in a backward State during October 1, 1994 and March 31, 2004, cold chain facility during April 1,
1999 and March 31, 2004.
4. It should employ 10 workers (where manufacturing process is carried on with the aid of power) or 20 workers
(where manufacturing process is carried on without the aid of power).
 Amount of deduction - If the above conditions are satisfied 100 per cent of the profit is deductible for the first 5
years and 30 per cent (25 per cent in the case of non-corporate assessee) is deductible for the next 5 years. In the
case of a small scale industrial undertaking deduction is available at the rate of 30 per cent (25 per cent in the case
of non-corporate assessee) for first 10 years. Tax holiday period is 10 years (12 years in the case of a co-operative
society). However, in the case of an industrial undertaking in a Category B backward district, 100 per cent tax
holiday is available for first 3 years and for remaining period of tax holiday the partial deduction of 25 or 30 per
cent is available. Deduction commences from the previous year in which the industrial undertaking begins to
manufacture or produce articles or things, or to operate its cold storage plant or plants.
154.2 Operation of a ship - Now-a-days, this deduction is not available.
154.3 Hotel industry - Certain hotels (which started functioning before April 1, 2001) were qualified for
deduction under section 80-IB for 10 years. 10-year limit expired with the assessment year 2010-11. No deduction
is, therefore, available for the assessment year 2011-12 onwards.
154.4 Companies engaged in industrial research - The provisions are given below –
1. The taxpayer is a company registered in India.

2. Such company has scientific and industrial research and development as its main object.
3. It is for the time being approved by the prescribed authority (i.e., Secretary, Department of Scientific and
Industrial Research).
 Amount of deduction - 100 per cent of profit is deductible. Deduction is available for a period of first 5 years if
the prescribed authority approves the company at any time before April 1, 1999. However, if the prescribed
authority approves the company after March 31, 2000 but before April 1, 2007, deduction is available for a period
of first 10 years.
154.5 Mineral oils - The provisions are given below –
1. It should be a new undertaking. It should not be formed by transfer of machinery or plant previously used for
any purpose.
2. The undertaking should be located anywhere in India.
3. It should commence production of mineral oil after March 31, 1997 but before April 1, 2017 or refining of
mineral oil during October 1, 1998 and March 31, 2012 or production of natural gas (in a specified blocks) on or
after April 1, 2009 but before April 1, 2017.
 Amount of deduction - 100 per cent profit is deductible for the first 7 years.
154.6 Developing and building housing projects - The provisions are given below –
1. The project should be approved by a local authority before March 31, 2008.
2. The size of the plot of land is a minimum of one acre.
3. The undertaking commences development and construction of the housing project after September 30, 1998
and it should complete construction within 4 years from the end of the financial year in which the housing project
is first approved or before April 1, 2008, whichever is later. If, however, the housing project is approved on or
after April 1, 2005, the project should be completed within 5 years from the end of the financial year in which
the project is approved by the local authority.
4. The built-up area of the shops and other commercial establishments included in the housing project should
not exceed 3 per cent of the total built-up area of the housing project or 5,000 sq. ft., whichever is more.
5. The built-up area of each residential unit should not be more than 1,500 sq. ft. (1,000 sq. ft. in the cities of Delhi
and Mumbai and any area within 25 kilometres).
6. Not more than 1 residential unit should be allotted to the same person. If allottee is an individual, no other
residential unit in the housing project should be allotted to the individual, his/her spouse, minor children, Hindu
undivided family, etc.
 Amount of deduction - 100 per cent of the profit of the housing project is deductible.
154.7 Business of processing, preservation and packaging of fruits or vegetables, etc. - An undertaking
deriving profit from the business of processing, preservation and packaging of fruits or vegetables or meat or
meat products or poultry/marine/dairy products or from the integrated business of handling, storage and
transportation of foodgrains is qualified for deduction at the rate of 100 per cent of the profit for the first 5 years
and at 30 per cent (25 per cent in the case of non-corporate assessee) for the next 5 years.
154.8 Multiplex theatres - It is not available now-a-days.
154.9 Convention centre - It is not available now-a-days.
154.10 Operating and maintaining a hospital in rural area - The provisions are given below –
1. The assessee owns an undertaking deriving profits from the business of operating and maintaining a hospital
in a rural area.
2. Such hospital is constructed at any time during October 1, 2004 and ending on March 31, 2008. For this purpose
a hospital shall be deemed to have been constructed on the date on which a completion certificate in respect of
such construction is issued by the concerned local authority.
3. The hospital has at least 100 beds for patients.
4. The construction of the hospital is in accordance with the regulations, for the time being in force, of the local
authority.
154.11 Hospitals located in certain areas - If a few conditions are satisfied, 100 per cent profit is deductible
for the first 5 years, if hospital is situated anywhere in India (but other than excluded area, i.e., Delhi, Mumbai,
Kolkata, Chennai, Hyderabad, Bangalore, Ahmedabad, Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar,
Gandhi Nagar or Sikandrabad). The hospital should start functioning during April 1, 2008 and March 31, 2013.
 DEDUCTION IN RESPECT OF PROFITS FROM HOUSING PROJECTS [SEC. 80-IBA]
154A. The provisions of section 80-IBA are given below –
 Conditions - Deduction under this section is available to an assessee (maybe an individual, HUF, AOP, BOI,
company, firm or any other person), if the following conditions are satisfied –
1. The assessee has profits derived from the business of developing and building a housing project (i.e., a project
consisting predominantly of residential units with such other facilities and amenities as the competent authority
may specify).
2. The competent authority has approved the project after June 1, 2016, but on or before March 31, 2020.
3. The assessee completes the project within a period of 5 years from the date of first approval by the competent
authority. The project shall be deemed to have been completed when a certificate of completion of project as a
whole is obtained in writing from the competent authority.
4. The carpet area† of the shops and other commercial establishments included in the housing project does not
exceed 3 per cent of the aggregate carpet area†.
5. Size of the plot, area of residential units and minimum utilization of FAR (floor area ratio) should satisfy the
criteria given below.
6. The project is the only housing project on such plot of land as specified in Column 2 of the table supra.
7. Where a residential unit in the housing project is allotted to an individual, no other residential unit in the
housing project shall be allotted to the individual or the spouse or the minor children of such individual.
8. The stamp duty value of a residential unit in the housing project does not exceed Rs. 45 lakh (this condition
is applicable if only if the housing project is approved on or after September 1, 2019).
9. The assessee should maintain separate books of account in respect of the housing project.
†See next page.
451 Deduction in respect of profits and gains Para 155
Condition pertaining to plot size, area of residential unit, etc. - Apart from condition given above, the size of the plot,
area of residential unit and utilization of FAR should not exceed the following –
A - IF THE PROJECT IS APPROVED PRIOR TO SEPTEMBER 1, 2019
Location of project Area of plot of land on Carpet area† of residential Utilisation of

which project is units comprised in the permissible
situated housing project FAR
Project is located within the cities of Not less than 1,000 square Not to exceed 30 Not less than
Chennai, Delhi, Kolkata or Mumbai metres square metres 90%
Project is located in any other place Not less than 2,000 square Not to exceed 60 Not less than
metres square metres 80%
B - IF THE PROJECT IS APPROVED ON OR AFTER SEPTEMBER 1, 2019
Location of project Area of plot of land on Carpet area† of residential Utilisation of

which project is units comprised in the permissible
situated housing project FAR
Project is located within the metro- Not less than 1,000 square Not to exceed 60 Not less than
politan cities given in Note (infra) metres square metres 90%
Project is located in any other place Not less than 2,000 square Not to exceed 90 Not less than
metres square metres 80%
Note - It covers the metropolitan cities of Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida,
Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region).
 Amount of deduction - If the above conditions are satisfied, 100 per cent of the profit derived from the aforesaid
business is deductible under section 80-IBA. However, deduction is not available to any assessee who executes
the housing project as a works contract awarded by any person (including the Central/State Government). When
deduction is allowed under this section, deduction to the extent of such profit is not available under any
provision of the Act. Deduction should be claimed in the return of income (otherwise deduction is not available).
 Reversal of deduction if project not completed within stipulated time - Where the housing project is not completed
within 3 years from the date of first approval by the competent authority and in respect of which a deduction
has been claimed and allowed under this section, the total amount of deduction so claimed and allowed in one
or more previous years, shall be deemed to be business income of the assessee of the previous year in which the
period for completion so expires.
 DEDUCTION IN RESPECT OF PROFITS AND GAINS OF CERTAIN UNDERTAKINGS IN

CERTAIN SPECIAL CATEGORY OF STATES - HOW TO FIND OUT [SEC. 80-IC]
155. Provisions pertaining to section 80-IC are given in brief –
1. The industrial undertaking is not formed by splitting up, or the reconstruction, of a business already in
existence.
2. The industrial undertaking should be set up in Sikkim, Himachal Pradesh, Uttaranchal or in North Eastern
State.
3. It should manufacture any article but other than those given in the Thirteenth Schedule if it is situated in the
industrial zone of the relevant State. In other remaining area, it can manufacture any article given in the
Fourteenth Schedule.
4. Deduction is available in the case of new industrial undertaking or in the case of completion of substantial
expansion of an existing undertaking. These activities should take place in the case of Sikkim during December
23, 2002 and March 31, 2007, in the case of Himachal Pradesh or Uttaranchal during January 7, 2003 and March
31, 2012 and North Eastern State during December 24, 1997 and March 31, 2007.
†“Carpet area” means the net usable floor area of an apartment [excluding (a) the area covered by the external walls, (b) areas under services shafts/
exclusive balcony or verandah area/exclusive open terrace area, but including the area covered by the internal partition walls of the apartment].
 Amount of deduction - 100 per cent deduction is available for the first 10 years [however, in the case of Himachal
Pradesh or Uttaranchal, it is 100 per cent for the first 5 years and 30 per cent (25 per cent in the case of non-
corporate assessee) for the next 5 years].
 DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM BUSINESS OF HOTEL/CONVEN-

TION CENTRE IN NCR - HOW TO FIND OUT [SEC. 80-ID]
156. Provisions pertaining to section 80-ID are given in brief –
1. The taxpayer is engaged in the business of hotel located in a specified area. Alternatively, the taxpayer is
engaged in the business of building, owning and operating a convention centre located in specified area.
2. The aforesaid business is a new business. It is not formed by the splitting up, or the reconstruction, of a business
already in existence. It should not be formed by the transfer to a new business of machinery or plant previously
used for any purpose.
 Specified area - 2/3/4 star hotel or convention center in NCR (i.e., Delhi, Faridabad, Gurgaon, Gautam Budh
Nagar and Ghaziabad). Construction should be completed and hotel or convention centre should start
functioning during April 1, 2007 and July 31, 2010. Deduction is also available in the case of 2/3/4 star hotel at
a World heritage site (i.e., districts of Agra, Jalgaon, Aurangabad, Kancheepuram, Puri, Bharatpur, Chhatarpur,
Thanjavur, Bellary, South 24 Parganas (excluding areas falling within the Kolkata Urban Agglomeration),
Chamoli, Raisen, Gaya, Bhopal, Panchmahal, Kamrup, Goalpara, Nagaon, North Goa, South Goa, Darjeeling
and Nilgiri). In the case of world heritage site, the hotel should be constructed and started functioning during
April 1, 2008 and March 31, 2013.
 DEDUCTION IN RESPECT OF CERTAIN UNDERTAKINGS IN NORTH-EASTERN STATES -

HOW TO DETERMINE [SEC. 80-IE]
157. Provisions pertaining to section 80-IE are given in brief –
1. The taxpayer begins manufacture or production of goods or undertakes substantial expansion during April
1, 2007 and March 31, 2017. Alternatively, the taxpayer has begun to provide eligible services during April 1, 2007
and March 31, 2017.
2. Deduction under this section is not available in respect of manufacture or production of tobacco, pan masala,
plastic carry bags or less than 20 microns or goods produced by petroleum oil and gas refineries. Eligible services
for this purpose are hotel (3 star or above), nursing home (25 beds or more), old age homes, vocational training
institutes (such as hotel management, catering, entrepreneurship development, nursing and paramedical, civil
aviation related training, fashion designing and industrial training), IT related training centres, IT hardware
units and bio-technology.
3. The aforesaid activity takes place in any North-Eastern States.
4. The aforesaid business is not formed by the splitting up, or the reconstruction, of a business already in
existence. It is not formed by the transfer to a new business of machinery or plant previously used for any
purpose.
 Amount of deduction - 100 per cent profit is deductible for first 10 years.
 DEDUCTION IN RESPECT OF BUSINESS OF PROCESSING OF BIO-DEGRADABLE WASTE -

HOW TO DETERMINE [SEC. 80JJA]
158. The taxpayer, who is in the business of collecting, processing or treating of bio-degradable waste for
generating power or producing bio-fertilizers, bio-pesticides or other biological agents or for producing bio-gas
453 Deduction in respect of employment Para 159
or making pellets or briquettes for fuel or organic manure, can claim deduction under section 80JJA. Deduction
should be claimed in the return of income.
 Amount of deduction - 100 per cent profit from the above activity is deductible for first 5 years.
 DEDUCTION IN RESPECT OF EMPLOYMENT OF NEW EMPLOYEES [SEC. 80JJAA]

159. The provisions of section 80JJAA (as substituted with effect from the assessment year 2017-18) are given
below –
 Conditions - One has to satisfy the following conditions –
1. The assessee has income from business and is subject to tax audit under section 44AB.
2. The business of the assessee is not formed by splitting up, or the reconstruction, of an existing business.
However, this condition is not applicable in respect of a business which is formed as a result of the re-
establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to
in section 33B.
3. Business is not acquired by the assessee by way of transfer from any other person or as a result of any business
reorganisation.
 Amount of deduction - If the above conditions are satisfied, an amount equivalent to 30 per cent of additional
employee cost (incurred in the course of such business in the previous year) is deductible under section 80JJAA
for 3 assessment years including the assessment year relevant to the previous year in which such employment
is provided. Books of account should be audited and report of audit in Form No. 10DA should be submitted
electronically along with the return of income. Deduction should be claimed in the return of income (otherwise
deduction is not available). The following points should be noted –
1. “Additional employee cost” means total emoluments paid or payable to additional employees employed
2. In the case of an existing business, the additional employee cost shall be nil, if—
a. there is no increase in the number of employees from the total number of employees employed as on the last
day of the preceding year;
b. emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of
electronic clearing system through a bank account (or through prescribed electronic mode).
3. In the first year of a new business, emoluments paid or payable to employees employed during that previous
year shall be deemed to be the additional employee cost.
4. “Additional employee” means an employee who has been employed during the previous year and whose
employment has the effect of increasing the total number of employees employed by the employer as on the last
day of the preceding year, but does not include,—
a. an employee whose total emoluments are more than Rs. 25,000 per month; or
b. an employee for whom the entire contribution is paid by the Government under the Employees’ Pension
Scheme notified in accordance with the provisions of the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952;
c. an employee employed for a period of less than 240 days [150 days, if the assessee is engaged in the business
of manufacturing of apparel or footwear or leather products] during the previous year; or
d. an employee who does not participate in the recognised provident fund.
5. “Emoluments” mean any sum paid or payable to an employee in lieu of his employment by whatever name
called, but does not include employer’s contribution to pension fund/provident fund/any other fund for the
benefit of employee under any law. Further, it does not include lump sum payment at the time of termination
of service, or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment,
voluntary retrenchment benefits, commutation of pension, and the like.
6. If a new employee is employed during the previous year for a period of less than 240 days or 150 days but is
employed for a period of 240 days or 150 days, as the case may be, in the immediately succeeding year, he shall
be deemed to have been employed in the succeeding year and the benefit of section 80JJAA will apply
accordingly.
Problems
159-P1 X & Co. is a limited liability partnership (date of commencement of business June 1, 2019). It owns and operates retail outlets
in different parts of North India. During the previous year 2019-20, it appoints the following persons –
Date of appointment No. of employees Designation Salary (in Rs. per person)
May 1, 2019 8 Storekeeper 18,000
June 1, 2019 12 Salesperson 25,000
July 1, 2019 4 Supervisor 28,000
October 1, 2019 25 Helper 11,000
Total 49
Salary to storekeepers is paid in cash up to December 31, 2019. In other cases, salary is transferred by use of electronic clearing system
through SBI, Noida. Determine the amount of deduction available under section 80JJAA for the assessment year 2020-21 under the
following two situations –
Situation 1 - Turnover of X & Co. for the previous year 2019-20 is Rs. 6 crore and tax audit under section 44AB is applicable.
Situation 2 - Turnover of X & Co. for the previous year 2019-20 is Rs. 90 lakh and tax audit under section 44AB is not applicable.
Solution : Deduction under section 80JJAA is not available in Situation 2 (as tax audit under section 44AB is not applicable).
However, in Situation 1 deduction under section 80JJAA shall be determined as follows –
Salary [deductible under Deduction under

section 37(1)] section 80JJAA
Rs. Rs.
Storekeepers appointed on May 1, 2019 (Rs. 18,000 × 8 × 11 months) 15,84,000 4,75,200*
Salespersons appointed on June 1, 2019 (Rs. 25,000 × 12 × 10 months) 30,00,000 9,00,000*
Supervisors appointed on July 1, 2019 (Rs. 28,000 × 4 × 9 months) 10,08,000 Nil**
Helpers appointed on October 1, 2019 (Rs. 11,000 × 25 × 6 months) 16,50,000 Nil***
Total 72,42,000 13,75,200
*It is 30% of salary. Deduction under section 80JJAA is in addition to deduction available under section 37(1). If salary is
not paid by account payee cheque/draft (or not transferred by electronic clearing system through bank), deduction under
section 80JJAA is not available. However, this rule is applicable in the case of an existing business (and not in the first year
of a new business).
**Deduction under section 80JJAA is not available in respect of employees whose total emoluments are more than
Rs. 25,000 per month.
***Helpers are employed for less than 240 days during the previous year 2019-20. No deduction is available under section
80JJAA. If these helpers are employed for at least 240 days in the previous year 2020-21, deduction can be claimed for the
159-E1 In problem 159-P1, recalculate the amount of deduction under section 80JJAA if the assessee is a joint stock company (no
other change in the information/data given in the original problem).
 DEDUCTION IN RESPECT OF CERTAIN INCOME OF OFFSHORE BANKING UNITS AND

INTERNATIONAL FINANCIAL SERVICES CENTRE - TO WHAT EXTENT AVAILABLE [SEC.
80LA]
160. The provisions of section 80LA are given below—
1. The assessee is (a) a scheduled bank and having an offshore banking unit in a special economic zone; or (b) a
foreign bank and having an offshore banking unit in a special economic zone; or (c) a unit of International
Financial Services Centre.
2. The gross total income of the assessee includes (a) any income from the offshore banking unit in a Special
Economic Zone; (b) from the business referred to in section 6(1) of the Banking Regulation Act, with an
undertaking located in Special Economic Zone or any other undertaking which develops, develops and operates
or operates and maintains a Special Economic Zone; (c) from any unit of the International Financial Services
Centre from its business for which it has been approved for setting up in such a centre in a Special Economic Zone.
3. The report from a Chartered Accountant in Form No. 10CCF certifying that the deduction has been correctly
claimed in accordance with the provisions of this section should be submitted electronically.
4. Deduction under section 80LA is not available unless it is claimed in the return of income.
455 Consequences in case of multiple deduction Para 161.1
5. A copy of permission obtained under section 23(1)(a) of Banking Regulation Act should be submitted along
with the return of income.
160.2 Amount of deduction - If the above conditions are satisfied, deduction is available under section 80LA
as follows -
 Deduction available to scheduled bank/foreign bank having offshore banking unit in SEZ - 100 per cent of the aforesaid
income is deductible for 5 consecutive assessment years beginning with the assessment year relevant to the
previous year in which the permission as stated in point No. 5 (supra) or permission of SEBI or under any other
law, is obtained. For the next 5 years, 50 per cent of such income would be deductible.
 Deduction available to a unit of International Financial Services Centre - Such unit can avail the aforesaid deduction
up to the assessment year 2019-20. From the assessment year 2020-21, deduction shall be increased to 100 per
cent for any 10 consecutive years. The assessee, at his option, may claim the said deduction for any 10 consecutive
assessment years out of 15 years beginning with the year in which the necessary permission is obtained.
 DEDUCTION IN RESPECT OF INCOME OF A CO-OPERATIVE SOCIETY - TO WHAT EXTENT

AVAILABLE [SEC. 80P]
161. In the case of a co-operative society, the following amounts are allowed as deductions under this section :
 The whole of the amount of the profits attributable to any one or more of the following activities in the case of
a co-operative society engaged in :
a. carrying on the business of banking† or providing credit facilities to its members ; or
b. a cottage industry; or
c. marketing of the agricultural produce grown by its members ; or
d. purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the
purposes of supplying them to its members ; or
e. processing, without the aid of power, of the agricultural produce of its members ; or
f. collective disposal of the labour of its members ; or
g. fishing or allied activities, that is to say, catching, curing, processing, preserving, storing or marketing of fish
or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its
members.
In the case of a co-operative society falling under (f) and (g), deduction is available, subject to the conditions that
the rules and bye-laws of the society restrict the voting rights to the following classes of its members, viz., the
individuals who contribute their labour or as the case may be, carry on the fishing or allied activities, the co-
operative credit societies which provide financial assistance to the society and the State Government.
 The whole of the amount of profits in the case of a co-operative society, being a primary society engaged in
supplying milk, oilseeds, fruits or vegetables raised or grown by its members to a federal co-operative society
(being a society engaged in the business of supplying milk, oilseeds, or vegetables) or to the Government or local
authority or a Government company or a corporation established under the Central, State or Provincial Act.
 So much of the profits of a co-operative society, engaged in the activities other than those mentioned above,
either independently or in addition to all or any of the activities so specified, as do not exceed Rs. 50,000
(Rs. 1,00,000 in the case of a consumers’ co-operative society).
 The whole of the interest and dividend income derived by a co-operative society from its investment in any
other co-operative society.
 The whole of the income derived by a co-operative society from the letting of godowns or warehouses for
storage, processing or facilitating the marketing of commodities.
 The whole of the interest income from securities and property income, in the case of a co-operative society other
than housing society or an urban consumers’ society or a society carrying on transport business or a society
engaged in manufacturing operations with the aid of power provided gross total income of such co-operative
society does not exceed Rs. 20,000.
161.1 Consequences in the case of multiple deduction - Deduction under section 80P in respect of business
income of a co-operative shall be available with reference to income after claiming deduction under sections
80HH, 80HHA, 80HHB, 80HHC, 80HHD, 80-I and 80-IA.
†However, deduction under section 80P is not available to any co-operative bank (i.e., a state co-operative bank, a central co-operative bank and
a primary co-operative bank). A primary agricultural credit society or a primary co-operative agricultural and rural development bank will
continue to claim the benefit of deduction under section 80P.
 DEDUCTION IN RESPECT OF CERTAIN INCOME OF PRODUCER COMPANIES - TO WHAT

EXTENT AVAILABLE [SEC. 80PA]
162. Deduction under section 80PA is available if the following conditions are satisfied –
1. Assessee is a producer company as defined in section 581A(i) of the Companies Act, 1956 (i.e., a body corporate
which deals primarily with the produce of its active members. The objects of the producer company shall relate
to all or any of the matters specified in section 581B of the Companies Act, 1956).
2. Total turnover of the company is less than Rs. 100 crore in any previous year.
3. Income of the company includes any profit and gains derived from the eligible business. Eligible business for
this purpose is –
a. the marketing of agricultural produce grown by the members; or
b. the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the
purpose of supplying them to the members; or
c. the processing of the agricultural produce of the members.
 Amount of deduction - If the above conditions are satisfied, the producer company can claim 100 per cent
deduction for the assessment years 2019-20 to 2024-25 in respect of profits and gains of eligible business
(deduction is available only in respect of eligible business given above and not in respect of all businesses
specified in section 581B of the Companies Act, 1956).
 DEDUCTION IN RESPECT OF ROYALTY INCOME OF AUTHORS - TO WHAT EXTENT

AVAILABLE [SEC. 80QQB]
163. The provisions of section 80QQB are given below—
 Resident individual - The taxpayer is an individual resident in India. He may be an Indian citizen or foreign
citizen. He may be resident and ordinarily resident or resident but not ordinarily resident. But he should not be
a non-resident in India.
 Author or joint author - He is an author or joint author.
 Literary work - The book authored by him is work of literary, artistic or scientific nature. However, the “books”
shall not include brochures, commentaries, diaries, guides, journals, magazines, newspapers, pamphlets, text-
books for schools, tracts and other publications of similar nature, by whatever name called.
 Income includes royalty - The gross total income of the taxpayer includes the following—
a. royalty or copyright fees (payable in lump sum or otherwise) in respect of aforesaid book (it also includes
advance payment which is not returnable); and
b. lump sum consideration for transfer (or grant) of any interest in the copyright of the book.
 Furnishing of Form No. 10CCD - The taxpayer shall have to obtain a certificate in Form No. 10CCD from the
person responsible for paying the income and furnish it electronically along with the return.
 Return of income - Deduction under section 80QQB is not available unless it is claimed in the return of income.
163.2 Amount of deduction - If the aforesaid conditions are satisfied, then the amount of deduction is—
a. Rs. 3,00,000; or
b. income from royalty as stated above,
whichever is lower.
163.3 Other points - One should also keep in view the following points—
 Remittance from abroad - Where the eligible income is earned outside India, the deduction shall be allowed on
so much of the income earned in foreign exchange, which is brought in India within 6 months from the end of
previous year (or within extended period as permitted by RBI or competent authority). Moreover, deduction will
not be allowed unless the taxpayer electronically furnishes a certificate in Form No. 10H.
 Rate of royalty not to exceed 15 per cent - Where the income by way of royalty (or the copyright fee), is not a lump
sum consideration (in lieu of all rights of the assessee in the book) so much of the income (before allowing
expenses attributable to such income) as is in excess of 15 per cent of the value of such books sold during the
previous year, shall be ignored.
 Double deduction not available - Where a deduction under section 80QQB, for any previous year has been claimed
and allowed, no deduction in respect of such income shall be allowed under any other provision of the Act in
any assessment year.
Problems
163-P1 Determine the amount deductible under section 80QQB in the following cases pertaining to the assessment year 2020-21—
X Y Z A
Rs. Rs. Rs. Rs.
Royalty on books covered by section 80QQB 90,000 3,00,000 6,00,000 8,00,000
Is it lump sum payment for assignment of interest in copyright No No No Yes
Rate of royalty as % of value of books 18% 17.5% 12.5% NA
Expenditure for earning royalty 10,000 1,10,000 1,80,000 2,40,000
Is royalty received from abroad Yes Yes No Yes
Amount remitted to India till September 30, 2020 70,000 2,80,000 NA 7,00,000
Solution : Amount of deduction
a. Amount remitted to India in convertible foreign exchange
within 6 months from the end of the previous year or
within the extended time 70,000 2,80,000 — 7,00,000
b. Lump sum consideration — — — 8,00,000
c. Royalty not exceeding 15% 75,000 2,57,143 6,00,000 —
d. The lowest of (a), (b) or (c) 70,000 2,57,143 6,00,000 7,00,000
e. Expenditure incurred 10,000 1,10,000 1,80,000 2,40,000
f. Amount deductible under section 80QQB [i.e., (d) - (e)
but subject to maximum of Rs. 3,00,000] 60,000 1,47,143 3,00,000 3,00,000
163-E1 Make the following changes in problem 163-P1 and find out the amount of deduction under section 80QQB—
a. the books written by X are text-books for schools;
b. Y is non-resident Indian;
c. Z gets royalty from magazines;
d. A has authored only guides for foreign tourists.
 DEDUCTION IN RESPECT OF ROYALTY ON PATENTS - TO WHAT EXTENT AVAILABLE [SEC.

80RRB]
164. The provisions of section 80RRB are given below—
164.1 Conditions - The following conditions should be satisfied in order to claim deduction under section
80RRB—
 Individual - The taxpayer is an individual (may be an Indian citizen or foreign citizen).
 Resident in India - He is resident in India (he may be ordinarily resident or not ordinarily resident but deduction
under section 80RRB is not available if he is non-resident).
 Owner/co-owner of patent - He is a patentee (he maybe a co-owner of patent). Patentee means the person (being
the true and first inventor of the invention), whose name is entered on the patent register as the patentee, in
accordance with the Patents Act, 1970.
 Royalty from patent - He is in receipt of any income by way of royalty in respect of patent, which is registered
under the Patent Act after March 31, 2003. It includes advance royalty which is not returnable. However, it does
not include any consideration for sale of product manufactured with the use of patented process or of the
patented article per se for commercial use. Further, any consideration, which is chargeable under the head
“Capital gains” is, not royalty.
 Furnish Form No. 10CCE -The assessee shall have to furnish online a certificate in Form No. 10CCE, duly signed
by the prescribed authority [i.e., the controller under section 1(b) of the Patents Act] along with the return of
income.
 Return of income - Deduction under section 80RRB is not available unless it is claimed in the return of income.
164.2 Amount of deduction - If the aforesaid conditions are satisfied, then the amount of deduction is—
a. Rs. 3,00,000; or
b. income from “royalty” as stated above,
whichever is lower.
164.3 Other points - One should also keep in view the following points—
 Royalty from foreign sources - Where any income is earned from sources outside India on which the deduction
under this section is claimed, only so much of the income shall be considered, as is brought into India by, (or on
behalf of) the assessee in convertible foreign exchange within a period of 6 months from the end of the previous
year (or within such further period as RBI may allow in this behalf).
Where any income is earned from sources outside India, a certificate certifying that the deduction has been
correctly claimed in accordance with the provision of this section (in Form No. 10H), is required (to be submitted
electronically).
 Subsequent revocation of patent - In case the patent is subsequently revoked by the Controller or the High Court
or the name of the assessee is subsequently excluded from the patents register as patentee in respect of that
patent, the deduction relatable to royalty income in respect of the period for which the patentee’s claim was not
valid, shall be withdrawn. For this purpose, the assessment may be rectified within a period of 4 years from the
end of the previous year in which such order is passed by High Court or Controller.
 Double deduction not possible - Where a deduction for any previous year has been claimed and allowed under
section 80RRB in respect of any income referred to above, no deduction in respect of such income shall be
allowed, under any other provision of the Act in any assessment year.
 DEDUCTION IN RESPECT OF INTEREST ON DEPOSITS IN SAVINGS ACCOUNTS - WHEN

AVAILABLE [SEC. 80TTA]
165. Section 80TTA provides a deduction up to Rs. 10,000 in aggregate to an assessee (being an individual or a
Hindu undivided family) in respect of any income by way of interest on deposits (not being time deposits) in a
savings account with —
a. a banking company;
b. a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage
bank or a co-operative land development bank); or
c. a post office.
1. From the assessment year 2019-20, the above deduction is not available in the case of a senior citizen who is
eligible to claim deduction under section 80TTB.
2. Where the aforesaid income is derived from any deposit in a savings account held by, or on behalf of a firm,
an association of persons or a body of individuals, no deduction shall be allowed in respect of such income in
computing the total income of any partner of the firm or any member of the association or body.
165.1 Post Office savings bank interest exemption under section 10(15)(i) - Post Office savings bank interest
is exempt up to Rs. 3,500 (in an individual account) and Rs. 7,000 (in a joint account) under section 10(15)(i) by
virtue of Notification No. 32/2011, dated June 3, 2011, read with Notification No. GSR 607, dated June 9, 1989.
The cumulative impact of sections 10(15)(i) and 80TTA is as follows—
Interest on Post Office Savings Bank [exemption under Exemption up to Rs. 3,500 in a single account and Rs.
section 10(15)(i)] 7,000 in a joint account
Interest on savings account with a bank, co-operative Deduction up to Rs. 10,000
bank and Post Office (deduction under section 80TTA)
 DEDUCTION IN RESPECT OF INTEREST ON DEPOSITS IN CASE OF SENIOR CITIZENS - TO

WHAT EXTENT AVAILABLE [SEC. 80TTB]
166. Deduction under section 80TTB is available (from the assessment year 2019-20), if the following conditions
are satisfied –
1. The assessee is a senior citizen (i.e., a resident individual who is at least 60 years of age at any time during the
previous year).
2. His income includes interest on deposits with a bank/co-operative bank/Post Office (it may be interest on
fixed deposits, interest on savings account or any other interest).
 Amount of deduction - If these conditions are satisfied, the assessee can claim deduction under section 80TTB
which is equal to Rs. 50,000 or the amount of aforesaid interest, whichever is lower.
Where the aforesaid income is derived from any deposit in an account held by, or on behalf of a firm, an
association of persons or a body of individuals, no deduction shall be allowed in respect of such income in
computing the total income of any partner of the firm or any member of the association or body.
166.1 Post Office savings bank interest exemption under section 10(15)(i) - See para 165.1.
459 Deduction in case of a person with disability Para 167
 DEDUCTION IN THE CASE OF A PERSON WITH DISABILITY - TO WHAT EXTENT AVAIL-

ABLE [SEC. 80U]
167. The provisions of section 80U are given in brief—
1. The taxpayer is an individual and resident in India.

2. He suffers 40 per cent or more than 40 per cent of any disability (i.e., blindness, low vision, leprosy-cured,
hearing impairment, locomotor disability, mental retardation, mental illness).
3. The taxpayer shall have a certificate issued by the medical authority. Where the condition of disability requires
reassessment, a fresh certificate from the medical authority shall have to be obtained after the expiry of the period
mentioned on the original certificate in order to continue to claim the deduction.
 Amount of deduction - Fixed deduction of Rs. 75,000 is available. A higher deduction of Rs. 1,25,000 is allowed
in respect of a person with severe disability (i.e., having disability of 80 per cent or above).
Problems
167-P1 X is totally blind. Determine his net income for the assessment year 2020-21 :
Rs.
Salary from a publishing house for working as an artist (gross) 4,96,000
Special allowance from the employer 1,07,000
Transport allowance for commuting between office and residence 38,400
Cash award received from the Government 1,10,000
Remuneration for setting question papers 12,000
Dividend from a foreign company 51,200
Collection charges of question paper setting remuneration 1,100
Contribution towards recognised provident fund 62,000
Payment of insurance premium on the life of Mrs. X (sum assured in 2009 : Rs. 50,000) 12,500
Contribution to Prime Minister’s National Relief Fund 11,800
Solution :
Income from salary :
Transport allowance [Rs. 38,400 – (exemption of Rs. 3,200 × 12)] Nil
Cash award from the Government [*exempt under section 10] —*
Remuneration for paper setting 12,000
1,44,200
Less : Collection charges 1,100 1,43,100
Under section 80G 11,800
Under section 80U 1,25,000
Note : Transport allowance is exempt up to Rs. 3,200 per month if the taxpayer is a blind or dumb and deaf or an
orthopaedically handicapped.
167-E1 [P11.13]* X (55 years) is dumb and suffers from permanent deafness with hearing impairment of above 91 decibels. He is
employed as Public Relations Officer in a public sector undertaking on monthly salary of Rs. 44,000. He gets transport allowance
@ Rs. 4,200 per month for commuting between office and residence. The Income-tax Department is of the view that X does not come
in the definition of “an orthopaedically handicapped” person, and, consequently, nothing is exempt in respect of transport allowance.
X is of the opinion that he is qualified for exemption of Rs. 3,200 per month. Besides, he submits the following particulars for the
previous year ending on March 31, 2020 :
Rs.
Interest (out of which Rs. 4,000 is saving bank interest) 4,09,000
Donation by cheque to the National Defence Fund 21,000
Payment of insurance premium on own life insurance policy 11,000
Determine his net income for the assessment year 2020-21.
 DEDUCTIONS FROM TAX LIABILITY - HOW TO DETERMINE

168. First determine the net income and tax payable thereon at the rates mentioned in Appendix 1. From the sum
of tax so determined, deduct the following tax reliefs/tax rebates :
 Rebate under section 86 in respect of share of profit from an association of persons.
 Rebate under section 87A in the case of resident individual [see para 169].
 Relief under section 89 in respect of salary paid in advance or in arrears [see para 51].
 Relief for doubly taxed income under sections 90, 90A and 91.
The mode of the computation of the tax payable is as follows—

1. Tax on net income.
2. Less: Rebate under section 87A (applicable in the case of a resident individual, see para 169).
3. Find out (1) – (2).
4. Add : Surcharge
5. (3) + (4)
6. Add: Health and education cess @ 4 per cent of (5)
7. [(5) + (6)]
8. Less : Rebate under section 86, 89, 90, 90A or 91
9. (7) – (8) is tax payable, (8) cannot exceed (7).
 REBATE FOR RESIDENT INDIVIDUALS - HOW TO FIND OUT [SEC. 87A]

169. With a view to providing tax relief to individual taxpayers who are in lower income bracket, a rebate is
provided for under section 87A.
 Conditions - This rebate is available if the following two conditions are satisfied –
1. Taxpayer is a resident individual (he may be ordinarily resident or not ordinarily resident).
2. His total income or net income or taxable income (i.e., gross total income minus deduction under sections
80C to 80U) does not exceed Rs. 5 lakh.
 Amount of rebate - If the above two conditions are satisfied, the resident individual can claim rebate under
section 87A. The amount of rebate is 100 per cent of income-tax payable on total income However, the amount
of rebate under section 87A cannot exceed Rs. 12,500. This rebate is available from income-tax (before adding
surcharge and health and education cess).
Rebate under section 87A is not available in the case of a non-resident individual, resident or non-resident HUF/
AOP/BOI or any taxpayer other than resident individual.
Problems
169-P1 Find out tax liability for the assessment year 2020-21 in the case of X (who is resident individual and born on April 5, 1960)
in the following situations –
Situation 1 - Net income : Rs. 2,60,000, Situation 2 - Net income : Rs. 3,00,000, Situation 3 - Net income : Rs. 5,00,000,
Situation 4 - Net income : Rs. 6,00,000.
461 Problems on computation of total income Problem 170-P1
Solution :
Rs. Rs. Rs. Rs.
Net income 2,60,000 3,00,000 5,00,000 6,00,000
Income-tax on net income 500 2,500 12,500 32,500
Less: Rebate under section 87A 500 2,500 12,500 Nil
Balance Nil Nil Nil 32,500
Add: Surcharge Nil Nil Nil Nil
Total Nil Nil Nil 32,500
Add: Health and education cess @ 4% Nil Nil Nil 1,300
Tax liability Nil Nil Nil 33,800
169-E1 Find out tax liability for the assessment year 2020-21 in the case of Y (who is resident individual and born on April 1, 1960)
in the following situations – Situation 1 - Net income : Rs. 3,10,000, Situation 2 - Net income : Rs. 4,20,000, Situation 3 - Net income
: Rs. 5,00,000, Situation 4 - Net income : Rs. 6,00,000.
Problems on computation of total income

170-P1 X (age : 59 years) is an employee of a private limited company in Mumbai. He gets Rs. 45,000 per month as salary. Besides,
the employer provides a furnished housing facility (house being owned by the employer) at concessional rate (fair rent of unfurnished
house : Rs. 1,28,000 ; rent of furniture : Rs. 1,29,300 ; rent paid by X : Rs. 1,36,000) ; and medical allowance at the rate of Rs. 1,500
per month. The employer provides sports club facility. A similar facility will cost X Rs. 17,000 per year.
Determine the net income and tax liability of X for the assessment year 2020-21 after giving due consideration to the following
particulars :
Rs.
Long-term capital gains in respect of commercial buildings 1,17,000
Long-term capital gains in respect of shares (non-listed) 1,10,000
Income from horse races (gross) 1,04,000
Winnings from lottery (gross) 2,75,000
Expenditure on recovery of lottery prize 26,000
Interest from IFCI 18,000
Interest paid on capital borrowed for the purpose of investment in bonds of IFCI 18,500
Interest on company deposit 2,08,200
Insurance premium paid on a joint life policy on the life of X and Mrs. X (since 2007) (sum assured : Rs. 5,90,000) 1,24,000
Mediclaim insurance on the life of X’s father 26,000
Solution :
Income from salary [see Note 2] 5,85,000
Capital gains (Rs. 1,17,000 + Rs. 1,10,000) 2,27,000
Income from other sources : Rs.
Income from horse races 1,04,000
Winnings from lotteries 2,75,000
3,79,000
Less : Expenses (*not deductible) —* 3,79,000
Interest from IFCI 18,000
Less : Interest 18,500 (–)500
Income from company deposit 2,08,200
Less : Deduction under sections 80C to 80U
Under section 80C (maximum 20% of sum assured) 1,18,000
Under section 80D 26,000
Under section 80GG [see Note 3] 33,230
Notes :
1. Computation of tax liability
Income-tax
- On Rs. 3,79,000 @ 30% 1,13,700
- On Rs. 2,27,000 @ 20% 45,400
- On balance (i.e., Rs. 12,21,470—Rs. 3,79,000—Rs. 2,27,000) [see Appendix 1] 35,594
Problem 170-P2 Permissible deductions from gross total income 462
Rs.
Tax† 1,94,694
Add : Surcharge Nil
2. Computation of salary income
Basic salary (Rs. 45,000 × 12) 5,40,000
Medical allowance (Rs. 1,500 × 12) 18,000
Value of perquisite in respect of concession in rent :
Valuation of unfurnished house (15% of salary is taxable) 83,700
Add : Rent of furniture 1,29,300
2,13,000
Less : Rent paid by X 1,36,000 77,000
3. Computation of amount deductible under section 80GG in respect of rent paid
It is the least of the following :
a. Rs. 60,000 ;
b. Rs. 2,56,925 (being 25% of total income*) ; or
c. Rs. 33,230 (being the excess of rent paid, i.e., Rs. 1,36,000 over 10% of total income*).
Rs. 33,230, being the least, is, therefore, deductible
*Total income for this purpose :
Gross total income (excluding long-term capital gains) 11,71,700
Less : Deduction under sections 80C to 80U (except section 80GG) 1,44,000
Total income for the purpose of section 80GG 10,27,700
4. The perquisite in respect of sports club facility is not taxable in the hands of employees.
170-E1 [P11.14]* X (30 years) is an employee of a private limited company based in Bombay. He gets Rs. 20,000 per month as salary.
Besides, the employer provides furnished housing facility at concessional rate (lease rent of unfurnished house : Rs. 96,000; cost of
furniture : Rs. 2,40,000; rent paid by X : Rs. 63,000); and special allowance at the rate of Rs. 5,000 per month. The company provides
health club facility to X and other employees (approximate expenditure is Rs. 17,000).
Determine the net income and tax liability of X for the assessment year 2020-21 after giving due consideration to the following
particulars :
Rs.
Long-term capital gains in respect of shares (non-listed) 1,10,000
Long-term capital gains in respect of land 1,06,000
Winnings from lottery (gross) 1,50,000
Expenses incurred in collecting lottery prize 30,000
Mediclaim insurance premium paid on own policy 21,833
Contribution in public provident fund 1,42,000
170-P2 Following are the particulars furnished by X (date of birth : September 10, 1975) for the assessment year 2020-21. Determine
his taxable income and tax liability.
Rs.
One-third share from firm 29,000
Long-term capital gains on transfer of shares (shares are not listed) 1,18,000
Lottery winnings from U.P. State lottery 2,20,000
Life insurance premium paid on own policy (sum assured : Rs. 5,80,000) (policy taken in 2010) 1,25,000
Interest on Government securities 31,000
Income from a new industrial undertaking set up in Jammu in 2011 (eligible for deduction under section 80-IB) 2,26,000
Rs.
Profit from the business of computer software 1,12,000
Profit from the business of dairy farming 1,12,000
Birthday gift – Rs. 40,000 from Mrs. X and Rs. 2,30,000 from a friend.
Solution :
Business income Rs.
Income from newly set-up industrial undertaking 2,26,000
Profit from the business of software 1,12,000
Profit from the business of dairy farming 1,12,000
Share of profit from firm (not taxable) — 4,50,000
Long-term capital gains on sale of shares 1,18,000
Gift from friend 2,30,000
Under section 80C [payment of life insurance premium : Rs. 1,25,000 or 20% of sum assured of
Rs. 5,80,000, whichever is less] 1,16,000
Under section 80-IB in respect of profit from newly set up industrial undertaking [i.e., 25% of
Rs. 2,26,000] 56,500
Tax on Rs. 11,46,500
Long-term capital gain [20% of Rs. 1,18,000] 23,600
Winnings from lottery [30% of Rs. 2,20,000] 66,000
Other income 74,200
Tax† 1,63,800
Add : Surcharge Nil
170-E2 [P11.15]* From the following particulars submitted by Mrs. X (date of birth : June 10, 1970), determine her taxable income
and tax liability for the assessment year 2020-21 :
Rs.
One-half share of profit from a firm 1,16,000
Profit from a small scale industrial undertaking set up in Jammu in September 2011 1,24,000
Profits from the business of trading 1,02,000
Profits from export of film software 1,16,000
Profits from the business of poultry farming 2,18,000
Long-term capital gains on sale of gold 17,000
Birthday gift - Rs. 40,000 from X and Rs. 1,80,000 from a friend.
Insurance premium paid on own insurance policy (sum assured in 2015 : Rs. 13,00,000) 1,35,000
170-P3 For the assessment year 2020-21, X (61 years) submits the following particulars :
Income Rs.
Project allowance 1,06,000
High cost of living allowance 1,12,400
Commission (1% on turnover, turnover achieved by X : Rs. 60,00,000) 60,000
Gift of kitchen appliances by employer (cost to employer : Rs. 13,400) —
House rent allowance (rent paid in Delhi : Rs. 90,000) 1,00,000
Pension from a former employer 1,76,800
Rs.
Profits and gains of newly set up small scale industrial undertaking in Jammu (date of commencement
of production : March 3, 2011) 1,34,000
Profits from publication of books 1,40,000
Income from royalty on “Financial Accounts” a book written by X in Hindi and recommended by the
Rajasthan University (gross amount : Rs. 17,000, expenses : Rs. 5,000) 12,000
Interest on Post Office Savings Bank 15,500
Interest on bank fixed deposit 90,000
Profits from the business of dealing in equity shares on which securities transaction tax of Rs. 18,760 is
paid (and the profit is calculated after deducting securities transaction tax of Rs. 18,760) 35,000
Profits from business of hardware 2,28,000
Profits from export of goods outside India 3,21,000
Income from royalty on patents 19,000
Payments
Insurance premium on life insurance policy on the life of Mrs. X (policy was taken by the Hindu undivided family
of X in 2008 and sum assured is Rs. 8,20,000) 1,24,000
Determine the net income and tax thereon of X for the assessment year 2020-21, giving all permissible deductions.
Solution : Rs. Rs. Rs.
Income from salary
High cost of living allowance 1,12,400
Commission 60,000
Gift of kitchen appliances 8,400
House rent allowance 1,00,000
Less : Exempt from tax [see Note 1] 55,140 44,860
Pension 1,76,800
Less : Standard deduction 50,000 7,47,060
Newly set up industrial undertaking 1,34,000
Publication of books 1,40,000
Profit from dealing in equity shares 35,000
Export of goods 3,21,000
Royalty on patents 19,000
Hardware business 2,28,000 8,77,000
Interest on Post Office Savings Bank [Rs. 15,500 - exempt : Rs. 3,500] 12,000
Royalty on book 17,000
Less: Expenses 5,000 12,000 1,14,000
Under section 80C [life insurance premium] 1,24,000
Under section 80-IB [see para 154] in respect of profits of newly set up industrial
undertaking (i.e., 25% of Rs. 1,34,000) 33,500
Under section 88QQB [see para 163] in respect of royalty 12,000
Under section 80RRB [see para 164] in respect of regulatory on patents 19,000
Under section 80TTB [see para 166] in respect of interest on fixed deposit and
savings bank (Rs. 12,000 + Rs. 90,000, subject to maximum of Rs. 50,000) 50,000 2,38,500
Add : Surcharge Nil
Notes :
1. Exemption in respect of house rent allowance : It is the least of the following :
a. Rs. 1,74,300 (being 50% of salary Rs. 3,48,600, i.e., Rs. 2,88,600 + Rs. 60,000) ;
b. Rs. 1,00,000 (being house rent allowance) ; or
c. Rs. 55,140, being excess of rent paid over 10% of salary (i.e., Rs. 3,48,600)
Rs. 55,140, being the least, is therefore, exempt from tax.
2. It is assumed that conditions of section 80-IB are satisfied.
170-E3 [P11.16]* X (62 years) submits the following particulars of his income for the assessment year 2020-21 :
Salary income : Rs.
Basic pay 3,60,000
Commission (2 per cent on turnover, turnover achieved by X : Rs. 10,00,000) 20,000
House rent allowance (rent paid by X in Bombay : Rs. 31,000) 30,000
Other incomes :
Profits and gains of an industrial undertaking (small scale) set up in a village near Srinagar April 2011 1,03,000
Profits from publication and printing of books 1,08,000
Profits from speculative share trading business (securities transaction tax : Rs. 12,200) (-) 80,000
Profits from trading business 1,69,000
Income from royalty on a book written in Hindi and recommended by the Delhi University 28,000
Profits from export of goods 7,93,000
Income from royalty on patents 57,000
Interest on fixed deposit with SBI 42,000
Payments/investments (not deducted from incomes stated above) :
Interest on money borrowed for payment of taxes 12,700
Legal expenditure for filing income-tax appeal pertaining to the trading business 24,700
Donation of gold to a notified public charitable institute 10,000
Cash payment of insurance premium on own life policy since 2010 (sum assured : Rs. 5,80,000) 1,30,000
Determine the net income and tax liability of X for the assessment year 2020-21 giving all permissible deductions.
170-P4 X and Y (3 : 2) are partners of a firm based at Bombay. For the year ending March 31, 2020, the firm returns the following
income : Rs.
Long-term capital gains in respect of preference shares 30,000
Profit from newly set up small scale industrial undertaking in AP (production commenced during the previous
year 2001-02) 2,15,000
Profits and gains from the business of export of telecast rights 1,38,000
Profits and gains from export of machines to Sri Lanka 2,45,000
Gift received by the firm from A on December 1, 2019 2,00,000
The firm makes the following expenditures (not deducted from the aforesaid income) :
Donation in cash to the Prime Minister’s National Relief Fund 10,000
Interest on money borrowed for payment of income-tax 7,000
Determine the net income of the firm for the assessment year 2020-21.
Solution :
Computation of net income of the firm
Profit from newly set-up industrial undertaking 2,15,000
Profit from export of telecast rights 1,38,000
Profit from export of machines 2,45,000
Gift 2,00,000
Under section 80G [see para 147] in respect of donation to Prime Minister’s National Relief Fund
(cash donation exceeding Rs. 2,000 is not deductible) Nil
Under section 80-IB [see para 154] in respect of profits from newly set up industrial undertaking
(ten-year time-limit expired) Nil
Net income 8,78,000
Note : Income from lotteries is taxable @ 31.2% (i.e., 30% plus 4% of tax as health and education cess) under section 115BB.
Remaining income is also taxable @ 31.2% (i.e., 30% plus 4% of tax as health and education cess).
170-E4 [P11.17]* X and Y (1 : 4) are partners of a firm based at Madras. For the year ending March 31, 2020, the firm returns
the following income :
Rs.
Profit from an industrial undertaking set up in Himachal Pradesh in March 2012 2,10,000
Profit from an industrial undertaking set up in October 2003 in a notified backward district (Category A) 1,55,000
Profit from the business of trading in rice 3,18,000
Profit from export of computer goods to Burma 7,18,000
Long-term capital gains on sale of house 4,24,000
Gift received on September 1, 2019 35,00,000
The firm makes a cash donation of Rs. 10,000 to a notified charitable institute. Determine the net income of the firm for the assessment
year 2020-21.
170-P5 XYZ Ltd., an Indian company, furnishes the following particulars for the year ending March 31, 2020 :
Rs.
Profit from manufacturing activity set up in 1961 3,00,000
Profit from a small scale (backward district of category A) manufacturing activity set up in 2003-04 1,30,000
Interest from a fixed deposit in foreign bank 1,22,000
Dividends from a foreign company on share allotted to it in consideration of transfer of technical know-how 60,000
Dividend from Indian companies 20,10,000
Long-term capital gain on sale of gold 1,09,450
Royalty from Pakistan Government for use of its patents 14,000
Royalty from an Indian company on transfer of technical know-how 34,000
Brought forward business loss (–) 67,000
Expenses (not deducted from incomes stated above)
Legal expenses for tax advice 18,000
Interest on funds borrowed for the purpose of payment of advance income-tax 10,000
Donation by cheque to the National Defence Fund 24,400
Donation by cheque to a political party 10,000
Investment in equity linked savings scheme of UTI 4,000
Income tax 4,000
Determine the net income of the company for the assessment year 2020-21.
Solution : Business income Rs.
Manufacturing activity set up in 1961 3,00,000
Manufacturing activity set up in 2003-04 1,30,000
4,30,000
Less :
Brought forward loss 67,000
Legal expenses for tax advice 18,000 3,45,000
Capital gains
Short-term capital gains 1,46,000 2,55,450
Interest from a fixed deposit in foreign bank 1,22,000
Dividends 60,000
Royalty (i.e., Rs. 14,000 + Rs. 34,000) 48,000 2,30,000
Under section 80G [see para 147] in respect of donation to the National
Defence Fund (i.e., 100% of Rs. 24,400) 24,400
Under section 80GGB [100% of donation to a political party] 10,000
Under section 80-IB [see para 154] (10-year time limit expired) Nil 34,400
Net income 7,96,050
Notes -
1. Long-term capital gains is taxable @ 20%. Remaining income is taxable @ 30%. Health and education cess is 4% of tax. It
may be noted that surcharge is applicable only if net income exceeds Rs. 1 crore.
2. Dividend received by a company from domestic companies is exempt, even if such dividend exceeds Rs. 10,00,000.
170-E5 [P11.18]* XYZ Ltd., an Indian company, furnishes the following information relevant for the previous year ending on
March 31, 2020 :
Business income Rs.
Manufacturing activity set up in 1994-95 30,000
Speculative business income of dealing in shares (income computed after deducting securities
transaction tax : Rs. 17,240) 7,12,000
Commission agency business 27,240
Brought forward business loss (–)8,000
Other income
Dividends from a foreign company 32,000
Dividends from a foreign company on shares allotted in consideration of transfer of technical know-how 32,000
Royalty from a foreign concern for providing professional services (entire amount remitted to India) 16,000
Royalty from a foreign Government for use of patent 62,000
Royalty from an Indian concern for use of its patent rights 18,000
Long-term capital gains on sale of debentures 18,000
Expenses (not deducted from the aforesaid income)
Legal expenses for filing tax appeals 1,000
Interest on amount borrowed to pay income-tax 800
Donation by cheque to an approved charitable institution 13,200
Determine the net income of the company for the assessment year 2020-21. Can the company claim deduction of securities
transaction tax from income ?
170-P6 Find out the tax liability in the following cases for the assessment year 2020-21 :
Mrs. X Y Z
Age during 2019-20 40 years 66 years 86 years
Rs. Rs. Rs.
Income from business of dealing in equity shares (income computed after
deducting securities transaction tax : Rs. 18,750) 30,000 — —
Income from royalty of text-books for post-graduate courses 80,000 — —
Income from profession of acting — 7,35,000 2,16,750
Bank interest (fixed deposit) 30,000 60,000 5,250
Lottery winning 20,000 — —
Other income 7,75,000 — 10,00,000
Contribution towards public provident fund 1,10,500 4,000 14,000
Life Insurance premium (it is less than 10% of sum assured) 20,400 21,000 23,000
Mediclaim insurance premium on own life 19,000 40,000 —
Expenditure on own medical treatment (no mediclaim insurance premium paid) — — 40,000
Solution :
Under section 80C 1,30,900 25,000 37,000
Under section 80D 19,000 40,000 40,000
Under section 80TTB (interest on bank fixed deposit) Nil 50,000 5,250
Under section 80QQB [in respect of royalty] 80,000 — —
Net income 7,05,100 6,80,000 11,39,750
Income-tax on net income† 55,520 46,000 1,41,925
Add : Surcharge Nil Nil Nil
Tax and surcharge 55,520 46,000 1,41,925
Permissible deductions from gross total income 468
Mrs. X Y Z
Rs. Rs. Rs.
Add : Health and education cess 2,221 1,840 5,677
Tax payable (rounded off) 57,740 47,840 1,47,600
170-E6 [P11.19]* Find out the net income and tax liability in the following cases for the assessment year 2020-21 :
Mrs. X Mrs. Y
Rs. Rs.
Business income 12,35,000 —
Speculative business income from dealing in equity shares (securities transaction tax of
Rs. 1,874 deducted) — 12,35,000
Interest on company deposit 80,000 80,000
Contribution towards public provident fund 40,000 40,000
Life insurance premium (sum assured in 2012 : Rs. 2,00,000) 60,000 60,000
Amount invested in debentures of a notified infrastructure company 15,000 15,000
Donation to a notified public charitable institution by inter-net banking 10,200 10,200
Rent for residential house paid at Delhi 1,18,930 1,18,930
Mediclaim insurance premium 26,000 26,000
Age during 2017-18 59 years 50 years
●
Let us recapitulate
Section Who can claim Nature of deduction (for the assessment year 2020-21)
1 2 3
80C Individuals/HUFs Payment of insurance premia, contribution to provident fund, etc. (maximum
deduction: Rs. 1,50,000‡)
80CCC Individuals Contribution to certain pension fund (maximum deduction : Rs. 1,50,000)‡
80CCD Individuals Contribution to pension scheme of Central Government‡
80D Individuals/HUFs Medical insurance premia
80DD Resident individuals Expenditure for medical treatment, etc., and deposit made for maintenance, of
and HUFs dependent relative who is suffering from a permanent physical disability maxi-
mum (fixed deduction : Rs. 75,000 or 1,25,000)
80DDB Resident individuals Medical treatment expenses
or resident Hindu
undivided families
80E Individual Interest on loan taken for higher studies
80EE Any individual Interest on loan taken for acquisition of residential house property (maximum :
Rs. 50,000)
80EEA Individual Interest on loan taken for acquisition of residential house property (maximum :
Rs. 1,50,000)
80EEB Individual Interest on loan taken for purchase of electric vehicle (maximum : Rs. 1,50,000)
80G All assessees Donation to certain funds, charitable institutions (subject to maximum of 50 per
cent of qualifying donation, 100 per cent in some cases)
80GG Individuals Rent paid for furnished/unfurnished residential house subject to a maximum of
Rs. 60,000
80GGA All assessees not having Certain donations for scientific research or rural development
any income chargeable
under the head “Profits
and gains of business
or profession”
80GGB Indian company Donation to a political party
80GGC Other assessee Donation to a political party
80-IA All assessees Profits and gains from industrial undertakings or enterprises engaged in infra-
structure development, etc.
‡ The aggregate deduction under sections 80C, 80CCC and 80CCD cannot exceed Rs. 1,50,000. However, employer’s contribution towards NPS
(up to 10 per cent of salary of an employee) is outside the monetary ceiling of Rs. 1,50,000.
Section Who can claim Nature of deduction (for the assessment year 2020-21)
1 2 3
80-IAB Special Economic Zone Profits and gains by an undertaking or enterprise engaged in development of
Special Economic Zone (100% of such profits for 10 years)
80-IAC Company/LLP Profits and gains derived from eligible business
80-IB All assessees Profits and gains from industrial undertakings other than infrastructure develop-
ment undertaking
80-IBA Any assessee Profits and gains from housing projects
80-IC All assessees Profits and gains in respect of certain undertakings in certain special category of
States
80-ID All assessees Profit from the business of hotel and convention centre in NCR
80-IE All assessees Profit from certain undertakings in north eastern States
80JJA All assessees Profits and gains from the business of collecting and processing of bio-degradable
waste
80JJAA Any assessee who is Employment of new employees (30 per cent of additional employees cost)
subject to tax audit
under section 44AB
80LA Offshore Banking Certain income [100% of such income for 5 years, 50% of such income for next
units/International 5 years]
financial services
centre
80P Co-operative societies Specified incomes [subject to amount specified in sub-section (2)]
80PA Producer company Profit and gain attributable to eligible business
80QQB Resident individual Royalty from books (maximum deduction : Rs. 3,00,000)
80RRB Resident individual Royalty on patents [maximum : Rs. 3,00,000]
80TTA Individual (other than Interest on deposits in saving account (up to Rs. 10,000)
senior citizen)/any
HUF
80TTB Resident individual Interest on deposits with bank/co-operative bank/post office (maximum deduc-
(being senior citizen) tion Rs. 50,000)
80U Resident individual Income of a person with disability (subject to maximum of Rs. 1,25,000)
Test your knowledge

For answer, see the relevant paras indicated at the end of each question :
1. What kind of tax relief is available to an employee in respect of his provident fund contribution, life insurance premium
and interest earned on bank deposits ? [para 169]
2. What do you understand by the term “tax holiday” ? Who is entitled to it, and what are the provisions of the Act in this
connection ? [paras 152 and 154]
3. What are the provisions relating to deductions from gross total income in respect of donations to certain funds, charitable
institutions, etc., under section 80G of the Income-tax Act ? [para 147]
4. What are the provisions of law regarding deductions to be made in computing the total income of an assessee in respect
of the following :
a. Donations to certain funds and charitable institutions. [para 147]
b. House rent allowance. [para 42.1]
c. Rents paid. [para 148]
5. Discuss the conditions to be fulfilled for allowability of deductions under section 80-IB in respect of profits and gains from
newly established small-scale industrial undertakings set up in rural areas. [para 154]
6. Write notes on :
a. Deduction in respect of investment made in equity shares. [para 142A]
b. Deduction in respect of royalty income. [para 163]
c. Deduction in respect of donation for conducting scientific research. [para 149]
7. Discuss the provisions of the Income-tax Act regarding the following deductions, to be made in computing the total
income of an assessee :
a. Life insurance premium, contribution to provident fund, etc. [para 138]
b. Donations to certain funds, charitable institutions, etc. [para 147]
c. Royalty from patent [para 164]
Meaning of agricultural
CHAPTER 12 income and its tax
treatment
S
ection 10(1) exempts agricultural income from tax and also provides for its exclusion
in computing the total income of the assessee. The reason of exemption of
agricultural income from Central taxation is that the Constitution gives exclusive
power to make laws with respect to taxes on agricultural income to the State Legislatures.
From the assessment year 1974-75, agricultural income is, however, taken into account to
determine tax on non-agricultural income in certain cases. This Chapter explains the
meaning of “agricultural income” and mode of aggregation of agricultural income with non-
agricultural income to determine tax incidence on the latter.
 WHAT IS AGRICULTURAL INCOME

185. Section 10(1) exempts agricultural income from income-tax. By virtue of section 2(1A) the expression
“agricultural income” means :
1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes [sec.
2(1A)(a)—see paras 185.1 and 185.1-1].
2. Any income derived from such land by agricultural operations including processing of the agricultural
produce, raised or received as rent-in-kind so as to render it fit for the market or sale of such produce [sec.
2(1A)(b)—see paras 185.2 and 185.1-1].
3. Income attributable to a farm house subject to certain conditions [sec. 2(1A)(c)—see paras 185.3 and 185.1-1].
 Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
185.1 Rent or revenue derived from land [Sec. 2(1A)(a)] - According to section 2(1A)(a), if the following three
conditions are satisfied, income derived from land can be termed as “agricultural income”:
a. rent or revenue should be derived from land (may be in cash or kind) ;
b. the land is one which is situated in India (if the land is situated in a foreign country, this condition is not
satisfied) ; and
c. the land is used for agricultural purposes.
185.1-1 LAND USED FOR AGRICULTURAL PURPOSES - The primary condition to claim exemption as “agricultural
income” is that the land in question should be used for agricultural purposes whether exemption is sought under
sub-clause (a) or (b) or (c) of section 2(1A).
The terms “agriculture” and “agricultural purposes” have not been defined in the Act; one has, therefore, to
depend upon ordinary meaning and decided cases.
In CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC), Bhagwati, J. laid down the following principles to
serve as a guide in the determination of the scope of the terms “agriculture” and “agricultural purposes”:
 Basic operations - Prior to germination, some basic operations are essential to constitute agriculture. The basic
operations would involve expenditure of human skill and labour upon the land itself and not merely on the
growth from the land. Some illustrative instances of basic operations are tilling of land, sowing of the seeds,
planting, and similar kind of operations on the land.
 Subsequent operations - Besides the basic operations, there are certain subsequent operations which are
performed after the produce sprouts from the land. Illustrative instances of subsequent operations are weeding,
470
471 Income derived from agricultural land Para 185.2
digging the soil around the growth, removal of undesirable undergrowths and all operations which foster the
growth and preserve the same, not only from insects and pests but also from degradation from outside, tending,
pruning, cutting, harvesting and rendering the produce fit for the market. Mere performance of these subsequent
operations on the products of the land (where such products have not been raised on the land by the performance
of the basic operations described above) would not be enough to characterise them as agricultural operations.
Where, however, the subsequent operations are performed in conjunction with and in continuation of the basic
operations, the subsequent operations would also constitute part of the integrated activity of agriculture.
 Agriculture not merely includes food and grains - Agriculture does not merely imply raising of food and grains for
the consumption of men and animals; it also includes all products from the performance of basic as well as
subsequent operations on land. These products, for instance, may be grain or vegetable or fruits including
plantation and groves or grass or pasture for consumption of beasts or articles of luxury such as betel, coffee, tea,
spices, tobacco, etc., or commercial crops like cotton, flax, jute, hemp, indigo, etc. All these are products raised
from the land and the term “agriculture” cannot be confined merely to the production of food and grains
products for human beings but must be understood as comprising all the products of the land which have some
utility either for consumption or for trade and commercial asset would also include forest products such as
timber, sal and piyasal trees, casuarina plantation, tendu leaves, horra nuts, etc.
 Some connection with land not sufficient - The mere fact that an activity has some connection with or is in some
way dependent on land is not sufficient to bring it within the scope of the term “agriculture”. For instance,
breeding and rearing of livestock, dairy farming, cheese and butter-making and poultry farming would not by
themselves be agricultural purposes.
 Income from nursery operations - Any income derived from saplings or seedlings grown in a nursery shall be
deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried
out on land, such income is treated as agricultural income and, consequently, it is under section 10(1).
185.2 Income derived from agricultural land by agricultural operations [Sec. 2(1A)(b)] - Section 2(1A)(b)
gives the following three instances of agricultural income :
a. any income derived by agriculture from land situated in India and used for agricultural purposes ;
b. any income derived by a cultivator or receiver of rent-in-kind of any process ordinarily employed to render
the produce raised or received by him to make it fit to be taken to market; or
c. any income derived by such land by the sale by a cultivator or receiver of rent-in-kind of the produce raised
or received by him in respect of which no process has been performed other than a process of the nature
described in (b).
The aforesaid income are agricultural income, if such income are derived from land which is situated in India
and is used for agricultural purposes.
Any surplus arising on sale or transfer of agricultural land (in urban area) is not treated as rent or revenue derived
from land.
185.2-1 INCOME DERIVED FROM MARKETING PROCESS - Sometimes it becomes difficult to find ready market of the crop
as harvested. In order to make the produce a commodity which is saleable, it becomes necessary to perform some
kind of process on the produce. The income, arising by way of enhancement of value of such produce, by
performing such process to make the raw produce fit for market, is also agricultural income. However, the
following conditions must be satisfied :
a. the process must be one which is ordinarily employed by a cultivator or receiver of rent-in-kind ; and
b. the process must be applied to render the produce fit to be taken to market.
For instance, tobacco leaves are ordinarily dried to make them suitable for sale. Therefore, the income from the
ordinary process employed to dry the tobacco leaves to make them fit to be taken to market, is agricultural
income. The ordinary process employed to render the produce fit to be taken to market includes thrashing,
winnowing, cleaning, drying, crushing, boiling and decanting, etc., though the nature of process depends upon
quality of the produce and varies from time to time and place to place.
Moreover, if marketing process is performed on a produce which can be sold in its raw form (without requiring
any process to make it fit for marketing), income derived therefrom is partly agricultural and partly non-
agricultural. For instance, if sugarcane is generally sold in a given area without being subjected to any process,
the process of converting sugarcane into gur would not be agricultural process and income attributable to the
process of converting sugarcane into gur would not be agricultural income—Brihan Maharashtra Sugar Syndicate
Ltd. v. CIT [1946] 14 ITR 611 (Bom.).
Para 185.3 Meaning of agricultural income and its tax treatment 472
Section 2(1A)(b) does not contemplate sale of commodity different from what is cultivated and processed and
where the assessee was growing mulberry leaves, feeding them to silkworms and obtaining silk cocoons, income
from sale of silk cocoons would not be agricultural income—K. Lakshmanan Co. v. CIT [1999] 239 ITR 597 (SC).
185.3 Income from farm building [Sec. 2(1A)(c)] - Bona fide annual value of house property is taxable under
section 22. However, income from a house property which satisfies the following cumulative conditions would
be treated as agricultural income and, consequently, it would be exempt from tax by virtue of section 10(1) :
a. the building should be occupied by the cultivator (as a landlord or as a tenant) or receiver of rent-in-kind (as
a landlord) ;
b. it should be on or in the immediate vicinity of land, situated in India and used for agricultural purposes ;
c. the cultivator or receiver of rent-in-kind should by reason of his connection with the agricultural land requires
the building as a dwelling house or as a store house or other out-building ; and
d. the land is assessed to land revenue or local rate or, alternatively, the land (though not assessed to land
revenue or local rate), is situated in a rural area†.
If all the aforesaid conditions are satisfied, income from a farm building is exempt from tax under section
2(1A)(c).
 Use of building or land for any purpose other than agriculture - Income would be exempt from tax only if land or
building is used for agricultural purposes. In other words, if land or building is used for any other purposes,
exemption is not available. For instance, if a farmer gives his building on rent for residential purposes, income
 WHAT ARE INSTANCES OF INCOME HELD TO BE AGRICULTURAL/NON-AGRICULTURAL

INCOME
186. In the following cases, income is held as agricultural income :
1. If denuded parts of the forest are replanted and subsequent operations in forestry are carried out, the income
arising from the sale of replanted trees.
2. Profit on sale of standing crop or the produce after harvest by a cultivating owner or tenant of land.
3. Rent for agricultural land received from sub-tenants by mortgagee-in-possession.
4. Compensation received from an insurance company for damage caused by hail storm to the green leaf forming
part of assessee’s tea garden (moreover, no part of such compensation consists of manufacturing income, as such
compensation cannot be apportioned under rule 8 between manufacturing income and agricultural income).
5. Income from growing flowers and creepers.
6. Salary received by a partner for rendering services to a firm which is engaged in agricultural operations is
agricultural income as payment of salary is only a mode of adjustment of the firm’s income [it may be noted that
share of profit from such firm is not taken as “agricultural income” as such share is exempt under section 10(2A)].
7. Interest on capital received by a partner from the firm engaged in agricultural operations.
8. If nursery is maintained by carrying out basic operations and subsequent operations are carried out in pots
in continuation of basic operations, then income from such nursery would be agricultural income.
 Instances of non-agricultural income :
1. Annual annuity received by a person in consideration of transfer of agricultural land even if it is charged on
land, as source of annuity is covenant and not land.
†Rural area for the above purpose is as follows –

From the assessment year 2014-15 - Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000
or more and also which does not fall within distance (to be measured aerially) given below –
2 kilometres from the local limits of municipality/cantonment If the population of the municipality/cantonment board is more than
board 10,000 but not more than 1 lakh
board 1 lakh but not more than 10 lakh
board 10 lakh
For the above purpose, “population” means the population according to the last preceding census of which the relevant figures have been
published before the first day of the previous year.
473 Any other case Para 187.1
2. Interest on arrears of rent in respect of agricultural land as it is neither rent nor revenue derived from land.
3. Interest accrued on promissory notes obtained by a zamindar from defaulting tenants.
4. Income from sale of forest trees, fruits and flowers growing on land naturally, spontaneously and without the
intervention of human agency.
5. Income from sale of wild grass and reeds of spontaneous growth.
6. Income of salt produced by flooding the land with sea water as it is not derived from land used for agricultural
income.
7. Profit accruing from the purchase of a standing crop and resale of it after harvest by a merchant, having no
interest in land except a mere licence to enter upon the land and gather upon the produce, as land is not the direct,
immediate or effective source of income.
8. Remuneration received by managing agent at a fixed percentage of net profit from a company having
agricultural income.
9. Interest received by a money-lender in the form of agricultural produce.
10. Income of sale of agricultural produce received by way of price for water supplied to land.
11. Commission earned by the landlord for selling agricultural produce of his tenant.
12. Income derived from land let out for storing crops.
13. Income from fisheries.
14. Maintenance allowance charged on agricultural land.
15. If the assessee takes loans on hypothecation of agricultural produce cultivated by him and advances the same
to its sister concerns, interest earned thereupon (is not agricultural income).
16. Royalty income of mines.
17. Income from butter and cheese making.
18. Income from poultry farming.
19. Income from sale of trees of forest which are of spontaneous growth and in relation to which forestry
operations alone are performed.
20. Where the assessee-company is growing various kinds of hybrid/germ plasm seeds after conducting
agrigenetic agricultural research costing crores of rupees, income earned on sale of such seeds cannot be treated
as ‘agricultural income’.
21. Receipts from TV serial shooting in farm house.
 WHAT IS THE TAX TREATMENT OF INCOME WHICH IS PARTLY AGRICULTURAL AND

PARTLY FROM BUSINESS [RULES 7, 7A, 7B AND 8]
187. For disintegrating a composite business income which is partly agricultural and partly non-agricultural, the
following rules are applicable—
Income* Non-agricultural Agricultural Income-tax
income income Rules
 Growing and manufacturing tea in India‡ 40% 60% Rule 8
 Sale of centrifuged latex or cenex or latex based crepes (such as pale
latex crepe) or brown crepes (such as estate brown crepe, remilled
crepe, smoked blanket crepe or flat bark crepe) or technically specified
block rubbers manufactured or processed from field latex or coagu-
lum obtained from rubber plants grown by the seller in India 35% 65% Rule 7A
 Sale of coffee grown and cured by seller 25% 75% Rule 7B(1)
 Sale of coffee grown, cured, roasted and grounded by seller in India
with or without mixing chicory or other flavouring ingredients 40% 60% Rule 7B(1A)
187.1 Any other case [Rule 7] - For disintegrating a composite business income which is partly agricultural and
partly non-agricultural, the market value of any agricultural produce, raised by the assessee or received by him
* Income in respect of the business given above is, in the first instance, computed under the Act as if it were derived from business after making
permissible deduction. 40 or 35 or 25 per cent of the income so arrived at is treated as business income and the balance is treated as agricultural
income. Salary and interest received by a partner from a firm (growing leaves and manufacturing tea or any other activity mentioned in the table)
is taxable only to the extent of 40 or 35 or 25 per cent and the balance is treated as agricultural income.
‡ If a person directly sells green tea leaves, income therefrom is 100 per cent agricultural income.
Para 188 Meaning of agricultural income and its tax treatment 474
as rent-in-kind and utilised as raw material in his business, is deducted. No further deduction is permissible in
respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind.
The following examples are given to illustrate the aforesaid provisions —
1. X Ltd. grows sugarcane to manufacture sugar. Data of 2019-20 is as follows —
(Rs. in lakh)
Cost of cultivation of sugarcane 4
Market value of sugarcane when sugarcane is transferred to factory 9
Other manufacturing cost 6
Sales turnover of sugar 22
Income in this case will be determined as follows —
Income from Agriculture
manufacturing income
Rs. in lakh Rs. in lakh
Sales turnover/market value of sugarcane 22 9
Less : Expenses
Manufacturing expenses 6 —
Market value of raw material (i.e., sugarcane) 9 —
Cultivation expenses — 4
Income 7 5
2. Y Ltd. is engaged in the business of growing and manufacturing tea in India. The following data is available for the
previous year 2019-20—
(Rs. in lakh)
Sales turnover of tea 45
Less :
Expenses on growing tea leaves 20
Manufacturing expenses 15
Income [60 per cent of Rs. 10 lakh will be agriculture income and 40 per cent of Rs. 10 lakh (i.e., Rs. 4 lakh), 10
will be taken as non-agriculture income]
3. Assume in the above case, Y Ltd. is engaged in the cultivation, manufacture and sale of coffee. As per rule 7B, 40 per cent
of the income from growing and manufacturing coffee in India with or without mixing of chicory or other flavouring
ingredients is taken as non-agricultural income.
 WHAT IS THE SCHEME OF PARTIAL INTEGRATION OF NON-AGRICULTURAL INCOME

WITH AGRICULTURAL INCOME
188. The scheme of partial integration of non-agricultural income with agricultural income is applicable if the
following conditions are satisfied—
Condition 1 The taxpayer is an individual, a Hindu undivided family, a body of individual, an association of persons
or an artificial juridical person.
Condition 2 The taxpayer has non-agricultural income exceeding the amount of exemption limit**.
Condition 3 The agricultural income of the taxpayer exceeds Rs. 5,000.
If the three conditions are satisfied, then the scheme of partial integration of tax on non-agricultural income with
income derived from agriculture is applicable.
It may be noted that, the aforesaid scheme is not applicable in the case of a firm, company, co-operative society,
etc.
188.1 Computation of tax in cases covered by the scheme - In cases covered by the scheme, income-tax will
be computed for the assessment year 2020-21 in the following manner :
 Step one - Net agricultural income is to be computed as if it were income chargeable to income-tax.
** Exemption limit for the assessment year 2020-21 is Rs. 2,50,000 [higher exemption limit (a) in the case of a resident senior citizen born on or
after April 2, 1940 but on or before April 1, 1960: Rs. 3,00,000; and (b) in the case of a resident super senior citizen born on or before April 1, 1940:
Rs. 5,00,000].
475 Computation of tax in cases covered by scheme Para 188.1
 Step two - Agricultural and non-agricultural income of the assessee will then be aggregated and income-tax is
calculated on the aggregate income as if such aggregate income were the total income.
 Step three - The net agricultural income will then be increased by the amount of exemption limit (i.e., the first
slab of income on which tax is charged at nil rate**) and income-tax is calculated on net agricultural income, so
increased, as if such income was the total income of the assessee.
 Step four - The amount of income-tax determined at Step two will be reduced by the amount of income-tax
determined under Step three.
 Step five - Find out the balance. Add surcharge and health and education cess.
 Step six - The amount so arrived will be the total income-tax payable by the assessee.
Problems
188-P1 For the previous year ending March 31, 2020, non-agricultural income of X (age : 22 years) is Rs. 2,50,000, whereas agricultural
income is Rs. 6,80,000. Is he liable to pay income-tax ?
Solution : As non-agricultural income of X does not exceed Rs. 2,50,000, he is not liable to pay any tax, irrespective of
quantum of agricultural income.
188-E1 [P12.1]* From the following information, find out whether X (age : 63 years, resident) is liable to pay income-tax for the
assessment year 2020-21 : Rs.
Non-agricultural income for the year ending March 31, 2019 4,76,000
Agricultural income for the previous year ending March 31, 2020 48,00,000
Non-agricultural income for the year ending March 31, 2020 3,00,000
188-P2 For the assessment year 2020-21, net agricultural income of Mrs. X (age : 37 years) is Rs. 8,10,000 and non-agricultural income
is Rs. 4,78,300. Mrs. X pays Rs. 20,000 as life insurance premium (sum assured : Rs. 3,00,000) on the life of her major son. Determine
her tax liability.
Solution : Rs.
Less: Deduction under section 80C 20,000
Net income 4,58,300
Income-tax will be computed as under :
1. Income-tax on Rs. 12,68,300 (i.e., agricultural income Rs. 8,10,000 + non-agricultural income Rs. 4,58,300) 1,92,900
2. Income-tax on Rs. 10,60,000 (i.e., agricultural income Rs. 8,10,000 + exempted slab of income Rs. 2,50,000) 1,30,500
3. Income-tax computed at (1) minus income-tax computed at (2) 62,490
4. Less: Rebate under section 87A† 12,500
5. Balance 49,990
6. Surcharge Nil
7. Tax and surcharge 49,990
8. Health and education cess [4% of (7)] 2,000
9. Tax liability [(7) + (8)] (rounded off) 51,990
188-E2 [P12.2]* For the assessment year 2020-21, net agricultural income of Mrs. X (resident) is Rs. 9,46,000. Her non-
agricultural income is Rs. 4,60,000. Determine her tax liability on the assumption that she deposits Rs. 70,000 in public provident
fund account and invests Rs. 5,000 in NSC VIII Issue. None of the parent of Mrs. X is a senior citizen.
188-P3 For the assessment year 2020-21, X, an individual (age 62 years), submits the following information :
Rs.
House property income 6,25,000
Income from the business of growing and manufacturing coffee in India (gross) 5,00,000
Expenditure on earning coffee income 2,000
Determine the tax liability of X for the assessment year 2020-21 on the assumption that he contributes Rs. 60,000 towards public
provident fund.
** Exemption limit for the assessment year 2020-21 is Rs. 2,50,000 [higher exemption limit (a) in the case of a resident senior citizen born on or
after April 2, 1940 but on or before April 1, 1960: Rs. 3,00,000; and (b) in the case of a resident super senior citizen born on or before April 1, 1940:
Rs. 5,00,000].
†Rebate under section 87A is available only in the case of a resident individual if his/her taxable income is Rs. 5,00,000 or less. In this case, taxable
income of X is Rs. 4,58,300. Consequently, rebate under section 87A is available. Amount of rebate is 100% of income-tax (i.e., Rs. 62,490) or
Rs. 12,500, whichever is lower.
Para 188.1 Meaning of agricultural income and its tax treatment 476
Solution :
Computation of income Agricultural Non-agricultural
income income
Rs. Rs.
House property income — 6,25,000
Income from growing and manufacturing coffee (i.e., Rs. 5,00,000 — Rs. 2,000) [60%
of Rs. 4,98,000 is agricultural income and balance is treated as non-agricultural
income — see para 187] 2,98,800 1,99,200
Total 2,98,800 8,24,200
Less: Deduction under section 80C 60,000
Net income 7,64,200
COMPUTATION OF TAX LIABILITY ON NON-AGRICULTURAL INCOME
1. Income-tax on Rs. 10,63,000 (Rs. 2,98,800 + Rs. 7,64,200) 1,28,900
2. Income-tax on Rs. 5,98,800 (i.e., agricultural income Rs. 2,98,800 + exempted slab of income
Rs. 3,00,000) 29,760
3. Balance‡ [i.e., (1)—(2)] 99,140
4. Add : Surcharge (not applicable) Nil
5. Tax and surcharge [i.e., (3) + (4)] 99,140
6. Health and education cess [4% of (5)] 3,966
7. Tax liability [i.e., (5) + (6)] (rounded off) 1,03,110
188-E3 [P 12.3]* For the assessment year 2020-21, Mrs. X (date of birth : September 19, 1975), furnishes the following information :
Rs.
Gross agricultural income 12,21,000
Expenditure on earning agricultural income 90,000
Non-agricultural income 22,50,000
Determine the tax liability of Mrs. X for the assessment year 2020-21, on the assumption that she contributes Rs. 80,000 towards
public provident fund and pays insurance premium of Rs. 90,000 on her life insurance policy (sum assured : Rs. 3,00,000) (policy
taken in June 2019)
188-P4 X (age : 30 years) and Mrs. Y (age : 32 years) are two equal partners in XY and Co., a partnership firm. From the following
data, find out the net income and tax liability of the firm and partners for the assessment year 2020-21—
Firm Rs.
Business income from agriculture 1,70,000
Less :
Salary to X and Mrs. Y (equal) 24,000
Interest to X and Mrs. Y at the rate of 12% (equal) 10,000
Income from agriculture (shared equally by X and Mrs. Y) 1,36,000
Income from business
Less : Salary to X and Mrs. Y (equal) 20,000
Partners
X Mrs. Y
Rs. Rs.
Salary from Z Ltd. (after standard deduction) 6,80,000 -
Interest on debentures of A Ltd. (A Ltd. has distributed interest out of agricultural income) 20,000 15,000
Long-term capital gains under section 112 35,000 50,000
Winnings from lottery 60,000 90,000
Bank interest (fixed deposit) 93,000 38,000
Agricultural business income from outside India 10,000 10,20,000
‡Rebate under section 87A is not available, as taxable income of X (i.e., Rs. 7,64,200) is more than Rs. 5,00,000.
477 Computation of tax in cases covered by scheme Para 188.1
X Mrs. Y
Rs. Rs.
Agricultural business income in India (personal) 30,000 45,000
PPF contribution (out of non-agricultural income) 60,000 10,000
PPF contribution (out of agricultural income) 90,000 40,000
Solution : Firm
Non-agricultural Agricultural
income income
Rs. Rs.
Income (as computed in the problem) 1,40,000 1,36,000
Tax @ 30% (plus 4% of tax as health and education cess) 43,680 Nil
Partners
X Mrs. Y
Rs. Rs.
Non-agricultural income
Salary from Z Ltd. 6,80,000 -
Business income
Share of profit from firm out of non-agricultural income [it is exempt under section 10(2A)] Nil Nil
Salary from firm out of non-agricultural income 10,000 10,000
Agricultural income from outside India (it is treated as non-agricultural income) 10,000 10,20,000
Long-term capital gain 35,000 50,000
Winnings from lotteries 60,000 90,000
Interest on debentures of A Ltd. 20,000 15,000
Bank interest 93,000 38,000
Less : Deduction under section 80C 1,50,000 50,000
Non-agricultural income (a) 7,58,000 11,73,000
Agricultural income
Share of profit from firm out of agricultural income [exempt under section 10(2A)] - -
Salary from firm (out of agricultural income) 12,000 12,000
Interest from firm (out of agricultural income) 5,000 5,000
Agricultural income in India 30,000 45,000
Agricultural income (b) 47,000 62,000
Total [(a) + (b)] (c) 8,05,000 12,35,000
Computation of tax
1. Tax on (c)
Long-term capital gain @ 20% [20% of Rs. 35,000 and Rs. 50,000] 7,000 10,000
Lottery income @ 30% [30% of Rs. 60,000 and Rs. 90,000] 18,000 27,000
Remaining income [i.e., X : Rs. 7,10,000 (Rs. 8,05,000—Rs. 35,000—Rs. 60,000); Mrs. Y :
Rs. 10,95,000 (Rs. 12,35,000—Rs. 50,000— Rs. 90,000)] 54,500 1,41,000
Total 79,500 1,78,000
2. Tax on agricultural income + exemption limit† 2,350 3,100
3. (1) — (2) (rebate under section 87A is not available as non-agricultural income is
more than Rs. 5,00,000) 77,150 1,74,900
4. Add : Surcharge Nil Nil
5. Tax and surcharge 77,150 1,74,900
6. Add : Health and education cess [4% of tax and surcharge] 3,086 6,996
7. Tax payable (rounded off) 80,240 1,81,900
Notes—
1. The scheme of partial integration of non-agricultural income with agricultural income is not applicable in the case of firm.
2. Interest on debentures of A Ltd. is taken as non-agricultural income as the source of income is ownership of debentures.
†Rs. 2,50,000 in case of X and Mrs. Y.

Meaning of agricultural income and its tax treatment 478
3. Agricultural income outside India is taken as non-agricultural income.

4. Public provident fund contribution (or any other investment) can be made out of income taxable (or not taxable) in India.
5. Agricultural income from the firm is computed in the partner’s hand as if it is business income of the partners for the
purpose of partial integration of non-agricultural income with income derived from agriculture. Partners have received
salary, interest and share of profit from the firm out of agricultural income. Salary and interest are taken as agricultural
income of partners by virtue of specific provisions of section 28. However, share of profit from the firm is exempt under
section 10(2A). Moreover, under rule 5 of Part IV of the First Schedule to the Finance Act, 2017, share of profit from a firm
out of agricultural income is not considered as agricultural income of partners.
188-E4 [P12.4]* Find out the tax liability of X (26 years) from the following data for the assessment year 2020-21—
Rs.
Agricultural business income from Nepal (net profit on sale of crops) 20,000
Agricultural business income from Sikkim 1,30,000
Share of profit from a firm (out of agricultural income in India) 60,000
Interest from the aforesaid firm 30,000
Long-term capital gain from sale of agricultural land in Delhi 76,000
Salary from MP Agricultural University (Rs. 80,000 per month) 9,60,000
Loss from growing and manufacturing tea in India (-)1,00,000
Life insurance premium (sum assured : Rs. 2,00,000) on his own life paid out of profit from firm 10,000
Contribution towards university provident fund 57,000
●
Test your knowledge

For answer, see the relevant paras indicated at the end of each question :
1. What is agricultural income and how is it treated for income-tax purposes ? [paras 185 and 188]
2. Explain the term “agricultural income” and state the incomes included under this head. [para 185]
3. What is agricultural income ? How is it treated for income-tax purposes ? Explain with the help of a suitable example?
[paras 185 and 188]
4. Discuss whether the following items of income constitute “agricultural income” for the purpose of the Income-tax Act :
a. Income derived from rubber plantation in Singapore.
b. Rent received from a tenant to whom land in India has been let out and who uses it for cultivating wheat.
c. Dividend received by a shareholder from an Indian company the whole of whose income is agricultural income.
d. Income derived from sale of timber of spontaneous growth on Indian soil. [paras 185 and 186]
5. Explain the scheme of partial integration of agricultural income with the total income for computing tax liability. [para
188]
6. X is the manager of an agricultural farm in Bihar, cultivating paddy and jute. The income of the farm is agricultural income
within the meaning of the Income-tax Act, 1961. X claims that as his services are connected entirely with agricultural
production, his salary for acting as the manager is also agricultural income. State giving reasons whether his claim is
tenable. [paras 185 and 186]
7. An individual, owning some land in West Bengal on which there is a forest of spontaneous growth, clears the land and
sells the timber at a profit of Rs. 25,000. He then allows Y to cultivate paddy and other crops thereon for which he charged
a rent of Rs. 5,000. Y hires tractor from Z, the charge being Rs. 2,000 and used the tractor for agricultural operations on
the land. By growing and selling the agricultural product Y makes a net profit of Rs. 15,000. Discuss whether the sums
of Rs. 25,000, Rs. 5,000, Rs. 2,000 and Rs. 15,000, constitute agricultural income in the hands of X, Y and Z, respectively.
[paras 185 and 186]
CHAPTER 13
Individuals - Computation
of taxable income
A
ssessment of an individual involves the practical application of the various provisions
of the Income-tax Act, in a given situation. So far the earlier Chapters have dealt with
the treatment and computation of the assessee’s income under the individual heads.
This Chapter shows, with reference to various assessment problems, the cumulative impact
of the provisions on an individual’s assessment having various kinds of income and
outgoings.
 WHAT IS INCLUDED IN INCOME OF AN INDIVIDUAL

192. While computing taxable income of an individual, the following points should be considered —
Nature of income Tax treatment
Income earned by the taxpayer Except the following, all other incomes shall be included—
a. income exempt under sections 10 to 13A ;
b. incomes to be included in income of others by virtue of
sections 60 to 64
Share of profit from a Hindu undivided family It is exempt under section 10(2)
Share of profit from a firm assessed as firm It is exempt under section 10(2A)
Salary and interest from the aforesaid firm These are taxable as business income
Share of profit from an association of persons/body of If the association/body is taxable at the maximum marginal
individuals rate (or at a higher rate), then share of profit is not taxable in
the hands of recipient
Income earned by others and included in the income Such income shall be included in the income of the taxpayer
of the taxpayer by virtue of sections 60 to 64
➠ 192.1 Special provisions for persons governed by Portuguese civil law - Section 5A is applicable in the case
of appropriation of income between spouses governed by Portuguese Civil Code which is in force in the State
of Goa and Union territories of Dadra and Nagar Haveli and Daman and Diu. By virtue of section 5A, income
from all sources, except from salary, should be apportioned equally between the husband and the wife. The
income so apportioned will be included separately in the total income of the husband and of the wife and the
remaining provisions of the Act shall apply accordingly. Salary income is, however, taxable in the hands of the
spouse who has actually earned it.
 TAXABLE INCOME - HOW COMPUTED

193. Taxable income shall be computed as follows :
 Step 1 - Income under the different heads of income - First find out income under the five heads of income. The point
discussed in para 192 should be duly considered for this purpose.
 Step 2 - Adjustment of losses of the current year and earlier years - Losses should be set off according to the provisions
of sections 70 to 80 [see paras 132 to 136]. The income after adjustment of losses is gross total income.
 Step 3 - Deduction from gross total income - From the gross total income, deductions are available under sections
80C to 80U.
 Step 4 - Rounding off - The balance should be rounded off to the nearest Rs. 10. It is known as net income or total
income or taxable income.
479
Para 194 Individuals - Computation of taxable income 480
 TAX LIABILITY - HOW CALCULATED

194. Net income of an individual is chargeable to tax at the rates given in Appendix 1. If the individual has
agricultural income, then due consideration is to be given to the rules mentioned in para 188.1 to arrive at tax
on non-agricultural income.
Final tax liability shall be determined as under —
Tax on net income ***
Less: Rebate under section 87A [in the case of a resident individual whose net income does not exceed
Rs. 5 lakh] ***
Balance ***
Add : Surcharge ***
Total ***
Add: Health and education cess [4% of tax and surcharge] ***
Total tax ***
Less : Tax rebate or relief under sections 86, 89, 90, 90A and 91 ***
Tax ***
Add : Interest payable under sections 234A, 234B and 234C [see para 296] ***
Total ***
Less : Prepaid tax
Tax deducted at source on his own income and on income of others included in his taxable income ***
Tax collected at source ***
Advance tax ***
Tax payable at the time of submission of return of income ***
 Alternate minimum tax - Tax payable by a non-corporate assessee cannot be less than 18.5 per cent† [+ SC + HEC]
of “adjusted total income”. For detailed discussion, see para 194.2.
194.1 Income taxable at special rate - There are a few cases where income is taxable at special rates given under
different provisions of the Act. For instance, long-term capital gains are taxable at the rate of 20 per cent by virtue
of section 112. Short-term capital gains (if securities transaction tax is applicable) is taxable at the rate of 15 per
cent under section 111A. Winnings from lottery/races is taxable at the rate of 30 per cent by virtue of sections
115B/115BB. Complete list of such cases is narrated in para 0.6 of Appendix 1. However, a few cases are given
below –
194.1-1 SPECIAL PROVISIONS RELATING TO NON-RESIDENT INDIANS [SECS. 115C TO 115-I] - A citizen of India (who is non-
resident) or a person of Indian origin (who is non-resident) can take the benefit of special provisions under
sections 115C to 115-I. Under these sections, gross income (without claiming any deduction) from “foreign
exchange assets” is taxable (at the option of the taxpayer) at the rate of 20 per cent. Likewise, long-term capital
gain on transfer of “foreign exchange assets” is taxable (at option of the taxpayer) at the rate of 10 per cent.
“Foreign exchange assets” are shares in an Indian company, debentures of an Indian public company, deposits
with an Indian public company or the Government securities, if these assets are acquired/purchased/
subscribed in foreign exchange.
194.1-2 TAX ON INCOME FROM PATENT [SEC. 115BBF] - Section 115BBF has been inserted with effect from the assessment
year 2017-18. It provides that where the total income of the “eligible assessee” includes any income by way of
royalty in respect of a patent developed and registered in India, then such royalty shall be taxable (at the option
of the assessee) at the rate of 10 per cent [+ SC + HEC].
194.2 Alternate minimum tax [Secs. 115JC to 115JF] - A non-corporate assessee is subject to provisions of
alternate minimum tax (AMT). However, these provisions are applicable only if the non-corporate assessee has
claimed any deduction under section 10AA or under section 35AD or under sections 80H to 80RRB (except
section 80P).
194.2-1 LEVY OF ALTERNATE MINIMUM TAX - Alternate minimum tax which shall be determined as follows –
 Step 1 - Find out the regular income-tax liability of the non-corporate assessee ignoring the provisions of
sections 115JC to 115JF.
 Step 2 - Find out adjusted total income of the non-corporate assessee. Adjusted total income is net income or
total income of the non-corporate assessee as increased by –
† 9 per cent in case the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange.
481 Alternate minimum tax Para 194.2
a. amount claimed as deduction by the non-corporate assessee under sections 80H to 80RRB (except section 80P);
b. amount claimed as deduction by the non-corporate assessee under section 10AA; and
c. deduction claimed, if any, under section 35AD (as reduced by the amount of depreciation allowable in
accordance with the provisions of section 32 as if no deduction under section 35AD was allowed in respect
of the assets on which the deduction under that section is claimed).
If the assessee is an individual, HUF, AOP, BOI or an artificial juridical person and the adjusted total income is
Rs. 20 lakh (or less), then the provisions of alternate minimum tax are not applicable.
 Step 3 - Find out 18.5 per cent‡ [+ SC + HEC] of “adjusted total income” computed under Step 2.
 Step 4 - If amount computed under Step 1 is equal to or more than amount determined under Step 3, then the
provisions of alternate minimum tax are not applicable. If, however, amount computed under Step 3 is more than
the regular tax liability determined under Step 1, then –
a. adjusted total income determined under Step 2 shall be deemed as total income of the non-corporate assessee
for such previous year; and
b. 18.5 per cent‡ [+ SC + HEC] of adjusted total income shall be deemed as tax liability of the non-corporate
assessee for such previous year.
 Step 5 - The excess of the amount computed under Step 3 over the amount computed under Step 1 shall be
available as credit† for alternate minimum tax. It can be carried forward and can be set off against regular tax
liability of the non-corporate assessee of the next year or subsequent year [but not beyond 10th assessment year
(up to the assessment year 2017-18) and not beyond 15th assessment year (from the assessment year 2018-19)].No
interest is payable on such credit. Tax credit shall be allowed to be set off for an assessment year in which the
regular income-tax exceeds the alternate minimum tax to the extent of the excess of the regular income-tax over
the alternate minimum tax.
 Step 6 - If provisions of alternate minimum tax are applicable, the assessee will have to obtain a report in Form
No. 29C from a chartered accountant.
The assessee is a non-corporate-assessee for the assessment year 2020-21. Income of the assessee is calculated as follows –
Rs.
Add: Excess depreciation (i.e., excess of depreciation debited to profit and loss account over
depreciation available under section 32) 2,000
Add: Disallowance under section 37(1) and under section 43B 1,60,000
Total 69,22,000
Less: Deduction under section 10AA 65,00,000
Business income under section 28 4,22,000
Long-term capital gain (on transfer of gold) 1,50,000
Less: Deductions
Under section 80-IB 48,000
Net income 5,21,000
Individual, Firm/LLP
HUF/AOP or
BOI
Rs. Rs.
Tax computation under normal provisions –
Tax on long-term capital gain of Rs. 1,50,000 @ 20% 30,000 30,000
Tax on remaining income of Rs. 3,71,000 6,050 1,11,300
Total 36,050 1,41,300
†However, from the assessment year 2018-19, the amount of tax credit in respect of alternate minimum tax (AMT) shall not be allowed to be carried
forward to subsequent year to the extent such credit relates to the difference between the amount of foreign tax credit (FTC) allowed against AMT
and FTC allowable against the tax computed under regular provisions of Act other than the provisions relating to AMT.
‡ 9 per cent in case the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange.
Para 194.2 Individuals - Computation of taxable income 482
Individual, Firm/LLP
HUF/AOP or
BOI
Less : Rebate under section 87A Nil –
Balance 36,050 1,41,300
Tax liability (a) 37,490 1,46,952
 Computation of adjusted total income
Net income 5,21,000 5,21,000
Add: Deduction claimed under section 80-IB 48,000 48,000
Add: Deduction claimed under section 10AA 65,00,000 65,00,000
Adjusted total income 70,69,000 70,69,000
 Computation of alternate minimum tax
18.5% of adjusted total income 13,07,765 13,07,765
Add: Surcharge 1,30,777 Nil
Alternate minimum tax and surcharge 14,38,542 13,07,765
Alternate minimum tax (b) 14,96,083 13,60,076
 Tax payable [(a) or (b) whichever is more] (rounded off) 14,96,083 13,60,076
 Alternate minimum tax credit 14,58,593 12,13,124
Problems
194.2-P1 X (40 years) is a resident individual. For the previous year 2019-20, his taxable business income is Rs. 3,90,000. He has short-
term capital gain on transfer of equity shares of Rs. 26,00,000 (taxable under section 111A). He has written a text book for post graduate
students of Osmania University. Royalty income from the book is Rs. 11,000. However, it is deductible under section 80QQB. During
the year, he has contributed Rs. 1,50,000 towards public provident fund and Rs. 50,000 towards NPS. Find out tax liability of X for the
Solution :
Rs.
Royalty from books 11,000
Less: Deductions
Under section 80C (public provident fund contribution) 1,50,000
Under section 80CCD(1B) (NPS contribution) 50,000
Under section 80QQB (royalty from book) 11,000
Tax on net income
Tax on short-term capital gain (15% of Rs. 25,40,000) 3,81,000
Tax on income other than short-term capital gain Nil
Total 3,81,000
Less: Rebate under section 87A (not available as net income exceeds Rs. 5,00,000) Nil
Balance 3,81,000
Add: Surcharge (not applicable as net income does not exceed Rs. 50 lakh) Nil
Add: Health and education cess (4% of tax and surcharge) 15,240
Normal tax liability 3,96,240
Computation of adjusted total income - X is a non-corporate assessee. He has claimed deduction under section 80QQB. He will
be subject to the provisions of alternate minimum tax. To find out alternate minimum tax, one has to first calculate adjusted
total income. Adjusted total income shall be calculated as follows –
Rs.
Net income or normal taxable income 27,90,000
Add: Deduction claimed under section 10AA or under sections 80HH to 80RRB (except section 80P) 11,000
Adjusted total income 28,01,000
483 Alternate minimum tax Para 194.2
In the case of an individual, HUF, AOP, BOI or artificial juridical person, alternate minimum tax provisions are not
applicable if adjusted total income is Rs. 20,00,000 or less. This check of Rs. 20,00,000 is not applicable in the case of any other
non-corporate assessee (like a firm, LLP). In this problem, X (individual taxpayer) has claimed deduction under section
80QQB and his adjusted total income is more than Rs. 20,00,000, tax payable cannot be less than alternate minimum tax
which is calculated as follows –
Computation of alternate minimum tax –
Rs.
18.5% of adjusted total income 5,18,185
Add: Surcharge (not applicable as adjusted total income does not exceed Rs. 50 lakh) Nil
Alternate minimum tax 5,38,912
In this case, normal tax liability is Rs. 3,96,240. Alternate minimum tax liability is Rs. 5,38,912. Tax payable is Rs. 5,39,912
(i.e., normal tax or minimum alternate tax, whichever is higher). Tax credit (if any) pertaining to TDS/TCS, double taxation
relief under sections 90, 90A and 91, tax relief under sections 86 and 89, shall be deducted from the tax payable of
Rs. 5,39,912.
194.2-E1 Suppose in Problem 194.2-P1, X does not have income from royalty. No deduction is available under section 80QQB.
Recalculate tax liability for the assessment year 2020-21.
194.2-P2 X (31 years) is a resident individual. For the previous year 2019-20, his business income is Rs. 50,60,000. He does not have
any other income. He is eligible for deduction of Rs. 1,50,000 under section 80C, Rs. 25,000 under section 80D, Rs. 80,000 under section
80G and Rs. 45,00,000 under section 80-IB. Find out the tax liability of X for the assessment year 2020-21.
Solution :
Rs.
Less: Deductions
Under section 80D 25,000
Under section 80-IB 45,00,000
Net income 3,05,000
Tax on net income
Tax on net income 2,750
Less: Rebate under section 87A 2,750
Balance Nil
Add: Surcharge (not applicable as net income does not exceed Rs. 50 lakh) Nil
Tax and surcharge Nil
Add: Health and education cess Nil
Normal tax liability Nil
Computation of adjusted total income - X is a non-corporate assessee. He has claimed deduction under section 80-IB. He will
be subject to the provisions of alternate minimum tax. To find out alternate minimum tax, one has to first calculate adjusted
Rs.
Net income or normal taxable income 3,05,000
Add: Deduction claimed under section 10AA or under sections 80HH to 80RRB (except section 80P) 45,00,000
In the case of an individual, HUF, AOP, BOI or artificial juridical person, alternate minimum tax provisions are not
applicable if adjusted total income is Rs. 20,00,000 or less. This check of Rs. 20,00,000 is not applicable in the case of any other
non-corporate assessee (like a firm, LLP). In this problem, X (individual taxpayer) has claimed deduction under section
80-IB and his adjusted total income is more than Rs. 20,00,000, tax payable cannot be less than alternate minimum tax which
is calculated as follows –
Rs.
Add: Surcharge (not applicable as adjusted total income does not exceed Rs. 50 lakh) Nil
Problem 195-P1 Individuals - Computation of taxable income 484
Tax payable is Rs. 9,24,482 (i.e., normal tax or minimum alternate tax, whichever is higher). Tax credit (if any) pertaining
to TDS/TCS, double taxation relief under sections 90, 90A and 91, tax relief under sections 86 and 89, shall be deducted from
the tax payable of Rs. 9,24,482.
194.2-E2 Suppose in Problem 194.2-P2, business income of X is Rs. 21,60,000 and amount deductible under section 80-IB is
Rs. 19,00,000. There is no other change in data. Recalculate the tax liability of X for the assessment year 2020-21.
194.2-P3 X & Co. is a partnership firm.† The firm is eligible for deduction under section 35AD of Rs. 14,00,000 (because of this
deduction the firm cannot claim depreciation under section 32 of Rs. 80,000). Business income of the firm before deduction under section
35AD and before depreciation of Rs. 80,000 is Rs. 15,00,000. Deduction available under section 80-IB is Rs. 50,000. Income from other
sources is Rs. 1,00,000. The firm has given a donation of Rs. 90,000 to a political party. Find out the tax liability of the firm for the
Solution :
Rs.
Business income (Rs. 15,00,000 - Rs. 14,00,000) 1,00,000
Any other income 1,00,000
Less: Deductions
Under section 80GGC 90,000
Under section 80-IB 50,000
Net income 60,000
Tax on net income
Tax on net income @ 30% (normally a firm is taxable @ 30%) 18,000
Add: Surcharge (not applicable as net income does not exceed Rs. 1 crore) Nil
Add: Health and education cess 720
Normal tax liability 18,720
Computation of adjusted total income - X & Co. is a non-corporate assessee. It has claimed deduction under section 80-IB. It is
subject to the provisions of alternate minimum tax. To find out alternate minimum tax, one has to first calculate adjusted
Rs.
Net income or normal taxable income 60,000
Add: Deduction claimed under section 10AA or under sections 80HH to 80RRB (except section 80P) 50,000
Add: Deduction under section 35AD as reduced by depreciation which is not available because of
section 35AD deduction [i.e., Rs. 14,00,000 - depreciation : Rs. 80,000] 13,20,000
Adjusted total income is not more than Rs. 20,00,000. But the check of Rs. 20,00,000 is applicable only in the case of an
individual, HUF, AOP, BOI or artificial juridical person. A firm is subject to the provisions of alternate minimum tax even
if adjusted total income is Rs. 20,00,000 or less. Alternate minimum tax liability shall be calculated as follows–
Rs.
Add: Surcharge (not applicable as adjusted total income does not exceed Rs. 1 crore) Nil
Tax payable is Rs. 2,75,132 (i.e., normal tax or minimum alternate tax, whichever is higher). Tax credit (if any) pertaining
to TDS/TCS, double taxation relief under sections 90, 90A and 91, tax relief under sections 86 and 89, shall be deducted from
the tax payable of Rs. 2,75,132.
194.2-E3 Suppose in Problem 194.2-P3, amount deductible under section 80GGC is Rs. 3,00,000. There is no other change in data.
Recalculate the tax liability of X & Co.
Problems on computation of taxable income

195-P1 X (age : 30 years) is a salaried employee in Bombay. He gets the following emoluments from his employer during the previous
year ending March 31, 2020 :
†This Chapter covers provisions pertaining to assessment of individuals. However, this problem is given to explain provisions of alternate
minimum tax at one place.
485 Problems on computation of taxable income Problem 195-P1
Rs.
Bonus 1,30,000
Commission (fixed) 1,48,000
House rent allowance 1,20,000
Employer’s contribution towards recognised provident fund 62,400
During the previous year 2019-20, the employer has provided a laptop computer for using it for official and private purpose. Ownership
is not transferred. Further the employer provides club facility for official use.
He owns a house property which is used by him for his own residence. Municipal valuation of the house property is Rs. 1,30,000 ; whereas
the standard rent under the Rent Control Act is Rs. 1,20,000. He makes the following expenditures in respect of house property :
municipal taxes : Rs. 13,000 ; repairs : Rs. 11,000 ; interest on capital borrowed to pay municipal tax : Rs. 3,150 ; and insurance :
Rs. 1,600.
Besides, he has received Rs. 1,69,000 as interest from deposits in savings bank account. He has received different gifts from A — Rs. 25,000
on October 1, 2019 and from B Rs. 26,000 on March 1, 2020. During the previous year 2019-20, he makes the following expenditure
and investments : Rs.
Contribution towards recognised provident fund 1,40,000
Payment of insurance premium on own life policy (sum assured in 2006 : Rs. 60,000) 14,000
Donation to the National Defence Fund 3,200
Solution :
Income from salary [see Note 1] 8,32,800
Income from house property [see Note 2] Nil
 Bank interest on deposits in savings account 1,69,000
 Gift received on October 1, 2019 and gift received on March 1, 2020 [Rs. 25,000+ Rs. 26,000; as the
aggregate amount exceeds Rs. 50,000, it is taxable] 51,000
Under section 80C [contribution to RPF and insurance premium] 1,50,000
Under section 80G in respect of donation to the National Defence Fund (i.e., 100% of Rs. 3,200) 3,200
Under section 80TTA in respect of interest on deposits in savings bank account 10,000
Net income 8,89,600
Tax† [see Appendix 1] 90,420
Add : Surcharge (not applicable) Nil
Normal tax liability 94,040
Notes :
1. COMPUTATION OF INCOME FROM SALARY
Bonus 1,30,000
Commission 1,48,000
House rent allowance : Rs. 1,20,000
Less : Exempt from tax [see para 42.1] being the least of :
(a) Rs. 2,40,000 (being 50% of salary, i.e., Rs. 4,80,000); (b) Rs. 1,20,000 (being the house rent allowance);
or (c) Nil, being excess of rent paid (i.e., Nil) minus 10% of salary. Nil, being the least, is exempt from tax.
Amount taxable 1,20,000
Employer’s contribution in excess of 12% of salary (i.e., Rs. 62,400—Rs. 57,600) 4,800
The perquisites in respect of use of computer and club facility are not chargeable to tax.
2. COMPUTATION OF INCOME FROM HOUSE PROPERTY - Since house is used for the purpose of own residence, nothing
would be chargeable to tax under section 23(2)(a). Interest on capital borrowed to pay municipal tax is not deductible.
195-E1 [P13.12]* X (27 years) is a salaried employee of a public sector company in Delhi. He gets the following emoluments from
his employer during the previous year 2019-20 :
Basic pay : Rs. 1,96,000 ; dearness pay : Rs. 14,800 ; bonus and commission : Rs. 22,200 ; house rent allowance : Rs. 13,600 ; and
employer’s contribution to provident fund : Rs. 23,920. Besides the employer provides a free motor car (1098cc) for official and
personal use of X and provides holiday home facility at Shimla. The employer incurred an expenditure of Rs. 15,000 on providing
the holiday home facility. During 2019-20, the employer has sold a fridge to X for Rs. 1,500 (cost of the fridge to the employer when
purchased in 1998 : Rs. 20,000).
X owns a small house in Delhi since 1990 which is used by him for his own residence. Municipal valuation of the house property is
Rs. 1,20,000, whereas its standard rent under the Delhi Rent Control Act is Rs. 16,000. During the previous year, he pays repairs
expenditure of Rs. 1,600 and interest (capital borrowed for acquiring house) Rs. 75,800.
Besides, he has received Rs. 1,62,500 as interest from deposit in savings bank account and Rs. 39,970 as dividend from a foreign
company. He has withdrawn Rs. 1,14,200 from the National Savings Scheme, 1987 which includes interest of Rs. 18,000. He has
received a gift of Rs. 2,10,000 from a friend on August 3, 2019 and Rs. 60,000 from Mrs. X on March 1, 2020.
Determine the net income and tax liability of X for the assessment year 2020-21, on the assumption that he contributes Rs. 1,40,000
towards recognised provident fund and deposits Rs. 6,000 in the National Savings Certificates.
195-P2 For the assessment year 2020-21, X (age : 61 years), a resident individual, furnishes the following information :
Rs.
Basic pay 1,20,000
Education allowance (Rs. 200 per month for two sons and Rs. 150 per month for a daughter) 6,600
Hostel expenditure allowance (Rs. 650 per month for one child) 7,800
Transport allowance (for journey between office and residence) 19,200
Free car (1150cc) facility for X for official and private purposes, cost to the employer-company 27,000
Free meals in office (300 working days) 12,700
Employer’s contribution towards unrecognised provident fund 3,000
Share of profit from :
 a firm 36,000
 an association of persons 34,000
 a Hindu undivided family 18,000
Income from betting 2,400
Interest from Indian Overseas Bank (fixed deposit interest : Rs. 14,000, savings bank interest : Rs. 48,000).
PAYMENTS AND INVESTMENTS
Contribution towards unrecognised provident fund 6,700
Payment of premium on mediclaim insurance policy on X’s father who is resident in India 30,500
Payment of premium on own mediclaim policy 36,000
Investment in National Savings Certificates VIII issue 1,05,000
Donation to an approved public charitable institution 3,000
Solution :
INCOME FROM SALARY Rs. Rs.
Basic pay 1,20,000
Education allowance : 6,600
Less : Exempt (Rs. 100 × 2 × 12) : 2,400 4,200
Hostel allowance : 7,800
Less : Exempt (Rs. 300 × 12) : 3,600 4,200
Transport allowance 19,200
Less : Exempt Nil 19,200
Perquisite in respect of car 21,600
Perquisite in respect of free meals [not chargeable to tax] Nil
Employer’s contribution towards unrecognised provident fund (*not taxable even
if it exceeds 12% of salary) Nil*
Rs. Rs.
Less : Standard deduction 50,000 2,48,600
PROFITS AND GAINS OF BUSINESS OR PROFESSION
Profits from a firm [exempt] Nil
Profits from an association of persons [see Note 2] Nil
Profit from a Hindu undivided family Nil 4,91,600
Income from betting 2,400
Fixed deposit interest from bank 14,000
Savings bank interest 48,000 64,400
Under section 80C [investment in NSC] 1,05,000
Under section 80D (i.e., own mediclaim insurance premium : Rs. 36,000 plus mediclaim
insurance premium on the life of his father : Rs. 30,500) 66,500
Under section 80G [i.e., 50% of Rs. 3,000] 1,500
Under section 80TTB (FD interest : Rs. 14,000 + savings bank interest : Rs. 48,000,
maximum deduction is Rs. 50,000) 50,000
Net income 5,81,600
Notes :
1. Perquisite in respect of car is chargeable to tax in the hands of employee.
2. Share of profits from the association of persons is not included in the total income, as the association of persons is
chargeable to tax at the maximum marginal rate.
195-E2 [P13.13]* For the assessment year 2020-21, X (30 years) furnishes the following information :
Basic pay : Rs. 2,40,000 ; special pay : Rs. 80,000; perquisite in respect of free car facility only for private purposes : cost to the
employer : Rs. 24,000 ; free watchman : Rs. 72,000 ; free gardener : Rs. 14,400; employer’s contribution towards unrecognised
provident fund : Rs. 6,000.
Share of profits from a firm : Rs. 12,000 ; a Hindu undivided family : Rs. 18,000.
Income from a commission agency business : Rs. 3,09,000
Winnings from camel racing : Rs. 15,100
Gift from A, a colleague on December 5, 2019 : Rs. 46,000
Payments and investments :
Own contribution to unrecognised provident fund : Rs. 21,500
Contribution to public provident fund : Rs. 1,26,000
Donation to the Swachh Bharat Kosh : Rs. 12,000
Determine the net income and tax liability of X for the assessment year 2020-21. On June 17, 2019, he has been allotted 800 equity
shares by the employer-company @ Rs. 16 per share (market value : Rs. 186 per share) under Employees Stock Plan. Paid up equity
share capital of the employer company is Rs. 62 lakh.
195-P3 X (55 years) in a lecturer in a private college in Delhi. He submits the following particulars of income and payments for the
assessment year 2020-21 :
Basic salary : Rs. 22,500 per month
Dearness allowance : Rs. 9,000 per month
Wardenship allowance : Rs. 1,600 per month
Examinership remuneration from Jaipur University : Rs. 29,000
Royalty on books for university students : Rs. 73,921 [i.e., @ 17.5% of Rs. 4,55,500, being sales turnover of books minus Rs. 5,792
expenses]
Reimbursement by the Delhi University of cost of books purchased by X for preparing lectures : Rs. 14,250.
Income from house property : Rs. 16,000 per month [expenses being house tax : Rs. 13,000; during 2019-20, he has received a sum of
Rs. 32,000 being advance rent of April and May 2020; municipal valuation : Rs. 1,60,000, fair rent : Rs. 1,64,000, unrealised rent : Nil;
house remained vacant for one month]
Interest on Government securities : Rs. 52,000
Interest on company deposits (received on May 1, 2019) : Rs. 12,600
Contribution to statutory provident fund : Rs. 17,000

Contribution to public provident fund : Rs. 42,000
Medical insurance premium on the health of dependent mother : Rs. 28,000
Donation to an approved charitable institution : Rs. 50,000
Solution : Rs. Rs.
Income from salary
Basic salary (Rs. 22,500 × 12) 2,70,000
Wardenship allowance (Rs. 1,600 × 12) 19,200
Cost of books reimbursed by employer Nil
Gross annual value [see Note 2] 1,76,000
Less : Municipal tax 13,000
Less :
Property income 1,14,100
Examinership remuneration 29,000
Interest on company deposits 12,600
Royalty income 73,921
Interest on Government securities 52,000 1,67,521
Under section 80C [contribution to SPF and PPF] 59,000
Under section 80G [see Note 1] 23,965
Under section 80QQB [see para 163] (15% of Rs. 4,55,500 minus Rs. 5,792, subject to maximum
of Rs. 3,00,000) 62,533
Notes :
1. COMPUTATION OF AMOUNT DEDUCTIBLE UNDER SECTION 80G :
Gross qualifying amount 50,000
Net qualifying amount
It is the lower of the following :
a. Rs. 47,929 (being 10% of adjusted gross total income, i.e., Rs. 6,28,821 – Rs. 59,000—Rs. 28,000 —
Rs. 62,533); and
b. Rs. 50,000 (being gross qualifying amount).
Rs. 47,929, being the least, is net qualifying amount.
Amount deductible - Rs. 23,965, being 50% of Rs. 47,929, is deductible.
2. Gross annual value is determined as under– Rs.
Municipal value (MV) 1,60,000
Standard rent (SR) Not available
Annual rent 1,92,000
Unrealised rent Nil
Loss due to vacancy 16,000
subject to maximum of SR] 1,64,000
loss due to vacancy 1,92,000
195-E3 [P13.14]* X (32 years), a part-time college lecturer at Bombay, furnishes the following particulars for the assessment year
2020-21 :
Basic salary : Rs. 20,000 per month ; dearness pay : Rs. 800 per month ; wardenship allowance : Rs. 2,400 per month ; special
allowance : Rs. 400 per month ; examinership remuneration from the Madras University : Rs. 27,600 ; royalty on book for university
students : Rs. 1,37,600 ; income from house property : Rs. 1,14,000 ; long-term capital gain : Rs. 1,80,000 ; short-term capital gain :
Rs. 1,20,640 ; interest on Government securities : Rs. 18,000 ; bank interest (savings account) : Rs. 24,400 ; income from tuitions :
Rs. 1,60,640 contribution of X to statutory provident fund : Rs. 26,000; contribution to public provident fund : Rs. 59,000 ;
expenditure on mediclaim insurance premium of dependent grandmother who is resident: (age : 87 years) : Rs. 30,000 and donation
to Government for the purpose of promoting family planning : Rs. 80,000.
195-P4 X (36 years) is a lecturer in a college in Bombay. He joined college on August 1, 2016 in the grade of Rs. 15,000-400-22,200.
The salary becomes due and is paid on the first day of next month. He is entitled to dearness pay of Rs. 6,000 per month (which forms
part of retirement benefits) and gets Rs. 500 per month as dearness allowance (which does not form part of retirement benefits). Besides,
he is entitled to house rent allowance @ 15 per cent (of basic pay and dearness pay) and city compensatory allowance @ Rs. 100 per month.
He pays Rs. 3,000 per month as rent. During the year ending March 31, 2020, he receives Rs. 2,75,750 as income from royalty on text-
books for schools. Expenditure for earning royalty income is Rs. 750.
X holds 500, 10 per cent (listed) debentures of a company of Rs. 100 each. The interest of the whole year falls due on January 31, 2020.
The bank charges Rs. 225 as commission on the amount collected. X is a member of the provident fund of the college and contributes 18
per cent of his basic pay and dearness pay and the employer contributes @ 11 per cent of basic pay and dearness pay. His provident fund
account is credited on July 31, 2020 with Rs. 18,700 as interest calculated @ 10 per cent per annum.
Compute the taxable income and the amount of tax liability for the assessment year 2020-21 assuming that provident fund is a (a)
statutory provident fund, (b) recognised provident fund, or (c) unrecognised provident fund.
Solution : Statutory Recognised Un-
provident provident recognised
fund fund provident
fund
Rs. Rs. Rs.
Basic salary [Rs. (15,800 × 5) + (Rs. 16,200 × 7)][see Note 1] 1,92,400 1,92,400 1,92,400
Dearness pay 72,000 72,000 72,000
House rent allowance [see Note 2] 30,100 30,100 30,100
City compensatory allowance 1,200 1,200 1,200
Interest on provident fund (*Rs. 18,700 ÷ 10 × 0.5) — 935* —
Gross salary 3,01,700 3,02,635 3,01,700
Less: Standard deduction 50,000 50,000 50,000
Income under the head “Salaries” 2,51,700 2,52,635 2,51,700
Interest on securities [i.e., Rs. 5,000 (being gross interest) — Rs. 225 on account
of bank commission] 4,775 4,775 4,775
Royalty 2,75,000 2,75,000 2,75,000
Less : Deduction under section 80C [18% of Rs. 2,64,400] 47,592 47,592 —
Tax on net income
Income-tax 11,694 11,741 18,796
Less: Rebate under section 87A 11,694 11,741 Nil
Add: Surcharge Nil Nil Nil
Tax and surcharge Nil Nil 18,796
Add : Health and education cess (4% of tax and surcharge) Nil Nil 752
Tax liability (rounded off) Nil Nil 19,550
Notes :
1. During the previous year 2019-20, basic salary is Rs. 15,800 per month (i.e., Rs. 15,000 + Rs. 400 + Rs. 400) up to July 31,
2019. With effect from August 1, 2019, it is raised to Rs. 16,200 per month. As salary becomes due and is paid on the first day
of next month, salary for 5 months is payable @ Rs. 15,800 per month (i.e., salary received/due on April 1, 2019, May 1, 2019,
June 1, 2019, July 1, 2019 and August 1, 2019) and that for 7 months is payable @ Rs. 16,200 per month during the year ending
March 31, 2020.
2. House rent allowance exempt from tax is the least of the following : (a) Rs. 1,32,200 (being 50% of salary i.e., Rs. 1,92,400
+ Rs. 72,000); (b) Rs. 39,660 (being house rent allowance received @ 15% of salary); (c) Rs. 9,560 (being the excess of rent paid :
Rs. 36,000 over 10% of salary, i.e., Rs. 2,64,400). Amount taxable is Rs. 39,660 minus Rs. 9,560, i.e., Rs. 30,100.
3. Deduction under section 80QQB is not available in respect of royalty on text-books for school.
195-E4 Determine the taxable income and tax liability on the basis of information given in problem 195-P4, assuming that salary
becomes due for payment on the last day of each month but is paid on the first day of next month.
195-P5 X (30 years), an Indian national, furnishes the following particulars for the assessment year 2020-21 :
Income from salary Rs.
Bonus 52,000
City compensatory allowance 14,000
Car (1510cc) owned by X is used for personal and official purposes [expenditure reimbursed by the employer-
company : Rs. 1,58,000, as per certificate issued by the employer Rs. 1,22,000 is attributable towards official use
of the car]
Interest (net) on listed debentures paid on December 17, 2019 (net of tax deducted at 10%) 9,000
Winning from lotteries (amount received on March 1, 2020, net of tax deducted at source) 35,000
Dividends on shares in Indian companies 12,78,000
Deemed dividend under section 2(22)(e) 4,09,000
Besides, X owns a house property in Delhi (erection of which was completed on April 30, 1997). Municipal valuation of the house is
Rs. 1,60,000; fair rent is Rs. 1,58,000 and the standard rent under the Delhi Rent Control Act is Rs. 1,51,000. It is let out to a tenant
for residential purpose at monthly rent of Rs. 17,000. Unrealised rent pertaining to the financial year 2017-18 is Rs. 40,000. Unrealised
rent pertaining to the financial year 2019-20 : Rs. 14,000. During the previous year, the property remains vacant for 20 days.
X makes the following expenditure/investment during the previous year 2019-20 : Rs.
Municipal taxes 17,000
Repairs 12,000
Contribution to recognised provident fund 1,28,400
Insurance premium on own life insurance policy (sum assured : Rs. 50,000) (policy taken in 2009) 14,000
Determine the net income and tax payable of X for the assessment year 2020-21, assuming that tax deducted from salary is Rs. 7,200.
Solution :
INCOME FROM SALARY Rs. Rs.
Bonus 52,000
Car facility [see Note 3] 36,000
INCOME FROM HOUSE PROPERTY [see Note 1] 99,667
Interest on debentures [see Note 2] 10,000
Dividend from Indian companies [out of Rs. 12,78,000, Rs. 10,00,000 is exempt under
section 10(34)]. 2,78,000
Deemed dividend under section 2(22)(e) [exempt under section 10(34)] Nil
Winning from lottery [see Note 2] 50,000 3,38,000
Tax on net income
Winnings from lottery [30% of Rs. 50,000] 15,000
Dividend from Indian companies in excess of Rs. 10,00,000 [10% of Rs. 2,78,000] 27,800
Other income (i.e., Rs. 2,79,270) 1,463
Total† 44,264
Add : Surcharge (applicable if net income exceeds Rs. 50 lakh) —
Rs. Rs.
Tax (before adjusting pre-paid tax) 46,035
Less : Prepaid tax
Tax deducted from salary 7,200
Tax deducted from debenture interest 1,000
Tax deducted from winnings from lottery 15,000 23,200
Tax payable (rounded off) 22,840
Notes :
1. COMPUTATION OF INCOME FROM HOUSE PROPERTY :
Municipal valuation (MV) 1,60,000
Standard rent (SR) 1,51,000
Unrealised rent of the current year 14,000
Loss due to vacancy (Rs. 17,000 × 20 ÷ 30) 11,333
Income from let out property 99,667
2. Grossing up of income :
Net interest on debentures 9,000
Rate of tax deduction 10%
Gross interest [Rs. 9,000 ÷ (1– 0.1)] 10,000
Winning from lottery (net) 35,000
Rate of tax deduction 30%
Gross winnings [i.e., Rs. 35,000 ÷ (1– 0.3)] 50,000
3. Car facility is taxable in the hands of employee as follows—
Amount reimbursed by employer 1,58,000
Less: Amount for official purposes 1,22,000
Taxable 36,000
In this case, the standard rate valuation of Rs. 1,800 per month is not applicable, as car is owned by the employee [see para
44.14, Situation 5]
4. Deduction under section 80C is available with respect to contribution to recognised provident fund and life insurance
premium (subject to a maximum of 20% of sum assured).
195-E5 [P13.15]* Mrs. X (age : 39 years) furnishes the following information for the assessment year 2020-21:
Income from salary from A Ltd. Rs.
Bonus 16,000
High cost of living allowance 8,000
Car facility only for private use at concessional rate :
 expenditure by the employer 46,600
 amount recovered from Mrs. X by the employer 17,000

Gift-in-kind from employer 20,000
Use of employer’s camera (cost to employer : Rs. 24,000, Mrs. X has used it for private purpose from
December 1, 2019)
Interest on listed debentures (gross) 1,46,100
Dividends (declared during April 2019) from :
 B (Pvt.) Ltd., an Indian company 22,000
 A Ltd. (Mrs. X holds 24 per cent equity share capital in A Ltd., an Indian company) 4,000
Besides, Mrs. X. owns a house property in Bombay (erection of which was completed on April 14, 1996). It is let out to a tenant for
commercial purposes at Rs. 14,000 per month. The standard rent of the house according to the Bombay Rent Control Act is Rs.
1,40,000. Mrs. X incurs the following expenses in respect of house property : municipal taxes : Rs. 16,000 ; repairs : Rs. 2,000 ; interest
on capital borrowed for the purpose of construction of house property : Rs. 18,000.
Determine the net income and tax liability of Mrs. X for the assessment year 2020-21, after giving due consideration to the following
payments/investments made by her during the relevant previous year :
Rs.
Expenditure on marriage of dependent sister 22,000
Payment of insurance premium on the life of her mother (sum assured : Rs. 80,000) 16,000
195-P6 X (40 years) is a Central Government employee posted at Cochin. He had joined the Central Government on February 1, 2015.
For the previous year 2019-20, he gives the following information –
1. Basic salary : Rs. 3,15,000.
2. Allowances from Government chargeable to tax : Rs. 80,000.
3. Government’s contribution towards National Pension Scheme (NPS) : Rs. 32,700.
4. Contribution of X towards NPS : Rs. 35,000.
5. Gift received by X’s minor son on his birthday from friends : Rs. 45,000 (X’s minor son has not received any other gift during the
previous year 2019-20).
6. Minor daughter of X gets a Tagore painting on her birthday from a family friend. Fair market value of the painting is Rs. 8,86,500
(no other gift is received by her during the previous year 2019-20).
7. X deposits Rs. 6,000 in SBI fixed deposit account for the purpose of availing of deduction under section 80C.
8. X contributes Rs. 1,05,000 in an approved annuity plan of LIC for the purpose of claiming deduction under section 80CCC.
9. X has taken a loan for the education of his nephew who is dependent upon him. The loan has been taken for the purpose of pursuing
MBBS course. Interest on such loan for the year 2019-20 is Rs. 32,000. However, he has actually paid only Rs. 13,500. Besides, he has
paid Rs. 72,000 on account of repayment of loan.
Determine the amount of net income and tax liability of X for the assessment year 2020-21.
Solution : Computation of income of X – Rs. Rs.
Salary
Allowances 80,000
Government’s contribution towards NPS 32,700
Less: Standard deduction 50,000 3,77,700
Income from other sources [i.e., income of minor daughter : Rs. 8,86,500 – Rs. 1,500, being
exemption under section 10(32)] 8,85,000
Less: Deductions
Under section 80C (fixed deposit with SBI) 6,000
Under section 80CCC (annuity deposit of LIC) [maximum deduction under section 80CCC :
Rs. 1,50,000] 1,05,000
Under section 80CCD(1) (X’s contribution up to 10% of salary : Rs. 31,500) 31,500
Total deductible under sections 80C, 80CCC and 80CCD(1) [maximum Rs. 1,50,000] 1,42,500 1,42,500
Under section 80CCD(2) (employer’s contribution towards NPS up to 14% of salary) 32,700
Under section 80CCD(1B) (X’s contribution towards NPS, not considered under above
computation, subject to a maximum of Rs. 50,000) [i.e., Rs. 35,000 - Rs. 31,500] 3,500
Under section 80E 13,500
Tax on net income

Note - Minor son of X has received a gift of Rs. 45,000. As it is not more than Rs. 50,000, it is not income in the hands of minor
son. When income of minor son is zero, nothing shall be taxable in the hand of X.
195-E6 [P13.16]* The following particulars are furnished by X (age : 62½ years), an Indian citizen, for the year ending March 31,
2019 : Rs.
Salary (net of tax and X’s contribution to recognised provident fund) 2,36,800
X’s contribution to provident fund 22,400
Employer’s contribution to provident fund 22,400
Interest credited to provident fund @ 8.75 per cent per annum 28,000
Travelling expenses for proceeding on leave to home town (actual expenditure : Rs. 4,200) 3,200
House rent allowance (rent paid : Nil) 27,200
Interest on deposit with PQR Ltd., an Indian company (received on May 29, 2019) 1,98,294
Interest collection charges 400
Winnings from lotteries (net of tax) paid to X on October 10, 2019 70,000
Collection charges of lottery prize 300
Winnings from horse race (net of tax) paid to X on December 29, 2019 20,650
Tax deduction at source on :
 Salary 11,000
 Interest on company deposit Nil
 Winnings from lotteries 30,000
 Winnings from horse races 8,850
Contribution to public provident fund 1,14,000
Determine the total income and tax liability (after adjusting tax deducted at source) of X for the assessment year 2020-21 if X is (a)
resident and ordinarily resident, (b) resident but not ordinarily resident, (c) non-resident.
195-P7 From the following details and information, compute the total income of X (date of birth : March 20, 1950), an individual, for
Profit and loss account for the year ending March 31, 2020
Rs. Rs.
Staff salaries, bonus, etc. 6,30,000 Trading profits 22,60,000
Drawing for household expenses 4,00,000 Rent from portion let 4,80,000
Life insurance premia paid 65,000 Interest on fixed deposit with banks 70,000
Contribution to public provident fund 10,000 Income on units from Unit Trust of India 15,000
Depreciation on assets used in business 90,000 Gold coins received on Diwali 2019 from a family
Advertisement expenses 25,000 friend Y 46,000
Printing and stationery 30,000
Interest on loan 40,000
Net income for the year 15,81,000
28,71,000 28,71,000
Additional information—
1. Interest was on a loan of Rs. 4,00,000 taken in June 2019 for purposes of buying shares of a public limited company. The company
did not declare any dividends after purchase of shares by X.
2. Depreciation available for income-tax purposes is Rs. 1,10,000
3. Value of gold coins given in the profit and loss account is cost of the gold coins purchased by Y in 1998. However, the fair market value
of these coins on Diwali 2019 and March 31, 2020 is Rs. 1,40,000 and Rs. 1,55,000 respectively.
Solution : Computation of income of X for the assessment year 2020-21 –
Rs. Rs.
Income from house property [see Note 1] 3,36,000
exceed Rs. 50 lakh.
Rs. Rs.
Profits and gains of business or profession [see Note 2] 14,65,000
- Interest on fixed deposit 70,000
- Units (exempt) Nil
- Gift-in-kind (market value on the date of gift is considered) 1,40,000 2,10,000
Less: Deductions
Under section 80C (Rs. 65,000 + Rs. 10,000) 75,000
Under section 80TTB (interest on bank fixed deposit) (maximum deduction: Rs. 50,000) 50,000
Notes –
1. Computation of income under the head “Income from house property” –
First property (let out) portion:
Rs.
Gross annual value 4,80,000
Less : Municipal taxes Nil
Less : Standard deductions 1,44,000
Income under the head “Income from house property” 3,36,000
2. Computation of business income –
Adjustment
Add : Drawings 4,00,000
Add : Life insurance premium 65,000
Add : Contribution to provident fund 10,000
Less : Depreciation (Rs. 1,10,000 – Rs. 90,000) (–)20,000
Less : Rent (–)4,80,000
Less : Interest from deposits (–)70,000
Less : Interest on units (exempt) (–)15,000
Less: Gold coins (–)46,000
Add : Interest on loan 40,000
195-E7 [P13.17]* From the following particulars of X (date of birth : October 17, 1938), determine the net income and tax liability
Rs.
Profit from business of selling goods 4,67,000
Current profit of publication of magazines and journals 2,48,000
Brought forward loss of the business of publication 30,000
Profits from a small scale industrial undertaking set up in a village near Jammu in 2009
(before deducting the following) 1,92,000
 Salary to manager 64,000
 Depreciation 8,000
Income from business of dairy farming 1,01,000
Brought forward loss of the business of dairy farming 1,06,000
Agricultural income in India 1,02,000
Income from the business of dealing in equity shares (after deducting securities transaction tax of Rs. 18,000) 58,000
Payment of insurance premia on the life of married daughter (sum assured in 2009 : Rs. 20,000) 14,000
195-P8 Compute the taxable income and tax liability of X (46 years) for the assessment year 2020-21 –
Rs.
Net income from chemical trading business 8,00,000
Long-term capital gain on transfer of debentures (if computed without indexation) 6,00,000
Long-term capital gain on transfer of listed debentures (computed after indexation) (X wants to pay tax
at the rate of 20 per cent of Rs. 2,50,000 and not at the rate of 10 per cent of Rs. 6,00,000) 2,50,000
Rs.
Share of income from HUF in which he is a member 82,000
Winning from horse races (net of TDS of 30 per cent) 70,000
Interest on bank fixed deposits :
- Deposit in his own name 1,17,000
- In the name of minor son 1,450
- In the name of minor daughter 8,000
- In the name of major unmarried daughter 70,000
Expenditure incurred for the medical treatment of his 62 years old elder brother [dependent of X, being a person
with disability] 8,000
Repayment of loan taken for part-time studies of major daughter for graduate course in management (loan is taken
from a notified charitable institute) 6,90,000
Payment of interest from the aforesaid loan 76,000
Donation to the aforesaid notified charitable institute 5,000
Brought forward loss of a discontinued business pertaining to the assessment year 2016-17 26,000
Purchase of a commercial plot on November 30, 2019 from ABC Housing Development Co. Ltd. for Rs. 80,00,000
(stamp duty value is Rs. 83,00,000) 3,00,000
Purchase of a work of art on November 1, 2019 from a friend for Rs. 1,15,000 (market value is, however, Rs. 1,70,000) 55,000
Deposit in public provident fund account and purchase of NSC VIII issue 1,63,000
Solution :
Rs.
Computation of income of X
Income from chemical trading business 8,00,000
Less: Brought forward loss of a discontinued business (–)26,000 7,74,000
Long-term capital gains (indexation is not available in the case of debentures) 6,00,000
- Winning from horse races [Rs. 70,000 ÷ (1 – 0.3)] 1,00,000
- Interest on bank deposit (own) 1,17,000
- Interest on bank deposit [minor son (Rs. 1,450 – Rs. 1,450)] Nil
- Interest on bank deposit [minor daughter (Rs. 8,000 – Rs. 1,500)] 6,500
- Purchase of commercial plot for inadequate consideration (stamp duty value does not
exceed 105% of actual purchase consideration, nothing is taxable even if inadequacy of
consideration is more than Rs. 50,000) Nil
- Purchase of work of art (Rs. 1,70,000 – Rs. 1,15,000) 55,000 2,78,500
Less : Deduction
Under section 80DD 75,000
Under section 80E 76,000
Under section 80G (50% of Rs. 5,000) 2,500 3,03,500
Tax on net income
Income-tax (10% of Rs. 6,00,000 + 30% of Rs. 1,00,000 + normal tax on the balance)† 1,32,300
Notes :
1. In the case of transfer of quoted securities, one has an option to pay tax @ 10% if the benefit of indexation is not taken.
However, indexation benefit is never available in the case of debentures (whether quoted or not). In this problem taxable
long-term capital gain will be Rs. 6,00,000. X has an option to pay tax at the rate of 10% or 20%.
2. Interest income of major daughter is taxable in the hands of daughter.
3. Repayment of loan taken of higher studies, is not deductible.
4. Purchase of work of art for inadequate consideration is taxable under section 56(2)(x).
exceed Rs. 50 lakh.
195-E8 Keeping in view the provisions of the Income-tax Act, 1961, make necessary corrections in the following statements. You
are also required to give reasons in not more than 15 words in each case:
1. X is a resident individual. His income for the assessment year 2020-21 includes the following: Salary: Rs. 3,40,000; business profit :
Rs. 10,000. X is a member of an association of persons (AOP). Other partners of AOP are Y and Z. Share of profit received by X,
Y and Z from AOP is chargeable to tax in the hand of members for the assessment year 2020-21.
2. A purchases a house property on April 10, 2007 and gifts it to X on June 11, 2007. The house property is acquired by the Government
of India on March 5, 2009. Compensation is, however, received by X on July 21, 2019. X can claim exemption under section 54 by
acquiring another residential house property.
3. A foreign company, having income in India, cannot claim any deduction under section 80G in respect of donation made to Africa
(Public Contributions - India) Fund.
4. X is employed by A Ltd., a private sector company, on monthly salary of Rs. 60,000. Besides, the company wants to provide him
free use of company’s car for his personal use (expenditure by A Ltd. on providing free car will be Rs. 14,000 per month). He annually
gets rental income exceeding Rs. 1,50,000.
5. B, a resident individual having business income exceeding Rs. 120 lakh, has taken a building on rent from a company for the
financial year 2019-20 (rent being Rs. 2,40,000 per annum). He is required to deduct tax at source on payment of rent to the landlord
under section 194-I.
6. X & Co. is a partnership firm. It employs 90 full time employees throughout the previous year 2019-20. For the purpose of promoting
family planning amongst its employees, it incurs an expenditure of Rs. 2,46,000 (out of which Rs. 86,000 is of capital nature) during
the previous year 2019-20 and wants to claim the entire amount as deduction under section 36.
195-P9 Mrs. X (30 years) owns a business. Net profit of the business of the year ending March 31, 2020 as per auditor’s certificate is
Rs. 19,40,000. Salary debited to profit and loss account includes a payment by an account payee cheque of Rs. 9,60,000 to her brother
who is employed by Mrs. X to look after marketing department. However, no other businessman will pay more than Rs. 1,40,000 as salary
to her brother. Profit and loss account also includes an agricultural income of Rs. 4,00,000.
On November 1, 2019, Mrs. X purchased 500 equity shares of A Ltd. at the rate of Rs. 400 per share from a friend. Shares are quoted
in Bombay Stock Exchange but these were purchased outside stock exchange. Opening quotation of shares of A Ltd. in Bombay Stock
Exchange on November 1, 2019 was Rs. 2,100 (closing quotation : Rs. 1,950, lowest quotation of the day : Rs. 1,700).
Other incomes –
1. Mrs. X borrowed Rs. 3,00,000 in the year and invested it in units of quoted mutual funds. None of the mutual funds declared a dividend
in the year. She paid an interest of Rs. 35,000 on the loan taken by him.
2. Dividend on other units purchased, received in the year was Rs. 46,000.
3. Interest on fixed deposits with banks was Rs. 8,000.
4. Interest on bank deposit in the name of her dependent mother was Rs. 20,000. Deposit was made by her mother out of gifts received
from relatives.
5. Minor son of Mrs. X has received birthday gift of Rs. 65,000 from family friends on November 1, 2019. This amount is deposited in
a bank fixed deposit at interest rate of 6 per cent per annum.
Find out the net income and tax liability of Mrs. X for the assessment year 2020-21 on the assumption that she deposited Rs. 1,10,000
in a fixed deposit with SBI for claiming deduction under section 80C.
Solution :
Rs. Rs.
Add: Excess payment to brother (Rs. 9,60,000 – Rs. 1,40,000) 8,20,000
Less: Agricultural income (–) 4,00,000 23,60,000
Purchase of equity shares [(Rs. 1,700 – Rs. 400) × 500 shares] 6,50,000
Dividend on units (exempt) Nil
Bank FD interest 8,000
Interest on deposit of dependent mother (not taxable as income of Mrs. X) Nil
Birthday gift received by minor son of Mrs. X (Rs. 65,000 – Rs. 1,500) 63,500
Interest income of minor son (6% of Rs. 65,000 × 5 ÷ 12) 1,625 7,23,125
Tax liability of Mrs. X will be calculated as under–
Agricultural income 4,00,000
Total 33,73,130
Rs.
Tax on total 8,24,439
Less: Tax on Rs. 6,50,000 (i.e., agricultural income of Rs. 4,00,000 + exemption limit of Rs. 2,50,000) 42,500
Balance† 7,81,939
195-E9 [P13.18]* X (30 years) has prepared the following Profit and Loss Account for the year ending March 31, 2020:
Rs. Rs.
Salaries 2,12,000 Gross profit 7,55,800
Sundry expenses 3,03,000 Rental income (50 per cent portion) 2,40,000
Office expenses 1,05,000 Dividends from a foreign company 30,000
Interest on capital of X 54,000 Winnings from horse races (gross) 1,04,000
Fire insurance of house property 4,000 Winnings from lottery (gross) 2,20,000
Wealth-tax 1,01,000 Interest on Government securities 2,51,000
Provision for bad debts 42,400
Repairs of house property 2,16,000
Municipal tax of house property 50,000
Insurance premium on own life 16,000
Donation to CPI, a political party 14,000
Depreciation (allowable) 53,000
Net profit 4,30,400
16,00,800 16,00,800
X owns a house property having three independent units (erection of which was completed on April 14, 1998) which is being used
by him for the following purposes :
a. 25 per cent of carpet area for business purposes ;
b. 25 per cent of carpet area for self-residence ; and
c. 50 per cent of carpet area is let out for commercial purposes.
Determine the net income of X for the assessment year 2020-21 assuming that standard rent of the property under the Rent Control
Act is Rs. 4,00,000 and X deposits Rs. 1,20,000 on March 31, 2020 with SBI for the purpose of claiming deduction under section
80C.
195-P10 X (31 years) is a part-time lecturer in a private college (owned by a company) in Shriram Nagar (population : 8.5 lakh). He
was appointed in the grade of Rs. 5,600-400-9,600 on March 1, 2015. He gets Rs. 460 per month as dearness allowance (which forms
part of salary for computation of retirement benefits) and 8 per cent of salary as city compensatory allowance. Besides, he is entitled for
special allowance of Rs. 40,000. He has been provided with a rent-free furnished accommodation owned by the college whose estimated
rental value is Rs. 44,820 per annum. The cost of the furniture is Rs. 2,04,090. He has been given a car (1600cc) which is used by him
for official purposes. Besides, it can also be used for journey between office and residence. With effect from January 1, 2020, the car can
also be used for other personal purposes. Driver is provided with effect from February 1, 2020. Driver’s salary and all other expenses of
the car are borne by the employer. He has been provided with effect from July 31, 2019 with the facility of a personal attendant, watchman
and sweeper who are paid by the college @ Rs. 100 p.m., Rs. 150 p.m. and Rs. 120 p.m., respectively. He contributes 15 per cent of his
salary to a recognised provident fund to which the college contributes an equal amount. Interest amounting to Rs. 800 has been credited
to the balance of Rs. 18,000 standing to the credit of his provident fund account.
Salary of a month falls due on the first of next month. On March 20, 2020, X transfers equity shares in a company listed on National
Stock Exchange (securities transaction tax is paid) and generates long-term capital gain of Rs. 90,000 (i.e., sale consideration : Rs.
11,20,000 – cost of acquisition on March 3, 2019 : Rs. 10,30,000). On March 25, 2020, he transfers equity shares in another company
and generates short-term capital gain of Rs. 30,000 which is taxable under section 111A @ 15 per cent. Besides, he gets a lottery prize
of Rs. 6,50,000 (tax deducted at source : Rs. 1,95,000). Income of X from other sources is Rs. 3,15,140. Compute the total income and
income-tax payable by X for the assessment year 2020-21.
Solution : Computation of total income Rs.
Basic salary (i.e., salary of March 2019 to February 2020 received from April 1, 2019 to March 31, 2020 :
Rs. 7,200 × 12) 86,400
Dearness allowance (Rs. 460 × 12) 5,520
City compensatory allowance [i.e., 8% of Rs. 86,400 + Rs. 5,520] 7,354
†As taxable income (i.e., non-agricultural income : Rs. 29,73,130) is more than Rs. 5,00,000, rebate under section 87A is not available. Surcharge
is not applicable as taxable income does not exceed Rs. 50 lakh.
Rs.
Special allowance 40,000
Value of perquisite in respect of rent-free house [see Note 1] 30,855
Value of perquisite in respect of car [(Rs. 1,800 × 3) + (Rs. 900 × 2)] 7,200
Salary of attendant (Rs. 100 × 8) 800
Salary of watchman (Rs. 150 × 8) 1,200
Salary of sweeper (i.e., Rs. 120 × 8) 960
Employer’s contribution in excess of 12% of salary [i.e., 3% of (Rs. 86,400 + Rs. 5,520)] 2,758
Long-term capital gain on equity shares (taxable under section 112A) 90,000
Short-term capital gain on equity shares (as securities transaction is paid, it is taxable @ 15%) 30,000
 Winning from lottery 6,50,000
Gross total Income 12,18,187
Less : Deduction under section 80C [15% of (Rs. 86,400 + Rs. 5,520)] 13,788
Tax
Tax on Rs. 6,50,000 (winning from lottery) @ 30% 1,95,000
Tax on Rs. 30,000 (short-term capital gain under section 111A) @ 15% 4,500
Tax on Rs. 90,000 (long-term capital gain under section 112A) (no tax up to Rs. 1,00,000 under section 112A) Nil
Tax on Rs. 4,34,400 (i.e., Rs. 12,04,400—Rs. 6,50,000—Rs. 30,000—Rs. 90,000) as per the rates given in
Appendix 1 9,220
Tax† 2,08,720
Note : Valuation of perquisite in respect of rent-free house - Salary for the purpose of valuation of perquisite comes to Rs. 1,39,274
(i.e., Rs. 86,400 + Rs. 5,520 + Rs. 7,354 + Rs. 40,000). 7.5% of salary, i.e., Rs. 10,446 is taxable value of unfurnished house.
Valuation of furnished house, therefore, comes to Rs. 30,855 (i.e., Rs. 10,446 + 10% of cost of furniture).
195-E10 [P13.19]* Mrs. X (38 years) is a general manager of a private limited company at Delhi. She was appointed in the grade
of Rs. 8,000-400-12,001, on April 1, 2015 (salary falls due on the last date of each month). Besides, she gets Rs. 2,200 per month as
dearness pay which does not form part of salary. She had been provided with a rent-free unfurnished house whose lease rental value
is Rs. 20,000 per annum. She has also been provided with the facility of a gardener, watchman and personal attendant who are paid
by the employer at the rate of Rs. 3,720, Rs. 3,000 and Rs. 4,000 per annum, respectively. Mrs. X uses company’s car for official
purposes. The house provided to Mrs. X is not owned by the employer. Mrs. X and her employer contribute 22 per cent of salary
towards the recognised provident fund. Mrs. X gets prize of Rs. 5,45,000 (being winning from camel race) and bank’s interest (savings
bank) of Rs. 2,03,000 during the previous year 2019-20. Determine the taxable income and tax liability of Mrs. X for the assessment
year 2020-21.
195-P11 X (42 years) was appointed as a cost accountant in H Ltd., on a salary of Rs. 90,000 per month. He started contributing to
an unrecognised provident fund to which H Ltd. contributed a like amount. He was removed from service on December 31, 2019, but
got another job as a managing accountant on March 1, 2020 with R Ltd. on Rs. 1,50,000 per month and conveyance allowance of
Rs. 3,000 per month (fully used for official purpose). On the termination of his services, H Ltd. pays Rs. 1,20,000 on account of
unrecognised provident fund (i.e., contribution of X : Rs. 50,000 employer’s contribution : Rs. 50,000, interest on X’s contribution :
Rs. 10,000 and interest on company’s contribution : Rs. 10,000).
His income from other sources are : interest on Government securities : Rs. 1,50,000 and interest on bank deposit (savings bank) :
Rs. 1,70,000. The following investments are made by X in the National Savings Certificates of VIII Issue :
Date of Investment Amount Rate of accrual of interest

Rs. during 2019-20
March 10, 2016 11,040 11.14%
March 3, 2017 7,000 9.33%
January 10, 2018 6,000 8.18%
February 13, 2018 15,000 8.18%
March 31, 2019 38,000 8%
March 10, 2020 1,11,000 —
April 15, 2020 17,000 —
Determine the net income and tax liability for the assessment year 2020-21 on the assumption that salary becomes due on the last day
of each month.
Solution :
Salary from H Ltd. Rs.
Basic salary (i.e., Rs. 90,000 × 9) 8,10,000
Payment of unrecognised provident fund
 Contribution of X (*not taxable) Nil*
 Contribution of company 50,000
 Interest on X’s contribution (*taxable as income from other sources) Nil*
 Interest on company’s contribution 10,000
Salary from R. Ltd.
Basic salary (i.e., Rs. 1,50,000 × 1) Rs. 1,50,000
Conveyance allowance 3,000
Less : Exempt as used for official purposes 3,000 Nil
 Interest on Government securities 1,50,000
 Interest on bank deposit (savings bank) 1,70,000
 Interest on X’s contribution towards unrecognised provident fund 10,000
 Interest on National Savings Certificates VIII Issue purchased up to March 31, 2019
[see Note 1] 6,641
Less : Deduction under section 80TTA in respect of interest on deposits in savings bank account 10,000
Tax computation
Tax on Rs. 11,79,000† (see Appendix 1) 1,66,200
Notes :
1. Computation of interest on NSC VIII Issue :
Rate of Investment Interest accruing
Date of purchase interest Rs. in 2019-20
Rs.
March 10, 2016 11.14% 11,040 1,229.86
March 3, 2017 9.33% 7,000 653.10
January 10, 2018 8.18% 6,000 490.80
February 13, 2018 8.18% 15,000 1,227.00
March 31, 2019 8% 38,000 3,040.00
6,640.76
2. Deduction under section 80C is computed as under : Rs.

NSC VIII purchased during 2019-20 1,11,000
Deemed investments in NSC VIII [see Note 1] 6,641
Total 1,17,641
195-E11 [P13.20]* X (60 years) was appointed as a cost accountant in PQR Ltd. on a monthly salary of Rs. 84,000. He started
contributing to an unrecognised provident fund to which PQR Ltd. contributed a like amount. He was removed from service on
November 30, 2019 but got another job on February 1, 2020 with ABC Ltd. on Rs. 92,000 per month and conveyance allowance of
Rs. 8,000 per month which is fully utilised for office purpose. Besides, ABC Ltd. provided Honda car (1600 cc) along with driver for
official and private purposes with effect from February 1, 2020. The total expenditure incurred by PQR Ltd. on car during February
1, 2020 and March 31, 2020 excluding depreciation is Rs. 42,000 (approximately 40 per cent of which is attributable towards private
purposes). On termination of service, PQR Ltd. pays Rs. 3,00,000 on account of unrecognised provident fund (i.e., contribution of
X : Rs. 1,30,000, interest thereon : Rs. 20,000, contribution of the company : Rs. 1,30,000, interest thereon : Rs. 20,000).
His income from other sources is as follows : income from the profession of stage acting : Rs. 4,20,000 and interest on company deposit :
Rs. 1,90,000. Since March 2015, he contributes every year (during last week of March) Rs. 40,000 in National Savings Certificates
VIII Issue. Determine the net income and tax liability for the assessment year 2020-21 on the assumption that salary becomes due
on the last day of each month.
195-P12 Discuss the tax treatment of the following items which belong to different taxpayers —
1. A salaried employee has received medical allowance of Rs. 18,000 which is fully used for meeting medical expenses.
2. A salaried employee has received reimbursement of Rs. 18,000 on account of medical facilities.
3. A salaried employee gets Rs. 2,300 per month as transport allowance for meeting expenditure to cover the journey between office and
residence (actual expenditure : Rs. 190 per month).
4. A company provides free conveyance to its employees for the journey between office and residence.
5. X is employed by A Ltd. on salary of Rs. 25,000 per month. Besides, he gets free conveyance for office and private purposes. He holds
18 per cent equity share capital in A Ltd. He does not have any professional qualification to justify the remuneration. Mrs. X holds 2
per cent equity share capital in A Ltd.
6. A firm (having two equal partners) gets a loan of Rs. 40,000 from a private limited trading company whose general reserve is more
than its share capital of Rs. 20 lakh. X, one of the partners of the firm, holds 10 per cent equity share capital in the company.
7. A prize of Rs. 15,000 received from a TV contest on May 24, 2019.
8. A gift received from father on March 31, 2020.
9. A gift received by a lawyer from his client in appreciation of his service on April 1, 2019.
10. Gift of Rs. 16,000 received by an individual from his friend on October 20, 2019. Another gift of Rs. 20,000 from the same person
is received on January 20, 2020.
11. Bonus of the year 2019-20 paid on December 1, 2020.
12. Electricity bills of the year 2019-20 paid on December 1, 2020 by a manufacturing company.
13. Bonus received from LIC at the time of maturity of an endowment policy.
14. Money received from LIC on the maturity of a Keyman insurance policy by a company.
15. Leave encashment received by the legal heirs of a deceased employee.
16. X (age : 32 years) dies on June 15, 2019 (normal date of retirement is March 31, 2036). Gratuity is received by the legal heirs of X
on July 2, 2019.
17. X retires from A Ltd. on January 31, 2020. As per service rules, he is entitled for gratuity of Rs. 2,00,000. He dies on February 20,
2020. Gratuity is received by the legal heirs of X on March 3, 2020.
18. Family pension received by the legal heirs of a deceased employee.
19. Share of profit received from a firm.
20. Interest received on income-tax refund.
21. Interest paid on capital borrowed for payment of income-tax.
22. Income received by a minor from stage acting.
23. Interest received by a minor from a bank in which he deposits his earning from stage acting.
24. Loss from the activity of owning and maintaining race horses.
25. Loss from the activity of owning and maintaining camel for races.
26. A person was in foreign service for 120 months ending March 31, 2019. During 2019-20, he is in India for more than 182 days and
gets pension from the foreign employer which is paid to him in India.
27. Assume pension in the above case is first deposited in a bank account of the employee outside India and later on it is remitted to India.
28. A company pays LTC to its general manager (being air fare of the employee and family : Rs. 80,000 and boarding lodging
expenses : Rs. 20,000).
29. A person borrows money at the rate of 8 per cent per annum and the same is given as an interest-free loan to his wife.
30. A person has agricultural income in India (Rs. 20,000) as well as outside India (Rs. 60,000).
31. A farmer transfers rural agricultural land in India at a price higher than its cost of acquisition.
32. A farmer transfers rural agricultural land in Nepal at a price higher than its cost of acquisition.
Solution :
1. Medical allowance is always chargeable to tax (there is no exception).
2. Reimbursement of medical expenses of Rs. 18,000 is chargeable to tax (exemption of Rs. 15,000 is now not available for
such reimbursement).
3. Transport allowance for meeting the expenditure between office and residence is now taxable.
4. It is not taxable. Conveyance facility for covering the distance between the office and residence is not taken as perquisite
chargeable to tax.
5. Conveyance facility is chargeable to tax in the hands of employee. It is valued at Rs. 1,800 per month in case the cubic
capacity does not exceed 1600cc and Rs. 2,400 per month in case it so exceeds. Rs. 900 per month to be added in case driver
is provided along with car.
X does not have any technical/professional qualification and Mrs. X has a substantial interest in A Ltd. (i.e., shareholding
of Mrs. X : 2% + shareholding of her husband who is a “relative” : 18%), salary will be taxable in the hands of Mrs. X
(irrespective of the fact whether or not other incomes of Mrs. X is higher). If, however, Mrs. X is also employed by A Ltd.
without any technical/professional qualification, then the salary of X and Mrs. X shall be taxable in the hands of X or Mrs.
X whose other income is higher.
6. X has a substantial interest in the firm. He holds 10 per cent equity share capital in the private company. The company
gives a loan of Rs. 40,000 to the firm out of accumulated profit. The loan is treated as deemed dividend under section 2(22)(e).
However, deemed dividend under section 2(22)(e) is exempt in the hands of recipient by virtue of the exemption given by
section 10(34). The private limited company (which has given loan to the firm) will have to pay dividend distribution tax
under section 115-O at the rate of 30% (+SC+HEC, effective rate 34.944%).
7. It is taxable @ 30*%.
8. Gift from father (or any other relative) is not income. There is no gift-tax liability.
9. Gift from a client in appreciation of professional service is nothing but a professional income.
10. Since the total gift received does not exceed Rs. 50,000 nothing is chargeable to tax.
11. By virtue of section 43B, it is deductible for the previous year 2020-21. The recipient employees will include it in their
income for the previous year 2020-21 (if it was not taxed earlier).
12. It is deductible for the previous year 2019-20. Section 43B is not applicable.
13. Bonus on an endowment policy is not chargeable to tax [on the assumption that exemption is available under section
10(10D)].
14. Money received from LIC on Keyman Insurance Policy is taxable as business income.
15. Leave encashment received by the legal heirs of a deceased employee is not taxable.
16. Gratuity received by the legal heirs of a deceased employee is not taxable. It cannot be taxed in the hands of deceased
employee as it becomes due and is paid after his death. This amount is not taxable in the hands of legal heirs also as it does
not partake the character of income in their hands but is only a part of the estate devolving upon them.
17. In this case, gratuity becomes due on January 31, 2020 at the time of retirement. It is taxable in the hands of X even if it
is received by legal heirs after his death. After claiming exemption under section 10(10)(ii)/(iii), the balance shall be included
in the salary income of X. Income-tax return shall be submitted by Mrs. X (or her children) as legal heirs of X.
18. Family pension received by the legal heirs of a deceased employee is taxable in the hands of legal heirs as income from
other sources, one-third of which is qualified for deduction (maximum deduction : Rs. 15,000).
19. Share of profit received from a firm is exempt.
20. Interest received on income-tax refund is taxable.
21. Interest on capital borrowed for payment of income-tax is not deductible.
22. Income received by a minor child from stage acting is taxable as his own income.
23. Interest from a bank received by a minor child is taxable as income of his father or mother whose other income is higher.
This rule is applicable even if interest is received on accumulated earnings from stage acting (income from stage acting is
not taxable as income of father/mother).
24. Loss from the activity of owning and maintaining race horses can be set off only from income from the same activity.
It can be carried forward for the next 4 years for being set off against the same income.
25. Loss from the activity of owning and maintaining camels for races can be set off against any income of the current year
and unadjusted amount can be carried forward for being set off against any business income of the next 8 assessment years.
26. As X was outside India during 10 years ending March 31, 2019, he is resident but not ordinarily resident in India for the
previous year 2019-20. Pension is earned outside India as service was performed outside India. If pension is received in India,
it is chargeable to tax.
*Plus health and education cess see Appendix 1.

27. If such pension is paid to X outside India and later on it is remitted to India, it is not chargeable to tax.
28. While the company can claim deduction of Rs. 1 lakh under section 37(1), the general manager will pay tax on Rs. 20,000.
29. As there is no transfer of asset, clubbing provisions are not applicable. Interest payable may not be allowed as deduction.
30. Agricultural income in India is exempt under section 10(1). It is, however, taken into account while finding out tax on
non-agricultural income, if the recipient is an individual, HUF, AOP/BOI.
Agricultural income from outside India is taken as non-agricultural income.
31. Agricultural land in India in a rural area is not a “capital asset”. Gain on its transfer is not chargeable to tax.
32. The aforesaid rule is applicable only if the land is in India. Rural agricultural land outside India is a capital asset and gain
on its transfer is chargeable to tax under section 45.
195-E12 In each of the following sub-questions, only one answer is correct. Reproduce, in full, the correct answer to each one of the
sub-questions and give reasoning (not more than 20 words) for your answer. For wrong answer, not only no marks will be awarded,
but a deduction to the extent of 100 per cent of the marks allotted to the individual sub-questions will be made —
1. X, a director-employee (basic salary : Rs. 2,00,000 per month), has been provided a rent-free residential house (lease rent :
Rs. 18,000 per month). The employer-company also provides the facility of free watchman (salary paid by the employer to watchman
is Rs. 7,500 per month and the watchman is also engaged by the employer). The perquisite value of the free watchman shall be (a)
Rs. 600 per month, (b) Rs. 1,200 per month, (c) Rs. 3,750 per month, (d) Rs. 7,500 per month.
2. X is not covered by the Payment of Gratuity Act, 1972. At the time of retirement on October 31, 2019, the employer pays
Rs. 2,51,000 as leave encashment of salary. While computing exemption under section 10(10AA) in respect of leave encashment,
“average salary” shall be computed on the basis of salary drawn by him (a) from December 1, 2018 to September 30, 2019 or (b) from
January 1, 2019 to October 31, 2019.
3. X owns a house property whose municipal valuation is Rs. 1,50,000, fair rent is Rs. 1,80,000, actual rent is Rs. 1,95,000 and
standard rent according to the Delhi Rent Control Act is Rs. 2,10,000. Gross annual value of the property is (a) Rs. 2,10,000, (b)
Rs. 1,95,000, (c) Rs. 1,80,000, (d) Rs. 1,50,000, (e) nil.
4. X owns a house property. Ground floor of the property is self-occupied for residential purposes, while the first floor is given on rent
throughout the previous year. The income of the property (a) cannot be negative, or (b) can be negative.
5. Mrs. X comes to India for the first time on October 15, 2019. She leaves India on September 17, 2020. She joins an Indian company
on November 1, 2019 on monthly salary of Rs. 1,20,000 (salary becomes due and paid on the first day of next of each month). Her
income from other sources for the previous year 2019-20 is (1) bank FD interest in India Rs. 3,90,000, (2) foreign income earned and
received outside India : $ 21,700 (or Rs. 8,89,700). Standard deduction in this case for the assessment year 2020-21 is (a) Rs. 25,000,
(b) Rs. 12,000, (c) Rs. 11,000, (d) Rs. 18,000, (e) Rs. 50,000, (f) none of these.
195-P13 X (28 years) is employed by a private sector company, monthly salary being Rs. 40,000. He holds 100 shares in the company
and is a member of Board of Directors of the company. The employer-company provides the following allowances/perks :
1. Free car only for personal use - expenditure incurred by the employer (including depreciation and salary of driver) : Rs. 1,23,000,
10 per cent of the expenditure is attributable for covering the distance between office and residence.
2. Expenditure on providing computer training to X (Rs. 8,000), his wife (Rs. 4,300) and his children (Rs. 3,000).
3. Sale of goods manufactured by the employer at discount (discount availed during 2019-20 : Rs. 49,000). The same discount is given
by the company to its dealers.
4. Special allowance : Rs. 1,11,000.
5. Ordinary medical facility in a hospital owned by the employer : Rs. 15,700 (being cost to the employer).
6. Reimbursement of expenses on medical treatment of Mrs. X outside India - expenditure on medical treatment : Rs. 6,62,000 (permission
of RBI is taken), expenditure on travel of Mrs. X and X outside India for treatment of Mrs. X : Rs. 2,80,000, expenditure on boarding
and lodging outside India of Mrs. X and X : Rs. 3,17,000 (permission of RBI is taken).
7. Furniture provided to X : Rs. 14,000 (being market rent of the furniture, original cost to the employer : Rs. 2,20,000).
During the previous year 2019-20, X has the following other income :
1. He sold a residential house on May 5, 2019 for Rs. 12,37,000 (it was purchased in 1986 ; indexed cost of acquisition : Rs. 12,25,735).
He purchases a house property on April 6, 2019 for Rs. 12,40,000. He, however, sells the new house on March 30, 2020 for Rs. 12,95,000.
2. On July 10, 2019, he has withdrawn Rs. 50,000 (capital: Rs. 44,000, interest : Rs. 6,000) from the National Savings Scheme, 1987.
3. He owns a flat which is self-occupied for residential purposes (municipal valuation being Rs. 70,000). A loan of Rs. 8,00,000 was taken
from LIC to finance purchase of the flat. During 2019-20, he pays Rs. 33,000 (Rs. 17,000 interest and Rs. 16,000 as repayment of loan)
to LIC.
4. Winning from lotteries : Rs. 1,10,500 (gross) received on December 17, 2019.
5. Interest on company deposit received by minor son of X : Rs. 23,700 (income of Mrs. X is lower).
6. Income from agriculture in India : Rs. 1,60,000.
7. On June 29, 2019, X gets a cash gift of Rs. 30,000 from his friend in foreign currency outside India. No other gift is received from any
person during the previous year.
During the previous year 2019-20, he donates Rs. 10,000 to a public charitable institute and deposits Rs. 70,000 in the public provident
fund. Find out the amount of income and tax liability for the assessment year 2020-21.
Solution : Rs. Rs.

Salary [see Note 1] 10,10,000
Income from house property (–)17,000
Capital gains [see Note 2]
Sale proceeds of house 12,37,000
Less : Indexed cost of acquisition 12,25,735
Short-term capital gain (i.e., Rs. 12,95,000 – Rs. 12,40,000) 55,000
Amount withdrawn from NSS 87 50,000
Gift from friend [nothing is taxable since the quantum of gift received does not exceed
Rs. 50,000] Nil
Minor son’s income (Rs. 23,700—Rs. 1,500) 22,200 1,82,700
Less : Deduction under section 80C [Rs. 16,000 (repayment of loan to LIC) and Rs. 70,000 (PPF)] 86,000
Less : Deduction under section 80G 5,000
Computation of tax
1. Tax on Rs. 13,10,970 (being Rs. 11,50,970 + agricultural income) [see Note 3] 2,04,665
2. Tax on Rs. 4,10,000 (being agricultural income + Rs. 2,50,000) 8,000
3. (1)—(2)† 1,96,650
4. Add : Surcharge (applicable if net income exceeds Rs. 50 lakh) Nil
5. Tax and surcharge 1,96,650
6. Add : Health and education cess 7,866
7. Tax liability (rounded off) 2,04,520
Note :
1. Income from salaries
Car (Rs. 1,23,000 – Rs. 12,300) 1,10,700
Expenditure on training of X Nil
Expenditure on education of X’s family members 7,300
Sale of goods at discount 49,000
Medical facility in a hospital owned by the employer Nil
Medical treatment outside India (permitted by RBI) Nil
Expenditure on travel in connection with medical treatment outside India (taxable as gross total
income before including this expenditure exceeds Rs. 2,00,000) 2,80,000
Expenditure on stay outside India (RBI’s permission is taken) Nil
Furniture (10% of Rs. 2,20,000) 22,000
2. In this case, exemption under section 54 is not taken. X has purchased a house within the stipulated time which is sold
before the expiry of 3 years (within the same previous year). If exemption under section 54 is taken, then long-term capital
gain will be reduced to nil and short-term capital gain will be increased by Rs. 11,265. As a consequence, the tax bill of X will
be increased by Rs. 1,172 [i.e., 10% of Rs. 11,265 + HEC].
3. Tax liability on Rs. 13,10,970 is calculated as under: Rs.
On Rs. 11,265 [being long-term capital gain] @ 20% 2,253
On Rs. 1,10,500 [being winnings from lotteries] @ 30% 33,150
On the balance at the rate applicable to an individual 1,69,262
Total 2,04,665
➠ 195-E13 Find out the net income and tax liability of X in problem 195-P13 in the following two situations [also find out whether
it is beneficial to avail (or not to avail) exemption under section 54] :
1. Assume that income of Mrs. X is Rs. 18,90,000.
2. Assume that income of Mrs. X is Rs. 20,400, cost of furniture provided to X is Rs. 1,000, and X makes the following additional
contributions (in addition to the information given in problem 195-P13) :
a. donation to the Prime Minister’s National Relief Fund : Rs. 86,000; and
b. contribution to Home Loan A/c scheme of National Housing Bank : Rs. 14,000.
Hindu undivided families -
CHAPTER 14 Computation of taxable
income
H
indu undivided family (HUF) is treated as a separate taxable entity for the purpose
of income-tax assessment. This chapter explains as to what is a HUF, how it comes
into existence, when and how it can be partitioned and what are the tax implications
before and after its partition.
 WHAT IS UNDERSTOOD BY HINDU UNDIVIDED FAMILY

201. Under the Income-tax Act, a Hindu undivided family is treated as a separate entity for the purpose of
assessment. The term “Hindu undivided family” has not been defined under the Income-tax Act. The expression
is, however, defined under the Hindu law, as a family which consists of all persons lineally descended from a
common ancestor and includes their wives and unmarried daughters. The relation of a Hindu undivided family
does not arise from a contract but arises from status.
201.1 Hindu coparcenary - A Hindu Coparcenary includes those persons who acquire by birth an interest in
joint family property. Previously, it was limited to male descendents only. With the introduction of Hindu
Succession (Amendment) Act, 2005 from September 6, 2005, daughters also are given coparcener status. Hence,
Hindu Mitakshara Coparcener includes daughters of the Hindu Undivided Family in addition to sons, grand-
sons and great-grand sons. One of the important tests of coparcenary is that a coparcener enjoys the right to
enforce partition. This right is given to daughters also with effect from September 6, 2005.
201.2 Different schools of Hindu law - There are two schools of Hindu law — Dayabhaga and Mitakshara.
Dayabhaga school of law prevails in West Bengal and Assam. Under this school of law a son does not acquire
any interest by birth in an ancestral property. Son acquires such interest only after the death of his father.
Therefore, under this school of law, the son does not enjoy right to demand partition during the lifetime of his
father. In view of this, the father enjoys an absolute right to dispose of the property of the family according to
his desire. It can, therefore, be said that there is no coparcener in Dayabhaga school of law till the death of father.
During the lifetime of the father, father is assessed as an individual, and not as Hindu undivided family. After
the death of father, sons become coparceners in respect of property left by father and income arising therefrom
is taxable as income of Hindu undivided family.
Mitakshara school of law applies to the whole of India except West Bengal and Assam. Under this school of law
and with the introduction of Hindu Succession (Amendment) Act, 2005 with effect from September 6, 2005 both
son and daughter acquire by birth an equal right in the ancestral property along with their father. The
coparcenary under this law, is therefore, a fluctuating body which is enlarged at the time of each birth and
reduced at the time of each death of a coparcenary child.
201.3 Jain and Sikh families - Though Jain and Sikh families are not governed by the Hindu law, such families
are treated as Hindu undivided families for the purpose of the Income-tax Act.
 WHAT ARE THE BASIC CONDITIONS FOR ASSESSMENT OF HINDU UNDIVIDED FAMILY
202. Income of a joint Hindu family may be assessed as a Hindu undivided family if the following two conditions
are satisfied :
 There is a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is
assessed as Hindu undivided family, it continues to be assessed as such in subsequent assessment years till
partition is claimed by its coparceners.
505
Para 203 HUF - Computation of taxable income 506
There is a joint family property which consists of ancestral property, property acquired with the aid of ancestral
property and property transferred by its members. Ancestral property, in this connection, may be defined as the
property which a man inherits from any of his three immediate male ancestors, i.e., his father, grandfather and
great-grandfather. Therefore, property inherited from any other relation is not treated as ancestral property.
 WHAT IS THE BASIS OF COMPUTATION OF TAXABLE INCOME OF HUF

203. Income of HUF is calculated as follows –
 Step 1 - First ascertain income under different heads of income, ignoring incomes exempted under sections 10
to 13A. While computing income one should keep in mind the following additional points –
1. If funds of a Hindu undivided family are invested in a company or a firm, fees or remuneration received by
the member as a director or a partner in the company or firm may be treated as income of the family, if the fees
or remuneration is earned essentially as a result of investment of funds. Conversely, however, if the fees or
remuneration is earned essentially for services rendered by the member in personal capacity, it will be treated
as personal income of the member.
2. If any remuneration is paid by the Hindu undivided family to the karta for services rendered by him in
conducting family’s business, the remuneration is deductible if remuneration is paid under a valid and bona fide
agreement in the interest of, and expedient for, the business of family; and is genuine and not excessive.
 Step 2 - The following other points should be noted –
1. Under sections 60 to 63, income belonging to some other person, may be taxable as income of a Hindu
undivided family. For instance, if a Hindu undivided family transfer’s income without transferring the asset,
such income is taxable under section 60 in the hands of the family. Likewise, if an asset is transferred under
“revocable transfer” by the family, its income is taxable in the hands of the family.
2. Losses of the current year as well as preceding years will be set off under sections 70 to 80.
3. From the gross total income, a Hindu undivided family can claim deduction under sections 80C, 80CCF, 80D,
80DD, 80DDB, 80G, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA and 80TTA.
4. If the Hindu undivided family has agricultural income, then give due consideration to the rules mentioned
in Chapter 12 to arrive at tax on non-agricultural income.
 Step 3 - Net income of a Hindu undivided family is chargeable to tax at the rates applicable to an individual.
From the assessment year 2013-14, tax payable by a non-corporate assessee (including a Hindu undivided
family) cannot be less than 18.5 per cent† [+ SC + HEC] of “adjusted total income”. For detailed discussion, see
para 194.2.
 WHAT IS TAX IMPLICATION OF PARTITION OF A HINDU UNDIVIDED FAMILY

204. Once income of a joint family is assessed as income of Hindu undivided family, it will continue to be
assessed as such until one or more coparceners claim partition. Such claim must be made by the member before
the relevant assessment is completed. The Assessing Officer, on the receipt of such claim, must make an enquiry
after giving due notice to the members and record a finding whether there has been a partition and, if so, the date
of partition. Income of the family from the first day of the previous year till the date of partition is assessed as
income of Hindu undivided family and thereafter income of the property subject to partition is assessed as
individual income of recipient-member. If, however, the recipient-member forms another Hindu undivided
family along with his wife and son(s), income of the property subject to partition is chargeable to tax in the hands
of new Hindu undivided family.
 Partition - Total or partial - Under the Hindu law, a Hindu undivided family is entitled to have a partition which
may be total or partial. A partial partition may be partial as regards the persons constituting the joint family or
as regards the properties belonging to the joint family or both. However, a partial partition of a Hindu undivided
family (effected after December 31, 1978) is not recognised for tax purposes. Such family shall continue to be
assessed as if no such partial partition has taken place.
 Problems on computation of taxable income of HUF

205-P1 X is the karta of a Hindu undivided family : X and Brothers. The family consists of X (61 years), the karta and his two younger
brothers Y and Z as coparceners. The family and the coparceners has the following incomes for the year ended March 31, 2020 :
Salary of X as manager of a company : Rs. 5,48,000.
exchange.
507 Problems on computation of taxable income of HUF Problem 205-P1
Interest on securities :
 Interest in the name of X Rs. 2,60,634, on Government securities purchased out of his salary.
 Interest on Government securities in the names of all coparceners Rs. 26,616—investments made out of the family income.
Property income :
 Ancestral house : Rs. 72,000.
 House in the name of X (bought in 1954 out of family funds) : Rs. 7,200.
Business :
 Family business income : Rs. 3,81,000.
 Half share of income in a firm in which X is a partner as a representative of the family : Rs. 15,600.
 Income of Z as a lawyer : Rs. 4,96,000.
 Income of Y as a doctor : Rs. 4,70,000.
Capital gain :
On sale of long-term capital asset of the family : Rs. 55,000
On sale of long-term equity shares (securities transaction tax is paid at the time of acquisition as well as transfer) (cost of acquisition
on March 1, 2019 : Rs. 1,70,000, sale consideration on March 10, 2020 : Rs. 2,60,000)
On sale of short-term equity shares (securities transaction tax is applicable at the time of transfer) : Rs. 70,000
On sale of long-term property by Y : Rs. 1,60,000
Interest on Government securities :
 In the name of X, bought out of family funds : Rs. 80,750 (gross).
 In the name of X’s wife, bought out of her stridhan : Rs. 9,95,000 (gross).
Compute the total income and tax liability of the family and its members for the assessment year 2020-21 on the assumption that the family
pays health insurance premia of Rs. 30,000 for the benefit of members of the family (out of which Rs. 1,000 is mediclaim premium for
X, Rs. 21,000 is mediclaim premium for other members and Rs. 8,000 is on preventive health check up of members), deposits Rs. 1,49,000
in public provident fund account. The family gets total gift of Rs. 1,42,000 (i.e., on April 10, 2019 Rs. 62,000 from X, the karta and on
April 11, 2019 Rs. 80,000 from a relative of X), which is deposited by the family with a company (interest on company deposit for previous
year 2019-20 : Rs. 10,000). Y pays Rs. 18,000 to LIC on account of pension fund. Mrs. X pays insurance premium since 2012 on life
of her husband (Rs. 25,000). Y deposits Rs. 45,000 in public provident fund.
Solution :
HUF Rs. Rs.
Property income
Rent (i.e., Rs. 72,000 + Rs. 7,200) 79,200
Less : Standard deduction (30% of Rs. 79,200) 23,760 55,440
Business income :
Family business 3,81,000
Share of profits from the firm (exempt) Nil 3,81,000
Long-term capital gain on equity shares 90,000
Short-term capital gain on equity shares (as securities transaction tax is applicable, it is taxable @ 15%) 70,000
Gift (gift from a member of family is not taxable but gift from relatives of members is taxable) 80,000
Interest [Rs. 26,616 + Rs. 80,750 + Rs. 5,634†] 1,13,000
Under section 80C in respect of public provident fund 1,49,000
Under section 80D in respect of medical insurance premia (preventive health check up expenditure up
to Rs. 5,000 is deductible only in the case of individual and not in the case of HUF) 22,000
Net income 6,73,440
Tax on Rs. 70,000 @ 15% under section 111A 10,500
Tax on Rs. 55,000 @ 20% under section 112 11,000
Tax on Rs. 90,000 under section 112A (no tax up to Rs. 1,00,000) Nil
Tax on balance of Rs. 4,58,440 10,422
Total 31,922
Add : Surcharge –
† Rs. 10,000 × Rs. 80,000 ÷ Rs. 1,42,000.

Problem 205-P2 HUF - Computation of taxable income 508
Family members
X Y Z Mrs. X
Rs. Rs. Rs. Rs.
Salary [gross salary : Rs. 5,48,000 – standard deduction : Rs. 50,000] 4,98,000 – – –
Professional income of Y and Z – 4,70,000 4,96,000 –
Capital gain – 1,60,000 – –
Interest on company deposit [taxable in the hands of X by
virtue of section 64(2) - see para 128] 4,366† – – –
Interest on Government securities 2,60,634 – – 9,95,000
Under section 80C – 45,000 – 25,000
Under section 80CCC – 18,000 – –
Net income 7,63,000 5,67,000 4,96,000 9,70,000
Tax 62,600 39,850 12,300 1,06,500
Less : Rebate under section 87A Nil Nil 12,300 Nil
Balance 62,600 39,850 Nil 1,06,500
Add : Health and education cess 2,504 1,594 Nil 4,260
Tax liability (rounded off) 65,100 41,440 Nil 1,10,760
205-E1 [P14.2]* A Hindu undivided family has three coparceners : X (karta), Y and Z. The family has the following incomes for
the year ending March 31, 2020 :
Rs.
Interest on securities (gross) 2,15,600
Rental income (before standard deduction) 5,15,200
Rental income of a house (before standard deduction) (purchased in 1960 in the name of Mrs. X out of funds
of the family) 4,18,000
Income from family business 12,28,000
Bank interest (savings bank) 2,92,500
Salary of Y from a company 4,60,000
One-third share from a partnership firm in which Y is a partner, representing the family 5,12,000
Determine the total income and tax liability of the family for the assessment year 2020-21, assuming that the family pays life insurance
premium of Rs. 1,25,000 (sum assured : Rs. 30,00,000) on the life of X and medical insurance premium of Rs. 41,000 on the life
of X.
205-P2 X (66 years) is the karta of X (HUF). The following information is available from the records of family pertaining to the
assessment year 2020-21 –
Rs.
Interest on debentures (net of TDS at the rate of 10 per cent) 9,00,000
Interest on Punjab Government Securities (no tax is deducted) 5,00,000
Bank interest (deposits were made out of family’s funds in the name of X) (net of TDS at the rate of 10 per cent) 1,80,000
Dividend/interest from UTI 5,00,000
Rent of house property (net of TDS at the rate of 10 per cent) 3,24,000
Agriculture income in India (the family is engaged in the business of cultivation of wheat) 2,27,000
Brought forward agricultural loss of the assessment year 2018-19 10,000
The family pays Rs. 1,40,000 by way of insurance premium of its members and donates Rs. 2,00,000 to an Indian political party. The
return of income for the assessment year 2018-19 was submitted on April 1, 2019.
Municipal valuation of the property owned by the family is Rs. 3,30,000. The market rent of a similar property Rs. 3,35,000 and standard
rent is Rs. 4,00,000. Municipal tax paid by the family on April 1, 2019 is Rs. 56,000. This tax pertains to the financial year 2016-17.
Interest on loan taken from one of the members of the family for the purpose of repair of the property is Rs. 85,000. However, interest
is not paid to the member since 2015. Rate of interest charged by the member is 12 per cent per annum where as a similar loan from SBI
is available at the rate of 10.9 per cent.
The family has a brought forward loss of the assessment year 2015-16 of a business which was discontinued on January 1, 2018. The
amount of loss is Rs. 1,00,000. Income-tax return was submitted in time. The family wants to set off this loss against interest income.
† Interest on company deposit of Rs. 10,000 is taxable to the extent of Rs. 4,366 (i.e., Rs. 10,000 ÷ Rs. 1,42,000 × Rs. 62,000) in the hands of X by virtue
of section 64(2).
509 Problems on computation of taxable income of HUF Problem 205-P2
Determine the amount of net income and tax liability (after adjusting TDS) of the family for the assessment year 2020-21.
Solution : Computation of income and tax liability –
Rs.
Income from house property [see Note 1] 1,27,800
Profits and gains of business and profession (agricultural income in India, not chargeable to tax) Nil
Interest on debentures [Rs. 9,00,000 ÷ (1 – 0.10)] 10,00,000
Interest on Punjab Government Securities 5,00,000
Bank interest [Rs. 1,80,000 ÷ (1 – 0.10)] 2,00,000
Dividend/interest from UTI (exempt) Nil
Less: deductions
Under section 80GGC (contribution to political party) 2,00,000
Tax on net income [see Note 3] 1,69,610
Notes –
1. Computation of house property income –
Annual rent [Rs. 3,24,000 ÷ (1 – 0.10)] 3,60,000
of SR] 3,35,000
Step V - Gross annual value in Step III minus Step IV 3,60,000
Less: Municipal tax 56,000
Less: Deductions under section 24 –
Standard deduction @ 30% 91,200
Interest from borrowed capital 85,000
Income 1,27,800
2. Adjustment of brought forward loss - X(HUF) has a brought forward loss of a discontinued business of Rs. 1,00,000. By virtue
of section 72, it can be set off against any business income of the current year. It cannot be set off against other incomes of
the current year. Since there is no business income during the current year, the loss of Rs. 1,00,000 cannot be set off during
the current year. However, it can be carried forward.
3. Income tax liability - It is calculated as under –
Rs.
Agricultural income (Rs. 2,27,000 – Rs. 10,000, brought forward agricultural loss can be set off even if return
of the earlier year was submitted belatedly). 2,17,000
Total 17,04,800
Tax on Rs. 17,04,800 (tax on first Rs. 2,50,000 : Nil, between Rs. 2,50,000 and Rs. 5,00,000 tax rate is 5% :
Rs. 12,500, between Rs. 5,00,000 and Rs. 10,00,000 tax rate is 20% : Rs. 1,00,000, above Rs. 10,00,000 tax rate
is 30% : Rs. 2,11,440) (exemption limit in the case of HUF is Rs. 2,50,000, age of karta is not considered) 3,23,940
Less: Tax on Rs. 4,67,000 (i.e., non-agricultural income of Rs. 2,17,000 + exemption limit of Rs. 2,50,000) 10,850
Balance 3,13,090
Less: Tax deducted at source (10% of Rs. 10,00,000 + 10% of Rs. 2,00,000 + 10% of Rs. 3,60,000) 1,56,000
Problem 205-P2 HUF - Computation of taxable income 510
205-E2 In problem 205-P2 make the following changes and recalculate net income and tax liability (after adjusting tax deducted at
source) of the family –
1. Age of X (karta) is 35 years.
2. Agricultural activity of the cultivation of wheat is situated in Bhutan (and not in India).
3. X (HUF) is resident and ordinarily resident.
4. Return of the assessment year 2018-19 was submitted on July 1, 2018.
Firms* and associations of
CHAPTER 15 persons - Computation of
taxable income
T
his chapter discusses the assessment of firm and partners. At the same time, this
chapter enumerates the provisions applicable to an association of persons and
members.
 WHAT IS PARTNERSHIP
212. Section 4 of the Indian Partnership Act, 1932 defines partnership as “relationship between persons who
have agreed to share the profits of a business carried on by all or any of them acting for all”. Persons who have
entered into partnership with one another are called individually partners and collectively a firm and the name
under which their business is carried on is called the firm name.
 WHAT IS THE SCHEME OF TAXATION OF FIRMS

213. The salient features of the scheme are as under :
 A firm is taxed as a separate entity. Rules given below are applicable whether a firm is a traditional firm or
limited liability partnership.

 Partners’ share in the income of a firm is not chargeable to tax in the hands of partners.
 Any salary, bonus, commission or remuneration (by whatever name called), paid/payable to partners is
allowed as a deduction to the firm. However, the deduction is subject to certain restrictions in the hands of the
firm. The amount which is allowed as deduction to the firm is taxable in the hands of the partners.
 Where a firm pays interest to any partner, the firm can claim deduction of such interest from its total income.
However, the maximum rate at which interest can be allowed to a partner is 12 per cent per annum. The amount
of interest, allowed as deduction in the hands of the firm, is taxable in the hands of partner.
 Income of a firm is taxable at a flat rate of 30 per cent. Surcharge at the rate of 12 per cent of income-tax is
applicable if income of a firm is more than Rs. 1 crore. Besides, health and education cess is also applicable. The
effective rate of tax is 31.2 per cent (if income of a firm is not more than Rs. 1 crore) or 34.944 per cent (if income
of a firm is more than Rs. 1 crore). The above rate schedule is also applicable in the case of a limited liability
partnership (LLP).
 A firm (including, a limited liability partnership) is subject an alternate minimum tax.
 WHEN REMUNERATION/INTEREST PAID OR PAYABLE TO PARTNERS IS DEDUCTIBLE

214. Any expenditure by a business entity (including remuneration/interest to partners) is deductible only if
comes within the parameters of sections 30 to 37**. In the case of a firm, if it claims deduction in respect of
remuneration/interest to partners, it has also to prove that it satisfies the following –
 Conditions of section 184 [see para 215]
* From the assessment year 2010-11, these provisions are also applicable in the case of limited liability partnership.
** If borrowed capital is used by a business entity for earning tax-free income, interest on such borrowed capital is not deductible under section
36 (read with section 14A). Consequently, if capital borrowed by a firm from its partner is utilised for earning tax-free income (e.g., dividend on
shares), interest on such capital is not deductible under section 36, even if the firm satisfies section 184 conditions and payment of interest satisfies
the requirement of section 40(b).
511
Para 215 Firms and associations of persons - Computation of taxable income 512
 Conditions of section 40(b) [see paras 216 and 217].
Even if these conditions are satisfied, the assessee-firm may or may not claim the deduction in respect of payment
of remuneration and interest to partners. In other words, the Assessing Officer cannot enforce deduction of
remuneration and interest to partners, if the firm does not want to claim this deduction.
 WHAT ARE THE CONDITIONS A FIRM SHOULD FULFIL UNDER SECTION 184
215. Section 184 requires the following –
1. A firm must be evidenced by an “instrument”. In simple words, a firm should be evidenced by a partnership
deed. “Instrument” does not mean only a regular partnership deed. If terms of a partnership are contained in
a number of documents, such documents would constitute “instrument” for this purpose.
2. Individual share of partners must be specified in such “instrument” or partnership deed.
3. Certified copy of such “instrument” or partnership deed should be submitted along with return of income for
the first year*. For this purpose, a copy of the instrument of partnership (maybe xeroxed copy) may be taken.
It should be certified in writing by all partners (other than minors). If, however, the return is made after the
dissolution of the firm, it should be certified by all partners (other than minors) who were partners in the firm
immediately before dissolution and by legal representative of any such partner who is deceased.
4. Revised instrument of partnership or partnership deed should be submitted whenever there is change in the
constitution of firm/profit-sharing ratio*.
5. There should not be any failure as is mentioned in section 144. What is important is type of failure as given
in section 144 and not an assessment under section 144 [for section 144, see para 255].
 WHAT ARE THE CONDITIONS FOR CLAIMING DEDUCTION OF REMUNERATION OF

PARTNERS UNDER SECTION 40(b)
216. Section 40(b) requires the following –
1. Remuneration should be paid only to a working partner (i.e., an individual who is actively engaged in
conducting the affairs of the firm).
2. Remuneration must be authorized by the partnership deed and it should be paid according to the terms of
partnership deed.
3. Remuneration should not pertain to a period prior to partnership deed (in other words, partnership deed
cannot be amended with a retrospective effect to make a provision for payment of remuneration).
4. Remuneration should not exceed the permissible limit given below –
- On the first Rs. 3,00,000 of book profit or in the case of loss : Rs. 1,50,000 or 90 per cent of book profit, whichever
is more.
- On the balance of book profit : 60 per cent of book profit.
 How to find out “book profit” - It is calculated as follows –
1. Find out the net profit of the firm as per Profit and Loss Account.
2. Make adjustments as provided by sections 28 to 44DB.
3. Add remuneration to partners if debited to the Profit and Loss Account.
The resulting amount is “book profit”. However, the following points should be noted –
a. income chargeable to tax under the heads “Income from house property”, “Capital gains” and “Income from
other sources” is not part of “book profit”;
b. brought forward business losses are not to be deducted from “book profit” (one can, however, deduct brought
forward unabsorbed depreciation); and
c. permissible deductions from gross total income under sections 80C to 80U shall be ignored for computing
“book profit”.
*However, under income-tax return form (i.e., ITR-5), it is not possible to submit any annexure/certificate/report/document along with the return
of income. Certified copy of partnership deed should be retained by the firm and it can be produced whenever it is demanded by the Assessing
Officer.
513 Conditions for claiming deduction of remuneration Para 216
Problems
216-P1 Profit and loss account of X Co. [a firm of X, Y and Z which satisfies all conditions of sections 184 and 40(b)] for the year ending
March 31, 2020 is as follows :
Rs. Rs.
Cost of goods sold 47,90,000 Sales (commission agency business) 66,00,000
Remuneration to partners Rent of house property (half portion) 50,000
X 6,00,000 Interest on debentures (non-trade investment) 60,000
Y 9,00,000
Z 55,000
Income-tax 8,000
Interest to partners @ 13.5%
X 40,000
Y 10,000
Z 60,000
Municipal tax of house property
(entire property) 5,000
Net profit 32,000
67,10,000 67,10,000
Other information :
1. Out of other expenses, Rs. 48,500 is not deductible under sections 36, 37(1) and 43B.
2. On January 15, 2020, the firm pays an outstanding GST liability of Rs. 2,922 of the previous year 2017-18. As this amount pertains
to the previous year 2016-17, it has not been debited to the aforesaid profit and loss account.
3. Z is not a working partner.
4. The firm owns a house, the ground floor is used for business purposes, the first floor is given on rent. Municipal tax is paid on May
10, 2020.
Find out the net income of the firm (and tax treatment of the payments to partners in their hand) for the assessment year 2020-21.
Solution :
Computation of remuneration deductible under section 40(b) : Rs.
Less : Income not chargeable to tax under section 28
Rent (-)50,000
Interest (-)60,000
Balance (-)78,000
Add : Expenses debited to profit and loss account but which are not deductible
Remuneration (taken separately) (+) 15,55,000
Interest to partners [amount in excess of 12% which is not allowable as deduction] (+)12,222
Income-tax (+) 8,000
Municipal taxes of house property half portion given on rent (+)2,500
Other expenses (+)48,500
Balance 15,48,222
Less : Outstanding GST paid during 2019-20 (deductible by virtue of section 43B) 2,922
Book profit 15,45,300
Maximum amount which is deductible on account of payment of remuneration to partners :
Rs.
First Rs. 3,00,000 @ 90% 2,70,000
Balance of Rs. 12,45,300 @ 60% 7,47,180 10,17,180
Computation of income of the firm
Less : Municipal tax of Rs. 2,500 [not deductible as it is paid after the end of the previous year] —
Rs. Rs.
Less : Remuneration to partners (amount deductible is actual payment of Rs. 15,55,000
subject to a maximum of Rs. 10,17,180) 10,17,180 5,28,120
Net income 6,23,120
Notes :
1. It may be noted that if conditions of sections 184 and 40(b) are not satisfied, then nothing is deductible on account of
payment of salary and interest to partners.
2. Tax treatment in the hands of partners
X Y Z
Rs. Rs. Rs.
Share of profit (exempt) — — —
Salary [to the extent allowed as deduction to the firm; Rs. 10,17,180 shall be distributed
in ratio of 6 : 9 to X and Y; salary to Z is not allowed as deduction as Z is not a working
partner] 4,06,872 6,10,308 —
Interest to partners [to the extent allowed as deduction] 35,556 8,889 53,333
Amount taxable in the hands of partners 4,42,428 6,19,197 53,333
216-E1 [P15.1]* Profit and loss account of XY Co. [a limited liability firm which satisfies all conditions of sections 184 and 40(b)]
for the year ending March 31, 2020 is as follows :
Rs. Rs.
Remuneration to partners 8,50,000 Interest on company deposit (being income 2,70,000
Remuneration to employees 1,70,000 from other sources)
Income tax 52,500
Interest to partners 1,20,000
GST outstanding 1,10,000
Net profit 5,12,500
22,80,000 22,80,000
Other information :
1. Out of other expenses, Rs. 25,500 is not deductible by virtue of section 37(1).
2. Outstanding GST is paid on December 21, 2020.
3. Interest to partners is not deductible to the extent of Rs. 15,000.
Find out (a) book profit and (b) maximum remuneration to partners which is deductible under section 40(b) for the assessment year
2020-21.
216-P2 Profit and loss account of A Co. [a firm of chartered accountants which satisfies all conditions of sections 184 and 40(b)] for
year ending March 31, 2020 is as follows :
Rs. Rs.
Expenses 2,88,000 Receipts from clients for tax advice 3,60,000
Depreciation 2,32,000 Audit fees 2,72,000
Remuneration to partners 2,75,000 Net loss 2,18,000
Interest on capital to partners 55,000
8,50,000 8,50,000
1. Out of expenses of Rs. 2,88,000, Rs. 57,250 is not deductible under sections 36 and 37.
2. Depreciation as per section 32 is Rs. 3,23,100.
3. Interest on capital to partners, not deductible under section 40(b), is Rs. 17,900.
4. A Co. does not want to opt for the scheme of presumptive taxation under section 44ADA.
Solution :
Computation of remuneration deductible under section 37(1) read with section 40(b)
515 Conditions for claiming deduction of remuneration Para 216
Rs.
Net profit as per profit and loss account (–)2,18,000
Add : Expenses (other than remuneration) not deductible Expenses (+)57,250
Interest on capital to partners (+)17,900
(–)1,42,850
Less : Depreciation as per section 32 (i.e., Rs. 3,23,100 — Rs. 2,32,000 debited in profit and loss account) (–)91,100
(–)2,33,950
Add : Remuneration to partners debited to profit and loss account (+)2,75,000
Book profit 41,050
Maximum permissible remuneration (i.e., 90% of Rs. 41,050 or Rs. 1,50,000, whichever is more) 1,50,000
Book profit 41,050
Less : Remuneration to partners (–)1,50,000
Loss to be carried forward by firm (–)1,08,950
216-E2 [P15.2]* Profit and loss account of ABC & Co. (a firm of chartered accountants) for the year ending March 31, 2020 is as
follows :
Rs. Rs.
Expenses 2,10,000 Receipts from clients and audit fees 5,00,000
Depreciation 1,40,000 Dividend from foreign companies 1,05,000
Remuneration to partners 3,80,000 Net loss 2,50,000
8,55,000 8,55,000
Other information :
1. Out of expenses of Rs. 2,10,000, Rs. 56,400 is not deductible by virtue of sections 36 and 37.
2. Depreciation as per section 32 is Rs. 1,27,500.
3. Interest to partners is fully deductible under section 40(b).
4. The firm satisfies all conditions of sections 184 and 40(b).
5. ABC & Co. does not want to opt for the scheme of presumptive taxation under section 44ADA.
Find out the amount of net income of the firm for the assessment year 2020-21.
216-P3 Profit and loss account of XY and Co. (a limited liability firm) for the year ending March 31, 2020 is as follows :
Rs. Rs.
Other expenses 3,91,000 Net loss 2,72,000
Remuneration to partners 2,68,000
10,64,000 10,64,000
Out of other expenses debited to profit and loss account, Rs. 63,600 is not deductible under sections 30, 36 and 37(1). Interest to partners
is not deductible to the extent of Rs. 17,100. The firm satisfies all conditions of sections 184 and 40(b).
Solution :
Computation of remuneration deductible under section 37(1) read with section 40(b)
Rs.
Net profit as per profit and loss account (–)2,72,000
Add : Expenses other than remuneration not deductible
Other expenses (+)63,600
Interest to partners (+)17,100
(–)1,91,300
Add : Remuneration to partners debited to profit and loss account (+)2,68,000
Book profit 76,700
Rs.
Maximum permissible remuneration (90% of Rs. 76,700 or Rs. 1,50,000, whichever is more) 1,50,000
Computation of taxable income of the firm
Book profit 76,700
Less : Remuneration deductible under section 37(1) read with section 40(b) (–)1,50,000
Net income (–)73,300
216-E3 [P15.3]* Profit and loss account of XYZ (a firm of X, Y and Z) for the year ending March 31, 2020 is as follows :
Rs. Rs.
Cost of goods sold 62,69,000 Sales (agency business) 61,78,000
Interest to partners 64,000 Interest on company deposit 5,000
Remuneration to partners 40,000 Net loss 2,40,000
64,23,000 64,23,000
Out of other expenses of Rs. 50,000, Rs. 18,700 is not deductible under sections 30 to 37. Moreover, interest to partners is not
deductible to the tune of Rs. 24,000 under section 40(b). Find out the amount of net income of the firm for the assessment year
2020-21. The firm satisfies all conditions of sections 184 and 40(b).
 WHAT ARE THE CONDITIONS FOR CLAIMING DEDUCTION OF INTEREST TO PARTNERS

UNDER SECTION 40(b)
217. Interest is deductible only when a firm satisfies conditions of section 184. Besides, these conditions, a firm
should also satisfy the requirements of section 40(b), which are given below –
1. Payment of interest should be authorized by the partnership deed.
2. Payment of interest should pertain to the period after the partnership deed.
3. Rate of interest should not exceed 12 per cent.
 CARRY FORWARD AND SET OFF OF LOSS IN THE CASE OF CHANGE IN THE CONSTITUTION
OF FIRM
218. Section 78 provides that where there is a change in the constitution of the firm on account of death/
retirement, the firm shall not be entitled to carry forward of so much of the loss as is attributable to such partner.
This provision covers when a partner goes out of the firm (i.e., the case of retirement or death). It does not,
however, cover the case of change in profit-sharing ratio or the case of admission of a partner.
218.1 Carry forward of house property loss, business loss, capital loss and loss from the activity of owning
and maintaining race horses - These losses can be set off and carried forward by a firm in the case of change
in constitution of the firm as follows, as per the provisions of section 78 :
1. First ascertain the share of outgoing partner in the profit/loss of the firm in the year of change in the constitution
of firm.
2. Compute the share of loss of outgoing partner in the brought forward loss.
3. The difference between the two (in the case of profit in the year of change) or the aggregate of the two (if there
is loss in the year of change in the constitution of firm) cannot be allowed to be set off and carry forward.
218.2 Carry forward of unabsorbed depreciation - Section 78 is not applicable in the case of unabsorbed
depreciation and unabsorbed capital expenditure on scientific research. These unadjusted allowances (without
deducting share of outgoing partner) can be carried forward by the reconstituted firm.
Problems
218-P1 X, Y and Z (1:1:2) are three partners of a firm. For the assessment year 2019-20, net income of the firm is (-) Rs.1,30,000 (out
of which unadjusted depreciation is Rs. 40,000). On April 30, 2019, Z retires from the firm and the other partners carry on the same
business. The income of the firm for the assessment year 2020-21 before adjusting of the aforesaid loss and depreciation is Rs. 1,08,000.
Compute the net income of the firm after adjustment of loss and depreciation for the assessment year 2020-21. Assume that salary and
interest are not paid to partners.
517 How to find out tax liability of firm Para 220
Solution : Rs.
Brought forward loss from the assessment year 2019-20 1,30,000
Out of which depreciation 40,000
Brought forward loss (excluding depreciation) 90,000
Share of Z, the retiring partner (2/4 of Rs. 90,000) 45,000
Income of the firm of the assessment year 2020-21 before adjustment of loss 1,08,000
Out of which share of Z, the retiring partner [1/12 × 2/4 × Rs. 1,08,000] 4,500
Amount of brought forward loss which cannot be set off [Rs. 45,000—Rs. 4,500] 40,500
Computation of income of the firm for the assessment year 2020-21
Income (before adjustment) 1,08,000
Less:
Brought forward loss (i.e., Rs. 90,000—Rs. 40,500) 49,500
Unadjusted depreciation 40,000
Net income 18,500
218-E1 [P15.4]* From the following information, ascertain the net income of a firm (having four equal partners : X, Y, Z and A)
Assessment years
2019-20 2020-21
Rs. Rs.
Income before depreciation (–)1,10,000 8,47,000
Less: Depreciation –90,000 –85,000
Balance (–)2,00,000 7,62,000
Y retires on June 3, 2019 and the other partners carry on the business.
 HOW TO FIND OUT INCOME OF A FIRM

219. First find out the taxable income of firm under the following steps :
1. Find out income under the different heads of income (viz., “Income from house property”, “Profits and gains
of business or profession”, “Capital gains” and “Income from other sources”) excluding incomes exempt under
sections 10 to 13A. The payment of remuneration and interest to partners is deductible if conditions of section
184 [see para 215] and section 40(b) [see paras 216 and 217] are satisfied.
2. Make adjustment on account of brought forward losses/disallowances. The total income under the aforesaid
heads is gross total income.
3. From the “gross total income” give deductions under sections 80C to 80U. The balance is net income which
 HOW TO FIND OUT TAX LIABILITY OF FIRM

220. On the income computed above, tax is payable is calculated at follows :
1. Find out income-tax—
Tax rate
Short-term capital gain under section 111A 15%
Long-term capital gain under section 112 10% or 20%
Long-term capital gain under section 112A 10%
Winnings from lottery, races, etc. 30%
Income (not being income which is subject to special tax rate) 30%
2. Add: Surcharge @ 12% of (1) [applicable if total income exceeds Rs. 1 crore]
3. Find out total of (1) and (2)
4. Add: Health and education cess @ 4 per cent of (3)
5. Tax liability is (3) + (4)]
6. A limited liability partnership or any other firm is subject to alternate minimum tax at the rate of 18.5 per cent†
[+ SC + HEC] of “adjusted total income”. For detailed discussion, see para 194.2.
 HOW TO FIND OUT TAXABLE INCOME OF PARTNERS

221. These provisions are given below –
 Share of profit - It is not chargeable to tax in the hands of partners.
 Remuneration or interest - If condition of section 184 and section 40(b) are satisfied, interest, salary, bonus,
commission or remuneration paid/payable by the firm to partners is taxable in the hands of partners (to the
extent these are allowed as deduction in the hands of the firm).
The following points one should note —
1. Remuneration is taxable as business income.
2. Any expenditure incurred in order to earn salary/interest income can be claimed as a deduction under sections
30 to 37 from such income.
3. If salary/interest is disallowed in the hands of firm under section 40(b) and/or section 184, then the same is
not taxable in the hands of the partners.
 Problems on computation of taxable income of a firm and partners

222-P1 X (28 years) and Y (26 years) are resident individuals and partners of XY Co. (a firm of chartered accountants). On March 31,
2019, there is no provision for payment of salary and interest to partners. On April 1, 2019, the deed of partnership has been amended
to provide salary and interest as follows :
X Y
Salary Rs. 20,833 per month Rs. 25,000 per month
Interest 24 per cent per annum 24 per cent per annum
The income and expenditure account of XY Co. for the year ending March 31, 2020 is as follows :
Rs. Rs.
Office expenses 2,10,000 Receipt from clients 10,10,000
Salary to employees 70,000 Interest recovered from X and Y on drawings 3,000
Income tax 42,000
Salary to Y 3,00,000
Interest on capital to X @ 24% p.a. 16,000
Interest on capital to Y @ 24% p.a. 19,000
Net profit (shared by X and Y equally as per the
terms of partnership deed) 1,06,000
10,13,000 10,13,000
Other information :
1. Out of office expenses, Rs. 18,800 is not deductible by virtue of sections 30 to 37.
2. During the previous year 2019-20, the firm sells a capital asset (i.e., gold) for Rs. 7,10,000 (indexed cost of acquisition being
Rs. 1,45,865).
3. XY Co. does not want to opt for the scheme of presumptive taxation under section 44ADA.
4. Personal income and investments of partners are as follows :
X Y
Rs. Rs.
Interest from Government securities 4,80,000 4,33,000
Bank interest 6,50,000 1,52,000
Deposit in public provident fund 1,20,000 95,000
Mediclaim insurance premium 22,000 21,000
Find out the net income and tax liability of the firm and partners for the assessment year 2020-21 on the assumptions that—
a. conditions of sections 184 and 40(b) are satisfied; and
b. conditions of section 184 and/or section 40(b) are not satisfied.
exchange.
519 Problems on computation of taxable income of a firm & partners Problem 222-P1
Solution : Situation (a) : Situation (b) :

When condi- When condi-
tions of tions of
sections 184 section 184
and 40(b) are and/or 40(b)
satisfied are not
satisfied
Rs. Rs.
Computation of net income/tax liability of the firm
Net profit as per income and expenditure account 1,06,000 1,06,000
Add :
Income tax 42,000 42,000
Office expenses 18,800 18,800
Salary to X and Y (entire amount) 5,50,000 5,50,000
Interest to X and Y [to the extent not allowed as deduction, i.e., 12/24 of (Rs. 16,000 +
Rs. 19,000)] 17,500 35,000
Book profit 7,34,300 7,51,800
Less : Remuneration to partners [maximum deductible amount is 90% of Rs. 3,00,000 +
60% of Rs. 4,34,300] 5,30,580 —
Income from the profession 2,03,720 7,51,800
Capital gains Rs.
Net income (rounded off) 7,67,860 13,15,940
Tax
Income-tax on long-term capital gain [20% of Rs. 5,64,135] 1,12,827 1,12,827
Income-tax on balancing amount [@ 30%] 61,118 2,25,542
Tax 1,73,945 3,38,369
Add : Surcharge (not applicable) Nil Nil
Tax and surcharge 1,73,945 3,38,369
Tax liability of the firm (rounded off) 1,80,900 3,51,900
Note : Interest recovered from partners is fully taxable.
Computation of net income and tax liability of partners Situation (a) : Situation (b) :
When condi- When condi-
tions of tions of
sections 184 section 184
and 40(b) and/or 40(b)
are are not
satisfied satisfied
X Y X Y
Rs. Rs. Rs. Rs.
Interest from the firm *(to the extent allowed as deduction, i.e.,
12/24 of Rs. 16,000 and Rs. 19,000) 8,000* 9,500* – –
Salary received from the firm* (to the extent allowed as deduc-
tion, i.e., Rs. 5,30,580 distributed in the ratio of 25 : 30) 2,41,173* 2,89,407* – –
Income from profession 2,49,173 2,98,907 Nil Nil
Income from other sources 11,30,000 5,85,000 11,30,000 5,85,000
Under section 80C 1,20,000 95,000 1,20,000 95,000
Under section 80D 22,000 21,000 22,000 21,000
X Y X Y
Rs. Rs. Rs. Rs.
Net income (rounded off) 12,37,170 7,67,910 9,88,000 4,69,000
Tax on income
Income-tax 1,83,651 66,082 1,10,100 10,950
Less: Rebate under section 87A Nil Nil Nil 10,950
Balance 1,83,651 66,082 1,10,100 Nil
Add: Surcharge Nil Nil Nil Nil
Tax and surcharge 1,83,651 66,082 1,10,100 Nil
Add : Health and education cess (4% of tax and surcharge) 7,346 2,643 4,404 Nil
Tax liability (rounded off) 1,91,000 68,730 1,14,500 Nil
222-E1 [P15.5]* X (28 years), Y (26 years) and Z (32 years) are resident individuals and partners (1 : 2 : 3) of X Co., a limited liability
partnership engaged in manufacturing leather goods. The profit and loss account of the firm for the year ending March 31, 2020 is
as follows :
Rs. Rs.
Salary to staff 12,05,000 Long-term capital gains (according to section 48) 1,10,000
Income tax 1,10,000 Other business receipts 1,10,000
Depreciation 2,70,500 Net loss 1,09,500
Remuneration to partners :
X 2,04,000
Y 1,20,000
Z 1,44,000
Interest on capital to partners @ 20% p.a.
X 86,000
Y 1,40,000
Z 8,000
41,70,500 41,70,500
1. The firm is not eligible for deduction under section 80-IA/80-IB.
2. The firm has given donation of Rs. 40,000 to a notified public charitable trust which was not debited to the profit and loss account.
3. Salary and interest are paid to partners as per the partnership deed.
4. Depreciation allowable under section 32 is Rs. 3,70,400.
5. Income and investment of X, Y and Z are as follows :
X Y Z
Rs. Rs. Rs.
Interest on company deposit 4,20,000 4,05,000 4,46,000
Dividend from foreign companies 1,56,000 1,63,000 1,55,000
Contribution towards the Master Equity Plan 2020 of UTI 1,60,000 1,54,000 1,57,000
Find out the net income and tax liability of the firm and partners for the assessment year 2020-21 on the assumption that—
a. conditions of sections 184 and 40(b) are satisfied; and
b. conditions of section 184 and/or section 40(b) are not satisfied.
 HOW TO FIND OUT INCOME AND TAX OF AOP/BOI AND MEMBERS

223. These provisions are given below –
1. Salary and interest to members - If any salary or interest is paid by the AOP/BOI to its members, it is not
deductible. Even nominal interest/salary paid by an AOP/BOI to a member is not deductible.
2. Tax rate - Total income of the AOP/BOI is taxable either at the rates applicable to an individual, or at the
maximum marginal rate or at a rate higher than maximum marginal rate.**
**Maximum marginal rate of tax is 42.744 per cent (for the assessment year 2020-21).
521 How to find out income and tax of AOP/BOI and members Para 223
 When income of an AOP is taxable at the rate applicable to an individual - When shares of members are determinate,
none of the members has personal income exceeding the exemption limit and none of the members is a company,
then income of an AOP is taxable at the rate applicable to an individual. Share of members shall be included in
the income of individual members. However, if an AOP has paid tax, a rebate under section 86 is available.
 When income of an AOP is taxable at the maximum marginal rate or at higher rate - In the following cases, income
of an AOP is taxable at the maximum marginal rate† –
1. When one or more member has personal income of more than exemption limit.
2. When shares of members are indeterminate.
In these two cases, income of AOP is taxable at the maximum marginal rate† of tax. If, however, any member of
the AOP is taxable at a higher rate (i.e., higher than the maximum marginal rate), tax shall be payable by the AOP
at the higher rate on the share of profit of the member and remaining income is taxable at the maximum rate.
When income of an AOP is taxable at the maximum marginal rate or at a higher rate, share of profit will not be
taxable in the hands of members.
 Alternate minimum tax - Tax payable by a non-corporate assessee cannot be less than 18.5 per cent‡ [+ SC + HEC]
of “adjusted total income”. For detailed discussion, see para 194.2.
Problems
223-P1 X (30 years) and Y (62 years) are resident and members of an AOP. Profit and loss account of the AOP for the year ending March
31, 2020 is as follows :
Rs. Rs.
Cost of goods sold 7,14,000 Sales (commission agency business) 23,18,000
Interest on capital to members Interest recovered from members on drawings —
❑ X 1,08,000 X 1,02,000
❑ Y 1,19,000 Y 1,03,000
Salary to members
❑ X 1,45,000
❑ Y 1,19,000
25,23,000 25,23,000
Other information :
1. The AOP gives a donation of Rs. 23,000 to a public charitable trust (not debited to P & L A/c) which is eligible for section 80G deduction.
2. Out of other expenses, Rs. 14,000 is not deductible by virtue of section 43B.
Find out the tax liability of the AOP and members for the assessment year 2020-21 under the following situations :
Situation 1 - The profit-sharing ratio of X and Y is 2 : 3. Other income of members are given below :
Amount Nature of income PPF contribution
Rs. Rs.
X 2,72,000 Bank interest (savings account) 1,12,000
Y 3,40,000 Interest on Government securities 1,16,000
Situation 2 - The profit-sharing ratio of X and Y is 2 : 3. Other income of members are as follows :
Bank interest PPF deposit
Rs. Rs.
X 4,20,000 (savings account) 1,01,000
Y 4,81,000 (fixed deposit) 1,12,000
Situation 3 - One of the members X is a closely-held foreign company and the profit-sharing ratio of X Ltd. and Y is 2 : 3. Other income
of the members are as follows :
Rs.
X Ltd. Nil
Y 4,92,000
Situation 4 - One of the members X is a foreign company and the profit-sharing ratio is 2 : 3.
† Maximum marginal rate of tax is 42.744 per cent (for the assessment year 2020-21).
‡ 9 per cent in case the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange.
Other income of the members are as follows :

Rs.
X Ltd. 14,80,00,000
Y 6,10,000
Situation 5 - From the available information, it is not possible to find out the profit-sharing ratio. Other income of members are :
Amount Nature of income
Rs.
X 2,50,000 Bank interest (fixed deposit)
Y 3,16,000 Rent (taxable)
Situation 6 - It is not possible to determine the profit-sharing ratio of partners. One of the members, X is a closely-held foreign company.
Other income of members is as follows :
Rs.
X Ltd. 11,80,000
Y 11,60,000
Solution : Computation of taxable income of AOP
Net profit as per P&L A/c 11,78,000
Add :
Interest to members [being the net payment disallowed under section 40(ba) (i.e., X : Rs. 1,08,000 —
Rs. 1,02,000 ; Y : Rs. 1,19,000 — Rs. 1,03,000)] 22,000
Remuneration to members [disallowed under section 40(ba)] 2,64,000
Other expenses [not deductible under section 43B] 14,000
Situation 1 - Since shares of members are determinate and none of the members is a foreign company and none of the
members has taxable income exceeding exemption limit, the income of AOP will be taxable at the rates applicable to an
individual.
Rs.
Add : Surcharge Nil
Tax liability of AOP (rounded off) 2,62,550
Allocation of income to the members
Salary Interest Balance in the Total
ratio of 2:3
Rs. Rs. Rs. Rs.
X 1,45,000 6,000 4,72,200 6,23,200
Y 1,19,000 16,000 7,08,300 8,43,300
Total 2,64,000 22,000 11,80,500 14,66,500
Computation of income/tax liability of members :
X Y
Rs. Rs.
Business income (share of profit from AOP) 6,23,200 8,43,300
Income from other sources 2,72,000 3,40,000
Less: Deduction under section 80C [PPF contribution] 1,12,000 1,16,000
Less : Deduction under section 80TTA [bank interest on savings account] 10,000 —
Net income 7,73,200 10,67,300
523 How to find out income and tax of AOP/BOI and members Para 223
X Y
Rs. Rs.
Income-tax on net income† 67,140 1,30,190
Add : Surcharge Nil Nil
Tax and surcharge 67,140 1,30,190
Tax 69,826 1,35,398
Less : Rebate under section 86 in respect of share of profit from AOP [Rs. 69,826/
Rs. 7,73,200 × 6,23,200; Rs. 1,35,398/Rs. 10,67,300 × Rs. 8,43,300] 56,280 1,06,981
Tax liability of members (rounded off) 13,550 28,420
Situation 2 - Since in this case taxable income of X and/or Y exceeds exemption limit, the entire income of AOP will be taxable
at the maximum marginal rate of 42.744%.
Rs.
Net income of AOP 14,66,500
Tax @ 42.744% (rounded off) 6,26,840
Assessment of members :
X Y
Rs. Rs.
Share of income from AOP (not to be included as tax is payable @ 42.744% by AOP) — —
Other income 4,20,000 4,81,000
Less : Deduction under section 80C 1,01,000 1,12,000
Less : Deduction under section 80TTA [bank interest on savings account] 10,000 —
Less: Under section 80TTB (FD interest) — 50,000
Net income 3,09,000 3,19,000
Income-tax on net income 2,950 950
Less: Rebate under section 87A (100% of tax or Rs. 12,500, whichever is lower) 2,950 950
Balance Nil Nil
Add : Surcharge — —
Tax and surcharge Nil Nil
Add : Health and education cess (4% of tax) Nil Nil
Tax liability (rounded off) Nil Nil
Situation 3 - In this case, income of Y is more than the exemption limit. Consequently, income of AOP will be taxable at the
maximum marginal rate (i.e., 42.744%). Higher rate is not applicable, as none of the members is taxable at a rate which is
higher than maximum marginal rate (applicable tax rate in the case of X Ltd., being foreign company, is 40% + HEC,
surcharge is applicable only if income of the foreign company exceeds Rs. 1 crore).
Tax liability of AOP will be Rs. 6,26,840 (i.e., 42.744% of Rs. 14,66,500).
Tax liability of the members :
X Ltd. Y
Rs. Rs.
Share of profit from firm (not included) — —
Other income Nil 4,92,000
Net income Nil 4,92,000
Tax liability Nil Nil
Situation 4 - In this case, income of Y is more than the exemption limit. Consequently, income of AOP will be taxable at the
maximum marginal rate (i.e., 42.744%) or higher rate. X Ltd., one of the members of AOP, is taxable at the rate of 43.68% (i.e.,
40% + SC : 5% + HEC : 4%). Consequently, share of X Ltd. will be taxable at the rate of 43.68% and remaining income of AOP
will be taxable at the maximum marginal rate as follows –
Rs.
Tax on Rs. 6,23,200 (being share of X Ltd.) taxable at the rate of 43.68% 2,72,214
Tax on balance of Rs. 8,43,300 at the maximum marginal rate (i.e., 42.744%) 3,60,460
X Ltd. Y
Rs. Rs.
Share of profit from the firm (not to be included) — —
Other income 14,80,00,000 6,10,000
Net income 14,80,00,000 6,10,000
Income-tax 5,92,00,000 32,000†
Add : Surcharge 29,60,000 —
Tax and surcharge 6,21,60,000 32,000
Add : Health and education cess (4% of tax) 24,86,400 1,280
Tax liability (rounded off) 6,46,46,400 33,280
Situation 5 - Since shares of members are unknown, the entire income of AOP will be taxable @ 42.744% (tax liability being
Rs. 6,26,840, i.e., 42.744% of Rs. 14,66,500).
Taxable income and tax liability of the members will be as follows :
X Y
Rs. Rs.
Rent — 3,16,000
Bank interest 2,50,000 —
Less : Deduction — —
Net income 2,50,000 3,16,000
Tax on net income Nil 800
Less: Rebate under section 87A (100% of tax or Rs. 12,500, whichever is lower) Nil 800
Tax liability Nil Nil
Situation 6 - In this case, it is not possible to determine profit sharing ratio of partners. Consequently, income of AOP will
be taxable at the maximum marginal rate (i.e., 42.744%). Higher rate is not applicable, as none of the members is taxable at
a rate which is higher than maximum marginal rate (applicable tax rate in the case of X Ltd., being foreign company, is 40%
+ HEC, surcharge is applicable only if income of the foreign company exceeds Rs. 1 crore).
Tax liability of AOP will be Rs. 6,26,840 (i.e., 42.744% of Rs. 14,66,500).
Tax liability of members : X Ltd. Y
Rs. Rs.
Net income 11,80,000 11,60,000
Tax 4,72,000 1,58,000†
Add : Surcharge — Nil
Tax and surcharge 4,72,000 1,58,000
Add : Health and education cess 18,880 6,320
Tax liability (rounded off) 4,90,880 1,64,320
223-E1 [P15.7]* X (25 years) and Y (32 years) are two members of X Associates (an AOP). The profit and loss account of the AOP
for the year ending March 31, 2020 is as follows :
Rs. Rs.
Interest to X 40,000
Salary to Y 1,24,000
55,90,000 55,90,000
525 Problems on firms and partners Problem 224-P1
Other information :
1. Out of other expenses, Rs. 16,000 is advance income-tax.
2. The AOP gives a donation by cheque of Rs. 22,000 to a public charitable institute.
3. The AOP does not want to opt for the scheme of presumptive taxation under section 44AD.
Find out the taxable income and tax liability of the AOP and members under the following situations :
1. The profit sharing ratio of X and Y is 3 : 7. Other income of the members is - X : Rs. 1,90,000, Y : Rs. 1,50,000.
2. The profit sharing ratio of X and Y is 3 : 7. Other income of the members is - X : Rs. 10,90,000, Y : Rs. 2,43,000.
3. One of the members of the AOP X is a foreign company. The profit-sharing ratio of X Ltd. and Y is 3 : 7. Other income of the members
is as follows :
X Ltd. : Rs. 86,000, Y : Rs. 2,60,000.
4. From the available information it is not possible to find out profit-sharing ratio. Other income of the members is X : Rs. 7,05,000,
Y : Rs. 7,10,000.
5. It is not possible to find out profit-sharing ratio of the members. One of the members of the AOP X is a foreign company. Other
income of the members - X Ltd. : Rs. 15 crore, Y : Rs. 15,00,000.
Problems on firms and partners

➠ 224-P1 X (32 years), Y (40 years) and Z (26 years) are three partners of a firm [profit-sharing ratio being 1:3:5]. The firm satisfies
all conditions of section 184.
The following information is available from the records of the company for the year ending March 31, 2020 :
1. Net profit as per profit and loss account is Rs. 32,000.
2. Credit side of the profit and loss account includes —
a. interest recovered from X on drawing : Rs. 5,000
b. gift from relatives of Mrs. Y : Rs. 10,000
c. interest on advance payment to a supplier of raw material : Rs. 16,000
d. income-tax refund : Rs. 80,000
e. long-term capital gain on sale of plot of land : Rs. 2,10,000 (computed as per section 45)
f. rent of property at Delhi : Rs. 72,000
g. interest on fixed deposit kept for business purposes received on March 16, 2020 : Rs. 40,000 (tax deducted out of it : Rs. 4,000);
h. interest on fixed deposit (not being kept for business purposes) received on November 30, 2019 : Rs. 60,000 (tax deducted out of it :
Rs. 6,000).
3. Debit side of the profit and loss includes the payments which are authorised by the partnership deed and paid according to the terms
of partnership deed—
a. salary and commission to partners - X : Rs. 6,00,000; Y : Rs. 8,40,000, Z : Rs. 90,000 (Z is not a working partner) ;
b. interest on capital to partners @ 24 per cent (p.a.) - X : Rs. 40,000, Y : Rs. 20,000, Z : Rs. 2,00,000 ;
c. salary to employees include Rs. 40,000 being an outstanding liability of bonus which is paid on December 10, 2020 and employer’s
contribution towards unrecognised provident fund : Rs. 30,000 ;
d. outstanding GST : Rs. 10,000 (which is paid on May 10, 2020) ;
e. depreciation on Delhi house which is let out : Rs. 20,600 ;
f. depreciation on other assets : Rs. 4,10,000 (as per section 32 amount deductible is Rs. 3,90,000) ;
g. advance income-tax : Rs. 34,000 ;
h. arrears of income-tax : Rs. 11,000 ;
i. expenditure on income-tax appeals : Rs. 20,000 ;
j. outstanding interest on term loan taken from SBI : Rs. 60,000 (paid on December 20, 2020) ;
k. outstanding interest on term loan taken from IDBI : Rs. 65,000 (paid on May 20, 2020) ;
l. municipal tax of house at Delhi : Rs. 2,000 (paid on April 6, 2020) ;
m. capital expenditure on repairs to compound wall collapsed due to heavy rains : Rs. 25,000 ;
n. donation to an approved trust for providing relief to the victims of earthquake in Gujarat : Rs. 10,000 ;
o. office expenses : Rs. 50,640.
The firm wants to set off the following unadjusted losses brought forward from earlier years—
Rs.
Capital loss of 2017-18 40,000
Loss from house property of assessment year 1998-99 10,000
Unadjusted depreciation 5,000
Business loss of 2017-18 60,000
Problem 224-P1 Firms and associations of persons - Computation of taxable income 526
Partners
X Y Z
Rs. Rs. Rs.
Bank interest (savings account) 25,000 30,000 20,000
Business income 3,30,000 2,80,000 10,75,000
Contribution to LIC’s pension fund 6,000 5,000 10,000
PPF contribution 1,10,000 62,000 65,000
Compute the net income and tax liability of the firm and its partners for the assessment year 2020-21. Does it make any difference if the
salary authorised by partnership deed is Rs. 25,000 per month and Rs. 32,000 per month in the case of X and Y respectively, whereas
the amount actually paid is as given in 3(a) (supra)?
Solution : Computation of book profit
Rs.
Adjustment
Less : Gift (in the hands of a firm gift is not taxable) (-)10,000
Less : Income-tax refund (-)80,000
Less : Long-term capital gain (-)2,10,000
Less : Rent of property (-)72,000
Less : Interest on fixed deposit (not being kept for business purposes) (-)60,000
Add : Salary and commission to partners (taken separately) (+)15,30,000
Add : Interest on capital in excess of 12% (1/2 of Rs. 2,60,000) (+)1,30,000
Add : Outstanding bonus paid on December 10, 2020 (+)40,000
Add : Employer’s contribution towards unrecognised provident fund (+)30,000
Add : Depreciation on Delhi house (+)20,600
Add : Excess depreciation on other assets (+)20,000
Add : Income-tax (+)34,000
Add : Income-tax arrears (+)11,000
Add : Outstanding interest payable to SBI (+)60,000
Add : Municipal tax of Delhi house (+)2,000
Add : Capital expenditure on repairs (+)25,000
Add : Donation to an approved trust (+)10,000
Total 15,12,600
Less: Unadjusted depreciation 5,000
Maximum remuneration to working partners [90% of Rs. 3,00,000 + 60% of Rs. 12,07,600] 9,94,560
It shall be distributed between working partners X and Y (to whom total salary of Rs. 14,40,000 is paid)
as follows —
X [Rs. 9,94,560 × Rs. 6,00,000/Rs. 14,40,000] 4,14,400
Y [Rs. 9,94,560 × Rs. 8,40,000/Rs. 14,40,000] 5,80,160
Z (being non-working partner) Nil
Property income
Rs.
Less : Municipal tax (not deductible as it is not paid during the previous year) —
Business income
As per computation shown earlier 15,12,600
Less : Remuneration to working partners 9,94,560
Balance 5,18,040
Less : Brought forward depreciation and business loss 65,000 4,53,040
Capital gain
Less : Brought forward capital loss 40,000 1,70,000
527 Problems on firms and partners Problem 224-P1
Rs.
Interest on fixed deposit (not being kept for business purposes) 60,000
Net income 7,23,440
Tax
On long-term capital gain (i.e., 20% of Rs. 1,70,000) 34,000
On the balance of Rs. 5,53,440 @ 30% 1,66,032
Tax 2,00,032
Add : Surcharge [applicable @ 12% of tax if net income exceeds Rs. 1 crore] Nil
Note : The firm can claim tax credit in respect of tax deducted at source and advance tax.
Partners
X Y Z
Rs. Rs. Rs.
Share of profit from firm – – –
Salary from firm 4,14,400 5,80,160 Nil
Interest from firm (to the extent allowed as deduction to the firm) 20,000 10,000 1,00,000
Personal business income 3,30,000 2,80,000 10,75,000
Business income 7,64,400 8,70,160 11,75,000
Bank interest (savings account) 25,000 30,000 20,000
- Under section 80C 1,10,000 62,000 65,000
- Under section 80CCC 6,000 5,000 10,000
- Under section 80TTA 10,000 10,000 10,000
Net income† (rounded off) 6,63,400 8,23,160 11,10,000
Tax 45,180 77,132 1,45,500
Tax and surcharge 45,180 77,132 1,45,500
Add : Health and education cess (4% of tax and surcharge) 1,807 3,085 5,820
Tax payable (rounded off) 46,990 80,220 1,51,320
Note - As per section 40(b), nothing is deductible if salary, remuneration, etc., paid to partners is not in accordance with the
terms of the partnership deed. If salary paid to X and Y is more (or less) than the amount authorised by the partnership deed,
then nothing is deductible in respect of salary to partners. In such a case, even the remuneration which is permissible on the
basis of book profit (i.e., Rs. 9,94,560) is not deductible.
➠ 224-E1 Compute the net income and tax liability of the firm and partners in problem 225-P1 if the firm does not satisfy the
conditions of section 184 and/or section 40(b).
CHAPTER 16 Return of income
I
n the earlier chapters, types of income assessable under the Act as well as mode of
computation of such income have been discussed. This chapter briefly discusses the
procedure for filing of return of income.
 WHO HAS TO SUBMIT HIS/ITS RETURN OF INCOME ON VOLUNTARY BASIS AS A

STATUTORY OBLIGATION [SEC. 139]
244. The following persons shall submit return of income on compulsory basis (these rules are applicable even
in the case of a non-resident) –
Section Different situations
139(1)(a) A company/firm is required to submit its return of income (regardless of the quantum of income or loss).
139(1)(b) A person (other than an individual/HUF/AOP/BOI/artificial juridical person/company/firm) is required
to submit his/its return of income, if income exceeds exemption limit‡.
139(1)(b), read Individual/HUF/AOP/BOI/artificial juridical person is required to submit his/its return of income, if
with sixth income [without claiming deduction under sections 10A, 10B, 10BA, 80C to 80U, (for the assessment years
proviso 2017-18 and 2018-19) under section 10(38) and (from the assessment year 2020-21) under section 54/54B/54D/
54EC/54F/54G/54GA/54GB] exceeds the amount of exemption limit†.
139(1)(b), read Any person (other than a company or a firm) who is not required to furnish the return of income under any
with seventh other provision of section 139(1) and who during the previous year –
proviso (appli- a. has deposited an amount (or aggregate of the amounts) exceeding Rs. 1 crore in one (or more) current
cable with account(s) in a bank/co-operative bank; or
effect from the b. has incurred expenditure of an amount (or aggregate of the amounts) exceeding Rs. 2 lakh for himself
assessment (or any other person) for travel to a foreign country; or
year 2020-21) c. has incurred expenditure of an amount (or aggregate of the amounts) exceeding Rs. 1 lakh towards
consumption of electricity; or
d. fulfils such other conditions as may be prescribed.
139(4A) A person in receipt of income derived from property held under a trust for charitable or religious purposes
is required to submit return of income if its income (without giving exemption under section 11 or 12) exceeds
exemption limit‡.
139(4B) Chief executive officer of every political party is required to submit income-tax return if income of the political
party (without giving exemption under section 13A) exceeds exemption limit‡.
139(4C) If total income (without claiming any exemption given below) of the assessee (who is qualified to claim
exemption under the following sections) exceeds the exemption limit‡ –
- Section 10(21) - Section 10(23D) - Section 10(23FB)
- Section 10(22B) - Section 10(23DA) - Section 10(24)(a)/(b)
- Section 10(23A) - Section 10(23EC) - Section 10(29A)
- Section 10(23AAA) - Section 10(23ED) - Section 10(46)
- Section 10(23B) - Section 10(23EE) - Section 10(47)
- Section 10(23C)(iiiab)/(iiiac)/
(iiiad)/(iiiae)/(iv)/(v)/(vi)/(via)
April 2, 1940 but on or before April 1, 1960: Rs. 3,00,000; and (b) in the case of a resident super senior citizen born on or before April 1, 1940: Rs.
5,00,000].
‡ Exemption limit for the assessment year 2020-21 is Rs. 2,50,000.
528
529 Return Form Para 244.2
Section Different situations

139(4D) Any university/college/other institution referred to in section 35(1)(ii)/(iii) is required to submit return of
income (return has to be submitted whether there is income or loss. Such return has to be submitted even if
it is not required by any other provision).
139(4E)/(4F) These sub-sections cover submission of return by business trust/investment fund.
244.1 Exemption provided by the Government when taxable income of an individual is up to Rs. 5,00,000 -
This exemption is not available from the assessment year 2013-14 onwards.
244.2 Return form - These forms are given below—
ITR Forms Subject
ITR-1 (i.e., For a resident and ordinarily resident individual who has income from salary/family pension/
SAHAJ) one house property (not being brought forward loss or loss to be carried forward)/income from other
sources (not being loss and, not being winning from lottery/income from race horses) and who has not
claimed any deduction under section 57 (except standard deduction pertaining to family pension) [see
Note 1]
ITR-2 For an individual/HUF where the total income does not include income under the head business or
profession
ITR-3 For an individual/HUF having income under the head business or profession
ITR-4 (i.e., For an individual or a resident and ordinarily resident HUF or a resident firm (non being LLP)
Sugam) deriving business income and such income is computed in accordance with special provisions referred
to in section 44AD, 44ADA or 44AE [see Note 2]
ITR-5 For firms, AOPs and BOIs or any other person (not being individual or HUF or company or to whom
ITR-7 is applicable)
ITR-6 For companies other than companies claiming exemption under section 11
ITR-7 For persons including companies required to furnish return under section 139(4A)/(4B)/(4C)/(4D)
ITR-V Where the data of the return of income in Forms ITR-1, ITR-2, ITR-3, ITR-4, ITR-5 and ITR-7 transmitted
electronically without digital signature
Note 1 - ITR-1 is not applicable in the case of a person who, –

- has assets (including financial interest in any entity) located outside India;
- has signing authority in any account located outside India;
- has income from any source outside India;
- has income to be apportioned in accordance with provisions of section 5A;
- is a director in any company;
- has held any unlisted equity share at any time during the previous year;
- is assessable for the whole (or any part) of the income on which tax has been deducted at source in the hands of a person
other than the assessee;
- has claimed any relief of tax under section 90/90A/91;
- has agricultural income, exceeding Rs. 5,000;
- has total income, exceeding Rs. 50 lakh;
- has income taxable under section 115BBDA; or
- has income of the nature referred to in section 115BBE.
Note 2 - ITR-4 is not applicable in the case of a person mentioned in Note 1 given above. Besides, ITR-4 is not applicable in
the case of a person who, –
- owns more than one house property, the income of which is chargeable under the head “Income from house property”;
- has any brought forward loss or loss to be carried forward under any head of income.
244.2-1 MODE OF SUBMISSION - Mode of submission of income-tax return for the assessment year 2019-20 is as
follows–
Person Conditions Mode of furnishing return
Individual/  Case 1 - Accounts are required to be audited under Electronically with digital signature
HUF section 44AB
Case 2 - Return submitted by an individual (who was - Electronic mode given in Case 3; or
born before April 2, 1939) in ITR-1 or ITR-4 - Paper format
Para 244.2 Return of income 530
Person Conditions Mode of furnishing return

 Case 3 - Any other case Return can be submitted by using any one
of the following electronic modes –
A. Electronically under digital signature;
or
B. Transmitting the data in the return
electronically under electronic verifi-
cation code; or
C. Transmitting the data in the return
electronically and thereafter submit-
ting the verification of the return in
Form ITR-V†.
Company  Case 4 - Any company Electronically with digital signature

Person  Case 5 - Political party Electronically with digital signature
required to
furnish  Case 6 - Any other case Electronic mode given in Case 3
return in
ITR-7
Firm, LLP or  Case 7 - Accounts are required to be audited under Electronically with digital signature
any person section 44AB
(not men-  Case 8 - Any other case Electronic mode given in Case 3
tioned above)
required to
furnish re-
turn in ITR-5
Note - For the aforesaid table “electronic verification code” means a code generated for the purpose of electronic verification
of the person furnishing the return of income as per the data structure and standards specified by Principal Director General
(Systems) or Director General (Systems).
244.2-2 MODE OF SUBMISSION OF AUDIT REPORT - No document, audit report, statement, accounts, etc., can be attached
with return forms. However, where an assessee is required to furnish a report of audit specified under section
10(23C)(iv)/(v)/(vi)/(via), section 10A, section 10AA, section 12A(1)(b), section 44AB, section 44DA, section 50B,
section 80-IA, section 80-IB, section 80-IC, section 80-ID, section 80JJAA, section 80LA, section 92E, section 115JB
or section 115VW or to give a notice under section 11(2)(a), he shall furnish the same electronically.
244.3 Time for filing return of income [Sec. 139(1)] - The due dates for filing returns of income are given below :
Different situations Due date of sub-
mission of return
[see also Note]
1. Where the assessee is required to furnish a report under section 92E pertaining to
international or specified domestic transaction(s) November 30
2. Where the assessee is a company [not having international or specified domestic
transaction(s)] September 30
3. Where the assessee is a person other than a company [not having international
or specified domestic transaction(s)]
3.1 In case where accounts of the assessee are required to be audited under any law September 30
3.2 Where the assessee is a “working partner” in a firm whose accounts are required
to be audited under any law September 30
3.3 In any other case July 31
Note : Where the last day for filing return of income or loss is a day on which the office is closed, the assessee can file the return
on the next day afterwards on which the office is open and, in such cases, the return will be considered to have been filed
within the specified time limit—Circular No. 639, dated November 13, 1992.
† ITR-V should be sent within “specified period” by ordinary post (or speed post) to “Income-tax Department-CPC, Post Box No. 1, Electronic
City Post Office, Bengaluru - 560100, Karnataka”. “Specified period” for this purpose is 120 days from the date of uploading the electronic return.
However, this period has been extended from time to time in past. If ITR-V is not furnished within the “specified period”, then it will be deemed
that the assessee has not submitted his return of income. In such a case, the assessee will have to re-submit the return.
531 Conditions Para 247.1
 WHEN RETURN OF LOSS SHOULD BE FILED [SEC. 139(3)]

245. The return of loss should be filed in the prescribed form* and within the time allowed under section 139(1)‡.
The following losses cannot be carried forward if the return of loss is not submitted in time—
a. business loss (speculative or otherwise) ;
b. capital loss ; and
c. loss from the activity of owning and maintaining race horses.
However, the delay may be condoned if a few conditions are satisfied—Circular No. 9/2015, dated June 9, 2015.
 CAN RETURN BE FILED BEYOND TIME [SEC. 139(4)]

246. If return is not furnished within the time allowed under section 139(1) or within the time allowed under
notice issued under section 142(1), the person may furnish the return of any previous year at any time before the
end of relevant assessment year or the completion of assessment#, whichever is earlier.
1. An assessee is supposed to file return for the assessment year 2019-20 by September 30, 2019. If it does not file return up
to September 30, 2019, then such return, if submitted after the said date, will be belated return. Such belated return may be
submitted by the end of assessment year (i.e., up to March 31, 2020). If, however, the assessment is completed before March
31, 2020, then such return should be submitted before the completion of assessment.
2. A best judgment assessment is made on February 11, 2020 for the assessee’s failure to file return (for the assessment year
2019-20) despite notice under section 142. But before the assessment order is served on February 23, 2020, the assessee files
a return on February 15, 2020. It is not a valid return. Return in this case can be filed before February 11, 2020. If, however,
the best judgment assessment is made after March 31, 2020, then the return can be filed up to March 31, 2020.
246.1 Consequences of late submission - If return is submitted after the due date of submission of return of
income, the following consequences will be applicable. These rules are applicable even if a belated return is
submitted within the time-limit given above—
1. The assessee will be liable for penal interest under section 234A.
2. The assessee shall be liable for late filing fee under section 234F. Late filing fee under section 234F is Rs. 5,000
(if the return is furnished after the due date but on or before December 31 of the assessment year) or Rs. 10,000
(if return is furnished after December 31 of the assessment year). However, in a case where the total income does
not exceed Rs. 5 lakh, the late filing fee amount shall not exceed Rs. 1,000.
3. If return of loss is submitted after the due date, a few losses cannot be carried forward [see para 245]. However,
CBDT has power under section 119(2) to condone delay in case of a return which is filed late and where a claim
for carry forward of losses is made†.
4. If return is submitted after the due date, deduction under sections 10A, 10B, 80-IA, 80-IAB, 80-IAC, 80-IB,
80-IBA, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80LA, 80P, 80PA, 80QQB and 80RRB will not be available.
 CAN REVISED RETURN BE FILED [SEC. 139(5)]

247. If certain conditions are satisfied, a person may furnish a revised return of income under section 139(5).
247.1 Conditions - The following conditions one has to satisfy—
1. Which return can be revised - If any person, having furnished a return under section 139(1)/(4), discovers any
omission or any wrong statement therein, he may furnish a revised return. From the assessment year
2017-18, even a belated return submitted under section 139(4) can be revised.
2. Omission or wrong statement - Revised return can be filed only if the assessee discovers any omission or wrong
statement in return originally filed.
3. Time-limit - Revised return can be filed at any time before the end of the relevant assessment year or before the
completion of the assessment#, whichever is earlier.
For the assessment year 2020-21, a revised return can be filed up to March 31, 2021. If, however, the assessment
is completed before March 31, 2021 (say on December 15, 2020), then revised return can be filed before
December 15, 2020.
*See para 244.2.

‡See para 244.3.
† See Circular No. 9/2015, dated June 9, 2015.
# Assessment refers to assessment made under section 143(3) or 144. An intimation under section 143(1) is not assessment. Consequently, if an
assessee files a revised return or belated return after the service of an intimation under section 143(1) (but before the time given above), it will be
duly considered by the Assessing Officer.
Para 247.2 Return of income 532
247.2 Other points - The following broad propositions should be kept in view—
1. A second revised return can be filed for correcting any omission or wrong statement made in the first revised
return.
2. There is no provision in the Income-tax Act to seek permission to revise a return.
 WHAT IS A DEFECTIVE OR INCOMPLETE RETURN [SEC. 139(9)]

248. If the Assessing Officer considers that the return submitted by the taxpayer is defective or incomplete, he
may give the assessee an opportunity to rectify the defect within a period of 15 days from the date of such
intimation. This time-limit may be extended by the Assessing Officer on an application by the assessee.
If the defect is not rectified by the assessee within the period of 15 days (or such further extended period), then
the Assessing Officer shall treat the return as an invalid return and the other provisions of the Act will apply as
if the taxpayer had failed to furnish the return. Where the assessee rectifies the defect after the expiry of the period
of 15 days (or such further extended period) but before assessment is made, the Assessing Officer may condone
the delay and treat the return as a valid return.
➠ 248.1 When a return is defective - A return of income is regarded as defective in the following cases—
248.1-1 RETURN FORM HAS NOT BEEN DULY FILLED - All items in income-tax return form (i.e., ITR-1 to ITR-7) must be
filled in the manner indicated in the return form. If any schedule of the relevant form is not applicable in the case
of an assessee, it should be scored across as “.... NA....” If any item is inapplicable, one should write “NA” against
it. One should write “NIL” to denote nil figure. No column or row should be left blank. Otherwise the return may
be liable to be held defective or even invalid.
248.1-2 RETURN WITHOUT SELF-ASSESSMENT TAX - Section 139(9) provides that the return of income shall be regarded
as defective unless the tax together with interest, if any, payable in accordance with the provisions of section 140A
has been paid on or before the date of furnishing of the return.
 This provision has been amended by the Finance Act, 2016 from the assessment year 2017-18. After this
modification, a return (which is otherwise valid) would not be treated as defective merely because self-
assessment tax and interest payable in accordance with the provisions of section 140A, have not been paid on
or before the date of furnishing of the return.
248.1-3 ANNEXURES, STATEMENTS, ACCOUNTS, ETC. - Under section 139(9), a few statements, reports, proof of pre-paid
taxes, accounts, etc. should accompany the return of income, otherwise the return will become defective.
However, it is not possible to attach any certificate or report or computation or final accounts with new income-
tax return forms. Likewise, it is not possible to attach proof of pre-paid taxes (like tax deducted/collected at
source, advance payment of tax, self-assessment tax). The assessee should, therefore, retain these certificates,
report, computation, final accounts, proof of pre-paid taxes with him. These may be furnished whenever the
Assessing Officer wants to examine them in assessment proceedings or otherwise. Return of income will not
become defective because of non-fulfilment of this requirement.
 WHAT IS PERMANENT ACCOUNT NUMBER (PAN) [SEC. 139A]

249. The following persons‡ are required to obtain a PAN –
 If income exceeds exemption limit or turnover exceeds Rs. 5,00,000 - Application should be submitted to obtain PAN
before May 31 of the assessment year for which the income exceeds the maximum amount chargeable to tax or
before the end of the accounting year for which the gross turnover or receipts exceed Rs. 5,00,000.
 Charitable trust - A person who is required to furnish return of income under section 139(4A) (i.e., charitable
trust) is required to obtain PAN.
 Financial transaction in aggregate of Rs. 2,50,000 or more - Any resident person (not being an individual) who
enters into a financial transaction of an amount aggregating to Rs. 2,50,000 or more during a financial year (as
well as managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal
officer or office bearer of such person or any person competent to act on behalf of such person) is required to
obtain PAN with effect from April 1, 2018.
 Person specified by the Central Government - The Central Government has power to notify (for collection of any
information) any person to apply for PAN. For this purpose, the following persons have been notified by the
Central Government and these persons shall apply to the Assessing Officer for PAN – exporters/importers,
assessees under central excise/service tax/sales tax.
‡ Mere allotment of PAN under section 139A would not make the allottee necessarily a separate entity for purpose of assessment of tax – Sardar
Vallabhbhai Patel Education Society v. ITO [2017] 85 taxmann.com 336 (Guj.).
533 Return by whom to be verified Para 250
 Allotment by Assessing Officer of his own - Besides above cases, the Assessing Officer may also allot a PAN to any
other person by whom tax is payable. Any other person may also apply for a PAN.
 QUOTING OF AADHAAR NUMBER [SEC. 139AA]

249A. Section 139AA has been inserted with effect from April 1, 2017. Provisions of this section are given below–
 Category A - Every person who is eligible to obtain Aadhaar number shall (on or after July 1, 2017) quote
Aadhaar number –
a. in the application for the allotment of PAN;
b. in the income-tax return.
Where, however, the person does not possess the Aadhaar number, the Enrolment ID (of Aadhaar application
form issued to him at the time of enrolment) shall be quoted in the application for PAN or in the return of income.
 Category B - Every person who has been allotted PAN as on July 1, 2017, and who is eligible to obtain Aadhaar
number, shall intimate his Aadhaar number to the prescribed authority in prescribed form on or before a date
to be notified by the Central Government (i.e., December 31, 2019). In case of failure to intimate Aadhaar number,
the PAN allotted to the person shall be deemed to be invalid and the other provisions of the Act shall apply (as
if the concerned person had not been applied for allotment of PAN).
 When provisions of section 139AA not applicable - The provisions of section 139AA shall not apply to such person
or class or classes of persons or any State or part of any State, as may be notified by the Central Government.
The Central Government has notified that the provisions of section 139AA shall not apply to an individual who
does not possess the Aadhaar number or the Enrolment ID and is –
a. residing in Assam, Jammu and Kashmir and Meghalaya;
b. a non-resident as per the Income-tax Act;
c. of the age of 80 years or more at any time during the previous year (i.e., super-senior citizen);
d. not a citizen of India.
In these cases, it is not mandatory for an individual to quote his/her Aadhaar Number in return of income.
 SCHEME TO FACILITATE SUBMISSION OF RETURNS THROUGH TAX RETURN PREPARERS

[SEC. 139B]
249B. Section 139B provides as follows—
For the purpose of enabling any specified class or classes of persons to prepare and furnish returns of income,
the Board has framed a scheme providing that such persons may furnish their returns of income through a Tax
Return Preparer authorised to act as such under the scheme.
 The Scheme specifies the manner in which the Tax Return Preparer shall assist the persons furnishing the
return of income, and shall also affix his signature on such return.
 A Tax Return Preparer may be an individual other than a person referred to in section 288(2)(ii)/(iv) or an
employee of the specified class or classes of persons, who has been authorised to act as a Tax Return Preparer
under the above scheme.
 The above scheme also provides the manner in which a Tax Return Preparer shall be authorised, the
educational and other qualifications to be possessed, and the training and other conditions required to be
fulfilled, by a person to act as a Tax Return Preparer, the code of conduct for the Tax Return Preparer, the duties
and obligations of the Tax Return Preparer, the manner in which the authorisation may be withdrawn, and any
other matter which is required to be or may be specified.
 RETURN BY WHOM TO BE VERIFIED [SEC. 140]

250. The return of income is required to be verified :
Different assessees Who should verify the return
Individual By the individual himself or where the individual is absent from India by the individual himself
or by some person duly authorised by him on his behalf* and, where the individual is mentally
incapacitated from attending to his affairs, by his guardian or a person competent to act on his
behalf, and where for any other reason, it is not possible for the individual to verify the return, by
any person duly authorised by him in this behalf.
Hindu undivided By the karta, or where the karta is absent from India or is mentally incapacitated from attending
family to his affairs, by any other adult member of the family.
*Such person shall be holding a valid power of attorney.

Para 251 Return of income 534
Different assessees Who should verify the return

Company By the managing director thereof, or where, for any unavoidable reason, such managing director
is not able to verify, or where there is no managing director, by any director of the company†.
Firm By the managing partner thereof or where, for any unavoidable reason, such managing partner
is not able to verify or where there is no managing partner, by any partner thereof, not being a
minor.
Limited liability By the designated partner thereof, or where for any unavoidable reason such designated partner
partnership is not able to verify or where there is no designated partner, by any partner thereof.
Local authority By the principal officer thereof.
Political party By the chief executive officer of such party.
Any other By any member of the association or the principal officer thereof.
association
Any other person By that person or by some other person competent to act on his behalf.
 WHAT IS SELF-ASSESSMENT [SEC. 140A]

251. The provisions of section 140A are given below—
 An assessee is required to submit his return of income under section 139 or 142 or 148 or 153A or 158BC.
 Before submitting the aforesaid return, he is supposed to find out whether any tax and/or interest and/or fee
is payable. For this purpose, tax and/or interest and/or fee shall be calculated as follows :
Find out income-tax, surcharge and health and education cess as per return of income xxxx
Add: Interest and fee—
Interest under section 234A for late submissions of return of income* xxxx
Interest under section 234B for non-payment or short payment of advance tax* xxxx
Interest under section 234C for non-payment or short payment of different instalments
of advance tax* xxxx
Fee under section 234F for late submission of return of income xxxx xxxx
Total tax, interest and fee xxxx
Less: Advance tax, tax deducted at source, tax collected at source, MAT credit under
section 115JAA, alternate minimum tax credit under section 115JD and relief under
section 89/90/90A/91A xxxx
Self-assessment tax payable under section 140A xxxx
†Interest under sections 234A, 234B and 234C shall be calculated on the basis of income declared in the return of income.
 Self-assessment tax so determined shall be deposited by the assessee before submitting return of income. From
April 1, 2008, all corporate assessees and other assessees (who are subject to compulsory audit under section
44AB) will have to make electronic payment of tax through internet banking facility offered by authorized banks.
Alternatively, these taxpayers can make electronic payment of tax through internet by way of credit or debit
cards.
 The proof of deposit should be submitted along with the return of income (i.e., BSR code of bank, Serial No.
of challan, amount of deposit and date of deposit).

 Where the amount paid by the assessee falls short of the aggregate of tax, interest and fee, as determined above,
the amount so paid shall first be adjusted towards interest and fee payable and the balance, if any, shall be
adjusted towards tax payable.
Tax liability of X for the assessment year 2020-21 is Rs. 2,40,000. He is liable to pay interest under sections 234A, 234B and
234C of Rs. 4,340, Rs. 12,000 and Rs. 10,000, respectively. He is liable to pay a late fee of Rs. 5,000 under section 234F. He is
entitled for tax credit on account of pre-paid taxes (i.e., advance tax paid during the financial year 2019-20 : Rs. 17,000 and
tax deducted/collected at source : Rs. 6,000). At the time of filing of return of income for the assessment year 2020-21 on
December 12, 2020, the tax payable under section 140A shall be determined as under :
† In the case of a non-resident company, the return may be verified by a person who holds a valid power of attorney. Where the company is being
wound up, return shall be verified by the liquidator. Where management of a company is taken over by the Government, return shall be verified
by the principal officer thereof. Where in respect of a company, an application for corporate insolvency resolution process has been admitted by
the Adjudicating Authority under section 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016, the return shall be verified by the insolvency
professional appointed by such Adjudicating Authority.
535 What is summary assessment Para 253
Rs. Rs.
Income-tax 2,40,000
Add : Interest/fees
Under section 234A 4,340
Under section 234B 12,000
Under section 234F 5,000 31,340
Total 2,71,340
Less : Prepaid taxes
Advance tax 17,000
Tax deducted, collected at source, MAT credit and double taxation relief under section
90/90A/91 6,000 23,000
Self-assessment tax under section 140A 2,48,340
If the amount of tax paid under section 140A is less than Rs. 2,48,340, then the amount paid under section 140A, shall be first
adjusted towards interest and fee payable and the balance if any, shall be adjusted towards tax payable. Suppose in the above
case X pays (a) Rs. 1,69,000 or (b) Rs. 25,000 under section 140A, then tax so paid shall be adjusted as under :
Situation (a) Situation (b)
Rs. Rs.
Tax paid under section 140A 1,69,000 25,000
Amount treated as payment of interest under sections 234A, 234B and 234C
or fee under section 234F 31,340 25,000
Amount treated as payment of tax (Rs. 1,69,000 — Rs. 31,340) 1,37,660 Nil
251.1 Other points - The following should also be kept in view :

 After a regular assessment of income has been made, any amount paid under section 140A shall be deemed
to have paid towards such regular assessment.

 If any assessee fails to pay whole or any part of such tax or interest or fee in accordance with the provisions of
section 140A, he shall (without prejudice to any other consequences which he may incur) be deemed to be an
assessee in default in respect of the tax or interest or fee remaining unpaid, and all the provisions of the Act shall
apply accordingly.
 WHAT IS INQUIRY BEFORE ASSESSMENT UNDER SECTION 142 OR 142A

➠ 252. Sections 142 and 142A deals with the following :
1. Giving notice to the assessee to submit return (if not submitted earlier), produce
accounts, documents, etc. Sec. 142(1)
2. Making inquiry and giving opportunity to assessee Sec. 142(2), (3)
3. Giving direction to get books of account audited Sec. 142(2A) to (2D)
4. Valuation Officer Sec. 142A
 WHAT IS SUMMARY ASSESSMENT WITHOUT CALLING THE ASSESSEE [SEC. 143(1)]

253. Under section 143(1), the Assessing Officer can complete an assessment without passing a regular
assessment order. The assessment is completed on the basis of return submitted by the assessee. The Assessing
Officer can, however, make the following adjustments‡ to the total income declared in the return of income –
a. any arithmetical error in the return;
b. an “incorrect claim”, if such incorrect claim is apparent from any information in the return;
c. disallowance of loss claimed, if return of the previous year for which set off of loss is claimed is furnished
beyond the due date specified under section 139(1);
d. disallowance of expenditure indicated in the audit report but not taken into account in computing the total
income in the return, or
e. disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE,
if the return is furnished beyond the due date specified under section 139(1).
‡These adjustments are not possible in the case of debatable issues.

 Opportunity - Before making any adjustment, an opportunity shall be provided to the assessee to explain and
rectify the same within 30 days of issuance of such intimation and the response so received shall be considered
before making such adjustments. In case no response is received within such time, the adjustment of the amount
indicated in the intimation to be made.
 Intimation - Intimation shall be prepared or generated and sent to the assessee specifying the sum determined
to be payable by, or the amount of refund due to, the assessee after the aforesaid corrections. The amount of
refund due to the assessee shall be granted to him. The acknowledgement of the return shall be deemed to be
the intimation in a case where no sum is payable by, or refundable to, the assessee, and where no adjustment has
been made.
 “Incorrect claim” - It means such claim on the basis of an entry, in the return -
a. of an item, which is inconsistent with another entry of the same or some other item in such return;
b. in respect of which, information required to be furnished to substantiate such entry, has not been furnished
under the Act; or
c. in respect of a deduction, where such deduction exceeds specified statutory limit which may have been
expressed as monetary amount or percentage or ratio or fraction.
 Time-limit for intimation - An intimation under section 143(1) should not be sent after the expiry of one year from
the end of the financial year in which return of income is made.

For instance, for the assessment year 2019-20, return is submitted by a taxpayer on July 6, 2019. An intimation
may be sent up to March 31, 2021 (even if it is received by the assessee after March 31, 2021).
 Summary assessment and withholding of refund [Sec. 241A] - Where refund of any amount becomes due to the
assessee under section 143(1) and the Assessing Officer is of the opinion that grant of refund may adversely affect
the recovery of revenue, he may, for the reasons recorded in writing and with the previous approval of the
Principal Commissioner or Commissioner, withhold the refund up to the date on which the assessment is made.
 WHAT IS SCRUTINY ASSESSMENT UNDER SECTION 143(3)

254. The Assessing Officer will issue a notice to the assessee under section 143(2) to take the case in scrutiny.
Such notice shall be served on the assessee within a period of 6 months from the end of the financial year in
which return is furnished.
After hearing such evidence as the assessee may produce and after taking into account all relevant materials
which the Assessing Officer has gathered, he shall pass an assessment order in writing determining (a) the total
income or loss of the assessee, and (b) the sum payable by (or refundable to) the assessee on the basis of such
assessment order.
 New scheme for scrutiny assessment - A new scheme for the purpose of making assessments will be notified by
the Central Government under section 143(3A) so as to impart greater transparency and accountability, by
eliminating the interface between the Assessing Officer and the assessee, optimal utilization of the resources,
and introduction of team-based assessment.
 WHAT IS BEST JUDGMENT ASSESSMENT [SEC. 144]

255. The Assessing Officer, after considering all relevant material which he has gathered, is under an
obligation to make an assessment of the total income or loss to the best of his judgment in some cases. Such
cases are –
a. if any person fails to submit his return;
b. if any person fails to comply with all the terms of a notice under section 142(1);
c. if a person fails to comply with the direction to get his accounts audited;
d. if a person fails to respond to a scrutiny notice under section 143(2) or
e. if the Assessing Officer is not satisfied about the correctness or the completeness of the accounts.
A best judgment assessment can only be made after giving the assessee an opportunity of being heard.
 WHAT IS INCOME ESCAPING ASSESSMENT [SEC. 147]

256. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment,
he may assess/reassess such income. For this purpose, a notice shall be issued under section 148. Once an
assessment has been reopened, any other income which has escaped assessment and which comes to the notice
537 When can mistake be rectified Para 257
of the Assessing Officer subsequently in the course of the proceeding under section 147, can also be included in
the assessment.
 Conditions - There are two conditions –
1. The Assessing Officer must have reason to believe that income or profits or gains chargeable to income-tax
had escaped assessment.
2. Such an escapement had occurred by reason of either omission or failure on the part of the assessee to
disclose fully or truly all material facts necessary for his assessment of that year.
 When can reassessment process be started - Both these conditions should be satisfied if the original assessment
was made under section 143(3)/147 and the Assessing Officer wants to take action after the expiry of 4 years
from the end of the assessment year. However, only Condition 1 should be satisfied in the following cases –
a. if the Assessing Officer wants to take an action within 4 years (from the end of the assessment year) and the
original assessment was completed under section 143(1), 143(3), 144 or 147; or
b. if the Assessing Officer wants to take an action after the expiry of 4 years and the original assessment was
completed under section 143(1) or 144.
However, the above rule is not applicable where any income in relation to any asset (including financial interest
in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year.
 Notice for reassessment [Sec. 148] - Before making the assessment, reassessment or recomputation under
section 147, the Assessing Officer should serve on the assessee a notice requiring him to furnish a return of
income. Before issuing a notice, the Assessing Officer is required to record reasons for doing so.
 Time-limit for issue of notice - Notice can be issued within 4 years from the end of relevant assessment year. If,
however, the escaped income is Rs. 1,00,000 or more, notice can be issued within 6 years from the end of the
relevant assessment year. Where income in relation to any asset (including financial interest in any entity)
located outside India, chargeable to tax, has escaped assessment, notice can be issued within 16 years from the
end of the relevant assessment year. If the person on whom notice under section 148 is to be served is a person
treated as an agent of non-resident (under section 163), then notice shall not be issued after the expiry of 6 years
from the end of the relevant assessment year.
 WHEN CAN MISTAKE BE RECTIFIED [SEC. 154]

257. To rectify any mistake apparent from record, an income-tax authority may amend an order/intimation
passed under any provision of the Act. If, however, an order is subject matter of an appeal before any appellate
authority, that order cannot be amended by the Assessing Officer so long as it pertains to matter considered
and decided in appeal/revision.
 Mistakes which can be rectified- An error of law or fact, a clerical or arithmetical mistake, error in determining
written down value, overlooking the obligatory provisions of the Legislature, and mistake arising as a result of
subsequent retrospective amendment of law.
 Mistakes which cannot be rectified- Where controversy can be resolved only by way of a complicated process of
investigation or on a question of construction of law where two views are possible or a question on which there
is difference of opinion among two judges of High Court cannot be rectified under section 154.
 Time-limit for rectification- A rectification order can be made within 4 years from the end of the financial year
in which the order sought to be amended was passed. The point at which the period of limitation commences
is 4 years from the date of order sought to be amended (and not the date of original order). Moreover, an
application for rectification made by the assessee shall be disposed of by a written order by the concerned
authority within 6 months from the end of the month in which the application is received by it, either making
the amendment or refusing to allow the claim. The Central Board of Direct Taxes (CBDT) has directed that
time-limit of 6 months shall be strictly followed by Assessing Officers. However, CBDT has authorised its
officers to dispose of an application even after the expiry of 6 month time-limit, if a valid application had been
filed by the assessee within the statutory time-limit but was not disposed of by the concerned authority within
the aforesaid time-limit.
 WHAT IS TIME-LIMIT FOR COMPLETION OF ASSESSMENT/REASSESSMENT [SEC. 153]

258. An assessment under section 143 or 144 shall be completed within 21 months† from the end of the relevant
assessment year. An assessment or reassessment under section 147 must be completed within 9 months‡ from
the end of the financial year in which notice under section 148 was served.
 Special points - The following special points should be noted –
1. The time-limit specified above in cases where reference is made to Transfer Pricing Officer (TPO) shall be
extended by 12 months.
2. If assessment is set aside or cancelled by virtue of an order of Commissioner (Appeals) or the order of
Tribunal or a revision order of the Commissioner, fresh assessment shall be completed within 9 months‡ from
the end of the financial year in which the order cancelling/setting aside is received/passed by the Commis-
sioner.
3. Re-assessment/re-computation can be completed at any time where such an order is passed in consequence
of or to give effect to any finding/direction contained in an order of appeal/revision of an appellate authority/
Commissioner/any Court.
 Period to be excluded - In computing the above period of limitation, the following period shall be excluded – the
period during which assessment proceeding is stayed by a Court order, time taken in getting withdrawal of
certain approval, period for getting special audit, time taken when there is rejection of Settlement Commission
application/advance ruling application, etc.
Where immediately after the exclusion of the aforesaid time, the period of limitation available to the Assessing
Officer for making orders is less than 60 days, the remaining period shall be extended to 60 days and the
aforesaid period of limitation shall be deemed to be extended accordingly.
 WHO IS UNDER AN OBLIGATION TO FURNISH STATEMENT OF FINANCIAL TRANSACTION

[SEC. 285BA]
259. The following persons shall submit statement of financial transaction in respect of transactions given
below (list is not complete, only a few important cases are given) –
A banking company - Cash deposits aggregating to Rs. 10 lakh or more in a year in one or more accounts (not being
current account/time deposit) of a person.
A banking company - Cash payment for purchase of bank draft/pay order/prepaid instrument issued by RBI of
an amount exceeding Rs. 10 lakh in a financial year.
A banking company or any other company or institution issuing credit card - Payments made by any person against
bills raised in respect of a credit card issued to that person, aggregating to Rs. 10 lakh or more in a year by any
mode or Rs. 1 lakh or more in a year in cash.
A trustee of a Mutual Fund - Receipt from any person of an amount of Rs. 10 lakh or more for acquiring units of
that fund.
A company or an institution issuing bonds or debentures - Receipt from any person of an amount of Rs. 10 lakh or
more for acquiring bonds or debentures issued by the company or institution.
A company issuing shares through a public or rights issue - Receipt from any person of an amount of Rs. 10 lakh or
more for acquiring shares issued by the company (including share application money).
Registrar or Sub-Registrar appointed under the Registration Act - Purchase or sale by any person of immovable
property valued at Rs. 30 lakh or more or valued by the stamp valuation authority referred to in section 50C at
Rs. 30 lakh or more.
A person being an officer of the RBI or a person authorized by RBI - Receipt from any person of an amount or amounts
aggregating to Rs. 5 lakh or more in a year for bonds issued by the Reserve Bank of India.
A seller of goods/service provider - If the seller/service provider is required to get his account audited under section
44AB and such person receives for sale of goods/services to any person cash payment (in aggregate from one
or more transactions during the financial year) exceeding Rs. 2 lakh.
 Time-limit - AIR should be uploaded on or before May 31 immediately following the financial year in which
transaction is registered/recorded.
 Return form - Return should be submitted in Form No. 61A on computer readable media.
† 18 months (for the assessment year 2018-19), 12 months (from the assessment year 2019-20).
‡ 12 months (if notice is issued under section 148 on or after April 1, 2019 or if order under section 254 is received/order under section 263 or 264
is passed on or after April 1, 2019).
539 Problem on return of income and assessment Problem 261-P1
259.1 Provisions applicable from April 1, 2015 - With a view to facilitate effective exchange of information in
respect of residents and non-residents, the scheme of section 285BA has been amended as to also provide for
furnishing of statement by a prescribed reporting financial institution in respect of a specified financial transaction
or reportable account to the prescribed income-tax authority. The statement of information shall be furnished
within such time, in the form and manner as may be prescribed.
 WHAT IS THE REQUIREMENT OF SUBMISSION OF STATEMENT BY A NON-RESIDENT
HAVING LIAISON OFFICE IN INDIA [SEC. 285]
260. Under section 285 every person having a liaison office in India is required to file a statement electronically
in Form No. 49C pertaining to the liaison office within 60 days from the end of the financial year (i.e., on or before
May 30 after the end of the financial year).
 Problem on return of income and assessment
261-P1 Discuss whether the following persons are required to submit return of income for the assessment year 2019-20 [indicate form
number, mode of submission and due date] —
Assessee Net income Deduction claimed Sources of income Turnover/
Rs. under sections 10A, gross receipt
10B, 10BA, 80C Rs.
to 80U
X Ltd.* 41,000 — Business 60,80,000
Y (24 years) 3,60,000 4,000 Salary and income from -
two properties
Z (47 years) 5,37,000 64,500 Rent from a plot of land -
A Ltd.* (-)30,000 — Business 70,00,000
B (60 years) (-)20,000 3,71,000 Profession 35,00,000
C (31 years) (-)22,000 2,73,000 Capital gain and -
agricultural income
D (65 years) 2,53,000 41,000 Salary, pension and income -
from one house property
E (82 years)* 1,60,000 3,40,000 Business 58,00,000
Mrs. F (29 years) 65,000 1,94,000 Business 1,05,00,000
(having international
transactions)
G (18 years)* 1,65,000 86,000 Business 1,09,00,000
H (59 years) 1,80,000 70,100 Partner in a firm -
I (30 years)* 2,47,000 83,000 Business 35,00,000
J Ltd. (having inter-
national transactions) 8,00,000 - Business 90,00,000
K (Firm) (having (-) 10,000 - Business 65,00,000
international
transactions)
Solution :
Assessee Is it necessary to submit return under section 139(1) Due date
[see para 244]
Yes or No Form No. Is it compulsory Is it compulsory
to submit return to submit return
in electronic with digital
format signature
X Ltd. Yes ITR-6 Yes Yes September 30, 2019
Y Yes ITR-2 Optional Optional July 31, 2019
Z Yes ITR-1** Yes Optional July 31, 2019
A Ltd. Yes ITR-6 Yes Yes September 30, 2019
B Yes ITR-3 Yes Yes September 30, 2019
C Yes ITR-2 Optional Optional July 31, 2019
*Not having International and specified domestic transactions.

**ITR-1 is also known as Sahaj.
Return of income 540
Assessee Is it necessary to submit return under section 139(1) Due date

[see para 244]
Yes or No Form No. Is it compulsory Is it compulsory
to submit return to submit return
in electronic with digital
format signature
D No ITR-1** Optional Optional —
E No ITR-4*** Optional Optional —
Mrs. F Yes ITR-3 Yes Yes November 30, 2019
G Yes ITR-3 Yes Yes September 30, 2019
H Yes ITR-2 Optional Optional July 31*, 2019
I Yes ITR-4*** Optional Optional July 31, 2019
J Ltd. Yes ITR-6 Yes Yes November 30, 2019
K (Firm) Yes ITR-5 Yes Yes November 30, 2019
Notes :
1. Audit under section 44AB is compulsory when turnover exceeds Rs. 1 crore, even if taxable income is lower than the
amount of exemption limit.
2. If return of income is not submitted in time, loss cannot be carried forward.
3. If a taxpayer is an individual/HUF/AOP/BOI and his income (before giving any deduction under sections 10A, 10B,
10BA, 80C to 80U) exceeds the exemption limit, he will have to submit his return of income. This rule is applicable even if
his taxable income (after giving aforesaid deductions) is equal to or less than exemption limit and his tax liability is zero.
Income of E (before giving deduction under aforesaid sections) is Rs. 5,00,000, he may not submit his return of income (E
being super senior citizen, exemption limit is Rs. 5,00,000). Conversely, income of Mrs. F is Rs. 65,000 (tax liability is zero).
She will have to submit her return of income because income (before giving aforesaid deductions) exceeds the exemption
limit of Rs. 2,50,000.
261-E1 State, giving reasons, whether the following are correct or incorrect —
1. Income of X Ltd. for the assessment year 2020-21 is (-) Rs. 12,000 (i.e., loss from other sources). As the loss under the head “Income
from other sources” is not permitted to be carried forward, the company should not submit return of income.
2. Income of Y for the assessment year 2020-21 is Rs. 98,000 deduction under section 80C is Rs. 1,40,000. He is not entitled for any
other deduction. He does not want to submit return of income, as the income is not more than Rs. 2,50,000.
3. Z is a salaried employee. His net income for the assessment year 2020-21 is Rs. 2,50,000 (income includes fixed deposit interest
of Rs. 12,000). He has claimed deduction of Rs. 5,000 under section 80C. The employer has not deducted tax at source, as net income
is not more than Rs. 2,50,000. However, he is liable to submit return of income.
4. A is a minor. As his income is included in the income of his father, he is not required to submit his return of income.
●
Test your knowledge

For answer, see the relevant paras indicated at the end of each question.
1. What do you mean by income-tax return ? What are the various forms which are to be filed by different categories of
assessees while filing income-tax return ? State the limitation periods under the provisions of the Income-tax Act relating
to filing the return. [paras 244 to 250]
2. What is the time limit for filing of return of income under the Income-tax Act ?
3. Write short notes on the following—
a. Self-assessments. [para 251]
b. Regular assessments. [para 254]
4. What do you mean by reassessment ? State the provisions under the Income-tax Act relating to assessment. [para 256]
5. What are the time limits for filing return of income, completion of assessment and rectification of mistake under section
154 ? [para 257]
*September 30, 2019, if the firm (in which H is a partner) is subject to audit under provisions of any law.
**ITR-1 is also known as Sahaj.
***ITR-4 is also known as Sugam.
CHAPTER 17 Advance payment of tax
U
nder the scheme of advance payment of tax (pay-as-you-earn), an assessee is
required to pay tax in a particular financial year, preceding the assessment year, on
the basis of his estimated income. This would mean that though the income earned
during the previous year 2019-20 is taxable in the assessment year 2020-21, tax on such
income is payable during the financial year 2019-20 under the scheme of advance payment
of tax. This chapter deals with the provisions relating to assessees’ obligations concerning
payment of advance tax.
 WHEN A PERSON BECOMES LIABLE TO PAY ADVANCE TAX

266. Every person is liable to pay advance tax if advance tax payable is Rs. 10,000 or more. All items of income
are liable for payment of advance tax.
 A senior citizen (i.e., a resident individual who is at least 60 years of age at any time during the financial year)
not having any income from business/profession, is not liable to pay advance tax.
The following illustration is given to have a better understanding—
X (26 years) is employed by a manufacturing company. For the previous year 2019-20, his estimated income is as follows—
Rs. Rs.
Estimated gross salary 13,30,000
Less :
X’s contribution towards recognised provident fund 1,28,800
Tax deduction at source by employer 1,55,385
Take home pay 10,45,815
Estimated bank interest (FD interest : Rs. 78,000 + savings bank interest : Rs. 22,000) 1,00,000
Less : Tax deduction at source by the bank 7,800
Net interest likely to be received by X from bank 92,200
PPF Contribution 1,00,000
If advance tax payable is Rs. 10,000 or more, then X is liable to pay advance tax during the financial year 2019-20. For this
purpose, the calculation shall be made as follows—
Rs. Rs.
Bank interest (Rs. 92,200 + Rs. 7,800) 1,00,000
Less : Deduction under section 80TTA 10,000
541
Para 267 Advance payment of tax 542
Rs. Rs.
Tax on net income‡ 1,78,500
Add : Surcharge Nil
Add : Health and education cess (4% of Rs. 1,78,500) 7,140
Less : Tax deduction at source
By employer 1,57,560
By bank 7,800 1,65,360
Advance tax payable during the financial year 2019-20 (a) 20,280
In this case, tax computed under (a) (supra) is Rs. 10,000 or more. Therefore, X will have to pay advance tax during the
financial year 2019-20 (the detailed provisions are given below). It may be noted that if tax computed under (a) above is less
than Rs. 10,000, then no advance tax is payable.
 WHEN ADVANCE TAX PAYMENT BECOMES DUE

267. Advance tax due dates are given below –
Due date of payment of advance tax For any assessee (except an eligible An assessee who declares his business/
assessee given in Column 3) professional income in accordance with
the provisions of section 44AD(1) or
section 44ADA(1)
On or before June 15 of the previous Up to 15 per cent of advance tax –
year payable
On or before September 15 of the Up to 45 per cent of advance tax –
previous year payable
On or before December 15 of the Up to 75 per cent of advance tax –
previous year payable
On or before March 15 of the pre- Up to 100 per cent of advance tax Up to 100 per cent of advance tax
vious year payable payable
267.2 Other points - One should also keep in view the following points –
 Where advance tax is payable by virtue of the notice of demand issued by the Assessing Officer, the whole or
the appropriate part of the advance tax shall be payable in the remaining instalments.
 Any payment of advance tax made on or before March 31 shall be treated as advance tax paid during the
financial year.
 If the last day for payment of any instalment of advance tax is a day on which the receiving bank is closed, the
assessee can make the payment on the next immediately following working day, and in such case, the mandatory
interest leviable under sections 234B and 234C would not be charged.
 HOW ADVANCE TAX IS COMPUTED

268. Advance tax liability is computed as follows :
268.1 Payment of advance tax by the assessee on his own account - An assessee who is liable to pay advance
tax is required to estimate his current income and pay advance tax thereon without having to submit any estimate
or statement of income to the assessing authorities.
 Revision of second and subsequent instalments - After making payment of first or second instalment of advance
tax, an assessee can revise the remaining instalment(s) of advance tax in accordance with his revised estimate
of current income and pay tax accordingly without any requirement of filing the revised estimate of advance tax.
268.1-1 COMPUTATION OF TAX - Tax can be computed on the current income (estimated by the taxpayer) at the rates
in force during the financial year [see Appendix 1]. From the tax so computed, tax deducted*/collected* at source
will be deducted. Calculation can be made on similar lines in the case of upward/downward revision of current
income.
*Only tax actually deducted/collected shall be reduced. If tax is deductible or collectible but the payer or collector has not deducted/collected
tax at source, such tax cannot be reduced.
543 Payment of advance tax by assessee on his own account Para 268.1
Problems
268.1-P1 The following are the particulars submitted by different taxpayers for the assessment year 2020-21 :
Mrs. X (an Y (a Hindu Z (a firm)
individual) undivided
(30 years) family)
Rs. Rs. Rs.
(1) (2) (3)
Salary (Rs. 1,60,000 minus standard deduction : Rs. 50,000) 1,10,000 — —
Income from house property 62,000 7,97,000 6,000
Profits and gains of business or profession 10,00,000 (-)3,000 5,98,840
Capital gains (short-term) 6,000 — 18,380
Income from other sources 13,000 38,000 23,000
Under section 80C 50,000 61,000 —
Under section 80D 20,000 14,500 —
Under section 80G — 13,000 1,02,000
Net income 11,21,000 7,43,500 5,44,220
Tax† 1,48,800 61,200 1,63,266
Tax and surcharge 1,48,800 61,200 1,63,266
Add: Health and education cess (4% of tax and surcharge) 5,952 2,448 6,531
Total 1,54,752 63,648 1,69,797
Less : Tax deducted or collected at source 1,44,753 19,638 63,519
Balance (a) 9,999 44,010 1,06,278
Determine the amount of advance tax payable during the financial year 2019-20.
Solution : Advance tax1 payable for the financial year 2019-20 will be as under :
X Y Z
Rs. Rs. Rs.
Advance tax payable on or before June 15, 2019 [15% of (a)] —* 6,602‡ 15,942‡
Advance tax payable after June 15, 2019 but on or before September 15, 2019 [30% of (a)] — 13,203‡ 31,883‡
Advance tax payable after September 16, 2019 but on or before December 15, 2019
[i.e., 30% of (a)] —* 13,203‡ 31,883‡
Advance tax payable after December 15, 2019 but on or before March 15, 2020
[i.e., 25% of (a)] —* 11,003‡ 26,570‡
*Since in the case of X, amount of tax as shown at (a) is not more than Rs. 10,000 it is not necessary to pay advance tax.
268.1-E1 [P17.2]* In the cases given below, find out the amount of advance tax payable during the financial year 2019-20 (assume
that normal tax rate in the case of A Ltd. is 30 per cent) :
X A Ltd. B & Co.
(29 years) (an Indian (a firm)
Co.)
Rs. Rs. Rs.
Business income 1,80,000 1,80,000 1,80,000
Long-term capital gain on transfer of gold on June 1, 2019 1,46,000 1,63,000 1,63,000
Bank interest (*in the case of X, it includes saving bank interest of Rs. 4,000) 1,80,000* 1,20,000 1,20,000
Other income 2,10,000 1,10,000 1,10,000
Tax deducted at source 42,000 42,000 42,000
268.1-P2 From the following particulars submitted by X (25 years), ascertain the advance tax payable during the financial year
2019-20—
1. For consequences of non-payment of advance tax, see Problems 296.4-P1 and 296.4-P2.
‡To be rounded off to nearest Rs. 10.
Para 268.1 Advance payment of tax 544
Income Tax deduction

by payer
Rs. Rs.
Salary 2,10,000 6,000
Rent @ Rs. 20,000 per month 2,40,000 24,000
Long-term capital gain on sale of unlisted shares on June 1, 2019 1,25,000 —
Winning from a TV game show 10,000 3,000
Winning from lottery 5,00,000 1,50,000
Winning from races 50,000 15,000
Bank interest (fixed deposit) 80,000 8,000
Dividend from foreign companies 70,000 —
Agricultural income in India 85,000 —
X has contributed Rs. 13,600 towards recognised provident fund. All winnings are received prior to June 15, 2019.
Solution : Computation of income of X
Rs.
Salary (Rs. 2,10,000 – standard deduction : Rs. 50,000) 1,60,000
Income from house property [i.e., Rs. 2,40,000 — 30% of Rs. 2,40,000] 1,68,000
Winnings from betting, lottery, etc. [Rs. 10,000 + Rs. 5,00,000 + Rs. 50,000] 5,60,000
Dividend 70,000
Less : Deduction under section 80C 13,600
Agricultural income 85,000
Total 12,34,400
Computation of tax
Rs. Rs.
1. Tax on Rs. 12,34,400
Tax on Rs. 1,25,000, being long-term capital gain [i.e., 20% of Rs. 1,25,000] 25,000
Tax on Rs. 5,60,000, being winnings from lottery [i.e., 30% of Rs. 5,60,000] 1,68,000
Tax on the balance (i.e., Rs. 5,49,400) 22,380 2,15,380
2. Tax on Rs. 3,35,000 (i.e., agricultural income + Rs. 2,50,000) 4,250
3. Tax (1) - (2)‡ 2,11,130
Add : Surcharge Nil
Less : Tax deducted at source [Rs. 6,000 + 24,000 + 3,000 + Rs. 1,50,000 + Rs. 15,000 + Rs. 8,000] 2,06,000
Amount payable by way of advance tax 13,575
Advance tax payable on or before June 15, 2019 2,036†
Advance tax payable after June 15, 2019 but on or before September 15, 2019 4,072†
Advance tax payable after September 15, 2019 but on or before December 15, 2019 4,072†
Advance tax payable after December 15, 2019 but on or before March 15, 2020 3,394†
†To be rounded off to nearest Rs. 10.
268.1-E2 [P17.3]* The following particulars are submitted by X (26 years) for the previous year 2019-20—
Gross amount Tax deducted Net
at source amount
Rs. Rs. Rs.
Winning from lottery 25,000 7,500 17,500
Rent [before any deduction under section 24] received on February 24, 2,00,000 20,000 1,80,000
2019
Interest on debentures received on November 15, 2019 30,000 3,000 27,000
Salary income (before standard deduction) 11,55,810 1,64,740 9,81,070
Bank interest (fixed deposits) received on December 31, 2019 12,000 1,200 10,800
Ascertain the advance tax payable for the financial year 2019-20 on the assumption that he has contributed Rs. 11,000 towards Home
Loan Account Scheme of the National Housing Bank.
268.2 Payment of advance tax in pursuance of order of Assessing Officer - The Assessing Officer may pass
an order under section 210(3) requiring an assessee to pay advance tax on his current year’s income. The order
must specify the different instalments in which the advance tax should be paid. Such order must be passed
during the previous year but not later than last day of February. Such order passed by the Assessing Officer can
be revised by him.
On receipt of such order, the assessee has the following options –
 Payment of advance tax - The assessee may pay advance tax as demanded by the Assessing Officer.
 Lower estimate by the assessee - On receipt of the notice from the Assessing Officer to pay advance tax, the assessee
can submit his own estimate of lower current income/advance tax and pay tax accordingly. In such a case he has
to send an intimation in Form No. 28A to the Assessing Officer.
 Higher estimate by the assessee - Alternatively, if the advance tax on current income, as per own estimate of the
assessee, is likely to be higher than the amount estimated by the Assessing Officer, the assessee shall pay higher
tax in accordance with his own calculation. In such case, no intimation to the Assessing Officer is required.
 WHAT ARE THE CONSEQUENCES WHEN ADVANCE TAX IS NOT PAID

268A. See paras 296.3 and 296.4.
●
Test your knowledge

1. Discuss the provisions of the Income-tax Act in regard to payment of advance tax [paras 266 to 268].
2. Write a note on the following :
a. Due dates of payment of advance tax [para 267]
b. Pay-as-you-earn scheme. [paras 266 to 268]
3. X is a non-resident and citizen of Canada. Under what circumstances is he liable to send a statement of advance tax ?
[para 266]
4. Which income is not subject to advance tax ? When does the liability to pay advance tax arise ? How is it computed
and paid? Explain. [paras 266 to 268]
Deduction and collection
CHAPTER 18
of tax at source
T
o avoid cases of tax evasion, the Income-tax Act has made provisions to collect tax at
source on accrual of income. Cases included in the scheme are, generally, those
where income can be computed at the time of accrual of income. Under this scheme,
persons responsible for making payment of income covered by the scheme are responsible
to deduct tax at source and deposit the same to the Government’s treasury within the
stipulated time. The recipient of income—though he gets only the net amount (after
deduction of tax at source)—is liable to tax on the gross amount and the amount deducted
at source is adjusted against his final tax liability. The details of the scheme of tax deduction
and collection at source are briefly discussed in this chapter.
 WHAT IS THE SCHEME OF TAX DEDUCTION AT SOURCE (TDS)

269. The scheme of tax deduction at source can be explained with the help of the following example—
X (29 years) is a businessman. For the financial year 2019-20, his business income is Rs. 8,86,000. Besides, he has received
Rs. 90,000 as interest on fixed deposit from Punjab National Bank on January 31, 2020 (gross interest earning on fixed deposit:
Rs. 1,00,000, less tax deducted at source by bank : Rs. 10,000). He has deposited Rs. 60,000 in public provident fund.
At the time of assessment, the tax computation shall be made on the following lines—
Rs. Rs.
Bank fixed deposit interest
Net interest received from bank 90,000
Add : Tax deducted at source by bank 10,000
Gross interest 1,00,000
Less : Deduction under section 80C 60,000
Net income 9,26,000
It may be noted that net interest received from bank is Rs. 90,000, whereas amount included in gross total income is
Rs. 1,00,000. Rs. 10,000 that is deducted by way of tax at source by the Punjab National Bank, is included in the gross interest,
although it is not actually received by X. The final tax liability according to the above computation is Rs. 1,01,608. However,
X is not supposed to pay Rs. 1,01,608. He is entitled for a tax credit of Rs. 10,000, which has been deducted by the Punjab
National Bank out of the interest earning. The bank will issue a certificate to X in Form No. 16A after downloading from
TRACES Portal. The certificate in Form No. 16A will state the following—
Rs.
Gross interest 1,00,000
Less : Tax deducted at source by Punjab National Bank 10,000
Net interest paid to X 90,000
546
547 TDS rates during the financial year 2019-20 Para 269.2
The certificate in Form No. 16A will also indicate the date on which the tax deducted at source is paid by the Punjab National
Bank to the Government of India. On submission of details of Form 16A, in the Income-tax return, he will get a tax credit
of Rs. 10,000. Consequently, X will pay only Rs. 91,608 (i.e., Rs. 1,01,608 – Rs. 10,000).
To conclude, one can say that the scheme of tax deduction at source is only payment of tax on ad hoc basis by the payer of
income on behalf of recipient.
269.1 Payments covered by TDS scheme - TDS scheme covers payments like salary (to resident/non-resident),
payment other than salary to residents (namely, interest, rent, commission/brokerage, lottery winnings,
winnings of races, technical/professional fees, royalty, compensation, etc.) and payment to non-residents/
foreign companies. These provisions are discussed in paras given below.
269.2 TDS rates during the financial year 2019-20 - Normal TDS rates are summarized in Appendix 1, para
0.7. If the recipient does not furnish his PAN to the deductor, tax will be deducted (by virtue of section 206AA†)
at the normal rate or at the rate of 20 per cent, whichever is higher**. PAN of the deductee should be mentioned
in any correspondence and document which is exchanged between the deductor and deductee.
Moreover, where any person located in a notified* jurisdictional area is entitled to receive any sum on which tax
is deductible under any provision of the Act, the payer will deduct tax—
a. at the rates in force or at the rate specified in the relevant provision of the Act (i.e., rates given Appendix 1);
or
b. at the rate of 30 per cent (surcharge or education cess cannot be added),
 Surcharge on TDS payments during the financial year 2019-20 - Surcharge will be applicable for the purpose of TDS
during the financial year 2019-20 in the following cases (in no other case for TDS purpose surcharge will be
applicable) –
1. Payment of salary to a resident or non-resident (surcharge is applicable @ 10 per cent of TDS if amount subject
to TDS during the financial year 2019-20 exceeds Rs. 50 lakh but does not exceed Rs. 1 crore, surcharge is 15 per
cent of TDS if amount subject to TDS during the financial year 2019-20 exceeds Rs. 1 crore but does not exceed
Rs. 2 crore, surcharge is 25 per cent of TDS if amount subject to TDS during the financial year 2019-20 exceeds
Rs. 2 crore but does not exceed Rs. 5 crore and surcharge is 37 per cent of TDS if amount subject to TDS during
the financial year 2019-20 exceeds Rs. 5 crore).
2. Payment/credit (other than salary) to a non-resident (individual, HUF, AOP, BOI or artificial juridical person)
(surcharge is applicable @ 10 per cent of TDS if amount subject to TDS during the financial year 2019-20 exceeds
Rs. 50 lakh but does not exceed Rs. 1 crore, surcharge is 15 per cent of TDS if amount subject to TDS during the
financial year 2019-20 exceeds Rs. 1 crore but does not exceed Rs. 2 crore, surcharge is 25 per cent of TDS if amount
subject to TDS during the financial year 2019-20 exceeds Rs. 2 crore but does not exceed Rs. 5 crore and surcharge
is 37 per cent of TDS if amount subject to TDS during the financial year 2019-20 exceeds Rs. 5 crore).
3. Payment/credit (other than salary) to a foreign company (surcharge is applicable only if amount subject to TDS
during the financial year 2019-20 exceeds Rs. 1 crore, surcharge is 2 per cent of TDS if the payment subject to TDS
is more than Rs. 1 crore but not more than Rs. 10 crore, 5 per cent of TDS if payment subject to TDS exceeds Rs.
10 crore).
 Health and education cess during the financial year 2019-20 - Health and education cess (at the rate of 4 per cent)
is applicable only in the following cases—
1. Tax deduction from payment of salary (where recipient is resident or non-resident).
2. Tax deduction from payment/credit of any sum (other than salary) to a non-resident or a foreign company.
In the case of payment/credit (other than salary) to a resident, education cess, etc., is not applicable for TDS
purposes during the financial year 2019-20.
 No TDS on GST - If GST is shown separately in the invoice, TDS is applicable on the payment (excluding GST).
 TDS on reimbursement to agent - Where technical fees (or any other expenditure like rent, commission, royalty,
professional fees, etc.) is paid by an agent or associate enterprise on behalf of the assessee and tax is deducted
properly within the legal parameters by the agent/associate enterprise, reimbursement later on by the assessee
of the expenditure to his agent/associate enterprise is not again subject to tax deduction at source – Circular
No. 5/2002, dated July 30, 2002.
*Notified under section 94A.

** If the recipient does not furnish, PAN tax will be deducted under section 192A at the maximum marginal rate of tax.
†Provisions of section 206AA are not applicable in respect of payment of interest on long-term bonds as referred to in section 194LC. Moreover,
section 206AA is not applicable if a few condition given by rule 37BC are satisfied.
Para 269.3 Deduction and collection of tax at source 548
269.3 Consequences of default - Where a person who is required to deduct tax at source, does not deduct, or
after deducting fails to pay, the whole or any part of tax, as required by the Act, then such person shall be
deemed to be an assessee in default in respect of such tax under section 201(1). He will be liable for payment of
tax, interest, penalty and prosecution. Besides, disallowance under section 40(a) will be attracted.
 When recipient has paid tax - See para 82.2-1.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM SALARY [SEC. 192]
270. The summarized provisions of section 192 are given below—
Who is the payer Employer
Who is the recipient Employee
Payment covered Taxable salary of the employee
At what time tax has to be deducted at source At the time of payment
Maximum amount which can be paid without tax The amount of exemption limit†
deduction
Rate of tax deduction at source Normal rates applicable to an individual [see para 269.2
and Appendix 1]
When the provisions are not applicable —
Is it possible to get the payment without tax deduction The employee can make an application in Form No. 13 to
or with lower tax deduction the Assessing Officer to get a certificate of lower tax deduc-
tion or no tax deduction.
The employer may, at the time of deducting tax at source, increase or decrease the amount to be deducted for
the purpose of adjusting any previous deficiency or excess deduction.
270.1 How to compute taxable salary and tax thereon - For computing taxable salary, refer to Chapter 4 and
Chapter 11. At the time of deducting tax at source, the person responsible for paying salary during the financial
year 2019-20 should keep the following points in consideration :
 House rent allowance exemption - Exemption pertaining to house rent allowance shall be calculated by the
employer on the basis of specified limits provided by section 10(13A). These limits have been given in the book
in para 42.1. This exemption depends upon rent paid by the employee. The concerned employee should submit
to the employer a written statement pinpointing rent paid, name of landlord, address of the property and PAN
of landlord (PAN is required only if rent paid is more than Rs. 1,00,000 per annum) along with rent receipt given
by the landlord. However, for the purpose of tax deduction, the Central Board of Direct Taxes has given a
concession that rent receipt is not required if house rent allowance is Rs. 3,000 per month or less.
 Other incomes of employee - An employee (at his option) can declare his other incomes to the employer. He cannot
declare negative incomes (except house property loss).
 Deduction from gross total income - Employer should take into consideration amount deductible under sections
80C, 80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E, 80EE, 80GG, 80GGA, 80TTA, 80TTB and 80U.
 Tax liability - Tax is deductible on the taxable income at the rates applicable for the financial year. These rates
are given in Appendix 1. If the employee does not have PAN, tax is deductible either at the normal rate or at the
rate of 20 per cent, whichever is higher. Tax is not deductible, if estimated salary of an employee does not exceed
exemption limit (this rule is applicable even if the employee does not have PAN). At the request of an employee,
the employer can give relief under section 89. However, this facility is available only if the employer is
Government or public sector undertaking or company, co-operative society, local authority, university,
institution or association or body.
 When a person is employed by two or more employers during the financial year - In such a case, tax will be deducted
by each employer separately. However, the employee is under obligation to declare salary received (and tax
deducted thereon) from other employers to one of the employers by submitting information in Form No. 12B.
The employer to whom Form No. 12B is submitted shall deduct tax on the basis of aggregate salary.
 Supporting evidence for HRA/LTC/interest on home loan/deductions under Chapter VI-A - An employee shall furnish
supporting evidence pertaining to the following in Form No. 12BB for the purpose of estimation of his income
and tax deduction at source. This form should be submitted to the person responsible for tax deduction under
section 192 –
† Exemption limit for the assessment year 2020-21 is Rs. 2,50,000 [higher exemption limit (a) in the case of a resident senior citizen born on or after
Rs. 5,00,000].
549 TDS withdrawal from EPF Scheme Para 270A
Nature of claim Evidence or particulars

House rent allowance - Name and address of landlord/landlords
- Amount of rent paid/payable
- PAN of landlord/landlords (where the aggregate rent
paid during the financial year exceeds Rs. 1 lakh)
Leave travel concession or assistance Expenditure and evidence pertaining to expenditure
Deduction of interest under the head “Income from Name, address, PAN of the lender and interest paid/
house property” payable
Deduction under sections 80C, 80CCC, 80CCD, 80CCG, Amount of investment/expenditure and evidence of invest-
80D, 80DD, 80DDB, 80E, 80EE, 80GG, 80GGA, 80TTA, ment/expenditure
80TTB and 80U
 TDS certificate - TDS certificate will be given to the employee in Form No. 16 annually on or before May 31 after
the end of the financial year. This certificate has to be given in paper format. However, if a few conditions are
satisfied Form No. 16 can be given with digital signature. The employer should also give a statement of
perquisites/profits in lieu of salary in Form No. 12BA (if salary exceeds Rs. 1,50,000).
 Salary without TDS or with lower TDS - To get salary without TDS or with lower TDS, the employee will have
to approach the Assessing Officer by submitting an application in Form No. 13 under section 197. These
provisions are given in para 289.7.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM WITHDRAWAL FROM

EMPLOYEES PROVIDENT FUND SCHEME [SEC. 192A]
270A. Section 192A has been inserted with effect from June 1, 2015. Under this section, tax is deductible
(notwithstanding anything contained under other provisions of the Act) as follows –
1. Who is deductor - Tax is to be deducted by the trustees of Employees’ Provident Fund Scheme, 1952 or any other
person authorised under the scheme to make payment of accumulated sum to employees.
2. Which amount is subject to tax deduction - Tax is deductible from “taxable premature withdrawal”. In other
words, tax is deductible from accumulated lump sum payment (at the time of retirement or at the time of leaving
job) in case the employee has not rendered continuous service of 5 years and he does not fall in any of 4 cases
given below –
- If the employee has rendered continuous service with his employer for a period of 5 years or more. For the
purpose of calculating 5-year time-limit, service rendered with the previous employer shall be included, if the
previous employer also maintained recognized provident fund and the provident fund balance of the
employee was transferred by him to the current employer.
- If the employee has been terminated because of certain reasons which are beyond his control (e.g., ill health
of the employee, discontinuation of business by employer, completion of project for which the employee was
employed, etc.).
- If the employee has resigned before completion of 5 years but he joins another employer (who maintains
recognized provident fund and provident fund money with the current employer is transferred to the new
employer).
- If the entire balance standing to the credit of the employee is transferred to his account under a pension scheme
referred to in section 80CCD and notified by the Central Government (i.e., NPS).
Out of the lump sum payment, only amount includible in the total income of the employee is subject to tax
deduction at source.
3. Time of tax deduction - Tax is deductible at the time of payment.
4. Rate of TDS - Tax is deductible under section 192A at the rate of 10 per cent (no surcharge/education cess if
recipient is resident, surcharge/education cess applicable if recipient is non-resident) of “taxable premature
withdrawal”. If PAN of the recipient is not available, tax is deductible at the maximum marginal rate of tax (i.e.,
42.744 per cent for the financial year 2019-20).
5. What is threshold limit - Tax is not deductible if “taxable premature withdrawal” is less than Rs. 50,000.
6. Is it possible to get lower TDS certificate under section 197 - Lower TDS certificate under section 197 is not possible.
Para 271 Deduction and collection of tax at source 550
7. Is it possible to avoid TDS by submitting Form No. 15G/15H under section 197A - The recipient can give a declaration
in Form No. 15G to the effect that his total income including taxable premature withdrawal from provident fund
does not exceed the maximum amount not chargeable to tax and on furnishing of such declaration, no tax will
be deducted. Similar facility of filing self-declaration in Form No. 15H for non-deduction of tax under section
197A is available to a senior citizen receiving pre-mature withdrawal.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM INTEREST ON SECURITIES

[SEC. 193]
Who is the payer Payer of interest on securities
Who is the recipient A resident person holding securities
Payment covered Interest on securities
At what time tax has to be deducted at source At the time of payment or at the time of credit, whichever
is earlier
Maximum amount which can be paid without tax -
deduction
Rate of tax deduction at source 10 per cent (no surcharge, education cess, etc.*).
When the provisions are not applicable Interest on Central/State Government securities + a few
more given in para 271.1
Is it possible to get the payment without tax deduction See paras 289.7 and 289.8
or with lower tax deduction
271.1 Securities interest which is not subject to tax deduction - No tax is deductible at source from the amount
of interest payable on the following† :
a. debentures issued by any co-operative society (including a co-operative land mortgage bank or a co-operative
land development bank) or any other institution or authority or a public sector company notified by the
Central Government;
b. any security of the Central/State Governments [However, interest exceeding Rs. 10,000 payable during a
financial year on 8 per cent Savings (Taxable) Bonds, 2003 or 7.75 per cent Savings (Taxable) Bonds, 2018
(popularly known as Relief Bonds) are subject to tax deduction at source];
c. securities beneficially owned by the Life Insurance Corporation of India or the General Insurance Corporation
of India or to any of the four companies formed by virtue of the schemes framed under section 16(1) of the
General Insurance Business (Nationalisation) Act, 1972 or any other insurer;
d. interest on debentures up to Rs. 5,000 paid or payable by a widely-held company by an account payee cheque
to a resident individual or a resident Hindu undivided family, and
e. any listed Demat security.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM DIVIDENDS [SEC. 194]
Who is the payer Domestic company
Who is the recipient Resident shareholder
Payment covered Deemed dividend under section 2(22)(e) up to March 31,
2018
Maximum amount which can be paid without tax —
deduction
Rate of tax deduction at source 10%
When the provisions are not applicable Dividends covered by section 115-O‡
Is it possible to get the payment without tax deduction See paras 289.7 and 289.8
*For detailed discussion, see para 269.2.

†Only the securities which are currently in force are printed in the book.
‡ With effect from April 1, 2018, even deemed dividend under section 2(22)(e) is covered by dividend distribution tax under section 115-O.
Consequently, with effect from April 1, 2018, TDS provisions of section 194 do not have any practical utility.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM INTEREST OTHER THAN
INTEREST ON SECURITIES [SEC. 194A]
273. The provisions of section 194A are given below—
Who is the payer Any person paying interest other than interest on securities (not being
an individual or a Hindu undivided family whose books of account
are not required to be audited under section 44AB in the immediately
preceding financial year)
Who is the recipient A resident person
Payment covered Interest other than interest on securities
At what time tax has to be deducted at source At the time of payment or at the time of credit, whichever is earlier
Maximum amount which can be paid without See para 273.1
tax deduction
Rate of tax deduction at source 10% (no surcharge and education cess)*
When the provisions are not applicable For a few cases, see para 273.1-1
Is it possible to get the payment without tax See paras 289.7 and 289.8
deduction or with lower tax deduction
273.1 Interest not subject to tax deduction - Tax is not deductible in the following cases—
a. where the amount of interest credited or paid (or likely to be credited or paid) during a financial year† does
not exceed the amount given below –
Interest paid or payable by –
Bank/co-operative bank/post office Any other person
Up to March 31, 2018 Rs. 10,000 Rs. 5,000
During financial year 2018-19 Rs. 10,000 (Rs. 50,000 if recipient is senior citizen) Rs. 5,000
From April 1, 2019 Rs. 40,000 (Rs. 50,000 if recipient is senior citizen) Rs. 5,000
b. where interest is credited or paid to any banking company, co-operative bank, public financial institutions,
the Life Insurance Corporation, the Unit Trust of India, an insurance company or a co-operative society
carrying on the business of insurance, or notified institutions;
c. where interest is credited or paid by the firm to its partner(s);
d. where interest is credited or paid by a co-operative society (other than a co-operative bank) to its members
or to any other co-operative society;
e. where interest is credited or paid in respect of deposits under the schemes of Post Office (Time Deposits), Post
Office (Recurring Deposits), Post Office Monthly Income Account, Kisan Vikas Patra, National Savings
Certificates VIII Issue, and Indira Vikas Patra;
f. where interest is credited or paid in respect of deposits (other than time deposit)‡ with a banking company
or (interest to non-members on deposit) with a co-operative bank;
g. where interest is credited or paid in respect of deposit (by non-members) with a primary agricultural society,
etc.;
h. where interest is credited or paid by the Central Government under different provisions of the direct taxes;
i. where the interest is paid (or, up to May 31, 2015, credited) on compensation awarded by the Motor Accidents
Claims Tribunal if the amount of payment or the aggregate amount of such payment does not exceed
Rs. 50,000;
j. income paid/payable by an infrastructure capital/fund or public sector company in relation to zero coupon
bonds issued on or after June 1, 2005;
k. where interest is paid or credited by an offshore banking unit on deposits made (or borrowings given) after
March 31, 2005 by a person who is resident but not ordinarily resident in India; and
l. interest referred to in section 10(23FC).
273.2 Other points - The following points should be noted –
 Adjustments - The person responsible for tax deduction under section 194A can make adjustments for any excess
deduction or any deficiency arising out of any previous deduction during the same year.
† The aforesaid limits shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative
society, as the case may be. However, branch-wise computation system is discontinued from June 1, 2015. From June 1, 2015, section 194A has
been amended to provide that for computing threshold limit (given above) interest credited or paid by the banking company/co-operative bank
which has adopted core banking solutions (CBS), shall be considered.
‡ Interest on “time deposit” is subject to TDS under section 194A. “Time deposit” for this purpose includes recurring deposit.
 Interest on time deposit by bank on daily/monthly basis in CBS software - Such interest is credited in software by
different banks for the purpose of macro monitoring purposes only. No effective credit is actually given to the
depositors. Tax need not be deducted in such cases – Circular No. 3/2010, dated March 2, 2010.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM WINNINGS FROM LOTTER-
IES OR CROSSWORD PUZZLES [SEC. 194B]
274. The provisions of section 194B are given below—
Who is the payer Any person paying winnings from lotteries/crossword
puzzles/card games/other games
Who is the recipient Any person
Payment covered Winnings from lotteries/crossword puzzles/card games/
other games
Maximum amount which can be paid without tax If the amount of payment is Rs. 10,000 or less than
deduction Rs. 10,000
Rate of tax deduction at source 30% (no surcharge or education cess)
Is it possible to get the payment without tax deduction Not possible
X wins a lottery prize of Rs. 2,00,000 on March 22, 2019, out of which Rs. 20,000 is payable to the agent. Out of Rs. 1,80,000
payable to the winner, Rs. 54,000 (being 30 per cent of Rs. 1,80,000) shall be tax deduction at source under section 194B.
274.1 Prize given partly in cash and partly in kind - Where the prize is given partly in cash and partly in kind,
tax will be deductible from cash prize, with reference to the aggregate amount of cash prize and the value of the
prize in kind. Where the winnings are wholly in kind or where they are partly in cash and partly in kind but the
part in cash is not sufficient to meet the liability for tax deduction in respect of the whole of the winnings, the
person responsible for paying shall, before releasing the winnings either in cash or in kind, ensure that tax has
been paid in respect of the winnings.
For instance, X wins a Maruti-Zen on December 15, 2019 (value of Rs. 3.70 lakh) in a draw of lot organised by Maruti Udyog.
Tax liability on the prize in kind comes to Rs. 1,11,000 (i.e., 30 per cent of Rs. 3.70 lakh) which may be recovered by the Maruti
Udyog from X and the same can be deposited with the Government on account of tax deduction.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM WINNINGS FROM HORSE
RACES [SEC. 194BB]
275. The provisions of section 194BB are given below—
Who is the payer Any person paying winnings from horse races
Payment covered Winnings from horse races
Maximum amount which can be paid without tax If the amount of payment is Rs. 5,000 (Rs. 10,000 from June
deduction 1, 2016) or less
Rate of tax deduction at source 30% (no surcharge or education cess)
Is it possible to get the payment without tax deduction Not possible
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM PAYMENTS TO CONTRAC-

TORS OR SUB-CONTRACTORS [SEC. 194C]
276. The provisions of section 194C are given below—
Who is the payer A specified person [see para 276.1]
Who is the recipient A resident contractor (contractor includes sub-contractor)
Rate of tax deduction at source 1% if recipient is an individual/HUF, otherwise 2%
553 Meaning of work contract Para 276.2
Payment covered Consideration for any “work contract”

At what time tax has to be deducted at source At the time of payment or at the time of credit, whichever
is earlier
Maximum amount which can be paid without tax See para 276.4
deduction
Is it possible to get the payment without tax deduction The recipient can make an application in Form No. 13 to
or with lower tax deduction the Assessing Officer to get a certificate of lower tax deduc-
tion or no tax deduction [see para 289.7]
276.1 Who is deductor - Any of the following persons responsible for paying any sum to a resident contractor
is supposed to deduct tax at source under section 194C, if the other conditions are satisfied—
a. the Central Government or any State Government; or
b. any local authority; or
c. any corporation established by or under a Central, State or Provincial Act; or
d. any company; or
e. any co-operative society; or
f. any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and
satisfying the need for housing accommodation or for the purpose of planning, development or improvement
of cities, towns and villages, or for both; or
g. any society registered under the Societies Registration Act; or
h. any trust; or
i. any university or an institution declared to be a university; or
j. any Government of a foreign State or a foreign enterprise or any association or body established outside India;
or
k. any firm; or
l. an individual or a Hindu undivided family (HUF) or an association of persons (AOP) or a body of individuals
(BOI).
 Additional requirement if payer is an individual/HUF/AOP/BOI - If the payer is an individual/HUF/AOP/BOI,
tax shall be deducted at source only if the following additional conditions are satisfied—
Additional requirement if payer is an Additional requirement if payer
individual/HUF is an AOP/BOI
Payment/credit should be It should not be exclusively for personal No such requirement
for business purposes purposes
Audit of books of account Books of account are liable to be audited under Books of account are liable to be audi-
section 44AB(a)/(b) during the financial year ted under section 44AB(a)/(b) during
immediately preceding the financial year in the financial year immediately prece-
which tax is deductible ding the financial year in which tax is
deductible.
276.2 Meaning of work contract - Section 194C is applicable in respect of consideration for carrying out any
works contract (including supply of labour for carrying out any work). For this purpose, “contract” shall include
sub-contract.
 “Work” as defined in section 194C - The expression “work” shall also include the following five services—
a. advertising;
b. broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
c. carriage of goods or passengers by any mode of transport other than by railways;
d. catering;
e. manufacturing or supplying a product according to the requirement or specification of a customer by using
material purchased from such customer.
It does not include manufacturing or supplying a product according to the requirement or specification of a
customer by using material purchased from a person, other than such customer.
In other words, the provisions of section 194C are attracted only where any sum is paid for carrying out any work
(manpower is sine qua non and without manpower it cannot be said that work has been carried out) including
supply of labour and five services noted above.
276.3 Rate of TDS - To rationalise the TDS rates and to remove multiple classifications, the same rate of TDS will
be applicable to the case of payment for advertising contracts. The following TDS rate are applicable under
section 194C—
If the recipient is an individual/HUF 1%*
If the recipient is any other person 2%*
 Other points - The following points should be noted—

1. There is no surcharge and health and education cess.
2. If the recipient is a transport operator and he furnishes his PAN to the payer, TDS rate is nil. “Transport
operator” is a person who is in the business of plying, hiring or leasing of goods carriages.
3. In the case of work contract being manufacturing or supplying product according to the specification of
customer (by using material purchased from such customer), TDS shall be deducted on the invoice value
excluding the value of material purchased from such customer, if such value is mentioned separately in the
invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted
on the whole of the invoice value.
4. Tax is deductible on the consideration excluding GST, if any.
276.4 When tax is not deductible - In the following cases, tax is not deductible or deductible at lower rate under
section 194C—
 Petty cases - To avoid tax deduction in petty cases, tax is required to be deducted at source where the amount
credited or paid to a contractor exceeds Rs. 30,000 in a single payment or credit or Rs. 1,00,000 in the aggregate
during a financial year. In other words, tax is not deductible under section 194C, if the following two conditions
are satisfied—
a. the amount of any (single) sum credited or paid (or likely to be credited or paid) to the contractor does not
exceed Rs. 30,000; and
b. the aggregate of the amount of such sums credited or paid (or likely to be credited or paid) during the financial
year does not exceed Rs. 1,00,000.
 Transport operators - If recipient (maybe an individual, firm, company, or any other person) is a transport
contractor (who is in the business of plying, hiring or leasing goods carriages) and satisfies the following
conditions, tax is not deductible –
- Up to May 31, 2015 - Recipient furnishes his PAN to the deductor.
- From June 1, 2015 - Recipient owns 10 (or less than 10) goods carriages at any time during the financial year.
He gives a declaration to this effect to the deductor. Besides, he furnishes his PAN to the deductor.
Deductors who make payments to transporters without deducting TDS (as they have quoted PAN) are required
to intimate these PAN details to the Income-tax Department in the prescribed format (i.e., Form No. 26Q).
 Lower rate TDS certificate under section 197 - See para 289.7.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM INSURANCE COMMISSION

[SEC. 194D]
277. The provisions of section 194D are given below—
Who is the payer Any person paying insurance commission
Payment covered Insurance commission
Maximum amount which can be paid without Any amount which is Rs. 15,000, or less (to be calculated on
tax deduction aggregate basis for the entire financial year)
Rate of tax deduction at source 5% (if recipient is a person other than company) 10% (if recipient is
a company)
Is it possible to get the payment without tax The recipient can make an application in Form No. 13 to the
deduction or with lower tax deduction Assessing Officer to get a certificate of lower tax deduction or no tax
deduction [see para 289.7]
*See also para 269.2.

555 TDS from payment to NR sportsmen or sports associations Para 278
 WHEN AND HOW TAX TO BE DEDUCTED AT SOURCE FROM PAYMENT OF LIFE INSURANCE
POLICY [SEC. 194DA]
277A. The provisions of section 194DA are given below –
Who is payer Any person responsible for paying to a resident any sum under a life
insurance policy (including bonus)
Who is recipient A resident person
Payment covered Any payment pertaining to life insurance policy (whether at the time of
maturity or otherwise)
At what time tax has to be deducted At the time of payment
Maximum amount which can be paid Any amount which is less than Rs. 1,00,000 (to be calculated on aggregate
without tax deduction basis for the entire financial year)
Rate of tax deduction 1% of payment (applicable during June 1, 2016 and August 31, 2019).
5% of the amount of income comprised in payment (applicable with effect
from September 1, 2019)
Rate of tax deduction 2% (1% from June 1, 2016) [see also para 269.2]
When the provisions are not applicable If the payment is exempt in the hands of recipient under section 10(10D)
Is it possible to get the payment without If the recipient submits Form No. 15G/15H under section 197A, tax is not
tax deduction or with lower tax deduc- deductible.
tion
 Exemption under section 10(10D) - If exemption is available to the recipient under section 10(10D), then the
above TDS provisions are not applicable. Consequently, in the following cases TDS provisions of section 194DA
are applicable –
a. any payment under a keyman insurance policy;
b. any payment under section 80DD(3) or section 80DDA(3);
c. any payment under insurance policy issued during April 1, 2003 to March 31, 2012 where annual insurance
premium is more than 20 per cent of capital sum assured;
d. any payment under insurance policy issued after March 31, 2012 where annual insurance premium is more
than 10 per cent of capital sum assured; or
e. any payment under insurance policy issued after March 31, 2013 to a person covered under section 80U or
80DDB where annual insurance premium is more than 15 per cent of capital sum assured.
In cases covered by (c), (d) or (e) (supra), tax is not deductible if the payment is made on the death of a person.
Any payment under a policy [not being a keyman insurance policy or a policy covered under section 80DD(3)
or section 80DDA(3)] issued prior to April 1, 2003, is not subject to TDS provisions of section 194DA.
TDS provisions of section 194DA are applicable whether payment is made at the time of maturity or otherwise.
Suppose an insurance company gives a loan of Rs. 1,00,000 (or more) to a policyholder against an insurance
policy (which was issued on or after April 1, 2003 and annual insurance premium is more than 20 per cent of
sum assured), TDS provisions of section 194DA would be applicable at the time of release of loan amount to
policyholder.
 WHEN AND HOW TAX IS DEDUCTIBLE AT SOURCE FROM PAYMENT TO NON-RESIDENT

SPORTSMEN OR SPORTS ASSOCIATIONS [SEC. 194E]
278. The provisions of section 194E are given below—
Who is the payer Any person making payment to non-resident foreign citizen sports-
man/sports association/entertainer
Who is the recipient Non-resident foreign citizen sportsman/sports association/enter-
tainer
Payment covered Payment to non-resident foreign citizen sportsman/sports associa-
tion/entertainer
Maximum amount which can be paid without Nil
tax deduction
Rate of tax deduction at source 20% [see para 269.2]

Is it possible to get the payment without tax No provision
 WHEN AND HOW TAX IS DEDUCTIBLE FROM PAYMENTS IN RESPECT OF NATIONAL

SAVINGS SCHEME [SEC. 194EE]
279. The provisions of section 194EE are given below—
Who is the payer Post office
Payment covered Payment (principal + interest) out of National Saving Scheme, 1987
Maximum amount which can be paid without If the amount of payment is Rs. 2,500 or less than Rs. 2,500
tax deduction
Rate of tax deduction at source 10% (no surcharge and education cess, etc.) [see para 269.2].
When the provisions are not applicable The payment is made to legal heirs of the deceased depositor
Is it possible to get the payment without tax See para 289.8.
 WHEN AND HOW TAX IS DEDUCTIBLE ON PAYMENTS ON ACCOUNT OF REPURCHASE OF

UNITS OF MUTUAL FUNDS OR UTI [SEC. 194F]
280. The provisions of section 194F are given below—
Who is the payer Mutual fund or UTI
Who is the recipient Unit holder under section 80CCB
Payment covered Payment on account of repurchase of units referred to in section
80CCB
Maximum amount which can be paid without —
tax deduction
 WHEN TAX IS DEDUCTIBLE FROM COMMISSION, ETC., ON SALE OF LOTTERY TICKETS

[SEC. 194G]
281. The provisions of section 194G are given below—
Who is the payer Any person paying commission on sale of lottery tickets
Payment covered Commission on sale of lottery tickets
Maximum amount which can be paid without If the amount of payment is Rs. 15,000 or less
tax deduction
If an authorised lottery ticket agent purchases lottery tickets in bulk at a discount from the State Government and
sells the same at a price of his choice, section 194G is not applicable.
557 How tax is deductible from payment on transfer of certain immovable properties u/s 194-IA Para 283A
 WHEN AND HOW TO DEDUCT TAX AT SOURCE FROM COMMISSION OR BROKERAGE [SEC.
194H]
282. The provisions of section 194H are given below—
Who is the payer Any person paying commission or brokerage (not being an indi-
vidual or a Hindu undivided family whose books of account are not
required to be audited under section 44AB in the immediately
preceding financial year)
Who is the recipient Any resident person
Payment covered Commission or brokerage (not being insurance commission)
Maximum amount which can be paid without If the amount of payment is Rs. 15,000 or less
tax deduction
When the provisions are not applicable -
282.1 Meaning of commission or brokerage - “Commission or brokerage” for the purpose of section 194H
includes any payment which satisfies the following conditions—
Condition 1 Payment is received or receivable by a person acting on behalf of the payer.
Condition 2 The aforesaid payment is received for services rendered (not being professional services) or for any
service in the course of buying/selling of goods* or in relation to any transaction relating to any asset,
valuable article or thing, not being securities.
Condition 3 The above payment may be received or receivable directly or indirectly.
Condition 4 The above payment is not insurance commission covered by section 194D.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM RENT [SEC. 194-I]

283. The provisions of section 194-I are given below—
Who is the payer Any person paying rent (not being an individual or a Hindu
undivided family whose books of account are not required to be
audited under section 44AB in the immediately preceding financial
year)
Payment covered Rent of land, building, plant, machinery or furniture
Maximum amount which can be paid without If the amount of payment during a financial year does not exceed –
tax deduction - Rs. 1,80,000 (applicable up to March 31, 2019)
- Rs. 2,40,000 (applicable from April 1, 2019)
Rate of tax deduction at source Rent of plant or machinery : 2%, rent of land, building or furniture :
10%, tax is deductible on payment/credit (excluding GST and
municipal tax). See also para 269.2.
When the provisions are not applicable No tax is deductible when rent is paid/credited to real estate
investment trust.
Is it possible to get the payment without tax The recipient can make an application in Form No. 13 [see para
deduction or with lower tax deduction 289.7] Alternately, the recipient can submit a declaration in Form
No. 15G/15H.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM PAYMENT ON TRANSFER OF CERTAIN

IMMOVABLE PROPERTIES UNDER SECTION 194-IA
283A. Section 194-IA is applicable as follows—
 Who is responsible for tax deduction - Any person (being a transferee) responsible for paying (other than the person
referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any
*Discount given to stamp vendors for purchasing stamps in bulk quantity is in nature of cash discount in transaction of sale. It is not commission
or brokerage. Section 194H is not applicable.
Para 283B Deduction and collection of tax at source 558
immovable property (other than agricultural land in rural area in India), is liable to deduct tax at source under
section 194-IA.
 Time of deduction - Tax shall be deducted at the time of payment or at the time of giving credit to the transferor,
whichever is earlier.
 Rate of tax deduction - Tax is deductible at the rate of 1 per cent**. However, no tax is deductible where the
consideration† paid or payable is less than Rs. 50,00,000.

 Provisions of TAN - Not applicable in the case of deductors under section 194-IA.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM RENT BY CERTAIN INDIVIDUALS/HUFs

UNDER SECTION 194-IB
283B. Section 194-IB is applicable with effect from June 1, 2017.
 Who is responsible for tax deduction - Any individual/HUF [whose books of account are not required to be
audited under section 44AB(a)/(b)] responsible for paying to a resident rent of land or building, is liable to
deduct tax under section 194-IB. Tax is deductible under this section if the quantum of rent is more than
Rs. 50,000 per month (or part of month).
 Time of deduction - Tax shall be deducted only at the time of credit of rent (for the last month of the previous
year or last month of tenancy if the property is vacated during the year) to the account of payee or at the time
of payment thereof in cash or by cheque/draft, whichever is earlier.
 Rate of tax deduction - Tax is deductible at the rate of 5 per cent of rent paid/credited during the financial year.
However, no tax is deductible where rent is Rs. 50,000 per month (or less). If PAN of recipient is not available,
tax is deductible at the rate of 20 per cent (however, in such a case amount of TDS cannot exceed rent payable
for the last month of the previous year or last month of tenancy).
 Provisions of TAN not applicable - Provisions of section 203A (pertaining to TAN) shall not apply in respect of
tax deducted under section 194-IB.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM PAYMENT UNDER JOINT DEVELOPMENT
AGREEMENT UNDER SECTION 194-IC
283C. Section 194-IC is applicable with effect from April 1, 2017.
 Who is responsible for tax deduction - Any person responsible for paying to a resident any sum by way of
consideration (not being consideration in kind) under a joint development agreement, is responsible for tax
deduction under section 194-IC.
 Time of tax deduction - Tax is deductible at the time of credit of such sum to the account of the payee or at the
time of payment thereof in cash or by issue of a cheque/draft or by any other mode, whichever is earlier.
 Threshold limit - Nil.
 Rate of tax deduction - Tax is deductible at the rate of 10 per cent. If PAN of recipient is not available, tax is
deductible at the rate of 20 per cent.

 Meaning of joint development agreement - It is a registered agreement in which a land owner (i.e., a person who
owns land or building or both) agrees to allow another person to develop a real estate project on such land or
building or both, in consideration of a share (being land or building or both) in such project, whether with or
without payment of part of the consideration in cash.
 WHEN TAX IS DEDUCTIBLE AT SOURCE ON FEES FOR PROFESSIONAL OR TECHNICAL

SERVICES [SEC. 194J]
284. The provisions of section 194J are given below—
Who is the payer Any person (not being an individual/HUF) who pays/credits fees
for professional/technical service/royalty, is responsible for tax
deduction.
**If the recipient does not have PAN, tax will be deductible at the rate of 20 per cent.
† Consideration (with effect from September 1, 2019) for transfer of immovable property includes all charges of the nature of club membership
fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature, which are incidental to
transfer of the immovable property.
559 Royalty Para 284.3
However, an individual/HUF is responsible for tax deduction only

if books of account of the payer is subject to audit under section 44AB
in the immediately preceding year and payment/credit is of profes-
sional fees (not for personal purposes) or technical fees†
Payment covered Fees for professional/technical services/royalty/director’s fees
Maximum amount which can be paid without If the amount of profession fees during a financial year is Rs. 30,000
tax deduction or less than Rs. 30,000. Similarly, if the amount of technical fees
during a financial year is Rs. 30,000 or less. Further if the amount of
royalty during a financial year is Rs. 30,000 or less. No threshold
limit for director’s fees.
Rate of tax deduction at source 10% (2% in the case of a payee who is engaged only in the business
of operation of call centre, applicable with effect from June 1, 2017).
Tax is deductible on total payment (excluding GST). Even reim-
bursement of actual expenditure cannot be deducted out of the bill
amount in the case of a consolidated bill.
Is it possible to get the payment without tax The recipient can make an application in Form No. 13 [see para
deduction or with lower tax deduction 289.7].
284.1 Time of tax deduction - Tax shall be deducted at the time of credit of such sum to the account of the payee
or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
284.2 Meaning of professional/technical services - The expression “professional services” has been defined to
mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural
profession or the profession of accountancy or technical consultancy or interior decoration or advertising (i.e.,
models, artists, photographers, providing services to an advertising agency) or such other profession as is notified
by the Board for the purposes of section 44AA [i.e., authorised representative, film artist or company secretary or
information technology] or of this section‡.
The expression “fees for technical services” means any consideration for rendering any managerial, technical or
consultancy services. It does not include (a) consideration for any construction, assembly, mining or like projects,
(b) consideration for any service provided by machines or robots, and (c) salary payment.
 Amount paid by non-resident - Any fees paid through regular banking channels to any chartered accountant,
lawyer, advocate or solicitor who is resident in India by the non-resident who do not have any agent or business
connection or permanent establishment in India may not be subject to the provisions of tax deduction at source
under section 194J— Circular No. 726, dated October 16, 1995.
 Payment to hospital by Third Party Administrators (TPAs) - TPAs who are making payment on behalf of insurance
companies to hospitals for settlement of medical/insurance claims, etc., under various schemes including
cashless schemes, are liable to deduct tax at source under section 194J — Circular No. 8/2009, dated November
24, 2009.
284.3 Royalty - Royalty for this purpose is defined by Explanation 2 to section 9(1)(vi). Apart from a few other
points, royalty as per Explanation 2 also includes consideration for the use of any patent, invention, model, design
secret formula or process or trade mark or similar property. This definition of royalty has been amended by
inserting Explanations 4, 5 and 6 to section 9(1)(vi) by the Finance Act, 2012 with retrospective effect from June
1, 1976. These Explanations are given below –
Explanation 4 clarifies that royalty includes transfer of all or any right for use (or right to use) a computer software
(including granting of a licence) irrespective of the medium through which such right is transferred.
Explanation 5 clarifies that royalty includes any consideration in respect of any right, property or information,
whether or not—
†If payer is an individual/HUF and payment/credit is of royalty, tax is not deductible under section 194J, even if the books of the payer are
required to be audited.
‡For the purpose of section 194J, the Board has notified the following professions in relation to the sports activities as “professional services”—
(a) sports persons, (b) umpires and referees, (c) coaches and trainers, (d) team physicians and physiotherapists, (e) event managers, (f)
commentators, (g) anchors, and (h) sports columnists.
Para 284A Deduction and collection of tax at source 560
a. the possession or control of such right, property or information is with the payer;
b. such right, property or information is used directly by the payer;
c. the location of such right, property or information is in India.
Explanation 6 clarifies that expression “process” includes transmission by satellite (including up-linking,
amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology,
whether or not such process is secret.
 Relief given by Notification No. 21/2012 - In exercise of the power given by section 197A(1F), the Central
Government has given a relief vide Notification No. 21/2012, dated June 13, 2012, which is explained with the
help of an example given below –
1. A Ltd. (a resident taxpayer) purchased software and at the time of purchase it deducted tax at source under
section 194J or 195.
2. Without any modification A Ltd. transfers software to B Ltd.
3. A Ltd. gives a declaration (giving its PAN) that tax was deducted by it at the time of purchase under section
194J/195.
If these conditions are satisfied B Ltd. will not deduct tax at source under section 194J.
 Reference of Explanations 4, 5 and 6 missing in the definition of royalty given in sections 194J, 195 and 40(a)(i)/(ia) -
For the purpose of sections 194J, 195 and 40(a)(i)/(ia), “royalty” means royalty as given in Explanation 2 to section
9(1)(vi). When Explanations 4, 5 and 6 were inserted in section 9(1)(vi) by the Finance Act, 2012, a reference of these
Explanations was not simultaneously incorporated in sections 194J, 195 and 40(a)(i)/(ia). Consequently, the
application of Explanations 4, 5 and 6 to section 9(1)(vi) for the purpose of sections 194J, 195 and 40(a)(i)/(ia) is
questionable (one should legally challenge it if the Assessing Officer does not agree) – see Sonata Information
Technology Ltd. v. CIT [2012] 54 SOT 233 (Mum.).
 WHEN AND HOW TO DEDUCT TAX AT SOURCE FROM PAYMENT OF COMPENSATION ON

ACQUISITION OF CERTAIN IMMOVABLE PROPERTY [SEC. 194LA]
284A. Section 194LA provides for deduction of tax at source in the case of payment of compensation on
acquisition of immovable properties. The provisions of section 194LA are given below—
Who is the payer Any person paying compensation/enhanced compensation/consideration/en-
hanced consideration on account of compulsory acquisition of any land (not being
agricultural land*) or building
Payment covered Compensation/enhanced compensation/consideration/enhanced consideration
on account of compulsory acquisition of land (not being agricultural land*) or
building
At what time tax has to be At the time of payment or at the time of credit, whichever is earlier
deducted at source
Maximum amount which can If the amount of payment/credit during the financial year does not exceed
be paid without tax deduction Rs. 2,50,000
Rate of tax deduction at source 10% (no surcharge and education cess, etc.) [see para 269.2]
When the provisions are not If award is exempt from levy of income-tax under section 96 of the Right to Fair
applicable Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013 (applicable with effect from April 1, 2017).
Is it possible to get the payment The recipient can make an application in Form No. 13 to the Assessing Officer
without tax deduction or with to get a certificate of lower tax deduction or no tax deduction [see para 289.7]
lower tax deduction
*If land was agricultural land and not used for non-agricultural purposes, it will be treated as “agricultural land” for the purpose of section 194LA
and, consequently, tax is not deductible from payment of compensation on acquisition of such “agricultural land”, even if it was not actually used
for agricultural purposes.
561 How tax is deductible from income of investment in securitization fund Para 284E
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM INTEREST PAYABLE ON

INFRASTRUCTURE DEBT FUND [SEC. 194LB]
284B. Section 194LB provides for tax deduction at source as follows—
Who is payer/deductor Any person responsible for paying income by way of interest by an infrastruc-
ture debt fund referred to in section 10(47)
Who is the recipient A non-resident or a foreign company
Payment covered Interest on infrastructure debt fund
At what time tax shall be deducted At the time of credit of such income to the account of recipient or at the time of
payment thereof in cash or by cheque/draft/any other mode, whichever is
earlier
Maximum amount which can be paid No threshold limit
without tax deduction
Rate of tax deduction 5% (+SC+HEC) [See para 269.2]
Is it possible to get payment without Section 197 is not applicable
TDS or with lower TDS
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM INCOME FROM UNITS OF
BUSINESS TRUST [SEC. 194LBA]
284C. The provisions of section 194LBA are given below –
 Time of tax deduction - Tax deduction is applicable if a business trust distributes any income referred to in
section 115UA [being of the nature referred to in section 10(23FC)(a)/(23FCA)] to its unit holder. Tax is
deductible at the time of credit of such payment to the account of the payee or at the time of payment thereof
in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.
 Rate of TDS - Tax is deductible at the following rates –
- If the recipient is resident - If the recipient unit holder is resident in India, tax is deductible at the rate of 10 per
cent.
- If the recipient is non-resident - If the recipient unit holder is a non-resident or a foreign company, tax is
deductible at the rate of 5 per cent (+SC+HEC). If, however, rental income (received by a real estate investment
trust) is distributed to unitholders, tax shall be deducted at the rate of 30 per cent (40 per cent if recipient is
foreign company) (+SC+HEC).
If the recipient does not have PAN, tax is deductible at the rate of 20 per cent. Provisions of section 197 or section
197A are not applicable.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM INCOME IN RESPECT OF UNITS OF INVEST-
MENT FUND [SEC. 194LBB]
284D. Provisions of section 194LBB are given below –
 Time of tax deduction - Tax deduction is applicable if a business trust distributes any income referred to in section
115UB [not being business income of the nature referred to in section 10(23FBB)] to its unitholders. Tax is
deductible at the time of credit of such payment to the account of the payee or at the time of payment thereof in
cash or by cheque/draft.
 Rate of TDS - Tax is deductible at the rate of 10 per cent‡. If the recipient does not have PAN, tax is deductible
at the rate of 20 per cent.
 Lower TDS certificate - Provisions of section 197 are applicable.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM INCOME IN RESPECT OF INVESTMENT IN

SECURITIZATION FUND [SEC. 194LBC]
284E. Provisions of section 194LBC are given below –
 Time of tax deduction - Tax deduction is applicable if income is payable to an investor in respect of an invest-
ment in a securitization trust. Tax is deductible at the time of credit of such payment to the account of the payee
‡With effect from June 1, 2016 tax is deductible at the rates in force, if the recipient is non-resident/foreign company.
Para 284F Deduction and collection of tax at source 562
or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever
is earlier.
 Rate of TDS - Tax is deductible at the rates given below –
a. 25 per cent (where the payee is a resident individual/HUF);

b. 30 per cent (where the payee is a resident but other than an individual/HUF);
c. 40 per cent (+SC+HEC) (where the payee is a foreign company);
d. 30 per cent (+SC+HEC) (where the payee is a non-resident, not being a foreign company).
 Lower TDS certificate - Provisions of section 197 are applicable. However, section 197A is not applicable.
 WHEN AND HOW TAX IS TO BE DEDUCTED BY AN INDIAN COMPANY FROM INTEREST TO

A NON-RESIDENT/FOREIGN CITIZEN [SEC. 194LC]
284F. The provisions of section 194LC are given below –
Who is payer/deductor Indian company or business trust
Who is the recipient A non-resident or a foreign company
Payment covered See Note
At what time tax shall be deducted At the time of credit of such income to the account of recipient or at the time of
payment thereof in cash or by cheque/draft/any other mode, whichever is
earlier
Maximum amount which can be No threshold limit
paid without tax deduction
Rate of tax deduction 5% (+SC+HEC) [see para 269.2]†
Is it possible to get payment Section 197 is not applicable
without TDS or with lower TDS
Note - Section 194LC is applicable if interest is paid or payable at approved rate. Interest should pertain to money borrowed
in foreign currency from a source outside India—
a. under a loan agreement (at any time on or after July 1, 2012 but before July 1, 2020); or
b. by way of issue of long-term infrastructure bonds (at any time on or after July 1, 2012 but before October 1, 2014); or
c. by way of issue of long-term bonds including long-term infrastructure bonds (at any time on or after October 1, 2014
but before July 1, 2020).
Section 194LC is also applicable on interest in respect of money borrowed from outside India by way of rupee denominated
bond (before July 1, 2020).
 WHEN AND HOW TAX IS TO BE DEDUCTED FROM INTEREST ON BONDS/GOVERNMENT

SECURITIES UNDER SECTION 194LD
284G. The provisions of section 194LD are given below—
Who is deductor - Any person who is responsible to for making payment (as given below) should deduct tax at
source.
Who is deductee - A foreign institution investor or a qualified foreign investor.
Payment covered by section 194LD - Interest on a rupee denominated bond of an Indian company (interest not to
exceed notified‡ rate of interest) or Government security which is payable after May 31, 2013 but before July 1,
2020.
Time of tax deduction - At the time of payment or at the time giving credit to the recipient, whichever is earlier.
Rate of TDS - 5 per cent (+SC+HEC). If recipient does not have PAN, tax is deductible at the rate of 20 per cent.
Lower TDS certificate under section 197 - Not possible.
†If the recipient does not furnish his PAN to the deductor, tax will be deducted (by virtue of section 206AA) at the rate of 20 per cent. However,
the provisions of section 206AA will not apply in the tax deduction under section 194LC from June 1, 2013.
‡Notified rate of interest is any rate but not exceeding 500 basis points (bps) over the Base Rate of SBI applicable on the date of issue of the bonds
or July 1, 2010, whichever is later.
563 How tax is deductible on payment of amounts in cash Para 284.1
Provisions of sections 195 and 196D - If tax is deductible under section 194LD, TDS under sections 195 and 196D
will not be applicable.
 WHEN AND HOW TAX IS DEDUCTIBLE ON CERTAIN PAYMENTS BY INDIVIDUAL/HUF

[SEC. 194M]
284H. Section 194M has been inserted with effect from September 1, 2019. Provisions of this section are given
below –
Who is deductor - An individual/HUF (who is not required to deduct tax at source under section 194C, 194H or
194J) is required to deduct tax under section 194M. Consequently, an individual/HUF is required to deduct tax
at source in respect of the following under section 194M –
- Payment/credit to a resident contractor or resident professional, when such payment is for personal use.
- Payment/credit to a resident contractor or resident professional or to a resident by way of commission (not
being insurance commission) or brokerage [where payer is an individual/HUF who carries on business or
profession and books of account are not subject to tax audit under section 44AB(a)/(b) in the immediately
preceding financial year].
Threshold limit - Tax is not deductible if aggregate amount paid or payable during the financial year to a resident
does not exceed Rs. 50 lakh.
Payment covered - TDS under section 194M is applicable in respect of amount paid/payable to a resident for
carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract or by
way of commission (not being insurance commission) or brokerage or by way of fees for professional services.
When deductible - Tax is deductible at the time of credit of aforesaid sum or at the time of payment of the aforesaid
sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
Rate of TDS - Tax is deductible at the rate of 5 per cent of the aforesaid payment or credit.
Lower TDS certificate - Recipient can apply for nil/lower TDS certificate under section 197.
TAN not necessary - Individual/HUF (who is required to deduct tax under section 194M) shall be able to deposit
the tax deducted using his PAN and shall not be required to obtain TAN.
 WHEN AND HOW TAX IS DEDUCTIBLE ON PAYMENT OF CERTAIN AMOUNTS IN CASH

[SEC. 194N]
284-I. Section 194N has been inserted with effect from September 1, 2019. Provisions of section 194N are given
below –
Who is deductor - A bank, co-operative bank or a post office, who is responsible for paying any sum in cash to an
accountholder, is required to deduct tax at source under section 194N.
Threshold limit - It is Rs. 1 crore. In other words, tax is deductible by a bank (or co-operative bank or post office)
if aggregate payment in cash from one or more accounts during a previous year to an accountholder, exceeds
Rs. 1 crore.
When deductible - Tax is deductible at the time of payment in cash.
Rate of TDS - Tax is deductible at the rate of 2 per cent of payment (or aggregate payment) in cash exceeding Rs.
1 crore.
Lower TDS certificate - Not possible.
Cash payment to certain recipients without TDS - Exemption is available, when cash payment is made to certain
recipients, such as the Government, banking company, co-operative society engaged in carrying on the business
of banking, post office. Exemption is also available when cash payment is made to the following persons –
- Any business correspondent of a banking company or co-operative bank in accordance with the guidelines
issued in this regard by RBI.
- Any white label ATM operator of a banking company/co-operative bank in accordance with the authorisation
issued by RBI under the Payment and Settlement Systems Act, 2007.
- Such other person or class of persons notified by the Central Government in consultation with RBI†.
 WHEN AND HOW TAX IS TO BE DEDUCTED AT SOURCE FROM OTHER SUMS [SEC. 195]
Who is the payer Any person (resident or non-resident) responsible for making pay-
ment to a non-resident
Who is the recipient A non-resident person
Payment covered Any payment to non-resident (other than salary) which is taxable in
the hands of recipient in India
Maximum amount which can be paid without —
tax deduction
Rate of tax deduction at source See Appendix 1
When the provisions are not applicable If in the hands of the recipient, the amount is not chargeable to tax
in India
Is it possible to get the payment without tax The recipient can make an application to the Assessing Officer to
deduction or with lower tax deduction get a certificate of lower tax deduction or no tax deduction [see para
289.7]
 Information pertaining to payment to non-resident/foreign company - With effect from June 1, 2015, the person
responsible for paying to a non-resident/foreign company, any sum (whether or not chargeable under the
provisions of this Act in the hands of recipient) shall furnish the information relating to payment of such sum,
in such form and manner, as may be prescribed.
 Remittance - A person making remittance to a non-resident/foreign company is required to furnish an
undertaking in digital mode in Form No. 15CA. In some cases, a certificate of a chartered accountant in Form No.
15CB has to be taken before uploading Form No. 15CA. The relevant provisions (applicable from April 1, 2016)
are given below –
 Category A - Amount (which is to be remitted abroad) is not chargeable to tax in the hands of recipient in India—
1. Undertaking in Form No. 15CA and certificate in Form No. 15CB is not required, if remittance pertains to 33
items specified in rule 37BB.
2. Undertaking in Form No. 15CA and certificate in Form No. 15CB is not required, if—
a. the remittance is made by an individual; and
b. prior RBI approval is not required‡ by virtue of section 5 of FEMA read with Schedule III to the Foreign
Exchange (Current Account Transaction) Rules, 2000.
† The Central Government has specified the following persons for this purpose –
Persons specified by the Central Government (these TDS provisions of section 194N are not applicable only if these conditions are satisfied –
persons can withdraw cash without TDS under
section 194N)
1. Cash Replenishment Agencies (CRA’s) and These persons maintain a separate bank account from which cash withdrawal is made
franchise agents of White Label Automated only for the purposes of replenishing cash in ATM operated by such WLATMO’s and the
Teller Machine Operators (WLATMO’s) WLATMO have furnished a monthly certificate to the bank certifying that cash with-
drawal has been reconciled with the amount of cash deposited in the ATMs.
2. The commission agent/trader, operating If these persons have certified to the banking company/co-operative society/post office
under Agriculture Produce Market Committee that cash withdrawal (in excess of Rs. 1 crore in the previous year) is for the purpose of
(APMC) and registered under any law relating making payments to the farmers on account of purchase of agriculture produce.
to APM of the concerned State
3. An authorised foreign exchange dealer (and If cash withdrawal is made only for the purpose of purchase of foreign currency from
its franchise agent/sub-agent). foreign tourists or non-residents visiting India or from resident Indians on their return
4. Full-Fledged Money Changer (FFMC) licensed to India, in cash as per the RBI directions or guidelines. Moreover, these persons are not
by RBI (and its franchise agent). subject to TDS provisions of section 194N if cash withdrawal is made by these persons
for the purpose of disbursement of inward remittances to the recipient beneficiaries in
India in cash under Money Transfer Service Scheme (MTSS) of RBI.
‡Prior RBI approval is not required for remittance by an individual within the limit of US $ 5,00,000 for - (a) Private visits to any country (except
Nepal and Bhutan); (b) Gift of donation; (c) Going abroad for employment; (d) Emigration; (e) Maintenance of close relatives abroad; (f) Travel
for business/conference/specialised training/medical treatment/studies abroad; and (g) Any other current account transaction.
565 TDS from income of Foreign Institutional Investors Para 288
3. In any other case, certificate in Form No. 15CB is not required. However, undertaking in Form No. 15CA (Part
D) should be uploaded.
 Category B - Amount (which is to be remitted abroad) is chargeable to tax in the hands of recipient in India -
4. If remittance (or aggregate amount of remittance during the financial year) does not exceed Rs. 5,00,000, Form
No. 15CB is not required. However, undertaking in Form No. 15CA (Part A) should be uploaded.
5. If lower TDS certificate is received under section 197 or order of the Assessing Officer is received under section
195(2)/(3), information is to be uploaded in Form No. 15CA (Part B). Certificate from a chartered accountant in
Form No. 15CB is not required.
6. In any other case of remittance outside India, the person making remittance will have to take a chartered
accountant certificate in Form No. 15CB and, subsequently, he/it will have to furnish an undertaking in Form
No. 15CA (Part C).
 Capital gain on the transfer of controlling interest of a foreign company (having tangible and intangible assets
in India) is chargeable to tax in India and the transferee (i.e., the purchaser) shall deduct tax at source out of
consideration payable to the transferor. This rule is applicable even if controlling interest is transferred outside
India or even if the transferee is a non-resident and situated outside India [provisions has amended by the
Finance Act, 2012].
 No tax is deductible under section 195 in respect of dividends referred to in section 115-O or when tax is
deductible under sections 194LB, 194LC and 194LD.
 WHEN AND HOW TAX IS DEDUCTIBLE FROM UNITS OR LONG-TERM CAPITAL GAIN
UNDER SECTION 196B
286. Where any income is payable in respect of units referred to in section 115AB or by way of long-term capital
gain arising from the transfer of such units to an Offshore Fund, the person responsible for making the payment
shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash
or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the
rate of 10 per cent*.
 WHEN TAX IS DEDUCTIBLE FROM INCOME OR LONG-TERM CAPITAL GAIN FROM FOR-
EIGN CURRENCY BONDS/GLOBAL DEPOSITORY RECEIPTS [SEC. 196C]
287. The provisions of section 196C are given below—
Who is the payer Any person responsible for paying income/long-term capital gain
from GDR/bonds
Who is the recipient A non-resident person
Payment covered Income/long-term capital gain from GDR/bonds
Maximum amount which can be paid without -
tax deduction
Rate of tax deduction at source 10%*
When the provisions are not applicable Dividend referred to in section 115-O
 WHEN TAX IS DEDUCTIBLE AT SOURCE FROM INCOME OF FOREIGN INSTITUTIONAL

INVESTORS FROM SECURITIES [SEC. 196D]
288. The provisions of section 196D are given below—
Who is the payer Any person responsible for paying income in respect of securities
referred to in section 115AD (not being income referred to in section
194LD)
Who is the recipient Foreign Institutional Investor
Payment covered Income in respect of securities referred to in section 115AD (not
being income referred to in section 194LD)
Maximum amount which can be paid without -
tax deduction
Rate of tax deduction at source 20%*

When the provisions are not applicable Dividend referred to in section 115-O; capital gain arising from
transfer of securities referred to in section 115AD
 WHAT ARE OTHER POINTS FOR CONSIDERATION

289. Apart from what has been discussed earlier, the following points merit consideration—
289.1 Amount payable to Government/RBI/certain corporations not subject to tax deduction - By virtue
of section 196, tax is not deductible under any provision of the Act in respect of amount payable to the
following—
a. Central Government or State Government;
b. the Reserve Bank of India;
c. a statutory corporation whose income is exempt from income-tax; or
d. a mutual fund.
 Section 197A(1D) - Tax is not deductible by off-shore banking unit from interest paid to non-resident or not
ordinarily resident.
 Section 197A(1E) - No deduction of tax is required from any payment to any person for, or on behalf of, the New
Pension System Trust.

 Section 197A(1F) -Tax is not deductible from a specified payment to a notified institution/association. Notified
payment/institutions are—
- Certain payments† given by a person to a bank.
- Payments pertaining to software, if a few conditions given in Notification No. 21/2012, dated June 13, 2012
are satisfied.
- Any income (other than business income) given to an investment trust (referred to in section 115UB) which
is exempt under section 10(23FBA).
- Payment of interest or rent (covered by section 193, 194A or 194-I) to the Tirumala Tirupati Devasthanams,
Tirupati, Andhra Pradesh.
- Payments of the nature specified in section 10(23DA) to securitisation trust.
If any person makes payment to the aforesaid persons, no tax is deductible at source.
289.2 Tax deducted - To be treated as income of deductee and available for tax credit [Secs. 198 and 199]
- Tax deducted at source is deemed as income of the deductee [a few exceptions are : (a) tax paid by employer
on non-monetary perquisites of employees, (b) tax deducted under section 194N by a bank/co-operative bank/
post office on cash withdrawal in excess of Rs. 1 crore]. Further, the same amount is available as tax credit in the
hands of deductee subject to the following propositions—
1. Credit for tax deducted at source and paid to the Central Government, shall be given to the deductee for the
assessment year for which such income is assessable.
2. Where tax has been deducted at source and paid to the Central Government and the income is assessable over
a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion
in which the income is assessable to tax.
3. If the income on which tax has been deducted is assessable in the hands of a person other than the deductee,
then tax credit will be given to such other person if—
a. the deductee files a declaration with the deductor (the declaration should contain the name, address, PAN of
the person to whom credit is to be given and reasons for giving credit to such person);
b. the deductor shall keep the declaration in safe custody and reports the tax deduction in the name of such other
person in Form Nos. 16A, 26Q, etc.

†In the case of the following payments to a bank, tax is not deductible by virtue of section 197A(1F) – (a) bank guarantee commission; (b) cash
management service charges; (c) depository charges on maintenance of DEMAT accounts; (d) charges for warehousing services for commodities;
(e) underwriting service charges; (f) clearing charges (MICR charges); (g) credit card or debit card commission for transaction between the
merchant establishment and acquirer bank.
567 Quarterly statement of tax deduction/collection Para 289.4
289.3 Time of deposit of tax deducted at source (TDS) or collected at source (TCS) - Tax deducted/collected
by a person shall be deposited to Government account as follows—
Different situations Time of deposit of TDS/TCS (applicable in the case of tax
deducted/collected on or after April 1, 2010)
Time of deposit of TDS* Time of deposit of TCS*
1. Tax is deducted/collected by an On the same day on which tax is deducted On the same day on
office of the Government and tax is which tax is collected
paid without production of an in-
come-tax challan
2. Tax is deducted/collected by an On or before 7 days from the end of the month in On or before 7 days
office of the Government and tax is which tax is deducted from the end of the
accompanied by an income-tax chal- month in which tax is
lan [Challan No. ITNS 281] collected
3. Tax is deducted/collected by a  Where income or amount is paid or credited in the Within one week
person (not being an office of the month of March : Tax should be deposited by from the last day of
Government) [Challan No. ITNS 281] April 30 the month in which
 Where income or amount is paid or credited before tax is collected
March 1 : Tax should be deposited within 7 days
from the end of the month in which tax is deducted
4. Tax is deducted by a person (not  For the quarter ending June 30 : Tax should be —
being an office of the Government) deposited by July 7
and the Assessing Officer (with prior  For the quarter ending September 30 : Tax should
approval of Joint Commissioner) has be deposited by October 7
permitted quarterly deposit of tax  For the quarter ending December 31 : Tax should
deducted under sections 192, 194A, be deposited by January 7
194D and 194H [Challan No. ITNS  For the quarter ending March 31 : Tax should be
281] deposited by April 30
5. Tax is deducted by a person under Within 30 days from the last date of month in —
section 194-IA [Challan No. : Form which tax is deducted
26QB]
section 194-IB [Challan No. : Form which tax is deducted
26QC]
section 194M [Challan No. : Form which tax is deducted
26QD]
How to obtain refund - A claim for refund for TDS paid to the credit of the Central Government shall be furnished
by the deductor in Form No. 26B electronically under digital signature.
289.4 Quarterly statement of tax deduction/collection - In respect of tax deducted/collected, quarterly TDS/
TCS statements shall be submitted in the following forms—
Form No.
Tax deduction from salary under section 192 24Q
Tax deduction when deductees are non-resident (not being a company), foreign company and
persons who are resident but not ordinarily resident 27Q
Tax deduction under section 194-IA 26QB
Tax deduction under section 194-IB 26QC
Tax deduction under section 194M 26QD
Tax deduction in any other case 26Q
Tax collection 27EQ
Quarterly return cannot be submitted before deposit of TDS/TCS, interest for late deposit of TDS/TCS and late
fee under section 234E.
289.4-1 DUE DATE OF SUBMISSION OF QUARTERLY RETURNS - In respect of tax deducted/collected the above quarterly
returns shall be submitted within the time-limit given below—
*After March 31, 2008, all corporate assessees and other assessees (who are subject to compulsory audit under section 44AB) will have to make
electronic payment of tax (including TDS) through internet banking facility offered by authorized banks.
For the quarter Due date of submission of quarterly statements

ending TDS returns Quarterly TCS returns
June 30 July 31 July 15
September 30 October 31 October 15
December 31 January 31 January 15
March 31 May 31† May 15
Note - The time-limit given above is not applicable in the case of TDS under section 194-IA/194-IB. In these cases, challan
of electronic deposit of TDS (i.e., Form No. 26QB/26QC) is itself taken as quarterly statement of TDS (no separate statement
of TDS is to be submitted).
289.4-2 MODE OF FURNISHING QUARTERLY RETURNS - The following persons shall submit quarterly TDS/TCS returns
electronically (along with the verification of the statement in Form No. 27A)—
1. When deductor or collector is an office of the Government.
2. When deductor/collector is the principal officer of a company.
3. When deductor/collector is a person who is required to get his account audited under section 44AB in the
immediately preceding financial year.
4. When the number of deductee’s/collectee’s records in a statement for any quarter of the financial year are 20
or more.
Barring the cases given above, any other deductor/collector can submit quarterly TDS/TCS returns either in
paper format or electronically.
 Mode of uploading return - The aforesaid electronic return can be submitted/uploaded under any one of the
following options –
Option 1 - Uploading quarterly returns with digital signature.
Option 2 - Furnishing quarterly return electronically along with the verification of the statement in Form No. 27A.
Option 3 - Furnishing quarterly return electronically along with electronic verification of the statement in Form
No. 27A.
289.5 Certificate of tax deduction/collection at source - TDS/TCS certificate shall be issued to deductees/
collectees (Form No. 16 for TDS from salary, Form No. 16A for TDS from other than salary, Form No. 16B for TDS
under section 194-IA , Form No. 16C for TDS under section 194-IB and Form No. 27D for TCS). In the case of tax
deduction from the salary, a statement of perquisites/profits in lieu of salary should be separately given to
employees in Form No. 12BA.
289.5-1 TIME-LIMIT FOR ISSUE OF TDS/TCS CERTIFICATE - Time-limits for issue of TDS/TCS certificates are given below—
Form No. Periodicity Due date
Form Nos. Annual On or before June 15 of the financial year‡ immediately following the financial year
16 and 12BA in which tax is deducted.
Form No. 16A/ Quarterly Within 15 days from the due date of furnishing quarterly TDS/TCS returns. In other
Form No. 27D words—
For the quarter TDS/TCS certificate should be given on or before
ending Form No. 16A Form No. 27D
June 30 August 15 July 30
September 30 November 15 October 30
December 31 February 15 January 30
March 31 June 15 May 30
Form No. 16B – Within 15 days of furnishing challan in Form No. 26QB
Form No. 16C – Within 15 days of furnishing challan in Form No. 26QC
Form No. 16D – Within 15 days of furnishing challan in Form No. 26QD
†Extended in the case of Form No. 24Q from May 31, 2019 to June 30, 2019.
‡ Extended in the case of Form No. 16 from June 15, 2019 to July 10, 2019.
569 Obtaining a certificate of lower rate from AO Para 289.7
 TDS certificate in Form No. 16 - Form No. 16 can be issued as follows –

Form Contents How to generate different
No. 16 parts of Form No. 16
Part A This part contains information of employer and employee, All deductors (including Government
(Form summary of tax deduction at source, details of tax deduc- deductors) shall issue Part A of Form
No. 16) ted and deposited with the Central Government (like, tax No. 16, by generating and subsequently
deposited, BSR code of bank, date of deposit, challan downloading through TRACES Portal.
serial number, status of challan matching with OLTAS). Part A of Form No. 16 shall have a unique
In verification, the deductor will have to certify the TDS certificate number.
amount of tax deducted and deposited by him.
Part B Part B includes details of salary paid, other incomes, All deductors (including Government
(Form amount deductible under Chapter VI-A, tax payable and deductors) shall issue Part B of Form No. 16
No. 16) relief under section 89. Part B also includes a separate by generating and downloading through
verification to certify that salary/tax details are complete TRACES Portal)† in respect of all sums
and correct on the basis of books of account and other deducted on or after April 1, 2018 under
available records/documents/statements. section 192. The TRACES generated Form
No. 16 shall have a unique TDS certificate
number.
 When a person is employed by more than one employer during a financial year - If a person is employed under more
than one employer during the year, each of the employers shall issue Part A of Form No. 16 pertaining to the
period for which such person was employed with each of the employers. Part B may be issued by each of the
employers or the last employer at the option of the employee.
 Form No. 16 with digital signature - Part A of Form No. 16 shall be issued only by downloading it from the
TRACES Portal. Further, Part B of Form No. 16 (in respect of all sums deducted on or after April 1, 2018) shall
be issued only by downloading it from TRACES portal. However, Item Nos. 2(f) and 10(k) in Part B (Annexure)
of Form No. 16 shall be filled in by the deductor manually and it should be printed at the bottom of the TRACES
generated Form No. 16 (Part B). Before issuing Part A and Part B to the deductee, deductor shall authenticate the
correctness of contents of these parts. Authentication can be verified either by using manual signature or by using
digital signature.
 TDS (non-salary) certificate in Form No. 16A - TDS Certificates in Form No. 16A shall be issued by downloading
from TRACES Portal by the following deductors –

a. any deductor (including a Government deductor who deposits TDS in the Central Government Account
through book entry), if tax is deducted on or after April 1, 2012, and
b. any company (including a banking company), if tax is deducted on or after April 1, 2011.
Authentication of TDS certificate in Form No. 16A - Deductors, issuing the TDS certificates in Form No.16A by
downloading from the TRACES portal, can authenticate these certificates by either using digital signature or
manual signature.
TDS certificate in Form No. 16B - If tax is deducted under section 194-IA by a person purchasing an immovable
property, TDS certificate shall be issued in Form No. 16B by downloading from TRACES Portal.
289.6 Tax deduction and collection account number [Sec. 203A] - Every person, deducting tax under any
section or collecting tax, who has not been allotted a tax deduction account number (TAN), shall apply for the
allotment of TAN, within one month from the end of month in which tax is deducted or collected.
 Cases when TAN is not required - For reporting of tax deducted under section 194-IA or 194-IB, the deductor is
not required to obtain and quote TAN and he is allowed to report the tax deducted by quoting his PAN.
Moreover, section 203A has been amended (with effect from June 1, 2015) so as to provide that the requirement
of obtaining and quoting of TAN shall not apply to the notified deductors or collectors.
289.7 Obtaining a certificate of lower rate from the Assessing Officer [Sec. 197] - The provisions of section
197 are given below—
1. Tax is deductible under section 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA, 194LBB,
194LBC, 194M or 195.
†However, Item Nos. 2(f) and 10(k) in Part B (Annexure) of Form No. 16 shall be filled in by the deductor manually and it should be printed at
the bottom of the TRACES generated Form No. 16 (Part B) before furnishing it to employees.
2. The recipient can apply in Form No. 13 to the Assessing Officer to get a certificate authorizing the payer to
deduct tax at lower rate or deduct no tax as may be appropriate.
3. The certificate of lower tax shall be issued direct to the person responsible for deducting tax under advice to
the person who made the application for issue of such certificate. This certificate shall be valid only with regard
to the person responsible for deducting tax and named therein. If the number of persons responsible for
deducting tax is likely to exceed 100, the certificate of lower tax may be issued to the person who made the
application.
4. If the recipient does not have PAN, he cannot apply for the aforesaid certificate under section 197.
289.7-1 HOW LOWER RATE IS DETERMINED - The Assessing Officer will issue lower TDS certificate on the basis of
“existing and estimated tax liability” of the recipient. Such liability shall be determined by the Assessing Officer
on the basis of the following –
1. Tax payable on estimated income of the previous year relevant to the assessment year.
2. Tax payable on the assessed or returned income, as the case may be, of the last four previous years.
3. Existing liability of the recipient under the Income-tax Act and Wealth-tax Act.
4. Advance tax payment of the recipient relevant to the previous year till the date of making application in Form
No. 13 for lower deduction or no deduction.
5. Tax deducted/collected at source by the recipient for the assessment year relevant to the previous year till the
date of making application in Form No. 13.
289.8 Provisions of section 197A - If a declaration is submitted under section 197A by the recipient to the payer,
then no tax is deductible in a few cases. The provisions of section 197A as are given in the table (infra) —
Taxable Interest [Secs. 193 Dividend Payment in National
pre-mature and 194A] or rent [Sec. 194] respect of life Saving
withdrawal [Sec. 194-I] insurance Scheme
from or insurance policy [Sec. [Sec.
provident commission [Sec. 194DA] 194EE]
fund 194D, with effect
[Sec. 192A] from June 1, 2017]
Condition 1 - Who is recipient Individual Other than Resident Other than a Resident
a company individual company or individual
or firm firm
Condition 2 - What is tax on total income of Nil Nil Nil Nil Nil
the previous year
Condition 3 - How much is total of income Not exceeding the maximum amount not chargeable to tax*
covered by sections 192A, 193, 194, 194A,
194D, 194DA and 194-I
Notes—
1. If the above conditions are satisfied and the recipient gives a declaration to the payer of income along with his PAN, the
payer will not deduct tax at source. Such declaration should be given in Form No. 15G (Form No. 15H for senior citizen of
60 years or more). If this declaration is given to a bank, bank will give an acknowledgement at the time of receipt of Form
No. 15G/15H.
2. Condition 3 is not applicable up to May 31, 2002.
3. Condition 3 is not applicable from June 1, 2002 if the income of recipient is exempt under section 10(20), (23AA), (23AAB),
(23BB), (23BBA), (23BBC), (23BBD), (23BBE), (23C), (23EB), (25), (25A), (26BB) and (29A)—Circular No. 4/2002, dated July
16, 2002.
4. Condition 3 is not applicable if the recipient is a senior citizen [senior citizen is a resident individual who is at least 60 years
of age during the financial year].
5. If the above conditions are satisfied, the recipient of income can submit Form No. 15G (for senior citizen Form No. 15H)
to the payer of income. It can be submitted in paper format (or electronically after duly verifying through an electronic
process). The declarant shall quote his/her PAN.
6. The payer of income shall upload all declarations in Form No. 15G/15H on quarterly basis in the give file format on the
e-filing site (www.incometaxindiaefiling.gov.in). These forms should be uploaded within 15 days from the end of each
* Exemption limit for the assessment year 2020-21 is Rs. 2,50,000 [higher exemption limit (a) in the case of a resident senior citizen born on or after
Rs. 5,00,000].
571 Processing of statements of TDS Para 289.10
quarter (within 30 days from the end of 4th quarter ending on March 31). Form received during October 1, 2015 and March
31, 2016 can be uploaded on or before June 30, 2016. Declarations in Form No. 15G/15H should be retained by the payer
of income for 7 years.
7. It is the duty of the Assessing Officer to give an opportunity to rectify the defects in the declarations in Form No. 15G or
No. 15H.
289.9 Furnishing of quarterly returns regarding the details of non-deduction of tax by certain persons [Sec.
206A] - Section 206A has two sub-sections.
 Sub-section (1) - Sub-section (1) is applicable if the following conditions are satisfied—
1. The person who is otherwise responsible for deducting tax at source is (a) any banking company, (b) a co-
operative society, (c) a public company.
2. It is responsible for paying to a resident interest (other than interest on securities).
3. Such interest (other than interest on securities) paid or payable during the financial year does not exceed
threshold limit of section 194A.
If the above three conditions are satisfied, the person, responsible for making payment, is not required to deduct
tax at source under section 194A. However, a banking company£ shall prepare quarterly returns (i.e., consoli-
dated return for all branches) for the period ending on June 30, September 30, December 31 and March 31 in each
financial year and deliver the same to the prescribed income-tax authority (or the person authorized by such
authority). Such return should be submitted within one month from the end of each quarter (June 30 in the case
of last quarter) in digital format on a floppy, diskette, magnetic cartridge tape, CD-ROM or any other computer
readable media [Form No. 26QAA‡].
 Sub-section (2) - Sub-section (2) is applicable if the following conditions are satisfied—
1. The payer is a person other than the person who is covered by sub-section (1).
2. Such person is responsible for paying to a resident any income which is liable for deduction of tax at source
under sections 192 to 194LA.
If the above two conditions are satisfied, the Central Government may require (by notification in the Official
Gazette) such person to prepare and deliver quarterly returns in the prescribed digital format*. Such return
should be submitted to the prescribed income-tax authority (or the person authorised by such authority) on a
floppy, diskette, magnetic cartridge tape, CD-ROM or any other computer readable media.
Electronic filing of statement of aforesaid transactions (with effect from September 1, 2019) - The above provisions have
been modified to provide for electronic filing of statement (where tax has not been deducted on payment of
interest to residents). Further, this modification also provides for correction of such statements for rectification
of any mistake or to add, delete or update the information furnished.
289.10 Processing of statements of tax deducted at source [Sec. 200A] - Section 200A provides for processing
of statements of tax deducted at source on computer so that liabilities on account of interest and other defaults
in TDS payment are promptly calculated and intimated to the deductor.
The following adjustments can be made during the computerized processing of statements of tax deducted at
source:
a. any arithmetical error in the statement; or
b. an incorrect claim, if such incorrect claim is apparent from any information in the statement, for example, in
respect of rate of deduction of tax at source where such rate is not in accordance with the provisions of the Act.
After making adjustments, tax and interest would be calculated and sum payable by the deductor or refund due
to the deductor will be determined. An intimation will be sent to the deductor informing him of his tax liability
or granting him the refund due within one year from the end of the financial year in which the statement is filed.
Further it is provided that the processing of these statements can be undertaken in a centralized processing
centre.
£ Only a banking company is required to submit this return as per Rules 31AC and 31ACA.
‡Each branch of a banking company which is required to submit quarterly return under section 206A in respect of interest on time deposit without
TDS shall keep and maintain the particular of such time deposit in Form No. 26QA.
*No such format is notified till the publication of this book. Consequently, sub-section (2) of section 206A does not have any practical utility.
 TAX COLLECTION AT SOURCE [SEC. 206C]

290. Under section 206C in some cases tax has to be collected at source.
290.1 In which case tax has to be collected at source - Under section 206C, tax has to be collected at source
in the following cases –
Nature of goods Percentage rate of tax
collection at source
(TCS) applicable†
Category A (sale of the following) –
A1. Alcoholic liquor for human consumption (other than Indian made foreign
liquor) 1
A2. Indian made foreign liquor 1
A3. Tendu leaves 5
A4. Timber obtained under a forest lease 2.50
A5. Timber obtained by any mode other than under a forest lease 2.50
A6. Any other forest produce not being timber or tendu leaves 2.50
A7. Scrap 1
A8. Minerals, being coal or lignite or iron ore 1
Category B (grant of lease/license of the following) –
B1. Parking lot, toll plaza, mining and quarrying (other than mining and quarrying of
mineral oil, petroleum and natural gas) 2
Category D (sale of the following whether payment is received by cheque or by any other mode) –
D1. Motor vehicle of the value exceeding Rs. 10 lakh 1
Note - In some cases, these rates are subject to surcharge and health and education cess. If the purchaser or the licensee is
a foreign company and the amount subject to tax collection is more than Rs. 1 crore, but not more than Rs. 10 crore, surcharge
is 2 per cent of TCS during 2019-20 (it is 5 per cent of TCS if such amount is more than Rs. 10 crore). If purchaser/licensee
is non-resident firm/co-operative society, surcharge @ 12 per cent is applicable only if amount subject to TCS is more than
Rs. 1 crore. If purchaser/licensee is non-resident individual/HUF/AOP/BOI, surcharge is 10 per cent of TCS (if amount
subject to TCS is more than Rs. 50 lakh but not more than Rs. 1 crore), 15 per cent of TCS (if amount subject to TCS is more
than Rs. 1 crore but not more than Rs. 2 crore), 25 per cent of TCS (if amount subject to TCS is more than Rs. 2 crore but not
more than Rs. 5 crore) or 37 per cent of TCS (if amount subject to TCS is more than Rs. 5 crore). If purchaser or licensee is
a non-resident or a foreign company, health and education cess of 4 per cent (of TCS+SC) is applicable. In no other case,
surcharge and health and education cess shall be added.
290.1-1 TAX COLLECTION IN CATEGORY A - In Category A “seller” shall collect tax from the “buyer” of goods.
290.1-1a WHO IS SELLER IN CATEGORY A - For this purpose, “seller” means the Central Government, a State
Government or any local authority or corporation or authority established by or under a Central, State or
Provincial Act, or any company or firm or co-operative society. “Seller” also includes an individual or a Hindu
undivided family whose books of account are required to be audited under section 44AB(a)/(b) during the
financial year immediately preceding the financial year in which goods are sold. Consequently, tax will be
collected at source by such individuals/Hindu undivided families.
290.1-1b WHO IS BUYER IN CATEGORY A - “Buyer” means a person who obtains in any sales by way of auction,
tender or any other mode, goods of the nature specified under Category A or the right to receive any such
goods. It, however, does not include the following—
a. a public sector company, the Central Government, a State Government, and an Embassy, a High Commis-
sion, Legation, Commission, Consulate and the trade representation, of a foreign State and a club; or
b. a buyer in the retail sale of such goods purchased by him for personal consumption.
 Purchase for personal consumption from retailer - A buyer in the retail sale of Category A goods purchased by him
for ‘personal consumption’ shall be excluded from being treated as a ‘buyer’. This means that if a retailer sells
Category A goods to a customer for personal consumption only (and not for any other purpose), the purchasing
customer will not be treated as a ‘buyer’ and tax collection at source is not required.
† These rates are subject to the provisions of section 206CC [see para 290.7].
573 Tax collection account number Para 290.6
290.1-1c MEANING OF “SCRAP” - In the case of sale of “scrap” tax shall be collected by the seller. “Scrap” for this
purpose has been defined as waste and scrap from the manufacture or mechanical working of materials which
is definitely not usable as such because of breakage, cutting up, wear and other reasons.
290.1-1d WHEN TAX HAS TO BE COLLECTED IN CATEGORY A - Tax has to be collected by the seller at the time of debiting
of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the
buyer in cash or by issue of cheque/draft, or by any other mode, whichever is earlier.
290.1-1e GOODS UTILISED FOR MANUFACTURING/PROCESSING IN CATEGORY A IS NOT SUBJECT TO TAX COLLECTION - No tax
will be collected at source from a resident buyer who purchases goods for the purposes of manufacturing,
processing or producing any article or thing or for the purpose of generation of power and not for the purpose
of trading. This rule is applicable only in Category A, if the resident buyer gives a declaration (with PAN) in
duplicate in Form No. 27C to the seller that the goods to be purchased are to be utilised in the carrying on of
any of the activities referred to above, no tax will be collected under section 206C.
290.1-2 TAX COLLECTION IN CATEGORY B - In Category B, every person, who grants a lease or a licence or enters into
a contract or otherwise transfers any right or interest in any parking lot or toll plaza or mine or quarry, to
another person (hereafter in this section referred to as “licensee or lessee”) for the use of such parking lot or toll
plaza or mine or quarry for the purpose of business, shall collect tax at source.
 Public sector company - If the licensee or lessee is a public sector company tax is not collectible.
290.1-3 TAX COLLECTION IN CATEGORY C - In Category C, tax collection is not applicable with effect from April 1,
2017.
290.1-4 TAX COLLECTION IN CATEGORY D - In Category D, tax is collected by seller who receives any amount as
consideration for sale of motor vehicle of value exceeding Rs. 10,00,000. Tax is collected at the rate of 1 per cent
of the sale consideration. This tax collection is required with effect from June 1, 2016, regardless of the fact
whether consideration is received in cash or by cheque or by any other mode.
1. The above tax collection provision is applicable only in the case of sale of motor vehicles in transactions of
retail sales. In other words, the above provision is not applicable on sale of motor vehicles by manufacturers to
dealers/distributors.
2. The above provision is applicable if the amount of sale consideration of a motor vehicle is more than Rs. 10
lakh (irrespective of the fact whether the motor vehicle is a luxury car or any other car).
3. The above provision is not applicable if buyer is the Central Government, a State Government, an Embassy/
High Commission/consulate/trade representation of a Foreign Government, local authority or a public sector
company which is engaged in the business of carrying of passengers.
4. The above provision is applicable on each sale of motor vehicle of value exceeding Rs. 10 lakh (not on
aggregate value of sale made during the year). For instance, a car dealer sells a car to an individual for Rs. 24
lakh. Rs. 1 lakh is received at the time of booking and balance Rs. 23 lakh at the time of delivery. Tax will be
collected at the rate of 1 per cent of Rs. 1 lakh at the time of booking and 1 per cent of Rs. 23 lakh at the time of
delivery. This rule is applicable whether mode of payment is cash or by cheque. Suppose, at the time of
delivery Rs. 5 lakh is received in cash and balance Rs. 18 lakh is received by cheque. Tax will be collected by the
seller at the rate of 1 per cent of Rs. 23 lakh at the time of delivery under Category D (provisions of Category C are
not applicable). If, however, sale price of a motor vehicle of Rs. 10 lakh (or less) (suppose sale price is Rs. 9 lakh)
and consideration received in cash is more than Rs. 2 lakh, tax collection at the rate of 1 per cent of cash
consideration is applicable under Category C (up to March 31, 2017).
290.2 Tax collection at lower rate - Where the Assessing Officer is satisfied that the total income of the buyer
justifies the collection of the tax at any lower rate than the relevant rate specified in para 290.1 (Category A,
Category B or Category C), he can give a certificate for collection of tax at lower rate. For obtaining this certificate,
the buyer shall make an application in Form No. 13 (without PAN of the buyer, the application in Form No. 13
remains invalid).
290.3 Deposit of tax - See para 289.3.
290.4 Issue of certificate - See para 289.5.
290.5 Quarterly returns to Government - See para 289.4.
290.6 Tax collection account number - See para 289.6.
Deduction and collection of tax at source 574
290.7 Requirement to furnish PAN by collectee [Sec. 206CC] - In order to strengthen the PAN mechanism,
section 206CC has been inserted with effect from April 1, 2017. Collectee shall furnish his PAN to the person
responsible for collecting such tax at source. If PAN is not intimated, tax shall be collected at the twice the
normal rate or at the rate of 5 per cent, whichever is higher. However, this provision is not applicable in the case
of a non-resident collectee who does not have any permanent establishment in India.
●
Test your knowledge

1. What are the provisions relating to deduction of tax at source from salary, interest other than interest on securities and
income from dividends ? [paras 270, 272 and 273]
2. State the law relating to deduction of tax at source. [paras 270 to 287]
3. What are the provisions of the law regarding deduction of tax at source in respect of “interest on securities”? [para 271]
Interest payable by
CHAPTER 19
assessee/Government
I
n certain circumstances, the assessee becomes liable to pay interest to the revenue
department, while in certain cases the revenue department is required to pay interest to
the assessee. This Chapter explains as to when and by whom such interest is payable,
its quantum, the date from which it is payable and the situations in which the interest
realisable from the assessee can be waived.
 WHEN INTEREST BECOMES PAYABLE BY ASSESSEE

296. Interest is payable by the assessee under the Income-tax Act in the circumstances enumerated below :
296.1 For defaults in furnishing return of income [Sec. 234A] - If the return of income is furnished after the
due date or is not furnished, the assessee is liable to pay interest under section 234A.
296.1-1 HOW TO CALCULATE INTEREST - Interest is calculated as under :
1. Rate of interest 1 per cent per month or part of month (simple interest).
2. Period for which interest Commencing on the date immediately following the due date for filing the return of
is payable income and ending on—
a. the date of furnishing the return (where return has been filed after the due date); or
b. the date of completion of assessment under section 144 (where no return has been
furnished).
3. Amount on which interest It is calculated as under :
is payable 1. Find out the tax on total income as determined under section 143(1) or on assessment
under section 143(3) or section 147 or 153A (if the assessment is made for the first time
under section 147 or 153A)1.
2. From the tax so determined, advance tax paid, tax deducted or collected at source,
relief under section 89/90/90A/91, MAT credit under section 115JAA and alternate
minimum tax credit under section 115JD (but not tax paid under section 140A) shall be
deducted.
296.1-2 OTHER POINTS - The following points shall also be kept in view:
 Self-assessment tax paid before the due date and return submitted after due date - The Assessing Officer cannot charge
interest under section 234A in a situation where the assessee has paid due taxes before the due date of submission
of return of income and merely filing of income-tax return is delayed—CIT v. Pranoy Roy [2009] 179 Taxman 53
(SC).
 Self-assessment tax paid after due date and return is submitted thereafter - In case of Pranoy Roy (supra), the Apex Court
held that –
a. if self-assessment tax is paid before the due date of submission of return of income and return is submitted
after the due date, interest under section 234A is not applicable [Case (a)]; and
b. if self-assessment tax is paid after the due date of submission of return of income, interest under section 234A
is applicable [Case (b)].
1. If one has to calculate interest under section 234A for the purpose of self-assessment under section 140A, tax on returned income shall be
taken [see problem 296.4-P3].
575
Para 296.1 Interest payable by assessee/Government 576
However, the Court’s ruling is silent on the point whether in Case (b), interest is payable till the date of payment
of self-assessment tax or till the date of submission of return of income. The Court’s ruling gives consideration
to the fact that when self-assessment tax is paid before submitting return of income [under Case (a)] interest
should not be payable after the deposit of self-assessment tax (there being no loss to the revenue). A similar view
should be taken in Case (b) as well. If self-assessment tax is paid after the due date of submission of return of
income (assume date of payment is December 20, 2019) and return is submitted belatedly after payment of tax
(say, return is submitted on January 20, 2020 for the assessment year 2019-20), interest under section 234A should
be payable up to date of payment of self-assessment tax (i.e., up to December 20, 2019).
Problems
296.1-P1 Determine the amount of interest under section 234A in the following cases:
X Mrs. Y X (P.) Ltd. X(HUF)
(31 years) (62 years) (a trading co.)
Due date of filing return for the assessment year 2020-21(a) July 31, July 31, September September
2020 2020 30, 2020 30, 2020
Date of filing return (b) Not filed October 4, March 10, December
2020 2021 17, 2020
Date of completion of assessment (c) February October April 15, November
3, 2021 4, 2020 2021 17, 2021
Rs. Rs. Rs. Rs.
Income declared — 11,84,510 10,80,100 7,65,500
Income assessed 7,49,800 11,84,510 10,87,000 7,65,500
Advance tax paid during the financial year 2019-20 43,600 1,09,700 1,55,000 17,000
Tax deducted at source — 3,300 11,100 40,110
Self-assessment tax paid under section 140A — 70,000 1,80,000 30,000
Date of payment of self-assessment tax (d) — August 16, January November
2020 23, 2021 26, 2020
Solution : Interest will be determined as under :

Period of default [It is (c) – (a) in the case of X, and (d) – (a) 7 months 1 month 4 months 2 months
in other cases (a part of month is taken as full month) Rs. Rs. Rs. Rs.
Income assessed 7,49,800 11,84,510 10,87,000 7,65,500
Tax 62,460 1,65,353 3,26,100 65,600
Add : Surcharge Nil† Nil† Nil† Nil†
Tax and surcharge 62,460 1,65,353 3,26,100 65,600
Add : Health and education cess (4% of tax and surcharge) 2,498 6,614 13,044 2,624
Tax payable on assessed income 64,458 1,71,967 3,39,144 68,224
Less : Advance tax paid and tax deducted at source 43,600 1,13,000 166,100 57,110
Shortfall 21,358 58,967 1,73,044 11,114
Shortfall (rounded off) (c) 21,300 58,900 1,73,000 11,100
Interest on (c) at the rate of 1% per month 1,491 590 6,920 222
296.1-E1 [P19.6]* Find out the amount of interest payable under section 234A in the following cases :
Mrs. X (59 years) X (P.) Ltd. (an X Co. (a firm)
industrial co.)
Due date of filing return July 31, 2020 September 30, 2020 September 30, 2020
Date of filing return November 10, 2020 March 15, 2021 March 10, 2021
Rs. Rs. Rs.
Tax on assessed income 19,785 3,56,578 24,123
Less: Advance tax paid during the financial year 2019-20 17,400 2,12,000 16,000
Less: Tax deducted at source during the financial year 2019-20 1,900 1,05,000 7,000
† Surcharge is applicable only if taxable income exceeds Rs. 50 lakh/1 crore.

577 For failure to deduct or collect and pay at source Para 296.2
Mrs. X X (P.) Ltd. X Co.

Rs. Rs. Rs.
Balance 485 39,578 1,123
Less: Self assessment tax paid under section 140A 590 40,000 1,200
Balance (-)105 (-)422 (-)77
Date of payment of self assessment tax September 2, 2020 January 13, 2021 November 30, 2020
296.1-P2 Determine the amount of interest under section 234A in the following cases—
X Y Z
Rs. Rs. Rs.
Due date of filing of return of income (a) July 31, 2020 July 31, 2020 September 30, 2020
Actual date of filing of return of income (b) November November December
6, 2020 6, 2020 15, 2020
Tax on income declared in the return (c) 56,000 56,000 68,000
Tax on income assessed by the Assessing Officer (d) 79,000 79,000 69,000
Advance tax paid during the financial year 2019-20 (e) 40,000 40,000 30,000
Tax deducted at source during the financial year 2019-20 (f) 4,000 4,000 9,000
Self-assessment tax paid (g) 36,000 10,000 12,000
Date of payment of self-assessment tax (h) July 25, 2020 July 25, 2020 October 10, 2020
Solution :
X Y Z
Rs. Rs. Rs.
Tax on assessed income after deducting advance tax and TDS [(d) - (e) - (f)] 35,000 35,000 30,000
Less: Self-assessment tax 36,000 10,000 12,000
Balance (-) 1,000 25,000 18,000
Period of default (a part of month is taken as one month) [(b) - (a)] 4 months 4 months 3 months
In the case of X, entire outstanding amount is paid by way of self-assessment tax on July 25, 2020 (i.e., before the due date
of submission of return of income). However, return of income is submitted after due date. Consequently, interest under
section 234A is not applicable — CIT v. Pranoy Roy [2009] 179 Taxman 53 (SC). In the case of Y, self-assessment tax is partly
paid before the due date of submission of return of income and return of income is submitted belatedly. Interest on Rs. 25,000
is payable under section 234A at the rate of 1 per cent per month for 4 months which comes to Rs. 1,000. In the case of Z, self-
assessment tax is paid partly but after the due date of submission of return of income. Interest is payable under section 234A
on Rs. 30,000 for 1 month [i.e., (h) - (a)] and on Rs. 18,000 for 2 months [i.e., (b) – (a) – 1 month] at the rate of 1 per cent per
month which comes to Rs. 660.
296.1-E2 [P19.7]* Find out the amount of interest payable under section 234A in the following cases (due date of submission of
return of income : September 30, 2020) :
X Ltd. Y Ltd.
Date of submission of return of income for the assessment year 2020-21 January 3, 2021 February 14, 2021
Date of payment of self-assessment tax September 1, 2020 February 14, 2021
Rs. Rs.
Tax on income assessed by the department (after deducting advance tax and TDS) 40,000 1,90,000
Self-assessment tax paid 5,000 1,90,000
296.2 For failure to deduct or collect and pay tax at source [Sec. 201(1A)† or 206C(7)] - If a person responsible
for deducting/collecting tax at source does not deduct/collect tax at source, wholly or partly, under sections 192
to 196D and 206C or after deducting/collecting tax, he fails to pay the same as required by the Act, he is liable
for payment of interest.
† Chief Commissioner/Director General may reduce or waive interest charged under section 201(1A)(i) in certain cases.
 Amount of interest - 1 per cent per month (or part thereof) from the date on which tax was deductible to the date
tax is actually deducted. 1.5 per cent per month (or part thereof) from the date tax is actually deducted to the date
of actual deposit.
In the case of tax collection at source, interest is payable at the rate of 1 per cent per month (or part thereof) from
the date on which tax was collectible to the date of actual deposit.
 Relaxation if recipient has paid tax - The aforesaid provisions have been amended if tax is deductible but the payer
has not deducted tax. After the amendment, the payer shall not be deemed to be an assessee in default if -
a. the recipient has included such income in the return submitted under section 139 and the recipient has paid
tax on such income; and
b. the payer submits a certificate to this effect from a chartered accountant.
In such a case, interest shall be payable at the rate of 1 per cent from the date on which tax was deductible to the
date of furnishing of return of income by the recipient.
296.3 For default in payment of advance tax [Sec. 234B] - Interest is payable if an assessee who is liable to pay
advance tax, has failed to pay such tax. It is also payable if an assessee has paid advance tax but the amount of
advance tax paid by him is less than 90 per cent of assessed tax.
 Rate of interest - Interest is payable on short-term or non-payment at the rate of 1 per cent per month (or part
thereof).
 Period for which interest is payable - From April 1 of the assessment year to the date of determination of income
under section 143(1) or where regular assessment is made to the date of regular assessment.
 Amount on which interest is payable - It is payable on “x”. x = Assessed tax (as per assessment order) as reduced
by tax deducted or collected at source or relief under section 89/90/90A/91, MAT credit under section 115JAA
and alternate minimum tax credit under section 115JD on any income which is taken into account in computing
advance tax.
 Special points - Interest under section 234B is not applicable if advance tax paid during the financial year (i.e.,
April 1 to March 31 immediately preceding assessment year) is 90 per cent (or more) of x. Further interest is not
payable if x is less than Rs. 10,000.
296.4 For deferment of advance tax [Sec. 234C] ** - Interest is payable under section 234C if an assessee has
not paid advance tax or underestimated instalments of advance tax. Interest is to be computed on the following
basis–
296.4-1 CATEGORY A - This category covers any assessee [but not being an eligible assessee covered by
section 44AD or 44ADA and discussed in para 296.4-2]. In this case, interest under section 234C is payable as
follows –
When interest is payable Rate of interest Period of interest Amount on which
under section 234C interest is payable
(1) (2) (3) (4)
If advance tax paid on or Simple interest @ 1 per cent 3 months 15% (a—b)—c
before June 15 is less than per month
12% (a—b)
If advance tax paid on or Simple interest @ 1 per cent 3 months 45% (a—b)—d
before September 15 is less per month
than 36% (a—b)
If advance tax paid on or Simple interest @ 1 per cent 3 months 75% (a—b)—e
before December 15 is less per month
than 75% (a—b)
If advance tax paid on or Simple interest @ 1 per cent — 100% (a—b)—f
before March 15 is less
than 100% (a—b)
Notes:
a. Tax on the total income declared in the return filed by the assessee.
**For reduction or waiver of interest, see paras 299 to 302.

579 Deferment of advance tax Para 296.4
b. Tax deducted or collected at source, relief under section 89/90/90A/91 and MAT/AMT credit.
c. Amount of advance tax paid on or before June 15 of the financial year immediately preceding the relevant assessment
year.
d. Amount of advance tax paid on or before September 15 of the financial year immediately preceding the relevant
assessment year.
e. Amount of advance tax paid on or before December 15 of the financial year immediately preceding the relevant
assessment year.
f. Amount of advance tax paid on or before March 15 of the financial year immediately preceding the relevant assessment
year.
296.4-2 CATEGORY B - In the case of an eligible assessee (covered under section 44AD or 44ADA), interest under
section 234C is payable (in respect of non-payment or short payment of advance tax pertaining to eligible
business) as follows –
When interest is payable under Rate of interest Period of interest Amount on which interest
section 234C is payable
If advance tax paid on or before Simple interest @ 1 per cent — 100% (a—b)—c
March 15 is less than 100% (a—b)
Notes :
a. Tax on the total income declared in the return filed by the assessee.
b. Tax deducted or collected at source, relief under section 90/90A/91 and MAT/AMT credit.
c. Amount of advance tax paid on or before March 15 of the financial year immediately preceding the relevant assessment
year.
296.4-3 SHORT PAYMENT OF ADVANCE TAX IN CASE OF CAPITAL GAINS/CASUAL INCOME/INCOME FROM NEW BUSINESS
OR PROFESSION/DIVIDEND INCOME [FIRST PROVISO TO SEC. 234C(1)] - No interest will be levied in respect of any
shortfall in the payment of advance tax due on the returned income if—
a. the shortfall is on account of underestimate or failure to estimate the amount of capital gains (short-term or
long-term) or income of the nature referred to in section 2(24)(ix) (i.e., lottery income, gambling income, etc.)
or income from a new business/profession or dividend income ; and
b. the assessee has paid the whole of the amount of tax payable in respect of such income, as part of remaining
instalments of advance tax which are due or if no instalment is due, then such tax is paid before the end of the
financial year [see problem 296.4-P3].
Problems
296.4-P1 During the financial year 2019-20, X (36 years) pays the following instalments of advance tax :
Rs.
First instalment on June 15, 2019 52,000
Second instalment on September 15, 2019 1,02,000
Third instalment on December 10, 2019 1,60,000
Fourth instalment on March 13, 2020 30,000
Fifth instalment on March 20, 2020 20,000
The regular assessment for the assessment year 2020-21 is completed on January 10, 2021 and income determined by the Assessing
Officer is Rs. 20,44,390 (income as per income-tax return : Rs. 20,18,140, addition made by the Assessing Officer : Rs. 26,250). He is
also entitled to tax credit of Rs. 2,800 on account of tax deducted at source.
Self assessment tax is not paid. Is he liable for interest under section 234B or 234C?
Solution : Interest liability under section 234B :
Rs.
Income computed by the Assessing Officer 20,44,390
Tax on Rs. 20,44,390 [for rates, see Appendix 1] 4,42,850
Less : Tax deducted at source 2,800
Assessed tax 4,40,050
90% of assessed tax 3,96,045
Advance tax paid during the financial year 2019-20 (Rs. 52,000 + Rs. 1,02,000 + Rs. 1,60,000 + Rs. 30,000
+ Rs. 20,000) 3,64,000
Rs.
Since advance tax paid during the financial year is less than 90% of assessed tax, X is liable to pay interest under section 234B
as follows –
Less: Advance tax paid during the financial year 2019-20 3,64,000
Short fall 76,050
Short fall (rounded off) 76,000
Period for which interest is payable (from April 1, 2020 to January 10, 2021) 9 months (and a few days)
Period for which interest is payable (rounded off) 10 months
Rate of interest 1% per month
Amount of interest under section 234B (Rs. 76,000 × 1% × 10) 7,600
Interest liability under section 234C –
Income as per return of income 20,18,140
Tax on Rs. 20,18,140 (for rates, see Appendix 1) 4,34,660
Less : Tax deducted at source 2,800
First instalment (due date : June 15, 2019)
15% of assessed tax 64,779
Advance tax actually paid up to June 15, 2019 52,000
Since advance tax paid is not less than 12% of assessed tax, interest is not payable for short payment of
first instalment of advance tax.
Second instalment (due date : September 15, 2019)
Advance tax actually paid up to September 15, 2019 (Rs. 52,000 + Rs. 1,02,000) 1,54,000
Since advance tax paid is less than 36% of assessed tax, interest is payable for short payment of second
instalment of advance tax.
Short fall (45% of assessed tax : Rs. 1,94,337 – advance tax paid up to September 15, 2019 : Rs. 1,54,000) 40,337
Interest for short payment of second instalment (Rs. 40,300 × 1% × 3 months) 1,209
Third instalment (due date : December 15, 2019)
Advance tax actually paid up to December 15, 2019 (Rs. 52,000 + Rs. 1,02,000 + 1,60,000) 3,14,000
Since advance tax paid is less than 75% of assessed tax, interest is payable for short payment of third
Short fall (75% of assessed tax : Rs. 3,23,895 – advance tax paid up to December 15, 2019 : Rs. 3,14,000) 9,895
Interest for short payment of third instalment (Rs. 9,800 × 1% × 3 months) 294
Fourth instalment (due date : March 15, 2020)
Advance tax actually paid up to March 15, 2020 (Rs. 52,000 + Rs. 1,02,000 + Rs. 1,60,000 + Rs. 30,000) 3,44,000
Since advance tax paid is less than 100% of assessed tax, interest is payable for short payment of fourth
Short fall (100% of assessed tax : Rs. 4,31,860 – advance tax paid up to March 15, 2020 : Rs. 3,14,000) 87,860
Interest for short payment of fourth instalment (Rs. 87,800 × 1%) 878
Interest payable under section 234C (Rs. 1,209 + Rs. 294 + Rs. 878) 2,381
296.4-E1 [P19.8]* During the financial year 2019-20, X, a non-resident (64 years), pays the following instalments of advance tax :
Rs.
 Amount paid on September 15, 2019 68,750
 Amount paid on December 15, 2019 27,500
 Amount paid on March 16, 2020 1,15,310
The regular assessment for the assessment year 2020-21 is completed on March 10, 2021 and income determined by the Assessing
Officer without any addition is Rs. 12,77,110. X is also entitled to tax credit of Rs. 19,931.50, on account of tax deducted at source
under section 193. Find out the amount of interest payable under sections 234B and 234C. Self assessment tax is not paid.
➠ 296.4-P2 X Ltd., an Indian company, files return of income on December 10, 2020, though the due date is September 30, 2020 for
the assessment year 2020-21. On the same day, it deposits Rs. 2,69,300 (being self-assessment tax) under section 140A computed as
follows —
Rs.
Tax on income of Rs. 11,88,460 declared in the return 3,70,800
Less:
Advance tax paid during 2019-20 1,23,600
Tax deducted at source 16,572
Balance 2,30,628
Add: Interest
Under section 234A for late submission of return [@ 1% per month on Rs. 2,30,600 for 3 months] 6,918
Under section 234B for short deposit of advance tax [on Rs. 2,30,600 from April 1, 2020 to December 10, 2020 @ 1%
per month] 20,754
Under section 234C [Rs. 11,000 is correctly computed under section 234C] 11,000
Total 2,69,300
Assessment is completed under section 143(3) on April 20, 2021 on income of Rs. 12,20,000. Find out the amount of tax payable on the
assumption that applicable tax rate in the case of X Ltd. is 30 per cent.
Solution : Interest liability under section 234A
Date of filing return December 10, 2020
Due date of return September 30, 2020
Period of default (a part of month is taken as full month) 3 months
Rs.
Income 12,20,000
Tax on income [i.e., 30% of Rs. 12,20,000 plus 4% health and education cess] 3,80,640
Less: Advance payment of tax 1,23,600
Less: Tax deducted at source 16,572
Interest under section 234A on assessed tax (i.e., Rs. 2,40,400) @ 1% per month for 3 months 7,212
Interest liability under section 234B :
Assessed tax (i.e., tax minus tax deducted at source; as computed above) 3,64,068
Advance tax paid during 2019-20 1,23,600
It is liable to pay interest under section 234B as advance tax paid is shorter than Rs. 3,27,661
Shortfall from April 1, 2020 to December 10, 2020 2,40,468
Period of default (April 1, 2020 to December 10, 2020) 9 months
Interest @ 1% per month for 9 months 21,636
Shortfall from December 10, 2020 to April 20, 2021 [i.e., Rs. 2,40,468 — Rs. 2,30,628 (self-assessment tax
under section 140A paid on December 10, 2020—see Note 1)] 9,840
Period of default January 1, 2021 to April 20, 2021 (in the shortfall of 9 months period up to December 31,
2020 is included) 4 months
Interest on Rs. 9,800 for 4 months @ 1% per month 392
Interest under section 234B 22,028
Notes :
1. In this example, X Ltd. has paid Rs. 2,69,300 on December 10, 2020 under section 140A. As per calculation given in the
problem, Rs. 38,672 is adjusted towards payment of interest and the balance Rs. 2,30,628 is adjusted towards tax payable.
If tax paid under section 140A (i.e., self-assessment tax) is less than Rs. 2,69,300, then the amount paid under section 140A,
shall be first adjusted towards interest payable and the balance if any, shall be adjusted towards tax payable.
2. Net tax and interest payable is to be computed as under : Rs.
Tax on Rs. 12,20,000 3,80,640
Add: Interest
Under section 234A 7,212
Under section 234B 22,028
Total 4,20,880
Less: Prepaid tax
Tax deduction at source 16,572
Advance tax 1,23,600
Self-assessment tax under section 140A 2,69,300
Balance payable (rounded off) 11,410
➠ 296.4-E2 In problem 296.4-P2 if advance tax paid during 2019-20 is Rs. 3,30,000, find out the interest liability under section
234B. Does it make any difference if out of Rs. 3,40,000, Rs. 3,29,000 is paid on March 27, 2020 ?
296.4-P3 X (50 years) is a businessperson. For the previous year 2019-20, he reports the following transactions in his return of
income –
Rs.
Income from brokerage and commission (business was established in 1982) 14,30,000
Long-term capital gain on sale of gold on September 18, 2019 3,00,000
Income from commission agency business (new business started on November 4, 2019) 6,78,000
Amount deposited in PPF on March 20, 2020 1,50,000
Prepaid tax –
TDS/TCS 10,525
Advance tax paid on –
- June 13, 2019 21,000
- September 15, 2019 49,000
- December 14, 2019 1,50,000
- March 15, 2020 2,00,000
Calculate the amount of interest payable under section 234C.
Solution :
Interest under section 234C for short payment of first instalment of advance tax (i.e., on or before June 15, 2019) - For this purpose,
long-term capital gain generated after June 15, 2019 and new business started after June 15, 2019 shall not be considered.
Short fall will be calculated as follows –
Rs.
Income from brokerage and commission 14,30,000
Tax (including health and education cess) 2,04,360
Less: TDS/TCS 10,525
Advance tax paid up to June 15, 2019 21,000
Short fall (for short payment of first instalment of advance tax, interest under section 234C is not
applicable if advance tax paid up to June 15, 2019 is not less than 12% of assessed tax. In this case, X has
paid advance tax of Rs. 21,000 which is less than 12% of assessed tax of Rs. 23,260. In such a case, interest
Rs.
is payable under section 234C. Short fall will be calculated as the difference between 15% of assessed tax
and advance tax paid up to June 15, 2019, i.e., Rs. 29,075 – Rs. 21,000. It comes to Rs. 8,075) (rounded
off) 8,000
Interest under section 234C for short payment of first instalment of advance tax (interest on Rs. 8,000
@ 1% per month for 3 months) 240
Interest under section 234C for short payment of second instalment of advance tax (i.e., on or before September 15, 2019) - For this
purpose, long-term capital gain generated after September 15, 2019 and new business started after September 15, 2019
shall not be considered. Short fall will be calculated as follows –
Rs.
Advance tax paid up to September 15, 2019 (Rs. 21,000 + Rs. 49,000) 70,000
Short fall (for short payment of second instalment of advance tax, interest under section 234C is not
applicable if advance tax paid up to September 15, 2019 is not less than 36% of assessed tax. In this case,
X has paid advance tax of Rs. 70,000 which is more than 36% of assessed tax of Rs. 69,781. If advance tax
paid up to September 16, 2019 is shorter than Rs. 69,781, short fall will be calculated by taking the
difference between 45% of assessed tax and advance tax paid up to September 15, 2019) Nil
Interest under section 234C for short payment of second instalment of advance tax Nil
Interest under section 234C for short payment of third instalment of advance tax (i.e., on or before December 15, 2019) - Short fall
will be calculated as follows –
Rs.
Income from brokerage and commission 14,30,000
Income from business newly set-up on November 4, 2019 6,78,000
Tax (including health and education cess) 4,78,296
Less: TDS/TCS 10,525
Advance tax paid up to December 15, 2019 (Rs. 21,000 + Rs. 49,000 + Rs. 1,50,000) 2,20,000
Short fall (rounded off) 1,30,800
Interest under section 234C for short payment of third instalment of advance tax (interest on Rs. 1,30,800
@ 1% per month for 3 months) 3,924
Interest under section 234C for short payment of fourth instalment of advance tax (i.e., on or before March 15, 2020) - Short fall will
be calculated as follows –
Rs.
Advance tax paid up to March 15, 2020 (Rs. 21,000 + Rs. 49,000 + Rs. 1,50,000 + Rs. 2,00,000) 4,20,000
Interest under section 234C for short payment of fourth instalment of advance tax (interest on Rs. 47,700
@ 1%) 477
Interest payable under section 234C : Rs. 4,641.
296.4-E3 X (27 years) commences a new business of dealing in imported goods on December 16, 2019 (he does not have any source
of income prior to commencement of this business). Income of the business for the previous year ending March 31, 2020 is Rs.
37,00,000. He contributes Rs. 1,50,000 towards public provident fund on March 20, 2020 and pays advance tax of Rs. 3,80,000
on March 21, 2020. Find out interest payable under section 234C.
296.4-P4 X (40 years) owns a manufacturing business. Turnover of the business for the previous year 2019-20 is Rs. 1,79,09,060
(Rs. 40,80,000 received by cheque and balance in cash). He does not maintain books of account. The following transactions are noted
from his return of income (which he will upload in ITR-4) for the assessment year 2020-21 –
Rs.
Business income under section 44AD (6% of Rs. 40,80,000 + 8% of balance of Rs. 1,38,29,060) (TDS/TCS :
Rs. 9,000) 13,51,125
Rental income from a commercial property purchased on December 18, 2019 (let out @ Rs. 3,00,000 per month
from January 1, 2020, municipal tax : nil, interest : nil, tax deducted by tenant : Rs. 90,000 @ 10 per cent) 9,00,000
Interest on bank FD (tax deducted by bank : Rs. 4,00,000) 40,00,000
PPF deposit on March 20, 2020 1,50,000
Advance tax paid on –
- June 14, 2019 1,08,000
- July 15, 2019 1,62,000
- December 15, 2019 2,70,000
- March 15, 2020 4,00,000
- March 31, 2020 3,00,000
Calculate the amount of interest payable under section 234C.
Solution :
Rs.
Income from house property (Rs. 9,00,000 – deduction under section 24 @ 30%) 6,30,000
Business income under section 44AD 13,51,125
Bank interest 40,00,000
Section 234C does not provide method of calculating tax separately on business income (covered by section 44AD) and
other incomes. In this case, business income is Rs. 13,51,125 and gross total income is Rs. 59,81,125. Tax pertaining to
business income may be calculated on the basis of these figures which comes to Rs. 4,03,622 (i.e., Rs. 17,86,744 ×
Rs. 13,51,125 ÷ Rs. 59,81,125).
Tax pertaining to –
Income u/s 44AD Other incomes
Rs. Rs.
Tax on income 4,03,622 13,83,122
Less: TDS/TCS 9,000 4,90,000
Assessed tax 3,94,622 8,93,122
15% of assessed tax (12% of assessed tax : Rs. 1,07,175) – 1,33,968
45% of assessed tax (36% of assessed tax : Rs. 3,21,524) – 4,01,905
75% of assessed tax – 6,69,842
100% of assessed tax 3,94,622 8,93,122
Computation of interest under section 234C –
Rs.
First instalment (advance tax paid up to June 15, 2019 is not less than 12% of assessed tax, interest under
section 234C is not applicable for short payment of first instalment) Nil
Second instalment (advance tax paid up to September 15, 2019 is less than 36% of assessed tax, interest
under section 234C is applicable) (short-fall : Rs. 4,01,905 – Rs. 1,08,000 – Rs. 1,62,000 = Rs. 1,31,905)
(Rs. 1,31,900 × 0.01 × 3 months) 3,957
Third instalment (short-fall : Rs. 6,69,842 – Rs. 1,08,000 – Rs. 1,62,000 – Rs. 2,70,000 = Rs. 1,29,842) (Rs.
1,29,800× 0.01 × 3 months) 3,894
Fourth instalment (short-fall : Rs. 3,94,622 + Rs. 8,93,122 – Rs. 1,08,000 – Rs. 1,62,000 – Rs. 2,70,000 – Rs.
4,00,000 = Rs. 3,47,742) (Rs. 3,47,700 × 0.01) 3,477
Total 11,328
585 Interest payable to assessee Para 297
296.4-E4 X (40 years) owns a departmental store [turnover for the previous year 2019-20 is Rs. Rs. 1,90,00,000 (out of Rs. 80,000
is by way credit card payment)]. He annually contributes Rs. 1,50,000 towards public provident fund and Rs. 50,000 towards NPS.
He does not maintain books of account and pays tax by taking 8 per cent or 6 per cent of turnover as business income within the
parameters of section 44AD. During the previous year advance tax paid by him is as follows – Rs. 10,000 on June 10, 2019, Rs.
20,000 on December 1, 2019 and Rs. 5,000 on March 20, 2020. Find out interest payable under section 234C.
296.5 Interest on excess refund [Sec. 234D] - Section 234D is applicable if any refund is granted under section
143(1) but no refund is due on regular assessment. It is further applicable if any refund is granted to the assessee
under section 143(1) and the refund so granted exceeds the amount refundable on regular assessment.
 Rate of interest - 0.5 per cent per month or part of a month.
 Period for which interest is payable - The period commencing from the date of grant of refund under section 143(1)
to date of regular assessment

 Amount on which interest is payable - The excess of amount refunded under section 143(1) over the amount
refundable on regular assessment.

296.6 Fees for defaults in furnishing quarterly returns [Sec. 234E] - If a person fails to deliver a quarterly TDS/
TCS return within the prescribed time, he shall be liable to pay, by way of fee, a sum of Rs. 200 for everyday during
which the failure continues.
This fees is in addition to other consequences under the Act. However, the fees shall not exceed the amount of
tax deductible/collectible. After July 1, 2012, it is not possible to submit belated quarterly TDS/TCS returns
without payment of fees under section 234E.
296.7 Fee for default in furnishing return of income [Sec. 234F, applicable from the assessment year 2018-
19] - A fee for delay in furnishing of return shall be levied for assessment year 2018-19 under section 234F where
the return is not filed within the due dates given under section 139(1). The amount of fee under section 234F
is as follows –
1. A fee of Rs. 5,000 shall be payable, if the return is furnished after the due date but on or before December 31
of the assessment year.
2. A fee of Rs. 10,000 shall be payable in any other case.
3. However, in a case where the total income does not exceed Rs. 5 lakh, the fee amount shall not exceed Rs. 1,000.
296.8 For making late payment of income-tax [Sec. 220(2)] - If any assessee fails to pay any tax (other than
advance tax) specified in a demand notice within 30 days of the service of notice of demand, he is liable to pay
interest at the rate of 1 per cent for every month or part of month from the expiry of 30 days of the service of
demand notice.
 INTEREST PAYABLE TO ASSESSEE [SEC. 244A]

297. Interest is payable where any refund arises due to any excess payment of tax. There is no need for making
claim for refund.
 Rate of interest - 0.5 per cent per month (or part of month).
 Period - Interest is payable by the Government for the following period –
 Up to May 31, 2016 - In the case of refund of advance income-tax, tax deducted or collected at source, interest
is payable to the assessee from the first day of the assessment year to the date of grant of refund (i.e., the date of
signing of the refund order). In any other case, it is payable to the assessee from the date of payment of tax to the
date of grant of refund (i.e., the date of signing of the refund order).
 With effect from June 1, 2016 - In the case of refund of advance income-tax, tax deducted or collected at source,
interest is payable to the assessee as follows –

- If return is submitted on or before due date - From the first day of the assessment year to the date of grant of refund
(i.e., the date of signing of the refund order).
- If return is submitted after due date - From the date of furnishing of return of income to the date of grant of refund
(i.e., the date of signing of the refund order).
In any other case (i.e., the case of refund other than refund of advance tax/tax deducted or collected at source),
interest is payable by the Government to the assessee from the date of furnishing of return or date of payment
of tax, whichever is later, to the date of grant of refund (i.e., the date of signing of the refund order).
297.1 Interest on refund of TDS to deductor - If refund of TDS is given to the deductor, he can claim interest
from the Government under section 244A(1B) (with effect from April 1, 2017)†. Interest is calculated at the rate
of 0.5 per cent per month (or part of a month). Interest is available from the date on which claim for refund is
made in the prescribed form to the date on which the refund is granted. Where refund arises on account of
giving effect to an appellate order under section 250/254/260/262, interest will be available from the date of
deposit of TDS to the date on which refund is granted. However, interest shall not be allowed for the period
for which the delay (in the proceedings resulting in the refund) is attributable to the deductor.
 PROCEDURE TO BE FOLLOWED IN CALCULATION OF INTEREST [RULE 119A]

298. In calculating interest payable by the assessee or interest payable by the Central Government to the assessee,
the amount of tax, penalty or other sum in respect of which interest is to be calculated will be rounded off to the
nearest multiple of Rs. 100 ignoring any fraction of Rs. 100.
 IS IT POSSIBLE TO REDUCE/WAIVE INTEREST

➠ 299. Where as a result of any order of a Court, statutory authority or of the Government (other than an order
of assessment, appeal, reference or revision passed under the provisions of the Income-tax Act) passed after the
close of the said previous year (such income and the order hereinafter referred to as the “relevant income” and
the “relevant order”, respectively) interest under sections 234A, 234B and 234C shall be reduced or waived by
the Chief Commissioner/Director-General, if a few conditions are satisfied.
 IS IT POSSIBLE FOR CHIEF COMMISSIONER/DIRECTOR GENERAL (INVESTIGATION) TO

REDUCE PENAL INTEREST IN CERTAIN CASES
➠ 300. Vide order (dated June 26, 2006), the Central Board of Direct Taxes have authorised Chief Commission-
ers/Director General (Investigation) to reduce/waive interest under sections 234A, 234B and 234C in some cases
(e.g., when account books of the assessee have been taken over by Income-tax Department in the course of search,
when unanticipated income is received after advance tax instalment becomes due, retrospective amendment of
law, increase in tax liability because of Supreme Court ruling, voluntary submission of belated return, voluntary
payment of advance tax after due date). These instances are taken are illustrative and not exhaustive.
 CAN CENTRAL BOARD OF DIRECT TAXES MAKE RELAXATION

➠ 301. The Board has power to make relaxation in cases covered by sections 234A, 234B and 234C and where
assessee makes an application for waiver of interest under said sections, Board cannot decline assessee’s request
by a cryptic order that it was unable to interfere in matter—Sant Lal v. UOI [1996] 89 Taxman 272 (Punj. & Har.).
 WRIT PETITION - IS IT MAINTAINABLE AGAINST LEVY OF INTEREST

➠ 302. Since no appeal is provided by statute against levy of interest under sections 234A, 234B and 234C, writ
petition is maintainable against such levy—Uday Mistanna Bhandar & Complex v. Tej Kumari Devi [1996] 222 ITR
44 (Pat.).
† For earlier period, one can claim interest under Circular No. 11/2016, dated April 26, 2016.
UNIT 2 GST
CHAPTER 20 Basic concepts of GST
T his chapter covers basis of charge of GST. Besides, it covers a few points which a
beginner is supposed to know before beginning study of GST.
 WHAT IS THE DIFFERENCE BETWEEN DIRECT TAX AND INDIRECT TAX

401. Taxes are broadly classified into direct tax and indirect tax. A direct tax is imposed directly on the taxpayer.
It is paid directly to the Government by the person on whom it is imposed. It cannot be transferred or shifted to
another person. For instance, income-tax is direct tax. An individual pays income-tax on his income directly to
the Government. The burden of income-tax falls flatly on the individual who earns his taxable income and
income-tax cannot be shifted to others. Direct tax is generally progressive in nature (for instance, rate of income-
tax is higher for taxpayers having higher ability to pay tax).
Indirect tax, on the other hand, is a tax which can be shifted to another person. In the case of indirect tax, the
person who collects tax on sale/supply of a commodity is just a conduct. Tax incidence is passed on at every stage
till the commodity finally reaches the consumer. In the case of indirect tax, it is the consumer who bears the
incidence of commodity tax. Commodity tax is, thus, indirect tax. Indirect tax is generally regressive in nature
(persons consuming goods will have to bear equal burden regardless of their capacity to bear tax).
 WHAT WAS PRE-GST INDIRECT TAX STRUCTURE IN INDIA

402. In pre-GST regime, goods were taxed by the Central Government and State Government. Services were
taxed by the Central Government. Goods and services tax (GST) is a single tax levied on both goods and services.
The following taxes (of pre-GST regime) are merged into GST –
 Taxes by Central Government - GST has subsumed the following taxes which were imposed and collected by the
Central Government –
- Central excise duty
- Duties of excise (medicinal and toilet preparations)
- Additional duties of excise (goods of special importance)
- Additional duties of excise (textiles and textile products)
- Additional duties of customs (CVD)
- Special additional duty of customs (SAD)
- Service tax
- Central surcharges and cesses so far as they relate to supply of goods and services
 Taxes by State Governments - GST has subsumed the following taxes which were collected by State Govern-
ment –
- State VAT/sales tax
- Central sales tax (it was levied by Central Government but collected by States)
- Luxury tax
- Octroi and entry tax (all forms)
- Entertainment and amusement tax (excluding tax levied by the local bodies)
- Taxes on advertisements
587
Para 403 Basic concepts of GST 588
- Purchase tax
- Taxes on lotteries, betting and gambling
- State surcharges/additional taxes and cesses so far as they relate to supply of goods and services
 WHAT ARE DIFFERENT ABBREVIATIONS USED IN THE BOOK

403. For the sake of brevity, the following abbreviations are used in the book –
Abbreviation Full form
GST Goods and services tax
CGST Central goods and services tax
SGST State goods and services tax
UTGST Union Territory goods and services tax
IGST Integrated goods and services tax
CGST Act Central Goods and Services Tax Act, 2017 (section numbers referred to in Unit 2 the book pertain to
CGST Act, unless otherwise stated)
IGST Act Integrated Goods and Services Tax Act, 2017
UTGST Act Union Territory Goods and Services Tax Act, 2017
CGST Rules Central Goods and Services Tax Rules, 2017 (rule numbers referred to in Unit 2 the book pertain to
CGST Rules, unless otherwise stated)
UTGST Rules Union Territory Goods and Services Tax Rules, 2017
Notes –
1. Section numbers referred to in Unit 2 the book pertain to CGST Act, unless otherwise stated. Likewise, rules or rule number
referred to in Unit 2 the book pertain to CGST Rules, unless otherwise stated.
2. Whenever GST rate is referred to in the book, it represents—
- in the case of inter-State supply, IGST rate.
- in the case of intra-State supply, the total of CGST rate and SGST rate (50 per cent of GST is CGST and 50 per cent is
SGST).
 WHAT ONE SHOULD KNOW BEFORE BEGINNING STUDY OF LAW REGULATING GST
404. One should know the following before beginning study of GST –
404.1 GST on supply - GST is levied on “supply” of goods or services or both in India. It is applicable with effect
from July 1, 2017. It is applicable on whole of India (State of Jammu and Kashmir is covered with effect from July
8, 2017). Area up to 200 nautical miles inside sea is “India” for the purpose of levy of GST.
404.2 Dual GST - GST introduced in India is a dual GST. The Central Government and State Government will
levy GST simultaneously on a common base (i.e., supply of goods or services or both).
404.3 Intra-State supply - In the case of intra-State supply (i.e., supply within a State or Union Territory), CGST
will be payable to the Central Government and SGST (or UTGST) is payable to the State Government (or to Union
Territory). Area up to 12 nautical miles inside sea is part of State or Union Territory which is nearest.
Consider the following transactions –
 X of Jaipur sells 10,000 units of an article at the rate of Rs. 210 per article. Purchaser is Y of Ajmer. GST rate is 12 per cent.
This is intra-State supply (i.e., supply within Rajasthan). GST will be shown as follows in the invoice –
Rs.
Taxable value of supply (Rs. 210 × 10,000) 21,00,000
Add: GST –
- CGST (@ 6% of Rs. 21,00,000) 1,26,000
- SGST (Rajasthan) (@ 6% of Rs. 21,00,000) 1,26,000
Total amount charged by X 23,52,000
Note - If X does not have any input tax credit, the Central Government will get Rs. 1,26,000. Likewise, the State Government
of Rajasthan will get Rs. 1,26,000. X will remit these taxes through internet banking by using the same challan.
 Suppose, in the above case, the seller X and purchaser Y are in Chandigarh. GST will be shown as follows in the
invoice –
589 Union Territory GST Act Para 404.14
Rs.
Add: GST –
- CGST (@ 6% of Rs. 21,00,000) 1,26,000
- UTGST (@ 6% of Rs. 21,00,000) 1,26,000
404.4 Inter-State supply - Supply from one State or Union Territory to another State or Union Territory is inter-
State supply. In the case of inter-State supply, IGST is payable to Central Government. IGST is also applicable
if supply is beyond 12 nautical miles but up to 200 nautical miles.
X of Maharashtra sells 10,000 units of an article at the rate of Rs. 210 per article. Purchaser is Y of Karnataka. GST rate is
12 per cent. This is inter-State supply (i.e., supply from Maharashtra to Karnataka). GST will be shown as follows in the
invoice –
Rs.
Add: GST –
- IGST (@ 12% of Rs. 21,00,000) 2,52,000
Note - If X does not have any input tax credit, the Central Government will get Rs. 2,52,000. Revenue from IGST will be
apportioned among Union and States by Parliament on basis of recommendation of Goods and Services Tax Council.
404.5 GST rates for supply of goods - For inter-State supply, IGST rates are : nil, 0.25 per cent, 3 per cent, 5 per
cent, 12 per cent, 18 per cent, 28 per cent. For intra-State supply, CGST will be 50 per cent of IGST and SGST (or
UTGST) will be 50 per cent of IGST. Besides, compensation cess is applicable in the case of supply of tobacco
products, pan masala, motor cars, coal, aerated waters, etc.
404.6 GST rates for supply of services - For inter-State supply, IGST is applicable. For intra-State supply, CGST
and SGST (or UTGST) are applicable. CGST and SGST (or UTGST) rates are 50 per cent of IGST rates. General
rate of IGST on services is 18 per cent. However, in a few cases, services are taxed at 5 per cent, 12 per cent and
28 per cent. Moreover, a few services are exempt from GST.
404.7 Compensation cess - In addition to CGST, SGST, UTGST and IGST, GST compensation cess is payable
on tobacco products, pan masala, motor cars, coal, aerated waters, etc. If a State loses revenue because of abolition
of central sales tax, Central Government will pay compensation for 5 years. Revenue generated through
collection of GST compensation cess will be utilised for payment of such compensation†.
404.8 Import of goods - Import of goods is subject to basic customs duty, education cess and secondary and
higher education cess. Besides, IGST and GST compensation cess will be applicable. By virtue of section 25(1)
of Customs Act, exemption is available on certain imports from payment of basic customs duty (by way of
exemption notifications). IGST has been exempted in the case of some such imports.
404.9 Administration control - Tax is payable to both Central Government and State Government/Union
Territory. However, administrative control will be exercised either by the State Government/Union Territory
Authorities or by Central Government Authorities in the case of a particular taxpayer.
404.10 GST not applicable presently on petroleum products - Petroleum products (i.e., petroleum crude, high
speed diesel, motor spirit or petrol), natural gas and aviation turbine fuel, will continue under excise duty.
Presently, these are out of GST and may be brought within the purview of GST by the Government in future.
404.11 Alcoholic liquor - Presently, it is out of GST. State excise duty will continue.
404.12 Tobacco products - Tobacco products will be subject to excise duty, GST and GST compensation cess.
404.13 State GST Acts - To impose SGST on supply of goods and services within a State, each State has passed
its own State GST Act. These State GST Acts are copies of CGST Act (all provisions are identical).
404.14 Union Territory GST Act - UTGST Act has been passed for Union Territories which do not have
legislature. These Union Territories are (a) Andaman and Nicobar Islands (b) Lakshadweep (c) Dadra and Nagar
Haveli (d) Daman and Diu (e) Chandigarh. Supply of goods/services within these Union Territories (for instance
supply by a trader from Andaman to another trader in Andaman) will be subject to CGST and UTGST. For the
purpose of GST, each of these territories shall be considered as a separate Union Territory. For instance, if a trader
of Andaman supplies goods to a trader of Chandigarh, it will be treated as inter-State supply and subject to IGST.
† GST Council (in its 32nd Meeting held on January 10, 2019) has approved levy of cess on intra-State supply of goods/services within the State
of Kerala at a rate not exceeding 1 per cent for a period not exceeding 2 years.
Para 404.15 Basic concepts of GST 590
Delhi and Puducherry are not covered by the list of Union Territories for this purpose. They have their own
legislatures and they have passed their own SGST Acts.
404.15 Registration - Registration is PAN based. Registration is required for each State separately where the
taxable person has manufacturing/trading/service units. One single registration for each State is sufficient even
if the taxpayer has multiple branches/units/divisions/depots within one State. However, one can have more
than one registration in one State/Union Territory if he has multiple places of business within a State or Union
Territory. For each registration, a separate GST Registration No. (i.e., GSTIN) of 15 digits is allotted. In a GSTIN,
the first two digits represents the State Code, followed by the next 10 digits representing the PAN of the applicant,
one digit representing entity code, one digit is left blank and the last digit is a check digit. For instance, Anil of
Maharashtra gets the following GSTIN : 27AANPA1257K1Z1. In this case, 27 is State Code of Maharashtra,
AANPA1257K is PAN of Anil and the digit 1 after PAN is entity code of taxpayer.
404.16 Inter-State stock transfer - Supply of goods/services between two distinct persons (having different
GSTIN) in the course of business is subject to GST. This covers even inter-State stock transfers/branch transfers.
For instance, supply of goods/services by the Punjab branch (of X Ltd.) to Maharashtra branch (of X Ltd.) is
subject to GST (of course, input tax credit is available to Maharashtra branch). Likewise, service provided by
telecommunication companies or banks to their branches in another State is subject to GST.
404.17 Distinction between goods and services - GST is applicable whether it is supply of goods or services.
However, distinction has been made in a few cases. This distinction is relevant to ascertain place of supply, time
of supply, valuation and Composition Scheme/Alternative Composition Scheme. There are some supplies
which are neither “goods” nor “services”. For instance, service provided by an employee for the employer in the
course of employment is neither treated as supply of “goods” nor “services”. These cases are specified in
Schedule III.
404.18 Consideration - GST is applicable if goods/services are supplied for a “consideration”. Consideration
need not be in cash (it may be in kind). If consideration is nil, GST is not applicable. However, activities given
in Schedule I are subject to GST, even if there is no consideration. For instance, supply of goods/services by a
taxable person to a related person is subject to GST, even if consideration is nil or even if supply is by way of gift.
In other words, free gifts to a related person is subject to GST. Employer and employee have been treated as
“related persons” for the purpose of GST. For instance, if an asset is gifted by a company to its employee (not
covered by employment agreement) it is subject to GST. Even if consideration is absent in this case, GST is
applicable (however, gifts up to Rs. 50,000 in a financial year to an employee is not subject to GST).
404.19 Gift - Supply by way of gift between unrelated persons is not subject to GST. But input tax credit will
have to be reversed. Gift between related persons is subject to GST.
404.20 Small taxable persons - A person having “aggregate turnover” of not exceeding Rs. 20 lakh is exempt
from GST (this limit is Rs. 10 lakh for Manipur, Mizoram, Nagaland and Tripura). “Aggregate turnover”
includes taxable supplies, exempt supplies, stock transfers, exports, etc. It is calculated on all India basis of
taxable person who has same PAN for income-tax. If GST is payable under reverse charge mechanism, this
exemption is not available.
 With effect from April 1, 2019, the above exemption is available in the case of a person who is engaged in
exclusive supply of goods and whose aggregate turnover in the financial year does not exceed Rs. 40 lakh, if a
few conditions are satisfied [see para 522.2-4].
404.21 Reverse charge - GST is normally payable by supplier of goods/services. In some cases, however, the
recipient is liable to pay tax under reverse charge mechanism. If tax is payable under reverse charge mechanism,
it has to be paid by cash (via internet banking). Input tax credit cannot be utilised to pay GST liability under
reverse charge mechanism. However, once tax is paid by the recipient on input under reverse charge mechanism,
input tax credit is available to him (if he is otherwise eligible for input tax credit).
404.22 Time of payment of GST - Normally, GST is payable when supply is made or when payment is received,
whichever comes earlier. GST of current month is payable by 20th of following month. However, a few persons
can pay tax on quarterly basis.
404.23 Composition Scheme - A simplified scheme (which is also known as Composition Scheme) is available
to a taxpayer if his aggregate turnover of the preceding financial year does not exceed Rs. 1.5 crore†. However,
in the case of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand,
this limit is Rs. 75 lakh. The scheme is optional. The scheme is not available to supplier of services (except in a
few cases). Further, this scheme is not available to the manufacturer of certain goods (ice cream, pan masala,
aerated water, tobacco products). A dealer opting for Composition Scheme cannot make inter-State supply. No
input tax credit available to composition dealers. Moreover, a dealer under Composition Scheme is not eligible
to supply goods through an e-commerce portal. A person who is under Composition Scheme is not allowed to
† This limit was Rs. 75 lakh up to October 12, 2017 and Rs. 1 crore during October 13, 2017 and March 31, 2019.
591 Input tax credit Para 404.26
charge GST in his invoice. Such a person will have to pay tax on his total turnover (out of his pocket) as follows
– Manufacturer : 1 per cent†, trader : 1 per cent, supplier of goods/drinks : 5 per cent. No input tax credit is
available to the person who gets supply of goods/services from a dealer under Composition Scheme. A person
opting for Composition Scheme is required to file quarterly GST return.
 Alternative Composition Scheme - A service provider (except restaurant service provider) cannot opt for the
aforesaid Composition Scheme. GST Council (in its 32nd Meeting) has recommended an Alternative Composi-
tion Scheme for mixed suppliers (who are engaged in supply of services as well as goods). Under the Alternative
Composition Scheme, a supplier of service (and/or goods) can opt for payment of GST at the rate of 6 per cent,
if a few conditions are satisfied. Relevant conditions and procedures pertaining to Alternative Composition
Scheme is discussed in paras 517 to 519.
404.24 Tax invoice - A taxable person who supplies goods/services is required to issue “tax invoice”. Tax
invoice should be prepared as per details specified in rule 46. Tax invoice should have unique consecutive serial
number in one or multiple series, including alphabets or numericals or special character hyphen or dash or slash.
Tax invoice should contain HSN code of goods/services. However, a taxpayer (whose turnover of the preceding
financial year) does not exceed Rs. 1.5 crore, is not required to mention HSN code in tax invoice. Moreover, a
taxpayer (whose turnover of the preceding financial year exceeds Rs. 1.5 crore but not exceed Rs. 5 crore) is
required to mention only two digits of HSN code (i.e., only Chapter number). If such turnover exceeds Rs. 5 crore,
tax invoice should contain 4 digits of HSN code. Tax invoice should be issued within 30 days of supply of service
(45 days in the case of banking company/NBFC/financial institutions).
404.25 GST is destination based tax - GST is a destination-based tax. Origin based tax is one which is levied
where goods/services are produced. Conversely, a destination based tax is one which is levied where goods/
services are consumed. In destination based tax, zero tax is applicable on exports and imports are taxed on par
with domestic production. SGST will accrue to the State where goods/services are ultimately consumed. This
is illustrated in a few examples given below.
404.26 Input tax credit - To avoid cascading effect, input tax credit is available. It is based on VAT concept of
allowing input tax credit on inputs, input services and capital goods. Output supplier of goods/services can avail
credit of CGST, SGST, UTGST and IGST charged by input supplier of goods, services and capital goods. This
credit is available as follows –
- Input tax credit of SGST can be utilised for payment of SGST first and balance for payment of IGST on outward
supply.
- Input tax credit of UTGST can be utilised for payment of UTGST first and balance for payment of IGST on
outward supply.
- Input tax credit of CGST can be utilised for payment of CGST first and balance for payment of IGST on
outward supply.
- Input tax credit of IGST can be utilised for payment of IGST, CGST and SGST on outward supply.
- Input tax credit of GST compensation cess can be utilised only for payment of GST compensation cess.
Input tax credit of SGST/UTGST cannot be used for payment of CGST. Similarly, input tax credit of CGST cannot
be used for payment of SGST/UTGST. Barring a few exceptions, tax credit is available for all input goods,
services and capital goods used (or intended to be used) in the course (or furtherance) of business. If a person
supplies taxable goods/services and exempt goods/services, he can avail only proportionate tax credit. One can
understand the mechanism of utilization of input tax credit for payment of GST on output with the help of the
table given below –
IGST CGST SGST UTGST Compensation cess
Tax on output xxxx xxxx xxxx xxxx xxxx
Less: Tax credit –
- IGST on input (1st priority)  (2nd priority)  (3rd priority)  (4th priority)  (Not available) 0
- CGST on input (2nd priority)  (1st priority)  (Not available) 0 (Not available) 0 (Not available) 0
- SGST on input (2nd priority)  (Not available) 0 (1st priority)  (Not available) 0 (Not available) 0
- UTGST on input (2nd priority)  (Not available) 0 (Not available) 0 (1st priority)  (Not available) 0
- Compensation cess (Not available) 0 (Not available) 0 (Not available) 0 (Not available) 0 (1st priority) 
Notes –
1. Input tax credit on account of IGST shall first be utilised towards payment of IGST, and the amount remaining, if any, may
be utilised towards the payment of CGST and SGST/UTGST, as the case may be, in any order.
2. Input tax credit on account of CGST, SGST/UTGST shall be utilised towards payment of IGST, CGST, SGST/UTGST, as
the case may be, only after the input tax credit available on account of IGST has first been utilised fully.
† 2 per cent prior to January 1, 2018.
3. SGST/UTGST can be utilized for payment of IGST only when the balance of the input tax credit on account of CGST is
not available for payment of IGST.
 Intra-State supply - Consider the following cases pertaining to supply within the State of Maharashtra (assume that GST
rate is 12 per cent) –
1. X of Maharashtra supplies goods/services to Y of Maharashtra. Taxable value of supply is Rs. 1,00,000. X does not have
any input tax credit. GST will be shown as follows in the invoice of X –
Rs.
Taxable value of supply 1,00,000
Add: GST –
- CGST @ 6% of Rs. 1,00,000 6,000
- SGST (Maharashtra) @ 6% of Rs. 1,00,000 6,000
Note - X will remit CGST of Rs. 6,000 and SGST of Rs. 6,000 to the account of Central Government and Government of
Maharashtra by using single challan. He does not have any input tax credit.
2. Y, in the above case, supplies the same goods/services after making value addition at the rate of 30 per cent. Recipient
of supply is Z of Maharashtra. GST will be shown as in the invoice of Y –
Rs.
Taxable value of supply (Rs. 1,00,000 + 30% value addition) 1,30,000
Add: GST –
- CGST @ 6% of Rs. 1,30,000 7,800
- SGST (Maharashtra) @ 6% of Rs. 1,30,000 7,800
Total amount charged by Y 1,45,600
In this case, Y will remit CGST to the Central Government and SGST to Maharashtra Government as follows –
CGST SGST
Rs. Rs.
Tax on output 7,800 7,800
- CGST on input 6,000 0
- SGST on input 0 6,000
Balance payable in cash (through internet banking) 1,800 1,800
Statement showing revenue generated by Government –
Revenue generated by
Central Maharashtra
Government Government
Rs. Rs.
On supply of goods/services by X to Y 6,000 6,000
On supply of goods/services by Y to Z 1,800 1,800
Total 7,800 7,800
 Inter-State supply - Consider the following cases pertaining to intra-State/inter-State supply (GST rate is assumed to be 12
per cent) –
1. X of Bengaluru supplies goods/services to Y of Mysore. Taxable value of supply is Rs. 5,00,000. X does not have any input
tax credit. This is intra-State supply. GST will be shown as follows in the tax invoice issued by X.
Rs.
Add: GST –
- CGST @ 6% of Rs. 5,00,000 30,000
- SGST (Karnataka) @ 6% of Rs. 5,00,000 30,000
Note - X will remit CGST of Rs. 30,000 and SGST of Rs. 30,000 to the account of Central Government and Government of
Karnataka by using single challan. He does not have any input tax credit.
2. Y, in the above case, supplies the same goods/services after making value addition at the rate of 40 per cent. Recipient
of supply is Z of Trivandrum. This is inter-State supply. GST will be shown as in the invoice of Y –
Rs.
Taxable value of supply (Rs. 5,00,000 + 40% value addition) 7,00,000
Add: GST –
- IGST (@ 12% of Rs. 7,00,000) 84,000
Total amount charged by Y 7,84,000
593 GST Council Para 404.27
In this case, Y will remit IGST to the Central Government as follows –

IGST
Rs.
Tax on output 84,000
- CGST on input 30,000
- SGST on input 30,000
Balance payable by Y in cash (through internet banking) 24,000
Note - Karnataka (the exporting State) will transfer SGST credit of Rs. 30,000 utilised in payment of IGST to the Central
Government. This is internal transfer, the taxpayers Y or Z are not supposed to take any action on this account.
3. Z, in the above case, supplies the same goods/services after making value addition @ 30 per cent. Recipient of supply is
A of Kerala. This is intra-State supply within the State of Kerala. GST will be shown as follows in the tax invoice issued
by Z.
Rs.
Taxable value of supply (Rs. 7,00,000 + value addition 30%) 9,10,000
Add: GST –
- CGST @ 6% of Rs. 9,10,000 54,600
- SGST (Kerala) @ 6% of Rs. 9,10,000 54,600
In this case, Z will remit CGST to the Central Government and SGST to Kerala Government as follows –
CGST SGST
Rs. Rs.
Tax on output 54,600 54,600
- IGST on input 54,600 29,400
Balance payable in cash (through internet banking) Nil 25,200
Note - The Central Government will transfer IGST credit of Rs. 29,400 utilised in SGST payment to Kerala Government. This
is an internal transfer, Z or A are not supposed to take any action on this account.
Statement showing revenue generated by the Central Government, Karnataka Government and Kerala Government –
Revenue generated by
Central Karnataka Kerala
Government Government Government
Rs. Rs. Rs.
On supply of goods/services by X to Y 30,000 30,000 –
On supply of goods/services by Y to Z 24,000 – –
Transfer by Karnataka Government to Central Government 30,000 (–) 30,000 –
On supply of goods/services by Z to A Nil – 25,200
Transfer by Central Government to Kerala Government (–) 29,400 – 29,400
Total 54,600 0 54,600
404.27 GST Council - Goods and Services Tax Council (GST Council) is an apex constitutional body. It was
constituted by virtue of Article 279A(1) of the Constitution. It is a joint forum of the Centre and the States and
consists of the following members –
a. Union Finance Minister - Chairperson
b. Union Minister of State, in-charge of Revenue of finance - Member
c. Minister In-charge of finance or taxation or any other Minister nominated by each State Government -
Members
As per Article 279A(4), the GST Council will make recommendations to the Union and the States on the matter
governing the following –
a. the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed
in GST;
b. the goods and services that may be subjected to, or exempted from the GST;
Para 405 Basic concepts of GST 594
c. the threshold limit of turnover below which goods and services may be exempted from GST;
d. the rates including floor rates with bands of GST;
e. any special rate or rates for a specified period, to raise additional resources during any natural calamity or
disaster;
f. special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
g. the date on which GST be levied on petroleum crude, high speed diesel, motor spirit (commonly known as
petrol), natural gas and aviation turbine fuel.
h. any other matter relating to GST, as the Council may decide.
The following points should also be noted –
1. While discharging the constitutional functions, the GST Council shall be guided by the need for a harmonised
structure of GST and for the development of a harmonised national market for goods and services.
2. One-half of the total number of Members of the GST Council shall constitute the quorum at its meetings.
3. The GST Council shall determine the procedure in the performance of its functions.
4. Every decision of the GST Council shall be taken at a meeting, by a majority of not less than three-fourths of
the weighted votes of the members present and voting, in accordance with the following principles, namely:—
- the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
- the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes
cast,
in that meeting.
5. The GST Council shall establish a mechanism to adjudicate any dispute —
- between the Government of India and one or more States; or
- between the Government of India and any State or States on one side and one or more other States on the other
side; or
- between two or more States,
arising out of the recommendations of the Council or implementation thereof.
 WHAT ARE RELEVANT DEFINITIONS WHICH A BEGINNER SHOULD KNOW
405. One should know the following before beginning study of GST –
405.1 Aggregate turnover - “Aggregate turnover” means the aggregate value of –
a. all taxable supplies pertaining to intra-State/inter-State activities;
b. exempt supplies†; and
c. exports of goods or services or both.
Aggregate turnover is required to be computed on pan-India basis for the person having the same Permanent
Account Number. It includes value of stock transfers/branch transfer. However, it does not include the
following –
a. the value of inward supplies on which tax is payable by a person on reverse charge basis, and
b. CGST, SGST, UTGST, IGST and GST compensation cess.
405.2 Business - Business includes the following –
 General activities - The following general activities are covered in business –
a. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity,
whether or not it is for a pecuniary benefit; and
b. any activity or transaction in connection with or incidental or ancillary above activities.
The above shall be included whether or not there is volume, frequency, continuity or regularity of such
transaction.
 Specific activities - The following specific activities are also covered in the definition of business –
a. supply or acquisition of goods including capital goods and services in connection with commencement or
closure of business;
† “Exempt supply” means supply of any goods/services which attracts nil rate of GST or which may be wholly exempt from tax under Exemption
Notification and includes non-taxable supply [e.g., petroleum products (i.e., petroleum crude, high speed diesel, motor spirit or petrol), natural
gas and aviation turbine fuel].
595 Taxable territory Para 405.6
b. provision by a club, association, society, or any such body (for a subscription or any other consideration) of
the facilities or benefits to its members;
c. admission, for a consideration, of persons to any premises;
d. services supplied by a person as the holder of an office which has been accepted by him in the course or
furtherance of his trade, profession or vocation;
e. activities of a race club including by way of totalisator or a license to book maker or activities of a licensed
bookmaker in such club; and
f. any activity or transaction undertaken by the Central Government, a State Government or any local authority
in which they are engaged as public authorities.
405.2-1 POINTS TO BE NOTED - The following points should be noted –
1. Business includes any trade, commerce, manufacture, etc., regardless of the fact whether such activities are
undertaken regularly or occasionally (volume, frequency or continuity are not taken into consideration).
2. Wager is included in the definition of business (betting is covered by GST).
3. Education service is covered.
4. Acquisition of goods/capital goods in connection with commencement of business is covered. Likewise,
supply of goods after closer of business is also covered.
5. A social club providing services to its member is covered in the definition of business.
6. Clause (d) may require understanding of employment as differentiated from profession. If a practicing
chartered accountant/cost accountant provides independent director service, it is treated as business.
405.3 India - “India” means –
- The territory of India as referred to in article 1 of the Constitution.
- Its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone
or any other maritime zone.
- The air space above its territory and territorial waters.
Territorial waters, air space above India and air space above territorial waters are part of India. Consequently,
GST is applicable even if supply is made in a ship in territorial waters of India or in an aircraft flying from Chennai
to Kolkata.
405.4 Person - “Person” includes the following –
a. an individual;
b. a Hindu Undivided Family;
c. a company;
d. a firm/LLP;
e. an AOP/BOI, whether incorporated or not, in India or outside India;
f. any corporation established by or under any Central Act, State Act or Provincial Act or a Government
company;
g. any body corporate incorporated by or under the laws of a country outside India;
h. a co-operative society registered under any law relating to co-operative societies;
i. a local authority;
j. Central Government or a State Government;
k. society;
l. trust; and
m. every artificial juridical person, not falling within any of the above.
405.5 Taxable person - “Taxable person” means a person who is registered (or liable to be registered under
section 22 or 24). Every “supplier” whose aggregate turnover in a financial year exceeds Rs. 20 lakh (Rs. 10 lakh
in a few cases) is required to register under GST in the State (or Union Territory) from where he supplies goods
or services or both. For detailed discussion, see para 522.
 In the case of a person who is engaged in exclusive supply of goods, the above limit of Rs. 20 lakh has been
increased to Rs. 40 lakh with effect from April 1, 2019, if a few conditions are satisfied [see para 522.2-4].
405.6 Taxable territory - “Taxable territory” means the territory to which the provisions of CGST/IGST apply
(i.e., whole of India including the State of Jammu and Kashmir).
405.7 Supplier - “Supplier” in relation to any goods or services or both, shall mean the person supplying the said
goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the
goods or services or both supplied.
In the above definition, the supplier may be taxable person or otherwise. Likewise, supplier may be registered
person or unregistered person. An agent who supplies goods/services on behalf of the supplier is included in
the definition of “supplier”.
405.8 Recipient - “Recipient” is defined as follows –
Consideration Goods or services Who is recipient
Where consideration is payable Supply of goods The person liable to pay consideration is “recipient” of
or services or both goods or services
When no consideration is payable Supply of goods The person to whom the goods are delivered or made
available, or to whom possession or use of the goods is
given or made available is “recipient”
When no consideration is payable Supply of services The person to whom the service is rendered is “recipient”
Note - Any reference to a person to whom a supply is made shall be construed as a reference to the recipient of
the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services
or both supplied;
405.9 e-Commerce and e-commerce operator - “Electronic commerce” means the supply of goods or services
or both, including digital products over digital or electronic network. “Electronic commerce operator” means
any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. For
detailed discussion, see para 562.
405.10 Export of goods - It means taking goods out of India to a place outside India.
405.11 Export of services - “Export of services” means the supply of any service when,—
a. the supplier of service is located in India;
b. the recipient of service is located outside India;
c. the place of supply of service is outside India;
d. the payment for such service has been received by the supplier of service in convertible foreign exchange [or
(from February 1, 2019) in Indian rupees wherever permitted by RBI†]; and
e. the supplier of service and the recipient of service are not merely establishments of a distinct person.
405.12 Import of goods - “Import of goods” with its grammatical variations and cognate expressions, means
bringing goods into India from a place outside India.
405.13 Import of services - “Import of services” means the supply of any service, where—
a. the supplier of service is located outside India;
b. the recipient of service is located in India; and
c. the place of supply of service is in India;
●
Test your knowledge

1. What is the difference between direct tax and indirect tax ? [para 401]
2. Prepare a list of taxes which have been subsumed in GST. [para 402]
3. Discuss whether GST is applicable on whole of India (excluding Jammu and Kashmir) or on whole of India (including
Jammu and Kashmir). [para 404.1]
4. Which of the following taxes is applicable in the case of supply of goods from Bihar to Andhra Pradesh –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [paras 404.3 and 404.4]
5. Which of the following taxes is applicable in the case of supply of services from West Bengal to Chandigarh –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [paras 404.3, 404.4 and 404.14]
† This amendment has been made to allow receipt of payment in Indian rupees in case of export of services where permitted by the RBI (e.g., in
the case of exports to Nepal and Bhutan, the payment is received in Indian rupees as per RBI regulations).
6. Which of the following taxes is applicable in the case of supply of goods from Chandigarh to Puducherry –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [paras 404.3 and 404.4]
7. Which of the following taxes is applicable in the case of supply of services from Puducherry to Chennai –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [paras 404.3, 404.4 and 404.14]
8. Which of the following taxes is applicable in the case of supply of services from Chandigarh to Port Blair –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [paras 404.3, 404.4 and 404.14]
9. Which of the following taxes is applicable in the case of supply of goods from Port Blair to Kolkata –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [paras 404.3, 404.4 and 404.14]
10.Narrate the cases where GST compensation cess can be levied. Further, discuss how the revenue generated through GST
compensation cess will be utilised by the Government. [para 404.7]
11.Which of the following taxes is applicable in the case import of goods –
a. CGST;
b. UTGST;
c. SGST; or
d. IGST. [para 404.8]
12.Which of the following is subject to GST currently –
a. supply of petroleum crude;
b. supply of high speed diesel;
c. supply of petrol;
d. supply of aviation turbine fuel;
e. supply of alcoholic liquor;
f. manufacture of cigarette;
g. sale of cigarette by a wholesaler to a retailer. [paras 404.10 to 404.12].
13.Write a note on GSTIN. [para 404.15]
14.Discuss with reasons with brief whether the following statements are true or false –
- Inter-State stock transfer is not subject to GST.
- Supply of goods is chargeable to GST. Likewise, supply of services is chargeable to GST. As both are chargeable to
GST, the distinction between the terms “goods” and “services” has become absolutely irrelevant. [paras 404.16 and
404.17]
- If consideration for supply of goods/services is nil, GST is also nil. [paras 404.16 to 404.18]
15.Aggregate turnover of X Ltd. is Rs. 45,00,000. It has two branches. Turnover of the Agra branch is Rs. 7,00,000. Turnover
of the Pune branch is Rs. 38,00,000. Agra branch is not subject to GST, as its turnover does not exceed Rs. 20,00,000. Do
you agree with it ? Discuss. [para 404.20]
16.Discuss whether the following statements are correct or incorrect –
- X is a wholesaler in Madurai. He mainly deals in grey fabric which is used in manufacture of ladies garments. His
annual turnover is Rs. 55,00,000. He cannot opt for Composition Scheme.
- X is a wholesaler in Shimla. He mainly deals in grey fabric which is used in manufacture of ladies garments. His
annual turnover is Rs. 55,00,000. He cannot opt for Composition Scheme.
- X supplies goods from Chennai to Patna. His annual turnover is not more than Rs. 7,00,000. He can opt for
Composition Scheme.
- X is in the business of manufacture of pan masala. His turnover is not more than Rs. 25,00,000. He can opt for
Composition Scheme. [para 404.23]
17.Tax invoice should always contain HSN codes. Discuss. [para 404.24]
18.Write a note with suitable example to discuss that GST is a destination based tax. [para 404.25]
19.Input tax credit is not available in the case of purchase of plant and machinery which is used by the purchaser for
manufacture of goods. Manufactured goods are sold to distributors and GST is applicable. Discuss whether the statement
is correct. [para 404.26]
20.Input tax credit of IGST can be utilised for payment of GST compensation cess. Do you agree with this statement ? [para
404.26]
CHAPTER 21 Concept of supply
T axable event under GST is “supply” of goods or services or both. The concept of supply
is discussed in this chapter. Besides, the chapter covers other issues related to supply.
 WHAT IS TAXABLE EVENT

410. A taxable event in a law is the event, happening of which results in imposition of tax. Taxable event is that
event which on its occurrence activates tax liability. For instance, under the Income-tax Act, taxable event is
earning of income. If a person earns any income, he is subject to income-tax and provisions of Income-tax Act
is applicable, unless such income is exempt from tax. Under excise duty, taxable event is manufacturing of goods.
Under service tax, taxable event is provision of service. Under GST, taxable event is supply of goods or services
or both by a person.
410.1 Taxable event in GST as compared to taxable event in earlier laws - The table given below highlights
taxable event in GST vis-à-vis taxable event in pre-GST regime –
Taxable event in pre-GST regime GST Taxable event in GST
Excise duty Manufacture of goods
Central sales tax Inter-State sale of goods

State VAT Intra-State of goods
Service tax Provision of service GST is applicable
Taxable event is
in lieu of taxes
Countervailing duty (CVD) Import of goods supply of goods or
mentioned in
Special CVD Import of goods services or both
Column 1
Entertainment tax Provision of entertainment
Luxury tax Provision of luxury
Entry tax Entry of goods into specific local area
410.2 “Supply” is taxable event in GST - “Supply” of goods or services or both is taxable event in GST. GST
is applicable only if there is supply of goods/services. To ascertain GST liability, the following propositions
should be kept in view –
Detailed discussion given
in the following paras
1. There is a “supply”. 411
2. Supply is of goods or services or both. 411.1 and 411.2
3. Supply is made by the supplier in the course or furtherance of his business. 416
4. Supply includes deemed supply specified in Schedule II. 413
5. GST is not applicable if supply pertains to an activity given in Schedule III (Schedule III
gives a list of activities/transactions which are treated neither as supply of goods nor
supply of services). 415
6. GST is not applicable if supply pertains to goods/services specified in exemption
notification. 436 and 437
598
599 Meaning of services Para 411.2
Detailed discussion given

in the following paras
7. GST is applicable if supply is for a consideration (however, there are a few cases when
GST is attracted even if consideration is absent or consideration is zero or supply is by way
of gift). 414
8. Supply is made in taxable territory. 444
9. Supply is made by a taxable person. 405.5
10. Time of supply is important to find out GST is liability. 455 to 458
11. Place of supply is also relevant to find out GST liability. 444 to 449
12. GST liability depends upon “value of taxable supply”. 464 to 475
13. GST is payable by person making supply (however, there are a few cases when reci-
pient of supply is subject to GST under reverse charge mechanism). 481 to 483
14. Person making supply can avail credit for input tax. 492 to 500
 WHAT IS “SUPPLY”
411. Supply of goods or services or both is taxable event in GST.
411.1 Meaning of “goods” - The expression “goods” is defined by section 2(52). The following are salient
features of the definition of goods –
1. “Goods” means every kind of movable property.
2. It does not include money and securities.
3. It includes growing crops, grass and things attached to (or forming part of) the land which are agreed to be
severed before supply or under a contract of supply.
4. It includes actionable claims. However, Schedule III (read with section 7) lists the activities or transactions
which shall be treated neither as supply of goods nor supply of services. The Schedule lists actionable claims (but
other than lottery, betting and gambling) as one of such transactions. Thus, only lottery, betting and gambling
shall be treated as supplies. All the other actionable claims shall not be supplies.
411.2 Meaning of “services” - The term “services” is defined by section 2(102). The following are salient features
of the definition–
1. “Services” means anything other than goods, money and securities. However, the expression “services”
includes facilitating or arranging transactions in securities.
2. It includes activities relating to the use of money or its conversion by cash or by any other mode, from one form,
currency or denomination, to another form, currency or denomination for which a separate consideration is
charged.
 Transactions in money - Transactions only in money do not constitute service and not chargeable to GST. A few
example of such activity are –
a. deposit of principal amount in a bank and withdrawal of such amount;
b. advancing or repayment of principal sum on loan to anybody;
c. conversion of a currency note of Rs. 200 into one rupee coins to the extent amount is received in money form.
- Promissory note is included in the definition of “money” as given in section clause (75) of Section 2 and hence
not liable to GST.
- If a separate consideration is charged for the above activities, the consideration separately charged will be
subject to GST. A transaction in money, per se, is outside the ambit of GST (it is not included in the definition
of “goods” or “services”). However, the related activity, for which a separate consideration is charged, is
subject to GST if other elements of taxability are present. For example, a foreign exchange dealer while
exchanging one currency for another also charges a commission (often inbuilt in the difference between the
purchase price and selling price of forex). The activity of providing the services of conversion of forex,
documentation and other services (for which a commission is charged separately or built in the margins) is
subject to GST.
Securities - Securities are neither goods nor services. Consideration received for transfer of “securities” is not
subject to GST. The following are securities for this purpose –
Para 411.3 Concept of Supply 600
- Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or
of any incorporated company or other body corporate.
- Derivative.
- Security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
- Units or any other such instrument issued to the investors under any mutual fund scheme.
- Any certificate or instrument issued to any investor by a special purpose distinct entity (which possesses any
debt or receivable).
- Government securities.
- Instruments (as may be declared by the Central Government to be securities).
- Rights or interest in securities.
An activity which is in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of
securities on principal-to-principal basis (excluding services of dealers, brokers or agents in relation to such
transactions) is outside the ambit of “services” and, consequently, GST is not applicable. Where, however, a
broker charges brokerage for transfer/purchase of securities, GST is applicable on brokerage. Likewise,
activities which are not in the nature of transfer of title in securities (for example a person agreeing not to exercise
his right in a security for a given period of time for a consideration) would be subject to GST.
 Future contract - Future contracts are in the nature of financial derivatives, the price of which is dependent on
the value of underlying stocks or index of stocks or certain approved currencies and the settlement happens
normally by way of net settlement with no actual delivery.
Since future contracts are in the nature of derivatives these qualify as “securities”. As securities are neither goods
nor services, future contracts are not chargeable to GST. Where, however, the future contracts have a delivery
option and the settlement of contract takes place by way of actual delivery of underlying commodity/currency,
then such forward contracts would be treated as normal supply of goods and liable to GST.
Further, if some service charges/service fees/documentation fees/broking charges, etc., are charged, the same
would be a consideration for supply of service and chargeable to GST.
 Forward contract in commodities or currencies - A forward contract is an agreement executed to purchase or sell
a pre-determined amount of a commodity/currency at a pre-determined future date at a pre-determined price.
The settlement could be by way of actual delivery of underlying commodity/currency or by way of net settlement
of differential of the forward rate over the prevailing market rate on the settlement date.
Where the settlement takes place by way of actual delivery of underlying commodity/currency, then such
forward contracts would be treated as normal supply of goods and liable to GST.
Where the settlement takes place by way of net settlement of differential of the forward rate over the prevailing
market rate on the settlement date, the same would fall within the purview of “securities”. As securities are
neither goods nor services, future contracts are not chargeable to GST. If, however, some service charges/service
fees/documentation fees/broking charges, etc., are charged, the same would be a consideration for supply of
service and chargeable to GST.
 Sale, purchase, acquisition or assignment of a secured debt - Sale, purchase, acquisition or assignment of a secured
debt is in the nature of a derivative. It is a sale/purchase of a security. Consequently, GST is not applicable.
 Exit-load on mutual funds - Exit load in the form of a fee (whether or not as a fixed percentage of the investment)
is liable to GST. Even if the exit load is in the form of units in the fund, it may be concluded that the consideration
received in money was later converted to NAV units.
411.3 Concept of supply - Scope of supply is specified by section 7(1). Under this section, definition of supply
is very wide and includes the following –
Different Activity Important point to be noted

categories Consideration Supply in the course or
furtherance of business
of supplier
Category 1 Supply of goods and services Consideration is required Necessary
Category 2 Import of service Consideration is required Not necessary
601 Meaning of consideration Para 412.1
Different Activity Important point to be noted

categories Consideration Supply in the course or
furtherance of business
of supplier
Category 3 Supply without consideration GST applicable, even if no consideration See para 414
Category 4 Deemed supply Barring a few cases, consideration is required See para 413
 Category 1 : Supply of goods or services - This category includes all forms of supply of goods or services or both
such as sale, transfer, barter, exchange, licence, rental, lease or disposal. Under this category, supply of goods
or services shall be treated as “supply” only if the following are satisfied –
1. Supply is made (or agreed to be made) for a consideration.
2. Supply is made by the supplier in the course or furtherance of his business [see para 416].
GST is not applicable if the supplier is not in the business of supplying goods or services. A salaried employee
is not subject to GST if he sells his old gold (as he is not in the business of selling gold).
 Category 2 : Import of service - Import of service is also supply for the purpose of GST. However, it is subject to
the following–
1. Import of service should be for a consideration.
2. Import of service may (or may not be) in the course or furtherance of the business of the supplier.
3. Recipient of service (or importer of service) is liable to pay GST under reverse charge mechanism.
 Category 3 : Supply without consideration - Supply includes a few activities specified in Schedule I. These activities
are treated as supply even if supply is made without a consideration [see para 414].
 Category 4 : Deemed supply - A few activities or transactions referred to in Schedule II are treated as supply (or
deemed as supply) [see para 413].

411.3-1 OTHER POINTS INCLUDED IN THE DEFINITION OF SUPPLY UNDER SECTION 7 - The following points should be
noted –
 Activities or transactions specified in Schedule III are treated neither as supply of goods nor supply of services
[see para 415.1].

 Such activities or transactions undertaken by the Central Government, a State Government or any local
authority in which they are engaged as public authorities, as may be notified by the Government, shall be treated
neither as a supply of goods nor a supply of services [see para 415.2].
 Under section 7(3), Government has power to specify by notification, the transactions that are to be treated as—
a. a supply of goods and not as a supply of services; or

b. a supply of services and not as a supply of goods.
 WHAT IS THE SIGNIFICANCE OF “CONSIDERATION”

412. “Consideration” is defined in section 2(31). The definition of term “consideration” in section 2(31) is
inclusive not exhaustive. Therefore, the term “consideration” not only includes those things which are included
in section 2(31) but also includes such things which the term signifies according to its general and natural
meaning. Before discussing the definition of consideration given in section 2(31), it is imperative to know
meaning of “consideration” as generally understood.
Meaning of “consideration” as generally understood See para 412.1

Extended money of “consideration” under section 2(31) See para 412.2
412.1 Meaning of “consideration” as generally understood - In layman’s terms, consideration means

something in return. Since the definition of “consideration” in section 2(31) is inclusive, it will not be
inappropriate to refer “consideration” as defined in section 2(d) of the Indian Contract Act, 1872 which is given
below –
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing,
or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence
or promise is called a consideration for the promise.”
In simple terms, ‘consideration’ means everything received or recoverable in return for goods/services. It
includes monetary payment, any consideration of non-monetary nature or deferred consideration. Generally,
consideration refers to something of value given to someone in return for goods, services or some other promise.
Consideration need not be adequate. Moral consideration is not sufficient. Past consideration is not good
consideration. Consideration cannot be illusory.
412.2 “Consideration” as defined under section 2(31) - Under section 2(31) consideration in relation to supply
of goods or services or both includes the following –
“(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the
inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall
not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply
of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy
given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment
made for such supply unless the supplier applies such deposit as consideration for the said supply”.
 Salient features - Salient features of the definition are given below –
1. Monetary consideration - Consideration includes monetary consideration. ‘Money’ has been defined in section
2(75) and includes not only cash (Indian currency as well as foreign currency) but also cheque, promissory note,
bill of exchange, letter of credit, draft, pay order, traveller’s cheque, money order, postal or electronic remittance
or any such similar instrument recognised by RBI.
2. Non-monetary consideration - Consideration includes non-monetary consideration. Non-monetary consider-
ation essentially means compensation in kind such as the following –
- Supply of goods and services in return for provision of service (for instance, X agrees to dry clean Y’s clothes
and Y agrees to click X’s photograph).
- Refraining or forbearing to do an act in return for provision of service (for instance, Z agrees not to open dry
clean shop in A’s neighbourhood and A agrees not to open photography shop in Z’s neighbourhood).
- Tolerating an act or a situation in return for provision of a service (for instance, B agrees to design C’s house
and C agrees not to object to construction of B’s house in his neighbourhood).
- Doing or agreeing to do an act in return for provision of service (for instance, D agrees to construct 4 flats for
E on land owned by E and E agrees to provide one flat to D without any monetary consideration).
The value of non-monetary consideration is determined as per section 15 [see para 467].
3. Consideration paid by a person other than recipient of supply - The consideration for goods and/or services may
be provided by a person other than the recipient of supply as long as there is a link between supply of goods and/
or services and receipt of consideration. For instance, holding company may pay for goods and/or services that
are supplied to its subsidiary company.
4. Subsidy from Government - Consideration does not include any subsidy given by the Central Government or
a State Government.
5. Monetary value of an act or forbearance - Consideration includes monetary value of an act or forbearance.
Consideration Meaning For what ?
“Consideration” includes Act means to do something 1. In respect of supply of goods and/or
monetary value of an act services.
“Consideration” includes Forbearance means to abstain from 2. In response to supply of goods and/or
monetary value of forbearance doing anything or refraining services.
from enforcement of something 3. For inducement of supply of goods and/
or services.
Any consideration received for doing something or promise to refrain for doing something, is subject to GST.
6. Deposit - A deposit given in respect of the supply of goods and/or services is generally not considered as
payment made for such supply (e.g., refundable deposit is not subject to GST). If, however, deposit is non-
refundable or the supplier applies such deposit as consideration for the said supply, GST is applicable.
1. A grant given for a research (where the researcher is under no obligation to carry out a particular research)
would not be a consideration for such research.
603 Activities or transactions which are treated Para 413
2. An act by a charity for consideration would be a service and taxable (unless otherwise exempted).
3. Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result
in making it a provision of service.
4. Donations to a charitable organization are not consideration unless charity is obligated to provide something
in return, e.g., display or advertise the name of the donor in a specified manner or such that it gives a desired
advantage to the donor†.
5. An award received in consideration for contribution over a life time or even a singular achievement carried
out independently or without reciprocity to the amount to be received, will not comprise an activity for
consideration.
6. There could be cases of payments without an activity. In such cases, GST is not applicable. Thus grant of pocket
money, a gift or reward (which has not been given in terms of reciprocity), amount paid as alimony for divorce
would be examples in this category. These are not chargeable to GST. Conversely, a reward given for an activity
performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for
a service to be rendered by the winner, would be a consideration for such service and chargeable to GST.
7. Fines and penalties which are legal consequences of a person’s actions are not in the nature of consideration
for an activity. Fines and penalties are imposed for breaking the law by a person. They are not in the nature of
a consideration for an activity and, consequently, would not constitute a supply of service. GST is not applicable.
8. Forfeiture of security deposit (on cancellation of an agreement to provide service), amounts to consideration
for the agreement that has been entered into for the provision of service.
9. Refundable security deposit (which is refundable on completion of provision of service) is in the nature of
security and does not generally represent consideration of service. However, if the deposit is in the nature of a
colourable device (wherein the interest of deposit substitutes for the consideration for service provided), then
such interest would form part of gross amount received for such service.
10. If excess payment is received by a supplier (as a result of a mistake), it is not treated as consideration provided
it is returned or refunded to the recipient of supply.
11. Demurrage received (for using service beyond the agreed period, e.g., retention of generator beyond the
agreed period) is treated as consideration.
 WHAT ARE ACTIVITIES OR TRANSACTIONS WHICH ARE TREATED AS SUPPLY UNDER

SCHEDULE II
413. Supply includes activities or transactions specified in Schedule II. These activities were chargeable to VAT/
service tax in pre-GST regime. Only to remove any ambiguity on the taxability of these activities, Schedule II has
been incorporated. Schedule II includes the following activities/transactions. These are treated as supply of
goods or supply of services and are chargeable to GST –
As given in Schedule II Brief discussion of different activities Whether supply Para Nos.
Item No. Main heading of goods or supply for detailed
of services discussion
1(a) Transfer Any transfer of the title in goods Supply of goods 413.1
1(b) Transfer Any transfer of right in goods or of undivided share in
goods without the transfer of title thereof Supply of services 413.2
1(c) Transfer Transfer of title under a forward contract Supply of goods 413.3
2(a) Land and building Any lease, tenancy, easement, licence to occupy land Supply of services 413.4
2(b) Land and building Any lease or letting out of building Supply of services 413.5
3 Treatment or process Job work Supply of services 413.6
† When the name of the donor is displayed in recipient institution premises, as an expression of gratitude and public recognition of donor’s act
of philanthropy and is not aimed at giving publicity to the donor in such manner that it would be an advertising or promotion of his business,
then it can be said that there is no supply of service for a consideration (in the form of donation). For example,
“Good wishes from X” printed underneath a digital blackboard donated by X to a charitable yoga institution.
“Donated by Y in the memory of her grandfather” written outside the room in a temple complex which was constructed from such donation.
In these cases, there is no reference of any business activity of the donor which otherwise would have got advertised. Thus, where all the three
conditions are satisfied [namely, the gift or donation is made to a charitable organization, the payment has the character of gift or donation and
the purpose is philanthropic (i.e., it leads to no commercial gain) and not advertisement], GST is not leviable.
As given in Schedule II Brief discussion of different activities Whether supply Para Nos.
Item No. Main heading of goods or supply for detailed
of services discussion
4(a) Transfer of business Transfer or disposal of goods forming part of the assets
assets of a business Supply of goods 413.7
4(b) Transfer of business Business goods are put to non-business use Supply of services 413.8
assets
4(c) Transfer of business Treatment of business goods when a person ceases to
assets be a taxable person Supply of goods 413.9
5(a) Supply of services Renting of immovable property Supply of services 413.10
5(b) Supply of services Construction of a complex Supply of services 413.11
5(c) Supply of services Temporary transfer or permitting the use or enjoyment
of any intellectual property right Supply of services 413.12
5(d) Supply of services Development, design, programming, customisation,
adaptation, upgradation, enhancement, implementa-
tion of information technology software Supply of services 413.13
5(e) Supply of services Agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act Supply of services 413.14
5(f) Supply of services Transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash,
deferred payment or other valuable consideration Supply of services 413.15
6(a) Composite supply Works contract Supply of services 413.16
6(b) Composite supply Restaurant service for cash/deferred payment/other
valuable consideration Supply of services 413.17
7 Supply of goods By any unincorporated association or body of persons
to a member thereof for cash, deferred payment or
other valuable consideration. Supply of goods 413.18
413.1 Transfer of title in goods - Any transfer of the title in goods is supply of goods. It is chargeable to GST
(if other points are satisfied). “Goods” means only movable property. If there is a transfer of title of immovable
property, GST is not applicable.
X sells fertilizers to Y. The title in goods is transferred by X to Y. It is a transaction of supply of goods.
413.2 Transfer of right in goods - Any transfer of right in goods (or of undivided share in goods) without the
transfer of title thereof, is supply of services.
1. X Ltd. owns a computer. It is given on rent to Y. Ownership is not transferred. X Ltd. has transferred only right to use
computer to Y. It is transaction of supply of services.
2. X Ltd. and Y Ltd. own a manufacturing unit. X Ltd. transfers its share in the manufacturing unit to Z. However, Y Ltd.
retains its share. Thus, complete ownership of the manufacturing unit is not transferred. The transaction of transferring
undivided share in the manufacturing unit to Z, is supply of services.
413.3 Transfer of title in goods under a forward contract - Any transfer of title in goods under an agreement
which stipulates that property in goods shall pass at a future date upon payment (of full consideration as agreed),
is supply of goods.
X enters into an agreement with Y on July 20, 2019. Under this agreement, X will sell 5,000 bags of white cement to Y on
December 1, 2019 at Rs. 810 per bag. Title in goods will be transferred to Y at the time of payment of full consideration on
December 1, 2019. This is supply of goods.
413.4 Lease/tenancy of land and building - Any lease, tenancy, easement, licence to occupy land, is supply of
services.
X owns agricultural land. It is given on lease for non-agricultural purposes to Y on yearly rent of Rs. 24 lakh. This lease is
for 3 years. This transaction is treated as supply of services.
605 Renting of immovable property Para 413.10
413.5 Letting out of land and building - Any lease or letting out of the building including a commercial,
industrial or residential complex for business or commerce, is supply of services. This rule is applicable whether
the building is given on lease wholly or partly. This is given by Item 2(b) in Schedule II. Renting of immovable
property is also separately included in Item 5(a) in Schedule II.
X owns a industrial complex. It is given on lease to Y (monthly lease rent being Rs. 8.50 lakh). It is treated as supply of services.
413.6 Job work services - Any treatment or process which is applied to another person’s goods, is supply of
services. Such process/treatment is generally known as job work services. For a job worker, it is not production
or manufacture of goods.
X Ltd. is a publishing house. It gives printed sheets of a book to Y who owns a binding unit. Y will perform book binding
work as per direction of X for a consideration of Rs. 50 per book. The process/treatment undertaken by Y is supply of services.
This rule will remain the same regardless of the fact whether binding material is supplied by X Ltd. or purchased by Y from
an outside source.
413.7 Transfer of business assets - Where goods forming part of the assets of a business are transferred or
disposed of by (or under the directions of) the person carrying on the business so as no longer to form part of those
assets, such transfer or disposal is treated as supply of goods. This rule is applicable whether such transfer is for
a consideration or otherwise.
413.8 Use of business goods for non-business use - Where (by or under the direction of a person carrying on
a business) goods held (or used) for the purposes of the business are put to any private use (or where such goods
are made available to any person for non-business use), such activity/transaction is treated as supply of services.
This rule is applicable whether such goods are made available to the other party for a consideration or without
consideration.
1. X Ltd. is a marketing company. Its shares are owned by X and his family members. X Ltd. owns 50 computers in its office.
One of the computers (owned by X Ltd.) is given by X to his friend Y for his personal use. Ownership is not transferred,
No consideration is recovered from Y. This is treated as supply of services by X Ltd. to Y.
2. Z Ltd. is a manufacturing company. Managing director of the company is Z. One of the cars (owned by the company) is
given to A (a friend of Z) for personal use. The car is used by A for a private journey between Mumbai and Pune. No
consideration is charged from A. As business asset is used by Z Ltd. for non-business purposes, it is supply of services.
413.9 Treatment of goods after the person (owning the business) ceases to be a taxable person - The relevant
provision is given below –
1. A person ceases to be a taxable person.
2. When he ceases to be a taxable person, his business has goods forming part of the assets of the business which
was carried on by him.
If the above two points are satisfied, the above goods shall be deemed to be supplied by him in the course or
furtherance of his business immediately before he ceases to be a taxable person. However, this rule is not
applicable in the following two cases –
a. the business is transferred as a going concern to another person; or
b. the business is carried on by a personal representative who is deemed to be a taxable person.
X is in the business of selling computer hardware in New Mumbai. He closes his business on November 25, 2019.
Immediately after November 25, 2019, he ceases to be a taxable person under GST. At the time of closer, the business has
the following stock-in-trade –
1. 20 unsold Dell computers (model : Optiplex 9099).
2. 84 unsold LG computer monitors (model : 7020 TP 30).
3. 38 unsold HP printers (model : 4250).
Value of above closing stock is Rs. 16,90,000. On the closure of business on November 25, 2019, it would be deemed that these
goods have been supplied by X in the course of business. However, this rule is not applicable if the business is transferred
as a going concern to another person or business was carried on by X as a personal representative of another person.
413.10 Renting of immovable property - Renting of immovable property is included in Schedule II. It is
chargeable to GST. It is specifically included in Schedule II only to remove any uncertainty on its taxability in
future. Renting generally means “allowing, permitting or granting access, entry, occupation, usage or any such
facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the
immovable property. Letting includes leasing, licensing or other similar arrangements in respect of an
immovable property.
 Is renting of all types of immovable properties chargeable to GST - Renting of all types of immovable properties is
not chargeable to GST. The following cases of renting are given in exemption notification and, consequently,
chargeable to GST at nil rate –
a. renting of vacant land, with or without a structure incidental to its use, relating to agriculture;
b. renting of residential dwelling for use as residence;
c. renting out of any property by a Government or a local authority to a non-business entity†;
d. renting of precincts of a religious place meant for general public (owned/managed by a charitable institute);
and
e. renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging
purposes [value of service of a unit of accommodation is Rs. 1,000 (or less) per day or equivalent] (up to
September 30, 2019, this exemption is applicable only if value of service of a unit of accommodation is less than
Rs. 1,000 per day).
 Property tax - Property tax paid by the service provider to municipal authorities is not deductible from the gross
rent.
 Renting for temporary purpose - Giving a property on rent even for temporary purpose (like conduct of a marriage
or any other social function) is chargeable to GST.

 Transfer of tenancy right - The activity of transfer of “tenancy rights” is squarely covered under the scope of
“supply” and taxable under GST. Transfer of tenancy rights to a new tenant against consideration in the form
of tenancy premium is taxable. Likewise, services provided by outgoing tenant by way of surrendering the
tenancy rights against consideration in the form of a portion of tenancy premium, is liable to GST. However,
renting of residential dwelling for use as a residence is exempt vide Exemption Notification (Entry 12).
Consequently, grant of tenancy rights in a residential dwelling for use as residence dwelling against tenancy
premium or periodic rent (or both) is exempt from GST.
Problems
413.10-P1 X of Bengaluru owns 7 properties in different parts of Karnataka. From the information given below, find out GST for
the quarter ending March 31, 2020. GST rate is 18 per cent (i.e., CGST 9 per cent + SGST 9 per cent). Municipal
tax pertaining to these properties is Rs. 44,000. Expenditure on repair is Rs. 1,32,000. Fire insurance premium paid by X is
Rs. 48,000–
Rs.
Rent of residential Building I (given on rent to Y, a salaried employee for his residence) 15,00,000
Rent of residential Building II (given on rent to a bank for residence of a branch manager) 22,00,000
Rent of vacant plot of Land III (given on rent to a manufacturing company) 6,00,000
Rent of vacant plot of Land IV (given on rent for agriculture purposes) 3,50,000
Rent of residential Building V (given on rent to Z Ltd. for residence of employees) 4,00,000
Rent of commercial Building VI (given on rent to A, who has a sole proprietary business) 1,50,000
Rent of residential building VII (it is situated in residential area but used for commercial purposes and it is
given on rent on the understanding that the tenant can use it for commercial purposes if there is no
objection by the municipal corporation) 8,50,000
Solution :
Computation of GST of X –
Rent of residential building I (renting of residential dwelling for use as residence is not chargeable to GST) Nil
Rent of residential building II (letting out of residential building for residential purposes is not chargeable
to GST) Nil
Rent of vacant plot of land III 6,00,000
Rent of vacant plot of land IV (letting out of vacant plot for agricultural purposes is not chargeable to GST) Nil
Rent of residential building V (letting out of residential building for residential purposes is not chargeable
to GST) Nil
† “Business entity” means any person carrying out business. Even a person carrying on a profession is business entity.
607 Construction of a complex, etc. Para 413.11
Rent of commercial building VI (letting out of commercial property is chargeable to tax) 1,50,000
Rent of residential building VII (letting out of residential property for residential purposes is not taxable,
if residential property is let out for commercial purposes, it is chargeable to tax) 8,50,000
GST –
- CGST (@ 9% of Rs. 16,00,000) 1,44,000
- SGST (Karnataka) (@ 9% of Rs. 16,00,000) 1,44,000
Note - X has paid fire insurance premium and expenditure on repair of buildings. These expenses are not deductible while
calculating taxable value of supply. However, input tax credit pertaining to these expenses can be claimed.
413.10-E1 X Ltd. is in the business of letting out of properties on rent. From the information given below pertaining to December
2019, find out GST payable by X Ltd. (GST rate is 18 per cent) –
Rs.
Rent of a residential building situated at 612, Star Enclave, Nagpur (given on rent to SBI to operate its Mall Road
branch from the residential building) 36,00,000
Rent of another residential building situated at 9/25, MM Road, Nagpur (given on rent to SBI for using it as
residence of the Branch Manager of Mall Road branch) 6,00,000
Rent of a vacant plot of land situated at 614, Star Enclave, Nagpur (given on rent to SBI for using it as parking
space for the staff and customers of Mall Road branch) 1,20,000
Star Enclave is a residential plotted colony. However, some of the buildings are used unauthorisedly for commercial purposes. MM
Road is fully residential area.
413.10-P2 X of Hyderabad owns the following properties in Telangana. Find out GST liability for the quarter ending March 31, 2020.
All figures are exclusive of GST, if any. GST rate is 18 per cent –
Rs.
Commercial property given on rent to a recognised college affiliated to Osmania University (municipal tax paid by X :
Rs. 75,000) 30,75,000
A vacant plot of land given on rent for animal husbandry (municipal tax paid by X : Rs. 10,000) 2,00,000
Residential building given on rent to a departmental store for placing vending machines (municipal tax paid by X :
Rs. 30,000) 3,30,000
Terrace of a residential building given on rent to Airtel for erecting communication tower (municipal tax of terrace
paid by X : Rs. 10,000) 6,10,000
Renting of a building for organizing entertainment events for temporary basis (municipal tax is zero) 50,000
Renting of a theatre (rent is not received, under profit sharing arrangement, share of profit of Rs. 7,25,000 is received
from the other party, municipal tax paid by X : Rs. 25,000) 7,25,000
Solution:
Rent of commercial property 30,75,000
Rent of a plot of land (not chargeable as it is covered in exemption notification) Nil
Rent of residential building given to a departmental store for placing vending machines (residential
building given on rent for commercial use is chargeable to GST) 3,30,000
Rent of terrace (chargeable to tax) 6,10,000
Rent of a building for organizing entertainment events (chargeable to tax even if used on temporary basis) 50,000
Rent of a theatre (chargeable to GST as the arrangement amounts to renting of immovable property) 7,25,000
GST –
- CGST (@ 9% of Rs. 47,90,000) 4,31,100
- SGST (Telangana) (@ 9% of Rs. 47,90,000) 4,31,100
413.10-E2 Recalculate tax liability in Problem 413.10-P2 if properties given in the problem are owned by X Ltd. (shares in X Ltd.
are equally held by the Punjab Government, RBI and the Institute of Chartered Accountants of India).
413.11 Construction of a complex, building, civil structure - This service was taxable even prior to July 1, 2012,
when negative list concept was not implemented. It is specifically included in declared services only to remove
any uncertainty on its taxability in future.
This entry covers the services provided by builders or developers or any other person for construction of a
complex, building, civil structure or a part thereof. It also includes building/complex intended for sale to a buyer,
wholly or partly. It does not, however, include the building where the entire consideration has been received
after –
a. issuance of completion certificate (where required) by a competent authority; or
b. building’s first occupation,
Construction for this purpose includes additions, alterations, replacements or remodelling of any existing civil
structure.
 Case 1. Raheja Developers constructs a commercial complex in Vijayawada. Completion certificate is issued by
municipality on March 23, 2020. However, the occupants are using the complex for commercial purposes since November
1, 2019. The complex has three commercial flats which are sold to A Ltd., B Ltd. and C Ltd. as follows –
(Rs. in thousands)
Consideration (it includes Amount received during Amount received on or after
cost of land) October 2019 November 1, 2019
Flat 1 : A Ltd. 92,00 1,00 91,00
Flat 2 : B Ltd. 94,00 94,00 Nil
Flat 3 : C Ltd. 91,00 Nil 91,00
Completion certificate is issued on March 23, 2020. Commercial building was first occupied on November 1, 2019. The earlier
date is November 1, 2019.
Entire consideration is received from C Ltd. after November 1, 2019. Consequently, service provided to C Ltd. is not deemed
supply under Schedule II and not chargeable to GST. However, supply of service to A Ltd. and B Ltd. is deemed supply under
Schedule II and chargeable to GST.
 Case 2. X enters into a contract with DLF Construction Ltd. for purchase of a flat for which the payment has to be made
in 10 monthly instalments of Rs. 30,00,000 each. The first instalment is paid at the time of signing of the contract on July 1,
2019. The flat is likely to be completed during June 2020. On February 1, 2020, X transfers his right to Y after paying 6
instalments. The point for consideration is whether such activity of transfer by X to Y is treated as “declared supply” under
Schedule II.
The activity of transfer of right in the flat by X to Y does not fall in “deemed supply”, as X is not providing any construction
service to Y. It is a case of transfer of interest in immovable property. Such transfer of immovable property (or any interest
therein) is outside the ambit of GST. However, on 6 instalments paid to DLF by X (and subsequent 4 instalments payable
to DLF by Y) GST will be applicable.
413.12 Temporary transfer (or permitting the use or enjoyment) of any intellectual property right - Service
by way of temporary transfer of any intellectual property right, is deemed supply and chargeable to GST. It also
includes service by permitting use or enjoyment of any intellectual property right.
 Meaning of intellectual property right - Intellectual property right has not been defined in the Act. The phrase has
to be understood as in normal trade parlance as per which intellectual property right includes the following –
a. copyright;
b. patents;
c. trademarks;
d. designs and
e. any other similar right to an intangible property.
 Registration in India or outside India - Since there is no condition regarding the law under which an intellectual
right should be registered, temporary transfer of a patent registered outside India would also be covered in this
entry. However, it will become taxable to GST only if place of supply of temporary transfer of intellectual
property right is in India.
X is a scientist. He owns a patent right to manufacture art paper by using grass. The patent right is transferred on temporary
basis to Y Ltd. By virtue of this arrangement, Y Ltd. can use the patent for manufacture of art paper for the quarter ending
December 2019 against payment of Rs. 20 lakh. This is deemed supply under Schedule II and chargeable to GST.
413.13 Development, design, programming, customization, adaptation, upgradation, enhancement,

implementation of information technology software - These are taken as deemed supply. The term
‘information technology software’ may be defined as ‘any representation of instructions, data, sound or image,
including source code and object code, recorded in a machine readable form, and capable of being manipulated
609 Activities which are treated as supply under Schedule I Para 414
or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other
device or equipment’.
413.14 Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an
act - In terms of this entry the following activities if carried out by a person for another for consideration would
be treated as deemed supply –
1. Agreeing to the obligation to refrain from an act.
2. Agreeing to the obligation to tolerate an act or a situation.
3. Agreeing to the obligation to do an act.
 Case 1. X Ltd. is a manufacturing company. Sole distribution rights in the State of Tamil Nadu is given to Y Ltd. By virtue
of this agreement, goods manufactured by X Ltd. will be distributed in Tamil Nadu only by Y Ltd. On August 1, 2019, the
agreement is terminated. Under the termination agreement, X Ltd. will pay a consideration of Rs. 20 lakh in lieu of Y Ltd.’s
promise not to distribute similar goods of any other manufacturer in Tamil Nadu for a period of 2 years. This is treated as
deemed supply by Y Ltd. GST is applicable.
 Case 2. By virtue of a non-compete agreement, one party agrees, for consideration, not to compete with the other in any
specified products, services, geographical location or in any other manner. Such action on the part of one person is deemed
as supply of service and subject to GST.
 Case 3. Amount received on pre-mature termination of employment is treated as a payment in relation to services provided
by the employee to the employer in the course of employment. It is not chargeable to GST. However, any amount paid for
not joining a competing business would be liable to be taxed under GST being paid for supplying of service of forbearance
to act.
413.15 Transfer of right to use any goods - Transfer of the right to use any goods is treated as deemed supply
under Schedule II. The following points should be noted –
1. Purpose of transfer is not relevant.
2. Such transfer may or may not be for a specified period.
3. The transfer of right to use any goods should be for a consideration. It may be cash consideration or deferred
payment or any other valuable consideration.
413.16 Works contract to be treated as composite supply - Works contract is treated as supply of service (or
supply of composite service). Works contract as per section 2(119) means a contract for building, construction,
fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance,
renovation, alteration or commissioning of any immovable property wherein transfer of property in goods
(whether as goods or in some other form) is involved in the execution of such contract.
X Ltd. owns a commercial flat at Nariman Point, Mumbai. Renovation work of this flat is given to Y for a consideration of
Rs. 5 lakh. Renovation work will be done by Y according to design/plan given by X Ltd. Labour and material for the
renovation work will be supplied by Y. This is a works contract. By virtue of Schedule II, it is treated as composite supply
and chargeable to GST.
413.17 Supply of food/other article for human consumption to be treated as composite supply - This entry
includes supply of goods, being food or any other article for human consumption or any drink (other than
alcoholic liquor for human consumption). Supply of these for cash consideration (including deferred payment
or any other valuable consideration) is treated as deemed supply (or supply of composite service). There is no
reference of supply in a restaurant in this entity. Consequently, it covers even home delivery of food or articles
for human consumption.
413.18 Supply of goods by AOP/BOI to its members - This entry includes supply of goods by unincorporated
association or body of persons to its members. Such supply of goods is treated as deemed supply if it is made
for cash consideration, deferred payment or other valuable consideration. Supply of goods by a social club to its
members for a consideration is covered by this entry and, consequently, GST is applicable. However, this entry
does not cover supply of services by a club to its members. It does not cover supply of services.
 WHAT ARE ACTIVITIES WHICH ARE TREATED AS SUPPLY UNDER SCHEDULE I EVEN IF
CONSIDERATION IS ABSENT
414. GST is applicable if supply of goods/services is made for a consideration. However, certain activities
without consideration would be treated as supply under GST and chargeable to tax. These activities (given
below) are specified in Schedule I –
Brief discussion Important condition Important exception Para No. (for

detailed
discussion)
Permanent transfer/disposal Supplier has availed input tax
of business assets credit – 414.1
Supply to a related person or Supply is made in the course or Supplier by way of gift to an emp-
distinct person furtherance of business (of loyee (not exceeding Rs. 50,000 in
supplier) a financial year) 414.2
Supply of goods between – Supply of services between prin-
principal and agents cipal and agents, not covered 414.3
Import of services from a Supply is made in the course or
related person or his other furtherance of business (of
establishment outside India supplier) – 414.4
414.1 Permanent transfer/disposal of business assets - It is applicable if the following points are satisfied –
1. Supply is made by a taxable person to a taxable/non-taxable person.
2. Supply is permanent transfer of business assets or permanent disposal of business assets.
3. In respect of the aforesaid supply, the supplier has availed input tax credit.
If the above conditions are satisfied, GST is applicable even if supply is made without consideration.
 Case 1. X is a retail dealer in garments. Out of his business stock, 5 shirts are given free of cost to a friend. Input credit was
availed when these shirts were purchased. There is no consideration. However, the supply satisfies the above 3 conditions.
GST is applicable. For this purpose, “value of supply” shall be determined according to the provisions of section 15.
 Case 2. Y Ltd. is a manufacturing company. It owns more than 50 computers for office purposes. Input tax credit was availed
at the time of purchase of these computers. On December 1, 2019, 6 computers are given as a gift to a charitable institute.
As the above 3 conditions are satisfied, GST is applicable. For this purpose, “value of supply” shall be determined according
to the provisions of section 15.
 Case 3. Z Ltd. transfers a plant without consideration to its holding company : A Ltd. Input credit was availed by Z Ltd.
when the plant was purchased. As the above 3 conditions are satisfied, GST is applicable when plant is supplied to A Ltd.
For this purpose, “value of supply” shall be determined according to the provisions of section 15.
414.2 Supply between related persons or distinct persons - This rule is applicable if the following conditions
are satisfied –
1. There is a supply of goods/services between related persons or between distinct persons.
2. Supply is made in the course or furtherance of business.
If the above 2 conditions are satisfied, GST is applicable even if supply of goods/services is made without any
consideration.
414.2-1 RELATED PERSONS - The term “related persons” is defined by Explanation to section 15. By virtue of this
definition, persons (including legal persons) shall be deemed to be “related persons” if—
a. such persons are officers or directors of one another’s businesses;
b. such persons are legally recognised partners in business;
c. such persons are employer and employee;
d. any person directly or indirectly owns, controls or holds 25 per cent or more of the outstanding voting stock
or shares of both of them;
e. one of them directly or indirectly controls the other;
f. both of them are directly or indirectly controlled by a third person;
g. together they directly or indirectly control a third person; or
h. they are members of the same family.
1. “Family” means, –
a. the spouse and children of the person, and
b. the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the
said person.
611 Supply of goods between principal and agents Para 414.3
2. Persons who are associated in the business of one another in that one is the sole agent (or sole distributor or
sole concessionaire), of the other, shall be deemed to be related.
 Case 1. X holds 25 per cent (or more) equity share capital in Y Ltd. as well as Z Ltd. Y Ltd. and Z Ltd. are “related persons”.
Y Ltd. supplies goods/services without consideration to Z Ltd. If supply is made in the course or furtherance of business
of Y Ltd., GST is applicable. For this purpose, “value of supply” shall be determined according to the provisions of section
15 [see also para 468].
 Case 2. B is an architect. He gifts his BMW car to his wife Mrs. B. B and Mrs. B are related persons. Consideration is absent.
However, GST is not applicable. Supply is not made by B in the course or furtherance of his business.
414.2-1a SUPPLY BETWEEN EMPLOYER AND EMPLOYEE - Services provided by an employee to his employer in the course
of (or in relation to) his employment is not treated as supply of goods or supply of services (it is covered by
Schedule III and discussed in para 415.1). GST is not applicable on services provided by employee. When
remuneration (in cash and/or in kind) is paid under the employment contract by the employer, GST is not
applicable. If, however, employer supplies goods/services to its employees without consideration (outside the
employment contract or which is not covered by employment contract), GST is applicable. Supply by way of gift
(not exceeding Rs. 50,000 in value in a financial year) by an employer to his employee is not treated as supply
of goods/services. Conversely, if value of such supply exceeds Rs. 50,000, it is chargeable to GST even if no
consideration is charged by the employer.
X is marketing head of Y Ltd., a car manufacturing company. As per employment contract, salary of X is Rs. 3,50,000 per
month. Besides, he gets commission, bonus and allowances. On October 19, 2019, Y Ltd. transfers a new car to X as Diwali
gift (this gift is not covered by the employment agreement). Taxable value of the gift as per section 15 is Rs. 19,90,000. Besides,
Y Ltd. provides tea, coffee, light snacks during tea break to all of its employees in the office premises. Annual expenditure
on this account is Rs. 4,10,000. Point for consideration is whether GST is applicable.
Service provided by X to Y Ltd. is not supply of goods or supply of services, GST is not applicable.
Salary, commission, bonus and allowances paid by Y Ltd. as remuneration (within employment agreement) are not subject
to GST.
Car transferred by Y Ltd. to X without consideration is subject to GST (X and Y Ltd. being employer and employee, are related
persons. Supply is not covered by employment agreement. Value of supply exceeds Rs. 50,000).
Provision of tea, coffee, light snacks is not subject to GST (although supply is not covered by employment agreement, GST
is not applicable, it is difficult to identify who is recipient of supply).
414.2-2 DISTINCT PERSONS - The expression “distinct persons” is defined in section 25(4). A person who has
obtained or is required to obtain more than one registration (whether in one State/Union territory or more than
one State/Union Territory) shall, in respect of each such registration, be treated as distinct persons.
X Ltd. is a cement manufacturing company. Head office and manufacturing unit of the company are situated in Mumbai.
The company has two branches – Kolkata and Noida. The company has taken 3 registrations under GST (head office, Kolkata
branch and Noida branch). In this case, head office, Kolkata branch and Noida branch are treated as distinct persons. Supply
of goods/services between head office and Kolkata/Noida branch or supply of goods/services between Kolkata branch and
Noida branch will be subject to GST, even if such supply is made without any consideration.
On December 5, 2019, 500 bags of cement are dispatched by head office to its Noida branch for retail sale. No consideration
is charged. As head office and Noida branch are treated as distinct persons, GST is applicable. Head office will charge GST
on taxable value of supply. Noida branch will claim input tax credit for the same.
414.3 Supply of goods between principal and agents - It covers the following –
1. Supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the
principal.
2. Supply of goods by an agent to his principal where the agent undertakes to receive such goods on behalf of
the principal.
1. The aforesaid provision does not cover supply of services between principal and agents.
2. In case of supply of goods between principal and agent, GST is applicable even if no consideration is charged.
The important point for the applicability of this provision is “supply or receipt of goods by an agent on behalf
of his principal”. The key ingredient for determining relationship under GST would be whether the invoice for
the further supply of goods on behalf of the principal is being issued by the agent or not. Where the invoice for
further supply is being issued by the agent in his name then, any provision of goods from the principal to the
agent would fall within the fold of this entry.
X Ltd., a fertilizer manufacturing company, is located in Chennai. Y Ltd. of Maharashtra is one of the selling agents of X Ltd.
Y Ltd. sells fertilizer in Maharashtra and Gujarat on behalf of X Ltd. (but bills are issued to the customers by Y Ltd. in its own
name). On November 10, 2019, X Ltd. sends 1,000 bags of fertilizer to Y Ltd. for sale on behalf of X Ltd. No consideration
is charged. As Y Ltd. is an agent of X Ltd., GST is applicable. X Ltd. will charge GST on taxable value of supply. Y Ltd. can
claim input tax credit.
414.4 Import of services - It covers import of services if the following points are satisfied –
1. Service is imported by a person. The importer of services may or may not be registered under GST (maybe
engaged only making exempted supplies but is otherwise engaged in business activities).
2. It is imported from a related person. Alternatively, it is imported from any of his other establishments outside
India.
3. Such service is imported in the course or furtherance of business.
If the above points are satisfied, GST is applicable even if supply of services is without consideration.
 Case 1. X is a businessman. Y, his younger brother, is an interior designer. Presently, he is employed by a multi-national
company and posted in Hong Kong (Y is not in practice). X wants to construct a residential house in Pune. Interior designing
service is provided by Y from Hong Kong. X does not pay any consideration to Y. GST is not applicable, as import of service
by X is not in the course of or furtherance of business (i.e., business of supplier Y).
 Case 2. Y & Co., is a firm of advocates. Head office of the firm is in Hyderabad. One of its branches is situated in Singapore.
In the case of a multi-national company pertaining to transfer pricing, Hyderabad office obtains legal advice from Singapore
branch. No consideration is paid. However, GST is applicable [import of service is in the course of or furtherance of business
(i.e., business of supplier)].
 WHAT ARE ACTIVITIES GIVEN IN NEGATIVE LIST (NEITHER SUPPLY OF GOODS NOR
SUPPLY OF SERVICES)
415. Under GST regime, the following activities/transactions can be termed as negative list (technically there
is no concept of negative list in GST, the transactions given below are treated neither as supply of goods nor as
supply of services) –
Section Description Para
Sec. 7(2)(a) Activities specified in Schedule III 415.1
Sec. 7(2)(b) Notified activities undertaken by Government/local authority 415.2
415.1 Activities given in Schedule III - The following activities/transactions (specified in Schedule III) are
neither treated as supply of goods nor supply of services –
No. Brief description Nature of activities
1. Employment Services by an employee to the employer in the course of or in relation to his employment.
[see para 415.1-1]
2. Court Services by any court or Tribunal established under any law for the time being in force.
Court for this purpose includes District Court, High Court and Supreme Court.
3. MPs - Functions performed by the Members of Parliament, Members of State Legislature,
Members of Panchayats, Members of Municipalities and Members of other local
authorities.
- Duties performed by any person who holds any post in pursuance of the provisions of
the Constitution in that capacity.
- Duties performed by any person as a Chairperson or a Member or a Director in a body
established by the Central Government or a State Government or local authority and
who is not deemed as an employee before the commencement of this clause.
4. Funeral Services of funeral, burial, crematorium or mortuary including transportation of the
deceased.
5. Sale of land Sale of land and sale of building [however, construction of a complex is chargeable to GST
– see para 413.11].
613 Notified activities undertaken by Government Para 415.2
No. Brief description Nature of activities

6.† Actionable claims Actionable claims, other than lottery, betting and gambling. [see para 415.1-2]
7.† Supply from non- Supply of goods from a place in the non-taxable territory to another place in the non-taxable
taxable territory to a territory without such goods entering into India [see para 415.1-3].
non-taxable territory
8.† Supply of ware- Supply of warehoused goods to any person before clearance for home consumption [see
housed goods para 415.1-4].
9.† Supply by endorse- Supply of goods by the consignee to any other person, by endorsement of documents of title
ment of documents to the goods, after the goods have been dispatched from the port of origin located outside
India but before clearance for home consumption [see para 415.1-4].
10. Liquor licence Service by way of grant of alcoholic liquor licence, against consideration in the form of
licence fee/application fee (if licence is granted by a State Government in which it is
engaged as public authority).
415.1-1 EMPLOYMENT - Service provided by an employee for his employer (in the course of or in relation to his
employment) is not subject to GST. However, a supply which is not connected with the employment is not
covered by this entry. For example, if X, an employee and whole-time director of A Ltd., provides his services
to A Ltd., he is not chargeable to GST. This rule is applicable even if he gets an extra payment from A Ltd. for
some extra work (suppose, he gets Rs. 2,000 per meeting of Board of Directors as sitting fees apart from regular
salary of Rs. 90,000 per month, GST is not applicable on sitting fees as well as regular salary). Services provided
outside the ambit of employment for a consideration, would be a supply of service and chargeable to GST. In the
above example, if X also gets rent of his commercial property from A Ltd., GST is applicable on rent. Similarly,
if X gets consultancy fee on contract basis from B Ltd. (an associate company of A Ltd.), then this would be treated
as supply of service and GST will be applicable on consultancy fee.
415.1-2 ACTIONABLE CLAIM - Actionable claim can be enforced only through a court of law. It cannot be brought
or sold. However, it can be assigned. Basically, actionable claim means a claim for any amount receivable (e.g.,
claim for arrears of rent, claim for profit by a partner in a firm, claim for provident fund, claim for recovery of
insurance money, etc.). When no action is necessary to realise the debt, it cannot be said to be an actionable claim.
However, a debt secured by mortgage of immovable property/movable property, cannot be treated as
actionable claim.
When actionable claim is chargeable to GST - Only actionable claim pertaining to lottery, betting and gambling is
chargeable to GST. Any other actionable claim is neither treated as supply of goods nor supply of services. Where
sale, transfer or assignment of debts falls within the purview of actionable claims, the same would not be subject
to GST. However, any charges collected in the course of transfer or assignment of a debt would be chargeable
to GST (being in the nature of consideration for supply of services).
415.1-3 SUPPLY FROM NON-TAXABLE TERRITORY TO A NON-TAXABLE TERRITORY - Transactions which involve movement
of goods, caused by a registered person (or by any other person) from one non-taxable territory to another non-
taxable territory, is not subject to GST (such transactions are neither treated as supply of goods nor supply of
services).
415.1-4 SUPPLY OF WAREHOUSED GOODS/IN THE COURSE OF HIGH SEA SALES - This entry has been inserted [by the CGST
(Amendment) Act, 2018] to ensure that there is no double taxation of transactions where supply of goods occurs
in the course of high sea sales and sale of warehoused goods, before clearance for home consumption.
Before this amendment, it was observed that in case of supply of goods as high seas sales and sale of warehoused
goods, before being cleared for home consumption, IGST was being levied twice, once under the Customs Tariff
Act, 1975 (read with the IGST Act) and then for a second time, on clearance for home consumption under the
IGST Act.
Since double taxation needs to be avoided, circulars were issued by the Board to state that IGST would be
payable only once at the time of clearance of goods for home consumption. However, the relevant provision
has been amended and the aforesaid situation is included in Schedule III. After this amendment, the aforesaid
transaction is neither treated as supply of goods nor supply of services.
415.2 Notified activities undertaken by Government - The provisions of section 7(2)(b) are given below –
1. An activity/transaction is undertaken by the Central Government, a State Government or Union Territory or
any local authority in which it is engaged as public authorities.
2. Such activity is notified for the purpose of section 7(2)(b) by the Government on the recommendation of GST
Council.
† Applicable from February 1, 2019.
Para 416 Concept of Supply 614
If the above two conditions are satisfied, the activity/transaction shall be treated neither as a supply of goods
nor a supply of services.
Vide Notification No. 14/2017-Central Tax (Rate), dated June 28, 2017, Government has notified services by
way of any activity in relation to a function entrusted to a Panchayat under article 243G of the Constitution or
to a Municipality under article 243W of the Constitution, for this purpose.
 WHAT IS THE SIGNIFICANCE OF EXPRESSION “SUPPLY MADE IN THE COURSE OR

FURTHERANCE OF BUSINESS”
416. “Business” is defined under section 2(17). It includes any trade, commerce, manufacture, profession,
vocation, adventure or wager, etc., whether (or not) undertaken for a pecuniary benefit. Besides, business
includes any activity or transaction which is incidental or ancillary to the aforementioned listed activities [for
complete definition, see para 405.2]. Any activity undertaken by the supplier and which is included in the
definition of “business” would be treated as made in the course or furtherance of business. Such activity is subject
to GST.
 Supply in the course of business of supplier (or recipient) - The term “supply” in the expression “supply made in
the course or furtherance of business”, is from the point of view of the supplier of goods/services. If supplier is
not in the business of supplying goods and services, GST is not applicable (even if recipient of goods/services
is engaged in the business). In the press release, dated July 13, 2017, it was clarified that when an individual (who
is not in the business of selling jewellery) sells old jewellery, GST is not applicable under reverse charge
mechanism. This clarification is equally applicable in the case of any other supply made (not being in the course
of business) by an individual.
X, an individual, buys a motor car for his personal use. He sells the car after 2 years to a car dealer. GST is not applicable.
The sale of old and used car by X is not in the course or furtherance of his business. It will not be a transaction of “supply”
in terms of CGST/SGST Act.
 WHAT IS RELEVANT TO ATTRACT GST – SUPPLY BY A “PERSON” OR SUPPLY BY A

“TAXABLE PERSON”
417. GST is applicable when supply of goods or services or both is made by a taxable person.
 Who is a taxable person - A “taxable person” is a person who is registered or liable to be registered under section
22 or 24 [see para 522]. A person (who is not liable for registration) has taken voluntary registration. He is a taxable
person. Likewise, a person (who is liable for registration) has not taken registration. He is unregistered but he
is a taxable person.
 When GST is attracted - To attract GST, supply should be made by a taxable person. The recipient of supply may
be a taxable person or non-taxable person. The following points should be noted –

1. Supply by a non-taxable person to a non-taxable person, is not subject to GST.
2. Supply by a non-taxable person to a taxable person, may attract GST under reverse charge mechanism under
section 9(4) (if the supply is made by the supplier in the course of or furtherance of his business). However, the
provisions of section 9(4) are not applicable during October 13, 2017 and March 31, 2019. From April 1, 2019,
section 9(4) is applicable in a few notified cases [see para 483].
 WHAT ARE DIFFERENT TYPES OF “SUPPLY”

418. Different types of supply are given below –
418.1 Taxable supply - Taxable supply refers to a supply of goods and/or services which is chargeable under
GST. Supply which is exempt or supply which is subject to nil rate of tax, is not treated as taxable supply.
However, for the purpose of computation of aggregate turnover (to determine threshold limit for small traders)
exempt supply shall be included. For the purpose of Composition Scheme/Alternative Composition Scheme,
aggregate turnover includes exempt supply (but not exempt supplies by way of extending loan/deposit/
advance where consideration is represented by way of interest or discount).
418.2 Zero rated supply - Zero rated supply is a supply of any goods and/or services on which no tax is payable
but input tax credit pertaining to that supply is admissible. Supply by way of export of goods is treated as zero
rated supply. Zero rated supply also includes supply of goods and/or services to a Special Economic Zone
developer or a Special Economic Zone unit.
615 Composite supply/mixed supply Para 418.7
418.3 Exempt supply - Exempt supply means supply of any goods and/or services which are not taxable under
GST. These supplies are exempt by virtue of exemption notifications issued under section 11. Under section 11,
a supply may be exempt generally either absolutely or subject to such conditions as may be specified in a
notification issued by the Government. When an exemption in respect of any goods and/or services is provided
in the notification, the supplier of goods and services is exempt from GST.
418.4 Continuous supply - Section 2(32) defines “continuous supply of goods”. Broadly, it means a supply of
goods which is provided (or agreed to be provided) continuously or on recurrent basis, under a contract. Such
supply may (or may not) be made by means of a wire, cable, pipeline or other conduit. Supplier issues invoices
to recipient on a regular or periodic basis.
“Continuous supply of services” means a supply of services which is provided (or agreed to be provided)
continuously or on recurrent basis, under a contract. Such a contract is for a period exceeding 3 months with
periodic payment obligations.
1. Continuous supply of goods and/or services also includes such supply which is notified by the Government
for this purpose.
2. Identifying a supply as a continuous supply of goods/services is required to find out “time of supply”.
418.5 Inter-State supply or intra-State supply - See paras 426 and 427.
418.6 Deemed supply - See para 413.
418.7 Composite supply/mixed supply - GST is chargeable on supply of individual goods and/or services as
per notified rates. If there is a supply of an individual goods and/or services, one can easily find out the
applicable GST rate from the relevant notification. When 2 or more individual goods and/or services are
supplied under a contract, it becomes difficult to find out applicable GST rate for such composite supply or mixed
supply. Composite supply/mixed supply is taxable as follows—
Supply Description GST rate
Composite supply Composite supply comprises 2 or more GST rate applicable on the principal supply shall
supplies naturally bundled in ordinary be applied on the entire consideration
course of business, one of which is principal
supply
Mixed supply It comprises 2 or more supplies (not natu- It will be treated as supply of that particular item
rally bundled) for a single price which attracts highest GST rate. Highest GST rate
will be applied on the entire consideration
418.7-1 COMPOSITE SUPPLY - Composite supply is defined by section 2(30). The following are salient features of
the definition –
1. Supply is made by a taxable person to a recipient.
2. Such supply consists of 2 or more taxable supplies of goods and/or services or any combination thereof.
3. Such combination of 2 or more supplies of goods and/or services is naturally bundled.
4. Such naturally bundled goods and/or services is supplied in conjunction with each other in the ordinary
course of business.
5. Out of naturally bundled supply of goods and/or services, one is principal supply (“principal supply” means
the supply which constitutes the predominant element of a composite supply and to which any other supply
forming part of that composite supply is ancillary).
If the above conditions are satisfied, GST is chargeable on the entire consideration at the rate applicable on
principal supply.
 Case 1. Goods are packed and transported with insurance. The supply of goods, supply of packing materials, transport
service and insurance service is a composite supply. Supply of goods is a principal supply. GST rate applicable on supply
of goods will be applied on this composite supply.
 Case 2. X Ltd. supplies a laptop to B Ltd. Laptop is supplied along with Window 10 and MS Office (licensed version of both
are installed in the laptop). Laptop is given along with laptop bag. Laptop carries onsite warranty for 3 years. The laptop
is supplied for Rs. 80,000. This is a composite supply comprising supply of laptop, license of Window 10 and MS Office,
supply of laptop bag and warranty of 3 years. The principal supply is supply of laptop. The entire consideration of Rs. 80,000
will be subject to GST rate which is applicable on supply of laptop.
 How to find out whether 2 or more supplies of goods and/or services are bundled in the ordinary course of business† -
Whether goods and/or services are bundled in the ordinary course of business would depend upon the normal
or frequent practices followed in the business to which supply of goods and/or services relate. Such normal and
frequent practices adopted in a business can be ascertained from several indicators some of which are listed
below –
 Perception of the recipient of goods and/or services - If large number of recipients of goods and/or services of such
bundle of goods/services reasonably expect such supply to be provided as a package, then such a package could
be treated as naturally bundled in the ordinary course of business.
 Practice followed by majority of supplier - If majority of supplier of goods/services in a particular area of business
provide similar bundle of goods/services, then such a package could be treated as naturally bundled in the
ordinary course of business. For example, in the case of air travel, majority of airlines provide along with air
ticket, catering on board. Transport by air and catering on board is naturally bundled service.
 Nature of goods and/or services - The nature of the various goods and/or services in a bundle of goods/services
will also help in determining whether it is bundled in the ordinary course of business. If the nature of goods/
services is such that one of them is the main supply of goods/services and the other are combined in the nature
of incidental or ancillary goods/services which help in better enjoyment of a main goods/services, then such a
package could be treated as naturally bundled in the ordinary course of business. For example, service of stay
in a hotel is often combined with a service or laundering of 3-4 items of clothing free of cost per day. Such service
is an ancillary service to the provision of hotel accommodation and the resultant package would be treated as
services naturally bundled in the ordinary course of business.
 Other indicators - Other illustrative indicators, not determinative but indicative of bundling of goods/services
in ordinary course of business are –

- There is a single price or the customer pays the same amount, no matter how much of the package they actually
receive or use.
- The elements are normally advertised as a package.
- The different elements are not available separately.
- The different elements are integral to one overall supply – if one or more is removed, the nature of the supply
would be affected.
No straight jacket formula can be laid down to determine whether goods/services are naturally bundled in the
ordinary course of business. Each case has to be individually examined in the backdrop of several factors some
of which are outlined above.
418.7-2 MIXED SUPPLY - Mixed supply is defined by section 2(74). The salient features of the definition are given
below –
1. Supply is made by a taxable person to a recipient.
2. Supply is made for a single price.
3. It is supply of two or more individual supplies of goods and/or services, or any combination thereof.
4. Such supply is made in conjunction with each other.
5. Such supply does not constitute a composite supply.
If the above conditions are satisfied, it is treated as mixed supply of goods and/or services. It is treated as supply
of that particular item in the mixed supply which attracts highest GST rate. Highest GST rate will be applied on
the entire consideration.
 Case 1. A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit
juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent
on any other. It shall not be a mixed supply if these items are supplied separately. Suppose, these supplies are made in a
single package for a single price of Rs. 1,000 and out of different items in the package, the highest applicable GST rate is 28
per cent, then the entire consideration of Rs. 1,000 will be subject to GST at the rate of 28 per cent.
 Case 2. A house is given on rent, one floor of which is to be used as residence and the other for housing a printing press.
Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single
rent deed is executed it will be treated as mixed supply. In this case, renting for use as residence is exempt from GST.
However, renting for non-residence use is chargeable to GST at the rate of 18 per cent. Since the latter category attracts highest
† As given in para 9.2.4 in Taxation of Services : An Education Guide, Central Board of Indirect Taxes and Customs, Government of India.
617 Problems on supply Problem 419-P3
GST liability amongst the two services mixed together, the entire bundle would be treated as renting of commercial property
and the entire consideration will be subject to GST at the rate of 18 per cent.
 Problems on “supply”
419-P1 Discuss whether GST is applicable in the following transactions –
1. X transfers 1,000 debentures of A Ltd. to Y for a consideration of Rs. 4,75,000. Date of transaction is July 20, 2019.
2. On July 25, 2019, Z transfers a plot of land situated in Madurai to B for a consideration of Rs. 40 lakh. Consideration is, however,
payable in instalments.
3. X, a registered person in GST, is a flower dealer in Pune. On July 28,2019, he sells roses for decoration purposes for Rs. 1,50,000 to
an interior decorator.
Solution :
1. Transfer of debentures - GST is applicable on supply of goods and/or services. Debentures are securities. Securities are not
treated as supply of “goods” under section 2(52). Likewise, under section 2(102), transfer of debentures cannot be termed
as supply of “services”. Therefore, transfer of debentures by X is not subject to GST.
2. Transfer of plot of land - Transfer of immovable property is not subject to GST. Immovable property is not included in the
definition of goods under section 2(52).
3. Supply of flowers - “Flowers” are goods. GST is applicable. However, the notified GST rate for supply of natural flower is
nil. Therefore, GST liability is nil.
419-E1 Discuss whether GST is applicable in the following transactions –
1. X transfers Government securities on August 3, 2019 to Y for Rs. 2,10,000. These were purchased in 2015 for Rs. 1,80,000.
2. Z transfers agricultural land situated in Shimla to C for Rs. 60 lakh. Date of transfer is July 18, 2019.
3. D is a registered person in GST. He deals in scrap. He transfers his personal car on August 3, 2019 for a consideration of
Rs. 1,55,000.
1. X deposits Rs. 1 lakh in cash in his savings account with State Bank of India, Jaipur.
2. Transfer of derivatives by Y for a consideration of Rs. 4,10,000. Y is a dealer in shares and security.
3. Z takes a housing loan of Rs. 1.5 crore from Kotak Mahindra Bank. Rate of interest is 7.9 per cent. Loan is repayable after 3 years.
Rs. 10,000, being documentation charges, is payable by Z at the time of taking loan. Interest would be part of EMI which will be payable
on 10th day of every month.
Solution :
1. Cash deposit in bank - It is a transaction in money. GST is not applicable on making a bank deposit.
2. Transfer of derivatives - Derivatives are securities. GST is not applicable on transfer of securities.
3. Housing loan - Taking a loan from a bank is not supply of goods and/or services by bank. GST is not applicable. However,
document charges of Rs. 10,000 is subject to GST.
1. X of Delhi wants to send Rs. 1 lakh to Y of Mumbai. He purchases a bank draft from SBI. SBI charges Rs. 200 as bank commission.
2. Z purchases 1,000 units of UTI mutual fund for Rs. 15,000. Units are purchased through a broker who charges brokerage of
Rs. 150.
3. A repays a loan to PNB. Loan was taken for business purposes in 2018. Amount of repayment is Rs. 10 lakh along with interest
of Rs. 2 lakh.
1. X is a registered person under GST. He deals in non-stick cookware. On September 2, 2019, he supplies 50 non-stick cookware for
a consideration of Rs. 800 per piece to Y. Y is not a registered person under GST.
2. B is not a registered person under GST. He is employed as a tax consultant in D Ltd. On September 3, 2019, he sells his old TV to
a TV dealer for Rs. 2,800. TV dealer is a registered person under GST.
3. E Ltd. is a manufacturing company. It takes legal advice from F, an advocate located in Chicago, USA. US $ 5,000 is paid for this
purpose.
Solution :
1. Supply by registered person to unregistered person - Supply by a registered person to an unregistered person, is subject to GST.
2. Supply by unregistered person to registered person - B sells his old TV to a registered person. B is not in the business of selling
TVs. GST is not applicable. The recipient (TV dealer) is not required to pay GST under reverse charge mechanism, as the
supply is not made in the course of or furtherance of business of supplier.
3. Import of service - Import of service is covered by section 7(1). The important requirement is that service is imported for
a consideration. Import of service is in the course of or furtherance of business of the supplier. These two conditions are
satisfied when E Ltd. take legal advice from advocate F. GST is applicable. E Ltd. will pay GST under reverse charge
mechanism.
Problem 419-P4 Concept of Supply 618

1. X is not a registered person under GST. He owns a business of retail trading in pharma goods. He purchases a TV for his drawing
room for Rs. 80,000 on October 10, 2019. However, he sells it on October 15, 2019 for Rs. 76,000 to a TV dealer who is registered
under GST. Discuss whether GST is applicable at the time of resale.
2. Y Ltd. is a consultancy firm. It takes legal advice from Z, a solicitor located in Singapore. However, no consideration is paid for
this purpose. Y Ltd. and Z are not related.
3. A Ltd. is in the business of manufacture of water purifier. The manufactured goods are sold by the company in rural areas. The
State Government of Tamil Nadu gives a subsidy of Rs. 5 lakh to A Ltd. Discuss whether GST is applicable on subsidy.
1. X gives his vacant plot of land situated in a residential colony in Delhi to Y Ltd. (monthly rent being Rs. 4,10,000). Y Ltd. is a car
distributor and plot of land is used by it for parking unsold cars.
2. Z owns a vacant land in a village. It is given rent to B (monthly rent being Rs. 6,40,000). B uses the land for agricultural activities.
Annual income from this activity is more than Rs. 80 lakh.
3. C is in the business of selling electronic white goods. He closes down his business on March 31, 2020. Value of unsold stock of electronic
goods on that date is Rs. 9 lakh.
Solution :
1. Renting of vacant land - Renting of dwelling units for use as residence is not subject to GST. However, renting of residential
plot for commercial use is chargeable to GST.
2. Renting of agricultural land - Renting of agriculture land for agricultural activities is not chargeable to GST.
3. Business goods when a person ceases to be a taxable person - It is covered by Item 4(c) of Schedule II [see para 413.9]. C is registered
under GST. He closes his business on March 31, 2020. At the time of transfer, he has closing stock of Rs. 9 lakh. By virtue
of Item 4(c), law will assume that the unsold stock has been supplied by C in the course of his business and GST is applicable.
1. X owns a commercial property. It is given on rent to Y. Y uses this property for storing his raw material. Monthly rent is
Rs. 6,28,000.
2. Z owns a residential building. It is given on rent to a fertilizer manufacturing company. The building is used by tenant for storing
raw material. Monthly rent is Rs. 7,15,000.
3. B Ltd. is in the business of construction of commercial buildings. One of the flats in a commercial complex situated at Nariman
Point, Mumbai is sold to the D Ltd. for a consideration of Rs. 14.5 crore. Completion certificate of the complex is not yet received.
Building is not occupied till the time of sale to D Ltd.
419-P5 X, located in Mumbai, is a technical consultant to many companies. He is a registered person under GST. He has been providing
technical services to A Ltd., Nagpur since 2011. Consideration is settled for each assignment. On December 10, 2019, A Ltd. has paid
Rs. 10 lakh to X on his promise of not providing similar technical services to any other business entity in India or abroad for a period
of 10 years ending on December 31, 2029. X is of the view that Rs. 10 lakh is not chargeable to GST. Do you agree ? If not, calculate GST
liability of X (it cannot be recovered from A Ltd.). Technical services provided by X is otherwise chargeable to GST at the rate of 18 per
cent.
Solution : Scope of supply is specified by section 7(1). It includes deemed supply given under Schedule II. Under Item 5(e)
of Schedule II, any consideration received for agreeing to the obligation to refrain from an act, is subject to GST.
Consideration received for non-compete agreement is also consideration for supply of services. Consideration of Rs. 10 lakh
received on the promise of X of not providing similar services to any other person, is consideration for supply which is
chargeable to GST. Since GST is not separately collected, it will be assumed that it is included in Rs. 10 lakh. Consequently,
value of taxable supply will be Rs. 8,47,458 (i.e., Rs. 10,00,000 × 100 ÷ 118). GST liability on Rs. 8,47,458 will be calculated as
follows (it will be paid by X out of his pocket) –
Rs.
Add: GST –
- CGST (@ 9% of Rs. 8,47,458) 76,271
- SGST (Maharashtra) (@ 9% of Rs. 8,47,458) 76,271
419-E5 Make the following changes in Problem 419-P5 and recalculate the GST liability of X (there is no other change) –
1. A Ltd. is holding company of B Ltd. Both are Indian companies. But B Ltd. is located in Tamil Nadu.
2. Consideration of Rs. 10,00,000 is paid by B Ltd. to X.
3. This amount is paid to X on his promise of not providing similar technical service to another business entity in India for a period
of 5 years.
419-P6 X, is an architect and based at Mumbai. During December 2019, he has prepared building plan of a new hotel for ITC which
will be constructed near Nariman Point in Mumbai. For this purpose, he charges Rs. 55 lakh from ITC. In addition, ITC has provided
619 Problems on supply Problem 419-P8
travellers cheques of Rs. 10 lakh (which can be used only outside India) and complementary voucher for stay of 3 nights at ITC Grand
Chola, Chennai (value of voucher is Rs. 44,000). X is of the view that only monetary consideration of Rs. 55 lakh is chargeable to GST
at the rate of 18 per cent and the value of travellers cheques/ complementary stay voucher is not taxable. Do you agree ? If not, calculate
GST liability in this case which will be borne by ITC additionally.
Solution : Consideration for supply of goods and/or services can be received in money or in kind. In either case, it is
chargeable to GST. X is not legally correct to claim tax-free status for travellers cheques and complementary stay voucher.
In this case, GST liability of X will be calculated as follows –
Rs.
Monetary consideration 55,00,000
Value of travellers cheques 10,00,000
Value of complementary stay voucher 44,000
Add: GST –
- CGST (@ 9% of Rs. 65,44,000) 5,88,960
- SGST (Maharashtra) (@ 9% of Rs. 65,44,000) 5,88,960
Total 77,21,920
419-E6 In Problem 419-P6, ITC agrees to bear GST liability on monetary consideration of Rs. 55,00,000. However, on non-monetary
consideration GST liability will not be payable by ITC. Recalculate GST liability of X.
419-P7 Suppose, in Problem 419-P6, X agrees not to provide similar drawings to any other company in hospitability industry in India
or abroad. On this promise, X gets from ITC, Wills Lifestyle Complementary Vouchers (for purchasing any article from any Wills
Lifestyle Store in India for Rs. 10 lakh). X is of the view that no additional supply of service and nothing is chargeable to GST on receipt
of complementary vouchers. X has not received any other consideration in cash or by cheque. Is it chargeable to GST ? What will be GST
liability if ITC does not want to pay any GST along with complementary vouchers to X ? GST rate for similar service is 18 per cent.
Solution : A promise not to do a particular act is “service” chargeable to tax. Consequently, value of complementary
vouchers will be subject to GST. As GST is not paid separately, value of taxable service will be Rs. 8,47,458 (i.e., Rs. 10,00,000
× 100 ÷ 118). GST liability on Rs. 8,47,458 will be calculated as follows (it will be paid by X out of his pocket) –
Rs.
Add: GST –
- CGST (@ 9% of Rs. 8,47,458) 76,271
- SGST (Maharashtra) (@ 9% of Rs. 8,47,458) 76,271
Total 10,00,000
419-E7 X Ltd. has registered office in Dubai. It has branches in Nagpur and Patna. Dubai office provides software consultancy service
to Nagpur branch for which a bill of Rs. 40,00,000 is raised. X Ltd. is of the view that GST is not applicable as the service provider
and service recipient are part of the same establishment. Do you agree ? If not find out GST liability on the assumption that software
consultancy service is chargeable to GST at the rate of 18 per cent.
419-P8 X provides computer maintenance service since 2002 in Odisha. During the month ending March 31, 2020, he provides
computer maintenance service in Puri to A Ltd. X receives Rs. 25,000 from A Ltd. and Rs. 16,40,000 from holding company of A Ltd.
A Ltd. is of the view that only Rs. 25,000 is chargeable to tax (GST on Rs. 25,000 at the rate of 18 per cent will be paid by A Ltd.). Find
out GST liability on this case on the assumption that any additional liability will be borne by X (and not by A Ltd. or its holding company).
Solution : Consideration received for an activity carried by a person from another person is chargeable to GST. It is not
necessary that the supplier of service should receive consideration from the recipient of service. Consideration can be paid
by any other person on behalf of the recipient of service. Consequently, even Rs. 16,40,000 received from holding company
of recipient of service is chargeable to tax. GST liability in this case will be calculated as follows –
Rs.
Consideration paid by A Ltd. 25,000
Consideration paid by holding company [since GST on this consideration is not additionally paid, taxable
value of supply out of this consideration will be Rs. 13,89,830 (i.e., Rs. 16,40,000 × 100 ÷ 118)] 13,89,830
Add: GST –
- CGST (@ 9% of Rs. 14,14,830) 1,27,335
- SGST (Odisha) (@ 9% of Rs. 14,14,830) 1,27,335
Total 16,69,500
Problem 419-P9 Concept of Supply 620
419-E8 X & Co. is a partnership firm located in Kolkata. X, Y and Z are three partners (profit sharing ratio – X : 90 per cent, Y :
5 per cent and Z : 5 per cent). The firm is in the business of providing technical consultancy. Star Chemicals, Durgapur, is a sole
proprietary concern entirely owned by X. X & Co. provides technical consultancy to Star Chemicals for a consideration of Rs.
27,00,000 during the month ending January 31, 2020. GST is not charged in the invoice on the plea that a partnership firm supplies
goods and/or services to its partner (firm and partners are same entity under Partnership Act). Do you agree? If not, calculate GST
liability (GST rate which is otherwise applicable on this service is 18 per cent). Nothing can be recovered from Star Chemicals.
419-P9 X is a well-known singer. Cine Society of Chennai gives him a life-time achievement award on January 1, 2020. The award
consists of a memento and a cheque of Rs. 25,00,000. Find out GST liability of X.
Solution : An award received in consideration for contribution over a life time or even a singular achievement carried out
independently or without reciprocity to the amount to be received will not comprise an activity for consideration. Since it
is not an activity for consideration, it is not “supply of service” and not chargeable to GST.
419-E9 X Ltd. enters into a contract to purchase a commercial flat from Sun Developers Pvt. Ltd. (date of contract : July 20, 2019,
consideration : Rs. 1.85 crore). The flat is situated on the 3rd floor of the building, construction of which was commenced in 2016.
Completion certificate is issued by the municipal authority on December 20, 2019. However, the building is occupied by a majority
of the flat owners before June 1, 2019. Discuss whether GST is applicable.
419-P10 A Inc. is an American car manufacturing company. It has a branch in Hyderabad. X is HRD head of Hyderabad branch. For
the year ending March 31, 2020, CTC of X (as per employment agreement) is as follows –
Rs.
Salary (Rs. 3,00,000 per month) 36,00,000
Residential accommodation (cost to company : Rs. 6,00,000) 6,00,000
Employer’s contribution towards provident fund 5,40,000
Conveyance facility (reimbursement up to Rs. 40,000 per month) 4,80,000
Cost to company (CTC) 52,20,000
A Inc. maintains a gym near Hyderabad office. Employees (and their family members) of the Hyderabad office can use gym facility. Cost
to the company for maintaining this facility in Hyderabad is approximately Rs. 27,00,000 per year. On January 1, 2020, A Inc. gifts
a new car to X (price tag : Rs. 12,65,000 before GST). Gym facility and gift of car are not covered by CTC as well as employment agreement.
X owns a commercial flat in Hyderabad. It is given on rent to A Inc. (monthly rent being Rs. 1,00,000).
Discuss whether GST is applicable. Determine the amount of GST liability for the month of January 2020 (assume that GST rate is 28
per cent for car and 18 per cent for others) –
1. Supply of employment service to A Inc.
2. Renting of commercial flat by X to A Inc.
3. Salary paid by A Inc.
4. Residential accommodation, conveyance facility and gym facility provided by A Inc. to X.
5. Gift of car by A Inc. to X.
Solution : Supplies covered by employment agreement - Service provided by X to A Inc. is neither supply of goods nor supply
of services. GST is not applicable. Remuneration paid by A Inc. to X within CTC or employment agreement is, therefore, not
chargeable to GST. Consequently, expenditure on salary : Rs. 36,00,000, expenditure on residential accommodation :
Rs. 6,00,000 and conveyance : Rs. 4,80,000 is not subject to GST. Likewise, employer’s contribution towards provident fund
is outside the purview of GST. All these supplies are covered by employment agreement.
Supply is not covered by employment agreement - The following supplies, not covered by the employment agreement, are subject
to GST –
Supply by X Supply by A Inc.
CGST SGST CGST SGST
Rs. Rs. Rs. Rs.
Renting of commercial flat by X (GST is applicable, GST rate is 18%) 9,000 9,000 – –
Gym facility (it is not covered by employment agreement. However, GST is not
applicable. It is difficult to find out recipient of service) – – – –
Gift of car (GST is applicable. Even if consideration is nil, supply between related
persons is chargeable to GST. Employer and employee are treated as related
person. Supply by way of gift by employer to employee up to Rs. 50,000 in a
financial year is not chargeable to tax) (applicable GST rate given in the
problem is 28%) – – 1,77,100 1,77,100
419-E10 Discuss whether GST is applicable in the following cases (GST calculation is not required) –
1. X takes voluntary retirement from a private sector company. He gets Rs. 28,00,000 as voluntary retirement scheme (VRS).
2. X Ltd. is an Indian company. It has branches in Pune and Chennai. Pune branch provides consultancy service to Chennai branch
against an invoice of Rs. 15,00,000.
3. Y Ltd. is an American company. It has branches in New York and Jammu. New York branch provides consultancy service to Jammu
branch against an invoice of Rs. 18,00,000.
4. Z Ltd. is an Australian company. It has branches in Sydney and New Delhi. Sydney branch provides consultancy service to New
Delhi branch against an invoice of Rs. 40,00,000.
Test your knowledge

1. What is taxable event in GST ? [para 410]
2. Explain the concept of supply. [para 411]
3. What are deemed supply ? [para 413]
4. What are the activities or transactions which are treated as supply of goods and/or services under Schedule II ? [para
413]
5. “A transaction in money, per se, is outside the ambit of GST”. Explain. [para 411.2]
6. When actionable claim is subject to GST ? [para 411.1]
7. Discuss whether supply of goods and/or services without consideration is liable for GST. [para 414]
8. What is the GST treatment of goods after the person (owing the business) ceases to be a taxable person ? [para 413.19]
9. Is there any GST liability if business goods are used by a trader for non-business purposes ? [para 413.8]
10. When renting of immovable property is chargeable to GST ? [para 413.10]
11. When construction of commercial complex is subject to GST ? [para 413.11]
12. Temporary transfer of a copyright for a consideration is not subject to GST. Do you agree ? [para 413.12]
13. A person transfers a plot of land for a consideration of Rs. 45 lakh. Is it subject to GST ? [para 411.1]
14. By virtue of non-compete agreement, X Ltd. agrees for a consideration of Rs. 10 lakh not to compete with Y Ltd. in
marketing of computers in Maharashtra for 2 years ending March 31, 2022. Discuss whether GST is applicable in this
transaction. [para 413.14]
15. X is a computer hardware supplier. From his stock, he has given 1TB external hard drive to his son, who is a student
of Institute of Chartered Accountants of India. The external hard drive will be used by his son for taking back-up of his
notes. X does not recover any consideration. Discuss whether GST is applicable. [para 414.2-1]
16. When import of service without consideration is subject to GST ? [para 414.4]
17. Employment contracts are not subject to GST. Discuss. Is there any situation when a transaction between employer and
employee is subject to GST ? [para 413]
18. What is the significance of expression “supply made in the course or furtherance of business” ? [para 416]
19. Who is a taxable person ? [para 417]
20. What is exempt supply ? Is it different from zero rated supply ? [paras 418.2 and 418.3]
21. Why a composite supply and mixed supply are subject to different GST treatment ? [para 418.7]
22. What are the parameters which one has to keep in mind to decide whether goods and/or services are bundled in
ordinary course of business ? [para 418.7-1]
23. How GST liability is determined in composite supply and mixed supply ? [para 418.7]
24. When gift given by employer to his employee is subject to GST ? [para 414.1-2a]
25. When supply between principal and agent is subject to GST ? [para 414.3]
26. How would you define “distinct person” ? [para 414.2-2]
27. Discuss whether the following supplies are chargeable to GST –
- Giving a commercial property on rent to a friend without charging any rent.
- Giving a commercial property on rent to a relative without charging any rent.
- Transferring title in goods for a consideration under an agreement which stipulates that property will pass at a future
date. [paras 413.10 and 413.3]
28. Which of the following supplies are bundled naturally in the ordinary course of business –
- A packet of fountain pen, potato chips and face wash.
- A packet containing air ticket and circus ticket.
Concept of Supply 622
- A package offered by tour operator for 3 night visit to Singapore containing air ticket, room tariff for 3 nights, local
conveyance and airport tax. [para 418.7]
29. Which of the following is not included in Schedule II –
- Renting of commercial property.
- Job work.
- Works contract.
- Business goods are put to non-business goods.
- Service provided by employer to employee. [paras 413 and 414]
30. Which of the following is covered in Schedule I –
- Import of services from a related person.
- Import of goods from a related person.
- Development of IT software.
- Works contract. [paras 413 and 414]
CHAPTER 22 Levy of GST
T
his chapter explains basis of charge of goods and services tax (GST). Levy of Central
GST (CGST), State GST (SGST), Union Territory GST (UTGST) and Integrated GST
(IGST) is discussed in this chapter. Besides, this chapter covers GST rates notified for
different supplies.
 WHAT IS THE BASIS OF CHARGE OF GST

425. GST is applicable on supply of goods or supply of services or both. Concept of supply has been discussed
in the earlier chapter. Different taxes under GST are as follows –
Different types of supply A few examples How to show GST in tax invoice if value of taxable
supply in examples given in Column 2 is
Rs. 1,00,000 and GST rate is 12%
Rs.
Inter-State supply (i.e., - Supply from Punjab to Taxable value of supply 1,00,000
supply from one State/ Maharashtra Add: GST –
Union Territory to another - Supply from Punjab to - IGST (@ 12% of Rs. 1,00,000)* 12,000
State/Union Territory) Andaman Total amount charged 1,12,000
- Supply from Lakshadweep
to Karnataka
- Supply from Lakshadweep
to Chandigarh
Intra-State supply (i.e., - Supply from Rajasthan to Taxable value of supply 1,00,000
supply within a State) Rajasthan (i.e., supply from Add: GST –
a supplier in Rajasthan to - CGST (@ 6% of Rs. 1,00,000)** 6,000
another person in Rajasthan) - SGST (Rajasthan) (@ 6% of Rs. 1,00,000)† 6,000
Total amount charged 1,12,000
Intra-State supply (i.e., - Supply from Chandigarh to Taxable value of supply 1,00,000
supply within a Union Chandigarh (i.e., supply Add: GST –
Territory) from a supplier in Chandi- - CGST (@ 6% of Rs. 1,00,000)** 6,000
garh to another person in
- UTGST (@ 6% of
Chandigarh)
Rs. 1,00,000)‡ 6,000
Total amount charged 1,12,000
* Levied under IGST Act, 2017.

** Levied under CGST Act, 2017.
† Levied under Rajasthan GST Act, 2017.
‡ Levied under UTGST Act, 2017.
 HOW GST IS LEVIED IN THE CASE OF INTER-STATE SUPPLY

426. Basis of charge in the case of inter-State supplies of goods or services or both is given by section 5 of IGST
Act. These provisions are given below–
623
Para 426.1 Levy of GST 624
 GST is charged as IGST - Inter-State supplies of goods or services or both are chargeable to integrated GST. In
this case, CGST and SGST/UTGST is not applicable. If GST rate is 12 per cent, the entire tax of 12 per cent is
charged as IGST (as shown in the table above).
 IGST rate - IGST is charged at such rates which are notified by the Central Government (on the recommen-
dation of GST Council). However, such rate cannot be more than 40 per cent [see para 428].
 Alcoholic liquor excluded - All inter-State supplies are covered. However, GST is not applicable on the supply
of alcoholic liquor for human consumption.

 GST presently not applicable on petroleum products - Inter-State supplies of petroleum crude, high speed diesel,
motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, are presently not covered by
GST. GST in respect of these supplies will be levied from a date which is yet to be notified.
 Taxable value - For the purpose of charging GST, taxable value of supply shall be calculated under section 15
[see paras 464 to 476].

 Reverse charge - Generally, GST is payable by the supplier of goods and/or services. However, in a few cases
(which are notified by the Government on the recommendation of GST Council), GST is payable by the recipient
of supply under reverse charge mechanism.
 Supply by unregistered person to a registered person - If inter-State supply is made by an unregistered person to
a registered person, the recipient of supply is required to pay GST under reverse charge mechanism under
section 9(4). However, the provisions of section 9(4) are not applicable during October 13, 2017 and March 31,
2019. From April 1, 2019, section 9(4) is applicable in a few notified cases [see para 483].
 Power to grant exemption - Government has power to grant exemption by issue of a Notification on the
recommendation of GST Council. Full exemption/partial exemption from GST may be given subject to certain
condition specified in the relevant notification [see paras 436 and 437].
426.1 What is inter-State supply - To find out whether a supply is inter-State supply or not, one has to first
ascertain the location of supplier and the place of supply. The following are treated as inter-State supply by
virtue of section 7 of IGST Act –
Supply within India Case 1 Where the location of supplier of goods/services and the place of supply of
goods/services are in two different States.
Case 2 Where the location of supplier of goods/services and the place of supply of
goods/services are in two different union territories.
Case 3 Where the location of supplier of goods/services and the place of supply of
goods/services are in a State and a Union Territory.
Import of goods/services Case 4 Supply of goods/services imported into India
Export of goods/services Case 5 Where the supplier of goods/services is located in India and the place of supply
is outside India.
Supply to SEZ Case 6 Supply of goods/services to (or by) a Special Economic Zone (SEZ) developer or
SEZ unit.
Any other Case 7 Supply of goods/services in the taxable territory (not being intra-State supply)
not covered in above cases.
 How to ascertain location of supplier - See paras 445 and 446.

 How to ascertain place of supply - See paras 448 and 449.
 HOW GST IS LEVIED IN THE CASE OF INTRA-STATE SUPPLY

427. Basis of charge in the case of intra-State supplies of goods or services or both is given below –
 Dual GST - Intra-State supply of goods/services is chargeable simultaneously under the following two
Acts –
1. - Central GST Act (CGST Act) Section 9 of CGST Act
2. - State GST Act (SGST Act) Section 9 of SGST Act†
Or
- Union Territory GST Act (UTGST Act) Section 7 of UTGST Act‡
† To impose SGST on supply of goods and services within the State, each State has passed its own State GST Act. These
State GST Acts are copies of CGST Act (all provisions are identical). For instance, in the case of intra-State supply in
625 GST rates notified for supply of various goods Para 428
Karnataka (i.e., supply by a person from Karnataka to Karnataka), it is taxable simultaneously under section 9 of CGST
Act and section 9 of Karnataka GST Act. If GST rate is 12%, 6% will be charged under section 9 of CGST Act and 6% will
be charged under section 9 of SGST Act.
‡ UTGST Act has been passed for Union Territories which do not have legislature. These Union Territories are (a)
Andaman and Nicobar Islands (b) Lakshadweep (c) Dadra and Nagar Haveli (d) Daman and Diu (e) Chandigarh*. Intra-
State supply of goods/services within a Union Territory (for instance supply by a trader from Andaman to another trader
in Andaman), is taxable simultaneously under section 9 of CGST Act and section 7 of UTGST Act. If GST rate is 12%, 6%
will be charged under section 9 of CGST Act and 6% will be charged under section 7 of UTGST Act. For the purpose of
GST, each Union Territory shall be considered as a separate Union Territory. For instance, if a trader of Andaman supplies
goods to a trader of Chandigarh, it will be treated as inter-State supply and subject to IGST.
*Delhi and Puducherry are not covered by the list of Union Territories for this purpose. They have their own legislatures
and they have passed their own SGST Acts.
 GST rate - On the recommendation of GST Council, GST rates are notified as follows –
Act Who will notify GST rates Maximum GST rates
Under CGST Act Central Government has power to notify rates† under Maximum rate cannot exceed 20%
CGST Act
Under SGST Act The concerned State Government has power to notify Maximum rate cannot exceed 20%
rates† under SGST Act
Under UTGST Act Central Government has power to notify rates† under Maximum rate cannot exceed 20%
UTGST Act
† These rates are briefly given in paras 428 and 429.

 Alcoholic liquor excluded - All intra-State supplies are covered. However, GST is not applicable on the supply
of alcoholic liquor for human consumption.
 GST presently not applicable on petroleum products - Intra-State supplies of petroleum crude, high speed diesel,
motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, are presently not covered by
GST. GST in respect of these supplies will be levied from a date which is yet to be notified.
 Taxable value - For the purpose of charging GST, taxable value of supply shall be calculated under section 15
of CGST Act (similar provisions are given in section 15 of SGST Act) [see paras 464 to 475].
 Reverse charge - Generally, GST is payable by the supplier of goods and/or services. However, in a few cases
(which are notified by the Government on the recommendation of GST Council), GST is payable by the recipient
of supply under reverse charge mechanism.
 Supply by unregistered person to a registered person - If intra-State supply is made by an unregistered person to
a registered person, the recipient of supply is required to pay GST under reverse charge mechanism under
section 9(4). However, the provisions of section 9(4) are not applicable during October 13, 2017 and March 31,
2019. From April 1, 2019, section 9(4) is applicable in a few notified cases [see para 483].
 Power to grant exemption - Central Government/State Governments have power to grant exemption by issue
of a Notification on the recommendation of GST Council. Full exemption/partial exemption from GST may be
given subject to certain condition specified in the relevant notification.
427.1 What is intra-State supply - To find out whether a supply is intra-State supply or not, one has to first
ascertain the location of supplier and the place of supply.
 When treated as intra-State supply - Where the location of supplier of goods/services and location of supply of
goods/services are in the same State or same Union Territory, the supply is treated as intra-State supply.
 When not treated as intra-State supply - The following supplies are not treated as intra-State supply –
1. Supply of goods/services to (or by) a Special Economic Zone (SEZ) developer or SEZ unit.
2. Goods imported into the territory of India (till they cross the customs frontiers of India).
3. Goods supplied to a tourist.
 WHAT ARE GST RATES NOTIFIED FOR SUPPLY OF VARIOUS GOODS

428. Six different GST rates have been notified for the purpose of charging tax on supply of goods under IGST
Act, CGST Act, SGST Act and UTGST Act as follows –
Different rates Inter-State supply Intra-State supply

IGST CGST SGST/UTGST GST
(i.e., CGST + SGST/UTGST)
Schedule I - 5% 5% 2.5% 2.5% 5%
Schedule II - 12% 12% 6% 6% 12%
Schedule III - 18% 18% 9% 9% 18%
Schedule IV - 28% 28% 14% 14% 28%
Schedule V - 3% 3% 1.5% 1.5% 3%
Schedule VI - 0.25% 0.25% 0.125% 0.125% 0.25%
In this book, wherever GST rate is mentioned,—

a. it is IGST rate (in the case of inter-State supply); or
b. it is total of CGST rate and SGST/UTGST rate (in the case of intra-State supply).
428.1 How to find out GST rate for supply of different goods - These rates are notified by the different
Governments and are available on CBIC website. Alternatively, one can visit www.gst.taxmann.com. A few
rates† are summarized‡ in the table given below –
Schedule I - 5% Meat/fish (other than fresh or chilled) put up in a container and bearing a registered brand name,
[see Note 1] Ultra High Temperature (UHT) milk, skimmed milk powder, chena or paneer put up in a container
and bearing a registered brand name, honey natural put up in a container and bearing a registered
brand name, pigs’, hogs’ or boars’ bristles and hair, skins and other parts of birds, cashew nuts
(whether or not shelled or peeled), desiccated coconuts, areca nuts (dried whether or not shelled or
peeled), singhada (dried whether or not shelled or peeled), makhana (dried whether or not shelled
or peeled but put up in a container with a registered brand name), mangoes (sliced, dried), grapes
(dried and raisins), coffee (roasted), tea (whether or not flavoured, other than unprocessed green
leaves of tea), mate, vanilla, cinnamon and cinnamon-tree flowers, cloves (whole fruit, cloves and
stems), nutmeg, ginger (other than fresh ginger), cereals/wheat/rye/barley/oats/maize/corn/
rice/grain sorghum/ ragi/flours/meal powder (put up in a container with a registered brand name),
Guar gum refined split, soya beans, ground nuts (not roasted), copra, linseed, oil seeds, hop cones
(ground, powdered or in the form of pellets; lupulin), plants, natural gums, tamarind kernel powder,
mehendi paste in cones, soap nuts, soya-bean oil, ground nut oil, olive oil, palm oil, sunflower-seed,
vegetable fats, beet sugar, cane sugar, mishri, batasha, bura, sakar, cocoa beans, pizza bread,
khakhra, roasted gram, idli/dosa batter; chutney powder, sweetmeats, unbranded namkeens, ethyl
alcohol supplied to oil marketing companies for blending with motor spirit (petrol), rice bran (other
than de-oiled rice bran), oil cake, wine lees, tobacco leaves, sulphur, natural graphite, chalk, marble
and travertine (crude or roughly trimmed), granite crude or roughly trimmed, asbestos, mica, iron
ores/manganese ores/copper ores/nickel ores/aluminium ores/zinc ores and concentrates, fly ash,
bio-gas, coal, kerosene oil PDS, fertilizer grade phosphoric acid, compressed air, insulin, animal or
human blood vaccines, medicaments, animal or vegetable fertilizers, agarbatti, handmade safety
matches, waste, natural rubber, erasers, raw hides, raw hides and skins, leather, natural cork (raw
or simply prepared), newsprint, kites, silk yarn, cotton and cotton waste, real zari thread, products
of coir, coir mats, matting, floor covering and handloom durries, saree fall, embroidery articles,
textile articles (sale value not exceeding Rs. 1,000 per piece), footwear of sale value not exceeding
Rs.1000 per pair, walking-sticks including seat sticks, fly ash bricks, glass beads, cullet, aircraft
engines, hand pumps, solar water heater, machines for cleaning/sorting/grading, bio-gas plant,
solar power based devices and a few renewal energy devices††, e-waste, charger or charging station
for electrically operated vehicles, wet grinder consisting of stone as grinder, electrically operated
vehicles (including 2 and 3 wheeled electric vehicles), parts and accessories of carriage for disabled
persons, scientific and technical instruments (apparatus, equipment, etc. required for launch vehicles
and satellites and payloads), cruise ships, fishing vessels, cotton quilts (sale value not exceeding Rs.
1,000 per piece), toy balloons, fishing hooks, broomsticks, postage/revenue stamps, numismatic
coins, rosaries, prayer beads or hawan samagri, biomass briquettes or solid bio fuel pellets.
Schedule II - Live horses, condensed milk, ghee/butter oil, branded cheese, brazil nuts, dates (soft or hard), citrus
12% fruit, starches, pig fats, wool grease, edible mixtures, sugar boiled confectionery, pasta, vegetables/
fruits/nuts/tomato/mushrooms (prepared or preserved by vinegar or acetic acid), jams, fruit juices,
yeasts (active and inactive), soya bari, branded namkeens, diabetic foods, drinking water packed in
† GST rate is generally given in Question Papers. Students/examinees are not required to remember these rates.
‡ It is only a summary. List is not complete. For complete list, one may visit CBIC website or www.gst.taxmann.com.
†† If the goods specified in this entry are supplied, by a supplier, along with service by way of construction/engineering/installation of bio-gas
plant, solar power based devices, etc., value of supply of goods shall be deemed to be 70 per cent of gross consideration and balance 30 per cent
shall be deemed to be value of taxable service.
627 How to find out GST rate for supply of different goods Para 428.1
20 litres bottles, soya milk drinks, fruit juice based drinks, branded tender coconut water, marble/
granite blocks, potassium iodate, steam, medical grade oxygen, printing/writing ink, tooth powder,
candles, bio-pesticides (a few items), bio-diesel, woven and non-woven bags and sacks of polyeth-
ylene used for packing of goods, feeding bottlers, plastic beads, rubber bands, hand bags, gloves,
idols of wood/stone/metal, wood wool, sheets for veneering, bamboo flooring, bamboo wood
building joinery, tableware/kitchenware of wood, natural cork (debacked or roughly squared, or in
rectangular/square blocks), articles of natural cork, agglomerated cork, uncoated paper/paper
board, boxes/pouches, exercise book, paper pulp moulded trays, calendars, saving thread of
manmade filaments, articles of yarn, carpets, (other than handmade), terry toweling, quilted textile
products in the piece, tyre cord, textile wall coverings, transmission belts, articles of apparel (value
exceeding Rs. 1,000 per piece), flexible intermediate bulk containers, textile caps, hats, umbrellas,
sand lime bricks, statues, pots. Tableware/kitchenware (porcelain or china), mathematical boxes,
sewing needles, kerosene stoves, brass kerosene pressure stove, utensils, knives with cutting blades,
metal bells, bicycle pumps, hand operated rubber roller, nozzles for drip irrigation equipment,
sprinklers (drip irrigation system including laterals, mechanical sprayers), agricultural machinery,
sewing machines, composting machines, telephone for cellular networks, walkie talkie, LED lamps,
rail locomotives, railway or tramway goods, fuel cell motor vehicles, tractors (not more than 1,800cc),
bicycles, hand carts, rickshaws, glucometer/test strips, frames and mountings for spectacles,
goggles, artificial parts of body, bamboo furniture, coir products, cotton quilts (sale value exceeding
Rs. 1,000 per piece), kerosene lamp, playing cards, chess board, carom board, sport goods, fishing
rods, worked ivory, slide fasteners and parts thereof, pens, combs, paintings, antiques (age
exceeding 100 years), lottery# (run by State Government, not allowed to be sold in any other State),
permanent transfer of intellectual property (IP) right in respect of goods other than IT software, all
old and used vehicles (other than those where GST rate is 18%).
Schedule III - Malt (whether or not roasted), vegetable saps and extracts (other than tamarind kernel powder),
18% tendu leaves, Indian katha, glycerol, vegetable waxes, artificial honey, sugar confectionery (other
than mishri, batasha, bura, sakar, til patti, til revdi, sugar makhana, groundnut sweets, gajak and
sugar boiled confectionery), cocoa butter, cocoa powder, chocolates, malt extract, pastry, cakes,
biscuits, ice cream, mineral water (other than drinking water packed in 20 litres bottles), non-
alcoholic beverages (other than tender coconut water and caffeinated beverages), vinegar, marble/
granite (other than blocks), petroleum oils, petroleum gases, all inorganic chemicals (barring a few)
including fertilizer grade phosphoric acid, organic chemicals, chemical fertilizers, synthetic organic
colouring matter, prepared pigments, paints and varnishes, artists’/students’/signboard painters’
colours, glaziers’ putty, grafting putty, resin cements, caulking compounds, essential oils, perfumes
and toilet waters, beauty/make-up preparations, preparations for use on the hair (except mehendi
paste in cones), preparation for oral and dental hygiene, pre-shave/shaving/after-shave prepara-
tions, personal deodorants, soap, lubricating preparations, artificial waxes, polishes/creams for
footwear/furniture/floors, modelling pastes, propellant powders, prepared explosives, safety
fuses, fireworks, matches (not being handmade), ferro-cerium, photographic paper, artificial graph-
ite, activated carbon, tall oil, gum, rosin and resin acids, wood tar, insecticides, finishing agents, anti-
knock preparations, preparations and charges for fire-extinguishers, organic composite solvents and
thinners, hydraulic brake fluids, anti-freezing preparations, industrial monocarboxylic fatty acids,
floor coverings of plastics, self adhesive plates, sanitary ware of plastics, plastic kitchenware,
powders and granules obtained from waste, real tractor tyres, retreaded/used pneumatic tyres of
rubber/solid or cushion tyres/tyre treads/tyre flaps of rubber, inner tubes of rubber, trunks, suit-
cases, vanity-cases, brief cases, leather clothing, articles of apparel of furskin, wood in the rough,
particle board, fibre board, plywood, wooden frame (not being handicraft goods) for painting,
bamboo flooring tiles, toilet or facial tissue stock/towel/napkin stock, carbon paper, paper/paper
board, cigarette paper, wall paper, envelope/letter cards, toilet paper, cartons/boxes/cases of non-
corrugated paper or paper board, registers/account books, braille paper. Waste of manmade fibres,
footwear, artificial flowers, wool/other animal hair, wigs/false/beards/eyebrows, worked slate,
millstones for grinding, petroleum bitumen/coal tar pitch, articles of cement, of concrete or of
artificial stone, fabricated asbestos fibres, worked mica, ceramic flooring blocks, chimney-pots,
ceramic flags, cast glass/rolled glass in sheets, safety glass, glass mirrors, glassware used in kitchen,
glass fibres, ferro-alloys, wire of iron or non-alloy steel, railway or tramway track construction
material of iron or steel, screws/bolts/nuts, knitting needles, cookers, radiators for central heating,
ghamella, sanitary ware (and parts thereof) of iron and steel, copper waste, copper wire, nails of
copper, nickel sheets, aluminium wire/plates/sheets/foil/tubes, zinc waste/dust/bars/plates,
cermets and articles thereof, hand-operated spanners, hand tools, razors and razor blades, hair
clippers, kitchen cleavers, locks, base metal mountings/fittings, safe deposit lockers, filing cabinets,
# Value of supply of lottery shall be 100/112 of the face value (or price notified by the organizing State, whichever is higher). For detailed
discussion, see Problems 428.1-P2 and 484-P7.
fittings for loose-leaf binders, sign-plates/name plates, steam or other vapour generating boilers,
central heating boilers, producer gas or water gas generators, turbo-jets, concrete pumps, air or
vacuum pumps, industrial or laboratory furnaces, refrigerators/freezers/freezing equipment,
weighing machinery, mechanical appliances for projecting/dispensing/spraying liquids/powder/
fire extinguishers/spray guns/steam or sand blasting machines (other than sprinklers; drip irriga-
tion systems), fork-lift trucks, self-propelled bulldozers, book-binding machinery, printing machin-
ery used for printing by means of plates, weaving machines (looms), knitting machines, household/
laundry-type washing machines, metal-rolling mills, machine-tools, machinery and apparatus for
soldering, calculating machines and pocket-size data recording machines, office machines, auto-
matic goods-vending machines, transmission shafts/cam shafts/crank shafts/cranks, electric gen-
erating sets, electrical transformers (other than charger or charging station for electrically operated
vehicles), electro-magnets, primary cells/primary batteries, lithium-ion batteries, lithium-ion accu-
mulators (other than battery), lithium-ion power bank, vacuum cleaners, electro-mechanical domes-
tic appliances, shavers/hair clippers/hair-removing appliances, electrical lighting or signaling
equipment, portable electric lamps, electric instantaneous/storage water heaters, immersion heat-
ers, electro thermic hair-dressing apparatus, electric smoothing irons, telephone sets, microphones,
video/sound recording/reproducing apparatus, CCTV, TV sets (including LCD/LED TV) of screen
size not exceeding 32 inches, computer monitors (not exceeding 32 inches), electrical capacitors,
printed circuits, electrical filament, insulated wire/cable conductors, carbon electrodes, insulating
fittings for electrical machines, waste and scrap of primary cells, buses for use in public transport
which exclusively run on Bio-fuels, cars (LPG/CNG driven vehicles not exceeding 1200cc or diesel
driven vehicles of not exceeding 1,500cc) for persons with orthopedic physical disability, refrigerated
motor vehicles, special purpose motor vehicles (for example, breakdown lorries, crane lorries, fire
fighting vehicles, concrete-mixer lorries, road sweeper lorries, etc.), baby carriages, works trucks,
self-propelled (for short distance transport of goods), trailers/semi-trailers/other vehicles (not
mechanically propelled) parachutes, aircraft launching gear, spectacles (other than corrective)/
goggles, optical telescopes, cinematographic cameras, image projectors, liquid crystal devices,
direction finding compasses, instruments/apparatus and models/designed for demonstrational
purposes, gas/liquid/electricity supply or production meters, checking instruments, wrist-watches,
musical instruments, arms/ammunition (parts and accessories thereof but not revolvers and pistols),
furniture, entertainment articles, prefabricated buildings, video game consoles/machines/articles
of funfair, gymnastics, brushes, travel sets for personal toilet, fountain pens, drawing boards, derive
for printing/embossing labels, typewriters, cigarette lighters, scent sprays and similar toilet sprays,
vacuum flasks, dummies used for shop window dressing, monopods, laboratory chemicals, tyre/
tube for tractors, agricultural diesel engine, hydraulic pumps for tractors, permanent transfer of
intellectual property (IP) right in respect of IT software, goods which are not specified in Schedule
I, II, IV, V or VI, old and used LPG/CNG driven motor vehicles of engine capacity of 1200 cc or more
and of length of 4000 mm or more, old and used, diesel driven motor vehicles of engine capacity of
1500 cc or more and of length of 4000 mm, old and used SUV of engine capacity exceeding 1500 cc,
supply of any goods (other than capital goods and cement) by an unregistered person to a promoter
for construction of the project on which tax is payable by the promoter under reverse charge
mechanism under section 9(4).
Schedule IV - Pan masala, all goods (including aerated waters) containing added sugar/other sweetening matter/
28% flavoured, caffeinated beverages, cigars/cigarettes/ manufactured tobacco substitutes, portland
cement, new pneumatic tyres of rubber (other than of a kind used on/in bicycles, cycle-rickshaws and
three wheeled powered cycle rickshaws; rear tractor tyres; and of a kind used on aircraft), spark-
ignition reciprocating or rotary internal combustion piston engine (other than aircraft engines),
compression-ignition internal combustion piston engines (diesel or semi-diesel engines), air-condi-
tioning machines, computer monitor (exceeding 32 inches), TV set (including LCD/LED TV) of
screen size exceeding 32 inches, projectors, road tractors (for semi-trailers of engine capacity more
than 1800 cc), motor vehicles for the transport of 10 or more persons, including the driver (other than
buses for use in public transport, which exclusively run on bio-fuels), motor cars for transportation
of persons/goods, racing cars, motorcycles, aircrafts for personal use, yachts and other vessels for
pleasure/sports, rowing boats, revolvers and pistols, smoking pipes, cigar/cigarette holders, all
dutiable articles imported for personal use, lottery¥ (authorised by State Government, which can be
sold even in other State), actionable claim in the form of chance to win in betting, gambling, or horse
racing in race club.
Schedule V - 3% Pearls (natural or cultured, whether or not worked or graded but not strung, mounted or set), pearls
(natural or cultured, temporarily strung for convenience of transport), dust and powder of natural
or synthetic precious or semi-precious stones, silver [(including silver plated with gold or platinum),
unwrought or in semi-manufactured forms, or in powder form], gold [(including gold plated with
platinum), unwrought or in semi-manufactured forms, or in powder form], platinum, articles of
¥ Value of supply of lottery shall be 100/128 of the face value (or price notified by the organizing State, whichever is higher). For detailed
discussion, see Problems 428.1-P2 and 484-P7.
629 How to find out GST rate for supply of different goods Para 428.1
jewellery (and parts thereof) of precious metal, articles of goldsmiths’ or silversmiths’ wares (and
parts thereof) of precious metal, articles of natural or cultured pearls, imitation jewellery, coins.
Schedule VI - Diamonds (whether or not worked, but not mounted or set), precious stones (other than diamonds)
0.25% and semi-precious stones (whether or not worked or graded but not strung, mounted or set),
ungraded precious stones (other than diamonds) and semi-precious stones (temporarily strung for
convenience of transport), synthetic or reconstructed precious or semiprecious stones (whether or
not worked or graded but not strung, mounted or set), ungraded synthetic or reconstructed precious
or semiprecious stones (temporarily strung for convenience of transport).
Note 1 - GST rate of 5% is also applicable in the case of food preparations put up in unit containers and intended for free
distribution to economically weaker sections of the society under a programme duly approved by the Central Government
or any State Government – Notification No. 39/2017, dated October 18, 2017.
Problems
428.1-P1 X Ltd., Nasik, is a wholesale dealer in piston rings. GST rate for supply is 28 per cent. The following data is noted from
the records of the company for December 2019 –
Date of supply Recipient of supply Place of supply Quantity Rate (in Rs. per unit) Discount
December 2, 2019 A Ltd. Jaipur 3 67,000 10%
December 6, 2019 B Ltd. Patna 8 69,000 9%
December 18, 2019 C Ltd. Mumbai 10 64,000 5%
December 20, 2019 D Ltd. Pune 12 70,000 1%
December 28, 2019 E Ltd. Andaman 4 59,000 6%
December 30, 2019 F Ltd. Delhi 6 58,500 3%
No other supply is made by X Ltd. during December 2019. Calculate GST liability for December 2019. Assume that input tax credit
for December 2019 is nil.
Solution : Computation of GST of X Ltd. for December 2019 –
Recipient of supply Nature of supply Taxable value after discount IGST @ 28% CGST @ 14% SGST @ 14%
Rs. Rs. Rs. Rs.
A Ltd. Inter-State supply 1,80,900 50,652 – –
B Ltd. Inter-State supply 5,02,320 1,40,650 – –
C Ltd. Intra-State supply 6,08,000 – 85,120 85,120
D Ltd. Intra-State supply 8,31,600 – 1,16,424 1,16,424
E Ltd. Inter-State supply 2,21,840 62,115 – –
F Ltd. Inter-State supply 3,40,470 95,332 – –
Total 3,48,749 2,01,544 2,01,544
428.1-E1 Recalculate tax liability in Problem 428.1-P1 if X Ltd. is located in –

- Situation 1 : Delhi.
- Situation 2 : Mumbai.
428.1-P2 During December 2019, X Ltd. (an entity authorised by the Kerala Government to issue Kerala Government lottery tickets)
issues following lottery tickets to the distributors –
1. Monsoon lottery (face value : Rs. 500, price as notified in the Official Gazette : Rs. 290).
2. Jackpot (face value : Rs. 1,000, price as notified in the Official Gazette : Rs. 640).
Monsoon lottery can be sold only in Kerala. Jackpot can be sold even in other States.
On December 5, 2019, X Ltd. sells 2,000 Monsoon lottery to A Ltd. of Kerala and 1,800 Jackpot to B Ltd. of Tamil Nadu. Determine
the amount of GST in this transaction.
Solution : Monsoon lottery cannot be sold outside Kerala. Applicable GST rate is 12%. Jackpot can be sold even outside
Kerala. Applicable GST rate in the case of Jackpot is 28%. GST liability will be calculated as follows –
Recipient of Nature of supply Taxable value IGST @ 28% CGST @ 6% SGST @ 6%

supply Rs. Rs. Rs. Rs.
A Ltd. Intra-State supply 8,92,857 [(Rs. 500 × 2,000) × 100 ÷ 112] – 53,571 53,571
B Ltd. Inter-State supply 14,06,250 [(Rs. 1,000 × 1,800) × 100 ÷ 128] 3,93,750 – –
428.1-E2 Recalculate tax liability in Problem 428.1-P2 if B Ltd. is located in Kerala (nature of Jackpot does not change, B Ltd,
can sell it in Kerala or even outside Kerala).
Para 429 Levy of GST 630
 WHAT ARE GST RATES NOTIFIED FOR SUPPLY OF VARIOUS SERVICES

429. Four different GST rates have been notified for the purpose of charging tax on supply of services under
IGST Act, CGST Act, SGST Act and UTGST Act as follows –
Different rates Inter-State supply Intra-State supply
IGST CGST SGST/UTGST GST
(i.e., CGST + SGST/UTGST)
Category I - 5% 5% 2.5% 2.5% 5%
Category II -12% 12% 6% 6% 12%
Category III - 18% 18% 9% 9% 18%
Category IV - 28% 28% 14% 14% 28%
In this book, wherever GST rate is mentioned,–

a. it is IGST rate (in the case of inter-State supply); or
b. it is total of CGST rate and SGST/UTGST rate (in the case of intra-State supply).
429.1 How to find out GST rate for supply of different services - Most of the services are chargeable to GST
at the rate of 18 per cent. A few services are taxable at the lower rate of 5 per cent or 12 per cent. Some services
are taxable at a higher rate at 28 per cent. These rates are notified by the different Governments and are available
on CBIC website. Alternatively, one can visit www.gst.taxmann.com. These rates are narrated in brief in the table
given below‡ –
Service Brief description GST rate
Construction services (i) †Construction of affordable residential apartments in residential real estate project
(RREP) [see Point A, para 572.1] 1.5%
(ia) †Construction of residential apartments (other than affordable residential apart-
ments) in RREP [see Point A, para 572.1] 7.5%
(ib) †Construction of commercial apartments in RREP [see Point A, para 572.1] 7.5%
(ic) †Construction of affordable residential apartments in real estate project (REP) [see
Point A, para 572.1] 1.5%
(id) †Construction of residential apartments (other than affordable residential apart-
ments) in REP [see Point A, para 572.1] 7.5%
(ie) †Construction of apartments in an outgoing project under certain specified schemes
[see Point B, para 572.1] 12%
(if) †Construction of commercial apartments in REP or residential apartments in an out-
going project [see Point C, para 572.1] 18%
(iii) Composite supply of works contract to Central Government/State Government/
Union Territory/ Government authority/Government entity1 by way of construction,
completion, repair, etc., of historical/ancient monuments, canal/dam/irrigation works,
pipeline/conduit/plant for water supply, water treatment or sewerage treatment or
disposal 12%
(iv) Composite supply of works contract supplied by way of construction, erection,
completion, repair, maintenance of : (a) road, bridge, tunnel or terminal for road
transportation for use by general public, (b)† civil structure pertaining to JLN National
Urban Renewal Mission or Rajiv Awas Yojana, (c)† civil structure works pertaining to
a scheme under the housing for All (Urban) Mission/PM Awas Yojana (Urban), (d)†
similar work pertaining to “Beneficiary led individual house construction/enhance-
ment”, (da)† a civil structure or any other original works pertaining to the “Economi-
cally Weaker Section (EWS) houses” constructed under the Affordable Housing in
partnership by State or Union Territory or local authority or urban development
authority under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana
(Urban); (db)† a civil structure or any other original works pertaining to the “houses
constructed or acquired under the Credit Linked Subsidy Scheme for EWS/ LIG/ MIG-
1/MIG-2” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana
† In the case of supply of these services (involving transfer of property in land or undivided share of land), value of taxable supply for GST will
be equal to total amount charged for such supply minus value of land (or undivided share of land). The value of land (or undivided share of land)
shall be deemed to be one-third of total amount charged. For detailed discussion, see 429.1-P1.
1. See Note 1 at the end of table.
‡ GST rate is generally given in Question Papers. Students/examinees are not required to remember these rates.
631 How to find out GST rate for supply of different services Para 429.1

(Urban); (e) pollution control treatment plant (not being located as a part of factory), (f)
structure meant for funeral (g) a building owned by an entity registered under section
12AA of the Income-tax Act, which is used for carrying out the activities of providing,
centralised cooking or distribution, for mid-day meals under the mid-day meal scheme
sponsored by the Central Government/State Government/Union Territory/local
authorities 12%
(v) Composite supply of works contract pertaining to : (a) railways (including monorail
and metro), (b)† single residence (not being a part of residential complex), (c)/(d)/(da)†
low-cost houses up to a carpet area of 60 square metres per house in a housing project
approved by competent authority under “Scheme of Affordable Housing in Partner-
ship” framed by the Ministry of Housing/“Affordable Housing in Partnership” com-
ponent of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana/any
housing scheme of a State Government/affordable housing project which has been
given infrastructure status vide notification of Government of India, in Ministry of
Finance, (e) post-harvest storage infrastructure for agricultural produce including a
cold storage for such purposes, (f) mechanised food grain handling system, machinery
or equipment for units processing agricultural produce as food stuff excluding alco-
holic beverages. 12%
(va) Composite supply of works contract [see Point D, para 572.1] 12%
(vi) Composite supply of works contract (i.e., construction, repair, completion, mainte-
nance, renovation, etc.) provided to Central Government/State Government/Union
Territory/local authority/Governmental authority/Government entity1 pertaining to:
(a) civil structure/any other original work meant predominantly for use other than for
commerce/industry/business/profession, (b) a structure meant predominantly for use
as an educational/ clinical/an art or cultural establishment, (c)† a residential complex
predominantly meant for self-use of Government/Union Territory, etc. or for the use of
their employees or for MPs/Member of State Legislature, etc. 12%
(vii) Composite supply of works contract involving predominantly earth work (that is,
constituting more than 75% of the value of the works contract) provided to the Central
Government/State Government/Union Territory/local authority/Governmental
authority/Government entity1. 5%
(viii) Composite supply of works contract and associate services, in respect of offshore
works contract relating to oil and gas exploration and production (E&P) in the offshore
area beyond 12 nautical miles from base line. 12%
(ix) Composite supply of works contract provided by a sub-contractor to the main
contractor providing services specified in item (iii) or item (vi) above to the Central
Government/State Government/Union Territory/local authority/Governmental autho-
rity or a Government entity. 12%
(x) Composite supply of works contract provided by a sub-contractor to the main
contractor providing services specified in item (vii) above to the Central Government/
State Government/Union Territory/local authority/Governmental authority/ Govern-
ment entity. 5%
(xi) Services by way of house-keeping (such as plumbing, carpentering, etc.) where the
person supplying such service through electronic commerce operator is not liable for
registration under section 22(1) [credit of input tax charged on goods and services, not
available]. 5%
(xii) Construction services other than (i), (ia), (ib), (ic), (id), (ie), (if), (iii), (iv), (v), (va), (vi),
(vii), (viii), (ix), (x) and (xi) above. 18%
Trade services Services in wholesale trade (it does not include sale or purchase of goods but include) :
(a) Commission agent, commodity brokers, auctioneers, etc., (b) electronic wholesale
agents and brokers, (c) whole sale auctioning houses 18%
Services in retail trade (it does not include sale or purchase of goods) 18%
Accommodation, food  Accommodation in a hotel/inns/guest house/club/campsites/other similar places for
and beverage service residential purposes having value of supply -
(a) Rs. 1,000 (or less) per unit per day Nil
† In the case of supply of these services (involving transfer of property in land or undivided share of land), value of taxable supply for GST will
be equal into total amount charged for such supply minus value of land (or undivided share of land). The value of land (or undivided share of
land) shall be deemed to be one-third of total amount charged. For detailed discussion, see 429.1-P1.
1 See Note 1 at the end of table.

(b) More than Rs. 1,000 but not exceeding Rs. 7,500 per unit per day 12%
(c) More than Rs. 7,500 per unit per day 18%
 Supply of “restaurant service” other than at “specified premises”
[see Notes 3 and 5] (credit of input tax charged on goods and services used in supplying
the service, not available) 5%
 Supply of goods (being food or any other article for human consumption or any drink)
by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd. or
their licensees, whether in trains or at platforms (credit of input tax charged on goods and
services used in supplying the service, not available) 5%
 Supply of “outdoor catering”, at premises other than “specified premises” provided by
any person other than—
(a) Suppliers providing “hotel accommodation” at “specified premises”, or
(b) Suppliers located in “specified premises”.
[for meaning of outdoor catering, specified premises and hotel accommodation, see Notes
4, 5 and 6] (credit of input tax charged on goods and services used in supplying the service,
not available) 5%
 Composite supply of “outdoor catering” together with renting of premises (including
hotel, convention center, club, pandal, shamiana or any other place, specially arranged for
organising a function) at premises other than “specified premises” provided by any
person other than—
(a) Suppliers providing “hotel accommodation” at “specified premises”, or
(b) Suppliers located in “specified premises”.
[for meaning of outdoor catering, specified premises and hotel accommodation, see Notes
4, 5 and 6] (credit of input tax charged on goods and services used in supplying the service,
not available) 5%
 Any other food and beverages services including the following -
(a) Supply of “restaurant service” at “specified premises”
(b) Supply of “outdoor catering”, provided by suppliers providing “hotel accommoda-
tion” at “specified premises”, or suppliers located in “specified premises”
(c) Composite supply of “outdoor catering” together with renting of premises (includ-
ing hotel, convention center, club, pandal, shamiana or any other place, specially
arranged for organising a function) provided by suppliers providing “hotel accom-
modation” at “specified premises”, or suppliers located in “specified premises”
[for meaning of restaurant service, outdoor catering, specified premises and hotel
accommodation, see Notes 3, 4, 5 and 6] 18%
Passenger transport Transport of passengers, with or without accompanied belongings, by –
(a) rail in first class or air-conditioned coach [credit of input tax charged in respect of
goods used in supplying the service is not available for paying CGST or IGST on
supply of the service] 5%
(b) air-conditioned contract carriage other than motorcab/air-conditioned stage car-
riage/radio taxi [credit of input tax charged on goods and services used in supply-
ing the service, not available] 5%
(c) air in economy class† 5%
(d) air, embarking from or terminating in a Regional Connectivity Scheme Airport† 5%
(e) air (by non-scheduled air transport service or charter operations, engaged by
specified organisations in respect of religious pilgrimage facilitated by the Govern-
ment of India, under bilateral arrangement)† 5%
(f) air (any other economic class) 12%
Transport of passengers by any motor vehicle designed to carry passengers where the
cost of fuel is included in the consideration charged from the service recipient –
(a) without taking input tax credit of goods/services‡ 5%
(b) otherwise (i.e., if input tax credit is taken) 12%
Passenger transport services (not given above) 18%
Goods transport Transport of goods in containers by rail by any person other than Indian Railways 12%
Transport goods by rail (not being covered by above entry) [credit of input tax charged
in respect of goods used in supplying the service is not available for paying CGST or IGST
on supply of the service] 5%
† Credit of input tax charged on goods used in supplying the service, not available.
‡ Credit of input tax charged on goods and services used in supplying the service [other than the input tax credit of input service in the same line
of business (i.e., service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle)], not
available.

Transport of goods in a vessel #
5%
Service provided by goods transport agency (GTA) by road (in relation to transportation
of goods including used household goods for personal use) –
(a) without taking input tax credit of goods/services 5%
Transportation of natural gas, petroleum crude, motor spirit (commonly known as
petrol), high speed diesel or aviation turbine fuel through pipeline –
(a) without taking input tax credit of goods/services 5%
Multimodal transportation of goods from a place in India to another place in India [i.e.,
carriage of goods, by at least two different modes of transport (by road, air, rail, inland
waterways or sea) from the place of acceptance of goods to the place of delivery of
goods by a multimodal transporter] 12%
Goods transport services/supporting services in transport (not covered by any of the
above entry) 18%
Rental services of Renting of any motor vehicle designed to carry passengers where the cost of fuel is
transport vehicles included in the consideration charged from the service recipient –
with operators (a) without taking input tax credit of goods/services$ 5%
Time charter of vessels for transport of goods [credit of input tax charged on goods (other
than on ships, vessels including bulk carriers and tankers) not available] 5%
Rental services of transport vehicles with operators (other than the service
covered by the above entry) 18%
Courier Postal and courier services 18%
Distribution Electricity, gas, water and other distribution services 18%
Financial/related Services provided by a foreman of a chit fund in relation to chit [credit of input tax
services charged on goods used in supplying the service, not available] 12%
- Transfer of the right to use any goods for any purpose (whether or not for a GST Rate
specified period) for cash/deferred/any other valuable consideration applicable
- Any transfer of right in goods or of undivided share in goods without the transfer for trans-
of title thereof. fer of title
Leasing of motor vehicles purchased and leased prior to July 1, 2017 65% of
GST rate
applicable
for trans-
fer of title
Service of third party insurance of “goods carriage” 12%
Financial and related services (other than given above) 18%
Real estate services Services by the Central Government, State Government, Union Territory or local autho-
rity to governmental authority or government entity, by way of lease of land Nil
Supply of land or undivided share of land by way of lease or sub-lease where such supply
is a part of composite supply of construction of flats, etc. [as specified in (i), (ia), (ib), (ic),
(id), (ie) and (if) above] Nil
Real estate services other than given above 18%
Leasing or rental  Temporary/permanent transfer or permitting the use or enjoyment of Intellectual
services Property (IP) right in respect of goods other than IT software 12%
without operator  Temporary/permanent transfer or permitting the use or enjoyment of IP right in
respect of IT software 18%
 Leasing of motor vehicles purchased and leased prior to July 1, 2017 65% of
GST rate
applicable
for trans-
fer of title
# Credit of input tax charged on goods (other than on ships, vessels including bulk carriers and tankers) used in supplying the service, not
available.
$ Credit of input tax charged on goods and services used in supplying the service [other than the input tax credit of input service in the same line
of business (i.e., service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle)], not
available.

 Supply of the following -
- Transfer of the right to use any goods for any purpose (whether or not for a speci- GST rate
fied period) for cash/deferred/any other valuable consideration. applicable
- Any transfer of right in goods or of undivided share in goods without the transfer for
of title thereof. transfer
- Leasing or renting of goods. of title
 Leasing or rental services, without operator (not covered by above) 18%
Business/production Research and development services 18%
services Legal and accounting services 18%
Selling of space for advertisement in print media 5%
Other professional, technical and business services relating to exploration, mining or
drilling of petroleum crude or natural gas or both 12%
Other professional, technical and business services (other than given above and other
than construction services pertaining to construction/engineering/installation of bio-gas
plant, solar power based devices, etc.) 18%
Telecommunications, Supply consisting only of e-book (i.e., an electronic version of a printed book supplied
broadcasting online which can be read on a computer or a hand held device) 5%
Telecommunications, broadcasting and information supply services other than given
above 18%
Support services Supply of tour operators services (bill includes accommodation/transportation charges)
[credit of input tax charged on goods and services used in supplying the service (other
than the input tax credit of input service in the same line of business, i.e., tour operator
service procured from another tour operator) not available] 5%
Services by way of house-keeping (such as plumbing, carpentering, etc.) where the person
supplying such service through electronic commerce operator is not liable for registration
under section 22(1) [credit of input tax charged on goods and services, not available] 5%
Support services (other than given above) 18%
Support services to Support services to agriculture, forestry, fishing, animal husbandry [for details, see Entry
agriculture, hunting, 54/55/57 of Exemption Notification given in para 437] Nil
forestry, fishing, Support services to exploration, mining or drilling of petroleum crude or natural gas or
mining and utilities both 12%
Support services to mining, electricity, gas and water distribution 18%
Maintenance, repair Services by way of house-keeping, such as plumbing, carpentering, etc., where the person
and installation supplying such service through electronic commerce operator is not liable for registration
(except construction) under section 22(1) [credit of input tax charged on goods and services, not available] 5%
services Any other maintenance/repair/installation (except construction) service (but other than
pertaining to bio-gas plant, solar power based devices, etc.) 18%
Manufacturing/ Services by way of printing of all goods falling under Chapter 48 or 49 [including
printing/publishing newspapers, books (including braille books)/journals/periodicals], which attract IGST
services @ 12% or 5% or Nil [where only content is supplied by the publisher and the physical inputs
including paper used for printing belong to the printer] 12%
Other manufacturing services; publishing, printing and reproduction services; mate-
rials recovery services (other than above). 18%
Manufacturing servi- Service by way of job work in relation to –
ces on physical inputs - Printing of newspapers
(goods) owned by - Textiles and textile products (falling under Chapters 50 to 63 of Customs Tariff
others [in case of print- Act)
ing, paper and other - All products, other than diamonds (falling under Chapter 71 of Customs Tariff
physical inputs belongs Act)
to publisher] - Printing of books (including braille books)/journals/periodicals
- Printing of all goods (falling under Chapter 48 or 49, which attract IGST @ 5%
or Nil)
- Processing of hides, skins and leather
- Manufacture of leather goods or foot wear falling under Chapter 42 or 64
- All food/food products (falling under Chapters 1 to 22 of Customs Tariff Act)
- All products (falling under Chapter 23 of Customs Tariff Act, except dog and cat
food)
- Manufacture of clay bricks
- Manufacture of handicraft goods 5%

Service by way of job work in relation to –
- Manufacture of umbrella
- Printing of all goods (falling under Chapter 48 or 49, which attract IGST @ 12%) 12%
Services by way of job work in relation to diamonds falling under Chapter 71 in the First
Schedule to the Customs Tariff Act 1.5%
Services by way of job work in relation to bus body building 18%
Services by way of job work (other than given above) undertaken by a person on goods
belonging to another registered person 12%
Service by way of any treatment or process on goods belonging to another person, in
relation to –
- Printing of newspapers
- Printing of books (including braille books)/journals/periodicals
- Printing of all goods (falling under Chapter 48 or 49, which attract IGST @ 5%
or Nil) 5%
Service by way of any treatment or process on goods belonging to another person, in
relation to printing of all goods (falling under Chapter 48 or 49, which attract IGST @
12%) 12%
Tailoring services 5%
Manufacturing services on physical inputs (goods) owned by persons other than
those registered under GST (not covered by above) 18%
Community services Public administration and other services provided to the community as a whole;
compulsory social security services. 18%
Education services 18%
Human health and social care services 18%
Sewage and waste collection, treatment and disposal and other environmental protec-
tion services 18%
Services by way of treatment of effluents by a Common Effluent Treatment Plant 12%
Sewage and waste collection, treatment and disposal and other environmental protection
services (other than given above) 18%
Services of membership organisations 18%
Recreational, cultural Services by way of admission or access to circus, Indian classical dance including folk
and sporting services dance, theatrical performance, drama or planetarium 18%
Services by way of admission exhibition of cinematograph films where price of
admission ticket is Rs. 100 (or less) 12%
Services by way of admission exhibition of cinematograph films where price of admission
ticket is above Rs. 100 18%
Services by way of admission to amusement parks including theme parks, water parks,
joy rides, merry-go rounds, go-carting and ballet 18%
Services by way of admission to entertainment events or access to amusement facilities
including, casinos, race club, any sporting event such as IPL and the like 28%
Services provided by a race club by way of totalisator or a license to bookmaker in such
club 28%
Gambling 28%
Recreational, cultural and sporting services (other than given above) 18%
Other services Domestic services 18%
Services provided by extraterritorial organisations and bodies. 18%
Washing, cleaning and dyeing services; beauty and physical well-being services; and
other miscellaneous services including services nowhere else classified 18%
Construction, mainte- Construction or engineering or installation or other technical services, provided in
nance, repairs relation of setting up of following : bio-gas plant, solar power based devices, solar
power generating system, wind mills, wind operated electricity generator, waste to
energy plants/devices, Ocean waves/tidal waves energy devices/plants† 18%
† If the goods specified in this entry are supplied, by a supplier, along with service by way of construction/engineering/installation of bio-gas
plant, solar power based devices, etc., value of supply of goods shall be deemed to be 70 per cent of gross consideration and balance 30 per cent
shall be deemed to be value of taxable service.

Supply of services by Supply of services (other than grant of development rights, long-term lease against
unregistered supplier upfront payment or FSI) by an unregistered person to a promoter for construction of
to a promoter the project on which tax is payable by the promoter under reverse charge mechanism
under section 9(4). 18%
Notes -
1. Government entity means an authority (or board/any other body/society/trust/corporation) set up by an Act of
Parliament/State Legislature. It also includes an authority (or board, etc.) established by any Government (with 90% or
more participation by way of equity/control).
2. “Declared tariff” includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like
furniture, air conditioner, refrigerators or any other amenities, but without excluding any discount offered on the
published charges for such unit.
3. “Restaurant service” means supply, by way of or as part of any service, of goods (being food or any other article for human
consumption or any drink) provided by a restaurant (or by eating joint, mess, canteen) whether for consumption on or away
from the premises where such food/drink is supplied.
4 “Outdoor catering” means supply, by way of or as part of any service, of goods (being food or any other article for human
consumption or any drink) at exhibition halls, events, conferences, marriage halls and other outdoor or indoor functions
that are event based and occasional in nature.
5. “Specified premises” means premises providing “hotel accommodation” services having declared tariff of any unit of
accommodation above Rs. 7,500 per unit per day or equivalent.
6. “Hotel accommodation” means supply, by way of accommodation in hotels, inns, guest houses, clubs, campsites or other
commercial places meant for residential or lodging purposes including the supply of time share usage rights by way of
accommodation.
Problems
429.1-P1 X Ltd., a real estate developer company, is registered in Mumbai (no other registration is taken). The following data is noted
from the records of the company pertaining to sale of properties by it during January 2020 –
Date Purchaser Location Agreed consideration (before GST) in Rs. Expected comple-
of unit tion date
For super- Undivided Total
structure share of land
January 4, 2020 A Ltd. Bengaluru 3.8 crore 0.4 crore 4.2 crore March 2021
January 4, 2020 B Jaipur 2 crore 1.6 crore 3.6 crore June 2021
January 20, 2020 C Ltd. Patna Separate figure not available 3 crore July 2021
January 21, 2020 D Ltd. Indore Separate figure not available 4 crore July 2019 (already
completed)
January 25, 2020 E Ltd. Mumbai Separate figure not available 6 crore December 2021
Applicable GST rate in these cases is 18 per cent. In all cases, 50 per cent of the agreed consideration (+ GST) is received at the time
of signing the agreement during January 2020. However, in the case of transfer of Indore flat to D Ltd., the entire amount is received
during January 2020. Calculate the GST liability of X Ltd. for January 2020 (before adjusting input tax credit). Assume that aforesaid
agreements involve transfer of super-structure as well as undivided share of land.
Solution : Indore property was completed during July 2019. If entire consideration is received after completion of
construction (or after the property is first occupied, whichever is earlier), GST is not applicable (it becomes a transaction
of transfer of immovable property). In all other cases, GST is applicable. In case of construction of a complex (involving
transfer of property in land or undivided share of land), value of taxable supply for the purpose of GST will be equal to
total amount charged for such supply minus value of land (or undivided share of land). For this purpose, the value of land
(or undivided share of land) shall always be deemed to be 1/3rd of total amount charged. GST liability will be calculated
as follows –
Recipient Nature Taxable value pertaining to advance received during January 2020 IGST CGST SGST
of supply of supply @ 18% @ 9% @ 9%
Advance Less : 1/3rd (i.e., Taxable
received undivided share of land) value
A Ltd. Inter-State 2.1 cr 0.7 cr 1.4 cr 25,20,000 – –
B Inter-State 1.8 cr 0.6 cr 1.2 cr 21,60,000 – –
C Ltd. Inter-State 1.5 cr 0.5 cr 1 cr 18,00,000 – –
E Ltd. Intra-State 3 cr 1 cr 2 cr – 18,00,000 18,00,000
Total 64,80,000 18,00,000 18,00,000
429.1-E1 Recalculate tax liability in Problem 429.1-P1 if the property which is transferred to C Ltd. is located in Pune.
429.1-P2 X Ltd. owns a hotel at Raj Road, Shimla (HP). From the information given below, find out GST liability pertaining to these
transactions (assume that date of transaction is November 1, 2019) –
Name of Declared tariff Discount given Extra charges (for Extra charges for Amount
guest of the room on room tariff extra bed or for early check-in and/ charged
upgrading room) or late check-out before GST
A Standard room : Rs. 900 10% Rs. 200 – Rs. 1,010
B Club room : Rs. 2,400 5% – Rs. 300 Rs. 2,580
C Delux room : Rs. 7,000 20% Rs. 2,000 – Rs. 7,600
D Delux room : Rs. 9,375 20% – – Rs. 7,500
E Tower room : Rs. 10,000 40% Rs. 1,000 Rs. 1,500 Rs. 8,500
Solution : In the case of hotel accommodation, GST rate depends upon value of supply of the unit. These rates are as
follows –
GST rate
Accommodation in a hotel for residential purposes having value of supply –
(a) Rs. 1,000 (or less) per unit per day Nil
(b) More than Rs. 1,000 but not exceeding Rs. 7,500 per unit per day 12%
(c) More than Rs. 7,500 per unit per day 18%
The above GST rates depend upon “value of supply” per unit of accommodation per day. Value of supply also includes
charges for extra bed, charges for permitting extra guest, charges for upgrading room, etc. These charges are also included
in “value of supply” per unit of accommodation per day. Where, however, charges are collected from guest for “early
check-in” and/or “late check-out”, such charges do not form part of “value of supply” (as these charges pertain to extra
time use of the accommodation by guest or use of the accommodation by guest for more than one day).
In the given problem, value of supply per unit of accommodation per day and GST liability will be as follows –
Name of Value of supply per unit per day before GST GST Amount charged from guest (including GST
guest rate early check-in/late check-out)
Room charges Extra charges Total
for bed
Rs. Rs. Rs. Rs. Rs.
A 810 200 1,010 12% 1,010 121.20
B 2,280 – 2,280 12% 2,580 309.60
C 5,600 2,000 7,600 18% 7,600 1,368
D 7,500 – 7,500 12% 7,500 900
E 6,000 1,000 7,000 12% 8,500 1,020
429.1-E2 Recalculate GST liability in Problem 429.1-P2 pertaining to A if he has taken two rooms (i.e., standard rooms, tariff
of each is Rs. 900) and paid before GST Rs. 2,020.
●
Test your knowledge

1. What is inter-State supply ? [para 426]
2. What is intra-State supply ? [para 427]
3. Prepare a brief note pertaining to different GST rates notified for supply of various goods. [para 428]
4. Give five examples pertaining to supply of goods chargeable to GST @ 28 per cent. [para 428.1]
5. Supply of goods is chargeable to GST at different rates (e.g., 5 per cent, 12 per cent, 18 per cent, 28 per cent, 3 per cent,
0.25 per cent). Give two examples for each category of supply of goods chargeable at these rates. [para 428.1]
6. Prepare a note pertaining to different GST rates for supply of various services. [para 429]
7. Supply of services is chargeable to GST at different rates (e.g., 5 per cent, 12 per cent, 18 per cent, 28 per cent). Give
two examples of each category. [para 429.1]
8. Which of the following tax is levied in the case of inter-State supply –
- CGST
- SGST
- UTGST
- IGST. [para 426]
Levy of GST 638
9. Which of the following tax is levied in the case of intra-State supply –

- CGST
- SGST
- UTGST
- IGST. [para 427]
10. What is the maximum rate which can be imposed by the Government under IGST Act –
- 28 per cent
- 20 per cent
- 40 per cent. [para 426]
11. What is the maximum rate which can be imposed by the Government under CGST Act –
- 28 per cent
- 20 per cent
12. What is the maximum rate which can be imposed by a State Government under SGST Act –
- 28 per cent
- 20 per cent
13. Which of the following is treated as intra-State supply –
- Goods imported into India from Germany.
- Goods supplied by a dealer in Kolkata to a tourist who has come from France for a visit of 20 days.
- Services supplied by X (who is located in Mumbai) to a SEZ unit situated in Nagpur.
- Goods supplied by Y (who is located in Patna) to a SEZ unit situated in Nagpur.
- Goods supplied by a SEZ unit in Nagpur to X (who is located in Mumbai).
- Goods supplied by a SEZ unit in Noida to Y (who is located in Patna). [para 427.1]
14. Which of the following is treated as inter-State supply –
- Services imported from USA.
- Goods imported from Nepal.
- Goods supplied by a trader in Delhi to a company in Hong Kong.
- Goods supplied by a trader in Patna to a SEZ unit in Daman. [para 426.1]
15. Declared tariff of a hotel room is Rs. 5,600 per unit per day. However, the hotel gives a discount of 60 per cent.
Amount actually paid by the guest is Rs. 2,240 per unit per day (i.e., after discount of 60 per cent). At what rate GST
would be charged in this case ? [para 429.1]
16. Meghalaya Government has come out with a new lottery –
- Face value : Rs. 1,000.
- Available during January 1, 2020 and January 15, 2020.
- First prize : Rs. 50 crore.
- Second prize : Rs. 1 crore.
- Other prizes : Ranging from Rs. 5,000 to Rs. 1,00,000.
- This lottery cannot be sold outside Meghalaya.
Find out GST liability in this case, if a distributor purchases 5,000 lottery tickets @ Rs. 700 per ticket. [para 428]
CHAPTER 23 Exemptions from GST
W
hen an intra-State supply or inter-State supply falls within charging provisions,
such supply is subject to GST. To find out GST liability, one has to ascertain the
applicable GST rate (these rates are discussed in the earlier chapter) and check
whether (or not) such supply is exempt from tax. This chapter covers in brief supplies which
are exempt from GST.
 POWER TO GRANT EXEMPTION - HOW TO EXERCISE

435. Power to grant exemption is given by section 11. Under this section, the Government (if it is satisfied that
it is necessary in the public interest) may exempt specified goods/services from GST. Such exemption may be
given by a notification. However, such exemption can be granted only on the recommendations of the GST
Council. Such exemption may be absolute exemption or exemption subject to certain conditions which may be
given in the notification. Government has also power under section 11 to issue clarifications pertaining to such
notifications. Such clarifications may be issued even from a retrospective effect (but not prior to one year from
the date of clarification).
The Government issues an exemption notification. It is Notification No. 250/2019†, dated July 4, 2019. It gives exemption
pertaining to renting of commercial space in Pune up to a carpet area of 10 square metre. A clarification pertaining to this
notification can be issued up to July 3, 2020. Suppose, the method of calculating carpet area (in the above notification) is given
by issuing a clarification on June 15, 2020. This clarification is issued within one year and it can be applied with retrospective
effect from July 4, 2019.
 WHAT ARE EXEMPTED GOODS UNDER EXEMPTION NOTIFICATION

436. Government has notified a few goods which are exempt from GST vide Notification No. 2/2017-CT
(Rate), dated June 28, 2017. This notification has been issued under CGST Act. Similar notifications have been
issued under IGST Act and SGST Acts. These notifications are available on CBIC website. Alternatively, one can
visit www.gst.taxmann.com. The table given below summarizes‡ the contents of Notification No. 2/2017. Supply
of following goods is exempt from GST –
Tariff Goods exempt from GST (only brief summary)
chapter
1 Live animals (excluding pure-bred breeding horses, horses for polo, other horses)
2 Meat and edible meat offal fresh or chilled (other than put up in unit container and bearing a registered brand
name)
3 Fish seeds, prawn/shrimp seeds whether or not processed, cured or in frozen state (other than goods
attracting 5% GST), live fish, fish (fresh or chilled excluding fish fillets and other fish meat), all goods (other
than those put up in a unit container and bearing a registered brand name)
4 Fresh milk and pasteurised milk, cream, curd, butter milk, paneer (other than those put up in a unit container
and bearing a registered brand name), birds’ eggs, in shell, fresh, preserved or cooked, natural honey (other
† No such notification has been issued. It is only for illustration purposes.

‡ It is only a summary. List is not complete. For complete list, one may visit CBIC website or www.gst.taxmann.com. Students/examinees are not
required to remember this list.
639
Para 436 Exemptions from GST 640

chapter
5 Human hair, unworked (whether or not washed or scoured), waste of human hair, bones and horn-cores, hoof
meal; horn meal; hooves, claws, nails and beaks; antlers; etc., semen including frozen semen, all goods (other
6 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage
7 Potatoes/tomatoes/onion/garlic/cabbages/cauliflowers/kohlrabi/lettuce/chicory/carrots/turnips/salad
beetroot/ radishes/cucumbers/leguminous vegetables/other vegetables (fresh or chilled), vegetables
(uncooked or cooked by steaming or boiling in water) frozen, vegetables provisionally preserved (for example,
by sulphur dioxide gas, in brine, in sulphur water or in other preservative solutions) but unsuitable in that state
for immediate consumption, dried vegetables, dried leguminous vegetables (other than those put up in a unit
container and bearing a registered brand name), manioc, arrowroot, salep, Jerusalem artichokes, sweet
potatoes, manioc/arrowroot (other than those put up in a unit container and bearing a registered brand name)
8 Dried makhana (other than those put up in a unit container and bearing a registered brand name), coconut/
brazil nuts/fresh nuts such as almonds, hazelnuts, walnuts (whether or not shelled or peeled), bananas (fresh
or dried), dates/figs/pineapples/avocados/guavas/mangoes/ mangosteens (fresh), citrus fruit/oranges/
grapes/lemons (fresh), grapes (fresh), melons/watermelons/papaws (fresh), apples/pears/quinces (fresh),
apricots/cherries/peaches/plums/sloes (fresh), other fruits (as specified) (fresh), tamarind dried, peel of
citrus fruit or melons (including watermelons) (fresh)
7, 9, 10 All goods of seed quality
9 Coffee beans (not roasted), unprocessed green leaves of tea, fresh ginger/turmeric (other than in processed
form)
10 Unbranded cereals (other than those put up in a unit container and bearing a registered brand name) : Wheat
and meslin, rye, barley, oats, maize, rice, grain sorghum, buckwheat, millet and canary seed, other cereals such
as jawar, bajra, ragi
11 Guar meal, unbranded flour of the cereals (other than those put up in a unit container and bearing a registered
brand name) : Flour of cereals given above, cereal grains hulled, unbranded flour of potatoes, unbranded flour
of pulses
12 Soyabeans seeds, ground-nuts (unroasted seeds), linseed seeds, rape or colza seeds, sunflower seeds, other
oil seeds, hop cones (fresh), hop cones (neither grounded nor powdered nor in the form of pellets)
13 Lac and shellac
14 Betel leaves, coconut shell (unworked), vegetable materials, for manufacture of jhadoo or broom sticks
17 Jaggery of all types including cane jaggery (gur), palmyra jaggery; khandsari sugar
19 Puffed rice, pappad, bread
21 Prasadam (supplied by religious places)
22 Water (other than purified in a sealed container), non-alcoholic toddy/neera, tender coconut water (other than
those put up in a unit container and bearing a registered brand name)
23 Aquatic feed including shrimp feed and prawn feed, poultry feed and cattle feed, including grass, hay and
straw, supplement & husk of pulses, concentrates and additives, wheat bran and de-oiled cake [other than rice-
bran], de-oiled rice bran, cotton seed oil cake
25 Salt (including table salt and denatured salt) and pure sodium chloride, whether or not in aqueous solutions
or containing added anti-caking or free flowing agents; sea water
26 Uranium ore concentrate
27 Electrical energy
28 Dicalcium phosphate (DCP) of animal feed grade
30 Human blood and its components, all types of contraceptives
31 Goods and organic manure (other than those put up in a unit container and bearing a registered brand name)
33 Kajal (other than kajal pencil sticks), kumkum, bindi, sindur, alta
38 Municipal waste, sewage sludge, clinical waste
39 Plastic bangles
40 Condoms and contraceptives
44 Firewood or fuel wood, wood charcoal (including shell or nut charcoal), whether or not agglomerated
44/68 Deities made of stone, marble or wood
46 Khali dona; goods made of sal leaves, siali leaves, sisal leaves, sabai grass, including sabai grass rope, plates
and cups made up of all kinds of leaves/flowers/bark
641 What are exempted goods under exemption notification Para 436

chapter
48/49 Judicial/non-judicial stamp papers, court fee stamps (when sold by the Government treasuries or authorised
vendors), postal items (sold by Government), rupee notes (sold by RBI), cheque book, printed books,
newspapers/journals and periodicals, children’s picture/drawing/colouring books, music, printed or in
manuscript, whether or not bound or illustrated, maps, duty credit scrips
48/49/ Rupee notes or coins when sold to RBI or the Government of India
71
50 Raw silk, silk waste
51 Wool/animal hairs (not carded or combed),
52 Gandhi topi
53 Coir pith compost other than those put up in unit container and,—
a. bearing a registered brand name; or
b. bearing a brand name on which an actionable claim or enforceable right in a court of law is available (other
than those where any actionable claim or enforceable right in respect of such brand name has been foregone
voluntarily, subject to a few conditions)
50- 55 Khadi yarn, khadi fabric (sold by KVIC or authorised outlets)
53 Jute fibres (raw or processed but not spun), coconut, coir fibre
63 Indian National Flag
67 Human hair (dressed, thinned, bleached or otherwise worked)
69 Earthen pot and clay lamps, Idols made of clay
70 Glass bangles (except those made from precious metals)
71 Bangles of lac/shellac
82 Agricultural implements (manually operated or animal driven), i.e., hand tools, such as spades, shovels,
mattocks, picks, hoes, forks and rakes; axes, bill hooks and similar hewing tools; secateurs and pruners of any
kind; scythes, sickles, hay knives, hedge shears, timber wedges and other tools of a kind used in agriculture,
horticulture or forestry
84 Charkha (for hand spinning of yarns, including amber charkha), handloom (weaving machines)
88 Spacecraft (including satellites) and suborbital and spacecraft launch vehicles, parts of gliders
90 Hearing aids
92 Indigenous handmade musical instruments (134 instruments are specified for this purpose)
96 Muddhas made of sarkanda, brooms or brushes, slate, slate pencils/chalk sticks, sanitary towels (pads)/
sanitary napkins/tampons
98 Passenger baggage
Any Puja samagri (e.g., rudraksha, wooden khadau, panchamrit, vibhuti, unbranded honey, diya, roli, kalava,
chapter Chandan tika), parts for manufacture of hearing aids
Any Rakhi (other than those made of goods falling under Chapter 71)
Chapter
except
71
Any Supply of gift items received by the President, Prime Minister, Governor or Chief Minister of any State or
Chapter Union territory, or any public servant, by way of public auction by the Government, where auction proceeds
are to be used for public or charitable cause.
– Supply of lottery by any person (other than Government/Union Territory/local authority) if appropriate GST
has been paid when lottery was supplied by Government/Union Territory/local authority to the authorised
distributor
– Supply of goods by a Government entity to Central Government/State Government/Union Territory/local
authority/any person specified by these Governments against consideration (received in the form of grants)
from these Governments
Note - Vide Notification No. 19/2019-CT (Rate), dated September 30, 2019, GST is not applicable (with effect from October
1, 2019) in the case of goods supplied to Food and Agricultural Organisation of the United Nations (FAO) for execution
of projects listed below -
- Strengthening capacities for nutrition-sensitive agriculture and food systems,
- Transforming Indian agriculture for global environment benefits and the conservation of critical biodiversity and forest
landscape.
 WHAT ARE SERVICES GIVEN IN EXEMPTION NOTIFICATION

437. Government has notified a few services which are exempt from GST vide Notification No. 12/2017-CT
(Rate), dated June 28, 2017. This notification has been issued under CGST Act. Similar notifications have been
issued under IGST Act and SGST Acts. These notifications are available on CBIC website. Alternatively, one can
visit www.gst.taxmann.com. The table given below summarizes the contents of Notification No. 2/2017. By virtue
of these notifications, supply of following services is exempt from GST –
 Entry 1 : Charitable trust - Services by an entity registered under section 12AA of the Income-tax Act. Exemption
is, however, available only when service is provided by way of charitable activities which are given below –
- Activities relating to public health by way of care or counselling of (a) terminally ill persons or persons with
severe physical or mental disability, (b) persons afflicted with HIV or AIDS, (c) persons addicted to a
dependence-forming substance such as narcotics drugs or alcohol.
- Activities relating to public health by way of awareness of preventive health, family planning or prevention
of HIV infection.
- Activities relating to advancement of religion, spirituality or yoga†.
- Activities relating to advancement of educational programmes or skill development relating to (a) aban-
doned, orphaned or homeless children, (b) physically or mentally abused and traumatized persons, (c)
prisoners, or (d) persons over the age of 65 years residing in a rural area;
- Activities relating to preservation of environment including watershed, forests and wildlife.
 Entry 2 : Transfer of a concern - Services by way of transfer of a going concern, as a whole or an independent part
thereof.
 Entry 3 : Panchayat/municipality - Pure services (excluding works contract service or other composite supplies
involving supply of any goods) provided to the Central Government/State Government/Union Territory/local
authority/Governmental authority/Government entity by way of any activity in relation to any function
entrusted to a panchayat under article 243G of the Constitution or in relation to any function entrusted to a
municipality under article 243W of the Constitution.‡
 Entry 3A : Works contract service to panchayat/municipality - Composite supply of goods and services (in which
the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply)
provided to the Central Government/State Government/Union Territory/local authority/Governmental
authority/Government entity by way of any activity in relation to any function entrusted to a panchayat under
article 243G of the Constitution or in relation to any function entrusted to a municipality under article 243W of
the Constitution.‡
 Entry 4 : Municipality services - Services by governmental authority by way of any activity in relation to any
function entrusted to a municipality.

 Entry 5 : Panchayat services - Services by governmental authority by way of any activity in relation to any
function entrusted to a Panchayat.

 Entry 6 : Services by Government - Services provided by the Central Government/State Government/Union
Territory/local authority except the following (the following are chargeable to GST) –
- Services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency
services provided to a person (other than the Central Government, State Government, Union Territory).
- Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport.
- Transport of goods or passengers.
- Any service (other than 3 services given above) provided to a business entity (i.e., any person carrying out
business/profession).
† Fee or consideration charged in any form from the participants (for participating in a religious, yoga or meditation programme or camp meant
for advancement of religion, spirituality or yoga) is exempt from GST. Residential programmes or camps where the fee charged includes cost of
lodging and boarding, is also exempt (exemption is, however, available only if the primary and predominant activity, objective and purpose of
such programme, is advancement of religion, spirituality or yoga). To put it differently, if a charitable or religious trust merely or primarily
provides accommodation or serve food and drinks against consideration in any form (including donation), the above exemption is not available.
Similarly, activities such as holding of fitness camps or classes such as those in aerobics, dance, music, etc., is taxable.
‡ Supply of ambulance service by a private service provider to the State Government (by way of transportation of patients on behalf of the State
Government) is exempt from GST under Entry 3/Entry 3A (“Health and sanitation” is entrusted to panchayats under article 243G of the
Constitution. Likewise, “public health” is entrusted to municipalities under article 243W of the Constitution. Thus, service is an activity in relation
to the functions entrusted to panchayats and municipalities under articles 243G and 243W of the Constitution.
643 What are services given in exemption notification Para 437
 Entry 7 : Services provided by Government to small business entity - Services provided by the Central Government,
State Government, Union Territory or local authority to a business entity with an aggregate turnover not
exceeding such amount in the preceding financial year as makes it eligible for exemption from GST registration.
This exemption is, however, not available in respect of services by way of renting of immovable property and
first 3 services mentioned in Entry 6 (supra).
 Entry 8 : Services provided by Government to Government - Services provided by the Central Government/State
Government/ Union Territory/local authority to another Government (i.e., Central Government/State Govern-
ment/local authority/Union Territory). This exemption is, however, not available in respect of first 3 services
mentioned in Entry 6 (supra).
 Entry 9 : Service provided by Government (up to Rs. 5,000) - Services provided by the Central Government/State
Government/Union Territory/a local authority where the consideration for such services does not exceed Rs.
5,000 (in the case of continuous service, Rs. 5,000 in a financial year). This exemption is, however, not available
in respect of first 3 services mentioned in Entry 6 (supra).
Cumulative impact of Entry 6, Entry 7, Entry 8 and Entry 9 - All services provided by the Central Government/State
Government/Union Territory/local authority are exempt except the following –
Service provided by the Government/ Recipient of service Taxable
local authority, etc.
1. Services by the Department of Any person other than Central Taxable
Posts by way of speed post, express Government/ State Govern-
parcel post, life insurance, and ment/Union Territory
agency services
2. Services in relation to an aircraft Any person Taxable
or a vessel, inside or outside the
precincts of a port or an airport
3. Transport of goods or passengers Any person Taxable
4. Renting of immovable property Any person† carrying out Taxable [if consideration exceeds Rs. 5,000
business/profession (not being (in the case of continuous service Rs. 5,000 in
Central Government/ State a financial year)]
Government/Union Territory)
5. Any other service Any person carrying out busi- Taxable only if‡ –
ness/profession (not being a. consideration exceeds Rs. 5,000 (in the
Central Government/State case of continuous service Rs. 5,000 in a
Government/Union Territory) financial year); and
b. aggregate turnover of the recipient ex-
ceeds such amount in the preceding fi-
nancial year as makes it liable to obtain
GST registration.
 Entry 9A : Service provided by FIFA - Services provided by and to Fédération Internationale de Football
Association (FIFA) and its subsidiaries directly or indirectly related to any of the events under FIFA U-17 World
Cup 2017 to be hosted in India.
 Entry 9AA : Service provided by FIFA - Services provided by and to Fédération Internationale de Football
Association (FIFA) and its subsidiaries directly or indirectly related to any of the events under FIFA U-17
Women’s World Cup 2020 to be hosted in India (applicable from October 1, 2019).
 Entry 9B : Transit cargo to Nepal/Bhutan - Supply of services associated with transit cargo to Nepal and Bhutan
(landlocked countries).
 Entry 9C : Service provided by Government entity - Supply of service by a Government entity to Central
Government/State Government/Union Territory/local authority/any specified person (i.e., specified by Cen-
tral Government/State Government, etc.). This exemption is, however, available only if consideration is
received from the Central Government/State Government, etc., in the form of grants.
 Entry 9D : Old age home - Services by an old age home run by the Central Government/State Government/
charitable institute (registered under section 12AA of the Income-tax Act) to its residents (aged 60 years or
more) against consideration up to Rs. 25,000 per month per member (if the consideration charged is inclusive
of charges for boarding/lodging/maintenance).
†Tax is payable by the recipient under reverse charge mechanism (if the recipient is registered under GST).
‡ Tax is payable by the recipient under reverse charge mechanism.
 Entry 10 : House construction for Pradhan Mantri Awas Yojana - Service provided by way of pure labour contracts
of construction, erection, etc., pertaining to “Beneficiary Led (Individual House) Construction or Enhancement
(BLC)” under the Housing for All (Urban) Mission of Pradhan Mantri Awas Yojana.
 Entry 10A : Electricity distribution network - Services supplied by electricity distribution utilities by way of
construction, erection, commissioning, or installation of infrastructure for extending electricity distribution

network up to the tube well of the farmer or agriculturalist for agricultural use.
 Entry 11 : Single residential unit - Services by way of pure labour contracts of construction, erection,
commissioning, or installation of original works pertaining to a single residential unit (otherwise than as a part
of a residential complex).
 Entry 11A : Service provided by fair price shop to Central Government - Service provided by Fair Price Shops to
Central Government/State Government/Union territory by way of sale of food grains, kerosene, sugar, edible
oil, etc., under PDS against consideration in the form of commission or margin.
 Entry 12 : Renting of residential house - Services by way of renting of residential dwelling for use as residence.
 Entry 13 : Religious ceremony - Services by a person by way of—
a. conduct of any religious ceremony;

b. renting of precincts of a religious place meant for general public (owned/managed by a charitable or religious
trust having income-tax exemption).
However, the exemption is not available in the following cases (the following are chargeable to GST) –
1. Renting of rooms where charges are Rs. 1,000 (or more) per day.
2. Renting of premises/community halls/kalyan mandapam/open area, etc., where charges are Rs. 10,000 (or
more) per day.
3. Renting of shops or other spaces for business/commerce where charges are Rs. 10,000 (or more) per month.
 Entry 14 : Hotel room up to Rs. 1,000 - Services provided by a hotel, inn, guest house, club or campsite, by
whatever name called, for residential or lodging purposes. However, the exemption is available only if value of
service of a unit of accommodation is -
a. less than Rs. 1,000 per day (or equivalent) [applicable up to September 30, 2019]; or
b. less than or equal to Rs. 1,000 per day (or equivalent) [applicable with effect from October 1, 2019].
 Entry 15 : Transport of passengers - Transport of passengers (with or without accompanied belongings) by—
a. air, embarking from or terminating in an airport located in the State of Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra located in West Bengal;
b. non-airconditioned contract carriage (other than radio taxi), for transportation of passengers (excluding
tourism, conducted tour, charter or hire); or
c. stage carriage (other than air-conditioned stage carriage).
Services given above in brackets are chargeable to GST. In other words, the following are taxable –
- Service provided by radio taxi.
- Service provided by contract carriage by way of tourism, conducted tour, charter or hire.
- Service provided by air-conditioned stage carriage.
 Entry 16 : Regional connectivity scheme airport - Services provided to the Central Government, by way of transport
of passengers (with or without accompanied belongings), by air, embarking from or terminating at a regional
connectivity scheme airport, against consideration in the form of viability gap funding. However, this exemption
is available only for a period of 3 years from the date of commencement of operations of the regional connectivity
scheme airport as notified by the Ministry of Civil Aviation.
 Entry 17 : Transportation of passengers - Service of transportation of passengers (with or without accompanied
belongings) by—
a. railways in a class other than (i) first class; or (ii) an AC coach;
b. metro, monorail or tramway;
c. inland waterways;
d. public transport (other than predominantly for tourism purpose) in a vessel between places located in India;
and
e. metered cabs or auto rickshaws (including e-rickshaws).

- National waterways - National waterways are covered in definition of inland waterways.
- Transportation between Chennai and Port Blair or Port Blair and Havelock - Service by way of transportation of
passengers on a vessel, from say Chennai to Port Blair (mainland - island) or Port Blair to Havelock (inter
island) is not chargeable to GST (it is covered by the Exemption Notification, Entry 17 given above). If,
however, the transportation is predominantly for tourism purpose, then it is not covered by exemption and
chargeable to GST.
- Scope of the phrase “predominantly for tourism purpose” - Entry 17 covers public transport by a vessel if it is not
predominantly for tourism purposes. Normal public ships/other vessels that sail between places located in
India would be covered by Entry 17 even if some of the passengers on board are using the service for tourism
(in such case the service is not predominantly for tourism purpose). However, services provided by leisure
or charter vessels or a cruise ship, predominant purpose of which is tourism, would not be covered by Entry
17 (and chargeable to GST), even if some of the passengers in such vessels are not tourists.
 Entry 18 : Transportation of goods - Service by way of transportation of goods—
a. by road [except the services of (i) a goods transportation agency, or (ii) a courier agency];
b. by inland waterways.
Services given above in brackets are chargeable to GST. In other words, the following are taxable –
- Service provided by goods transportation agency (GTA) (however, a few exceptions are given by Entry 21 and
Entry 21A).
- Service provided by a courier agency.
 Entry 19 : Transportation of goods by air - Services by way of transportation of goods by an aircraft from a place
outside India up to the customs station of clearance in India.
 Entry 19A : Transport of goods outside India by air - Services by way of transportation of goods by an aircraft from
customs station of clearance in India to a place outside India (applicable during January 25, 2018 and September
30, 2020).
 Entry 19B : Transport of goods outside India by vessel - Services by way of transportation of goods by a vessel from
customs station of clearance in India to a place outside India (applicable during January 25, 2018 and September
30, 2020).
 Entry 20 : Transportation of goods by rail or vessel - Services by way of transportation by rail or a vessel from one
place in India to another of the following goods—
a. relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap;
b. defence or military equipments;
c. newspaper or magazines registered with the Registrar of Newspapers;
d. railway equipments or materials;
e. agricultural produce;
f. milk, salt and food grain including flours, pulses and rice; and
g. organic manure.
 Entry 21 : Transportation of goods by GTA - Services provided by a goods transport agency (GTA), by way of
transport in a goods carriage of—
a. agricultural produce;
b. goods, where consideration charged for the transportation of goods on a consignment transported in a single
carriage does not exceed Rs. 1,500;
c. goods, where consideration charged for transportation of all such goods for a single consignee does not exceed
Rs. 750;
d. milk, salt and food grain including flour, pulses and rice;
e. organic manure;
f. newspaper or magazines registered with the Registrar of Newspapers;
g. relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap; or
h. defence or military equipments.
 Entry 21A : Transportation of goods by GTA - Services provided by a goods transport agency (GTA) to an
unregistered person (including an unregistered casual taxable person), other than the following recipients
(services to the following are chargeable to GST) —
a. any factory registered under (or governed by) the Factories Act;
b. any society registered under the Societies Registration Act;

c. any co-operative society;
d. any body corporate (established by or under any law);
e. any partnership firm/AOP;
f. any casual taxable person (registered under the CGST Act or IGST Act or SGST Act or UTGST Act).
 Entry 21B : Transportation of goods by GTA for Government department - Services provided by a goods transport
agency, by way of transport of goods in a goods carriage, to, –
a. a department or establishment of the Central Government or State Government or Union Territory; or
b. local authority; or
c. Governmental agencies,
which has taken registration under the CGST Act, 2017 only for the purpose of TDS under section 51 and not for
making a taxable supply of goods or services (applicable from January 1, 2019).
 Entry 22 : Hire - Services by way of giving on hire is not taxable in the following cases –
Service recipient What is given on hire

A state transport undertaking A motor vehicle meant to carry more than 12 passengers
A local authority An electrically operated vehicle meant to carry more than 12
passengers (applicable from August 1, 2019)
A goods transport agency (GTA) A means of transportation of goods
A person providing services of transportation of A motor vehicle for transport of students, faculty and staff
students, faculty and staff to an educational institu-
tion (which provides pre-school education and edu-
cation up to higher secondary or equivalent)
 Entry 23 : Toll charges - Services by way of access to a road or a bridge on payment of toll charges.
 Entry 23A : Payment of annuity - Services by way of access to a road or a bridge on payment of annuity.
 Entry 24 : Rice - Services by way of loading, unloading, packing, storage or warehousing of rice.
 Entry 24A : Warehousing of minor forest produce - Services by way of warehousing of minor forest produce.
 Entry 24B : Storage of cereals, pulses, etc. - Services by way of storage or warehousing of cereals, pulses, fruits,
nuts and vegetables, spices, copra, sugarcane, jaggery, raw vegetable fibres such as cotton, flax, jute, etc., indigo,
unmanufactured tobacco, betel leaves, tendu leaves, coffee and tea (applicable from October 1, 2019).
 Entry 25 : Electricity - Transmission or distribution of electricity by an electricity transmission or distribution
utility.
 Entry 26 : RBI - Services by RBI [this entry does not cover service to RBI. Service provided to RBI is generally
chargeable to GST (if it is not exempt under any other entry), see also para 437.1].
 Entry 27 : Interest - Services by way of—
a. extending deposits/loans/advances in so far as the consideration is represented by way of interest/discount

(other than interest involved in credit card services);
b. inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or
amongst banks and such dealers.
- Interest involved in credit card services is chargeable to GST.
- This entry covers sale/purchase of foreign currency by a bank/authorised dealer from another bank/
authorised dealers. It does not cover sale/purchase of foreign currency by any other person from bank/
authorised dealers. For instance, purchase of foreign currency by a manufacturing company from a foreign
exchange dealer against a commission, is not exempt under this Entry and commission charged by foreign
exchange dealer is subject to GST.
- In Collateralized Borrowing and Lending Obligations (CBLO) transaction, the borrowing bank pays an
amount as consideration to the lending bank for funds provided by it for a short term. Such amount would
qualify as “consideration represented by way of interest or discount” and, consequently GST is not applicable.
If, however, any charges or fees are levied for such transactions, the same would be a consideration and would
be chargeable to GST.
- “Repos” and “reverse repos” are financial instruments of short term call money market that are normally used
by banks to borrow from, or lend money to, RBI. The margins, called the repo rate or reverse repo rate, in such
transactions are nothing but interest charged for lending or borrowing of money. Thus, they have the
characteristics of loans and deposits for interest and are accordingly exempt from GST.
- Commercial Paper (CP) and Certificate of Deposit (CD) are unsecured money market instruments which are
issued in the form of a promissory note or in a dematerialized form through any of the depositories approved
by and registered with SEBI. CPs are normally issued by highly rated companies, primary dealers and
financial institutions at a discount to the face value. CDs can be issued by scheduled commercial banks and
financial institutions permitted by RBI.
Since these are instruments for lending or borrowing money wherein consideration is represented by way of
a discount or subscription to CPs or CDs, the same would be covered by Entry 27 (as consideration is
represented by way of interest or discount) and is not liable to GST.
- The services of loans, advances or deposits are exempt in so far as the consideration is represented by way of
interest or discount. Any charges or amount collected over and above the interest or discount would represent
taxable consideration and, consequently, liable to GST.
- Discounting of invoice/cheque falls within the purview of Entry 27. Such discounting is exempt from
payment of GST (as such discounting is nothing but a mode of extending a credit facility or a loan). If, however,
some service charges/fee/documentation fees/broking charges, etc., are charged, the same would be a
consideration for supply of service and chargeable to GST.
- As debt instruments such as debentures, bonds, etc., are in the nature of loans, interest thereon is exempt from
GST.
- Interest on finance lease transactions is not exempt under Entry 27 and chargeable to GST (It is a “purchase
the asset and lend it further” transaction for the lending bank. Neither the services are purely in the nature
of extending loans nor the consideration for a financial lease is purely in the nature of interest).
 Entry 27A : Service by bank to account holders under PMJDY - Services provided by a banking company to basic
saving bank deposit (BSBD) account holders under Pradhan Mantri Jan Dhan Yojana (PMJDY) (applicable from
January 1, 2019).
 Entry 28 : Annuity under NPS - Services of life insurance business provided by way of annuity under the National
Pension System (NPS).
 Entry 29 : Group insurance scheme of Army - Services of life insurance business provided (or agreed to be
provided) by the Army, Naval and Air Force Group Insurance Funds to members of the Army, Navy and Air
Force, respectively, under the Group Insurance Schemes of the Central Government.
 Entry 29A : Life insurance to cost guard - Services of life insurance provided or agreed to be provided by the Naval
Group Insurance Fund to the personnel of coast guard under the Group Insurance Schemes of the Central
Government.
 Entry 29B : Life insurance to Central Armed Police Forces - Services of life insurance provided (or agreed to be
provided) by the Central Armed Police Forces (under Ministry of Home Affairs) Group Insurance Funds to their
members under the Group Insurance Schemes of the concerned Central Armed Police Force (applicable from
October 1, 2019).
 Entry 30 : ESIS - Services by the Employees’ State Insurance Corporation to persons governed under the
Employees’ State Insurance Act.
 Entry 31 : Provident fund - Services provided by the Employees Provident Fund Organisation to the persons
governed under the Employees Provident Funds and the Miscellaneous Provisions Act, 1952.
 Entry 31A : Coal Mines Provident Fund - Services by Coal Mines Provident Fund Organisation to persons
governed by the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948.
 Entry 31B : NPS Trust - Services by National Pension System (NPS) Trust to its members against consideration
in the form of administrative fee.
 Entry 32 : IRDA - Services provided by the Insurance Regulatory and Development Authority (IRDA) to
insurers under the Insurance Regulatory and Development Authority of India Act.
 Entry 33 : SEBI - Services provided by the Securities and Exchange Board of India (SEBI) by way of protecting
the interests of investors in securities and to promote the development of, and to regulate, the securities market.
 Entry 34 : Services by an acquiring bank - Services by an acquiring bank, to any person in relation to settlement
of an amount up to Rs. 2,000 in a single transaction transacted through credit card/debit card/charge card/other
payment card service.
For the purposes of this entry, “acquiring bank” means any banking company/financial institution/NBFC/any
other person, who makes the payment to any person who accepts such card.
Whenever a cardholder uses a credit/debit card in a purchase transaction, the acquiring bank authorizes (or
rejects) the transaction based on the data from the issuing bank (e.g., SBI card, Axis Bank card) and card network
(i.e., VISA, Master Card). The acquiring bank receives the payment authorization request from the supplier of
goods/services and then sends it to the issuing bank for approval. If the purchase is approved, the funds are
deposited into the supplier’s account (generally at regular intervals). If the transaction value of a single
transaction does not exceed Rs. 2,000, GST on service provided by acquiring bank is not applicable.
 Entry 34A : Loan guarantee given by Government - Services supplied by Central Government/State Govern-
ment/Union Territory to their undertakings or Public Sector Undertakings (PSUs) by way of guaranteeing the
loans taken by such undertakings or PSUs from the banking companies and financial institutions.
 Entry 35 : General insurance business - Services of general insurance business provided under following
schemes –
- Hut Insurance Scheme - Pradhan Mantri Fasal Bima Yojana (PMFBY)
- Cattle Insurance under Swarnajayanti Gram Swarozgar Yojana - Pilot scheme on seed crop insurance
- Scheme for Insurance of Tribals - Central Sector Scheme on cattle insurance
- Janta Personal Accident Policy and Gramin Accident Policy - Universal Health Insurance Scheme
- Group Personal Accident Policy for self-employed women - Rashtriya Swasthya Bima Yojana
- Agricultural Pumpset and Failed Well Insurance - Coconut Palm Insurance Scheme
- Premia collected on export credit insurance - Pradhan Mantri Suraksha Bima Yojana
- Restructured Weather Based Crop Insurance Scheme (RWCIS) - Niramaya Health Insurance Scheme
- Jan Arogya Bima Policy - Bangla Shasya Bima
 Entry 36 : Life insurance - Services of life insurance business provided under following schemes –
- Janashree Bima Yojana - Varishtha Pension Bima Yojana
- Aam Aadmi Bima Yojana - Pradhan Mantri Jeevan Jyoti Bima Yojana
- Life micro-insurance product (as approved by IRDA), having - Pradhan Mantri Jan Dhan Yojana
maximum amount of cover of Rs. 50,000
- Pradhan Mantri Vaya Vandan Yojana
 Entry 36A : Reinsurance - Services by way of reinsurance of the insurance schemes specified in Entry 35 or 36
or 40.
 Entry 37 : Atal Pension - Services by way of collection of contribution under the Atal Pension Yojana.
 Entry 38 : Pension scheme of State Government - Services by way of collection of contribution under any pension
scheme of the State Governments.
 Entry 39 : Certain facilities in rural area - Services by the following persons in respective capacities –
- Business facilitator/business correspondent to a banking company with respect to accounts in its rural area
branch.
- Any person as an intermediary to a business facilitator/business correspondent with respect to services
mentioned above.
- Business facilitator/business correspondent to an insurance company in a rural area.
 Entry 39A : International financial services - Services by an intermediary of financial services located in a multi
services SEZ with International Financial Services Centre (IFSC)† status to a customer located outside India for
international financial services in currencies other than Indian rupees.
 Entry 40 : Insurance scheme when premium paid by Government - Services provided to the Central Government/
State Government/Union Territory under any insurance scheme for which total premium is paid by the Central
Government/State Government/Union Territory.
 Entry 41 : Premium payable under long-term lease - Upfront amount (called as premium, salami, cost, price,
development charges or by any other name) payable in respect of service which satisfies the following
conditions –
- Period of lease Premium, etc., pertains to granting of long-term lease of 30 years or more.
- Assets subject to lease Lease is of industrial plots or plots for development of infrastructure for financial business.
† For the purposes of this entry, the intermediary of financial services in IFSC is a person,—
a. who is permitted or recognised as such by the Government of India or any Regulator appointed for regulation of IFSC; or
b. who is treated as a person resident outside India under the Foreign Exchange Management (International Financial Services Centre)
Regulations; or
c. who is registered under IRDA (International Financial Services Centre) Guidelines as IFSC Insurance Office; or
d. who is permitted as such by SEBI under the SEBI (International Financial Services Centres) Guidelines.
- Lessor State Government Industrial Development Corporations/Undertakings or any other entity

having 50 per cent or more ownership of Central Government/State Government/Union
Territory (directly or through an entity which is wholly owned by the Central Government,
State Government or Union Territory).
- Lessee Industrial unit or the developer in any industrial or financial business area.
The above exemption is available irrespective of whether such upfront amount is payable or paid in one or more
instalments, provided the amount is determined upfront.
 Entry 41A : Transfer of development rights (TDR)/floor space index (FSI) - Transfer of development rights (TDR)
or floor space index (FSI) (including additional FSI) on or after April 1, 2019 for construction of residential
apartments by a promoter in a project, intended for sale to a buyer, wholly or partly [see para 573.1].
 Entry 41B : Upfront amount - Upfront amount (called as premium, salami, cost, price, development charges or
by any other name) payable in respect of service by way of granting of long-term lease of 30 years (or more) on
or after April 1, 2019, for construction of residential apartments by a promoter in a project, intended for sale to
a buyer, wholly or partly [see para 573.1].
 Entry 42 : Telecom service provider - Services provided by the Central Government/State Government/Union
Territory/local authority by way of allowing a business entity to operate as a telecom service provider or use
radio frequency spectrum during the period prior to April 1, 2016, on payment of licence fee or spectrum user
charges, as the case may be.
 Entry 43 : Leasing asset to Indian Railways - Services of leasing of assets (rolling stock assets including wagons,
coaches, locos) by the Indian Railways Finance Corporation to Indian Railways.

 Entry 44 : Incubatee - Services provided by an incubatee up to a total turnover of Rs. 50 lakh in a financial year
subject to the following conditions, namely—

a. the total turnover had not exceeded Rs. 50 lakh during the preceding financial year; and
b. a period of 3 years has not been elapsed from the date of entering into an agreement as an incubatee.
 Entry 45 : Arbitral tribunal/legal service - The following services are exempt –
Nature of service Supplier of service Recipient of service

Arbitration service Arbitral tribunal - Any person other than a person carrying on business/profession.
- Person carrying on business/profession with an aggregate turnover
not exceeding such amount in the preceding financial year as makes it
eligible for exemption from GST registration.
- Central Government/State Government/Union Territory/local
authority/Governmental authority/Government entity.
Legal service A firm of advocates/ - An advocate or partnership firm of advocates providing legal services.
an individual advo- - Any person other than a person carrying on business/profession.
cate (other than a
senior advocate) - Person carrying on business/profession with an aggregate turnover
Legal service Senior advocate - Any person other than a person carrying on business/profession.
- Person carrying on business/profession with an aggregate turnover
 Entry 46 : Health care of animals/birds - Services by a veterinary clinic in relation to health care of animals or birds.
 Entry 47 : Registration/testing service provided by Government - Services provided by Central Government/State
Government/Union Territory/local authority by way of –
- registration required under any law for the time being in force;
- testing, calibration, safety check or certification relating to protection or safety of workers, consumers or
public at large, including fire license, required under any law for the time being in force.
 Entry 47A :Food Safety and Standards Authority-Services by way of licensing, registration and analysis or testing
of food samples supplied by the Food Safety and Standards Authority of India (FSSAI) to food business
operators.
 Entry 48 : Technical services - Taxable services provided (or to be provided) by –
- a Technology Business Incubator or a Science and Technology Entrepreneurship Park recognised by the
National Science and Technology Entrepreneurship Development Board of the Department of Science and
Technology, Government of India.
- Bio-incubators recognised by the Biotechnology Industry Research Assistance Council, under the Depart-
ment of Biotechnology, Government of India.
 Entry 49 : Collecting news - Services by way of collecting/providing news by an independent journalist, PTI or
UNI.
 Entry 50 : Public library - Services of public libraries by way of lending of books, publications or any other
knowledge-enhancing content or material.
 Entry 51 : Service by GST network - Services provided by the Goods and Services Tax Network to the Central
Government or State Governments or Union territories for implementation of GST.
 Entry 52 : Exhibition outside India - Services by an organiser to any person in respect of a business exhibition held
outside India.
 Entry 53 : Sporting events - Services by way of sponsorship of sporting events organised –
- By a national sports federation/its affiliated federations, where the participating teams or individuals
represent any district, State, zone or Country.
- By Association of Indian Universities/Inter-University Sports Board/School Games Federation of India/All
India Sports Council for the Deaf/Paralympic Committee of India/Special Olympics Bharat.
- By the Central Civil Services Cultural and Sports Board.
- As part of national games, by the Indian Olympic Association.
- Under the Panchayat Yuva Kreeda Aur Khel Abhiyaan Scheme.
 Entry 53A : Fumigation service - Services by way of fumigation in a warehouse of agricultural produce.
 Entry 54 : Services relating to agricultural activities - Services relating to cultivation of plants and rearing of all life
forms of animals (except the rearing of horses) for food, fibre, fuel, raw material or other similar products or
agricultural produce by way of—
a. agricultural operations directly related to production of any agricultural produce including cultivation,
harvesting, threshing, plant protection or testing;
b. supply of farm labour;
c. processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying,
cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like
operations which do not alter the essential characteristics of agricultural produce but make it only marketable
for the primary market;
d. renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;
e. loading, unloading, packing, storage or warehousing of agricultural produce;
f. agricultural extension services;
g. services by any Agricultural Produce Marketing Committee or Board or services provided by a commission
agent for sale or purchase of agricultural produce;
h. services by way of fumigation in a warehouse of agricultural produce.
- Agricultural produce - “Agricultural produce” means any produce out of cultivation of plants and rearing of
all life forms of animals (except the rearing of horses) for food, fibre, fuel, raw material or other similar
products, on which either no further processing is done or such processing is done as is usually done by a
cultivator or producer which does not alter its essential characteristics but makes it marketable for primary
market.
- Processed products are not “agricultural produce” - Processed products such as tea (i.e., black tea, white tea, etc.),
processed coffee beans/powder, pulses (de-husked or split), jaggery, processed spices, processed dry fruits,
processed cashew nuts, etc., fall outside the definition of “agricultural produce” and, therefore, the exemption
from GST is not available to their loading, packing, warehousing, etc.
- Agricultural extension - “Agricultural extension” means application of scientific research and knowledge to
agricultural practices through former education or training;
- Breeding of fish - Activities like breeding of fish (pisciculture), rearing of silk worms (sericulture), cultivation
of ornamental flowers (floriculture) and horticulture, forestry are included in the definition of agriculture and
not subject to GST.
- Potato chips or tomato ketchup - Potato chips or tomato ketchup do not qualify as agricultural produce. In terms
of the definition of agricultural produce, only such processing should be carried out as is usually done by
cultivator producers which does not alter its essential characteristics but makes it marketable for primary
market. Potato chips or tomato ketchup are manufactured through processes which alter the essential
characteristic of farm produce (potatoes and tomatoes in this case). Supply of potato chips or tomato ketchup
is subject to GST.
- “Such like operations” - Exemption Notification includes “such like operations which do not alter the essential
characteristic of agricultural produce”. Therefore, activities like the processes carried out in agricultural farm
would also be covered in the exemption if the same are performed outside the agricultural farm provided such
processes do not alter the essential characteristics of agricultural produce but only make it marketable in the
primary market. Therefore, cleaning of wheat would be covered in the exemption, even if the same is done
outside the farm. Shelling of paddy would not be covered in the exemption relating to agriculture as this
process is never done on a farm but in a rice sheller normally located away from the farm. However, if shelling
is done by way of a job work, then the same may be covered under Entry 55 of Exemption Notification relating
to “carrying out of intermediate production process”.
- Grinding - The processes of grinding, sterilizing, extraction packaging in retail packs of agricultural products,
which make the agricultural products marketable in retail market, is not covered in the Exemption
Notification.
- Leasing of vacant land - Leasing of vacant land with a green house or a storage shed meant for agricultural
produce is covered in the Exemption Notification. If vacant land has a structure like storage shed or a green
house built on it which is incidental to its use for agriculture then its lease would be covered under the
Exemption Notification and not subject to GST.
 Entry 55 : Job work - Carrying out an intermediate production process as job work in relation to cultivation of
plants and rearing of all life forms of animals (except the rearing of horses) for food, fibre, fuel, raw material or
other similar products or agricultural produce [milling of paddy into rice is not eligible for exemption – Circular
No.19/19/2017-GST, dated November 20, 2017].
 Entry 55A : Artificial insemination of livestock - Services by way of artificial insemination of livestock (other than
horses).
 Entry 56 : Slaughtering of animals - Services by way of slaughtering of animals.
 Entry 57 : Pre-conditioning of fruits/vegetables - Services by way of pre-conditioning, precooling, ripening,

waxing, retail packing, labelling of fruits and vegetables which do not change or alter the essential characteristics
of the said fruits or vegetables.
 Entry 58 : Service provided by National Centre for Cold Chain Development - Services provided by the National
Centre for Cold Chain Development (under the Ministry of Agriculture) by way of cold chain knowledge
dissemination.
 Entry 59 : Foreign diplomatic mission - Services by a foreign diplomatic mission located in India.
 Entry 60 : Religious pilgrimage - Services by a specified organisation in respect of a religious pilgrimage facilitated
by the Ministry of External Affairs, the Government of India, under bilateral arrangement.
 Entry 61 : Passport, visa, driving licence - Services provided by the Central Government/State Government/
Union Territory/local authority by way of issuance of passport, visa, driving licence, birth certificate or death
certificate.
 Entry 62 : Fines, damages to Government - Services provided by the Central Government/State Government/
Union Territory/local authority by way of tolerating non-performance of a contract for which consideration in
the form of fines or liquidated damages is payable to the Central Government/State Government/Union
Territory/local authority under such contract.
 Entry 63 : Licence to use natural resources given to a farmer - Services provided by the Central Government/State
Government/Union Territory/local authority by way of assignment of right to use natural resources.
Exemption is, however, available only if such right is given to an individual farmer for cultivation of plants and
rearing of all life forms of animals (except the rearing of horses) for food, fibre, fuel, raw material or other similar
products.
 Entry 64 : Natural resources licence given prior to April 1, 2016 - Services provided by the Central Government/
State Government/Union Territory/local authority by way of assignment of right to use any natural resource
(where such right to use was assigned by the Central Government/State Government/Union Territory/local
authority before April 1, 2016):
The exemption shall apply only to tax payable on one time charge payable, in full upfront or in instalments, for
assignment of right to use such natural resource.
 Entry 65 : Merchant overtime charges - Services provided by Central Government/State Government/Union
Territory by way of deputing officers after office hours or on holidays for inspection or container stuffing or such
other duties in relation to import export cargo on payment of Merchant Overtime charges (MOT).
 Entry 65A : RTI - Services by way of providing information under the Right to Information Act, 2005.
 Entry 65B : Services to excess royalty collection contractor - Services supplied by a State Government to excess
royalty collection contractor (ERCC) by way of assigning the right to collect royalty on behalf of the State
Government on the mineral dispatched by a mining lease holder [i.e., a person who has been granted mining
lease, quarry lease or license or other mineral concession by the State Government under section 15(1) of the
Mines and Minerals (Development and Regulation) Act, 1957].
At the end of the contract period, ERCC shall submit an account to the State Government and certify that the
amount of GST deposited by mining lease holders on royalty is more than GST exempted on the service
provided by State Government to the ERCC (of assignment of right to collect royalty). Where, however, such
amount of GST paid by mining lease holders is less than the amount of GST exempted, the exemption shall be
limited to GST paid by the mining lease holders (and in such a case, the ERCC shall pay the difference between
GST exempted on the service provided by State Government to the ERCC of assignment of right to collect
royalty and GST paid by the mining lease holders on royalty).
 Entry 66 : Education - “Educational institution” for the purpose of this entry means an institute which provides
services by way of Activity one, Activity two, or Activity three given below –
Activity one Pre-school education and education up to higher secondary school or equivalent
Activity two Education as a part of a curriculum for obtaining a qualification recognised by any law for the time being
in force
Activity three Education as a part of an approved vocational education course
Under this entry, the supplier of following services is exempt from GST –
Different Supplier of service Recipient of service Nature of service
cases
Case 1 Educational institution Students, faculty and staff - Any education services (including educational
engaged in Activity one, of the educational institu- support services)
Activity two, or Activity tion
three
Case 2 Educational institution Any person - By way of conduct of entrance examination
engaged in Activity one, against consideration in the form of entrance
Activity two, or Activity fee.
three
Case 3 Any person Educational institution - Transportation of students, faculty and staff.
engaged in Activity one - Catering, including any midday meals scheme
sponsored by the Central Government, State
Government or Union Territory.
- Security or cleaning or housekeeping services
performed in such educational institution.
Case 4 Any person Educational institution - Services relating to admission to, or conduct
engaged in Activity one, of examination by, such institution†.
Activity two, or Activity
three
Case 5 Any person Educational institution - Service by way of supply of online educa-
engaged in Activity two tional journals or periodicals.
Other points - The following points should be noted –

- Activity one covers even services provided by international schools giving international certifications [like
International Baccalaureate (IB)].
†The Central and State Educational Boards shall be treated as educational institution for the limited purpose of providing services by way of
conduct of examination to the students.
- In Case 1, any education service provided to students is covered (e.g., pre-primary education, primary
education, secondary education, higher education, specialised education, cultural education services, sports
and recreation education services, commercial training, etc.). Boarding schools provide service of education
coupled with other services like providing dwelling units for residence and food. The entire bundle would
be treated as exempt service under Case 1. Transportation of students by educational institutions is also
covered by Case 1.
- Supply of all services by an educational institution to its students, faculty and staff is covered by Case 1 and
exempt under Entry 66. Such services include supply of food and beverages by an educational institution to
its students, faculty and staff. It has been clarified by CBIC that supply of food and beverages by an
educational institution to its students, faculty and staff, where such supply is made by the educational
institution itself, is exempt under Entry 66. However, such supply of food and beverages by any person other
than the educational institutions based on a contractual arrangement with such institution, is leviable to GST
@ 5 per cent.
- Private tuitions are not covered in the Exemption Notification. However, private tutors can avail the benefit
of threshold exemption of Rs. 20 lakh (Rs. 10 lakh for specified State).
- Services provided by way of education as a part of a prescribed curriculum for obtaining a qualification
recognized by a law of a foreign country, is not covered Activity two. To be covered in the Exemption
Notification, a course should be recognized by an Indian law.
- Sometimes a course in a college leads to dual qualification but only one of which is recognized by law.
Generally, provision of dual qualifications is in nature of two separate services as the curriculum and fees for
each of such qualifications are prescribed separately. Service in respect of each qualification would, therefore,
be assessed separately. If an artificial bundle of service is created by clubbing two courses together, only one
of which leads to a qualification recognized by law, then (by application of the rule of determination of
taxability of a service which is not bundled in ordinary course of business), it is liable to be treated as a course
which attracts the highest liability of GST.
- Placement services provided to educational institutions for securing job placements for students are not
covered in Exemption Notification.
- Fees charged by IITs, IIMs from prospective employers for campus recruitment, are not covered in the
Exemption Notification and chargeable to GST.
- If the job of conducting admission test is outsourced by an educational institution (which is engaged in Activity
one, Activity two, or Activity three), GST is not applicable.
- If catering service to students is outsourced by a school (up to higher secondary level), GST is not applicable.
 Entry 67 : Service provided by Indian Institutes of Management (IIM) (applicable up to December 31, 2018) - Services
provided by the Indian Institutes of Management (as per the guidelines of the Central Government) to their
students, by way of the following educational programmes, except Executive Development Programme, —
a. two-year full time Post Graduate Programmes in Management for the Post Graduate Diploma in Manage-
ment, to which admissions are made on the basis of Common Admission Test (CAT), conducted by Indian
Institute of Management;
b. fellow programme in Management;
c. five-year integrated programme in Management.
Other points - The following points should be noted –
- This entry has been omitted with effect from January 1, 2019. Consequently, IIMs are not exempt from GST
under Entry 67 with effect from January 1, 2019. However, after the enactment of the Indian Institutes of
Management Act, 2018 (with effect from January 31, 2018), all the IIMs are “institutions of national
importance”. They are empowered to grant degrees. All IIMs are “educational institutions” and are,
therefore, covered by Entry 66 with effect from January 31, 2018.
- During January 31, 2018 and December 31, 2018, exemption is available to IIMs under Entry 66 as well as Entry
67. Since exemption under two different Entries is available during this period, IIMs can claim exemption
under one of them which is more beneficial.
- With effect from January 1, 2019, IIMs can claim exemption under Entry 66. However, short duration/short-
term programmes of IIMs (for which they award participation certificate to the executives/professionals) are
not considered as qualification recognised by law. Such short duration programmes (generally less than one
year), are not exempt from GST under Entry 66 (applicable GST rate in such cases is 18 per cent).
 Entry 68 : Service provided to recognised sports body - Services provided to a recognised sports body by –
a. an individual as a player, referee, umpire, coach or team manager for participation in a sporting event
organised by a recognized sports body;
b. another recognised sports body.
 Entry 69 : Approved programme/vocational course - Any services provided by,—

Service provider Programme/course
National Skill Develop- Set up by the Government of India –
ment Corporation (NSDC)
Sector Skill Council (SSC) Approved by NSDC –
Assessment agency Approved by SSC or NSDC –
Training partner Approved by SSC or NSDC - National Skill Development Programme imple-
mented by NSDC.
- A vocational skill development course under the
National Skill Certification and Monetary Re-
ward Scheme.
- Any other Scheme implemented by NSDC.
 Entry 70 : Assessment under SDI Scheme - Services of assessing bodies empanelled centrally by Directorate
General of Training, Ministry of Skill Development and Entrepreneurship by way of assessments under Skill
Development Initiative (SDI) Scheme.
 Entry 71 : Deen Dayal Upadhyaya Grameen Kaushalya Yojana - Services provided by training providers (Project
implementation agencies) under Deen Dayal Upadhyaya Grameen Kaushalya Yojana implemented by the
Ministry of Rural Development by way of offering skill or vocational training courses certified by National
Council For Vocational Training.
 Entry 72 : Training programme financed by Government - Services provided to the Central Government/State
Government/Union Territory administration under any training programme for which total expenditure is
borne by the Central Government/State Government/Union Territory administration.
 Entry 73 : Service cord blood banks - Services provided by the cord blood banks by way of preservation of stem
cells or any other service in relation to such preservation.

 Entry 74 : Health care services - Health care services by a clinical establishment, an authorised medical
practitioner or paramedics or services provided by way of transportation of a patient in an ambulance.

“Clinical establishment” means a hospital, nursing home, clinic, sanatorium, etc., that offers services or facilities
requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any
recognised system of medicines in India. It also includes a place established as an independent entity or a part
of an establishment to carry out diagnostic or investigative services of diseases.
“Health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity,
abnormality or pregnancy in any recognised system of medicines in India. It includes services by way of
transportation of the patient to and from a clinical establishment. However, it does not include hair transplant
or cosmetic or plastic surgery (except when undertaken to restore or to reconstruct anatomy or functions of body
affected due to congenital defects, developmental abnormalities, injury or trauma). Consequently, doctor’s fees
for medical advice/treatment to a patient is not subject to GST. If such medical advice/treatment pertains to hair
transplant or cosmetic or plastic surgery, GST is applicable.
 Entry 74A : Services provided by rehabilitation professionals - Services provided by rehabilitation professionals
recognised under the Rehabilitation Council of India Act, 1992 by way of rehabilitation, therapy or counselling
and such other activity as covered by the said Act at medical establishments, educational institutions,
rehabilitation centers established by Central Government/State Government/Union Territory or an entity
registered under section 12AA of the Income-tax Act (applicable from January 1, 2019).
 Entry 75 : Disposal of bio-medical waste - Services provided by operators of the common bio-medical waste
treatment facility to a clinical establishment by way of treatment or disposal of bio-medical waste or the processes
incidental thereto.
 Entry 76 : Public convenience - Services by way of public conveniences such as provision of facilities of
bathrooms, washrooms, lavatories, urinal or toilets.

 Entry 77 : Services provided by certain registered societies to its members - Service by an unincorporated body or a
non-profit entity registered under any law to its own members by way of reimbursement of charges or share of
contribution—
a. as a trade union;
b. for the provision of carrying out any activity which is exempt from the levy of GST; or
655 Services exempt from IGST Para 437.1
c. up to an amount of Rs. 7,500 per month† per member for sourcing of goods or services from a third person
for common use of its members in a housing society or a residential complex [i.e., amount collected by a
Resident Welfare Association (RWA) from its members].
- If amount collected by RWA is more than Rs. 7,500 per month† per member, then the entire amount (not the
amount in excess of Rs. 7,500†) is chargeable to GST.
- RWA can claim the benefit of small service provider if taxable value of services provided by it in the
immediately preceding financial year does not exceed Rs. 20 lakh (Rs. 10 lakh in a specified States).
 Entry 77A : Services provided by registered unincorporated body/non-profit entity - Services provided by an
unincorporated body or a non-profit entity registered under any law for the time being in force, engaged in,—
a. activities relating to the welfare of industrial or agricultural labour or farmers; or
b. promotion of trade, commerce, industry, agriculture, art, science, literature, culture, sports, education, social
welfare, charitable activities and protection of environment.
The aforesaid exemption is, however, available only if the aforesaid service is provided to its own members
against consideration in the form of membership fee up to Rs. 1,000 per member per year.
 Entry 78 : Artist - Services by an artist by way of a performance in folk or classical art forms of (i) music, or (ii)
dance, or (iii) theatre, if the consideration charged for such performance is not more than Rs. 1.50 lakh (exemption
is not available in respect of service provided by such artist as a brand ambassador).
 Entry 79 : Admission to a museum/park - Services by way of admission to a museum, national park, wildlife
sanctuary, tiger reserve, or zoo.
 Entry 79A : Admission to protected monuments - Services by way of admission to a protected monument so
declared under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 or any of the State Acts,
for the time being in force (applicable with effect from November 15, 2017).
 Entry 80 : Recreational activities - Services by way of training or coaching in recreational activities relating to –
a. arts or culture, or
b. sports by charitable entities registered under section 12AA of the Income-tax Act.
 Entry 81 : Services by way of right to admission to circus, dance, award function, sporting event - Services by way of
right to admission to –
a. circus, dance, or theatrical performance including drama or ballet;
b. award function, concert, pageant, musical performance or any unrecognised sporting event;
c. recognised sporting event;
d. planetarium.
Exemption is, however, available only where the consideration for right to admission to the events or places as
referred to in item (a), (b), (c) or (d) above is not more than Rs. 500 per person.
 Entry 82 : Right to admission to FIFA U-17 event - Services by way of right to admission to the events organised
under FIFA U-17 World Cup 2017.
 Entry 82A : Right to admission to FIFA U-17 Women’s World Cup 2020 event - Services by way of right to admission
to the events organised under FIFA U-17 Women’s World Cup 2020 (applicable from October 1, 2019).
437.1 Services exempt from IGST - Apart from services given above, supply of the following services is exempt
from IGST –
 Service from non-taxable territory - Services received from a provider of service located in a non-taxable territory
by the following is exempt from IGST –

Recipient of service from a person located in a non-taxable All services are qualified for exemption, except the cases given
territory (when GST is not applicable) below (GST is applicable in the cases given below)
 Central Government/State Government/Union Ter- - Online information and database access or retrieval
ritory/local authority/Governmental authority or

services
an individual in relation to any purpose other than
commerce, industry or any other business or profes- - Services by way of transportation of goods by a
sion vessel from a place outside India up to the customs
station of clearance in India
 Charitable institution registered under section
12AA of the Income-tax Act, for the purpose of
providing charitable activities
† Prior to January 25, 2018, it is Rs. 5,000 per month.

Problem 438-P1 Exemptions from GST 656
Recipient of service from a person located in a non-taxable All services are qualified for exemption, except the cases given
territory (when GST is not applicable) below (GST is applicable in the cases given below)
 Educational institution (which provides education Any service (other than by way of supply of online
as a part of a curriculum for obtaining a qualification educational journals or periodicals)
recognised by any law for the time being in force)
which receives by way of supply of online educa-
tional journals or periodicals
 Person located in a non-taxable territory Services by way of transportation of goods by a vessel
from a place outside India up to the customs station of
clearance in India
 Service provided by intermediary when supplier as well as recipient of goods are located outside India - Service provided
by an intermediary when location of both supplier and recipient of goods is outside the taxable territory, is
exempt from IGST. However, the following documents shall be maintained for a minimum duration of 5
years -
- Copy of bill of lading.
- Copy of executed contract between supplier/seller and receiver/buyer of goods.
- Copy of commission debit note raised by an intermediary service provider in taxable territory from service
recipient located in non- taxable territory.
- Copy of certificate of origin issued by service recipient located in non- taxable territory.
- Declaration letter from an intermediary service provider in taxable territory on company letter head
confirming that commission debit note raised relates to contract when both supplier and receiver of goods are
outside the taxable territory.
 Services received by RBI - Services received by RBI, from outside India in relation to management of foreign
exchange reserves, are exempt from IGST.
 Tour operator - Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly
outside India, are exempt from IGST.
 Services imported by SEZ units - All services imported by SEZ unit/SEZ developer for authorised operations are
exempt from IGST.
 Grant of license to explore/mine petroleum crude/natural gas - Intra-State supply of services by way of grant of
license/lease to explore/mine petroleum crude or natural gas is exempt, if consideration is payable to the
Central Government in the form of Central Government’s share of profit petroleum as defined in the contract
entered by the Central Government in this behalf.
 Services to own establishment outside India - Services supplied by an establishment of a person in India to any
establishment of that person outside India (exemption is, however, available only if the place of supply is
outside India).
 Import of services by UNO - Import of services by United Nations or a specified international organisation for
official use of the United Nations or the specified international organisation.
 Import of services by foreign diplomatic mission - Import of services by foreign diplomatic mission or consular
posted in India, or diplomatic agents or career consular officers posted therein.
 Problems on exemption notifications
438-P1 Discuss whether the following services are chargeable to GST –
1. Service provided by courier agency.
2. Tirumala Tirupati Devasthanams (TTD) owns residential complexes in Tirumala. These are given on rent to pilgrims, who visit
Tirumala for Darshan. Daily rent of these units is as follows – Category A : Rs. 800 per day, Category B : Rs. 1,500 per day, Category
C : Rs. 3,500 per day.
Solution :
1. Courier service - Service provided by courier agency is chargeable to GST.
2. Renting of religious place - Renting of rooms to pilgrims is exempt from GST under Exemption Notification (Entry 13).
However, exemption is available only if room charge per day is less than Rs. 1,000. Therefore, renting of Category A room
is exempt from GST. In other words, GST is applicable in the case of renting of Category B or Category C units.
438-E1 Determine the amount of GST in the following cases (assume that supply is inter-State supply and applicable GST rate is
18 per cent) –
1. Transport of passenger by air service provided by Indigo Airlines from Sikkim to Mumbai (value of taxable service : Rs. 15,000).
2. X Transporters (a goods transport agency) takes 10 trucks on hire from B Ltd. Hire charges being Rs. 40,000 per truck per day.
These trucks will be utilised by X Transporters for transportation of goods in East India.
657 Problems on exemption notifications Problem 438-P5

1. Transportation of wheat by Krishna Transporters by road from Jallandhar to Ranchi.
2. Life insurance business service under Pradhan Mantri Jan Dhan Yojana.
3. X supplies farm labour to A Ltd. A Ltd. is in the business of cultivation of roses in Kerala.
Solution :
1. Transportation of agricultural produce by road by GTA - It is exempt from GST vide Exemption Notification (Entry 21).
Consequently, freight charged by Krishna Transporters for transportation of wheat from Jallandhar to Ranchi is not subject
to GST.
2. Pradhan Mantri Jan Dhan Yojana - Service of life insurance business provided under Pradhan Mantri Jan Dhan Yojana is
exempt from GST vide Exemption Notification (Entry 36).
3. Supply of farm labour - Supply of farm labour is exempt from GST vide Exemption Notification (Entry 54).
18 per cent) –
1. Supply of Gandhi topi by a trader in Surat to a trader in Delhi (consideration being Rs. 33,500).
2. Pune Municipal Corporation charges Rs. 40,000 as registration fees for opening a shop in a market near railway station.
3. Supply of hearing aids by Y Ltd. of Sultanpur to X & Co. of Kishangarh (value of consideration being Rs. 17,890).

X is an advocate (other than senior advocate) in Calcutta High Court. During December 2019, he provides legal service to A & Co. (a
firm of advocates in Kerala) for a fee of Rs. 1,45,000. Turnover of A & Co. for the preceding financial year is Rs. 28 lakh.
Solution :
If an advocate (other than senior advocate) provides legal service to a firm of advocates, it is exempt from GST vide Exemption
Notification (Entry 45) in the following 3 cases –
- Case 1 - If the recipient is an advocate/a firm of advocates.
- Case 2 - If recipient is a person other than business entity.
- Case 3 - If recipient is a business entity (i.e., a person carrying on business/profession) and turnover in the immediately
preceding financial year does not exceed Rs. 20 lakh (Rs. 10 lakh in the case of special category States).
In this case, exemption is available under Case 1. It may be noted that exemption under Case 1 is not available if service is
provided by a senior advocate.
18 per cent) –
1. Supply of earthen pot and clay lamps, idols made of clay (value of taxable supply : Rs. 28,000).
2. Tamil Nadu Government charges Rs. 6,000 per vehicle for providing pollution check service (pollution check is required in Tamil
Nadu on quarterly basis under State regulations).
3. X Ltd. supplies farm labour to B Ltd. B Ltd. is in the business of cultivation of Tulip in Srinagar and Chandigarh.
X is a senior advocate in Calcutta High Court. During December 2019, he provides legal service to A & Co. (a firm of advocates in Kerala)
for a fee of Rs. 1,45,000. Turnover of A & Co. for the preceding financial year is Rs. 18 lakh.
Solution :
If an advocate (other than senior advocate) provides legal service to a firm of advocates, it is exempt from GST vide Exemption
Notification (Entry 45) in the following 3 cases –
- Case 1 - If the recipient is an advocate/a firm of advocates.
- Case 2 - If recipient is a person other than business entity.
- Case 3 - If recipient is a business entity (i.e., a person carrying on business/profession) and turnover in the immediately
preceding financial year does not exceed Rs. 20 lakh (Rs. 10 lakh in the case of special category States).
If service provider is a senior advocate, then exemption under Case 1 is not available. In the given case, X is a senior advocate.
He cannot claim exemption under Case 1. Case 2 is not applicable (recipient is a business entity). Case 3 covers when recipient
is a business entity. In this case, recipient is A & Co. (a firm of advocates) and it is the business entity. Turnover of the recipient
in the preceding financial year is Rs. 18 lakh. Therefore, legal charges of Rs. 1,45,000 is not subject to GST.
18 per cent) –
1. Supply of electric energy by A Ltd. to B Ltd. (consideration being Rs. 55 lakh for the month of December 2019).
2. Supply of unbranded paneer (consideration being Rs. 13,700).
3. Hyderabad University pays Rs. 40,000 to B Ltd. B Ltd. is a printer and university question papers are printed by it.
1. A charitable trust (registered under section 12AA of the Income-tax Act) provides yoga training service to residents of South Mumbai.
2. Passenger transport service by radio taxi.

3. Delhi edition of Hindustan Times is transported by rail from New Delhi to Kolkata.
Solution :
1. Yoga training - Yoga training Service supplied by a charitable trust is not chargeable to GST. It is covered by Exemption
Notification (Entry 1).
2. Passenger transport service by radio taxi - Transport of passengers by non-airconditioned contract carriage is exempt from
GST vide Exemption Notification (Entry 15). This exemption is not available if service is provided by radio taxi.
3. Transportation of newspaper by rail - Service of transportation of newspapers by rail is exempt from GST vide Exemption
12 per cent) –
1. Supply of puja samagri by X of Mathura to Shri Ganesha Temple, Madurai (chandan tika : Rs. 4,000, kalava : Rs. 2,000).
2. Transportation of military equipment by railway (consideration being Rs. 3,70,900).
3. Supply of fresh apples by X Ltd. to a mall in Noida (consideration being Rs. 40,000).
1. Transport of passengers by auto-rickshaw/e-rickshaw.
2. Indian Railways Finance Corporation gives wagons/coaches on lease to Indian Railways. Lease rent is Rs. 47 lakh per month.
3. X is a senior advocate in the Bombay High Court. He provides legal service to a firm of advocates (legal charges being Rs. 35 lakh).
Solution :
1. Auto-rickshaw/e-rickshaw - Transport of passengers service by auto-rickshaw/e-rickshaw, is exempt from GST vide
Exemption Notification (Entry 17).
2. Wagons given on lease by Indian Railways Finance Corporation to Indian Railways - It is not subject to GST [it is covered by
Exemption Notification (Entry 43)].
3. Legal service - In this case, legal service is provided by a senior advocate to a firm of advocates. It is subject to GST. Exemption
given by Exemption Notification (Entry 45) is not applicable in this case.
18 per cent) –
1. Supply of khadi yarn/khadi fabric by KVIC to a dealer in Maharashtra (invoice value being Rs. 6,45,000).
2. Interest on fixed deposit paid by PNB to B Ltd. (interest before TDS being Rs. 42,000).
3. Renting of agricultural land for Rs. 90,000 per month (total rent of the financial year Rs. 10,80,000).
1. A charitable trust (registered under section 12AA of the Income-tax Act) provides services pertaining to preservation of wildlife.
2. “Jashn-e-Qawwali - Nizami Brothers live in Concert” is organized by XY Club, Faridabad at Kamani Auditorium on January 10, 2020.
Admission fees charged for this purpose is Rs. 10,000 per person.
3. A trade union charges Rs. 100 per month as fees from its members.
Solution :
1. Preservation of wildlife - Preservation of wildlife service supplied by a charitable trust is not chargeable to GST. It is covered
by Exemption Notification (Entry 1).
2. Musical performance - Service by way of right to admission to a musical performance is exempt from GST vide Exemption
Notification (Entry 81). However, the exemption is available if consideration for admission is not more than Rs. 500 per
person. In this case, the entire amount is subject to GST.
3. Fees charged by trade union - Fees charged by trade union from its members is not subject to levy of GST. Exemption is given
by Exemption Notification (Entry 77).
18 per cent) –
1. Supply of unbranded rice (not put in a unit container) for Rs. 27,800 by X of Delhi to A Ltd. of Kolkata.
2. A charitable trust (registered under section 12AA of the Income-tax Act) provides counselling of advancement of religion to
residents of South Madurai (consideration being Rs. 200 per person).
3. Supply of pappad by a co-operative society to a departmental store (consideration being Rs. 1,20,000 before discount of 10 per cent).

1. Express parcel service by department of post to Union Territory of Andaman.
2. XY, a charitable trust, is registered under section 12AA of Income-tax Act. It manages a gurudwara in Bhatinda. Within gurudwara
complex, there is a community hall which is generally given on rent to public for organizing marriage function. Rent charged is Rs. 8,000
per day.
3. Rama Transporters (a goods transport agency) takes 5 trucks on hire from A Ltd. Hire charges being Rs. 5,000 per truck per day. These
trucks will be utilised by Rama Transporters for transportation of goods in south India.
Solution :
1. Express parcel service to Andaman - If such service is provided to a person (other than Central Government/State
Government/Union Territory), it is chargeable to GST by virtue of Exemption Notification (Entry 6). If such service is
provided to the Central Government/State Government/Union Territory, it is exempt from GST under Exemption
2. Rent of community hall by a charitable trust - It is exempt from GST, as rent does not exceed Rs. 10,000 per day. This exemption
is provided by Exemption Notification (Entry 13).
3. GTA takes trucks on hire - It is exempt from tax vide Exemption Notification (Entry 22).
18 per cent) –
1. Supply of 10 charkha by X Ltd. of Gujarat to Y Handloom of Patna (invoice value being Rs. 44,000).
2. Audit fees charged by Y & Co., a firm of chartered accountants from B, a sole proprietor whose turnover of the current year is Rs.
15,00,000 (audit fees being Rs. 4,100).
3. Renting of UPS by A Ltd. to B Ltd. (hire charges being Rs. 8,000).

1. A charitable trust (which is not yet registered under section 12AA of the Income-tax Act) provides counselling services to the persons
affected with HIV.
2. X & Co. is a firm of advocates (partners are X and Y). The firm provides legal service to A Ltd., Mumbai, a software developer entity
(legal charges being Rs. 80,000). Turnover of A Ltd. in the preceding financial year is Rs. 17.5 lakh.
3. X is a homeopathy doctor. For general consultation, he charges Rs. 3,000 per sitting from his patient.
Solution :
1. Charitable trust not registered under Income-tax Act - Providing counselling services to the persons affected with HIV, is not
chargeable to GST. However, exemption is available only when service provider is an entity which is registered under
section 12AA of the Income-tax Act. In this case, the service provider is not registered under section 12AA. Consequently,
the exemption given by Exemption Notification (Entry 1) is not applicable.
2. Legal service to a business entity - Legal service by an advocate/a firm of advocates to a business entity is chargeable to tax
only if the turnover of the recipient (in the immediately preceding financial year) is more than Rs. 20 lakh (Rs. 10 lakh in the
case of special category States). In this case, turnover of the recipient business entity is Rs. 17.5 lakh. Consequently, GST
exemption is available vide Exemption Notification (Entry 45).
3. Consultation fee charges by a doctor - It is exempt from GST vide Exemption Notification (Entry 74).
18 per cent) –
1. X is a singer by profession. On March 31, 2020, he gives a musical performance in a function organized by Chennai Art Club at
Chennai. For this purpose, professional fees of Rs. 90,000 is charged.
2. Supply of prasadam by Tirupati Temple (consideration being Rs. 25 per laddu).
3. Passenger transport service by non-airconditioned contract carriage (consideration being Rs. 1,800).

1. Pune Municipal Corporation provides security services to a business entity (turnover of the business entity in the preceding financial
year is Rs. 18 lakh). Amount charged for the security services is Rs. 4.5 lakh per annum (before GST).
2. Business facilitator service provided by X to Punjab National Bank with respect to accounts in villages near Bhatinda and Jallandhar
3. IIM Ahmedabad charges Rs. 3,50,000 per company for participating in campus recruitment to select students for providing job.
Solution :
1. Security services by Pune Municipal Corporation - Recipient of service is business entity. Turnover of the business entity
before the preceding financial year does not exceed Rs. 20 lakh. Consequently, it is exempt from GST vide Exemption
Notification (Entry 7.)
2. Business facilitator service to a bank in rural area - This service is exempt vide Exemption Notification (Entry 39).
3. Fees charged by IIM from prospective employers - GST is applicable. Exemption provided by Exemption Notification (Entry
66 or Entry 67) is not applicable.
438-E10 Determine the amount of GST in the following cases (assume that supply is inter-State supply and applicable GST rate
is 18 per cent) –
1. Supply of fresh potatoes by X Ltd. of Sirsa to A Ltd. of Nagpur (invoice value being Rs. 6,50,000).
2. Supply of unbranded coconut water by a farm house in Kerala to B of Mumbai (invoice value being Rs. 13,000).
3. X is an ayurvedic doctor. He charges Rs. 700 per sitting from his Indian patients. If a patient comes from abroad after appointment,
he charges Rs. 2,000 per patient.

1. X is a singer by profession. On December 28, 2019, he gives a musical performance in a function organized by DB Art Club at Udaipur.
For this purpose, professional fees of Rs. 2,70,000 is charged.
2. Pune Municipal Corporation provides security services to a business entity (turnover of the business entity in the preceding financial
year is Rs. 28 lakh). Amount charged for the security services is Rs. 4.5 lakh per annum (before GST).
3. X provides warehousing services for storage of potatoes.
Solution :
1. Fees charged by an artist - Services by an artist by way of a performance is not subject to GST vide Exemption Notification
(Entry 78). However, exemption is available only if the consideration charged for such performance is not more than Rs. 1.5
lakh. In this case, amount charged is Rs. 2,70,000. Therefore, GST is applicable on the entire amount.
2. Security services by Pune Municipal Corporation - Recipient of service is a business entity. Turnover of the business entity
during the preceding financial year exceeds Rs. 20 lakh. Consequently, it is not exempt from GST under Exemption
Notification (Entry 7.)
3. Warehousing - Service pertaining to warehousing of agricultural produce, is not subject to GST. Exemption is provided by
438-E11 Determine the amount of GST in the following cases (assume that supply is intra-State supply and applicable GST rate
is 18 per cent) –
1. Supply of sitar (being indigenous handmade musical instrument) by X Ltd. to a well-known music director (invoice price being
Rs. 85,000).
2. Service provided by an accountant (who is not a chartered accountant) to a manufacturing company (amount charged being of
Rs. 1,80,000 for the quarter ending March 31, 2020, entire amount is received on March 1, 2020. GST, if any, would be paid by the
company additionally.
3. A charitable trust (not registered under section 12AA of the Income-tax Act) provides services pertaining to preservation of wildlife
to a zoo (consideration being Rs. 20,000).

1. Kerala Industrial Development Corporation gives an industrial plot of land to X Ltd. on lease for a period of 85 years (one time lease
rent/salami being Rs. 30 lakh). This plot will be utilised by X Ltd. for development of infrastructure for financial business.
2. Service provided to RBI.
3. Service by way of collection of contribution under Atal Pension Yojana.
Solution :
1. Long-term lease of industrial plot - It is not subject to GST [it is covered by Exemption Notification (Entry 41)].
2. Service provided to RBI - Service provided by RBI is exempt from GST vide Exemption Notification (Entry 26). Service
provided by a person from outside India to RBI in relation to management of foreign exchange reserves, is exempt from IGST.
Other services provided to RBI are chargeable to GST.
3. Atal Pension Yojana - It is exempt from GST vide Exemption Notification (Entry 37).
is 18 per cent) –
1. Supply of glass bangles (not made from precious metals) by Y Ltd. of Firozabad to City Square, a mall in Kolkata (invoice value
being Rs. 60,000).
2. Consultancy service provided by a firm of chartered accountants in Delhi to another firm of chartered accountants in Chandigarh
(consideration being Rs. 1 lakh).
3. Consultancy service provided by a firm of advocates in Delhi to another firm of advocates in Chandigarh (consideration being Rs.
1 lakh).
1. X owns a plot of land of 600 square meter in Bengaluru. For construction of single resident unit, labour contract for construction is
given to A Ltd. A Ltd. will charge Rs. 45 lakh for providing construction services. The entire construction material (including cement,
wood, steel, stone, bricks, pipes, electricity fittings, kitchen fittings, etc.) will be supplied by X.
2. In the above case, A Ltd. will provide not only labour but also construction material. For this purpose, A Ltd. will charge total
consideration of Rs. 2.5 crore (i.e., Rs. 45 lakh for labour and Rs. 2.05 crore for material).
3. X gives tractors on rent to A Ltd. (monthly rent being Rs. 23,000 per tractor). During December 2019, A Ltd. takes 20 tractors on
hire for the purpose of its farm land in Shimla.
Solution :
1. Single residential unit, labour contract - Services by way of pure labour contracts of construction, erection, commissioning,
or installation of original works pertaining to a single residential unit (otherwise than as a part of a residential complex) is
exempt from GST vide Exemption Notification (Entry 11).
2. Single residential unit, contract for labour and material - The above exemption is not available if the contractor supplies labour
as well as material. On the total consideration of Rs. 2.5 crore, GST will be payable @ 18%.
3. Renting of tractors - Service pertaining to renting of tractors for agriculture purpose is exempt from GST vide Exemption
is 18 per cent) –
1. Supply of chalk sticks to a college affiliated to Kamraj University (invoice value being Rs. 38,000).
2. Supply of plastic bangles (consideration being Rs. 8,000).

3. Supply of hand tools (agricultural implements) (consideration being Rs. 17,500).
1. General insurance policy provided under Pradhan Mantri Suraksha Bima Yojana.
2. X is an advocate. On January 17, 2020, he provides legal service to B, a senior Government officer presently posted in Surat. Legal
service pertains to a personal property dispute of B and his cousins.
3. A charitable trust (registered under section 12AA of the Income-tax Act) provides services pertaining to education programme for
the benefit of children of LIC employees.
Solution :
1. Pradhan Mantri Suraksha Bima Yojana - Service of general insurance business provided under Pradhan Mantri Suraksha
Bima Yojana is exempt from GST vide Exemption Notification (Entry 35).
2. Legal service - Legal service is provided by an advocate to a person other than business entity. It is exempt from GST vide
3. Education programme for children of LIC employees - It is not covered by Exemption Notification (supply of service is not a
“charitable activity” in this case). GST exemption is available if a charitable trust provides service pertaining to advancement
of education programmes for the benefit of (a) abandoned, orphaned or homeless children, (b) physically or mentally abused
and traumatized persons, (c) prisoners, or (d) persons over the age of 65 years residing in a rural area, is covered by charitable
activities. Since the service does not pertain to “charitable activity”, GST exemption is not available.
is 18 per cent) –
1. Supply of salt by a trader in Ghaziabad to another trader in Bhatinda (consideration being Rs. 18,000).
2. Indore Municipal Corporation provides security services to a business entity in Kolkata (turnover of the business entity in the
preceding financial year is Rs. 35 lakh). Amount charged for the security services is Rs. 60,000 per annum (before GST).
3. A charitable trust (not registered under section 12AA of the Income-tax Act) provides services pertaining to preservation of forests
(consideration being Rs. 1,30,000).
1. X Ltd. owns a plot of land. For construction of a single residential unit, a labour contract is given to Y Ltd. for Rs. 7,50,000. Material
will be supplied by X Ltd. Y Ltd. will construct residential house within 6 months which ends on March 31, 2020. 20 per cent of agreed
consideration is paid at the time of signing the agreement. The balance of 80 per cent will be paid after completion of construction.
2. Transport of passenger service provided by Indian Railways in first class.
3. Interest charged on late payment of credit card bill by Citibank.
Solution :
1. Construction of a single residential unit - GST is not applicable in the case of pure labour contract for construction of a single
residential unit. This exemption is provided vide Exemption Notification (Entry 11).
2. Passenger service provided by Indian Railways - Transport of passenger service provided by railways is not subject to GST.
However, GST is applicable if service is provided in first class or in AC coach. GST is applicable in this case.
3. Interest on credit card - It is subject to GST. Exemption is not available under Exemption Notification (Entry 27).
is 18 per cent) –
1. Supply of municipal waste, sewage sludge, clinical waste (consideration being Rs. 4,96,000).
2. Supply of coffee beans (not roasted) by A Ltd. to Hindustan Livers (consideration being Rs. 40,00,000).
3. Supply of unbranded bread by a departmental store to a consumer (consideration being Rs. 50).

1. A Ltd. owns a plot of land. For construction of a single residential unit, a works contract is given to B Ltd. for Rs. 4.5 crore. Labour
and material will be supplied by B Ltd. Construction will be completed within 2 years. 20 per cent of agreed consideration is paid at the
time of signing the agreement. The balance of 80 per cent will be paid in instalments depending upon completion of work.
2. Transportation of military equipment by railway.
3. Interest on fixed deposit.
Solution :
1. Construction of a single residential unit - GST is not applicable in the case of pure labour contract for construction of a single
residential unit. This exemption is provided vide Exemption Notification (Entry 11). If, however, the contractor supplies
material as well as labour, GST exemption is not available.
2. Transportation of military equipment by railway - If military equipment are transported by rail, it is exempt from GST vide
3. Interest on fixed deposit - Extending deposit/loan (where consideration is represented by way of interest) is not subject to
GST. This exemption is provided by Exemption Notification (Entry 27).
is 18 per cent) –
1. Supply of puffed rice by a wholesaler to a retailer (consideration being Rs. 38,000).
2. Indian Railways Finance Corporation gives 10 wagons on lease to Indian Railways (lease is given for 3 years and lease rent is Rs.
80,000 per quarter per unit).
3. Supply of fresh onion by a wholesaler to a retailer (consideration being Rs. 10 per kg., invoice value Rs. 2,70,000).

1. Marketing service provided by Punjab Government to a business entity (turnover the business entity is more than Rs. 10 crore since
2007).
2. Development of course contents for Delhi University against a charge (service provided during March 2020).
3. Service provided as agents for inland waterways.
Solution :
1. Marketing service - Marketing service is provided by the Punjab Government to a business entity (whose turnover in the
preceding financial year is more than Rs. 20 lakh). Consequently, exemption is not available. It is chargeable to GST.
2. Development of course contents - It is chargeable to GST.
3. Services provided as agents for inland waterways - These services are not covered in the exemption notification. These are in
the nature of services used for providing services given in the exemption notification. GST is applicable.
is 18 per cent). These services are provided by Government of Tamil Nadu –
1. Mining rights given to Bihar Government : Rs. 90,00,000.
2. Security services provided to Airtel : Rs. 40,00,000.

1. Renting of school building to a management school which provides management education recognized by UGC.
2. A hockey player gets fees from Indian Hockey Federation for participating in an international event.
3. A brand ambassador gets Rs. 4 crore from Reliance for advertising a new fabric prepared by Vimal Suitings.
4. Service provided from Jammu by a business house to a company located in Srinagar.
Solution :
1. Renting of building to a school - Renting of building to a school is not exempt from GST. It is not covered by Exemption
2. Fees from sports body - Fees received from a sports body for participation in a sporting event organized by a recognized
sports body, is not chargeable to GST. It is covered by Exemption Notification (Entry 68).
3. Brand ambassador - Brand ambassador is not covered by Exemption Notification (Entry 78). GST is applicable.
4. Service from Jammu - It is chargeable to GST.
is 18 per cent). These services are provided by X Ltd. which is registered under section 12AA of the Income-tax Act.
1. Hospital services to the employees of different companies in the private sector : Rs. 82,00,000.
2. Health-care services for the benefit of animals provided to different organizations in West Bengal : Rs. 8,00,000.
3. Services pertaining to preservation of forest and wildlife provided to different semi-government organizations in Orissa :
Rs. 18,00,000.
4. Educational services to poor students of slum area : Rs. 4,00,000.
1. Renting of precincts of a religious place meant for general public.
2. Legal service provided by a law firm to a medical doctor in practice (whose turnover of the last financial year was Rs. 48 lakh).
3. Food provided in an air-conditioned restaurant (no lodging facility).
4. Food provided in Jal Mahal (a non-air-conditioned restaurant of the Mount Abu Inter-Continental Hotel). The restaurant does not
have central air-heating facility. However, a few blower heaters are provided along with some tables in the restaurant during winter
season. The restaurant has a licence to serve alcoholic drinks. Mount Abu Inter-Continental Hotel provides lodging facilities (declared
tariff of highest category room is Rs. 6,000 per unit per day).
5. Food provided in a non-air-conditioned restaurant situated in Kodaikanal, Tamil Nadu. The restaurant has central air-heating facility.
However, this facility is utilised only on a few occasions during winter season. The restaurant does not have any licence to serve any
alcoholic drinks. The restaurant is situated in Kodaikanal Inter-Continental Hotel. Hotel provides lodging facilities (declared tariff of
highest category room is Rs. 15,000 per unit per day).
Solution :
1. Renting of religious place - It is covered by Exemption Notification (Entry 13). It is not chargeable to GST.
2. Legal service - Recipient of service is a business entity whose turnover in the immediately preceding financial year was more
than Rs. 20 lakh. Consequently, it is chargeable to GST.
3. Restaurant service - Restaurant service is chargeable to GST. GST rate is 5%.

4. Restaurant in Mount Abu - It is chargeable to GST. GST rate is 5%.
5. Restaurant in Kodaikanal - It is chargeable to GST @ 18%.
is 18 per cent) –
1. Supply of fresh milk (consideration being Rs. 22,000).
2. Supply of unbranded natural honey by a manufacturing company to a distributor (invoice value being Rs. 84,000).
3. Supply of cut flower suitable for bouquets by X to an event management company (invoice value being Rs. 14,000).
1. Service by way of transmission/distribution of electricity by BSES.
2. X Ltd. charges Rs. 2 lakh for storage and warehousing of turmeric.
3. Y Ltd. charges Rs. 2 lakh for storage of potato chips.
4. Service provided by Post Office by way of express parcel post.
Solution :
1. Transmission/distribution of electricity - GST is not applicable on supply of electricity. It is covered by Exemption Notification
(Entry 25).
2. Storage of turmeric - Turmeric is an agricultural produce. Rent charged by a service provider for storage and warehousing
of agricultural produce, is not chargeable to GST. It is covered by Exemption Notification (Entry 54).
3. Storage of potato chips - Potato chips is not an agricultural produce. Rent charged for storage and warehousing of potato
chips is chargeable to GST.
4. Express parcel service - Service provided by Department of Post by way of express parcel post, is not covered by exemption
notification and is chargeable to GST.
is 18 per cent) –
These services are provided by Andhra Pradesh Government.
1. Placement services given to management school : Rs. 5,00,000.
2. Supply of kajal (not kajal sticks) to a multinational company which is engaged in marketing of cosmetic products : Rs. 60,000.
1. Bank draft charges collected by SBI for transferring money from Delhi to Rameswaram.
2. Supply of labour in tea gardens.
3. X Ltd. is in the business of selling advertisement space in billboards near different airports in the country.
4. Water supply service provided by Bangalore Municipal Corporation.
Solution :
1. Bank draft charges - It is not covered by exemption notification and chargeable to GST.
2. Tea gardens - Supply of farm labour in tea gardens is not chargeable to GST. It is covered by Exemption Notification (Entry
54).
3. Billboards advertisement - Selling of space for advertisements on bill boards is subject to GST.
4. Service provided by municipality - It is covered by Exemption Notification (Entry 4).
438-E21 Nagpur Municipal Corporation provides the following services to a business house located in Mumbai –
1. Service by way of breeding of fish : Rs. 14,60,000.
2. Security service : Rs. 22,00,000.
Find out GST payable by the Nagpur Municipal Corporation. Above figures are exclusive of GST. If any GST is applicable, it will
be collected from the recipients (assume GST rate 18 per cent).
1. SEBI provides service by way of protecting interest on investors in stock market.
2. Service by railway for transportation of household effects, newspapers, postal mails, agricultural produce, sugar, edible oil and textile
goods.
3. Chemical fertilizer is dispatched from Madhya Pradesh factory to Mumbai by rail.
Solution :
1. Service provided by SEBI - Services provided by SEBI are exempt from GST vide Exemption Notification (Entry 33).
2. Transportation by railways - Transportation of newspaper and agriculture produce by railways is covered by Exemption
Notification (Entry 20). However, transportation of household effects, postal mails, sugar, edible oils and textile goods are
chargeable to GST.
3. Transportation by rail - Fair collected by railways for transportation of chemical fertilizer, is not covered by exemption
notification. It is chargeable to GST.
is 18 per cent) –
1. A charitable trust (which is registered under section 12AA of the Income-tax Act) provides counselling services to the persons
affected with AIDS.
2. Supply of curd to a hotel chain (consideration being Rs. 2,45,000).
3. Supply of rudraksha by a shop outside Sidhi Vinayak Temple, Mumbai (consideration being Rs. 3,100 per unit).
1. X provides service pertaining to labelling of fruits and vegetables.
2. Bombay Technical University pays Rs. 24 lakh to A Ltd. for organizing admission test to admit students to MBA course of the
university.
3. IIM Bengaluru charges Rs. 24 lakh as fees for its 2 year full time post graduate programme in management. Admission is made on
the basis of CAT result.
Solution :
1. Labelling of fruits and vegetables - These services are exempt from GST vide Exemption Notification (Entry 57).
2. Service relating to admission - Service relating to conducting admission test provided to an educational institution is exempt
from GST vide Exemption Notification (Entry 66).
3. Fees charged by IIM Bengaluru - Service provided by IIMs by way of full time post graduate programmes is not subject to
GST. Exemption is available only when admission is on the basis of CAT results. This exemption is provided by Exemption.
Notification (Entry 67, up to December 31, 2019 and Entry 66, with effect from January 1, 2020).
is 18 per cent) –
1. Supply of loading/unloading service of rice to a rice mill (consideration being Rs. 6,000 per day).
2. Service of general insurance business provided under Coconut Palm Insurance Scheme.
3. Courier service provided by Newways Ltd. (consideration being Rs. 3,000).

1. For issue of birth certificate, Vellore Municipal Corporation charges Rs. 1,100 per certificate.
2. XY Public School provides education facility up to 12th Standard. The school charges Rs. 3,000 per month as tuition fees, Rs. 1,000
per month transportation charges and Rs. 1,700 per month as computer fees. The school is not recognised by any Board.
3. X owns a catering unit. He provides catering service to Hyderabad University. Invoice is issued monthly on the basis of consumption.
For December 2019, the total amount charged by X on this account is Rs. 14,70,000.
Solution :
1. Charges for birth certificate - Such charges are not subject to GST vide Exemption Notification (Entry 61).
2. Fees charged by unrecognised school - Tuition fees, transportation fees, computer charges (or any other fees) charged by a
school which provides pre-school education or education up to higher secondary level (or equivalent), are not subject to GST.
This exemption is provided by Exemption Notification (Entry 66.). Exemption is available even in the case of a school which
is not a recognised school. Conversely, in the case of a college, GST exemption is available only if the college provides
education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force.
In the case of school, GST is not applicable even if school is not recognised.
3. Catering service to a university - Catering service to a school is exempt from GST vide Exemption Notification (Entry 66).
However, this exemption is not available when catering services is provided to a college or university.
is 5 per cent) –
1. Supply of cut flowers and flower buds suitable for preparation of bouquets by A Ltd. to ITC Maurya, New Delhi (consideration
being Rs. 200 per piece, invoice value for supply made during December 2019 : Rs. 18,17,500).
2. Supply of terry towels by B Ltd. to ITC Maurya, New Delhi (consideration being Rs. 1,600 per piece, invoice value for supply made
during December 2019 : Rs. 18,17,500).
3. Supply of fresh cream by C Ltd. to ITC Maurya, New Delhi (consideration being Rs. 400 per litre, invoice value for supply made
during December 2019 : Rs. 4,78,000).
1. X provides job works service in relation to cultivation of plants and rearing of animals.
2. Patna University pays Rs. 70,000 to A Ltd. A Ltd. is a printer and university question papers are printed by it.
3. Resident Welfare Association of Park Street, Jabalpur, charges Rs. 8,000 per month per member for March 2020. The amount so
collected is utilised by the association for providing different facilities in the housing complex (e.g., security, lighting, cleaning of roads,
etc.).
Solution :
1. Job works service pertaining to agriculture - These services are exempt from GST vide Exemption Notification (Entry 55).
2. Printing of question papers - Service relating to conduct of examination (including printing of question papers) is exempt
from GST if recipient of service is an educational institution. This exemption is provided by Exemption Notification (Entry
66). In the given case, GST is not applicable on Rs. 70,000.
3. Resident Welfare Association (RWA) - If amount collecting by RWA is not more than Rs. 7,500 per month per member, the
entire amount is exempt from GST. Conversely, if amount charged by RWA is more than Rs. 7,500 per month per member,
then GST is applicable on the entire amount.
is 5 per cent) –
1. A charitable trust (registered under section 12AA of the Income-tax Act) provides services pertaining to preparation of flower
bouquets to students of slum area.
2. Y Ltd., a chemical manufacturing company, provides services pertaining to preparation of flower bouquets to students of slum area
under CSR (amount charged from students : Nil).
3. Meerut Municipal Corporation provides security services to ABC Hotel (turnover of ABC Hotel for the preceding financial year
is Rs. 20,00,000 and for the current year it is Rs. 34,00,000).

1. X Ltd. is a textile manufacturing company. It provides yoga training service to the children who reside near its factory in Baroda.
2. Resident Welfare Association of Rose Street, Madurai, charges Rs. 6,000 per month per member for February 2020. The amount so
collected is utilised by the association for providing different facilities in the housing complex (e.g., security, lighting, cleaning of roads,
etc.).
3. IIM Kolkata charges Rs. 18,90,000 as fees from the students who join 2020 batch of its Executive Development Programme (it is a
part-time 3 year course for working executives).
Solution :
1. Yoga training by a manufacturing company- X Ltd. is not a charitable institute. It is not registered under section 12AA of the
Income-tax Act. Consequently, GST exemption is not available. It is not covered by Exemption Notification (Entry 1).
2. Resident Welfare Association (RWA) - If amount collecting by RWA is not more than Rs. 7,500 per month† per member, the
entire amount is exempt from GST. In this case, GST is not applicable vide Exemption Notification (Entry 77).
3. Fees charged by IIM for part-time course - GST exemption is not available if IIM charges fees for its executive development
programme. Exemption is not available under Exemption Notification (Entry 67 or Entry 66).
438-E26 X Ltd. provides the following services in Bhopal during February 2020 –
1. Internet advertisement charges : Rs. 9,00,000.
2. Charges for providing services of rearing horses : Rs. 8,00,000.
These services are provided in Madhya Pradesh. Find out GST liability if GST rate is 12 per cent.
1. For non-submission of certain documents by X within due date, the Ranchi Municipal Corporation imposes a fine on him of Rs. 5,000.
Discuss whether fine is subject to GST.
2. West Bengal Government charges Rs. 2,000 per vehicle for providing pollution check service (pollution check is required in Kolkata
on quarterly basis under State regulations).
3. X & Co. is a firm of advocates and located in Chennai. It provides legal service to Y & Co., a firm of advocates, registered in Mumbai.
Amount charged by X & Co. for December 2019 is Rs. 24 lakh.
Solution :
1. Fine by local authority - Fine charged by the Central Government/State Government/Union Territory/local authority is
not subject to GST. This exemption is provided by the Exemption Notification (Entry 62).
2. Charges for pollution check - It is exempt vide Exemption Notification (Entry 47)
3. Legal service - Legal service provided by an advocate (or by a firm of advocates) to another advocate (or a firm of advocates)
is exempt from GST. This exemption is given by Exemption Notification (Entry 45).
438-E27 X Ltd. is in the business of providing services relating to advertisement. During March 2020, it has collected the following
from inter-State services –
1. Sale of time space for advertisement on Radio Mirchi : Rs. 10,00,000.
2. Sale of time space for advertisement on Star Plus : Rs. 12,00,000.
3. For providing services relating to preparation of advertisement which will be telecasted on Doordarshan : Rs. 14,00,000.
Find out GST payable by X Ltd. for March 2020. Above figures are exclusive of GST. Ignore input tax credit. Assume GST rate is
12 per cent.

1. X owns a house in a residential colony. It is given on rent to A Ltd. for Rs. 4,10,000 per month. As per the written agreement, A Ltd.
can use the property for commercial purposes.
2. XY Hotels owns a hotel in Chennai. Hotel has 200 rooms (club category rooms 170, suit category room 30). Rack rate (or published/
declared tariff) of club category room is Rs. 2,500 per day. Actual rate charged is generally lower depending upon demand and supply.
On October 17, 2019, 10 club category rooms are given to B and his family. Tariff charged after discount is Rs. 900 per unit per day.
Whether GST is applicable.
3. Transport of passenger by air service provided by Indigo Airlines from Sikkim to Mumbai.
Solution :
1. Renting of residential property for commercial use - Renting of residential dwelling for use as residents, is not subject to GST
vide Exemption Notification (Entry 12). This exemption is not available if residential property is given on rent for commercial
purposes. GST is applicable on rent charged by X.
2. Hotel rooms - Exemption is available vide Exemption Notification (Entry 14), if “value of supply” of unit accommodation
is Rs. 1,000 (or less) per day. In this case, declared tariff of club category room is Rs. 2,500 per day. However, tariff charged
after discount is Rs. 900 per day. Consequently, GST is not applicable.
3. Air transport from Sikkim to Mumbai - Transport of passengers by air, embarking from or terminating in an airport located
in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra
located in West Bengal, is not chargeable to GST vide Exemption Notification (Entry 15). Consequently, GST is not applicable
for air transport passenger service between Sikkim and Mumbai.
is 5 per cent) –
1. X Ltd. supplies 1,000 wooden khadau to a temple in Vrindavan. The temple is, however, not registered under section 12AA of the
Income-tax Act (invoice value of the supply : Rs. 48,000).
2. Y Ltd. supplies unbranded wheat flour to the above temple (invoice value of the supply is Rs. 40,000).
3. C Ltd. supplies 3 indigenous handmade musical instruments (i.e., sitar, table, harmonium) to the above temple (consideration being
Rs. 1,42,000).
1. Punjab Government owns a commercial flat in Amritsar. It is given on rent to X & Co., a partnership firm, which deals in marketing
of computers. The aggregate turnover of X & Co. in the preceding financial year is Rs. 6 lakh.
2. Ajmer Municipal Corporation owns a plot of land near railway station. Municipal Corporation gives this plot of land on rent to general
public for organizing social functions. It is given on rent to X Ltd. for holding distributors meeting on January 3, 2020. For this purpose,
rent of Rs. 4,100 is charged.
3. Transportation of passengers between Port Blair and Havelock in a vessel.
Solution :
1. Rent of immovable property by Punjab Government - Renting of immovable property by Government to a business entity is
chargeable to GST (irrespective of turnover of the business entity). Consequently, GST is applicable.
2. Renting of immovable property to business entity - Renting of immovable property by Central Government/State Govern-
ment/Local Authority/Union Territory to a business entity is generally chargeable to GST. If, however, consideration does
not exceed Rs. 5,000, it is exempt from GST under Exemption Notification (Entry 9). In this case, the rent of plot of land
charged by Ajmer Municipal Corporation does not exceed Rs. 5,000. Consequently, GST is not applicable.
3. Transportation of passengers between Port Blair and Havelock in a vessel - Generally such service is exempt from GST vide
Exemption Notification (Entry 17). If the transportation is provided by leisure/charter vessel or cruise ship, predominant
purpose of which is tourism, then exemption is not available.
438-E29 X Ltd. of Assam provides different services. During December 2019, it provides the following services –
1. Services pertaining to soil testing for rice cultivation : Rs. 18,00,000.
2. Office cleaning services provided to RBI : Rs. 4,00,000.
3. White-washing services provided to SBI : Rs. 1,50,000.
Find out GST payable by X Ltd. for December 2019. The above figures are excluding GST. GST (if any) will be payable by the recipient
of supplies in addition to the amount noted above. Ignore input tax credit. Assume GST rate is 18 per cent.
1. FIFA hires the services of X Ltd., an event management company, for organizing FIFA U-17 World Cup 2017. X Ltd. will provide
this service against consultancy fee of Rs. 2.5 crore.
2. Transport of passengers by air-conditioned stage carriage.
3. X owns a piece of agricultural land. It is given on rent to A Ltd. A Ltd. pays monthly rent of Rs. 2.5 lakh and land is used by it for
plantation of black pepper.
Solution :
1. Service for organizing FIFA U-17 World Cup 2017 - Services provided by and to Fédération Internationale de Football
Association (FIFA) and its subsidiaries directly or indirectly related to any of the events under FIFA U-17 World Cup 2017
are exempt from GST vide Exemption Notification (Entry 9A).
2. Transport of passengers by air-conditioned stage carriage - Transport of passengers by non-airconditioned stage carriage is
exempt from GST vide Exemption Notification (Entry 15). This exemption is not available if service is provided by air-
conditioned stage carriage.
3. Renting of land - Renting of land for agricultural purposes is exempt from GST vide Exemption Notification (Entry 54).
438-E30 Find out GST payable by X & Co. (a firm) for January 2020 (ignore input tax credit, assume GST rate is 18 per cent, these
are intra-State supplies, figures given below are exclusive of GST, if any) –
1. Asset management service : Rs. 4,05,000.
2. Hire charges of pandal, shamiyana for organizing election rally : Rs. 2,00,000.
3. Hire charges of giving crane on hire Rs. 8,00,000.
4. Hire charges for giving diesel generators on hire to farmers for their domestic use : Rs. 50,000.
438-P31 Discuss whether the following services are chargeable to GST (all services are provided against consideration) –
1. Transportation of defence equipment by rail for Ministry of Defence.
2. Transportation of wheat by rail for a wholesaler.
3. Transportation of newspapers by rail for Udaipur University.
4. Transportation of milk by rail for a 5 star hotel.
5. Transportation of pulses by rail for a co-operative society.
6. Transportation of wheat flour for the canteen of Reliance Industries Ltd.
7. Transportation of machinery by rail for Reliance Industries.
Solution :
Exemption Notification (Entry 21) provides GST exemption in the case of service by way of transportation of goods by rail.
This entry provides exemption in respect of all cases given above. However, transportation of machinery by rail for Reliance
Industries is chargeable to GST.
438-E31 Discuss whether the following services are chargeable to GST (all services are provided against consideration) –
1. Transportation of wheat by truck by a goods transport agency for Taj Hotels.
2. Transportation of military equipment by truck by a goods transport agency for Ministry of Defence.
3. Transportation of newspapers by truck by a goods transport agency for a private university (not recognised by UGC).
4. Transportation of cow dung (organic manure) by truck by a goods transport agency for Bhatinda Agriculture University
(university will use cow dung for research purposes).
5. Transportation of milk by truck by a goods transport agency for co-operative society.
438-P32 Discuss whether the following services are chargeable to GST. Recipient of service in these cases is Orange Public School,
Cochin. This school is not recognised by any Board in India. The school provides education up to higher secondary which is recognised
by a Board in the United Kingdom –
1. X Transporters provides buses on hire (monthly rent being Rs. 80,000). These buses are utilised by the school for providing transport
facility to students, faculty and staff.
2. Y Caterers provides mid-day meals for students and teachers (invoice value being Rs. 170 per meal).
3. Z Security Services provides security service to the school (charges being Rs. 2,40,000 per month).
4. AB Consultants provides service relating to conduct of examination (for annual examination, amount charged being Rs. 2,85,000).
Solution :
Exemption Notification (Entry 66) provides exemption from GST in respect of supply of these services to a school which
provides pre-school education or education up to higher secondary school. This exemption is available even if school or the
institution is not recognised by any Board in India.
1. XY is a charitable institute. It is registered under section 12AA of the Income-tax Act. During December 2019, it organises a 3
day yoga camp in Shimla (charges being Rs. 18,000 per participant without boarding and lodging).
2. Z is a business correspondent for PNB Bank. He provides services pertaining to savings bank account/fixed deposit account in rural
branches of the PNB Bank in Himachal Pradesh (consideration being Rs. 500 per branch).
3. X is a football coach. He provides his services to Gargi College Football Team for an inter-college tournament of Delhi University.
This tournament is not recognised by any sports body of national or international level.
4. Z is a sports commentator. He provides his services to a sports event recognised by Indian Olympic Association.
1. Transport of passengers by Lucknow Metro.
2. Service by way of access to Mathura Lucknow highway on payment of toll charges of Rs. 2,500
3. X Ltd. provides service by way of warehousing of rice.
Solution :
1. Transport of passengers by Metro - Transport of passengers service by metro, monorail or tramway, is exempt from GST vide
2. Toll charges - Service by way of access to a road/bridge on payment of toll charges, is exempt from GST vide Exemption
3. Warehousing of rice - Service by way of loading, unloading, packing, storage or warehousing of rice is exempt from GST
vide Exemption Notification (Entry 24).
438-E33 X Ltd. provides different services relating to agriculture produce in Telangana. Data pertaining to February 2020 is given
below –
1. Supply of farm labour for cultivation : Rs. 25,25,000.
2. Supply of domestic servants for farmers : Rs. 2,00,000.
3. Agricultural extension service for training of farmers : Rs. 9,00,000. Training is, however, not recognised by any institute.
Find out GST payable by X Ltd. for February 2020. Above figures are inclusive of GST. If any GST is there, it will be paid by X Ltd.
without collecting from recipients of services. Assume GST rate is 18 per cent. Ignore input tax credit. These supplies are intra-State
supplies.

1. X Ltd. is a leading tax literature publishing company. It participates in a book fair organized by the Government of Kenya in Nairobi
during November 2019. For this purpose, it engages A Ltd., an event management company. A Ltd. charges Rs. 2.5 lakh for managing
book stall of X Ltd. in Nairobi.
2. For issue of driving license in the city of Cochin, the local government charges Rs. 250 per license (for commercial driving license
charges : Rs. 800 per license).
3. Technical advice given to B Ltd. (this service is utilised by B Ltd. in commencing a new venture of providing transportation of goods
by inland waterways from Haridwar to Mathura).
Solution :
1. Foreign exhibition - Service provided by an organizer in respect of a business exhibition held outside India, is exempt from
GST. This exemption is provided by Exemption Notification (Entry 52).
2. Charges for driving license - Charges for driving license are not subject to GST vide Exemption Notification (Entry 61).
3. Technical advice to B Ltd. - It is chargeable to GST.
is 18 per cent) –
1. Placement service given to a private management college (invoice value being Rs. 2,80,000).
2. Grading services to different agricultural farms (invoice value being Rs. 2,10,000).
3. Renting of vacant land for agricultural use (rent being Rs. 1,00,000).
1. Services provided by Cordlife, a cord blood bank for preservation of stem cells (amount charged being Rs. 7,50,000).
2. Transportation of passengers by Indian Railway by a first class (non-airconditioned coach) from Mathura to Indore (fair being Rs.
1,900 per passenger).
3. Transportation of passengers by Indian Railway by an air-conditioned coach from New Delhi to Mumbai (fare being Rs. 1,100 per
passenger).
4. Transportation of passengers by Indore Metro (fare being Rs. 80 per 10 kilometer).
Solution :
1. Cord blood bank service - It is not chargeable to GST. Exemption is provided by Exemption Notification (Entry 73).
2. Rail journey in first class - It is chargeable to GST even if the first class coach does not have air-condition facility.
3. Rail journey in air-conditioned coach - It is chargeable to GST.
4. Metro rail - Journey by metro is exempt from GST.
1. Speed post services provided by a post office in a rural area near Yamunanagar.
2. Express parcel services provided by post office in Bengaluru.
3. Ms. X is a well-known dancer. She is brand ambassador for Vimal Suitings owned by Reliance Industries. She has given a dance
performance in an event organized by Vimal Suitings during December 2019. Professional fees charged for this function is Rs. 90,000.
The entire amount is donated by her on the same day to Prime Minister Relief Fund.
4. Transportation of passengers by Jet Airways from Mumbai to Bagdogra.

1. X is a well-known singer. For giving a performance in a musical event (organised by Filmfare), he charges Rs. 1,50,000. X is not a
brand ambassador of Filmfare or any other person participating in the musical event.
2. Suppose in the above event, amount charged is Rs. 1,51,000 and the entire amount is donated on the same day by X to National Defence
Fund.
3. Renting of open land in a Gurudwara for marriage function. Rent for this purpose is Rs. 9,900 per day (before GST). Gurudwara is
managed by a charitable trust which is registered under section 12AA of the Income-tax Act.
4. Suppose in the above case, rent is Rs. 10,000 per day (before GST).
5. Suppose in the above case, rent is less than Rs. 10,000 per day but the charitable trust (which manages Gurudwara) is not registered
under section 12AA of the Income-tax Act.
Solution :
1. Musical event - Service provided by an artist in a musical event is not chargeable to GST, if amount charged for the
performance by the artist is not more than Rs. 1,50,000. Consequently, GST is not applicable. This exemption is not for a brand
ambassador.
2. Musical event - If amount charged is more than Rs. 1,50,000, GST is applicable. GST cannot be avoided even if the entire
amount is donated to National Defence Fund.
3. Renting of open land in a Gurudwara - If the charitable trust (which manages Gurudwara) is registered under section 12AA
of the Income-tax Act and rent of open land is less than Rs. 10,000 per day, GST is not applicable. In the given case, there
is no GST. Exemption is provided by Exemption Notification (Entry 13).
4. Renting of open land in a Gurudwara - Rent being Rs. 10,000 per day, above exemption is not available.
5. Renting of open land in a Gurudwara - The charitable trust (which manages Gurudwara) is not registered under section 12AA
of the Income-tax Act. Consequently, exemption is not available.
1. Transportation of 2 computers by X Transporters (a goods transport agency) in a truck from Nariman Point to Andheri (freight
being Rs. 1,500).
2. Suppose in the above case, freight is above Rs. 1,500.
3. Transportation of 20 HP printers for A Ltd. by X Transporters in a mini truck from New Delhi to Gurugram (freight being
Rs. 750).
4. Suppose in the above case, freight is more than Rs. 750.
438-P37 X Ltd. is engaged in the business of manufacture of goods. Find out GST liability of X Ltd. in respect of the following intra-
State supplies pertaining to January 2020 –
1. Interest on loan/advances given to different persons : Rs. 14,00,000 (funds not immediately required for business purposes is given
as loan or advance to different persons and interest is collected).
2. Rent of furnished flats given to employees for residential purposes : Rs. 6,00,000 (municipal tax paid is Rs. 14,000).
3. Rent of commercial property : Rs. 21,00,000 (municipal tax paid is Rs. 90,000).
Above figures are inclusive of GST. If any GST liability is applicable, it will be paid by X Ltd. without collecting from recipients of
supplies. Ignore input tax credit. Assume GST rate is 18 per cent.
Solution :
CGST SGST
Rs. Rs.
Interest on loan/advances [not subject to GST by virtue of Exemption Notification (Entry 27)] – –
Furnish flats given on rent for residential use [not subject to GST by virtue of Exemption
Notification (Entry 12)] – –
Rent of commercial property (Rs. 21,00,000 × 18 ÷ 118 = Rs. 3,20,339, out of which CGST is ½
of Rs. 3,20,339 and SGST is ½ of Rs. 3,20,339) 1,60,169 1,60,169
Total 1,60,169 1,60,169
is 18 per cent) –
1. X Ltd. is a paper manufacturing company. It provides skill development training to physically handicapped persons. Total
expenditure incurred during January 2020 is Rs. 90,000. However, it charges only Rs. 2,000 per person per month and amount
collected for January 2020 is Rs. 42,000 before GST. If any GST arises, it will be paid by X Ltd. out of its pocket.
2. Suppose in the above case, training is provided by a charitable institute registered under section 12AA of the Income-tax Act.
3. Suppose in the above case, training is provided by Laxmi College (University of Pune) and training programme is recognised by
UGC.

1. Service received by RBI from outside India in relation to management of foreign exchange reserves.
2. Service received by Government of India from a pollution consultant located in Germany. Service pertains to management of pollution
control in and around NCR. Consideration paid by Government is Rs. 12,00,000 out of which Rs. 3,00,000 is reimbursed by Delhi
Government.
3. X Ltd. is a tour operator. He is located in Chennai. He provides services to Y, a citizen of Sweden and Z, an Indian citizen. Service
pertains to tour conducted by X Ltd. wholly in Bangladesh. Consideration of Rs. 1,72,000 is received from each person in Indian currency
in India.
Solution :
1. Service to RBI - Service received by RBI from outside India in relation to management of foreign exchange reserves, is
exempt from GST.
2. Service imported by Government - Service imported by Government is exempt from GST. Even recovery of Rs. 3,00,000 from
Delhi Government is not subject to GST.
3. Foreign tourist - Service provided by a tour operator to a foreign tourist pertaining to a tour conducted wholly outside India,
is exempt from GST. However, this exemption is not available when recipient of service is not a foreign tourist. In the given
case, service provided to Y is exempt from GST and service provided to Z is chargeable to GST.
is 18 per cent) –
1. Transport of passengers by air provided by Jet Airways from Mumbai to Bagdogra (consideration being Rs. 9,500 per passenger).
2. Service pertaining to retail packing of fruits and vegetables.
3. Service pertaining to rearing of silk worms.
438-P39 X Ltd. owns a play school (not recognised by any board), a senior secondary school (recognised by a Board of education in UK)
and a college recognised by Madras University. Find out GST liability of X Ltd. in respect of the following pertaining to November
2019 –
1. Fees collected from the students of play school : Rs. 16,00,000.
2. Fees collected from the students of senior secondary school : Rs. 25,00,000.
3. Fees collected from the students of college pertaining to degree courses recognised by Madras University : Rs. 6,50,000.
4. Fees collected from the students of college pertaining to courses recognised by Oxford University : Rs. 40,00,000.
Find out GST payable by X Ltd. Above figures are inclusive of GST. If any GST liability arises, it will be paid by X Ltd. without collecting
from recipients of supply. It may be assumed that expenditure for running schools and colleges are not more than 40 per cent of the fees
collected and balance 60 per cent is net earning of X Ltd. Assume that applicable GST rate is 18 per cent, above supplies are intra-State
supply and ignore input tax credit.
Solution :
CGST SGST
Rs. Rs.
Fees from play school [not subject to GST by virtue of Exemption Notification (Entry 66)] – –
Fees from senior secondary school [not subject to GST by virtue of Exemption Notification
(Entry 66)] – –
Fees from degree course recognised by Madras University [not subject to GST by virtue of
Exemption Notification (Entry 66)] – –
Fees from course recognised by foreign university (Rs. 40,00,000 × 18 ÷ 118 = Rs. 6,10,169, out
of which CGST is ½ of Rs. 6,10,169 and SGST is ½ of Rs. 6,10,169) 3,05,085 3,05,085
Total 3,05,085 3,05,085
is 18 per cent) –
1. Supply of farm labour by A Ltd. to ITC Ltd. The service is utilised by ITC on different farms owned by it for cultivation of potatoes
and wheat in different parts of the country.
2. Supply of tractors on rent by B Ltd. to ITC Ltd. These tractors are used by ITC for cultivation purposes.
3. Loading/unloading, packing, storage, warehousing services provided by C Ltd. to ITC. ITC utilises these services in relation to its
agricultural activities.
Amount paid to A Ltd., B Ltd. and C Ltd. during March 2020 is Rs. 18,00,000, Rs. 28,00,000 and Rs. 9,50,000, respectively. These
figures are inclusive of GST if any.
●
Test your knowledge

1. When service relating to transportation of passengers is not chargeable to GST ? [para 437]
2. When leasing of vacant land is not chargeable to GST ? [para 437]
3. Service provided by certain registered societies to its members is covered by Exemption Notification. Discuss the scope
of this exemption. [para 437]
4. Construction service to Government is taxable. What are those cases when GST exemption is available in respect of
construction service to Government ? [para 437]
5. What are those cases when legal service is not chargeable to GST. [para 437]
6. Renting a room in a hotel is chargeable to GST. Is there any provision in Exemption Notification under which GST
liability can be avoided ? Discuss whether these are chargeable to GST. [para 437]
7. When service pertaining to transmission or distribution of electricity is not chargeable to GST ? [para 437]
8. Post Office generally provides services which are not chargeable to GST. Is there any service provided by Post Office
which is chargeable to GST ? [para 437]
9. What are agricultural extension services ? [para 437]
10. When transportation by rail or vessel is not subject to GST. [para 437]
11. A private airlines provides the following air transport service on its newly acquired small size aircraft having capacity
of 15 passengers –
a. Mumbai-Sikkim-Mumbai.
b. Mumbai-Srinagar-Mumbai.
c. Mumbai-Ladakh-Mumbai.
d. Mumbai-Bagdogra-Mumbai. [para 437]
12. A transport agency provides transportation of vegetables/foods by a newly acquired air-conditioned trucks. Is it
chargeable to GST ? [para 437]
13. Prepare list of supply of few goods which is not chargeable to GST. [para 436]
14. Discuss whether the following are chargeable to GST –
a. supply of fresh oranges by A Ltd., a fruit wholesale dealer, to Starwood Hotels operating in Mumbai;
b. supply of fresh milk to a Government canteen;
c. supply of flowers to an event management company which organises a seminar on GST;
d. supply of flowers to an event management company which organises an election meeting of political leaders in
Gujarat. [para 436]
15. Prepare a list of few services pertaining to education which are not chargeable to GST. [para 437]
16. When service pertaining to transportation of goods is not chargeable to GST? [para 437]
CHAPTER 24 Place of supply
D
etermination of place of supply of goods/services is very significant under GST law,
as the place of supply of goods/services together with location of supplier, determine
whether the supply is inter-State supply or intra-State supply.
 WHY ONE SHOULD FIND OUT LOCATION OF SUPPLIER AND PLACE OF SUPPLY
444. To determine whether a supply is inter-State supply or intra-State supply, one has to find out location of
supplier and place of supply. The table given below pinpoints† the same –
Location of supplier Place of supply Applicable tax if GST is levied @ 18%
Intra-State supply Inter-State supply
Maharashtra Maharashtra CGST : 9%, SGST : 9% –
Maharashtra Karnataka – IGST @ 18%
Maharashtra Andaman – IGST @ 18%
Andaman Maharashtra – IGST @ 18%
Andaman Andaman CGST : 9%, UTGST : 9% –
Andaman Chandigarh – IGST @ 18%
Andaman Delhi – IGST @ 18%
Delhi Chandigarh – IGST @ 18%
Delhi Noida (UP) – IGST @ 18%
SEZ in Andhra Pradesh Non-SEZ in Andhra Pradesh – IGST @ 18%
 LOCATION OF SUPPLIER OF GOODS - HOW TO FIND OUT

445. It is the geographical point (e.g., premises of supplier/site of supplier) where the supplier is situated with
goods (in its control ready to be supplied). Location of supplier is usually the place from where a supply is made.
A place mentioned as a principal place of business on the GST registration certificate, may be taken as location
of supplier.
 LOCATION OF SUPPLIER OF SERVICES - HOW TO FIND OUT

446. “Location of supplier of services” is given by section 2(15) of IGST Act. The table given below summarises
the definition –
Different situations Location of supplier of services
Where a supply is made from a place of business for which Location of such place of business
the registration has been obtained
Where a supply is made from a place other than the place of Location of such fixed establishment
business for which registration has been obtained (i.e., a
fixed establishment elsewhere)
Where a supply is made from more than one establishment, Location of the establishment most directly concerned
whether the place of business or fixed establishment with the provision of the supply
In any other case Location of the usual place of residence of the supplier
† In order to understand the propositions given in the table, it is advised that one should first refer to paras 426.1 and 427.1.
672
673 Place of supply of goods Para 448.1
 LOCATION OF RECIPIENT OF SERVICES - HOW TO FIND OUT

447. “Location of recipient of services” is given by section 2(14) of IGST Act. The table given below summarises
the definition –
Different situations Location of recipient of services
Where a supply is received at a place of business for which Location of such place of business
the registration has been obtained
Where a supply is received at a place other than the place of Location of such fixed establishment
business for which registration has been obtained (a fixed
establishment elsewhere)
Where a supply is received at more than one establishment, Location of the establishment most directly concerned
whether the place of business or fixed establishment with the receipt of the supply
In any other case Location of the usual place of residence of the recipient
 HOW TO FIND OUT PLACE OF SUPPLY OF GOODS

448. Parameters to find out place of supply of goods are given by sections 10 and 11 of IGST Act as follows –
Section of IGST Act Different situation Para No.
Section 10 Place of supply of goods (other than supply of goods imported into, or exported 448.1
from, India)
Section 11 Place of supply of goods imported into, or exported from, India 448.2
448.1 Place of supply of goods (other than goods imported/exported) - Rules given by section 10 of IGST Act
are given below –
Different situations Place of supply of goods Case studies
Movement of goods - Where the supply involves move- Place of supply shall be the location of the Case Studies
ment of goods (whether by the supplier or the reci- goods at the time at which the movement 1, 2 and 3
pient or by any other person) of goods terminates for delivery to the
recipient
Direction - Where the goods are delivered by the supp- It shall be deemed that the said third Case Study 4
lier to a recipient (or any other person) but on the person has received the goods and the
direction of a third person. Such third person may be place of supply of such goods shall be the
an agent or otherwise. Supply may be made before principal place of business of third person
(or during) movement of goods. Supply may be either
by way of transfer of documents of title to the goods
or even otherwise.
Supply does not involve movement of goods - Where the Place of supply shall be the location of –
supply does not involve movement of goods, whether such goods at the time of the delivery to
by the supplier or the recipient the recipient
Assembling or installation - Where the goods are assem- Place of supply shall be the place of such Case Study 5
bled or installed at site installation or assembly
Supply on-board - Where the goods are supplied on- Place of supply shall be the location at
board a conveyance, including a vessel, an aircraft, a which such goods are taken on-board Case Study 6
train or a motor vehicle
Any other case - Where the place of supply of goods Place of supply shall be determined in –
cannot be determined in the parameters given above such manner as may be prescribed.
Consider the case study given below –
 Case study 1 - X of Delhi sells goods to B of Madhya Pradesh. As per the terms of contract, goods are delivered by X in Delhi
to a transport company and transport company delivers goods to B at Indore. This is the case of movements of goods from
Delhi to Indore. Termination point of the movement of goods is Indore. Place of supply will be Indore. Consequently, it is
inter-State sale and IGST is applicable.
 Case study 2 - Suppose in the above case RR (i.e., bilti) is in the name of X. The place of supply will remain the same (i.e.,
Indore). IGST is applicable.
Para 448.2 Place of Supply 674
 Case study 3 - B of Madhya Pradesh comes to Delhi and selects goods from the shop of X in Delhi. Later on, goods are sent
by X from Delhi to Indore, as per requirement of B. X dispatches these goods through a goods transport agency by road.
Termination point of the movement of goods is Indore. Place of supply will be Indore. Consequently, it is inter-State sale
and IGST is applicable.
 Case study 4 - X of Mumbai sells goods to Y of Chennai. Before the movement of goods (or after the movements of goods)
from Delhi, these goods are sold by Y to Z of Nagpur.
On Y’s instructions, goods are dispatched by X from Mumbai to Z in Nagpur. X sends these goods from Mumbai to Z in
Nagpur on the instructions of third person (i.e., Y). Principal place of business of third person is in Chennai. The place of
supply would be first determined between X and Y. Between X and Y, the place of supply is Chennai. Consequently, it is
inter-State supply and IGST is applicable.
Place of supply between Y and Z will be determined as per the parameters given in Case Studies 1 and 2.
 Case study 5 - In the following cases, recipient is Y Ltd., a private limited company registered in Mumbai. Supplier is A Ltd.
of Nagpur –
Installation of plant Installation of air-conditioner Installation of generator

Location of supplier Nagpur Nagpur Nagpur
Installation/assembling site owned
by Y Ltd. Mumbai Surat Goa
Place of supply of goods Mumbai Surat Goa
Nature of supply Intra-State Inter-State Inter-State
Applicable GST CGST + SGST IGST IGST
 Case study 6 - In the following cases, recipient is Y Airways (P.) Ltd., a company operating aircrafts for transportation of
passengers and incorporated in Mumbai. Supplier is A Ltd. of Nagpur. A Ltd. supplies 200 ml. water bottles in different
flights operated by Y Airways. –
Flight 101 : Delhi–Mumbai Flight 102 : Flight 103 : Goa–
Mumbai–Chennai Mumbai–Kolkata
Location of supplier Nagpur Nagpur Nagpur
Place of boarding of passengers Delhi Mumbai Goa/Mumbai
Loading of water bottles by A Ltd. Delhi Mumbai Mumbai
Place of supply of goods Delhi Mumbai Mumbai
Nature of supply Inter-State Intra-State Intra-State
Applicable GST IGST CGST + SGST CGST + SGST
448.2 Place of supply of goods which are imported/exported - Import of goods means bringing goods into
India from a place outside India. Export of goods means taking goods out of India to a place outside India. Place
of supply of goods in the case of import and export is as follows –
 Import - In the case of import of goods, the location of importer is the place of supply of goods.
 Export - In the case of export of goods, the location outside India (where goods are exported) is the place of
supply of goods.
 HOW TO FIND OUT PLACE OF SUPPLY OF SERVICES

449. Parameters to find out place of supply of services are given by sections 12 and 13 of IGST Act as follows –
Section of IGST Act Different situation Para No.
Section 12 Place of supply of services (where location of supplier and recipient is in India) 449.1
Section 13 Place of supply of services (where location of supplier or location of recipient is
outside India) 449.2
449.1 Place of supply of services (supplier and recipient are located in India) - Rules given by section 12 of
IGST Act are given below –
449.1-1 GENERAL PROVISIONS [SEC. 12(2) OF IGST ACT] - These are given below –
Different cases Place of supply of services
- Supply made to a registered person Location of recipient
- Supply made to unregistered person (location of recipient available) Location of recipient
- Supply made to unregistered person (location of recipient not available) Location of supplier
675 Place of supply of services Para 449.1
The above rule is applicable in all cases (except the cases given below).
449.1-2 SERVICES DIRECTLY IN RELATION TO AN IMMOVABLE PROPERTY [SEC. 12(3)(a) OF IGST ACT] - The place of supply of
services which are directly in relation to an immovable property, shall be the location of such immovable
property. A few examples of such services (which are directly in relation to an immovable property) are –
- Services provided by an architect, interior decorators, surveyors, engineers and other related experts.
- Services provided by estate agents.
- Any service provided by way of grant of rights to use immovable property (i.e., giving property on rent/lease).
- Any service for carrying out or co-ordination of construction work.
- Services which are physically performed on any immovable property.
- Services pertaining to valuation of property.
- Property management services.
In these cases, location of immovable property is the place of supply of services.
Consider the cases given below –
1. Services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be directly in relation
to immovable property situated in Goa. Place of supply will be Goa. However, if an interior decorator is engaged by a retail
chain to design a common décor for all its stores in India, this service would not be related to an immovable property.
2. There must be more than a mere indirect or incidental connection between a service provided in relation to an immovable
property, and the underlying immovable property. For example, a legal firm’s general opinion with respect to the capital
gains tax liability arising from the transfer of a commercial property in India is basically advice on taxation legislation in
general even though it relates to the subject of an immovable property. This will not be treated as a service in relation to
immovable property. Likewise, in the following cases, services are not directly in relation to an immovable property –
- Service pertaining to repair and maintenance of machinery which is not permanently installed.
- Advice or information relating to land prices or property markets (because they do not relate to specific sites).
- Land or real estate feasibility studies (say in respect of the investment potential of a developing suburb) (since this service
does not relate to a specific property or site).
449.1-3 SERVICES BY WAY OF LODGING ACCOMMODATION BY HOTEL [SEC. 12(3)(b) OF IGST ACT] - This rule covers services by
way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by whatever name
called. It also includes lodging accommodation in a house boat or any other vessel.
In these cases, place of supply of services shall be the location at which the immovable property or boat or vessel,
as the case may be, is located or intended to be located.
1. If the location of the immovable property or boat or vessel is located (or intended to be located) outside India,
the place of supply shall be the location of the recipient of services.
2. Where the immovable property or boat or vessel is located in more than one State or Union Territory, the
supply of services shall be treated as made in each of the respective States or Union territories in proportion to
the value for services separately collected or determined in terms of the contract or agreement. If there is no such
agreement, mode of computation will be prescribed by the Government.
X is marketing head of A Ltd. (a Delhi based leading software development company). On an official visit, X goes to Mumbai
during December 2019 and stays in ITC Maratha (a 5-star hotel owned by ITC Ltd.). Invoice is prepared at the time of check-
out (room tariff charged is Rs. 14,000 per day) in the name of A Ltd. Location of recipient of supply is in Delhi. Location of
supplier is in Mumbai. Place of supply is Mumbai (i.e., the place where ITC Maratha is located). It is intra-State supply. In
this case, hotel accommodation service is subject to GST @ 18 per cent. ITC Maratha will charge CGST @ 9 per cent and SGST
@ 9 per cent.
449.1-4 SERVICES BY WAY OF ACCOMMODATION FOR ORGANISING FUNCTIONS [SEC. 12(3)(c) OF IGST ACT] - This rule covers
services by way of accommodation in any immovable property for organising any marriage or reception or
matters related thereto, official, social, cultural, religious or business function including services provided in
relation to such function at such property.
In these cases, place of supply of services shall be the location at which the immovable property is located.
X Ltd. is a publishing house and located in Gurugram (Haryana). For the purpose of organizing a book fair, it takes on rent
auditorium situated in the campus of IIT Delhi. It also engages an event management company, an interior decorator and
a caterer for this purpose. All these services will be covered by section 12(3)(c) of IGST Act. Place of supply of services will
be the location of immovable property (i.e., Delhi).
449.1-5 SERVICES ANCILLARY TO ABOVE 3 SERVICES [SEC. 12(3)(d) OF IGST ACT] - This rule covers any services ancillary to
above 3 services [i.e., mentioned in paras 449.1-2 to 449.1-4]. In such cases, the place of supply of services shall
be the location at which the immovable property (or boat or vessel) is located.
449.1-6 PERFORMANCE BASED SERVICES [SEC. 12(4) OF IGST ACT] - This rule covers supply of restaurant and catering
services, personal grooming, fitness, beauty treatment and health service (including cosmetic and plastic
surgery). In these cases, place of supply of services shall be the location where the services are actually
performed.
In these cases, nature of services is such which requires physical presence of the recipient of services. Though
these services are generally rendered at the premises of supplier of services (i.e., at a cosmetic or plastic surgery
clinic, or beauty parlour, or health and fitness centre, or internet café), they could also be provided at the
customer’s premises. Such services may also be provided occasionally while the receiver is on the move (i.e., a
personal security service; or a beauty treatment on-board an aircraft). Place of supply of services, shall be the
location where services are actually performed.
X Ltd. is an event management service provider and located in Mumbai. It organises a fashion show in Dubai for Raymond.
For this purpose, it engages a beauty parlour in Dubai for giving beauty treatment for its models in Dubai. In this case, place
of supply of services will be Dubai (i.e., the place where the beauty treatment service is actually performed). Consequently,
GST is not applicable on amount charged by beauty parlour from X Ltd.
449.1-7 TRAINING AND PERFORMANCE APPRAISAL SERVICES [SEC. 12(5) OF IGST ACT] - This rule covers supply of service in
relation to training and performance appraisal. Place of supply of services shall be as follows –
- Supply made to a registered person Location of recipient
- Supply made to unregistered person Location where services are actually performed
Princeton Academy (P.) Ltd. is a leader in executive education and corporate training. It is located in Mumbai. On December
17, 2019, it organises a corporate training programme on Transfer Pricing at JW Marriott, Mumbai. From the list of
participants, a few names are given below –
- Employees of A Ltd., Delhi [X and Y (from tax department) attended the training programme].
- Employees of B Airways Ltd., Bengaluru (Z, P, Q and R attended the training programme).
- C, an individual (he is a research scholar).
A Ltd. is registered GST dealer in Delhi. Likewise, B Airways Ltd. is a registered GST dealer in Bengaluru. X, Y, Z, P, Q, R
and C are not registered under GST. Place of supply of services will be as follows –
Employees of A Ltd. - A Ltd. is a registered GST dealer in Delhi. Place of supply of service will be the location of recipient (i.e.,
Delhi). It is an inter-State supply.
Employees of B Airways Ltd. - B Airways Ltd. is a registered GST dealer in Bengaluru. Place of supply of service will be the
location of recipient (i.e., Bengaluru). It is an inter-State supply.
C, individual research scholar - C is not registered under GST. Service is actually performed in Mumbai. Place of supply of
service will be Mumbai. It is an intra-State supply.
449.1-8 SERVICE BY WAY OF ADMISSION TO ANY EVENT [SEC. 12(6) OF IGST ACT] - This rule covers services provided by way
of admission to a cultural, artistic, sporting, scientific, educational, entertainment event or amusement park or
any other place and services ancillary thereto. In these cases, the place of supply of service will be the place where
the event is actually held or where the park or such other place is located.
1. X of Delhi visits Hyderabad. During his stay in Hyderabad, he visits Appu Ghar, Hyderabad (i.e., an amusement park).
The place of supply of service in this case is Hyderabad.
2. A leading business school of Delhi organises an exhibition in Chennai for prospective students. For visiting exhibition,
a student has to pay an admission fee of Rs. 500. This is the case of service provided by way of admission to an educational
event. The event takes place in Chennai. Consequently, the place of supply of service is Chennai.
3. A fashion show is organised by PC Jewellers in Dubai. X of New Delhi purchases a ticket to attend the fashion show. In
this case, place of supply is Dubai. Consequently, GST is not applicable.
449.1-9 SERVICE PERTAINING TO ORGANISATION OF AN EVENT [SEC. 12(7) OF IGST ACT] - This rule covers the following –
Different situations Place of supply of service
Supply of services provided by way of organisation of a
cultural, artistic, sporting, scientific, educational or enter-
 Supply to registered person - Place of supply of ser-
vices shall be the location of recipient.
tainment event including supply of services in relation to
a conference, fair, exhibition, celebration or similar events  Supply to unregistered person (event is held in India) -
Place of supply of services shall be the place where
Supply of services provided by way of – event is actually held.
- Services ancillary to organisation of any of the events/  Supply to unregistered person (event is held outside
services given above. India) - Place of supply of services shall be the location
- Assigning of sponsorship to such events of recipient.
Where a consolidated amount is charged and the event is held in more than one State or Union Territory, the
supply of services shall be treated as made in each of the respective States or Union territories in proportion to
the value for services separately collected or determined in terms of the contract or agreement. If there is no such
agreement, mode of computation will be prescribed by the Government.
1. X Ltd. is an Indian company based in Pune and engaged in fashion designing. It is not registered under GST. To organize
a fashion show in Dubai, X Ltd. engages Y & Co., an event organizer based in Mumbai (having GST registration). To organize
Dubai fashion show, it charges Rs. 4 lakh from X Ltd. In this case, service provider is Y & Co., a registered dealer. Supply
is received by X Ltd., an unregistered dealer. Event is held outside India. Accordingly, the place of supply of service is the
location of recipient (i.e., Pune). GST is applicable. It is intra-State supply. Y & Co. will charge CGST and SGST.
2. Suppose in the above case, fashion show is held in Chennai (not in Dubai). Recipient of supply is unregistered and event
is held in India. Place of supply will be Chennai (i.e., the location of event). It becomes inter-State supply. Y & Co. will charge
IGST.
3. Delhi University organises a seminar on pollution control in Gurugram (Haryana). It is sponsored by Saraswati Inc. (a
leading American manufacturer of air purifiers, not having any GST registration in India but it wants to start marketing of
its products in India). The entire cost of organizing seminar of Rs. 4,50,000 is borne by Saraswati Inc. (product advertisement
facility is provided to Saraswati Inc. at the event). In this case, service provider is Delhi University. Recipient of service is
Saraswati Inc., an unregistered person. The place of supply of service will be Gurugram (Haryana). It is inter-State supply.
IGST will be applicable.
449.1-10 SERVICE PERTAINING TO TRANSPORTATION OF GOODS [SEC. 12(8) OF IGST ACT] - This rule covers supply of services
by way of transportation of goods (including by mail or by courier). The place of supply of service will be as
follows –
Recipient of service Place of service
When the recipient of service is a registered person The place of service will be the location of recipient of
service
When the recipient of service is not a registered person The place of service will be the location at which such goods
are handed over for their transportation.
Note - If the transportation of goods is to a place outside India, the place of supply shall be the place of destination of such
goods (applicable with effect from February 1, 2019). Consequently, after February 1, 2019, transportation of goods from a
place in India to a place outside India by a transporter located in India would not be chargeable to GST, as place of supply
will be outside India.
1. X Ltd. is Indore based GST registered company. It engages a courier company located in Nagpur to send its samples by
courier from Nagpur to different locations. In this case, place of supply of service will be Indore (as recipient is registered
and located in Indore).
2. Suppose in the above case, X Ltd. is not registered under GST. The place of supply of service will be Nagpur (i.e., the place
where goods are handed over to the courier).
3. Suppose in the above 2 cases, letters are sent through courier. “Letters” are not goods. The above rule given by section
12(8) of IGST is not applicable [sending letters by courier would be covered by section 12(2) of IGST Act, see para 449.1-1].
449.1-11 SERVICE PERTAINING TO TRANSPORTATION OF PASSENGERS [SEC. 12(9) OF IGST ACT] - This rule covers passenger
transportation service. Place of supply of service is as follows –
Recipient of service Place of service

When the recipient of service is a registered person The place of service will be the location of recipient of
service
When the recipient of service is not a registered person The place of service will be the place where the passenger
embarks on the conveyance for a continuous journey.

1. Where the right to passage is given for future use and the point of embarkation is not known at the time of issue
of right to passage, the place of supply of such service shall be determined in accordance with the provisions of
section 12(2) of IGST Act, see para 449.1-1.
2. For the purposes of this rule, the return journey shall be treated as a separate journey, even if the right to
passage for onward and return journey is issued at the same time.
1. X Ltd. is a GST registered company located at Chennai. On December 1, 2019, it books Delhi–Hong Kong air ticket for B
(who is marketing head of the company). The booking is made on official website of Jet Airways. The place of supply will
be Chennai.
2. Suppose in the above case, ticket is booked by B himself (he does not give name of X Ltd. and GSTIN of X Ltd. to the airlines).
B is not registered under GST. The place of supply of service will be Delhi (being the place where passenger embarks on the
conveyance for a continuous journey.
449.1-12 SERVICES PROVIDED ON-BOARD A CONVEYANCE [SEC. 12(10) OF IGST ACT] - This rule covers any service provided
on-board for air passengers, railway passengers or passengers of any other mode. Some examples are on-board
service of movies, music, video, software games on demand, beauty treatment services. This rule is applicable
only when these services are provided during a passenger transport operation against a specific charge, and not
provided as a part of fare.
Under this rule, the place of supply of services shall be the location of the first scheduled point of departure of
that conveyance for the journey.
Air Asia provides a video game or a movie-on-demand on-board as entertainment against a charge during the Kolkata-Delhi
leg of a Bangkok-Kolkata-Delhi flight. The place of supply of this service will be Bangkok which is situated in a non-taxable
territory and, consequently, not chargeable to GST. Conversely, if the above service is provided by Air Asia on-board in its
Delhi-Kolkata-Bangkok-Jakarta flight during the Bangkok-Jakarta leg, then the place of supply of service will be Delhi and
chargeable to GST.
449.1-13 TELECOMMUNICATION SERVICES [SEC. 12(11) OF IGST ACT] - This rule covers telecommunication services
including data transfer, broadcasting, cable and direct to home television services to any person. The relevant
provisions are given below –
Different situations Place of supply of service
Services by way of fixed telecommunication Location where such telecommunication line, leased circuit or cable
line, leased circuits, internet leased circuit, connection or dish antenna is installed for receipt of services
cable or dish antenna
Mobile connection for telecommunication Location of billing address of the recipient of services on the record of the
and internet services provided on post-paid supplier of services
basis
Mobile connection for telecommunication,  When service is provided through a selling agent/re-seller/ distributor of
internet service and direct to home television subscriber identity module card or re-charge voucher - Place of supply of
services provided on pre-payment basis service will be the address of the selling agent or re-seller or distributor
through a voucher or any other means – as per the record of the supplier at the time of supply.
through selling agents, distributors of  When service is provided by any person to the final subscriber - Place of
recharge vouchers, etc. supply of service will be the location where such pre-payment is
received or such vouchers are sold.
In any other case Place of supply of service will be the address of the recipient as per the
records of the supplier of services and where such address is not
available, the place of supply shall be location of the supplier of services.

1. Where the address of the recipient (as per the records of the supplier of services) is not available, the place of
supply will be location of the supplier of services.
2. If pre-paid service is availed or the recharge is made through internet banking or other electronic mode of
payment, the location of the recipient of services on the record of the supplier of services shall be the place of
supply of such services.
3. Where the leased circuit is installed in more than one State/Union Territory and a consolidated amount is
charged, the place of supply of such services shall be taken as being in each of the respective States or Union
Territories. It may be calculated in proportion to the value for services separately collected or determined in
terms of the contract/agreement. In the absence of such contract/agreement, it may be calculated on such other
basis as may be prescribed.
449.1-14 BANKING AND FINANCIAL SERVICES [SEC. 12(12) OF IGST ACT] - This rule covers place of supply of banking and
other financial services (including stock broking services to any person). In such cases, the place of supply of
services shall be the location of the recipient of services on the records of the supplier. If, however, the location
of recipient of services is not on the records of the supplier, the place of supply shall be the location of the supplier
of services.
 X Ltd. of Delhi has a current account in South Extension branch of SBI. The place of supply of service by South Extension
branch of SBI to X Ltd. is Delhi (i.e., the location of the X Ltd., the recipient of services, on the records of SBI). If some services
(through its current account in South Extension branch) are obtained by X Ltd. in Maharashtra, the place of supply of services
will be Delhi (and, consequently, CGST and SGST will be chargeable). In such a transaction, the branch in Maharashtra will
only be a facilitator for providing these services. If the branch in Maharashtra levies any charges on the South Extension
branch in Delhi for providing this facility, that will be a separate supply between the two branches, it will be chargeable to
IGST.
 Rose Consultants (P.) Ltd. provides stock broking services in Gujarat. X and Y are clients of Rose Consultants. As per
records of the Bombay Stock Exchange (the details of the address of the client are required to be uploaded with the stock
exchange as part of the “Unique Client Code” details), address of X is New Park Street, Mumbai and address of Y is
Blacktown Road, Sydney.
Therefore, in the case of X, the place of supply shall be Mumbai [i.e., the “location of the recipient of services” in terms of
section 12(12) of IGST Act]. However, in the case of Y, the location of the recipient is outside India. The place of supply shall
be determined as per section 13(8) of IGST Act (i.e., as an intermediary).
449.1-15 INSURANCE SERVICES [SEC. 12(13) OF IGST ACT] - The place of supply of insurance services shall be as
follows –
 If recipient of service is registered under GST - The place of supply of services will be the location of recipient.
 If recipient is not registered under GST - The place of supply of services will be the location of the recipient of
services on the records of the supplier of services.
In the case of group insurance policies, a master policy is issued. Beneficiaries of the master policy may be located
in more than one State. If such policy is issued to a registered person and a single premium is charged (it is not
segregated based on the beneficiaries of the insurance policies), the place of supply for such policy will be the
location of the registered person paying the premium.
449.1-16 ADVERTISEMENT SERVICES PROVIDED TO GOVERNMENT [SEC. 12(14) OF IGST ACT] - This rule covers supply of
advertisement services to the Central Government, a State Government, a statutory body or a local authority. In
such cases, the place of supply of services will be the concerned State/Union Territory. If more than one State/
Union Territory is involved, the value of such supplies specific to each State or Union Territory shall be
calculated. Calculation can be made in proportion to the amount attributable to services provided by way of
dissemination in the respective States or Union territories as may be determined in terms of the contract/
agreement entered into in this regard. If there is no such agreement/contract, value may be calculated on such
other basis as may be prescribed.
X Ltd. is registered in Chennai. It provides advertisement services. It enters into an agreement with Kerala Government to
provide advertisement services pertaining to Swachh Bharat Abhiyan in the entire State of Kerala. Place of supply of service
in this case will be Kerala.
449.2 Place of supply of services (where location of supplier or location of recipient is outside India) - Rules
given by section 13 of IGST Act are applicable when supplier of services is located outside India or recipient of
services is located outside India. These rules are narrated in brief in the paras given below–
449.2-1 GENERAL PROVISIONS [SEC. 13(2) OF IGST ACT] - These are given below –
- Where the location of recipient of services is available Location of recipient
- Where the location of recipient of services is not available (in the ordinary course of Location of supplier
business)
The above rule is applicable in all cases (except the cases given below).
449.2-2 SERVICES ON GOODS MADE PHYSICALLY AVAILABLE BY THE RECIPIENT [SEC. 13(3) OF IGST ACT] - Rules given by section
13(3) of IGST Act are given below –
 Case 1 - If certain goods are required to be physically made available by the service recipient to the service
provider (in order to provide service), the place of provision of service would be the place where the services are
actually performed.
X of Hong Kong provides software repair services to Y Ltd. of Mumbai. Service is performed at software development site
of Y Ltd. in Chennai (service pertains to different software installed in computers of the Chennai unit). In this case, service
is actually performed in Chennai. Consequently, the place of supply of service by X will be Chennai.
Exceptions - The above rule has the following two exceptions –

1. When such services are provided from a remote location by way of electronic means, the place of supply shall
be the location where goods are situated at the time of provision of service. For instance, in the above case,
software repair service is performed by X from Hong Kong [by using Team Viewer software (which connects one
computer to another through internet and one can control another’s computer from a remote area]. Service is
performed in Hong Kong. By virtue of this exception, place of supply of service will be Chennai.
2. The above rule of Case 1 is not applicable if service is performed in respect of goods temporarily imported into
India (i.e., the case where goods are temporarily imported into India for repairs and are exported after the repairs
without being put to any use in India, other than that which is required for such repair). Law has been amended
(with effect from February 1, 2019) to extend the benefit of this exception to any other treatment or process done
on goods temporarily imported into India (e.g., gold, diamonds) which are then exported.
 Case 2 - If service is provided in the ordinary course of business, in the physical presence of an individual
(represented either as service receiver or as person acting on behalf of the receiver), the place of provision of
service would be the place where services are actually performed.
449.2-3 SERVICES IN RELATION TO IMMOVABLE PROPERTY [SEC. 13(4) OF IGST ACT] - This rule covers supply of services which
are directly in relation to an immovable property. This rule is similar to section 12(3)(a) of IGST Act [see paras
449.1-2 and 449.1-3].
449.2-4 SERVICE PERTAINING TO ADMISSION TO (OR ORGANISATION OF) AN EVENT [SEC. 13(5) OF IGST ACT] - This rule covers
services supplied by way of admission to (or organisation of) an event. The place of supply of service will be the
place where the event is actually held.
 This rule covers supply by way of admission to (or organisation of) a cultural, artistic, sporting, scientific,
educational or entertainment event, or a celebration, conference, fair, exhibition or similar events, and of services
ancillary to such admission or organisation.
A management school located in the Netherlands organizes a road show in Mumbai for prospective students. Any service
provided by an event manager will be deemed to be provided in Mumbai.
449.2-5 ABOVE SERVICES (PARAS 449.2-2 TO 449.2-4) PERFORMED IN TAXABLE TERRITORY [SEC. 13(6)/(7) OF IGST ACT] - This rule
covers the case where above services [which are covered by section 13(3)/(4)/(5) of IGST Act] is provided at more
than one location (including a location in taxable territory), the place of supply shall be the location in the taxable
territory.
X Ltd., an Indian company, provides a technical inspection and certification service to a Japanese company for a newly
developed bike (which has to meet emission standards in different States or countries). As per service agreement, testing
is carried out in Coimbatore (20 per cent) and Colombo (80 per cent). In this case, place of provision of service will be
Coimbatore.
 When more than one State/Union Territory is involved - Where above services are supplied in more than one State
or Union Territory, the place of supply of such services shall be taken as being in each of the respective States
or Union territories. The value of such supplies specific to each State or Union Territory shall be calculated
separately. The separate calculation can be done in proportion to the value for services separately collected or
determined in terms of the contract/agreement entered with the other party. If there is no such agreement/
contract, calculation can be made on such other basis as may be prescribed.
449.2-6 SERVICES TO ACCOUNT HOLDERS [SEC. 13(8) OF IGST ACT] - The place of supply of following services shall be the
location of supplier of services –
a. services supplied by a banking company, or a financial institution, or a non-banking financial company, to
account holders;
b. intermediary services;
c. services consisting of hiring of means of transport (including yachts but excluding aircrafts and vessels) up
to a period of 1 month.
1. “Account” means an account bearing interest to the depositor, and includes a non-resident external (NRE)
account and a non-resident ordinary (NRO) account.
2. As stated above, the place of supply of services supplied by a banking company located in India to account
holders located outside India is the location of the service provider (i.e., banking company located in India). This
rule is applicable in the case of services which are generally provided by a banking company/financial
institution/NBFC to account holders.
A few examples of services which are generally not provided by a banking company, etc., to an account holder
in the ordinary course of business are (a) financial leasing services including equipment leasing and hire-
purchase; (b) merchant banking services; (c) securities and foreign exchange (forex) broking, and purchase or sale
of foreign currency, including money changing; (d) asset management including portfolio management, all
forms of fund management, pension fund management, custodial, depository and trust services; (e) advisory
and other auxiliary financial services including investment and portfolio research and advice, advice on mergers
and acquisitions and advice on corporate restructuring and strategy; (f) banker to an issue service.
In case of any service which does not qualify as service provided to an account holder, the place of supply for
such services shall be the location of the recipient of services [as given in section 13(2) of IGST Act].
3. The location of the supplier in case of banking and other financial services (where multiple locations are
involved in providing the services to a customer) is location of home branch/account branch.
4. “Intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or
facilitates the supply of goods or services or both, or securities, between two or more persons, but does not
include a person who supplies such goods or services or both or securities on his own account. An intermediary
cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal,
although the principal may authorize the intermediary to negotiate a different price. Also, the principal must
know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the
intermediary obtains must be passed back to the principal. A few examples of “intermediary” are – travel agent
(any mode of travel), tour operator, commission agent for a service, recovery agent.
5. Banking services/financial services provided to non-account holders shall not be governed by this rule. It will
be governed by the parameters of section 13(2) of IGST Act.
449.2-7 TRANSPORTATION OF GOODS [SEC. 13(9) OF IGST ACT] - This rule covers transportation of goods (other than by
way of mail or courier). Under this rule the place of supply of services pertaining to transportation of goods shall
be the place of destination of goods.
X sends a consignment of artificial grass from Hyderabad to Hong Kong by air. The place of supply of transportation of
service will be Hong Kong. If, however, a consignment is sent by air from Hong Kong to Hyderabad, the place of supply
will be Hyderabad.
449.2-8 TRANSPORTATION OF PASSENGERS [SEC. 13(10) OF IGST ACT] - This rule covers passenger transportation service.
Under this rule, the place of passenger transportation service is the place where the passenger embarks on the
conveyance for a continuous journey. “Continuous journey” for this purpose, means a journey for which a single
ticket has been issued for the entire journey. It also covers a journey where more than one ticket is issued at the
same time. Such ticket may be issued by a single supplier or through an agent acting on behalf of more than one
supplier. Continuous journey does not involve any stopover between any legs of the journey. “Stopover” means
a place where a passenger can disembark either to transfer to another conveyance or break his journey for a
certain period in order to resume it at a later point of time.
Consider the following —
1. A single ticket is issued by Air India to a foreign tourist for Delhi-Mumbai-Dubai-London journey. The place of provision
of service will be Delhi (being the place of embarkation) and, consequently, it is chargeable to tax.
2. A single ticket is issued by Jet Airways for London-Mumbai-London flight (date of flight for London-Mumbai sector :
October 10, 2019, for return journey Mumbai- London: October 25, 2019). A single ticket is issued for the entire journey but
London-Mumbai-London journey is not a “continuous journey”. London-Mumbai will be treated as separate journey (place
of supply will be London) and for Mumbai-London leg, Mumbai will be place of supply.
3. Spice Jet issues two tickets to X, a foreign tourist, for Delhi-Dubai-London sector. First ticket covers Delhi-Dubai (departure
from Delhi on January 2, 2020 at 1:00 PM, arrival at Dubai at 4:00 PM). Second ticket covers Dubai-London (departure from
Dubai on January 2, 2020 at 5:30 PM). In this case, two tickets are issued to X at the same time but there is no “stopover” (break
in journey at Dubai from 4:00 PM to 5:30 PM is not a “stopover”). The place of supply of service will be Delhi. Consequently,
GST is applicable.
449.2-9 SERVICES PROVIDED ON-BOARD A CONVEYANCE [SEC. 13(11) OF IGST ACT] - This rule covers any service provided
on-board for air passengers, railway passengers or passengers of any other mode. This rule is similar to section
12(10) of IGST Act [see para 449.1-12].
449.2-10 ONLINE INFORMATION AND DATABASE ASSESS SERVICE [SEC. 13(12) OF IGST ACT] - The place of supply of online
information and database access or retrieval services shall be the location of the recipient of services.
 What is online information and database assess service - It means services whose delivery is mediated by information
technology over the internet or an electronic network and the nature of which renders their supply essentially
automated and involving minimal human intervention. A few examples are : internet advertisement, cloud
services, e-books/movie/music/software through internet, online supplies of digital content (movies, televi-
sion shows, music and the like), digital data storage, online gaming.
 When the recipient is deemed to be located in India - A person receiving above services shall be deemed to be located
in the taxable territory, if any two of the following non-contradictory conditions are satisfied –
a. the location of address (presented by the recipient of services through internet) is in the taxable territory;
b. the credit card/debit card/any other card by which the recipient of services settles payment has been issued
in the taxable territory;
c. the billing address of the recipient of services is in the taxable territory;
d. the internet protocol address of the device used by the recipient of services is in the taxable territory;
e. the bank of the recipient of services (in which the account used for payment) is maintained is in the taxable
territory;
f. the country code of the subscriber identity module card used by the recipient of services is of taxable territory;
g. the location of the fixed land line through which the service is received by the recipient is in the taxable
territory.
Taxmann website offers downloading of tax related matters. For this, Taxmann gets fixed charges through online mode. X,
an Indian citizen, is currently in London. He downloads a few judgments pertaining to income-tax and GST from Taxmann
website after making online payment from London. Location of recipient is in London. Place of supply of service (under the
main portion of this rule) should be London. But there is a deeming provision [(a) to (g) given above]. One has to see whether
X satisfies any of the above 2 non-contradictory conditions. Suppose, SBI credit card is used for making payment and billing
address of X is in India, it will be deemed that X is located in India (2 non-contradictory conditions are satisfied). In such
a case, the place of supply of service will be in India.
449.2-11 NOTIFIED SERVICES [SEC. 13(13) OF IGST ACT] - In order to prevent double taxation or non-taxation of the supply
of a service, or for the uniform application of rules, the Government has power to notify any description of
services or circumstances in which the place of supply shall be the place of effective use and enjoyment of a
service.
683 Problems on place of supply Problem 450-P2
 Notified services - Under section 13(13) of the IGST Act, the Central Government has notified that (with effect
from October 1, 2019) the place of supply shall be the place of effective use and enjoyment of the service if the
following conditions are satisfied -
Supplier - Supplier is a person located in taxable territory.
Recipient - Recipient is a person located in the non-taxable territory.
Contract - Supply of services is provided as per contract between supplier and recipient and it fulfils all conditions
in the definition of export of services.
Nature of services - The following services are provided -
- Integrated discovery and development
- Integrated development
- Evaluation of the efficacy of new chemical/biological entities in animal models of disease
- Evaluation of biological activity of novel chemical/biological entities in in-vitro assays
- Drug metabolism and pharmacokinetics of new chemical entities
- Safety Assessment/Toxicology
- Stability Studies
- Bio-equivalence and Bio-availability Studies
- Clinical trials
- Bio analytical studies
 Problems on place of supply
450-P1 X Ltd. is in the business of supply and installation of plant and machinery. It is located in Mumbai and has GST registration
from Maharashtra (it does not have GST registration in any other State/Union Territory). It enters into an agreement to supply and
install fertilizer machinery for the factory of Y Ltd. in Kota, Rajasthan. Agreed consideration for this supply is Rs. 90 lakh + GST.
Installation work is completed by X Ltd. during August 2019 (with the help of a team of workers/consultants deputed from Mumbai).
What is the place of supply in this case ? Determine the amount of GST (assume that GST rate is 18 per cent).
Solution :
By virtue of section 10(1)(d) of IGST Act, place of “supply” shall be the place of installation of plant and machinery (if goods
are assembled or installed at site). In this case, installation work is done at the factory of Y Ltd. in Kota, Rajasthan.
Consequently, place of supply is Rajasthan. Location of supplier is Maharashtra. It will be inter-State supply. Quantum of
GST will be calculated as follows –
Rs.
Value of taxable supply 90,00,000
Add: GST –
- IGST @ 18% 16,20,000
Total 1,06,20,000
450-E1 In Problem 450-P1, assume that X Ltd. has a branch office in Jaipur. Branch office is registered under GST. Supply of fertilizer
machinery and its installation is done by Jaipur branch of X Ltd.
450-P2 X is a chartered accountant based in Chennai. He has GST registration from Tamil Nadu (he does not have GST registration
in any other State/Union Territory). He provides tax consultancy to Y Ltd. (consultancy fee being Rs. 3,50,000 + GST). Y Ltd. has
transferred residential buildings situated near its Nasik factory. X has provided tax consultancy from his Chennai office and consultancy
pertains to different methods of minimising capital gains tax liability of Y Ltd.
Solution :
Supplier is X and he is located in Tamil Nadu. Tax consultancy pertains to transfer of buildings which are situated in Nasik.
However, place of supply cannot be Nasik. Place of supply in this case is Tamil Nadu. Consequently, it is intra-State supply.
GST will be calculated as follows –
Rs.
Add: GST –
- CGST @ 9% 31,500
- SGST @ 9% 31,500
Total 4,13,000
450-E2 In Problem 450-P2, assume that X has a branch office in Surat. Consultancy work is completed in Surat branch. Invoice is
issued by Surat branch. Is it inter-State supply ? Determine the amount of GST.
Problem 450-P3 Place of Supply 684
450-P3 X is an architect. He heads one of the leading architecture and design practices in the country with offices in Chennai and
Madurai. He has GST registration from Tamil Nadu (he does not have GST registration in any other State/Union Territory). He has
prepared building plans for Y Ltd. for its factory situated in Nagpur. Building plans are prepared by the team of X from Chennai office.
Construction work is completed by Y Ltd. under the supervision of X (only on a few occasions, X has visited Nagpur). Consultancy fee
charged by X is Rs. 30 lakh + GST.
Solution :
By virtue of section 12(3)(a) of IGST Act, place of supply of services shall be the location of immovable property. This rule
is applicable if service is directly connected to immovable property (e.g., service provided by architects, interior decorators,
engineers for carrying out construction work). In this case, architectural services pertain to immovable property situated in
Nagpur. Consequently, place of supply of service is Nagpur. Location of supplier is Tamil Nadu. It becomes inter-State
supply and GST will be shown as follows in the invoice –
Rs.
Add: GST –
- IGST @ 18% 5,40,000
Total 35,40,000
450-E3 In Problem 450-P3, assume that X has a branch office in Surat. Consultancy work is completed in Surat branch. Invoice is
issued by Surat branch. Is it inter-State supply ? Determine the amount of GST.
450-P4 A Ltd. is engaged in fertilizer manufacturing in Karnataka. It has GST registration from Karnataka (A Ltd. does not have
registration in any other State/Union Territory). X is head of finance department of the company. On January 10, 2020, X goes to Mumbai
to attend a 3 day conference on international finance organised by Harvard Business School at Nariman Point. For this purpose, he incurs
the following expenditure –
1. Bengaluru-Mumbai air ticket (paid to Air Vistara, Karnataka) : Rs. 26,000 + GST.
2. 3 day conference participation fee (paid to Harvard Business School, at the time of registration in Mumbai) : Rs. 1,50,000 + GST.
3. Hotel expenditure (paid to Taj Hotels, Mumbai) : Rs. 60,000 + GST.
4. Mumbai-Bengaluru air ticket (paid to Air India, Mumbai) : Rs. 32,000 + GST.
These expenses are paid by cheque by A Ltd. Recipient of supply is A Ltd. (GSTIN of A Ltd. is given on tax invoices).
What is the place of supply in these cases ?
Solution :
Place of supply will be determined as follows –
1. Bengaluru-Mumbai air ticket - This service is pertaining to transportation of passengers. It is covered by section 12(9) of IGST
Act. If the recipient is a registered person, place of supply of service is the location of recipient of service. A Ltd. is registered
in Karnataka. Place of supply of service is in Karnataka. Location of supplier is in Karnataka. Consequently, it is intra-State
supply.
2. Conference participation - Training services are covered by section 12(5) of IGST Act. If the recipient is a registered person,
place of supply of service is the location of recipient of service. A Ltd. is registered in Karnataka. Place of supply of service
is in Karnataka. Location of supplier is in Mumbai (it is assumed that Harvard Business School has taken registration in
Mumbai as a casual taxable person for this conference). Consequently, it is inter-State supply.
3. Lodging accommodation by Taj Hotels - It is covered by section 12(3)(b) of IGST Act. Place of supply of service is the location
of hotel building (i.e., Mumbai). Location of supplier is in Mumbai. It is, therefore, intra-State supply.
4. Mumbai-Bengaluru air ticket - As discussed above, place of supply of service is in Karnataka. Location of supplier is in
Mumbai. Consequently, it is inter-State supply.
450-E4 In Problem 450-P4, assume that A Ltd. is unregistered person. Determine the place of supply.
450-P5 Find out the place of supply in the cases given below –
1. X Ltd. is registered in Andaman. It provides advertisement services to the Central Government. The service pertains to achievement
of Central Government during 2019-20 to the tourist visiting Andaman. Service is performed in South Andaman and its nearby islands.
2. A trade fair is organised by the Delhi Government in New Delhi. Y Ltd. is a garment manufacturing company (it has taken GST
registration from Gujarat). Y Ltd. engages B Ltd., an event management company, located in New Delhi, to participate in the trade fair.
All services pertaining to New Delhi Trade Fair (designing of stall, display of products of Y Ltd., fashion show for Y Ltd., engaging of
models, arranging gifts for guests visiting stall) are provided by B Ltd. against a consolidated consultancy fee of Rs. 40 lakh. B Ltd. has
GST registration from New Delhi.
Solution :
1. Advertisement service to Government - It is covered by section 12(14) of IGST Act. This rule is applicable if advertisement
services are provided to the Central Government, a State Government, statutory body or a local authority. Place of supply
of services will be the concerned State/Union Territory. Consequently, the place of supply of service will be Andaman.
685 Problems on place of supply Problem 450-P9
2. Trade fair - It is covered by section 12(7) of IGST Act. If service pertaining to organization of an event is provided to a GST
registered person, the place of supply is the location of recipient. Location of recipient is in Gujarat. Consequently, the place
of supply of service will be in Gujarat.
450-E5 In Problem 450-P5, assume that Y Ltd. is unregistered person and trade fair is organised by the Delhi Government in Sri
Lanka.
1. X Ltd. is registered in Kolkata. It manufactures perfumes. To display its products to foreign tourist, it takes on rent an exhibition hall
situated in Srinagar. Rent at the rate of Rs. 10,000 per day is paid to the landlord who is located in Srinagar.
2. To organize the above display, X Ltd. engages C Ltd., Amritsar, an event management company. The entire display programme is
organised under the supervision of C Ltd. (event management fee being Rs. 80,000).
Solution :
1. Exhibition hall - Place of supply of service is Srinagar (i.e., the location of immovable property).
2. Event management - It is covered by section 12(7) of IGST Act. If service pertaining to organization of an event is provided
to a GST registered person, the place of supply is the location of recipient. Location of recipient is in Kolkata. Consequently,
the place of supply of service will be in Kolkata.
450-E6 In Problem 450-P6, find out the status of even management service. Is it inter-State or intra-State supply ?
1. X Ltd. has GST registration from Kanpur. It manufactures synthetic fiber for domestic and overseas market. On March 10, 2020, it
sends 200 packets of fiber to Singapore (these packets are handed over to Singapore Airlines at New Delhi).
2. X Ltd. sends another consignment of 300 packets to Norway on March 25, 2020 (these packets are handed over to Air India at New
Delhi).
Solution :
1. Consignment sent through Singapore Airlines - In the case of transportation of goods (where location of supplier or location
of recipient is outside India), the relevant rule is given by section 13(9) of IGST Act. Under this rule, the place of supply of
services pertaining to transportation of goods shall be the place of destination of goods. Consequently, place of supply will
be Singapore.
2. Consignment sent through Air India - Section 13(9) is not applicable where location of supplier (Air India) and location of
recipient of service (X Ltd.) are in India. In such a case, place of supply pertaining to transportation of goods is given by
section 12(8) of IGST Act. If recipient of service is a registered person, the location of recipient of service is the place of supply.
Recipient of service is X Ltd. Consequently, place of supply is Kanpur.
450-E7 In Problem 450-P7, find out the place of supply of consignment sent through Air India if X Ltd. is unregistered.
1. X Ltd. has GST registration from New Delhi. On December 1, 2019, it purchases Dubai-Delhi air ticket from Air India for one of its
chief executive officers for Rs. 1,10,000 + applicable GST.
2. Further, on January 1, 2020, X Ltd. purchases New York-Mumbai air ticket from Air France for US $ 4,000. Air France is not a
registered person in GST.
Solution :
1. In the case of service pertaining to transportation of passengers (if supplier and recipient are located in India), the relevant
rule is given by section 12(9) of IGST Act. In this case, X Ltd. and Air India are located in India. Under section 12(9) of IGST
Act, the location of recipient is the place of supply (if recipient is a registered person). Consequently, the place of supply will
be New Delhi.
2. The above rule of section 12(9) of IGST Act is not applicable if the location of supplier (i.e., Air France) or location of
recipient (i.e., X Ltd.) is outside India. In such a case, the relevant rule is given by section 13(10) of IGST Act. Under this rule,
the place of passenger transportation service is the place where the passenger embarks on the conveyance for a continuous
journey. The place of provision of service will be New York (being the place of embarkation).
450-E8 In Problem 450-P8, find out the place of supply of Dubai-Delhi air ticket if X Ltd. is not a registered person.
1. X Ltd. has a GST registration from Hyderabad. It is in the business of designing and manufacturing high quality fashion garments.
It wants to organise a fashion show in Dubai during March 2020. For this purpose, it engages B Ltd., an event management company
having GST registration from New Delhi. B Ltd. will provide different designs for the fashion show against a consultancy fee of Rs. 5
lakh + GST.
2. X Ltd. also engages C Inc., a Dubai based event management company. Fashion show will be organised under the supervision of C
Inc. For this purpose, C Inc. will charge a fee of US $ 6,000.
Place of Supply 686
Solution:
1. Event management service provided by B Ltd. - Location of supplier (B Ltd.) and location of recipient (X Ltd.) are in India. In
this case, the relevant rule is given by section 12(7) of IGST Act. Place of supply of service will be the location of recipient
(i.e., Hyderabad).
2. Event management service provided by C Inc. - Location of supplier (C Inc.) is outside India. In this case, relevant rule is
provided by section 13(5) of IGST Act. The place of supply will be the place where the event is actually held (i.e., Dubai).
450-E9 In Problem 450-P9, find out the place of supply is C Inc. has a branch in Jaipur. Jaipur branch is registered under GST. service
is provided by Jaipur branch of C Inc. What is the place of supply ?
●
Test your knowledge

1. What is the significance of finding out location of supplier and place of supply ? [para 444]
2. What are the parameters to find out location of supplier of goods/services ? [paras 445 and 446]
3. Discuss the provisions of IGST Act pertaining to place of supply of goods. [para 448]
4. How would you find out whether supply of services in relation to an immovable property is situated in India. [para
449.1-2]
5. How would you find out whether service is by way of lodging accommodation by hotel/guest house is situated. [para
449.1-3]
6. Prepare a brief note pinpointing place of supply of following services –
- Performance based services like beauty treatment.
- Accommodation for organizing functions.
- Training services.
- Admission to amusement park. [paras 449.1-6 to 449.1-8]
7. How would you find out place of supply of service in the following cases –
- Organisation of a musical programme.
- Sponsorship.
- Transportation of manufactured goods to a person who is registered under GST.
- Transportation of passengers by air.
- Movie on demand in a flight. [paras 449.1-9 to 449.1-12].
8. How would you find out place of supply of service when supplier is located outside India or recipient is located outside
India. [para 449.2]
9. What are the parameters to find out place of service when service is provided by a foreign airline to an Indian passenger.
[para 449.2-8]
10. You are a tax advisor to a multi-national company providing online information service through website. Prepare a note
for the chairman of your company pinpointing GST applicability when services of the company are utilised by Indian
companies. [para 449.2-10]
CHAPTER 25 Time of supply
G
ST is payable on supply of goods or services. At what point of time GST is attracted
is discussed in this chapter. GST law provides different parameters to determine
point of taxation. This chapter covers these provisions.
 TIME OF SUPPLY - HOW TO DETERMINE AND ITS SIGNIFICANCE

455. The liability to pay GST on goods/services arises at the time of supply of goods and services. The time of
supply fixes the point when the liability to charge GST arises. Due date of payment of GST depends upon time
of supply. GST pertaining to supply of current month should be normally paid on monthly basis by 20th day of
succeeding month.
Sections 12 and 13 provide parameters to find out time of supply of goods/services. Section 14 covers tax
incidence when there is change in rate of tax in respect of supply of goods/services. To understand implication
of these provisions, one should note down the following points –
455.1 Statutory time for issue of invoice in the case of taxable supply of goods - Section 31 covers time of
issue of invoice in the case of supply of goods. Invoice is required to be prepared before or at the time of –
a. removal of goods for supply to the recipient (where the supply involves movement of goods); or
b. delivery of goods; or
c. making available of goods to the recipient.
The obligation of the supplier of goods is to issue the invoice latest by performance of any of the above 3 activities.
For instance, X dispatches goods to Y from his depot on November 12, 2019. X can issue invoice on or before
November 12, 2019. The following points should be kept in view –
 Continuous supply of goods - In case of continuous supply of goods, where successive statements of accounts or
successive payments are involved, the invoice shall be issued before or at the time each such statement is issued
or each such payment is received.
 Goods on approval - Invoice of goods sent on approval is required to be issued –
a. within 6 months from the date of removal of goods, or

b. the date when recipient indicates that he has accepted the supply of goods,
455.2 Statutory time for issue of invoice in the case of taxable supply of services - Rule 47 covers time of issue
of invoice in the case of taxable supply of services. Such invoice should be issued within 30 days from the date
of supply of service. However, different time-limit is applicable in the following cases –
1. When supplier of services is an insurer/banking company/financial institution/non-banking financial
company, invoice can be issued within 45 days from the date of the supply of service.
2. An insurer/banking company/financial institution/non-banking financial company/telecom operator,
making taxable supplies of services between distinct persons (i.e., service provided by one branch to another
branch) may issue the invoice before or at the time such supplier records the same in his books of account or
before the expiry of the quarter during which the supply is made.
 Continuous supply of services - “Continuous supply of services” means a supply of services which is provided
(or agreed to be provided) continuously or on recurrent basis, under a contract. Such a contract is for a period
exceeding 3 months with periodic payment obligations. In the case of continuous supply of service –
687
Para 455.3 Time of Supply 688
- Where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the
due date of payment.
- Where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at
the time when the supplier of service receives the payment.
- Where the payment is linked to the completion of an event, the invoice shall be issued on or before the date
of completion of that event.
455.3 Date of receipt of payment - Generally, the date of receipt of payment is the date on which payment is
entered in the books of account of the supplier or the date on which payment is credited to his bank account,
whichever is earlier. For instance, X, the supplier of goods/services, receives a cheque on October 20, 2019. It is
recorded in his books on October 21. It is sent for collection to the bank on October 22 and bank credit the same
in the current account of X on October 23. The date of receipt of payment in this case is October 21, 2019 (i.e., the
date of recording in the books of account or date of credit by bank, whichever is earlier).
 Change in rate of tax in respect of supply of goods/services - The date of receipt of payment shall be the date of credit
in the bank account, if such credit in the bank account is after 4 working days from the date of change in the rate
of tax.
 WHAT ARE THE RULES FOR DETERMINATION OF TIME OF SUPPLY OF GOODS

456. Time of supply of goods is given by section 12.
456.1 General rules [Sec. 12(2)] - Generally, time of supply of goods can be determined on the basis of following
two events –
 Event 1 - Date of issue of an invoice by the supplier (or the last date on which the supplier is required to issue
invoice under section 31).

 Event 2 - Date of receipt of payment by the supplier.
Time of supply of goods will be as follows –

Law applicable
During July 1, 2017 During October 13, 2017 and November 14, 2017 On or after
and October 12, 2017 November 15, 2017
[see Case 1 given Aggregate turnover of supplier Aggregate turnover of supplier [see Case 2 given below]
below] Rs. 1.5 crore† or less more than Rs. 1.5 crore
Time of supply is – Time of supply is – Time of supply is – Time of supply is –
- Event 1; or - Event 1 - Event 1; or - Event 1
- Event 2, - Event 2,
whichever is earlier (Event 2 is irrelevant)‡ whichever is earlier (Event 2 is irrelevant)‡
Conclusion - Time of supply is generally determined on the basis of invoice or payment, whichever is earlier.
However, the Government has given a concession in the case of small taxpayers (having turnover of Rs. 1.5 crore
or less) (with effect from October 13, 2017) and in the case of all taxpayers (with effect from November 15, 2017).
After this concession, GST will be payable on the basis of date of invoice (not on the basis of advance payment)
in the case of supply of goods (no such concession is given in the case of supply of services). However, in the case
of a registered person (who has opted under section 10 for the Composition Scheme or Alternative Composition
Scheme), time of supply is date of issue of invoice (i.e., Event 1) or date of receipt of payment (i.e., Event 2),
 Case 1 - The following data is noted from the records of X Ltd., a chemical manufacturer –
1. It receives an order to supply 10,000 bags of caustic soda from A Ltd. on July 30, 2017.
2. Along with order, an advance of Rs. 4 lakh is received on the same day.
3. X Ltd. starts manufacture of the above goods on August 18, 2017 which is completed on August 26, 2017.
4. X Ltd. completes packaging on August 27, 2017.
5. On August 28, 2017, goods are sent from the factory to nearby depot of X Ltd. for inspection by A Ltd.
† It covers a registered person whose aggregate turnover in the financial year 2016-17 does not exceed Rs. 1.5 crore (or the registered person whose
aggregate turnover in the year in which registration is obtained is likely to be less than Rs. 1.5 crore).
‡ Event 2 is irrelevant in the case of a registered person who has not opted for the Composition Scheme or Alternative Composition Scheme under
section 10.
689 Continuous supply of goods Para 456.3
6. Goods are inspected by the team of A Ltd. on August 29, 2017. On the same day, A Ltd. transfers Rs. 10 lakh as advance
through NEFT credit in the SBI current account of X Ltd. (the same is recorded in the books of X Ltd. on September 1, 2017).
7. Goods are delivered from depot to the agent of A Ltd. on August 30, 2017.
8. Tax invoice is issued by X Ltd. on September 2, 2017.
9. Balance payment (i.e., amount of invoice minus advance of Rs. 14 lakh) is received September 14, 2017.
In this case, law requires X Ltd. to issue invoice on or before August 30, 2017 (i.e., the date of delivery of goods to the recipient).
Date of receipt of advance of Rs. 10 lakh is August 29, 2017 (i.e., the date of credit in bank account or date of recording the
transaction in the books of X Ltd., whichever is earlier). Time of supply will be as follows –
Different activities Date of invoice (or last date when Date of payment Time of supply
law requires to issue invoice)
Receipt of advance of Rs. 4 lakh August 30, 2017 July 30, 2017 July 30, 2017†
Receipt of advance of Rs. 10 lakh August 30, 2017 August 29, 2017 August 29, 2017‡
Final payment August 30, 2017 September 14, 2017 August 30, 2017‡
† GST should be paid on or before August 20, 2017 (i.e., 20th day of succeeding month).
‡ GST should be paid on or before September 20, 2017 (i.e., 20th day of succeeding month).
 Case 2 - The following data is noted from the records of Y Ltd., a synthetic silk manufacturing company (not covered by
Composition Scheme/Alternative Composition Scheme) –
1. It receives an order to supply 50,000 meters of synthetic silk from B Ltd. on November 30, 2019.
2. Along with order, an advance of Rs. 5 lakh is received on the same day.
3. Y Ltd. starts manufacture of the above goods on December 18, 2019 which is completed on December 26, 2019.
4. Y Ltd. completes packaging on December 27, 2019.
5. On December 28, 2019, goods are sent from the factory to nearby depot of Y Ltd. for inspection by B Ltd.
6. Goods are inspected by the team of B Ltd. on December 29, 2019. On the same day, B Ltd. transfers Rs. 20 lakh as advance
through NEFT credit in the SBI current account of Y Ltd.
7. Goods are delivered from depot to the agent of B Ltd. on December 30, 2019.
8. Tax invoice is issued by Y Ltd. on January 2, 2020.
9. Balance payment (i.e., amount of invoice minus advance of Rs. 25 lakh) is received on January 14, 2020.
In this case, law requires Y Ltd. to issue invoice on or before December 30, 2019 (i.e., the date of delivery of goods to the
recipient). Time of supply will be as follows –
Different activities Date of invoice (or last date when Date of payment Time of supply
law requires to issue invoice)
Receipt of advance of Rs. 5 lakh December 30, 2019 Not to be considered December 30, 2019†
Receipt of advance of Rs. 20 lakh December 30, 2019 Not to be considered December 30, 2019†
Final payment December 30, 2019 Not to be considered December 30, 2019†
† GST should be paid on or before January 20, 2020 (i.e., 20th day of succeeding month).
456.2 Option in the case of advance up to Rs. 1,000 - Where the supplier of taxable goods receives an amount
up to Rs. 1,000 in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess
amount shall, at the option of the said supplier, be the date of issue of invoice in respect of such excess amount.
 Practical relevance of this option (if a person is not covered by Composition Scheme/Alternative Composition
Scheme) - The Government has given a concession in the case of small suppliers of goods (having turnover of Rs.
1.5 crore or less) (with effect from October 13, 2017) and in the case of all suppliers of goods (with effect from
November 15, 2017). After this concession, GST is not payable on the basis of payment or advance payment.
Consequently, the aforesaid option does not have much practical utility (in the case of supply of goods) as is
shown in the table given below –
Practical utility of the option in case of advance up to Rs. 1,000
During July 1, 2017 During October 13, 2017 and November 14, 2017 On or after
and October 12, 2017 November 15, 2017
Aggregate turnover Rs. 1.5 crore† or less Aggregate turnover more than Rs. 1.5 crore
Applicable Option not relevant Applicable Option not relevant
† It covers a registered person whose aggregate turnover in the financial year 2016-17 does not exceed Rs. 1.5 crore (or the
registered person whose aggregate turnover in the year in which registration is obtained is likely to be less than Rs. 1.5 crore).
456.3 Continuous supply of goods - There is no special provision pertaining to time of supply in the case of
continuous supply of goods. However, section 31(4) requires that in case of continuous supply of goods, where
successive statements of accounts (or successive payments) are involved, the invoice shall be issued before or
at the time each such statement is issued (or each such payment is received).
 Case 1 - The following data is noted from the records of X Ltd. (supplier of paints through pipeline to Mar Udyog Ltd.)
and Mar Udyog Ltd. (a car manufacturer, recipient of goods) –
1 X Ltd. supplies paints through a pipeline from its factory to Mar Udyog Ltd.
2. On July 31, 2017, X Ltd. gets advance payment of Rs. 10,00,000 from Mar Udyog Ltd. for the quarter ending September
30, 2017 (invoice not issued).
3. Similar payment of Rs. 10,00,000 is received on August 31, 2017 and September 30, 2017 (no invoice issued)
4. On October 3, 2017, X Ltd. issues invoice for the quarter ending September 30, 2017 (total amount including GST : Rs.
40,50,000 minus advance of Rs. 30,00,000, balance due Rs. 10,50,000).
5. On October 10, 2017, X Ltd. gets payment of Rs. 10,50,000
In this case, law requires X Ltd. to issue invoice at the time of receipt of advance (or before). Time of supply of goods will
be as follows –
Different activities (receipt of Date of invoice Last date to issue invoice Date of payment Time of supply [(2), (3),
payment, issue of bill) (statutory requirement) (4), whichever is earlier]
(1) (2) (3) (4) (5)
Rs. 10,00,000 (July 31, 2017) – July 31, 2017 July 31, 2017 July 31, 2017‡
Rs. 10,00,000 (August 31, 2017) – August 31, 2017 August 31, 2017 August 31, 2017††
Rs. 10,00,000 (September 30, 2017) – Sept. 30, 2017 Sept. 30, 2017 Sept. 30, 2017#
Invoice (October 3, 2017) (balance October 3, 2017 – October 10, 2017 October 3, 2017$
due Rs. 10,50,000)
‡ GST should be paid on or before August 20, 2017 (i.e., 20th day of succeeding month).
†† GST should be paid on or before September 20, 2017 (i.e., 20th day of succeeding month).
# GST should be paid on or before October 20, 2017 (i.e., 20th day of succeeding month).
$ GST should be paid on or before November 20, 2017 (i.e., 20th day of succeeding month).
 Case 2 - The following data is noted from the records of Y Ltd. (supplier of paints through pipeline to Mar Udyog Ltd.)
and Mar Udyog Ltd. (a car manufacturer, recipient of goods) –
1. Y Ltd. supplies paints through a pipeline from its factory to Mar Udyog Ltd.
2. On November 30, 2019, Y Ltd. gets advance payment of Rs. 10,00,000 from Mar Udyog Ltd. for three months period ending
January 31, 2020 (invoice not issued).
3. Similar payment of Rs. 10,00,000 is received on December 31, 2019 and January 31, 2020 (no invoice issued)
4. On February 3, 2020, Y Ltd. issues invoice for the three month period ending January 31, 2020 (total amount including
GST : Rs. 40,50,000 minus advance of Rs. 30,00,000, balance due Rs. 10,50,000).
5. On February 10, 2020, Y Ltd. gets payment of Rs. 10,50,000
In this case, law requires Y Ltd. to issue invoice at the time of receipt of advance (or before). Time of supply of goods will
be as follows –
Different activities (receipt Date of invoice Last date to issue invoice Date of payment† Time of supply [(2), (3),
of payment, issue of bill) (statutory requirement) (4), whichever is earlier]
(1) (2) (3) (4) (5)
Rs. 10,00,000 (November 30, 2019) – November 30, 2019 Not to be considered November 30, 2019‡
Rs. 10,00,000 (December 31, 2019) – December 31, 2019 Not to be considered December 31, 2019††
Rs. 10,00,000 (January 31, 2020) – January 31, 2020 Not to be considered January 31, 2020#
Invoice (February 3, 2020) (balance February 3, 2020 – Not to be considered February 3, 2020$
due Rs. 10,50,000)
† Date of payment is not relevant in all the cases of suppliers of goods (with effect from November 15, 2017).
‡ GST should be paid on or before December 20, 2019 (i.e., 20th day of succeeding month).
†† GST should be paid on or before January 20, 2020 (i.e., 20th day of succeeding month).
# GST should be paid on or before February 20, 2020 (i.e., 20th day of succeeding month).
$ GST should be paid on or before March 20, 2020 (i.e., 20th day of succeeding month).
456.4 Goods sent on approval - There is no special provision pertaining to time of supply in the case of goods
sent on approval. However, section 31(7) requires that invoice should be issued within 6 months from the date
of removal of goods, or the date when recipient indicates that he has accepted the supply of goods, whichever
is earlier.
691 Time of supply of goods Para 456.5
 Case 1 - The following data is noted from the records of X Ltd. (supplier of goods) and Y Ltd. (recipient) –
1. Date of removal of goods from the premises of X Ltd. for sending for approval : July 30, 2019.
2. Acceptance indicated by Y Ltd. : December 20, 2019.
3. Issue of bill by X Ltd. : December 20, 2019.
4. Payment by Y Ltd. : January 6, 2019.
In this case, acceptance is indicated by the recipient within 6 months. Consequently, the time of supply is December 20, 2019.
 Case 2 - Suppose acceptance is indicated by Y Ltd. on February 6, 2020 (i.e., after 6 months from the date of removal).
Payment is made after February 6, 2020. Section 31 requires that invoice should be issued latest by 6 months from the date
of removal. 6-month time-limit expires on January 29, 2020. Consequently, date of supply is January 29, 2020.
456.5 Time of supply of goods when GST is payable under reverse charge mechanism - In some cases, GST
is payable by the recipient of goods under reverse charge mechanism [see para 482]. In such cases, time of supply
of goods will be determined on the basis of following –
Criteria 1 The date of the receipt of goods.
Criteria 2 The date of payment as entered in the books of account of the recipient (or the date on which the payment
is debited in his bank account, whichever is earlier).
Criteria 3 The date immediately following 30 days from the date of issue of invoice (or any other document in lieu
of invoice) by the supplier.
Time of supply Criteria 1, Criteria 2 or Criteria 3, whichever is earlier.
Note - Where it is not possible to determine the time of supply under the aforesaid 3 criteria, the time of supply shall be the
date of entry in the books of account of the recipient of supply.
 Case 1 - The following data is noted from the records of X Ltd. (supplier of goods) and Y Ltd. (recipient of goods covered
by reverse charge mechanism) –
1. Date of supply of goods by X Ltd. to agent of Y Ltd. : November 10, 2019.
2. Date of receipt of goods in the godown/factory of Y Ltd. : November 12, 2019.
3. Date of issue of invoice by X Ltd. : October 5, 2019.
4. Date of payment by Y Ltd. : December 20, 2019 (as per books of account of Y Ltd.) (amount debited by bank in current
account of Y Ltd. on December 21, 2019).
Time of supply in this case will be determined as follows –
Criteria 1 Date of the receipt of goods by Y Ltd. November 10, 2019

Criteria 2 Date of payment (as per books of account of Y Ltd. or date of debit entry in
bank account of Y Ltd., whichever is earlier). December 20, 2019
Criteria 3 Next date after (date of invoice + 30 days), i.e., date of invoice + 31 November 5, 2019
Time of supply Criteria 1, Criteria 2 or Criteria 3, whichever is earlier. November 5, 2019
 Case 2 - Suppose in the above case, date of invoice is November 10, 2019. Time of supply will be determined as follows –
Criteria 1 Date of the receipt of goods by Y Ltd. November 10, 2019

Criteria 3 Next date after (date of invoice + 30 days), i.e., date of invoice + 31 December 11, 2019
Time of supply Criteria 1, Criteria 2 or Criteria 3, whichever is earlier. November 10, 2019
 Case 3 - Suppose in Case 1, advance of Rs. 40 lakh is paid on October 10, 2019 and balance is paid on December 20, 2019.
Time of supply will be determined as follows –
Different activities Advance payment Final payment

Criteria 1 Date of the receipt of goods by Y Ltd. November 10, 2019 November 10, 2019
Criteria 2 Date of payment (as per books of account of Y Ltd. or
date of debit entry in bank account of Y Ltd., whichever
is earlier). October 10, 2019 December 20, 2019
Criteria 3 Next date after (date of invoice + 30 days), i.e., date of
invoice + 31 November 5, 2019 November 5, 2019
Time of supply Criteria 1, Criteria 2 or Criteria 3, whichever is earlier. October 10, 2019 November 5, 2019
456.6 In case of supply of vouchers - A voucher has been defined as an instrument where there is an obligation
to accept it as consideration (or part consideration) for a supply of goods/services. A shopkeeper may issue
vouchers for a specific supply (i.e., supply which is identifiable at the time of issuance of voucher). These are
known as single purpose vouchers. For example, vouchers for LG Convection Microwave (21L). Purchaser of
voucher can get only LG Convection Microwave (21L). Conversely, a voucher can be a general-purpose voucher
which can be used for multiple purposes. For example, a Rs. 5,000 voucher issued by Café Coffee Day can be used
for buying any product or service at any outlet of Coffee Café (up to Rs. 5,000). In these cases, time of supply shall
be determined as follows –
 When supply identifiable at the time of issue of voucher - Time of supply will be the date of issue of voucher.
 In other cases - Time of supply will be the date of redemption of voucher.
 Case 1 - ITC Ltd. sells gift vouchers of Rs. 10,000. These vouchers can be redeemed at any Wills Lifestyle outlet. The holder
of voucher can purchase any item in the outlet (shirt, tie, belt, purse, perfumes, cosmetics, etc.) up to Rs. 10,000. X Ltd.
purchases 10 vouchers on December 5, 2019 from ITC, Mumbai and the same are given to its employees as Christmas gift.
B (one of the employees who gets vouchers) purchases 3 casual shirts on January 3, 2020 from Wills Lifestyle outlet at Race
Road, Bengaluru. Date of supply of goods in this case is January 3, 2020 (supply is not identifiable at the time of issue of
voucher).
 Case 2 - Y purchases a Sony Bravia 48 inch LED TV from Vijay Sales on October 10, 2019 for Rs. 45,000. This TV is purchased
under Diwali bumper offer. Under this offer, Y gets a voucher on extra payment of Rs. 2,000 (voucher can be redeemed
against HP Laser Jet M1136 MFP Printer at any time within 30 days from Diwali 2019). Voucher is redeemed by Y on
November 11, 2019. In this case, supply is identifiable at the time of issue of voucher (i.e., on October 10, 2019). Consequently,
time of supply (of HP Laser Jet Printer) is October 10, 2019.
456.7 In any other case - When it is not possible to find out time of supply under the aforesaid situations, time
of supply shall be determined as follows –
 In case where GST periodical return has to be filed - Time of supply is the date on which such return is to be filed.
 In any other cases - Date on which GST is paid.
However, the time of supply to the extent it relates to an addition in the value of supply (by way of interest, late
fee or penalty for delayed payment of any consideration) shall be the date on which the supplier receives such
addition in value.
 WHAT ARE THE RULES FOR DETERMINATION OF TIME OF SUPPLY OF SERVICES

457. Time of supply of services is given by section 13. These rules are not applicable in the case of a person who
has opted for Composition Scheme or Alternative Composition Scheme.
457.1 General rules [Sec. 13(2)] - Generally time of supply of services is determined as follows –
Different situations Time of supply of service
Situation 1 - Invoice is issued This situation covers the case when invoice is issued by the supplier within the statutory
within statutory period period of 30 days (45 days in the case of banking service) of the date of supply of service.
In this case, time of supply of service is date of invoice or date of payment, whichever is
earlier.
Situation 2 - Invoice is not Date of provision of service or date of receipt of payment, whichever is earlier.
issued within statutory
period
Situation 3 - Where the above Date on which the recipient shows the receipt of services in his books of account.
provisions not applicable
Different situations in the case of Time of supply Examples

supply of technical testing service (i.e., time when
GST is attracted)
Invoice issued within 30 days Date of invoice Service of technical testing is provided on July 6, 2019. Invoice is issued
from the date of supply of on July 25, 2019. Payment is received on August 20, 2019. Time of supply
service (payment is received is July 25, 2019.
later on)
693 Continuous supply of services Para 457.3
Different situations in the case of Time of supply Examples

supply of technical testing service (i.e., time when
GST is attracted)
Invoice not issued within 30 Date of provision Service of technical testing is provided on July 3, 2019. Invoice is,
days from the date of service of service however, issued on August 10, 2019. Payment is received on September
(payment is received later on) 1, 2019. Time of supply is July 3, 2019.
Invoice not issued within 30 Date of provision Service of technical testing is provided on July 3, 2019. Invoice of Rs.
days from the date of supply of of service 7,00,000 is issued on August 8, 2019. Payment of Rs. 5,00,000 is received
service (payment is, however, on July 11, 2019 and the balance of Rs. 2,00,000 is received on August 19,
received before the issue of 2019.
invoice) Time of supply for Rs. 7,00,000 is July 3, 2019 (as the invoice is not issued
within 30 days from completion of service).
Invoice not issued within 30 Date of provision Service of technical testing is provided on July 3, 2019. Invoice of Rs.
days from the date of supply of of service 7,00,000 is issued on August 18, 2019. Payment of Rs. 5,00,000 is received
service (payment is, however, on August 11, 2019 and the balance of Rs. 2,00,000 is received on August
received before the issue of 19, 2019.
invoice) Date of supply of service for Rs. 7,00,000 is July 3, 2019 (as the invoice is
not issued within 30 days from date of supply of service).
Advance received before Date of receipt Service of technical testing is provided on August 3, 2019. Invoice of Rs.
supply of service of advance 3,00,000 is issued on August 4, 2019. Advance of Rs. 75,000 received on
payment July 25, 2019. Balance of Rs. 2,25,000 is received on August 7, 2019.
Date of supply for (a) Rs. 75,000 is July 25, 2019; and (b) Rs. 2,25,000 is
August 4, 2019.
If invoice is issued after 30 days from the date of supply of service (i.e.,
after September 2, 2019), then for Rs. 2,25,000 time of supply of service
will be August 3, 2019.
Invoice issued before supply Date of invoice Service of technical testing is provided on August 3, 2019. However,
of service invoice is issued in advance on July 15, 2019. An advance of Rs. 75,000
is received on July 16, 2019. Balance of Rs. 2,25,000 is received at the time
of completion of service on August 3, 2019.
Time of supply of service of Rs. 3,00,000 is July 15, 2019.
457.2 Option in the case of advance up to Rs. 1,000 - Where the supplier of taxable services receives an amount
up to Rs. 1,000 in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess
amount shall, at the option of the said supplier, be the date of issue of invoice in respect of such excess amount.
The following data is noted from the records of X Ltd. (a computer consultant company) and Y Ltd. (a garment retailer,
recipient of services) –
1. On October 5, 2019, X Ltd. provides computer consultancy to Y Ltd. vide Invoice No. 105 (taxable value Rs. 2,22,410 +
CGST : Rs. 13,345 + SGST : Rs. 13,345 = Total : Rs. 2,49,100).
2. Advance of Rs. 2,50,000 pertaining to Invoice No. 105 was received on September 30, 2019.
3. On November 25, 2019, X Ltd. provides another consultancy to Y Ltd. vide Invoice No. 175 (taxable value Rs. 5,00,000 +
CGST : Rs. 30,000 + SGST : Rs. 30,000 = Total : Rs. 5,60,000) (no advance).
4. On December 8, 2019, X Ltd. gets payment of Rs. 5,59,100 (i.e., Rs. 5,60,000 – excess advance of Rs. 900 received earlier).
In this case, X Ltd. receives an excess advance of Rs. 900 on September 30, 2019. Since the excess advance is not more than
Rs. 1,000, X Ltd. has an option. Time of supply to the extent of Rs. 900 will be treated as date of issue of Invoice No. 175 (against
which the excess advance is adjusted).
Time of supply of goods in the above cases will be as follows –
Different activities Date of invoice Date of payment Time of supply

Invoice No. 105 October 5, 2019 September 30, 2019 : Rs. 2,49,100 September 30, 2019
}
September 30, 2019 : Rs. 900 November 25, 2019 (to the
Invoice No. 175 November 25, 2019 December 8, 2019 : Rs. 5,59,100 extent of Rs. 900 + Rs. 5,59,100)
457.3 Continuous supply of services - There is no special provision pertaining to time of supply in the case of
continuous supply of services. However, section 31(5) requires that in case of continuous supply of services,
invoice shall be issued before the due date of the payment (where due date is ascertainable on the contract) or
before the date of completion of an event or before the date of receipt of payment.
On September 11, 2019, X Ltd. gives a building construction contract to a contractor (consideration being Rs. 80,00,000). The
payment schedule is as follows—
Instalment 1 - 10 per cent is payable within 10 days from signing of agreement.
Instalment 2 - 35 per cent is payable on casting of first floor slab.
Instalment 3 - 25 per cent is payable on casting of second floor slab.
Instalment 4 - 25 per cent is payable on completion of flooring and wooden work.
Instalment 5 - 5 per cent is payable on completion of building.
Casting of first floor and second floor slabs is completed on December 1, 2019 (invoice issued on December 7, 2019) and
January 10, 2020 (invoice issued on February 27, 2020) respectively. Flooring and wooden works are completed on March
7, 2020 (but no invoice issued). Construction of building is completed on May 20, 2020 (invoice issued on May 15, 2020).
Payment is made by X Ltd. to the contractor on September 5, 2019 (instalment 1), December 12, 2019 (instalment 2), March
20, 2020 (instalment 3), March 3, 2020 (instalment 4), June 1, 2020 (instalment 5).
In this case, time of supply will be as follows –
Completion of milestone for Date of issue of invoice Date of payment Time of supply (i.e., time
payment when GST is attracted)
September 21, 2019 No invoice issued September 5, 2019 September 5, 2019
December 1, 2019 December 7, 2019 December 12, 2019 December 1, 2019
January 10, 2020 February 27, 2020 March 20, 2020 January 10, 2020
March 7, 2020 No invoice issued March 3, 2020 March 3, 2020
May 20, 2020 May 15, 2020 June 1, 2020 May 15, 2020
457.4 Time of supply of services when GST is payable under reverse charge mechanism - In some cases, GST
is payable by the recipient of services under reverse charge mechanism [see para 482]. In such cases, time of
supply of services will be determined on the basis of following –
Criteria 1 The date of payment as entered in the books of account of the recipient (or the date on which the payment
is debited in his bank account, whichever is earlier).
Criteria 2 The date immediately following 60 days from the date of issue of invoice (or any other document in lieu
of invoice) by the supplier.
Time of supply Criteria 1 or Criteria 2, whichever is earlier.
Other points—
1. Where it is not possible to determine the time of supply under the aforesaid 2 criteria, the time of supply shall
be the date of entry in the books of account of the recipient of supply.
2. In case of supply by associated enterprises, where the supplier of service is located outside India, the time of
supply shall be the date of entry in the books of account of the recipient of supply or the date of payment,
 Case 1 - The following data is noted from the records of X Ltd. (supplier of services) and Y Ltd. (recipient of services covered
by reverse charge mechanism) –
1. Date of completion of services by X Ltd. to Y Ltd. : November 20, 2019.
2. Date of issue of invoice by X Ltd. : October 15, 2019.
3. Date of payment by Y Ltd. : December 21, 2019 (as per books of account of Y Ltd.) (amount debited by bank in current
account of Y Ltd. on December 20, 2019).
Time of supply in this case will be determined as follows –
Criteria 2 Next date after (date of invoice + 60 days), i.e., date of invoice + 61 December 15, 2019
Time of supply Criteria 1 or Criteria 2, whichever is earlier. December 15, 2019
695 How to find out time of supply Para 458
 Case 2 - Suppose in the above case, date of invoice is November 10, 2019. Time of supply will be determined as follows –
Criteria 2 Next date after (date of invoice + 60 days), i.e., date of invoice + 61 January 10, 2020
Time of supply Criteria 1 or Criteria 2, whichever is earlier. December 20, 2019
 Case 3 - Suppose in Case 1, advance of Rs. 50 lakh is paid on October 25, 2019 and balance is paid on March 20, 2020. Time
of supply will be determined as follows –
Different activities Advance payment Final payment

Criteria 1 Date of payment (as per books of account of Y Ltd. or
date of debit entry in bank account of Y Ltd., whichever
is earlier). October 25, 2019 March 20, 2020
Criteria 2 Next date after (date of invoice + 60 days), i.e., date of
invoice + 61 December 15, 2019 December 15, 2019
Time of supply Criteria 1 or Criteria 2, whichever is earlier. October 25, 2019 December 15, 2019
 Case 4 - Bank of Kuwait has a branch in Chennai. Chennai branch obtains a technical advice from Kuwait head office on
December 2, 2019. Receipt of service is recorded by the Chennai branch on December 3, 2019. Hard copy of the invoice is
received on December 6, 2019. Payment is transferred to the head office on January 10, 2020. This is the case of import of
service from an associate enterprise. Time of supply will be date of entry in the books of recipient or date of payment,
whichever is earlier (i.e., December 3, 2019).
457.5 In case of supply of vouchers - See para 456.6.

457.6 In case of supply by way of transfer of development rights (TDR) - By Notification No. 4/2018-CT
(Rate), dated January 25, 2018, the liability to pay GST in the case of transfer of development right (TDR) has been
deferred in the following cases –
Who is supplier of services Consideration
Land owner - A registered person who supplies develop- Consideration is (wholly or partly) in the form of construc-
ment rights to a developer/builder/construction com- tion service of complex, building or civil structure
pany/any other registered person
Developer - A registered person who supplies construction Consideration is (wholly or partly) in the form of transfer
service of complex, building or civil structure to the afore- of development rights (TDR)
said supplier of development rights
In the aforesaid two cases, the liability to pay GST shall arise at the time when the said developer (builder,
construction company, etc.) transfers possession (or the right in the constructed complex)/building/civil
structure to the land owner (i.e., the person who supplies the development rights) by entering into a conveyance
deed or similar instrument (e.g., allotment letter).
However, this concession is not available in respect of consideration in the form of cash component (no
deferment in point of taxation in respect of cash component). Moreover, the aforesaid concession is not available
with respect to the development rights supplied on or after April 1, 2019.
457.7 In any other case - When it is not possible to find out time of supply under the aforesaid situations, time
of supply shall be determined as follows –
 In case where GST periodical return has to be filed - Time of supply is the date on which such return is to be filed.
 In any other cases - Date on which GST is paid.
However, the time of supply to the extent it relates to an addition in the value of supply (by way of interest, late
fee or penalty for delayed payment of any consideration) shall be the date on which the supplier receives such
addition in value.
 HOW TO FIND OUT TIME OF SUPPLY IN CASE OF CHANGE IN GST RATE

458. Section 14 provides parameters to ascertain time of supply in case of change in GST rate (the above
provisions given by sections 12 and 13 are not applicable).
 Date of receipt of payment - For the purpose of section 14, date of receipt of payment shall be the date of credit
in the bank account (if such credit in the bank account is after 4 working days from the date of change in the rate
of tax).
458.1 When goods/services have been supplied before the change in rate of tax [Sec. 14(a)] - Section 14(a)
covers the case given below –
a. there is a supply of taxable goods or services or both;
b. after making this supply, there is a change in GST rate;
c. invoice is issued or payment is received (or both invoice is issued as well as payment is received) after the
change in GST rate of tax.
 Time of supply - If these conditions are satisfied, the time of supply (i.e., point of time to attract GST) shall be the
date of payment or date of issue of invoice, whichever is earlier. This rule is applicable whether change in GST
rate is upward or downward.
 Case 1 - X is a technical consultant. On November 10, 2019, it submits a technical report to its client Y Ltd. (value of taxable
supply being Rs. 10 lakh). GST rate on this supply has been changed with effect from November 15, 2019 (old rate : 28 per
cent, new rate with effect from November 15, 2019 : 18 per cent). The table given below pinpoints time of supply in different
situations –
Different situations Date of issue of invoice Date of payment Time of supply (i.e., point Applicable GST rate
of time to attract GST)
Situation 1 November 16, 2019 November 17, 2019 November 16, 2019 New rate : 18%
Situation 2 November 17, 2019 November 16, 2019 November 16, 2019 New rate : 18%
Situation 3 November 14, 2019 November 17, 2019 November 14, 2019 Old rate : 28%
Situation 7 January 1, 2020 January 3, 2020 January 1, 2020 New rate : 18%
 Case 2 - Suppose in Situation 4 of Case 1, payment is received by X by cheque on November 13, 2019. On the same day, it
is recorded in the books of account. It is sent for collection to the bank on November 18, 2019. It is credited in the current
account by the bank on November 22, 2019.
In this case, date of receipt of payment will be deemed to be November 22, 2019 (as cheque is credited in the bank account
after 4 working days from the date of change in GST rate). Consequently, time of supply will be November 18, 2019. Supply
of services will be taxable at the new rate of 18 per cent.
 Case 3 - Suppose in Situation 5 of Case 1, 40 per cent of payment is received on November 9, 2019 and balance 60 per cent
is received on November 20, 2019. In such a case, GST at the old rate will be applicable on 40 per cent and GST at new rate
will be applicable on balance 60 per cent payment.
 Case 4 - Suppose in different situations covered in Case 1, invoice is issued (and payment is also received) before November
15, 2019, then above rules of section 14 are not applicable. One has to apply the provisions narrated in para 457.1.
458.2 When goods/services have been supplied after the change in rate of tax [Sec. 14(b)] - Section 14(b)
covers the case given below –
a. there is a change in GST rate;
b. after the change in GST rate, there is a supply of taxable goods or services or both;
c. invoice is issued or payment is received (or both invoice is issued as well as payment is received) before the
change in GST rate.
If these conditions are satisfied, the time of supply (i.e., point of time to attract GST) shall be determined as
follows –
 Rule one - Invoice or payment, whichever is earlier - Time of supply will be date of issue of invoice or date of receipt
of payment, whichever is earlier, if supply is made after the change in GST rate, but invoice is issued (and
payment is received) before the change in the GST rate.
 Rule two - Invoice or payment, whichever is later - Time of supply will be date of issue of invoice or date of receipt
of payment, whichever is later, if supply is made after the change in GST rate, but –
- invoice is issued before (payment is received after) change in GST rate, or
- invoice is issued after (payment is received before) change in GST rate.
This above parameter of Rule one or Rule two are applicable whether change in GST rate is upward or downward.
 Case 1 - X, a computer consultant, provides consultancy to Y Ltd. on November 20, 2019. GST rate on this service has been
changed with effect from November 15, 2019 (before change GST was 18 per cent, new GST rate 12 per cent). The table given
below pinpoints time of supply in different situations –
Different Date of issue of invoice Date of payment Time of supply (i.e., point of Applicable GST rate
situations time to attract GST)
Situation 1 November 14, 2019 November 12, 2019 November 12, 2019 (Rule one) Old rate : 18%
Situation 2 November 14, 2019 November 16, 2019 November 16, 2019 (Rule two) New rate : 12%
Situation 3 November 16, 2019 November 14, 2019 November 16, 2019 (Rule two) New rate : 12%
Situation 4 November 14, 2019 January 1, 2020 January 1, 2020 (Rule two) New rate : 12%
Situation 5 January 14, 2020 November 14, 2019 January 14, 2020 (Rule two) New rate : 12%
Situation 6 July 1, 2019 February 1, 2020 February 1, 2020 (Rule two) New rate : 12%
Situation 7 February 1, 2020 July 1, 2019 February 1, 2020 (Rule two) New rate : 12%
 Case 2 - Suppose in the case of Situation 1 (Case 1), payment is partly (70 per cent) received on November 12, 2019 and balance
of 30 per cent is received on November 21, 2019. In such a case, GST at the old rate will be applicable on 70 per cent and the
balance 30 per cent will be subject to new GST rate.
 Case 3 - Suppose in the case of Situation 1 (Case 1), entire consideration is received by cheque on November 12, 2019
(recorded on the same day in the books of account of X Ltd. but amount is credited in its bank account on November 21, 2019).
In this case, date of receipt of payment will be deemed to be November 21, 2019 (as cheque is credited in the bank account
after 4 working days from the date of change in GST rate). Consequently, time of supply will be November 21, 2019. Supply
of goods will be taxable at the new rate of 12 per cent.
 Case 4 - Suppose in different situations covered in Case 1, invoice is issued after November 15, 2019 and payment is also
received after November 15, 2019, then the above rule of section 14 is not applicable. One has to apply the provisions narrated
in para 457.1.
458.3 Important points to be noted - The following should be noted –

 How to remember above provisions - One can memorize the aforesaid provisions of section 14 as follows –
1. If supply of goods/services takes place before the change in GST rate, the time of supply will be the earlier event
(i.e., date of invoice or date of payment, whichever is earlier).
2. If supply of goods/services takes place after the change in GST rate, the time of supply will be the later event
(i.e., date of invoice or date of payment, whichever is later). However, the later event is not applicable if both the
events (i.e., issue of invoice and receipt of payment) take place before change in GST rate (in such a case, the earlier
event will be applicable).
 Alternate mode to memorize above provisions - If there is a change in GST rate, one must first determine the
following –
- Date on which goods/services are supplied.
- Date of issue of invoice.
- Date of payment.
If two or more events fall before the change in GST rate, then old rate will apply. Conversely, if two or more events
fall after the change in rate, then the new GST rate will apply.
 Concession given by the Government - Time of supply is generally determined on the basis of above parameters.
However, the Government has given a concession in the case of small taxpayers (having turnover of Rs. 1.5 crore
or less) (with effect from October 13, 2018) and in the case of all taxpayers (with effect from November 15, 2018).
After this concession, GST will not be payable at the time of advance payment (but on the basis of date of invoice)
in the case of supply of goods (no such concession is given in the case of supply of services).
●
Test your knowledge

1. What is statutory time for issue of invoice in the case of taxable supply of goods ? [para 455.1]
2. Is there any time-limit for issue of invoice when a registered person supplies taxable services to another person who
is not registered ? [para 455.2]
3. How to determine date of receipt of payment ? [para 455.3]
4. What are the parameter to determine time of supply of goods/services ? [paras 456.1 and 457.2]
Time of Supply 698
5. How to determine time of supply in the case of continuous supply of goods/services ? [paras 456.3 and 457.3]
6. There are certain special provisions governing time of supply of goods/services when GST is payable under reverse
charge mechanism. Prepare a note pinpointing these rules with suitable illustration. [paras 456.5 and 457.4]
7. Supply is made by issue of vouchers. How to determine time of supply in such cases. [para 456.6]
8. A supplier of goods gets advance payment. Is he liable to pay GST ? [para 456.1]
9. A service provider gets advance payment. Is he liable to pay GST ? [para 457.1]
10. What is the time of supply when services are imported from foreign branch ? [para 457.4]
11. GST rates have been revised with effect from November 15, 2019. If goods/services are supplied before November 15,
2019 but invoice is issued after November 15, 2019, which GST rate will be applicable – old rate or new rate. [para 458.1]
12. GST rates have been revised with effect from November 15, 2019. If goods/services are supplied after November 15,
2019 but invoice is issued before November 15, 2019, which GST rate will be applicable – old rate or new rate. [para
458.2]
CHAPTER 26 Value of taxable supply
P
arameters to determine taxable value of supply of goods or services are discussed
in this Chapter. Broad guidelines are given by section 15. Besides, rules 27 to 35
provide specific mode of determination of taxable value of supply in different
circumstances (e.g., when consideration is not in money, supply between related persons,
supply through an agent, supply in case of pure agent, supply in relation to purchase or sale
of foreign currency/booking of air tickets/insurance policy/second hand goods, etc).
 WHAT ARE DIFFERENT METHODS OF CALCULATION OF VALUE OF TAXABLE SUPPLY

464. Basis of charge of GST is given by section 9. As per section 9, GST shall be levied on the value of taxable
supply of goods/services determined under section 15. Section 15 prescribes the parameters for arriving at value
of taxable supply of goods/services which is normally “transaction value”. In certain situations, however,
transaction value is not considered for determination of GST liability and in such cases taxable value is
determined under Chapter IV of CGST Rules (i.e., Rules 27 to 35). The table given below gives a bird’s eye view
of different methods for computation of value of taxable supply –
Different situations Section/rule Para no.
“Transaction value” generally taken as taxable value of supply Sec. 15(1) 465
Inclusion in value of supply Sec. 15(2) 465.1
Exclusion from value of supply Sec. 15(3) 465.2
When not possible to determine value of supply under section 15(1), one has to
follow parameters given by Chapter IV of GST Rules (i.e., Rules 27 to 35) Sec. 15(4) 466
Consideration is not wholly in money Rule 27 467
Supply between related persons or distinct persons Rule 28 468
Supply through an agent Rule 29 469
Valuation based on cost Rule 30 470
Residual method Rule 31 471
Value of supply in the case of pure agent Rule 33 473
Rate of exchange Rule 34 475
Mode of computation of taxable value when amount inclusive of GST is available Rule 35 476
Lottery run by a State Government – 474.1
Construction of a complex involving transfer of undivided share of land – 474.2
Compounding schemes (optional) –
- Money changing/foreign currency Rule 32(2)(a)/(b) 472.1
- Booking of air ticket Rule 32(3) 472.2
- Life insurance Rule 32(4) 472.3
- Second hand goods Rule 32(5) 472.4
- Token/voucher/coupon/stamp Rule 32(6) 472.5
699
Para 465 Value of taxable supply 700
 WHEN VALUE OF SUPPLY SHALL BE THE TRANSACTION VALUE

465. Transaction value is the price actually paid/payable for supply of goods or services or both. Section 15(1)
provides that the value of a supply of goods or services or both shall be the transaction value. However,
transaction value would be acceptable only when the following two conditions are satisfied –
a. where the supplier and the recipient of the supply are not related; and
b. the price is sole consideration for the supply.
When these two conditions are satisfied, transaction value is taken as taxable value of supply of goods/services
for calculation of GST liability. However, when the price is influenced by factors like relationship of parties or
where certain transactions are deemed to be supply, which do not have a price, the value has to be determined
in accordance with the GST Rules.
 Meaning of related persons - See para 414.2-1.
 Meaning of consideration - See para 412.
465.1 Inclusion in transaction value - Section 15(2) provides that the following shall be included in the value
of supply –
Taxes Any taxes†, duties, cesses‡, fees and charges levied under any statute.
However, taxes levied under CGST Act, SGST Act, UTGST Act and the Goods and Services Tax
(Compensation to the States for Loss of Revenue) Act shall not be added if these taxes are charged
separately by the supplier to the recipient.
Supplier’s obligation Any amount that the supplier is liable to pay in relation to such supply but which has
met by recipient been incurred by the recipient of the supply (and not included in the price actually paid or
payable for the goods/services).
Incidental expenses Incidental expenses, such as commission and packing, charged by the supplier to the recipient
of a supply, including any amount charged for anything done by the supplier in respect of the
supply of goods/services at the time of (or before) delivery of the goods/services.
Interest Interest or late fee or penalty for delayed payment of any consideration for any supply.
Subsidy Subsidies directly linked to the price (excluding subsidies provided by the Central and State
Government).
 Case 1 - X owns a commercial flat. It is given on rent to A Ltd. (rent being Rs. 2,50,000 per month). Besides rent, X recovers
house tax of Rs. 90,000 from A Ltd. Taxable value of supply in this case will be Rs. 30,90,000 (i.e., rent : Rs. 30,00,000 + house
tax : Rs. 90,000).
 Case 2 - A theatre charges Rs. 10,000 per person for a musical programme (to be held in Chennai on January 1, 2020). Besides,
it collects 5 per cent entertainment tax imposed by Tamil Nadu Government. Taxable value of supply for levy of GST will
be Rs. 10,500 (i.e., including entertainment tax).
 Case 3 - X supplies artificial silk to Y at the rate of Rs. 500 per meter. X also collects broker’s commission (which he has paid
at the rate of 5 per cent to a broker to get input supply). Taxable value of supply of silk by X to Y will be Rs. 525 per meter
(i.e., including broker’s commission charged by X).
 Case 4 - On July 5, 2019, Z (of Chennai) supplies 25 tons of a chemical to B (of Madurai) at the rate of Rs. 80,000 per ton.
Besides, he charges the following – freight : Rs. 3,12,000, packing charges : Rs. 72,000, weighing charges : Rs. 30,000,
inspection charges : Rs. 12,000, cost of an instrument which is specially purchased by Z to manufacture this chemical : Rs.
1,10,000 (this instrument cannot be used for other purpose). GST rate is 18 per cent. Inspection charges are directly borne
by B and not included in invoice. State Government has paid a subsidy of Rs. 40,00,000 to Z to set up chemical manufacturing
plant in Chennai. This subsidy was paid during 2018-19. Z is required to make payment within 15 days of supply. However,
payment is made in October 2019 and for late payment, Z charges interest of Rs. 11,000. GST liability will be calculated as
follows –
Rs.
25 tons of chemicals (Rs. 80,000 × 25) 20,00,000
Freight 3,12,000
Packing charges 72,000
Weighing charges 30,000
† For the purpose of determination of value of supply under GST, tax collected at source (TCS) under section 206C of the Income-tax Act, would
not be includible, as it is an interim levy not having the character of tax – Corrigendum, dated March 7, 2019 to Circular No. 76/50/2018-GST,
dated December 31, 2018.
‡ It does not include Kerala Flood Cess.
701 Exclusion from transaction value Para 465.2
Rs.
Inspection charges (supplier’s obligation met by recipient) 12,000

Cost of special instrument 1,10,000
Government subsidy (not linked to this supply; moreover, it is paid by Government) –
Interest for late payment 11,000
Add: GST –
- CGST (@ 9% of Rs. 25,47,000) 2,29,230
- SGST (Tamil Nadu) (@ 9% of Rs. 25,47,000) 2,29,230
Total 30,05,460
Note - GST should be paid on or before August 20, 2019 (i.e., 20th day of succeeding month). However, the time of supply
to the extent it relates to an addition in the value of supply by way of interest, shall be the date on which interest is received.
Consequently, last date of GST payment will be as follows –
CGST SGST Due date of deposit
Rs. Rs.
Value of taxable supply (excluding late payment interest) [9% of 2,28,240 2,28,240 August 20, 2019
(Rs. 25,47,000 – Rs. 11,000)
Value of taxable supply (being late payment interest) [9% of Rs. 11,000] 990 990 November 20, 2019
 Case 5 - C Ltd. owns a coaching institute in Puri. The institute charges Rs. 18,000 per student for giving training in digital
marketing. However, this training programme is subsidized by different institutions as follows – State Government of
Orissa : Rs. 500 per student, PQ Charitable Trust : Rs. 200 per student and Government of Japan : Rs. 100 per student.
Consequently, C Ltd. charges Rs. 17,200 + GST per student.
In this case, subsidies given by different institutions are directly linked to the price charged by C Ltd. State Government
subsidy can be excluded but subsidy paid by others will be included in taxable value. Consequently, value of taxable supply
and GST will be calculated as follows –
Rs.
Transaction value 17,200
Subsidy paid by PQ Charitable Trust 200
Subsidy paid by Japan Government 100
Value of taxable supply 17,500
CGST @ 9% of Rs. 17,500 1,575
SGST @ 9% of Rs. 17,500 1,575
Total 20,650
Note - Amount to be collected from students will be as follows : Rs. 17,200 (transaction value) + CGST : Rs. 1,575 + SGST :
Rs. 1,575.
 Case 6 - X sells a desktop to Y for Rs. 60,000. However, an option is given to Y to pay instalments of Rs. 16,000 every month
before 8th day of the following month, over next 4 months (i.e., Rs 16,000 × 4 = Rs. 64,000). Further, the contract specifies
that if there is any delay in payment by Y, Y would be liable to pay additional/penal interest to Rs. 400 per month for the
delay. Y agrees to pay by way of monthly instalments.
In this case, value of supply of desktop is Rs. 64,000. Even additional interest/penal interest charged for late payment of
instalment will be included in “value of supply”.
 Case 7 - In the above case, two separate invoices are issued by X. First invoice for sale of desktop for Rs. 60,000. Second
invoice for providing service of extending loan for which Rs. 1,000 per month is charged (and for late payment, an additional
penal interest for Rs. 400 per month).
In this case, value of supply of service will be Rs. 60,000 + Rs. 1,000 per month + penal interest of Rs. 400 per month. The
benefit of exemption given by Exemption Notification (Entry 27) is not available.
 Case 8 - X sells a desktop to Y for Rs. 60,000. Y has the option to avail a loan from Bajaj Finance Ltd. at interest of 2 per cent
per month for purchasing the desktop. The terms of the loan from Bajaj Finance Ltd. allows Y a period of 4 months to repay
the loan and an additional/penal interest at the rate of Rs. 400 per month for delay in payment.
In this case, value of supply of desktop by X to Y will be Rs. 60,000. Interest charged by Bajaj Finance Ltd. will be exempt
from GST by virtue of Exemption Notification (Entry 27). Even penal interest for late payment, will be covered by Entry 27.
465.2 Exclusion from transaction value - Section 15(3) provides that the value of supply shall not include any
discount which is given below –
Para 465.2 Value of taxable supply 702
 Situation 1 - Discount which is allowed before (or at the time of) supply - This discount will not be included in value
of taxable supply, if it is duly recorded in the invoice which is issued in respect of such supply.
 Situation 2 - Discount that is allowed after the supply has been affected - This discount will not be included in value
of taxable supply if the following two conditions are satisfied—

a. such discount is given under an agreement entered into at (or before) the time of such supply and specifically
linked to relevant invoices; and
b. input tax credit (as is attributable to the discount on the basis of document issued by the supplier) has been
reversed by the recipient of the supply.
 Case 1 - X Ltd. is a biscuit manufacturing company in Bhiwandi (Maharashtra). It generally gives a trade discount of 20
per cent in the list price when goods are purchased by a distributor. During December 2019, it offers Christmas Bonanza
under which a special Christmas discount of 10 per cent is given on the list price of all products to its distributors in addition
to normal discount of 20 per cent. A Ltd., one of the distributors from Karnataka, purchases 1,000 packets of chocolate biscuits
(list price Rs. 40 per packet of 118 gram) on November 30, 2019 and 2,000 packets of the same biscuits on December 1, 2019.
GST rate is 18 per cent which may be calculated as follows –
November December
30, 2019 1, 2019
Rs.
1,000/2,000 packets of chocolate biscuits 40,000 80,000
Less: Discount –
- Trade discount @ 20% 8,000 16,000
- Christmas Bonanza discount @ 10% – 8,000
Taxable value of supply 32,000 56,000
Add: GST –
- IGST @ 18% 5,760 10,080
Total 37,760 66,080
 Case 2- Y Ltd. manufactures slow juicer (list price for supply to distributors : Rs. 15,000, GST rate : 28 per cent). It offers
a special Diwali discount of 12 per cent to its distributors if more than 100 pieces are sold during October 2019. This discount
will be available for supplies taken by distributors for November 2019. Z & Co. is one of the distributors in Solapur. It places
an order of 70 pieces of juicer on October 30, 2019 for retail sale for November 2019. As data for October 2019 is not available
on October 30, 2019, Y Ltd. issues invoice as follows—
Rs.
Value of supply : 70 slow juicer (Rs. 15,000 × 70) 10,50,000
Add: GST –
- CGST @ 14% 1,47,000
- SGST @ 14% 1,47,000
Total 13,44,000
Data for October is compiled on November 10, 2019. Total sale made by Z & Co. during October 2019 is more than 100 pieces.
Consequently, Z & Co. is entitled for special Diwali discount of 12 per cent in the aforesaid transaction. The point for
consideration is whether this discount is available for GST purposes.
Situation 1 is not applicable (discount is allowed after supply). Under Situation 2, one has to satisfy the following two
conditions –
1. Whether terms of agreement existed at the time of supply - Yes, they existed.
2. Whether recipient is ready to reverse input tax credit if he has already availed it - This condition can be satisfied by Z & Co.
As the aforesaid two conditions are satisfied, discount of 12% will be allowed from the value of supply. Y Ltd. cannot issue
revised invoice. It can give a credit note to this effect under section 34(2).
 Case 3- Suppose in Case 2, on December 31, 2019 Y Ltd. offers a performance discount of 1 per cent to its distributors. This
discount is available if total turnover of a distributor for 2019 exceeds Rs. 50,00,000. Turnover of Z & Co. exceeds Rs. 50,00,000
and it is eligible for performance discount of 1 per cent on the turnover of 2019 (including the invoice given above). The point
for consideration is whether performance discount is available for GST purposes in the invoice given above.
Under GST, discount is deducted from value of taxable supply only under the following two situations –
Situation 1 - It covers discount given before or at the time of supply. Given case is not covered by this situation.
Situation 2 - It covers the case when discount is allowed (after supply) under an agreement which existed at the time of supply.
Performance discount is announced on December 30, 2019. It was not in existence at the time of supply. Consequently,
performance discount cannot be deducted from the value of taxable supply.
703 How to determine value of supply Para 467
 HOW TO DETERMINE VALUE OF SUPPLY WHEN VALUATION UNDER AFORESAID PROVI-

SIONS IS NOT POSSIBLE
466. When the value of supply of goods/services cannot be determined under the aforesaid provisions of section
15(1), the same shall be determined as per valuation rules notified by the Government for this purpose. These
rules are given by Chapter IV of GST Rules (i.e., Rules 27 to 35). These rules are discussed in the paras given
below.
 HOW TO DETERMINE VALUE OF SUPPLY WHERE THE CONSIDERATION IS NOT WHOLLY

IN MONEY [RULE 27]
467. Rule 27 gives a few parameters to determine value of supply of goods/services where consideration is not
wholly in money. These parameters are given below –
Different situations Value of supply
Situation 1 - General provisions when considera- Value of supply shall be open market value of such supply (i.e.,
tion is not wholly in money money payable by another person for the same supply)
Situation 2 - When open market value is not avai- Value of supply is the total of—
lable - Consideration is in money
- Such further amount in money (as is equivalent to the consid-
eration not in money), if such amount is known at the time of
supply
Situation 3 - If value of supply is not determinable Value of supply will be the value of supply of goods or services or
under Situation 1 and Situation 2 both of like kind and quality
Situation 4 - If value of supply is not determinable Value of supply is the total of—
under Situation 1, Situation 2 and Situation 3 - Consideration is in money
- Such further amount in money (i.e., equivalent to the consider-
ation not in money as determined by the application of rule 30
or 31 in that order)
Notes –
1. Meaning of “open market value” - It means the full value in money, excluding the IGST, CGST, SGST, UTGST and GST cess
payable by another person in a transaction, where the supplier and the recipient of the supply are not related and the price
is the sole consideration, to obtain such supply at the same time when the supply being valued is made.
2. Meaning of “supply of goods or services or both of like kind and quality” - It means any other supply of goods or services or both
made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials,
and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that
supply of goods or services or both.
 Case 1 - Y Ltd., a retailer in New City Square, offers iPhone X for Rs. 89,000 (with exchange offer of any old iPhone). It also
offers iPhone X without exchange for Rs. 98,000. Z purchases iPhone X under exchange offer by exchanging an old
iPhone 5. Value of old iPhone 5 is not available. In this case, value of supply of iPhone X to Z will be Rs. 98,000 (this case
is covered by Situation 1 above).
 Case 2 - X Ltd. manufactures laptop. Y Ltd. manufactures printer. X Ltd. sells a laptop to Y Ltd. For this supply, Y Ltd. pays
Rs. 90,000 and a printer (manufactured by it). Known value of printer is Rs. 3,000. However, value of laptop is not available,
Value of supply of laptop by X Ltd. to Y Ltd. will be Rs. 93,000 (this case is covered by Situation 2 above).
 Case 3 - Suppose in Case 2, X Ltd. offers same laptop to others for Rs. 95,000 (without any exchange or barter). Y Ltd.
purchases the laptop for Rs. 90,000 (+ a printer of Rs. 3,000).
In this case, value of supply of laptop by X Ltd. to Y Ltd. will be Rs. 95,000 (this case is covered by Situation 1 above).
 Case 4 - A Ltd. sells a music system to B for Rs. 60,000. B provides free tax consultancy to A Ltd. (value of such consultancy
is Rs. 10,000). The same music system is normally sold by A Ltd. to unknown person for Rs. 75,000.
Value of supply of music system by A Ltd. to B is Rs. 75,000 (this case is covered by Situation 1 above).
 Case 5 - Suppose in Case 4, normal value of music system is not available.
Value of supply of music system to B will be Rs. 70,000 (i.e., monetary consideration : Rs. 60,000 + value of consideration in
kind : Rs. 10,000) (this case is covered by Situation 2 above).
 Case 6 - Suppose in Case 4, normal value of music system is not available. Even value of tax consultancy is not available.
But the same model of music system is sold by another dealer in a nearby city for Rs. 80,000 + handling charges of Rs. 2,000
+ GST.
Para 468 Value of taxable supply 704
But the same model of music system is sold by another dealer in a nearby city for Rs. 80,000 + handling charges of Rs. 2,000
+ GST (this dealer gives a free DVD of Rs. 500).
The same model of music system is not available in any other store.
In this case, value of supply of music system by A Ltd. to B cannot be determined under Situation 1, Situation 2 and
Situation 3. It will be determined in the Situation 4. Under this situation, value of supply will be Rs. 60,000 (being monetary
consideration) + value of non-monetary consideration (as determined under rule 30, if it is not possible then one has to apply
rule 31) (this case is covered by Situation 4 above).
 HOW TO DETERMINE VALUE OF SUPPLY BETWEEN DISTINCT PERSONS OR RELATED

PERSON [RULE 28]
468. Rule 28 provides mode of valuation when supplier and recipient are related [for meaning of related person,
see para 414.2-1]. This rule is also applicable when supplier and recipient are distinct person [i.e., head office and
branch office, for technical meaning see para 414.2-2]. But this rule is not applicable when supply is made through
an agent.
Under this rule, value of supply of goods or services or both shall be determined as follows –
Situation 1 - Open market value Value of supply shall be open market value of such supply (i.e.,
money payable by another person for the same supply)
Situation 2 - If value of supply is not determinable Value of supply will be the value of supply of goods or services or
under Situation 1 both of like kind and quality
Situation 3 - If value of supply is not determinable Value of supply will be amount determined by the application of
under Situation 1 and Situation 2 rule 30 or 31 in that order
Situation 4 - Where goods are intended for further Value of supply of goods (at the option of supplier) will be 90 per
supply as such by the recipient cent of the price charged by the recipient for the supply of goods of
like kind and quality to his unrelated customers. This valuation
will be adopted at the option of supplier. Moreover, this valuation
is not applicable in case of supply of services
Situation 5 - When full input credit is available to Where the recipient is eligible for full input tax credit, the value
recipient declared in the invoice shall be deemed to be the open market value
of the goods or services.
Banks/financial institution/NBFC claiming input tax credit under
the 50 per cent option [given by section 17(4)] will be covered under
the scope of this provision (the value declared in the invoice will be
deemed to be open market value).
 Case 1 - X holds 25 per cent (or more) equity share capital in Y Ltd. (a computer manufacturer) as well as Z Ltd. (a paper
manufacturer). Y Ltd. and Z Ltd. are “related persons”. On September 22, 2019, Y Ltd. supplies a computer to Z Ltd. for Rs.
78,000. The same computer is offered by Y Ltd. to unrelated customers for Rs. 85,000. Z Ltd. is not entitled for input credit
for this transaction.
Value of supply of computer by Y Ltd. to Z Ltd. will be Rs. 85,000 (this is the case of supply of goods between related persons)
(this case is covered by Situation 1 above).
 Case 2 - Suppose in Case 1, Y Ltd. supplies computer to Z Ltd. as a gift without charging anything.
Normally, if supply of goods/services is made as a gift (without charging anything), GST is not applicable (if consideration
is zero, GST is zero). However, this rule is not applicable when supplier and recipient are related or when supplier and
recipient are distinct persons. In this case, Y Ltd. and Z Ltd. are related (X controls 25 per cent equity share capital in the two
companies). Value of supply will be Rs. 85,000 (as per Situation 1).
 Case 3 - A Ltd. (a software development company) controls 25 per cent (or more) equity share capital in B Ltd. (a technical
consultant). A Ltd. develops an accounting software for B Ltd. for Rs. 2,50,000. A similar accounting software is developed
by A Ltd. for an unrelated customer for Rs. 3,80,000. B Ltd. is eligible for full input credit for this input supply.
A Ltd. and B Ltd. are related persons. B Ltd. is eligible for full input credit. Therefore, value of supply will be the invoice
price of Rs. 2,50,000 (this is covered by Situation 5).
705 How to determine value of certain supplies given under rule 32 Para 472
 Case 4 - D Ltd. (a computer manufacturing company) holds 30 per cent equity share capital in E Ltd. (a computer
distributor). On August 18, 2019, D Ltd. supplies a computer to E Ltd. for Rs. 1,10,000. The same computer is supplied on
the same day to an unrelated customer for Rs. 1,40,000. E Ltd. supplies similar computer to its retailers (not related to E Ltd.)
for Rs. 1,50,000.
D Ltd. and E Ltd. are related persons. Similar computer is supplied by D Ltd. to unrelated customers for Rs. 1,40,000. Rs.
1,40,000 may be taken as value of supply of computer by D Ltd. to E Ltd. Alternatively, at the option of D Ltd. it can be taken
as 90 per cent of the price charged by recipient E Ltd. from its unrelated customers. 90 per cent comes to Rs. 1,35,000.
Therefore, at the option of D Ltd. value of supply will be Rs. 1,35,000 (this is covered by Situation 4).
 HOW TO DETERMINE VALUE OF SUPPLY OF GOODS MADE OR RECEIVED THROUGH AN

AGENT [RULE 29]
469. Rule 29 provides for supplies of goods between principal and his agent. This rule does not have any
application in the case of supply of services.
Under this rule, value of supply of goods shall be determined as follows –
Situation 1 - Open market value Value of supply of goods shall be open market value of such supply
(i.e., money payable by another person for the same supply)
Situation 2 - Where goods are intended for further Value of supply of goods (at the option of supplier) will be 90 per
supply as such by the recipient cent of the price charged by the recipient for the supply of goods of
like kind and quality to his unrelated customers. This valuation
will be adopted at the option of supplier
Situation 3 - If value of supply is not determinable Value of supply will be amount determined by the application of
under Situation 1 and Situation 2 rule 30 or 31 in that order
 Case 1 - On January 5, 2020, X Ltd. supplies 100 quintals of dried turmeric to Y, its agent in Kanpur for Rs. 8,000 per quintal.
On the same day, an independent supplier supplies 101 quintals of dried turmeric to Y at the rate of Rs. 8,500 per quintal.
This is the case of supply of goods between principal and agent. Open market value (i.e., Rs. 8,500 per quintal) will be taken
as value of taxable supply of goods (this is covered by Situation 1).
 Case 2 - Suppose in Case 1, Y supplies 98 quintals of the same quality of dried turmeric to his unrelated customers on the
same day for Rs. 9,100 per quintal. The point for consideration is whether this information can alter the aforesaid valuation.
X Ltd. has an option. Value of supply of goods by X Ltd. to Y may be taken as 90 per cent of price charged by the recipient
Y from his unrelated customers. Consequently, Rs. 8,190 (being 90 per cent of Rs. 9,100) may be taken as value of taxable
supply.
 HOW TO DETERMINE VALUE OF SUPPLY OF GOODS/SERVICES BASED ON COST [RULE 30]

470. Rule 30 is applicable if value of supply of goods/services is not determinable under the parameters
discussed above. Under this rule, value of supply will be taken as equal to—
a. 110 per cent of cost of manufacture or production or cost of acquisition of goods; or
b. 110 per cent of cost of acquisition of services.
Cost of production shall consist of material consumed, direct wages and salaries, direct expenses, works
overheads, quality control cost, research and development cost, packing cost, administrative overheads relating
to production.
 WHAT IS MODE FOR DETERMINATION OF VALUE OF SUPPLY UNDER RULE 31

471. It is also known as residual method. It is applicable when value cannot be determined under any of the above
provisions. In such a case, value of supply of goods/services shall be determined using reasonable means
consistent with the principles and the general provisions of section 15 and general provisions of Chapter IV of
GST Rules.
In the case of supply of services, the supplier may opt for this rule, ignoring rule 30.
 HOW TO DETERMINE VALUE OF CERTAIN SUPPLIES GIVEN UNDER RULE 32

472. Value of certain supplies given below shall be determined (at the option of the supplier) in the manner
specified by rule 32. These rules are given below –
472.1 Service in relation to purchase or sale of foreign currency [Rule 32(2)] - This rule covers value of supply
of services in relation to purchase or sale of foreign exchange (including money changing). In such cases, the
problem of valuation arises on account of the fact that as per normal trade practice in such services the
consideration is inbuilt in the difference between the selling/buying rates and the Reserve Bank of India (RBI)
reference rate for that currency at that time.
 Option 1 - Actual value - The following valuation rules are applicable –
1. If a currency is exchanged from or to Indian Rupees then the value of taxable service shall be equal to the
difference in the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency.
For example, if US $ 1,000 are sold by a customer @ Rs. 65 per US $ and RBI reference rate for US $ is Rs. 65.73,
then the taxable value shall be Rs. 730 (1,000 × 0.73).
2. In case RBI reference rate for a currency is not available, value of taxable service shall be 1 per cent of gross
amount of Indian rupees provided or received by the person changing money.
3. If a foreign currency is exchanged for another foreign currency, value of taxable service shall be equal to 1 per
cent of the lesser of the two amounts the person changing the money would have received by converting one of
the two currencies into Indian Rupees on that day at the reference rate provided by RBI.
Problems
472.1-P1 X sells $ 40,000 at the rate of Rs. 65 per US $ to a dealer. RBI reference rate on that date for US $ is Rs. 65.75. Determine
the value of taxable supply for GST purposes.
Solution :
Rs.
RBI reference rate (per US $) 65.75
Exchange rate offered by dealer (per US $) 65.00
Difference 0.75
Value of taxable supply (Rs. 0.75 × 40,000) 30,000
472.1-E1 X Ltd. purchases UK Pound 90,000 at the rate of Rs. 85 per pound. RBI reference rate for UK Pound is Rs. 84.40. Determine
the value of taxable supply.
472.1-P2 X purchases 20,00,000 Kenyan Shilling from a foreign exchange dealer at the rate of Re. 0.62 per Kenyan Shilling. RBI
reference rate is not available. Find out taxable value of supply.
Solution :
Rs.
RBI reference rate Not available
Exchange rate offered by dealer (per Kenyan Shilling) 0.62
Kenyan Shilling purchased : 20,00,000
Amount paid in Indian currency (20,00,000 × Re. 0.62) 12,40,000
Value of taxable supply (1% of Rs. 12,40,000) 12,400
472.1-E2 Y sells 20,00,000 Kenyan Shilling to a foreign exchange dealer at the rate of Re. 0.62 per Kenyan Shilling. RBI reference
rate is not available. Find out taxable value of supply.
472.1-P3 On January 2, 2020, X purchases 6,000 US $ from an authorised dealer in exchange of 5,400 Euros. Find out taxable value
of supply on the assumption that RBI reference rate is as follows – US $ : Rs. 68, Euros : Rs. 76.
Solution :
Rs.
RBI reference rate for Euro on the date of exchange 76
RBI reference rate for Dollar on the date of exchange 68
Rupee equivalent of 5,400 Euro (5,400 Euro × Rs. 76) (a) 4,10,400
Rupee equivalent of 6,000 US $ (6,000 US $ × Rs. 68) (b) 4,08,000
(a) or (b), whichever is less 4,08,000
Taxable value of supply [1% of (a) or (b), whichever is less] 4,080
472.1-E3 Y sells on March 2, 2020, 80,000 Singapore $ in exchange of 56,000 US $. Find out taxable value of supply on the
assumption that RBI reference rate is as follows – US $ : Rs. 67, Singapore $ : Rs. 48.
707 Buying and selling of second hand goods Para 472.4
 Option 2 - Deemed value - The following valuation rules are applicable at the option of supplier of services. However, this
option shall be exercised for a financial year and it cannot be withdrawn during the remaining part of that financial
year –
Gross amount of currency exchanged Value of service relating to supply of foreign currency (including money changing)
Up to Rs. 1,00,000 1% of gross amount of currency exchanged (minimum Rs. 250)
Above Rs. 1,00,000 but up to Rs. 1,000 + 0.5% of (gross amount of currency exchanged minus Rs. 1,00,000)
Rs. 10,00,000
Above Rs. 10,00,000 Rs. 5,500 + 0.1% of (gross amount of currency exchanged minus Rs. 10,00,000)
(maximum Rs. 60,000)
X Ltd. provides services in relation to money changing. On December 4, 2019, it sold US $ 30,000 in exchange of Rs. 19,50,000
at the exchange rate of Rs. 65. RBI reference rate for that day for US $ is Rs. 65.50. In this case, the normal value of taxable
supply will be Rs. 15,000 (i.e., the difference between sale price and RBI reference rate : Re. 0.50 per US $, taxable value
shall be Re. 0.50 × US $ 30,000). If X Ltd. has opted for compounding scheme, value of taxable supply will be calculated as
follows –
Rs.
Gross amount of currency exchanged in excess of Rs. 10,00,000 9,50,000
Amount calculated at the rate of 0.1% 950
Plus : Rs. 5,500 5,500
It may be noted that compounding scheme cannot be opted on daily basis. It has to be opted for the entire financial year.
472.2 Service provided by an air travel agent in relation to booking of air tickets [Rule 32(3)] - The value
of the supply of services in relation to booking of tickets for travel by air provided by an air travel agent shall
be deemed to be –
a. an amount calculated at the rate of 5 per cent of the basic fare in the case of domestic bookings; and
b. at the rate of 10 per cent of the basic fare in the case of international bookings of passage for travel by air.
“Basic fare” means that part of the air fare on which commission is normally paid to the air travel agent by the
airlines.
472.3 Service in relation to life insurance business [Rule 32(4)] - These rules are given below –
Different situations Value of taxable supply
If amount allocated for investment/saving on Gross amount of premium charged from a policyholder minus
behalf of policyholder is separately given at the amount allocated for investment or saving on behalf of policy-
time of providing service holder
Single premium annuity policies (other than 10% of single premium charged from the policyholder
given above)
Where the entire premium paid by the policy- Entire premium
holder is only towards the risk cover in life
insurance
In the case of any other life insurance policy - 25% of premium charged from the policyholder in the first year.
- 12.5% of premium charged from the policyholder in subsequent
years
472.4 Valuation based on margin – Buying and selling of second hand goods [Rule 32(5)] - Normally GST
is charged on the transaction value of the goods. However, in respect of second hand goods, a person dealing
in such goods is allowed to pay tax on the margin (i.e., the difference between the value at which the goods are
supplied and the price at which the goods are purchased). If there is no margin, no GST is charged for such
supply. The purpose of the scheme is to avoid double taxation [as the goods (having once borne the incidence
of GST at the time of original sale) should not be taxed again when these goods re-enter the supply chain as second
hand goods].
This scheme is given by rule 32(5). This rule covers the following –
 Buying and selling of second hand goods - This rule is applicable if the following conditions are satisfied –
1. Taxable supply is provided by a person who deals in buying and selling of second hand goods (i.e., used goods
as such or after such minor processing which does not change the nature of the goods).
2. No input tax credit has been availed on the purchase of such goods.
Value of taxable supply - If the above conditions are satisfied, the value of supply shall be the difference between
the selling price and the purchase price. If selling price is less than purchase price, value of taxable supply is zero.
 Goods repossessed from a defaulting borrower - This rule is also applicable when goods are repossessed from a
defaulting borrower. The following conditions should be satisfied –

1. Goods are repossessed from a defaulting borrower.
2. Defaulting borrower is not registered under GST.
3. Goods are repossessed for the purpose of recovery of loan or debt.
How to find out purchase value of goods repossessed - If above conditions are satisfied, the purchase value of goods
repossessed shall be deemed to be the purchase price of such goods by the defaulting borrower reduced by 5
percentage points for every quarter (or part thereof) between the date of purchase and the date of disposal by
the person making such repossession.
 Case 1 - X deals in buying and selling of second hand goods. On August 5, 2019, he purchases from B a second hand fridge
for Rs. 14,000. X makes some minor changes. He sells the same fridge for Rs. 17,000 on August 10, 2019. He does not take
any input tax credit on purchase of fridge from B (B will not issue any tax invoice to X). Taxable value of supply by X will
be Rs. 3,000. If, however, sale price is less than Rs. 14,000, value of taxable supply will be zero.
 Case 2 - Y purchases an air-conditioner for Rs. 80,000 on August 6, 2019. It is financed by A Ltd. On Y’s failure to pay EMIs,
air-conditioner is repossessed by A Ltd. on December 2, 2019. Later on, A Ltd. sells the air-conditioner on February 10, 2020
for Rs. 71,000.
Value of taxable supply will be calculated as follows –
Rs. Rs.
Selling price 71,000
Original purchase price on August 6, 2019 80,000
Less: Normal wear and tear @ 5% per quarter (number of quarters between August 6, 2019
and February 10, 2020 : 3, amount deductible is 15% of Rs. 80,000) 12,000
Purchase price (Rs. 80,000 – Rs. 12,000) 68,000
472.5 Value of token or voucher [Rule 32(6)] - This rule is applicable to find out value of a token or a voucher
or a coupon or a stamp (other than postage stamp). If these are redeemable against a supply of goods/services,
the taxable value of supply shall be equal to the money value of goods/services redeemable against such token,
voucher, etc.
X purchases a voucher of Rs. 5,000 from ITC Ltd. for Rs. 4,500 (i.e., after a discount of Rs. 500). This voucher is redeemable
against purchase of any article up to Rs. 5,000 from any Wills Lifestyle outlet on or before December 31, 2020. Value of taxable
supply in this case is Rs. 5,000.
472.6 Value of taxable services provided by notified service providers [Rule 32(7)] - This rule is applicable
if the following conditions are satisfied –
1. The Government may notify a class of service providers for the purpose of this rule.
2. Input credit is available to the supplier.
3. Service is provided to related persons without consideration. Alternatively, service is provided to distinct
persons (i.e., branch transfer, etc.)
If these conditions are satisfied, value of supply shall be deemed to be nil.
 HOW TO DETERMINE VALUE OF SUPPLY OF SERVICES IN THE CASE OF PURE AGENT

473. Any expenditure incurred by a supplier of services as a pure agent of the recipient of services shall be
excluded from the value of supply under the parameters of rule 33.
 Who is a pure agent - For the purpose of rule 33, “pure agent” means a person who satisfies the following
condition –
709 Value of supply in case of lottery Para 474.1
1. Pure agent enters into a contractual agreement with the recipient of supply to act as his pure agent to incur
expenditure (or costs) in the course of supply of goods/services (written contract is not necessary, it may be
implied).
2. He neither intends to hold nor holds any title to the goods/services so procured (or supplied) as pure agent
of the recipient of supply.
3. He does not use for his own interest such goods/services so procured.
4. He receives only the actual amount incurred to procure such goods/services in addition to the amount
received for supply he provides on his own account.
 Conditions - Any expenditure (or cost) incurred by the supplier as a pure agent of the recipient shall be excluded
from the value of supply if the following conditions are satisfied—

1. The supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party
on authorisation by such recipient.
2. The payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the
invoice issued by the pure agent to the recipient of service.
3. The supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in
addition to the services he supplies on his own account.
 Case 1 - A & Co. is a firm of chartered accountants. It provides services to Krishna Group to handle the legal work pertaining
to the incorporation of B Ltd. Apart from its service charges, A & Co. also recovers from B Ltd., registration fee and approval
fee for the name of the company paid to the Registrar of Companies. The fees charged by the Registrar of Companies for
the registration and approval of the name are compulsorily levied on B Ltd. A & Co. is merely acting as a pure agent in the
payment of those fees. Therefore, A & Co.’s recovery of such expenses is a reimbursement and not part of the value of supply
made by A & Co. to B Ltd.
 Case 2 - X contracts with Y, a real estate agent, to sell his house and thereupon Y gives a newspaper advertisement. Bill
of Y separately includes newspaper advertisement charges. In this case, GST is chargeable on total amount of bill.
Advertisement charges cannot be excluded, as Y did not pay advertisement expenditure as a pure agent of X. Advertising
service is an input service for the estate agent Y in order to enable or facilitate him to perform his services as an estate agent.
 Case 3 - In course of supplying a taxable service, a service provider incurs costs such as travelling expenses, postage,
telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the
service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own
account for providing the taxable service. GST is chargeable on total amount of bill.
 Case 4 - A contracts with B, an architect for building a house. During the course of supplying taxable service, B incurs
expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform his
services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense
or as part of an inclusive overall fee, GST is payable on total amount charged by B. Value of the taxable supply for charging
GST is what A pays to B. Charges for telephone, air travel, hotel accommodation, cannot be excluded, as these expenses are
not incurred by B as a pure agent of A.
 Case 5 - X Ltd. provides a taxable service of rent-a-cab by providing a chauffeur-driven BMW car for a foreign collaborator
of Y Ltd. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental
expenses such as parking fees by X Ltd. during the tour. At the end of the tour, the chauffeur returns the balance of amount
with a statement of his expenses and relevant bills. X Ltd. charges these amounts from Y Ltd. The cost incurred by the
chauffeur and billed to Y Ltd. constitutes part of gross amount charged for the supply of service. It cannot be excluded, as
the chauffeur’s expenses are not incurred by X Ltd. as a pure agent of Y Ltd.
Suppose X Ltd. also separately charges for the cost of flowers bouquet of Rs. 6,000. The flower bouquet is purchased by X
Ltd. on request of Y Ltd. from a vendor indicated by Y Ltd. and the same bouquet is presented to the foreign collaborator
at the beginning of the tour by the chauffeur. Rs. 6,000 will be excluded from value of taxable supply, as it is incurred by the
supper of service X Ltd. as a pure agent of the recipient of service.
 WHAT ARE OTHER MODES OF DETERMINATION OF VALUE OF TAXABLE SUPPLY

474. Other modes of valuation of taxable supply are given below –
474.1 Value of supply in case of lottery, betting, gambling and horse racing [Rule 31A] - These provisions
are given below –
 Lottery run by a State Government - In case of lottery run by a State Government, the following valuation rules
are applicable –
1. If the lottery is not allowed to be sold in any State (other than the organizing State), the value of supply shall
be deemed to be 100/112 of the face value of the ticket (or the price notified in the official gazette, whichever is
higher).
2. If the lottery is allowed to be sold even outside the State (i.e., even in States other than the organizing State),
the value of supply shall be deemed to be 100/128 of the face value of the ticket (or the price notified in the official
gazette, whichever is higher).
 See problem 484-P7.
 Chance to win in betting/gambling/horse racing - The value of supply of actionable claim in the form of chance to
win in betting, gambling or horse racing in a race club, shall be 100 per cent of the face value of the bet or the
amount paid into the totalisator.
474.2 Construction of a complex involving transfer of undivided share of land - In case of construction of
a complex (involving transfer of property in land or undivided share of land), value of taxable supply for the
purpose of GST will be equal into total amount charged for such supply minus value of land (or undivided share
of land). For this purpose, the value of land (or undivided share of land) shall always be deemed to be 1/3rd of
total amount charged.
 See problem 429.1-P1.
 RATE OF EXCHANGE OF CURRENCY - HOW TO DETERMINE

475. Rule 34 is applicable to determine rate of exchange of currency for calculating value of supply (if
consideration is received/receivable in a foreign currency).
 Supply of goods - The rate of exchange for determination of value of taxable goods shall be the applicable rate
of exchange (as notified by the Board under section 14 of the Customs Act) for the date of time of supply of such
goods.
 Supply of services - The rate of exchange for determination of value of taxable services shall be the applicable
rate of exchange determined as per the generally accepted accounting principles (GAAP)† for the date of time
of supply of such services.
 VALUE OF SUPPLY INCLUSIVE OF GST - HOW TO DETERMINE TAXABLE VALUE

476. Where the value of supply is inclusive of GST, the tax amount shall be determined in the following
manner –
Rate of GST
Amount of GST = Value inclusive of GST ×
100 + Rate of GST
 Case 1 - X of Mysore supplies 1,000 kg. of rubber bushes to Y of Amritsar. Invoice value inclusive of GST is Rs. 1,02,400.
Applicable GST rate is 28 per cent. Amount of tax will be determined as follows –
Rs.
Value of taxable supply (Rs.1,02,400 × 100 ÷ 128) 80,000
Add: GST –
- IGST (Rs.1,02,400 × 28 ÷ 128) or 28% of Rs. 80,000 22,400
Total 1,02,400
 Case 2 - Suppose in Case 1, recipient is Y of Bengaluru. GST will be calculated as follows (now it is intra-State supply) –
Rs.
Add: GST –
- CGST (Rs.1,02,400 × 14 ÷ 128) or 14% of Rs. 80,000 11,200
- SGST (Karnataka) (Rs.1,02,400 × 14 ÷ 128) or 14% of Rs. 80,000 11,200
Total 1,02,400
†As per AS-21, a foreign currency transaction shall be recorded in books by applying spot exchange rate. The spot exchange rate is followed by
different entities independently based on information from RBI, SBI, Foreign Exchange Dealers’ Association of India (FEDAI), etc., in line with
adopted accounting policies. In other words, it can be said that the exchange rate adopted for the purpose of accounting can be followed for the
purpose of GST in the case of supply of services.
 Case 3 - X is a technical consultant in the field of bio-degradable waste and located in Mumbai. On July 15, 2019, he enters
into an agreement with Y Ltd. (located in Nasik) to prepare a technical report. Consultancy fees for this purpose is Rs.
4,50,000 + GST. The work will be completed during November 2019. However, on July 15, 2019, he gets an advance payment
of Rs. 1,00,000. GST rate is 18 per cent. Quantum of GST out of advance of Rs. 1,00,000 will be calculated as follows –
Rs.
Add: GST –
- CGST (Rs.1,00,000 × 9 ÷ 118) or 9% of Rs. 84,746 7,627
- SGST (Maharashtra) (Rs.1,00,000 × 9 ÷ 118) or 9% of Rs. 84,746 7,627
Total 1,00,000
Test your knowledge

1. When value of supply can be taken as equal to transaction value ? [para 465]
2. In a contract, consideration payable by the recipient is partly in cash and partly in kind. How taxable value will be
determined ? [para 467]
3. Y, a registered dealer, supplies goods/services to a related person without any consideration. Is it subject to GST ? If yes,
discuss the provisions pertaining to determination of value of such supply. [para 468]
4. X Ltd. is a manufacturing company. Y Ltd. is an agent of X Ltd. in Punjab and Madhya Pradesh. Discuss the rule
pertaining to valuation of supply of goods by X Ltd. to Y Ltd. [para 469]
5. Write short notes on the following –
- Value of supply based on cost.
- Residual method of valuation.
- Service in relation to purchase of foreign currency. [paras 470, 471 and 472.1]
6. Is there any specific provision pertaining to valuation when a person deals in buying and selling of second hand
goods ? [para 472.4]
7. What are the special provisions for valuation pertaining to air travel agent and life insurance business ? [paras 472.3 and
472.2]
8. Who is a pure agent ? What are the special provisions governing valuation in the case of pure agent ? [para 473]
CHAPTER 27 Reverse charge mechanism
I
n a few cases, GST is payable by the recipient of goods/services under the scheme of
reverse charge mechanism. This chapter briefly discusses the scheme of reverse charge
mechanism.
 WHAT IS REVERSE CHARGE MECHANISM

481. Generally, supplier of goods/services is liable for payment of GST to the Government. In a few cases,
however, the recipient of goods/services is liable for payment of GST. These cases are given by section 9(3) read
with Notification No. 4/2017, dated June 28, 2017 and Notification No. 13/2017-CT, dated June 28, 2017. Similar
notifications are issued by State Governments. Likewise, the Government has issued Notification No. 10/2017-
IT (Rate), dated June 28, 2017 under IGST Act to recover reverse charge mechanism in the case of inter-State
supply.
 WHEN REVERSE CHARGE MECHANISM IS APPLICABLE [SEC. 9(3)]

482. There are two type of reverse charge scenarios provided in law. First is dependent on the nature of supply
and/or nature of supplier. This scenario is covered by section 9(3) and these are given below. Second scenario
is covered by section 9(4) which is discussed in para 483.
The following cases are covered by reverse charge mechanism. In these cases, the recipient of goods/services is
liable to pay GST –
Supply of goods
Description of supply of goods Supplier of goods Recipient of supply
1. Cashew nuts, not shelled or peeled Agriculturist Any registered person
2. Bidi wrapper leaves (tendu) Agriculturist Any registered person
3. Tobacco leaves Agriculturist Any registered person
4. Silk yarn Any person who manufactures Any registered person
silk yarn from raw silk or silk
worm cocoons for supply of
silk yarn
4A. Raw cotton Agriculturist Any registered person
5. Supply of lottery State Government, Union Lottery distributor or selling agent.
Territory or any local authority
6. Used vehicles, seized and confiscated Central Government, State Any registered person†
goods, old and used goods, waste and Government, Union Territory
scrap or a local authority
7. Priority Sector Lending Certificate Any registered person Any registered person‡
(PSLC)
† If recipient of supply is an unregistered person, it is chargeable to tax under normal provisions (i.e., GST is payable by the supplier under forward
charge). In such a case, the supplier (i.e., the respective Government department) shall be liable to get registered and pay GST – Circular No.
76/50/2018-GST, dated December 31, 2018.
‡ Nature of supply of PSLC between banks may be treated as a supply of goods in the course of inter-State trade or commerce – Circular No. 93/
12/2019-GST, dated March 8, 2019.
712
713 When reverse charge mechanism is applicable Para 482
Supply of services
Description of supply of services Supplier of services Recipient of supply
1. Supply of services by goods transport Goods transport agency (GTA) - Any registered factory under Facto-
agency (GTA) (who has not paid GST ries Act
@ 12%) in respect of transport of goods - Any society/co-operative society
by road to anybody given in Column 3 - Any person registered under GST
- Body corporate
- Firm/AOP
- Any casual taxable person located in
taxable territory†
2. Services provided by an individual An individual advocate (inclu- Any business entity located in the
advocate (including a senior advocate) ding a senior advocate) or firm taxable territory
or firm of advocates by way of legal of advocates
services, directly or indirectly
3. Services supplied by an arbitral An arbitral tribunal Any business entity located in the
tribunal taxable territory
4. Services provided by way of sponsor- Any person Any body corporate or partnership firm
ship located in the taxable territory
5. Services supplied by Government Central Government, State Any business entity located in the
(mentioned in Column 2) excluding – Government, Union Territory taxable territory
- Renting of immovable property. or local authority
- Speed post, express parcel post, life
insurance, agency services (by depart-
ment of post)
- Services in relation to an aircraft or a
vessel, inside or outside the precincts
of a port or an airport
- Transport of goods or passengers
5A. Services supplied by Government Central Government, State A person registered under GST
(mentioned in Column 2) by way of ren- Government, Union Territory
ting of immovable property or local authority
5B. Services supplied by any person by Any person Promoter [see para 573.2]
way of transfer of development rights or
Floor Space Index (FSI) (including addi-
tional FSI) for construction of a project
by a promoter
5C. Long term lease of land (30 years or Any person Promoter [see para 573.2]
more) by any person against consider-
ation in the form of upfront amount (called
as premium, salami, cost, price, develop-
ment charges or by any other name) and/
or periodic rent for construction of a
project by a promoter
6. Services supplied by a director of a A director of a company or a The company or a body corporate
company or a body corporate to the body corporate located in the taxable territory
said company or the body corporate
7. Services supplied by an insurance An insurance agent Any person carrying on insurance
agent to any person carrying on insu- business, located in the taxable territory
rance business
8. Services supplied by a recovery agent A recovery agent A banking company/financial insti-
tution/NBFC, located in the taxable
territory
† Entry 1 and Entry 14 are not applicable if the recipient of service is –

a. a department or establishment of the Central Government or State Government or Union Territory; or
b. local authority; or
c. Governmental agencies,
which has taken registration under the CGST Act, 2017 only for the purpose of TDS under section 51 and not for making a taxable supply of goods
or services (applicable from January 1, 2019).
Para 482 Reverse charge machanism 714
Description of supply of services Supplier of services Recipient of supply

9. Supply of services by a music com- Music composer, photographer, Music company, producer or the like,
poser, photographer, artist or the like by artist, or the like located in the taxable territory
way of transfer or permitting the use or
enjoyment of a copyright covered under
section 13(1)(a) of the Copyright Act, 1957
relating to original dramatic, musical or
artistic works to a music company, pro-
ducer or the like
9A. Supply of services by an author by Author Publisher located in the taxable territory
way of transfer or permitting the use or [see Note given at the end of the table]
enjoyment of a copyright covered under
section 13(1)(a) of the Copyright Act, 1957
relating to original literary works to a
publisher
10. Supply of services by the members of Members of Over-seeing Com- RBI
Overseeing Committee to RBI mittee constituted by RBI
11. Services supplied by individual Individual direct selling agents A banking company/NBFC located in
direct selling agents (other than a body (other than a body corporate/ the taxable territory
corporate/firm/LLP) firm/LLP)
12. Services provided by business facili- Business facilitator (BF) A banking company, located in the tax-
tator (BF) to a banking company able territory (applicable from January
1, 2019)
13. Services provided by an agent of An agent of business corres- A business correspondent, located in
business correspondent (BC) to business pondent (BC) the taxable territory (applicable from
correspondent (BC) January 1, 2019)
14. Security services (services provided Any person other than a body A registered person (not being a person
provided to a registered person under Composition Scheme or Alterna-
tive Composition Scheme) located in the
taxable territory (applicable from
January 1, 2019)†
15. Services provided by way of renting Any person (other than a body Any body corporate located in the
of a motor vehicle provided to a body corporate), paying GST at the taxable territory
corporate rate of 5% on renting of motor
vehicles with input tax credit
only of input service in the
same line of business
16. Services of lending of securities under Lender (i.e., a person who de- Borrower (i.e., a person who borrows
Securities Lending Scheme, 1997 posits his securities with an the securities under the Scheme through
(“Scheme”) of SEBI approved intermediary for the an approved intermediary of SEBI)
purpose of lending under the
Scheme of SEBI)
17. Any service supplied by any person Any person located in a non- Any person located in the taxable
who is located in a non-taxable territory taxable territory territory (other than non-taxable online
recipient)
18. Services supplied by a person located A person located in non-taxable Importer located in the taxable territory.
in non-taxable territory by way of trans- territory
portation of goods by a vessel from a
place outside India up to the customs
station of clearance in India
Note - Reverse charge as given in Entry 9A is not applicable (with effect from October 1, 2019) if the following conditions are
satisfied -
- The author has taken registration under GST.
- The author files a declaration with the jurisdictional CGST/SGST Commissioner that he exercises the option to pay GST
under forward charge under section 9(1). This declaration can be filed in the prescribed form. The form is given in
Annexure I to the Notification No. 22/2019-CT (Rate), dated September 30, 2019. This option can be filed before the
† See on page 713.

715 Reverse charge mechanism is applicable Para 483
commencement of the financial year (for the period commencing November 1, 2019 during the financial year 2019-20,
it can be filed at any time on or before October 31, 2019). Further, in the aforesaid declaration, the author declares to CGST/
SGST Commissioner that he shall not withdraw the said option within a period of 1 year from the date of exercising such
option.
- The author makes a similar declaration on the invoice issued by him in Form GST Inv-I to the publisher. The format of
declaration is given in Annexure II to the Notification No. 22/2019-CT (Rate), dated September 30, 2019.
 Agriculturist - “Agriculturist” means an individual/HUF who undertakes cultivation of land—
a. by own labour, or
b. by the labour of family, or
c. by servants on wages payable in cash or kind or by hired labour under personal supervision or the personal
supervision of any member of the family.
 Renting of immovable property- It means allowing, permitting or granting access, entry, occupation, use or any
such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control
of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect
of immovable property.
 Person liable to pay freight is deemed as recipient of service - The person who pays (or is liable to pay) freight for the
transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person
who receives the service.
 Recipient of service in the case of legal service - The business entity located in the taxable territory who is litigant,
applicant or petitioner, as the case may be, shall be treated as the person who receives the legal services for the
purpose of this notification.
 GST under reverse charge cannot be paid by utilising input tax credit - If GST is payable by the recipient of goods/
services under reverse charge mechanism, input tax credit cannot be utilised for payment of GST. This is because
for payment of GST on outward supply, input tax credit on inward supply can be utilised. GST under reverse
charge mechanism is not tax on outward supply (it is tax on inward supply). After payment of tax under reverse
charge mechanism, it can be utilised for payment of GST on outward supply.
 WHEN REVERSE CHARGE MECHANISM IS APPLICABLE ON SUPPLY BY UNREGISTERED

PERSON TO REGISTERED PERSON [SEC. 9(4)]
483. Section 9(4) provides that GST shall be paid by the recipient under reverse charge mechanism, if the
following conditions are satisfied –
a. supplier is not a person registered under GST;
b. he supplies goods/services which is taxable under GST, and
c. recipient is a registered person.
If the above conditions are satisfied, GST is payable by the recipient under reverse charge mechanism under
section 9(4) and all GST provisions shall apply to such recipient as if he is the person liable for paying GST in
relation to the supply of such goods/services.
 Section 9(4) amended with effect from February 1, 2019 - The above provisions of section 9(4) have been amended
with effect from February 1, 2019. After this amendment, the aforesaid provisions of section 9(4) are applicable
only in those cases which are notified by the Government.
 Provisions of section 9(4), as applicable before and after the above amendment - Applicability of section 9(4) during
different time is summarised below –

Different period Application of section 9(4)
From July 1, 2017 GST shall be paid under reverse charge mechanism by the recipient, if supplier is unregistered
to October 12, 2017 person. However, this provision is not applicable where the aggregate value of supplies of goods/
services received by a registered person from any (or all) unregistered suppliers is less than Rs. 5,000
in a day.
From October 13, Provisions of section 9(4) not applicable. Government issued different notifications for this purpose
2017 to January – Notification No. 8/2017, dated June 28, 2017 (as amended from time-to-time).
31, 2019
Problem 484-P1 Reverse charge machanism 716
Different period Application of section 9(4)

February 1, 2019 Section 9(4) has been amended. After this amendment, section 9(4) is applicable only in those cases
to March 31, 2019 which are notified by the Government. However, no notification is issued during February 1, 2019
and March 31, 2019. Consequently, during this period, section 9(4) is not applicable.
From April 1, 2019 Reverse charge provisions of section 9(4) are applicable in a few cases notified by the Government
vide Notification No. 7/2019, dated March 29, 2019. If a promoter of a real estate project procures
inputs, input services and capital goods from unregistered suppliers, he is required to pay GST
under reverse charge mechanism [see para 572.2].
Problems on reverse charge mechanism

484-P1 X is an insurance agent of Tata AIG General Insurance Company Ltd. Amount of commission up till June 30, 2019 was
approximately Rs. 5,00,000 every year. During July 1, 2019 and March 31, 2020, he is likely to get insurance commission of
Rs. 20,50,000 from the company. X is of the view that out of Rs. 20,50,000, Rs. 20,00,000 is not chargeable to GST and the balance of
Rs. 50,000 is taxable. Is he legally correct ? Can he claim exemption available to small taxable persons ?
Solution :
Generally, supplier of goods/services is liable for payment of GST. However, in some cases, recipient of goods/services is
subject to GST under reverse charge mechanism. In the case of service supplied by an insurance agent to any person carrying
on insurance business, the recipient of service will have to pay GST under reverse charge mechanism. The benefit of small
scale service provider is not available when GST is payable under reverse charge mechanism. Tata AIG General Insurance
Company will have to pay GST in respect of commission paid to X. If amount of commission during July 1, 2019 and March
31, 2020 is Rs. 20,50,000, then insurance company will make the following payment –
Commission to X 20,50,000*
GST to Government @ 18% 3,69,000
*Tata AIG General Insurance Company will deduct tax at source at the rate of 5% under section 194D of the Income-tax Act.
TDS will be Rs. 1,02,500. After TDS, the balance of Rs. 19,47,500 will be paid to X. There is no TDS on GST.
484-E1 X is a whole-time director of A Ltd. Salary is Rs. 1,00,000 per month. Besides, he gets sitting fees for Board’s meetings. The
amount paid for sitting fees for July 2019 is Rs. 5,000. During July 1, 2019 and March 31, 2020, sitting fees (before TDS) is Rs. 25,000
for five meetings. Find out GST liability of X and A Ltd. Is there any liability of deduction of income-tax at source under section
194J ?
484-P2 Tata AIG General Insurance Company pays insurance commission to X (an insurance agent of the company) as follows –
Date when service is Date of invoice Amount of commission Date of payment of commission by
provided by X Rs. Tata AIG General Insurance Co.
July 15, 2019 July 15, 2019 2,10,000 July 18, 2019
July 16, 2019 July 19, 2019 3,15,000 September 16, 2019
August 17, 2019 August 17, 2019 82,000 February 1, 2020
October 18, 2019 October 11, 2019 4,80,000 December 8, 2019
February 19, 2020 February 19, 2020 63,000 March 25, 2020
Find out the due date of payment of GST by Tata AIG General Insurance Co.
Solution :
Due date of payment of GST depends upon “time of supply”. If time of supply falls during the current month, GST should
be paid by 20th day of succeeding month. If time of supply is November 4, 2019, GST should be paid on or before December
20, 2019. In the case of commission to an insurance agent, GST is payable under reverse charge mechanism. For this purpose,
time of supply is date of payment of commission or the next day immediately after 60 days from the date of invoice,
whichever is earlier [for detailed discussion, see para 457.4].
The due date of payment of GST by Tata AIG General Insurance Co. will be as follows –
Date of invoice Amount of Date of payment of Next day immediately Time of supply Due date of
commission commission by Tata following the expiry of 60 (Column 3 or payment of GST
Rs. AIG General days from the date of invoice Column 4, whichever
Insurance Co. (Column 1 + 61 days) is earlier)
(1) (2) (3) (4) (5) (6)
July 15, 2019 2,10,000 July 18, 2019 September 14, 2019 July 18, 2019 August 20, 2019
July 19, 2019 3,15,000 September 16, 2019 September 18, 2019 September 16, 2019 October 20, 2019
August 17, 2019 82,000 February 1, 2020 October 17, 2019 October 17, 2019 November 20, 2019
October 11, 2019 4,80,000 December 8, 2019 December 11, 2019 December 8, 2019 January 20, 2020
February 19, 2020 63,000 March 25, 2020 April 22, 2020 March 25, 2020 April 20, 2020
717 Problems on reverse charge mechanism Problem 484-P4
484-E2 In problem 484-P2, insurance agent is X Ltd. (a company located in Mumbai). Find out the due date of payment of GST by
X Ltd. and Tata AIG General Insurance Company.
484-P3 X & Co. is a firm of advocates (partners are X and Y, having equal profit sharing ratio). Find out the GST liability –
1. Legal professional services provided to A, an advocate of Bombay High Court : Rs. 8,00,000 (gross receipts of A is always more than
Rs. 70,00,000 per annum).
2. Legal professional services provided to B & Co. (a firm of 10 advocates) : Rs. 32,00,000.
3. Legal professional services provided to C (an Additional Secretary in the Ministry of Finance, Government of India) (this service is
provided to C in a personal legal matter not connected with the employer) : Rs. 6,00,000.
4. Legal professional services provided to D Ltd. (turnover of D Ltd. of the preceding financial year is Rs. 8,00,000) : Rs. 11,00,000.
5. Legal professional services provided to E Ltd. (turnover of E Ltd. of the preceding financial year is Rs. 70,00,000) : Rs. 5,00,000.
Above figures are exclusive of GST. If any GST is there, it will be paid separately. X & Co. is not a small service provider. Find out –
a. GST payable by the supplier of service (i.e., X & Co.);
b. GST payable by recipients of service (i.e., A, B & Co., C, D Ltd., E Ltd.); and
c. tax deductible by the recipient of service under section 194J of the Income-tax Act.
Solution :
GST liability of GST liability TDS under
supplier of of recipient income-tax
service (X & Co.) of service by recipient
of service
Rs. Rs. Rs.
1. Professional services to A (an advocate) [it is covered by Exemption
Notification (Entry 45), no GST] (tax @ 10% under section 194J to be
deducted by payer) Nil Nil 80,000
2. Professional services to B & Co. (a firm of advocate) [it is covered by
Exemption Notification (Entry 45), no GST] (tax @ 10% under section
194J to be deducted by payer) Nil Nil 3,20,000
3. Professional services to C (not being a business entity) [it is covered
by Exemption Notification (Entry 45), no GST] (tax is not deductible by
an individual under section 194J in respect of personal expenses) Nil Nil Nil
4. Professional services to D Ltd. (a business entity whose turnover of
the preceding year is Rs. 20,00,000 or less) [it is covered by Exemption
Notification (Entry 45), no GST] (tax @ 10% under section 194J to be
deducted by payer) Nil Nil 1,10,000.
5. Professional services to E Ltd. (a business entity whose turnover of
the preceding year is more than Rs. 20,00,000) [it is not covered by
Exemption Notification (Entry 45), GST is applicable, it is covered
by reverse charge mechanism] (tax @ 10% under section 194J to be
deducted by payer) Nil 90,000 50,000
484-E3 In problem 484-P3, make following changes and calculate GST liability –
Situation 1 - Service provider is X, a senior advocate.
Situation 2 - Service provider is X & Co. (a firm of two senior advocates X and Y).
484-P4 X & Co. is a firm of chartered accountants (partners are X and Y, having equal profit sharing ratio).
1. Tax consultancy services provided to A, a chartered accountant having practice in Pune : Rs. 7,00,000 (gross receipts of A is always
more than Rs. 1,00,00,000 per annum).
2. Tax consultancy services provided to B & Co. (a firm of 10 chartered accountants) : Rs. 10,00,000.
3. Tax consultancy services provided to C (a Joint Secretary in the Ministry of Commerce, Government of India) (this service is provided
to C in a personal tax matter not connected with the employer) : Rs. 3,00,000.
4. Audit services provided to D Ltd. (turnover of H Ltd. of the preceding financial year is Rs. 9,00,000) : Rs. 4,00,000.
5. Audit services provided to E Ltd. (turnover of H Ltd. of the preceding financial year is Rs. 600 crore) : Rs. 45,000.
Above figures are exclusive of GST. If any GST is applicable, it will be paid separately. X & Co. is not a small service provider. Find
out –
a. GST payable by the supplier of service (i.e., X & Co.);
b. GST payable by recipients of service (i.e., A, B & Co., C, D Ltd., E Ltd.); and
c. tax deductible by the recipient of service under section 194J of the Income-tax.
Problem 484-P5 Reverse charge machanism 718
Solution :
This problem is similar to earlier problem. However, in this case, supplier of service is a firm of chartered accountants (not
a firm of advocates). There is no exemption when service is provided by a chartered account or by a firm of chartered
accountants [Exemption Notification (Entry 45) is not applicable]. Moreover, reverse charge mechanism is not applicable
even in the case of service provided to E Ltd. In the given problem, GST at the rate of 18% will be applicable in all cases. It
comes to Rs. 4,40,100 [i.e., 18% of (Rs. 7,00,000 + Rs. 10,00,000 + Rs. 3,00,000 + Rs. 4,00,000 + Rs. 45,000]. The person responsible
for making payment will deduct tax at source at the rate of 10% under section 194J. Tax to be deducted by A : Rs. 70,000,
B & Co. : Rs. 1,00,000, C : Nil (being personal payment by an individual), D Ltd. : Rs. 40,000 and E Ltd. : Rs. 4,500.
484-E4 X Ltd. is in the business of manufacture of artificial silk. During February 2020, it obtains a legal advice from A & Co., a
firm of advocates (consultancy fee : Rs. 4,00,000) and B & Co., a firm of chartered accountants (consultancy fee : Rs. 4,00,000). These
figures are exclusive of GST. Turnover of X Ltd. is given below –
Turnover of 2018-19 : Rs. 18,90,000.
Turnover of 2019-20 : Rs. 74,00,000 (expected amount)
GST rate is 18 per cent. Find out GST liability of X Ltd., A & Co. and B & Co.
484-P5 Technical service is provided by X (located in Dubai) to A Ltd. [located in Warangal (Telangana)]. Value of supply of service
is Rs. 8,00,000. This service is provided on March 1, 2020. Find out the amount of GST and who will be liable to pay.
Solution :
If any service is provided by a person located from a non-taxable territory to a person situated in the taxable territory, 100%
GST is payable by the recipient of service. In the given problem 18% of Rs. 8,00,000 will be payable as GST by A Ltd. (who
is the recipient of service).
484-E5 Recalculate the tax liability in Problem 484-P5 if service is supply of manpower and –
Situation 1 - X, the service provider, is located in Jammu.
Situation 2 - X, the service provider, is located in Bhutan.
Situation 3 - X, the service provider, is located in Sikkim.
There is no other change in data.
484-P6 X Ltd., a GST registered dealer, is in the business of cashew processing since 1920. During October 2019, it gets the following
supplies –
1. Purchase of cashew nuts (not shelled or peeled) from A : Rs. 22,00,000.
2. Supply of manpower for processing unit of X Ltd. from B : Rs. 6,84,000.
3. Purchase of cashew nuts (not shelled or peeled) from C : Rs. 11,70,000.
4. Purchase of cashew nuts (not shelled or peeled) from D Ltd. : Rs. 8,00,000.
The above figures are before GST. GST rate is 5 per cent (supply of manpower 18 per cent). A is a farmer and undertakes cultivation
of land by paid servants under the supervision of his family. C is not a farmer but a trader. D Ltd. undertakes cultivation of land by paid
servants under the supervision of its director.
Who is liable to pay GST in the aforesaid cases ? Also calculate GST liability.
Solution :
If cashew nuts (with shell) is purchased from an “agriculturist” by a GST registered person, then GST is payable by the
recipient under reverse charge mechanism. “Agriculturist” for this purpose is an individual/HUF who undertakes
cultivation of land by own labour or by the labour of family or by paid servants under his supervision. Consequently, A is
agriculturist and supply from A is subject to reverse charge mechanism. C and D Ltd. are not “agriculturist”. These suppliers
will pay tax under forward charge by charging GST in their invoices.
GST liability will be calculated as follows –
GST payable by –
Suppliers Recipient
Rs. Rs.
Cashew nuts supplied by A – 1,10,000
Manpower from B 1,23,120 –
Cashew nuts supplied by C 58,500 –
Cashew nuts supplied by D Ltd. 40,000 –
484-E6 Discuss whether reverse charge mechanism is applicable in problem 484-P6, if X Ltd. is not registered under GST (as its
turnover is less than Rs. 20,00,000).
484-P7 During January 2020, Kerala Government issues the following lottery tickets to A Ltd., one of its lottery distributors –
1. 800 tickets of New Year Bonanza lottery (face value per ticket : Rs. 1,000, price as notified by official gazette : Rs. 600) (this lottery
can be sold by A Ltd. even outside Kerala) (GST rate is 28 per cent) (recipient of supply is head office of A Ltd. located at Bengaluru).
719 Problems on reverse charge mechanism Problem 484-P9
2. 1,400 tickets of Golden Jackpot lottery (face value per ticket : Rs. 2,000, price as notified by official gazette : Rs. 1,200) (this lottery
cannot be sold by A Ltd. outside Kerala) (GST rate is 12 per cent) (recipient of supply is branch office of A Ltd. located at Trivandrum).
Determine who will pay GST in this case (quantum of GST calculation is required).
Solution :
If the supplier of lottery tickets is a State Government/Union Territory/local authority and recipient of supply is a lottery
distributor/selling agent, the recipient will have to pay GST under reverse charge mechanism. In this case, GST will be
payable by A Ltd. as follows –
Recipient of supply Nature of supply Taxable value† IGST @ 28% CGST @ 6% SGST @ 6%
Rs. Rs. Rs. Rs.
A Ltd. (head office) Inter-State 6,25,000 [(Rs. 1,000 × 800) × 1,75,000 – –
100 ÷ 128]
A Ltd. (branch office) Intra-State 25,00,000 [(Rs. 2,000 × 1,400) × – 1,50,000 1,50,000
100 ÷ 112]
†This mode of calculating taxable value of supply is given by Notification No. 1/2017-CT (Rate), dated June 28, 2017.
484-E7 Recalculate the quantum of IGST, CGST and SGST in problem 484-P7, if the head office of A Ltd. is situated in Kochi in
Ernakulam, Kerala.
484-P8 In problem 484-P7, A Ltd., the authorised lottery distributor of the Kerala Government, distributes 400 New Year Bonanza
lottery tickets on February 7, 2020 to B (one of its retail agent). Find out the amount of GST payable by A Ltd. or B.
Solution :
If the following conditions are satisfied, supply of lottery is exempt from GST vide Notification No. 2/2017, dated June 28,
2017 –
1. Supplier of lottery is any person (other than Government/Union Territory/local authority).
2. The appropriate GST was paid when lottery was supplied by Government/Union Territory/local authority to the
authorised distributor.
In this case, A Ltd. paid GST at the time of obtaining supply of lottery tickets from the Kerala Government. This GST was
paid by it under reverse charge mechanism. Any subsequent sale of lottery tickets by A Ltd. to any person will be exempt
from GST. Therefore, on supply of lottery tickets to B, GST is not payable by A Ltd. or B.
484-E8 Suppose in problem 484-P8, lottery tickets are sold on February 7, 2020 to B Ltd., located in Chennai.
484-P9 X Ltd. is located in Ludhiana. It is in the business of manufacture of cast glass. It has received the following services from different
persons during December 2019 –
1. Service by Department of Posts by way of express parcel post (value of service : Rs. 4,000).
2. X Ltd. owns an aircraft. This aircraft is used by directors/officers of the company for business purposes. Aircraft maintenance service
is provided by the Government of India. Payment of Rs. 8,00,000 is made for this purpose.
3. For transportation of goods, X Ltd. pays Rs. 60,000 to Indian Railways.
4. X Ltd. has taken a commercial property on rent from the Punjab Government for which company pays rent of Rs. 1,00,000.
5. X Ltd. has taken security services for factory complex from the Punjab Government for which payment of Rs. 30,000 is made.
6. X Ltd. has taken security services for office from Task Force Security Ltd. (a private sector company) for which payment of Rs. 95,000
is made.
The above figures are before GST. Turnover of X Ltd. for the financial year 2018-19 was more than Rs. 20,00,000. Discuss the follow-
ing –
- Whether GST is applicable.
- Whether GST is payable under reverse charge mechanism.
Solution :
Supplier of services Nature of service Value of Whether reverse charge is applicable
taxable services
Rs.
Department of Post Express parcel post 4,000 Reverse charge mechanism not applicable, sup-
plier will charge GST in its invoice
Government of India Aircraft maintenance 8,00,000 Reverse charge mechanism not applicable, sup-
service plier will charge GST in its invoice
Indian Railways Transportation of goods 60,000 Reverse charge mechanism not applicable, sup-
Punjab Government Renting of immovable 1,00,000 Reverse charge mechanism is applicable, if X
property Ltd. is registered under GST.
Punjab Government Security services 30,000 Reverse charge mechanism is applicable.
Reverse charge machanism 720
Supplier of services Nature of service Value of Whether reverse charge is applicable

taxable services
Rs.
Task Force Security Ltd. Security services 95,000 Reverse charge mechanism not applicable, sup-
484-E9 In problem 484-P9, turnover of X Ltd. for the financial years 2018-19 and 2019-20 is Rs. 17,50,000 and Rs. 1,10,25,500,
respectively. X Ltd. is a registered dealer under GST.
484-P10 XY Technical Study provides college education in India which is approved by the University of Chicago. During January 2020,
it organizes an international seminar on environment in its campus in Gurugram (Haryana). For this purpose, the college takes
sponsorship from the following persons –
1. A, sole proprietor of a business (he pays Rs. 5 lakh for his advertisement outside the hall).
2. B Ltd. (it pays Rs. 20 lakh for its advertisement on stationery of the seminar).
3. C, an individual who is a salaried employee (he pays Rs. 50,000, his name does not appear anywhere in the seminar).
Above figures are before GST (GST will be charged in addition to the amount given above). Discuss whether GST is applicable under
reverse charge and determine the quantum of GST if GST rate is 18 per cent and these are intra-State services.
Solution :
Supplier of sponsorship service is XY Technical Study. If recipient of service is a body corporate or a partnership firm located
in India, GST is payable under reverse charge mechanism by the recipient of service. If sponsorship service is supplied to
any other person, then GST is payable under forward charge by the supplier of service as follows –
Recipient of Who will deposit GST to Government Quantum of GST (in Rs.)
service CGST @ 9% SGST @ 9%
A XY Technical Study will pay GST, it will be included in the tax 45,000 45,000
invoice prepared by it
B Ltd. B Ltd. will pay GST under reverse charge mechanism 1,80,000 1,80,000
C There is no supply of goods/services in this case, no GST Nil Nil
484-E10 In problem 484-P10, assume that B Ltd. is a Government company. It is engaged in the business of manufacture of articles
which are meant for pollution control. It is eligible for investment allowance under section 32AC of the Income-tax Act. Discuss
whether reverse charge mechanism is applicable.
●
Test your knowledge
1. X is a full time director in A Ltd. (salary being Rs. 2,10,000 per month). In addition, he gets Rs. 20,000 per meeting of
Board of directors as sitting fees. Find out the GST liability on sitting fees. Can he claim exemption of GST on salary
received by him ? Who will pay GST in this case ? [para 482]
2. A foreign company provides maintenance service to X Ltd., an Indian company. The foreign company does not have
any representative in India. The entire consideration is received by the foreign company in US $ outside India. Is there
any GST liability ? How and from whom GST will be collected in this case ? [para 482]
3. Narrate 7 cases, where GST is payable by the recipient of service under reverse charge mechanism. [para 482]
4. Legal service is provided by an individual advocate to a firm of solicitors. Who is liable to pay GST in this case? What
will be GST liability if charges for legal service is Rs. 1,58,000 ? [para 482]
5. Who is liable to pay GST when service is provided by Government to a business entity located in Chennai and turnover
of the business entity for the preceding financial year is more than Rs. 1 crore ? [para 482]
6. X Ltd. is a registered person under GST. It purchases goods of Rs. 2.5 lakh from an unregistered person. Who will pay
GST in this case if time of supply is August 1, 2019 or November 1, 2019. [para 483]
CHAPTER 28 Input tax credit
S
upplier of goods or services or both can take credit of input tax charged on any supply
of goods or services or both to him which are used in the course of his business. These
provisions are given by sections 16 to 21 and rules 36 to 45. This Chapter briefly
covers these rules along with appropriate illustrations.
 WHAT ONE SHOULD KNOW BEFORE BEGINNING STUDY OF INPUT TAX CREDIT PROVI-
SIONS
492. To avoid cascading effect, input tax credit is available. It is based on VAT concept of allowing input tax credit
on inputs, input services and capital goods. Output supplier of goods/services can avail credit of CGST, SGST,
UTGST and IGST charged by input supplier of goods, services and capital goods. Before beginning study of input
tax credit provisions, one should know the following –
1. Input means any goods other than capital goods†. Capital goods means goods, value of which is capitalised
in books of account. Input tax credit on capital goods can be availed at one shot (i.e., 100 per cent‡ at the time of
capitalisation in books of account). There is no requirement to defer some portion of input tax credit on capital
goods to the subsequent year. In other words, there is no distinction between inputs and capital goods under GST
for the purpose of availment of input tax credit.
2. Basic condition for availing input tax credit is that input/input services/capital goods are used (or intended
to be used) in the course of or furtherance of business. There are a few more conditions which are discussed in
para 493.
3. In GST regime, IGST is levied on inter-State supply. CGST and SGST/UTGST are levied on intra-State supply.
These taxes on inward supply are creditable. However, one has to keep in mind that there is no centralized
registration under GST. Registration is required in all States/Union Territories from where one makes taxable
supplies of goods/services. Each registration is treated as distinct person. Consequently, input tax credit of one
State cannot be used to set off output GST liability of another State.
4. GST which is paid by recipient of supply under reverse charge mechanism during the current month, will
become eligible input tax credit.
5. Tax on inward supply paid by a person who is registered under Composition Scheme/Alternative Compo-
sition Scheme, is not eligible for input tax credit.
6. Input SGST credit cannot be used to pay output CGST. Likewise, input CGST credit cannot be used to pay
output SGST. Barring this limitation, input tax credit can be used to pay any output tax liability. For instance –
- IGST input credit can be used to set off output liability of IGST/CGST/SGST (in the same sequence).
- CGST input credit can be used to set off output liability of CGST/IGST.
- SGST input credit can be used to set off output liability of SGST/IGST.
7. Input tax credit is available only when GST is leviable on outward supply of goods/services. To put it
differently, if GST is not leviable on outward supply of goods/services, input tax credit is not available. Those
transactions where input tax credit is not available (because outward supply of goods/services is exempt) can
be termed as exempt transactions. There are certain output supplies which are “zero rated”. In such cases, GST
is not payable on outward supply (because applicable rate is zero) even then input tax credit is available. The
following transactions are zero rated transactions –
† Stores and spares, the expenditure on which has been charged as a revenue expense in the books of account, cannot be held to be capital goods.
‡ It is subject to provisions of rule 36(4) [see para 493.3].
721
Para 493 Input tax credit 722
- Export of goods/services.
- Supply of goods/services to special economic zone (SEZ).
These two supplies are zero rated supplies (applicable GST rate is zero). In the case of zero rated supplies, input
credit is available. However, input credit is not available in the case of exempt transactions.
X Ltd. manufactures electric-detonators in Maharashtra for domestic and export markets. Raw material is supplied by
different persons located in Gujarat and Tamil Nadu. GST rate is 18 per cent. The following information is given by X Ltd.
for January 2020 –
- Supply of 10,000 pieces at the rate of Rs. 120 to Y Ltd. of Kerala.
- Export of 25,000 pieces at the rate of Rs. 140 to A Inc., Holland.
- Input credit available in electronic credit ledger (on inputs/input services procured from Gujarat/Tamil Nadu) :
Rs. 1,50,000 (Situation 1) or Rs. 2,90,000 (Situation 2).
In this case, GST payable by X Ltd. will be as follows –
Rs. Rs.
IGST on supply of 10,000 pieces to Y Ltd. [18% of (Rs. 120 × 10,000)] 2,16,000 2,16,000
GST on export to A Inc., Holland Nil Nil
GST on outward supply for January 2020 2,16,000 2,16,000
Less: Input tax credit on input goods/services available in electronic credit ledger 1,50,000 2,90,000
Amount payable by X Ltd. in electronic cash ledger 66,000 –
Refund which can be claimed for excess credit (*actual quantification depends upon rule 89) – 74,000*
In the aforesaid two cases, there is no GST on exported goods (no GST on input as well as output).
8. Goods/services are purchased. Benefit of input tax credit has been taken. Out of goods/services so acquired,
taxpayer makes taxable supply as well as exempt supply. In such a situation, proportionate input tax credit
(which he has already availed) pertaining to exempt supply, shall be reversed (formula for reversal of input tax
credit is given in GST Rules). Similar reversal is required when capital goods are used for making taxable and
non-taxable supplies.
9. Entire input tax credit is available even if a part of input goes in waste or by products like sludge which is not
taxable.
10. Input credit is available as soon as inputs/input services are received (there is no need to wait till these inputs
are actually used in production or actually sold). Moreover, entire input tax credit forms a common pool (law
does not require invoice to invoice co-relation between input and output).
11. “Input tax” is defined by section 2(62). According to this definition, “input tax” in relation to a registered
person means CGST, IGST, UTGST on supply of goods/services to him. Further it includes the following –
- IGST charged on import of goods.
- CGST/IGST/SGST/UTGST payable on reverse charge mechanism.
However, it does not include tax paid under Composition Scheme/Alternative Composition Scheme.
 WHAT ARE CONDITIONS FOR TAKING INPUT TAX CREDIT

493. One has to satisfy the following conditions –
493.1 Registered person - Input tax credit is available only to a registered person. Moreover, it is available in
respect of input supplies of goods/services which are used (or intended to be used) in the course (or furtherance)
of the business of the person who wants to claim the benefit of input tax credit. To avail the benefit of input tax
credit, it should be credited in the electronic credit ledger.
493.2 Tax invoice - The input tax credit shall be availed by a registered person (including the Input Service
Distributor), on the basis of any of the following documents –
- An invoice issued by the supplier of goods/services.
- An invoice issued (when tax is payable by the registered dealer under reverse charge mechanism).
- A debit note issued by a supplier.
- A bill of entry (or any similar document prescribed under the Customs Act) for the assessment of IGST on
imports.
- An Input Service Distributor invoice (or Input Service Distributor credit note or any document issued by an
Input Service Distributor).
723 Uploading Para 493.3
493.3 Uploading - Input tax credit shall be availed by a registered person only if all the applicable particulars
(as specified in rules pertaining to issue of tax invoice) are contained in the aforesaid document and the relevant
information is uploaded in Form GSTR-2 by such person. However, uploading of Form GSTR-2 has been
suspended ever since the commencement of GST.
 Restriction prescribed under rule 36(4) - Rule 36(4) has been inserted with effect from October 9, 2019. To
understand the implication of rule 36(4), one has to understand the mechanism of filing Form GSTR-1 by input
supplier and reflection of this data in Form GSTR-2A of the recipient.
Form GSTR-1 - GSTR-1 is the return to be furnished for reporting details of all outward supplies. GSTR-1 is to
be filed by all normal taxpayers who are registered under GST. It is to be filed monthly (in some cases, quarterly).
Form GSTR-2A - On the basis of data uploaded by input supplier in Form GSTR-1, Form GSTR-2A is generated
for the recipient. For the recipient, date of GSTR-2A is auto-populated based upon GSTR-1 uploaded by all input
suppliers of a dealer for a tax period. GSTR-2A is a read-only return and no action can be taken.
Legal position before insertion of rule 36(4) - Before insertion of rule 36(4) (i.e., before October 9, 2019), one can take
input tax credit on the basis of suppliers’ invoices (regardless of data appearing in Form GSTR-2A).
Legal position after insertion of rule 36(4) - After insertion of rule 36(4) (i.e., on or after October 9, 2019), one cannot
take input tax credit without examining the credit available in Form GSTR-2A. Under rule 36(4), input tax credit
which is available to a registered dealer for a tax period cannot exceed 120 per cent of eligible credit available
in his Form GSTR-2A.
 X Ltd. is a registered GST dealer. It gives the following information pertaining to December 2019 –
Outward supply - During December 2019, GST on outward supply made by X Ltd. it is Rs. 54,90,000 (it is aggregate GST
liability of 59 invoices issued by X Ltd. during December 2019).
Inward supply - During December 2019, X Ltd. receives 30 tax invoices (pertaining to taxable inward supply of inputs, input
services and input capital goods). Input tax credit pertaining to these invoices is as follows –
- Eligible input tax credit (29 invoices) - Quantum of eligible input tax credit for December 2019 as per records of X Ltd. is
Rs. 50,40,000.
- Ineligible input tax credit (1 invoice) - X Ltd. has purchased a car during December 2019 for its executives (GST paid is
Rs. 7,80,000).
Inward supply subject to reverse charge - X Ltd. is also eligible for input tax credit of Rs. 60,000 pertaining to GST of December
2019 (it is paid by X Ltd. on inputs which are under reverse charge mechanism).
Credit reflected in Form GSTR-2A - Eligible input credit reflected in Form GSTR-2A for December 2019 is –
- Situation 1 - Rs. 36,00,000 (total invoices : 24).
Moreover, GSTR-2A of December 2019 of X Ltd. shows input tax credit pertaining to the car purchased by X Ltd. for its
executives (amount of input tax as per GSTR-2A is Rs. 7,80,000).
Input tax credit as per rule 36(4) - Number of invoices (given in above data) is not relevant for calculating input tax credit. Input
tax credit (pertaining to car) is not considered, as it is blocked by section 17(5)(a). It is not eligible for input tax credit even
if it is reflected in GSTR-2A. Quantum of input tax credit available as per rule 36(4) to X Ltd. is as follows –

Rs. Rs. Rs. Rs.
Eligible input tax credit as per records of X Ltd. (a) 50,40,000 50,40,000 50,40,000 50,40,000
Eligible input tax credit as reflected in GSTR-2A (b) 36,00,000 42,00,000 45,00,000 46,00,000
120% of (b) (c) 43,20,000 50,40,000 54,00,000 55,20,000
Eligible input tax credit available for December 2019 after
insertion of rule 36(4) [(a) or (c), whichever is lower] (d) 43,20,000 50,40,000 50,40,000 50,40,000
Amount restricted or blocked for December 2019 [after
insertion of rule 36(4)] [(d) – (a)] (e) 7,20,000 Nil Nil Nil
Amount payable by X Ltd. for December 2019 in cash - It is as follows –
- Under forward charge - X Ltd. will have to pay in cash Rs. 54,90,000 minus eligible input tax credit as per rule 36(4) [i.e. (d)]
minus input tax credit pertaining to amount paid under reverse charge (i.e., Rs. 60,000).
- Under reverse charge - Rs. 60,000 is payable in cash under reverse charge.
Para 493.4 Input tax credit 724
 X Ltd. can claim the blocked input tax credit [i.e., (e)] in any of the succeeding months provided details of requisite invoices
are uploaded by the suppliers in their GSTR-1 and subsequent reflection (i.e., auto-populated) of the same in GSTR-2A of
X Ltd. Suppose, in Situation 1, data submitted by the suppliers of X Ltd. (pertaining to December 2019 supplies) in their
GSTR-1 for January 2020 which is auto-populated in GSTR-2A of X Ltd. (for January 2020) shows eligible input tax credit
of Rs. 4,00,000 (Case 1) or Rs. 8,00,000 (Case 2). Amount available as eligible input tax credit to X Ltd. for the month of January
2020 (pertaining to December 2019 input supplies) will be as follows –
Case 1 Case 2
Rs. Rs.
Eligible input tax credit as reflected in GSTR-2A of January 2020 (pertaining input
supplies of December 2019) (f) 4,00,000 8,00,000
120% of (f) (g) 4,80,000 9,60,000
Input tax credit available in January 2020 [pertaining to amount restricted or blocked
for December 2019 under rule 36(4)] [i.e., (g) or (e), whichever is lower] (h) 4,80,000 7,20,000
Amount restricted or blocked even after GSTR-2A of January 2020 [(e) – (h)] (i) 2,40,000 Nil
Note - Amount, as shown in (i) above, can be claimed as input tax credit in February 2012 (or any subsequent month) provided
relevant data is uploaded by the suppliers of X Ltd. in their GSTR-1. As and when, invoices are uploaded by suppliers to
the extent of GST of Rs. 2,00,000 (i.e., Rs. 2,40,000 ÷ 1.2), X Ltd. will be able to claim full credit of Rs. 2,40,000.
493.4 Fraud - No input tax credit can be availed by a registered person in respect of any tax that has been paid
in pursuance of any order where any demand has been confirmed on account of any fraud, wilful misstatement
or suppression of facts.
493.5 Receipt of goods/services - Input tax credit is available only if the registered person has received goods/
services. For this purpose, it shall be deemed that the registered person has received the goods where the goods
are delivered by the supplier to an agent of recipient (or any other person on the direction of such registered
person). If goods are delivered to such person before or during movement of goods (either by way of transfer
of documents of title to goods or otherwise), it shall be deemed that registered person has received goods.
Likewise, it shall be deemed that the registered person has received services where services are provided by the
supplier to any person on the direction of, and on the account of, such registered person.
Where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to
take credit upon receipt of the last lot or instalment.
493.6 Time-limit to avail input tax credit - Input tax credit is available as soon as goods/services are received.
However, a registered person shall not be entitled to take input tax credit in respect of any invoice (or debit note)
for supply of goods/services after –
- the due date of furnishing of the return under section 39 for the month of September† (following the end of
financial year to which such invoice pertains); or
- furnishing of the relevant annual return,
X Ltd. is a registered person under GST. It has received goods/services on November 12, 2019 (eligible input tax credit
is Rs. 1,12,500). Credit of this input tax can be availed at any time after November 12, 2019. However, it cannot be claimed
after –
a. October 20, 2020 (i.e., due date of furnishing of return of GST for September 2020); or
b. date of filing of annual return for the financial year 2019-20 (due date is December 31, 2020),
If annual return for 2019-20 is uploaded on December 31, 2020, aforesaid tax credit can be claimed on or before October 20,
2020. Conversely, if annual return is uploaded on October 15, 2020, the aforesaid tax credit can be claimed on or before
October 15, 2020.
493.7 Failure to make payment to supplier of input goods/services - If above conditions are satisfied, the
recipient of input goods/services can avail input tax credit (as soon as goods/services are received and relevant
amount is credited in electronic credit ledger). Law requires that recipient of input goods/services should make
payment to the supplier within 180 days from the date of issue of invoice by the supplier. If payment is not made
within 180 days, input tax credit will have to be reversed (this rule is not applicable in case supply is obtained
† Generally, it is due date of furnishing the return under section 39 for the month of September following the end of financial year. However, a
concession is given in respect of any invoice (or debit note) for supply of goods/services made during the financial year 2017-18. In such a case,
input credit is available up to the due date of furnishing the return under section 39 for the month of March 2019.
725 Items not eligible for input credit Para 493.9
without consideration in cases discussed in para 414.2. Further this, rule is not applicable in the case of supplier’s
obligation met by the recipient as discussed in para 465.1). The relevant provision is explained in a case study
given below.
X Ltd. is a registered person under GST. It has received goods/services from A Ltd. vide invoice dated July 20, 2018 [value
of input taxable supply : Rs. 1,00,000, GST on input (i.e., IGST or CGST + SGST) : Rs. 18,000]. This input tax is credited in
electronic credit ledger. X Ltd. avails the benefit of credit for payment of tax for September 2018. Law requires that X Ltd.
should make payment of Rs. 1,18,000 to A Ltd. on or before January 16, 2019 (i.e., within 180 days from July 20, 2018). The
following consequences should be noted if X Ltd. makes payment after January 16, 2019 (suppose, actual payment is made
on May 18, 2019) –
1. X Ltd. will have to show Rs. 18,000 as output tax for February 2019 (this information will have to be uploaded in the return
of February 2019).
2. X Ltd. will have to pay interest at the rate of 18 per cent per annum from July 20, 2018 till the date of payment of tax of
Rs. 18,000.
3. X Ltd. can re-avail Rs. 18,000 as input credit on May 18, 2019 (i.e., the date of payment of Rs. 1,18,000 to A Ltd.). Time-limit
discussed in para 493.6 is not applicable for utilisation of this re-availed input tax credit.
493.8 Tax component of capital goods on which depreciation is claimed under income-tax - Where the
registered person has claimed depreciation on GST component of the cost of capital goods and plant and
machinery under the provisions of the Income-tax Act, the input tax credit on the said GST component shall not
be allowed.
493.9 Items not eligible for input credit - Input tax credit is available on almost all inward supply of goods/
services used for making outward taxable supply. However, a negative list of a few items is given by section
17(5). This negative list is given below –
Section Input credit not available Para No.
17(5)(a) Motor vehicles for transportation of persons having approved seating capacity of 13 (or
less) persons (including the driver) (subject to a few exceptions) 493.9-1
17(5)(aa) Vessels and aircraft (subject to a few exceptions) 493.9-2
17(5)(ab) Services of general insurance, servicing, repair and maintenance relating to above motor
vehicles, vessels or aircraft (subject to a few exceptions) 493.9-3
17(5)(b)(i) Supply of goods/services pertaining to food and beverages, outdoor catering, beauty treat-
ment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor
vehicles, vessels or aircraft referred to above (subject to a few exceptions) 493.9-4
17(5)(b)(ii) Membership of club, health and fitness centre 493.9-5
17(5)(b)(iii) Travelling benefits to employees on vacation such as LTC or home travel concession (sub-
ject to a few exceptions) 493.9-6
17(5)(c) Works contract services when supplied for construction of an immovable property (other
than plant and machinery) (subject to a few exceptions) 493.9-7
17(5)(d) Goods/services received by a taxable person for construction of an immovable property
(other than plant or machinery) on his own account including when such goods/services
are used in the course or furtherance of business 493.9-8
17(5)(e) Goods/services on which tax has been paid by a person covered by Composition Scheme/
Alternative Composition Scheme 493.9-9
17(5)(f) Goods/services received by a non-resident taxable person (except on goods imported by
him) 493.9-10
17(5)(g) Goods/services used for personal consumption 493.9-11
17(5)(h) Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples 493.9-12
17(5)(i) Any tax paid in accordance with the provisions of sections 74, 129 and 130 493.9-13
493.9-1 MOTOR VEHICLES FOR TRANSPORTATION OF PERSONS [SEC. 17(5)(a)] - If a person acquires a motor vehicle for
transportation of persons (having approved seating capacity of 13 persons or less, including driver), input tax
credit is not available. This rule is applicable even if such motor vehicle is used for the purpose of carrying on
his business or profession. However, when such motor vehicle is used for making the following taxable supplies,
input tax credit is available –
a. further supply of such motor vehicles,

b. transportation of passengers; or
c. imparting training on driving such motor vehicles.
 Similar rule for motor vehicle taken on lease - The above rules are also applicable when motor vehicle is not
purchased but taken on lease [sec. 17(5)(b)(i)].

 Similar rule for input services of general insurance, servicing, repair and maintenance of motor vehicle - The above rules
are also applicable for input services pertaining to motor vehicle (being input services of general insurance,
servicing, repair and maintenance) [sec. 17(5)(ab)].
 X (or X Ltd.) is registered under GST from Andhra Pradesh. He/it purchases a motor vehicle on April 6, 2019. GST paid
at the time of acquisition is Rs. 9,10,000 (it is total of CGST, SGST and GST cess). The point for consideration is whether X
(or X Ltd.) can claim input tax credit of Rs. 9,10,000 in the following situations –
Situation Type of motor Seating capacity as How motor vehicle is used Whether input
vehicle per registration credit of
certificate (including Rs. 9,10,000 is
driver) available
(1) (2) (3) (4) (5)
Situation 1 Car 5 persons Used by employees of taxpayer for performing official Not available
duties
Situation 2 Mini bus 13 persons Used by employees of taxpayer for performing official Not available
duties
Situation 3 Mini bus 14 persons Used by employees of taxpayer for performing official Available
duties
Situation 4 Car 5 persons Used by X for personal purposes Not available
Situation 5 Mini bus 13 persons Used by X for personal purposes Not available
Situation 6 Mini bus 14 persons Used by X for personal purposes Not available [see
para 493.9-11]
Situation 7 Car 5 persons X (or X Ltd.) is a car distributor. Car is purchased for Available
sale to its customers
Situation 8 Car 5 persons X (or X Ltd.) is taxi service provider, car is used for Available
transportation of passengers
Situation 9 Car 5 persons X (or X Ltd.) owns a driving training institute. Car is Available
used for imparting lessons to learn how to drive
Situation 10 Truck – Used by X (or X Ltd.) for transportation of goods Available
manufactured by him/it
Situation 11 Dumper – Used by X (or X Ltd.) for business purposes Available
Situation 12 Work- – Used by X (or X Ltd.) for business purposes Available
trucks/
fork-lift
trucks
Notes -
1. Input tax credit is denied only in respect of motor vehicles for transportation of persons having approved seating capacity
of not more than 13 persons (including the driver) or when motor vehicle is used for personal purposes. Moreover, in the
case of a motor vehicle [which is not for transportation of persons (e.g., truck, fork-lift truck, crane, digger, dozer, dumper,
etc.)], input tax credit is available if such vehicle is used for business purposes (i.e., for making taxable supplies).
2. Suppose in the above case of X (or X Ltd.), motor vehicle is not purchased but it is taken on lease or rent. GST is paid on
input service of leasing, renting or hiring motor vehicle. By virtue of section 17(5)(b)(i), tax credit for input service will be
available (or not available) as given in Column 5 of the table (supra).
 Y Ltd. is engaged in transportation of cash from currency chest to bank branches and for this purpose it purchased a cash
carry van after payment of GST (including GST cess). Input tax credit is available.
Under the old provisions applicable up to January 31, 2019, input tax credit was not available, as transportation of cash is
not transportation of goods (under the provisions applicable from February 1, 2019, as given above, input tax credit in the
case of motor vehicle is blocked only when such vehicle is used for transportation of persons).
493.9-2 VESSELS AND AIRCRAFT [SEC. 17(5)(aa)] - If a person acquires vessels or aircraft, input tax credit is not available,
except when it is used for the following purposes –
 When input tax credit is available - When vessel or aircraft is used for the following taxable supplies, input tax
credit is available –
a. further supply of such vessels or aircraft; or
b. transportation of passengers; or
c. imparting training on navigating such vessels; or
d. imparting training on flying such aircraft;
e. transportation of goods.
 Similar rule for vessels/aircraft taken on lease - The above rules are also applicable when vessels or aircraft is not
purchased but taken on lease [sec. 17(5)(b)(i)].

 Similar rule for input services of general insurance, servicing, repair and maintenance of vessels or aircraft - The above
rules are also applicable for input services pertaining to vessels or aircraft (being input services of general
insurance, servicing, repair and maintenance) [sec. 17(5)(ab)].
 Wipro Chemicals purchases an aircraft for the purpose of transportation of senior executives when they perform official
duties. IGST paid at the time of acquisition is Rs. 92 crore. Input tax credit for Rs. 92 crore is not available.
 Sky Airways operates a fleet of Airbus and Boeing aircraft serving different domestic destinations in India. It purchases
an aircraft on June 10, 2020 for transportation of passengers (or goods). Input tax credit is available.
 Reliance Industries purchases an aircraft for the purpose of transportation of goods manufactured by it. Input tax credit
is available.
493.9-3 SERVICES OF GENERAL INSURANCE, SERVICING, REPAIR AND MAINTENANCE RELATING TO ABOVE MOTOR VEHICLES, VESSELS
OR AIRCRAFT [SEC. 17(5)(ab)] - Services of general insurance, servicing, repair and maintenance insofar as they relate
to motor vehicles, vessels or aircraft referred to in section 17(5)(a)/(aa) [see paras 493.9-1 and 493.9-2] is not
eligible. To put it differently, when input tax credit on purchase of motor vehicle, vessel or aircraft is not available
(under the provisions given above), tax credit on input service pertaining to repairs, insurance and maintenance
of such motor vehicle, vessel or aircraft is also not available. However, input tax credit in respect of repair,
insurance and maintenance is available where such service is received by a taxable person who is engaged –
a. in the manufacture of such motor vehicles, vessels or aircraft; or
b. in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him.
 X Ltd. purchases a Honda City car for its senior executives. Input tax credit (for GST paid on purchase of car) is not available,
even if the car is used for official purposes by employees of X Ltd. Likewise, tax credit for input services of general insurance,
servicing, repair and maintenance of the car is not available.
 Y Ltd. purchases a bus [seating capacity as per registration certificate : 14 persons (or more)]. The bus is used by employees
of Y Ltd. for performing official duties or for journey between office and residence. Input tax credit (for GST paid on purchase
of bus) is available. Likewise, tax credit for input services of general insurance, servicing, repair and maintenance of the bus
is available.
 Taxmann Consultancy (P.) Ltd. purchases an AgustaWestland helicopter for its senior executives. Input tax credit (for GST
paid on purchase of helicopter) is not available, even if it is used for official purposes by employees of Taxmann. Likewise,
tax credit for input services of general insurance, servicing, repair and maintenance of the helicopter, is not available.
493.9-4 SUPPLY OF GOODS/SERVICES PERTAINING TO FOOD, BEVERAGES, OUTDOOR CATERING, BEAUTY TREATMENT, HEALTH SERVICES,
COSMETIC AND PLASTIC SURGERY, LEASING OF VEHICLES, VESSELS OR AIRCRAFT [SEC. 17(5)(b)(i)] - Input tax credit is not available
in respect of the following supply of goods/services –
a. food and beverages;
b. outdoor catering;
c. beauty treatment;
d. health services;
e. cosmetic and plastic surgery;
f. leasing (or renting or hiring) of motor vehicles, vessels or aircraft referred to in section 17(5)(a)/(aa) [see paras
493.9-1 and 493.9-2] except when used for the purposes specified therein;
g. life insurance and health insurance.
 Input tax credit available if input supply is used for making outward taxable supply of same category - Input tax credit
is available where an inward supply of above goods/services is used by a registered person for making an
outward taxable supply of the same category of goods/services or as an element of a taxable composite or mixed
supply.
 Input tax credit available where service is provided by an employer under legal obligation - Input tax credit in respect
of above goods/services is available, where it is obligatory for an employer to provide the same to its employees
under any law for the time being in force.
 X Ltd., a chemical manufacturing company, purchases 100 packets of lunch for its employees. Input tax credit is not
available.
 ITC Maratha, a 5-star hotel in Mumbai, purchases 10 one kg. chocolate cakes for one of its restaurants (to be used for Sunday
Buffet lunch). Input tax credit is available.
 Y Ltd., a manufacturing company (having more than 250 workers), is required to provide canteen facility to its employees
as per section 46 of the Factories Act, 1948. Input tax credit pertaining to canteen facility is available to Y Ltd.
 Medical service and health insurance service are provided by Z Ltd. to its employees under contractual obligations (i.e.,
as per employment agreement with employees). There is no legal obligation to provide medical service and/or health
insurance service to employees. In this case, input tax credit is not available.
 Z Ltd. provides medical services for its staff in a Government hospital in Hyderabad (annual payment to hospital includes
GST of Rs. 14,000). Providing such facility is compulsory under Telangana Government regulations. Input tax credit can be
claimed. If, however, there is no legal requirement, input tax credit is not available.
493.9-5 MEMBERSHIP OF CLUB, HEALTH AND FITNESS CENTRE [SEC. 17(5)(b)(ii)] - Input tax credit is not available in respect of
input supply of goods/services pertaining to membership of a club, health and fitness centre.
 Input tax credit available where service is provided by an employer under legal obligation - Input tax credit in respect
of above goods/services is available, where it is obligatory for an employer to provide the same to its employees
under any law for the time being in force.
 X Ltd., a software consultancy company, provides health club and sports club facility to its employees under contractual
obligations. There is no legal obligation under any government regulations for the same. Input tax credit is not available to
X Ltd. pertaining to these facilities.
Y Ltd. pays corporate membership fees of GymKhana Club for its managing director (fee includes GST of Rs. 82,000). As
there is no legal requirement to provide corporate membership of GymKhana Club to the managing director, Y Ltd. cannot
claim input tax credit of Rs. 82,000.
493.9-6 TRAVEL BENEFITS TO EMPLOYEES [SEC. 17(5)(b)(iii)] - Input tax credit is not available in respect of the input supply
pertaining to travel benefits to employees on vacation (such as leave or home travel concession).
 Input tax credit available if provided under legal obligation - Input tax credit in respect of the above input service
is available, where it is obligatory for an employer to provide the same to its employees under any law for the
time being in force.
A company pays leave travel concession (LTC) to B (one of its employee). Payment covers air fare of B and his family for
going on leave. GST on fare is not eligible for input tax credit.
493.9-7 WORKS CONTRACT INPUT SERVICES PERTAINING TO CONSTRUCTION OF AN IMMOVABLE PROPERTY [SEC. 17(5)(c)] - Works
contract services when taken as input supply for construction of an immovable property (other than plant and
machinery) is not eligible for input tax credit.
 Input tax credit available for further supply of works contract service - If the above input supply is used for further
supply of works contract service, input tax credit is available. For instance, a contractor can take input tax credit
pertaining to works contract services which he has obtained from a sub-contractor.
 Construction includes renovation, alteration, etc. - For the above purpose, “construction” includes re-construction,
renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property. If
cost of reconstruction, renovation, addition, alteration or repairs is not capitalised in the books of account of the
registered person, input tax credit can be taken.
 Plant and machinery - Input tax credit of GST paid on purchase of plant and machinery is available.
493.9-8 GOODS/SERVICES RECEIVED BY A TAXABLE PERSON FOR CONSTRUCTION OF AN IMMOVABLE PROPERTY [SEC. 17(5)(d)] -
Goods/services received by a taxable person for construction of an immovable property (other than plant or
machinery) on his own account (including when such goods/services are used in the course or furtherance of
business) is not available.
 Construction includes renovation, alteration, etc. - For the above purpose, “construction” includes re-construction,
renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property. If
cost of reconstruction, renovation, addition, alteration or repairs is not capitalised in the books of account of the
registered person, input tax credit can be taken.
 Plant and machinery - Input tax credit of GST paid on purchase of plant and machinery is available.
 X, a registered GST dealer, is an architect. To construct a building for his personal use, he purchases marble stone and air-
conditioners. GST paid on these goods is not eligible for input tax credit.
 In the above example, if the building is used for the purpose carrying on his profession, input tax credit is not available
for purchase of marble stone. However, input tax credit for purchase of air-conditioners is available.
493.9-9 INPUT GOODS/SERVICES RECEIVED BY A PERSON COVERED BY COMPOSITION SCHEME/ALTERNATIVE COMPOSITION SCHEME
[SEC. 17(5)(e)] - Input tax credit on goods/services received by a person who is registered under section 10 and
covered by Composition Scheme/Alternative Composition Scheme, is not available.
X has opted under section 10 for Composition Scheme or Alternative Composition Scheme. Tax on inputs paid by him is
not eligible for input tax credit.
493.9-10 GOODS/SERVICES RECEIVED BY A NON-RESIDENT TAXABLE PERSON [SEC. 17(5)(f)] - Input tax credit is not available
in respect of goods/services received by a non-resident taxable person. If, however, goods are imported by him,
tax credit is available.
493.9-11 GOODS/SERVICES USED FOR PERSONAL CONSUMPTION [SEC. 17(5)(g)] - Input tax credit is not available in respect
of goods/services used for personal consumption.
 If goods/services are used only for personal consumption of the registered dealer, input tax credit is not available (maybe
for personal consumption of sole proprietor, partners or directors of the registered person).
 Ifabove goods/services are partly used for personal purpose and partly used for business purposes, input tax credit will
be disallowed on proportionate basis.
493.9-12 GOODS LOST, STOLEN, GIFT, FREE SAMPLES [SEC. 17(5)(h)] - Input tax credit pertaining to goods lost, stolen,
destroyed, written off or disposed of by way of gift or free samples, is not available.
 A pharma company gives free samples to doctors. No GST is applicable on outward supply [supplier and recipients are
not “related”, consideration is absent, GST is nil – see para 404.18]. Input tax credit is not available.
 Free gifts are sent by head office to branch office. This activity of distribution of gifts or free samples falls within the scope
of “supply” on account of the provisions contained in Schedule I [see para 414.2]. On supply of gift by head office to branch
office, GST is applicable. Consequently, the supplier would be eligible to avail of the benefit of input tax credit.
 Only July 1, 2019, Reliance Digital offers “buy one mobile, get a power bank free”. It may appear at first glance that in such
a case, power bank is being “supplied free of cost” without any consideration. In fact, it is not an individual supply of free
goods but a case of two supplies where a single price is being charged for the entire supply (of mobile and power bank). It
can at best be treated as supplying two goods for the price of one. Since it is not free supply, input tax credit is available.
493.9-13 ANY TAX PAID IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 74, 129 AND 130 [SEC. 17(5)(i)] - Any tax paid in
accordance with the provisions of sections 74, 129 and 130 is not eligible for input tax credit. No input tax credit
shall be availed by a registered person in respect of any tax that has been paid in pursuance of any order where
any demand has been confirmed on account of any fraud, wilful misstatement or suppression of facts.
 HOW INPUT TAX CREDIT IS ALLOWED FOR PAYMENT OF CGST, SGST, UTGST AND IGST
494. If above parameters are satisfied, input tax credit can be utilised as follows –
Component of input tax credit How it is utilised
Input tax credit of IGST It can be utilised for payment of IGST, CGST and SGST on outward supply. Input tax
credit on account of IGST shall first be utilised towards payment of IGST, and the amount
remaining, if any, shall be utilised towards the payment of CGST and SGST/UTGST, as
the case may be, in any order.
Input tax credit of CGST It can be utilised for payment of CGST first and balance for payment of IGST on outward
supply. Input tax credit on account of CGST shall be utilised towards payment of IGST,
only after the input tax credit available on account of IGST has first been utilised fully.
Input tax credit of SGST It can be utilised for payment of SGST first and balance for payment of IGST on outward
supply. Input tax credit on account of SGST shall be utilised towards payment of IGST,
only after the input tax credit available on account of IGST and CGST has first been
utilised fully.
Input tax credit of UTGST It can be utilised for payment of UTGST first and balance for payment of IGST on
outward supply. Input tax credit on account of UTGST shall be utilised towards payment
of IGST, only after the input tax credit available on account of IGST and CGST has first
been utilised fully.
Input tax credit of GST It can be utilised only for payment of GST compensation cess.
compensation cess

1. Input tax credit of SGST/UTGST cannot be used for payment of CGST.
2. Similarly, input tax credit of CGST cannot be used for payment of SGST/UTGST.
3. Barring a few exceptions given in para 493.9, tax credit is available for all input goods, services and capital
goods used (or intended to be used) in the course (or furtherance) of business.
4. If a person supplies taxable goods/services and exempt goods/services, he can avail only proportionate tax
credit.
494.1 Order of utilization of input tax credit [Rule 88A] - Order of utilization of input tax credit is given by
rule 88A. It allows utilization of input tax credit of IGST towards the payment of CGST and SGST/UTGST in any
order subject to the condition that the entire input tax credit on account of IGST is completely exhausted first
before the input tax credit on account of CGST or SGST/UTGST can be utilized. After the insertion of rule 88A,
the order of utilization of input tax credit will be as per the order given below –
Input tax credit Output tax liability of IGST Output tax Output tax liability Remarks
liability of CGST of SGST/UTGST
Input tax credit  Step 1 - Utilise against pay-  Step 2 - Balance of input tax credit Balance of input tax credit of IGST
on account of ment of IGST of IGST (left after Step 1) should be (left after Step 2) will be carried
IGST utilised against payment of CGST forward. However, it will be car-
and/or SGST/UTGST in any order ried forward only if output liabi-
and in any proportion (at the option lity of CGST and SGST/UTGST
of taxpayer) (after Step 2) is reduced to zero
Input tax credit Input tax credit on account of
on account of CGST can be utilised under Step 3
CGST and Step 4 (given below) only if
input tax credit on account of IGST
has been completely exhausted
after Step 1 and Step 2
Input tax credit  Step 4 - Balance of input  Step 3 - Utilise Not possible Balance of input tax credit of CGST
on account of tax credit of CGST (left after against payment (left after Step 4) will be carried
CGST Step 3) should be utilised of CGST (which forward
against payment of IGST (if is left after Step 2)
any, left after Step 1)
731 Order of utilization of input tax credit Para 494.1
Input tax credit Output tax liability of IGST Output tax Output tax liability Remarks
liability of CGST of SGST/UTGST
Input tax credit Input tax credit on account of

on account of SGST/UTGST can be utilised
SGST/UTGST under Step 5 and Step 6 (given
below) only if input tax credit on
account of IGST has been com-
pletely exhausted after Step 1 and
Step 2
Input tax credit  Step 6 - Balance of input Not possible  Step 5 - Utilise Balance of input tax credit of
on account of tax credit of SGST/UTGST against payment SGST/UTGST (left after Step 6)
SGST/UTGST (left after Step 5) should be of SGST/ UTGST will be carried forward
utilised against payment of (which is left after
IGST (if any, left after Step 4) Step 2)
Problems
494-P1 On August 20, 2019, X Ltd. (of Chennai) supplies goods/services to Y Ltd. (of Vellore). Taxable value of supply is Rs. 26,80,000.
On August 26, 2019, X Ltd. supplies goods/services to Z Ltd. (of Bengaluru). Taxable value of supply is Rs. 5,00,000. GST rate is 18
per cent. X Ltd. has the following balance in his electronic credit ledger –
- IGST : Rs. 92,000.
- CGST: Rs. 5,000.
- SGST : Rs. 9,00,000.
On August 21, 2019, X Ltd. purchases Honda City (seating capacity as per RC : 5 persons) from a dealer in Chennai for its officers/
auditors. The car will be used by these persons only for performing official duties. GST paid for purchasing the car (which is not included
in the above figures) is as follows – CGST Rs. 1,68,000, SGST Rs. 1,68,000. There is no other transaction for the month of August 2019.
Find out GST on supply of goods to Y Ltd./Z Ltd. and prepare a statement for availment of input tax credit.
Solution :
Y Ltd. Z Ltd.
Rs. Rs.
Taxable value of supply of goods/services 26,80,000 5,00,000
Add: GST –
- IGST @ 18% of Rs. 5,00,000 – 90,000
- CGST @ 9% of Rs. 26,80,000 2,41,200 –
- SGST (Tamil Nadu) @ 9% of Rs. 26,80,000 2,41,200 –
Total amount charged by X Ltd. 31,62,400 5,90,000
IGST CGST SGST

Rs. Rs. Rs.
Tax on outward supply 90,000 2,41,200 2,41,200
Less: Input tax credit of IGST (balance IGST : Rs. 92,000 – Rs. 90,000 = Rs. 2,000) 90,000 – –
Balance Nil 2,41,200 2,41,200
Less: IGST – 2,000 –
Balance Nil 2,39,200 2,41,200
Less: CGST – 5,000 –
Balance Nil 2,34,200 2,41,200
Less: SGST (balance SGST : Rs. 9,00,000 – Rs. 2,41,200 = Rs. 6,58,800) – – 2,41,200
Balance payable through electronic cash ledger Nil 2,34,200 Nil
Balance available in electronic credit ledger on August 31, 2019 Nil Nil 6,58,800
Note - On purchase of Honda City car, input tax credit is not available (as seating capacity of motor vehicle is not more than
13 persons).
494-E1 In Problem 494-P1, Y Ltd. is located in Bengaluru and Z Ltd. is located in Vellore. Recalculate the amount payable through
electronic cash ledger. Also calculate the balance in electronic credit ledger on August 31, 2019.
494-P2 On May 1, 2019, X (of Maharashtra) supplies goods/services to A Ltd. (of Odisha). Taxable value of supply is Rs. 28,30,000.
On May 6, 2019, X supplies goods/services to B Ltd. (of Mumbai). Taxable value of supply is Rs. 58,00,000. GST rate is 18 per cent.
X has the following balance of input tax credit available in his electronic credit ledger – IGST : Rs. 7,60,000, CGST : Rs. 3,40,000,
SGST : Rs. 3,70,000. There is no other transaction for the month of May 2019. Find out the amount of GST payable for May 2019.
Solution :
Computation of GST on outward supply –
IGST CGST SGST
Rs. Rs. Rs.
Supply to A Ltd. of Odisha (18% of Rs. 28,30,000) 5,09,400 – –
Supply to B Ltd. of Mumbai (9% of Rs. 58,00,000, 9% of Rs. 58,00,000) – 5,22,000 5,22,000
Output tax liability of May 2019 5,09,400 5,22,000 5,22,000
Less: IGST on inward supply (balance IGST : Rs. 7,60,000 – Rs. 5,09,400
= Rs. 2,50,600) 5,09,400 – –
Balance Nil 5,22,000 5,22,000
Less: Balance of IGST on inward supply – 2,50,600 –
Balance Nil 2,71,400 5,22,000
Less: CGST on inward supply (balance CGST : Rs. 3,40,000 – Rs. 2,71,400
= Rs. 68,600) – 2,71,400 –
Balance Nil Nil 5,22,000
Less: SGST on inward supply – – 3,70,000
Balance payable by electronic cash ledger Nil Nil 1,52,000
SGST payable for May 2019 is Rs. 1,52,000. Unutilised input tax credit of CGST of Rs. 68,600 cannot be utilised for payment
of SGST (it can be carried forward). However, after utilising input IGST for payment of outward liability of IGST, the balance
of Rs. 2,50,600 can be utilised in the above case partly for payment of CGST and partly for payment of SGST as follows –
IGST CGST SGST
Rs. Rs. Rs.
GST on outward supply (as computed earlier) 5,09,400 5,22,000 5,22,000
= Rs. 2,50,600) 5,09,400 – –
Balance Nil 5,22,000 5,22,000
Less: IGST [balance of Rs. 2,50,600 to be utilised to the extent of Rs. 1,82,000
(see Note) towards payment of CGST and the balance of Rs. 68,600 towards
payment of SGST] – 1,82,000 68,600
Balance Nil 3,40,000 4,53,400
Less: CGST on inward supply – 3,40,000 –
Balance payable by electronic cash ledger Nil Nil 83,400
Note - Rs. 2,50,600 can be utilised (in any manner) for payment of CGST and SGST. As no restriction is imposed by the relevant
legal provision as given in rule 88A, the amount to be utilised towards payments of CGST, in this case, should not be more
than Rs. 1,82,000 (i.e., Rs. 5,22,000 – Rs. 3,40,000) to make minimum payment in cash.
494-E2 In Problem 494-P2, A Ltd. is located in Maharashtra and B Ltd. is located in Odisha. Recalculate the amount payable through
electronic cash ledger.
 APPORTIONMENT OF CREDIT - HOW TO DETERMINE

495. Where goods/services are used by the registered person partly for business purposes and partly for other
purposes, the amount of input credit will be reduced proportionately. Similarly, where goods/services are used
by the registered person partly for affecting taxable supplies (including zero rated supplies) and partly for
exempt supplies, input credit will be reduced proportionately. In such cases, if the registered person has already
availed input credit, the amount calculated proportionately will have to be reversed. The mode of calculating
proportionate amount in such cases is explained in the paras and examples given below.
495.1 When input credit available/not-available - The table given below highlights when input tax credit is
available/not available –
733 Common credits Para 495.2
Section Use of input goods/services by registered dealer Input tax credit available/not available
17(1) Used for business purposes Input tax credit available
Used for other purposes Input tax credit not available
17(2)/ Used for taxable supplies
(3) Used for zero rated supplies (i.e., export outside India or supply to
SEZ units). Input tax credit available
Use for activities/transaction specified in Schedule III (except for
sale of land and building)
Used for non-taxable supplies (i.e., alcoholic liquor for human
consumption, petroleum products, etc., not currently covered
under GST)
Used for exempt supplies (i.e., different entries covered under Input tax credit not available
Exemption Notification) or used for supplies which are covered
under reverse charge mechanism. Exempt supply also covers trans-
action in securities, sale of land/building.
495.2 Common credits - If input goods/services are exclusively used for purposes other than business
purposes, one can easily find out the quantum of input tax credit not available. Likewise, if input goods/services
are exclusively used for making non-taxable supplies/exempt supplies, determination of input credit not
available is not difficult. Problem arises where input goods/services are not exclusively used for aforesaid
purposes. Apportionment of common credit in such cases is governed by rule 42. The mechanism given by rule
42 is illustrated in the case study given below.
The following information is given by X Ltd., a pharmaceutical company, located in Mumbai. The data given below pertains
to IGST credit (tax period : January 2020) –
Different components Reference Rs.
Total input tax on input goods/services for January 2020 T 2,00,000
Out of T –
- Input tax exclusively used for non-business purposes T1 20,000
- Input tax used exclusively for making exempt supplies T2 21,000
- Input tax pertaining to ineligible items under section 17(5) [see para 493.3] T3 22,000
Total (T1 + T2 + T3) 63,000
Input tax credit amount credited to electronic credit ledger [T – (T1 + T2 + T3)] C1 1,37,000
Input tax credit exclusively used for taxable supplies (including zero rate supplies) T4 1,00,000
Common credit (C1 - T4) C2 37,000
Aggregate value of exempt supplies for tax period January 2020 E 10,00,000
Total turnover of the registered person for January 2020 F 80,00,000
Credit attributable to exempt supplies (E ÷ F × C2) D1 4,625
Credit attributable to non-business purposes (5% of C2) D2 1,850
Eligible common credit [C2 – (D1 + D2)] C3 30,525
Total credit eligible (T4 + C3) G 1,30,525
Notes –
1. T1, T2, T3 and T4 shall be calculated as above for the purpose of declaration in GSTR-3B. The amount C3, D1 and D2 shall
be computed separately for input tax credit of CGST, SGST/UTGST and IGST and declared in Form GSTR-3B or
through Form GST DRC-03.
2. If X Ltd. does not have any turnover for January 2020, then the value of E and F shall be considered for last tax period for
which data is available.
3. The above calculation shall be made by X Ltd. (or any other registered person) for each tax period and also for the whole
year. In case of calculation for the whole year, if there is any shortfall in tax credit availed, the necessary credit can be claimed
in the electronic ledger. Similar, adjustment can be made in cash of excess credit.
4. Where the amount of input tax relating to goods/services used partly for the purposes (other than business) and partly
for effecting exempt supplies has been identified and segregated at the invoice level by the registered person, the same shall
be included in T1 and T2 respectively, and the remaining amount of credit on such inputs or input services shall be included
in T4.
5. In the case of construction of complex, building, etc. [covered by Schedule II, Item 5(b), discussed in this book in para
413.11], the value of T4 shall be zero during the construction phase (because inputs and input services will be commonly used
for construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the
project, whichever is earlier) and those which are not booked by the said date.
6. In the case of construction of complex, building, etc. (as covered by the above Note), the value of E ÷ F (for the purpose
of calculating D1) for a tax period shall be calculated for each project separately, taking value of E and F as under —
E = aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the
apartments, construction of which is not exempt from tax, but are identified by the promoter to be sold after issue
of completion certificate or first occupation, whichever is earlier;
F = aggregate carpet area of the apartments in the project.
7. Similar calculation will be made for CGST, SGST and UTGST.
 WHAT IS THE MODE OF COMPUTATION OF INPUT TAX CREDIT PERTAINING TO CAPITAL

GOODS AND REVERSAL THEREOF
496. If capital goods are acquired by a registered person, he can immediately avail input tax credit. If, however,
these goods are used for non-business purposes or for the purpose of making exempt supplies, reversal of credit
is required. The mode of computation of such reversal is given in rule 43 and explained in the case study given
below.
The following information is given by Y Ltd., a paper manufacturing company, located in Chennai for September
2019 –
Y Ltd. has the following plant and machinery –
Plant A Plant B Plant C Plant D Plant E
Rs. Rs. Rs. Rs. Rs.
Date of acquisition July 1, 2019 July 1, 2019 July 1, 2019 July 1, 2019 July 1, 2019
Taxable value of inward supply 2,00,000 3,00,000 4,00,000 5,00,000 6,00,000
IGST @ 18% (b) 36,000 54,000 72,000 90,000 1,08,000
Capital asset is utilised for business/ Non-business Exempt Exclusively Exempt as Exempt as
other purposes purposes supplies for taxable well as well as
supply taxable taxable
supplies supplies
Life of capital goods in months (for GST
purposes it is always 60 months) – – – 60 months 60 months
ITC attributable for one month [(b) ÷ 60] Tr – – – 1,500 1,800
Manner of distribution of common input tax credit of capital goods –
Reference IGST (Rs.)

Input tax credit on capital goods used exclusively for non-business purposes (i.e., Plant A) T1 36,000
Input tax credit on capital goods used exclusively for effecting exempt supplies (i.e., Plant B) T2 54,000
Total (T1 + T2) 90,000
Input tax credit on capital goods used exclusively for taxable supplies (including zero rated
supplies) (i.e., Plant C) T3 72,000
Input tax credit on capital goods (other than T1, T2 and T3) (i.e., Rs. 90,000 + Rs. 1,08,000) 1,98,000
Input tax credit on capital goods (whose residual life remain in beginning of tax period) Tr 3,300
Aggregate value of exempt supplies for the month of September 2019 E 40,00,000
Total turnover of Y Ltd. for September 2019 F 1,25,00,000
Common credit attributable to exempt supplies [E ÷ F × Tr] Te 1,056
Note - Information pertaining to T1, T2 and T3 should be declared in GSTR-2 and GSTR-3B. But no credit pertaining T1 and
T2 should be recorded in electronic credit ledger. Credit pertaining to Plant C, Plant D and Plant E should be taken
immediately. However, Plant D and Plant E are not exclusively used for effecting taxable supplies. Therefore, for the month
of September reversal of Te is required. The amount Te shall be computed separately for input tax credit of CGST, SGST/
UTGST and IGST and declared in Form GSTR-3B. Similar calculation can be done for different tax period.
735 Mode of claiming input tax credit Para 498
 WHAT IS THE MODE OF DISTRIBUTION OF CREDIT BY INPUT SERVICE DISTRIBUTOR

(ISD)
497. The head office of X Ltd. at Mumbai has taken computer networking service from B Ltd. This service will
be utilised by Delhi, Chennai and Kolkata branches. Head office has received tax invoice from B Ltd. Payment
is also made by head office. Head office can distribute this input tax credit to its branches at Delhi, Chennai and
Kolkata. This can be done by issue of bill/challan by head office of X Ltd. to Delhi, Chennai and Kolkata branches.
After this, branches can claim input tax credit on inward supply for payment of GST on outward supplies. In this
example, X Ltd. is “Input Service Distributor”. “Input Service Distributor” is defined by section 2(61). Input
Service Distributor shall make a separate application for registration as Input Service Distributor. A few
conditions should be satisfied –
1. Input tax credit available for distribution in a month shall be distributed in the same month and the details
thereof shall be furnished in Form GSTR-6.
2. Input Service Distributor shall separately distribute the amount of ineligible input tax credit [ineligible under
the provisions of section 17(5) or otherwise] and the amount of eligible input tax credit.
3. Input tax credit on account of IGST shall be distributed as input tax credit of IGST to every recipient.
4. Input tax credit on account of CGST and SGST/UTGST shall—
- In respect of a recipient located in the same State/Union Territory in which the Input Service Distributor is
located, be distributed as input tax credit of CGST and SGST/UTGST respectively.
- In respect of a recipient located in a different State/Union Territory, be distributed as IGST (the amount of
distribution will be equal to total of CGST + SGST/UTGST).
5. Input Service Distributor shall issue an Input Service Distributor invoice, clearly indicating in such invoice that
it is issued only for distribution of input tax credit.
6. The mode of computation is illustrated in the case study given below –
X Ltd. has head office in Mumbai. It has four branches at Delhi, Kolkata, Chennai and Bengaluru. Head office and branches
are registered under GST. Head office has also taken registration as ISD. Head office has taken software maintenance service
from Y Ltd., Indore and Z Ltd., Nagpur. Data pertaining to month of September 2019 is given below –
Invoice from Y Ltd. - Taxable value of supply : Rs. 5,00,000, IGST : Rs. 90,000. This service is utilised by Delhi, Kolkata and
Chennai branches.
Invoice from Z Ltd. - Taxable value of supply : Rs. 3,00,000, CGST : Rs. 27,000, SGST : Rs. 27,000. This service is utilised by
Kolkata, Chennai and Bengaluru branches.
Turnover of the preceding financial year 2018-19 are as follows – Delhi : Rs. 2 crore, Kolkata : Rs. 5 crore, Chennai : Rs. 3 crore
and Bengaluru : Rs. 8 crore.
Head office can distribute input tax credit (pertaining to these invoices) to its branches as follows –
Delhi Kolkata Chennai Bengaluru Total
Rs. Rs. Rs. Rs. Rs.
Invoice from Y Ltd.
Turnover 2 crore 5 crore 3 crore – 10 crore
Turnover ÷ Total turnover × 100 (a) 20% 50% 30% – –
Input tax credit : Rs. 90,000 (IGST) × (a) 18,000 45,000 27,000 – 90,000
IGST distributed as – IGST IGST IGST – –
Invoice from Z Ltd.
Turnover – 5 crore 3 crore 8 crore 16 crore
Turnover ÷ Total turnover × 100 (b) – 31.25% 18.75% 50% –
Input tax credit : Rs. 54,000 (CGST + SGST) × (b) – 16,875 10,125 27,000 54,000
CGST + SGST distributed as – – IGST IGST IGST –
 WHAT IS THE MODE OF CLAIMING INPUT TAX CREDIT BY A BANKING COMPANY

498. A banking company is covered by section 17(4). Provisions of this section are given below –
1. Taxpayer is a banking company or a financial institution (including a non-banking financial company).
2. It provides services by way of accepting deposits, extending loans or advances.
If these two conditions are satisfied, the banking company can avail input tax credit as follows –
Option 1 - It can claim input tax credit under section 17(2). Under this section, if input services are utilised partly
for effecting taxable supplies (including zero rated supply) and partly for effecting exempt supplies, input tax
credit will be available on proportionate basis.
Option 2 - Under this option, it can avail of (every month) an amount equal to 50 per cent of the eligible input tax
credit on inputs, capital goods and input services in that month and the rest shall lapse.
1. If Option 2 is exercised, it shall not be withdrawn during the remaining part of the financial year.
2. The restriction of 50 per cent shall not apply to the tax paid on supplies made by one registered person to
another registered person having the same Permanent Account Number (PAN). In other words, if there is a
supply of goods/services by Nariman Point branch of SBI to Parliament Street branch of SBI on which GST is
paid, the recipient Parliament Street branch will be eligible for 100 per cent input tax credit, even if the SBI has
exercised Option 2. This rule is given by second proviso to section 17(4). It may be noted that this provision is
applicable only if the supplier and recipient has the same PAN. Consider the case where supplier branch is
located outside India (having a different PAN), the recipient Indian branch cannot take the benefit of second
proviso to section 17(4) (and in such a case the restriction of 50 per cent will apply).
 WHAT IS THE MODE OF AVAILABILITY OF CREDIT IN SPECIAL CIRCUMSTANCES UNDER

SECTION 18
499. The provisions of section 18 are given below –
499.1 Fresh registration - The case of fresh registration, covered by section 18(1)(a), is as follows –
1. A person has applied for GST registration within 30 days from the date on which he becomes liable to
registration.
2. On his uploading registration request, registration has been granted.
3. If the above two conditions are satisfied, he is entitled to take credit of input tax in respect of –
a. inputs held in stock;
b. inputs contained in semi-finished goods, and
c. inputs contained in finished goods.
Input tax credit is available in respect of these held in stock on the day immediately preceding the date from
which he becomes liable to pay tax. However, a registered person shall not be entitled to take input tax credit
in respect of any supply of goods/services to him after the expiry of 1 year from the date of issue of tax invoice
relating to such supply.
X deals in manufacture and sale of readymade garments in Hyderabad. He becomes liable to pay GST on September 3, 2019
(prior to this his aggregate turnover was less than Rs. 20,00,000). He submits online application for registration on September
17, 2019 and gets GSTIN on September 19, 2019. He is eligible for input tax credit on input held in stock (and/or contained
in semi-finished/finished goods) as on September 2, 2019 (i.e., the day immediately preceding the day when he becomes
liable to pay GST).
499.2 Voluntary registration - The case of voluntary registration, covered by section 18(1)(b), is as follows –
1. A person has applied for GST registration (his turnover is less than Rs. 20 lakh, law does not require him to
get registration, even than he has applied for registration).
2. On his uploading registration request, registration has been granted.
b. inputs contained in semi-finished goods, and
c. inputs contained in finished goods.
Input tax credit is available in respect of these held in stock on the day immediately preceding the date of grant
of registration. However, a registered person shall not be entitled to take input tax credit in respect of any supply
of goods/services to him after the expiry of 1 year from the date of issue of tax invoice relating to such supply.
737 When an exempt supply becomes a taxable supply Para 499.4
X deals in manufacture and sale of plastic flooring in Madurai. His annual aggregate turnover is not more than Rs. 15 lakh.
There is no other provision under which GST registration is required. However, he applies for GST registration by
submitting online request on October 12, 2019 and gets GSTIN on October 18, 2019. He is eligible for input tax credit on input
held in stock (and/or contained in semi-finished/finished goods) as on October 17, 2019 (i.e., the day immediately preceding
the day of grant of registration).
499.3 Registered person ceases to pay tax under Composition Scheme/Alternative Composition Scheme -
Section 18(1)(c) covers the case when a Composition Scheme dealer (or Alternative Composition Scheme dealer)
ceases to pay tax under Composition Scheme (or Alternative Composition Scheme). This section is applicable
as follows –
1. A person has opted for Composition Scheme [see para 512] or Alternative Composition Scheme [see para 517].
2. During the year, he ceases to pay tax under Composition Scheme/Alternative Composition Scheme (as his
turnover exceeds the specified limit).
b. inputs contained in semi-finished goods;
c. inputs contained in finished goods, and
d. capital goods.
Input tax credit is available in respect of these held on the day immediately preceding the date from which he
becomes liable to pay GST under normal provisions. However, a registered person shall not be entitled to take
input tax credit in respect of any supply of goods/services to him after the expiry of 1 year from the date of issue
of tax invoice relating to such supply.
 Case 1 - X deals in retail trading of readymade garments. He has opted for Composition Scheme and pays GST at the rate
of 1%. However, his aggregate turnover exceeds the specified amount of Rs 1.5 crore on December 8, 2019. Consequently,
he ceases to pay GST under Composition Scheme (with effect from December 9, 2019).
He is eligible for input tax credit on input held in stock (and/or contained in semi-finished/finished goods) and capital
goods as on December 8, 2019 (i.e., the day immediately preceding the day on which he becomes liable to pay GST under
normal provisions). However, credit on capital goods shall be calculated proportionately for remaining useful life of the
capital asset (as shown in Case 2).
 Case 2 - Y, a registered person, has opted for Composition Scheme on July 1, 2017. He continues under the Composition
Scheme up to December 14, 2019 (on this day his annual turnover exceeds the specified limit). With effect from December
15, 2019, he is liable to pay normal GST. He gives the following information pertaining to inputs/capital goods held by him
as on December 14, 2019 –
- Stock of raw material purchased on November 1, 2018 (GST paid on raw material : Rs. 10,000).
- Stock of semi-finished goods which contains raw material purchased on February 10, 2019 (amount of bill of raw material
: Rs. 84,000, inclusive of GST @ 12%).
- A plant and machinery purchased on March 11, 2019 (GST paid @ 12% : Rs. 2 lakh).
Input tax credit was not taken as he was under Composition Scheme.
On December 15, 2019, he can avail input tax credit pertaining to the aforesaid items as follows –
Rs.
Raw material purchased on November 1, 2018 (input credit not available after expiry of 1 year) Nil
Raw material purchased on February 10, 2019 (Rs. 84,000 × 12 ÷ 112) 9,000
Plant and machinery –
- Period of use : March 11, 2019 to December 14, 2019
- Period of use in number of quarters (or part thereof) : 4 quarters
- Eligible input tax credit [Rs. 2,00,000 – (5% for 4 quarters × Rs. 2,00,000)] 1,60,000
Total input tax credit which is available to Y on December 15, 2019 1,69,000
499.4 When an exempt supply becomes a taxable supply - Section 18(1)(d) covers the case when an exempt
supply of goods/services by a registered person becomes a taxable supply. Such person shall be entitled to take
credit of input tax in respect of –

d. capital goods.
Input tax credit in respect of these goods (held in stock relatable to such exempt supply) and on capital goods
(exclusively used for such exempt supply) shall be available on the day immediately preceding the date from
which such supply becomes taxable. However, a registered person shall not be entitled to take input tax credit
in respect of any supply of goods/services to him after the expiry of 1 year from the date of issue of tax invoice
relating to such supply.
499.5 Input tax credit in case of change in the constitution of registered person - Section 18(3) covers the case
when there is a change in constitution of a registered person on account of sale, merger, demerger, amalgam-
ation, lease or transfer of business with the provision of transfer of liabilities. Section 18(3) also covers transfer
or change in the ownership of business due to death of the sole proprietor. In such a case, the registered person
is allowed to transfer input tax credit which remains unutilised in his electronic credit ledger to such sold,
merged, demerged, amalgamated, leased or transferred business as follows –
1. The registered person shall, in the event of sale, merger, etc., furnish the details of sale, merger, demerger,
amalgamation, lease or transfer of business, in Form GST ITC-02, electronically on the common portal along with
a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee.
2. In the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new
units as specified in the demerger scheme. For this purpose, “value of assets” means the value of the entire assets
of the business, whether or not input tax credit has been availed thereon.
3. The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant/cost
accountant certifying that the sale, merger, demerger, etc., has been done with a specific provision for the transfer
of liabilities.
4. The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such
acceptance, the unutilized credit specified in Form GST ITC-02 shall be credited to his electronic credit ledger.
5. The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of
account.
499.6 Transfer of input tax credit on obtaining separate registration for multiple places of business within
a State/Union territory - Rule 41A is applicable in such cases as follows –
1. A registered person has obtained separate registration for multiple places of business.
2. He intends to transfer (wholly or partly) the unutilised input tax credit lying in his electronic credit ledger to
any or all of the newly registered place of business.
3. He shall upload the details in Form GST ITC-02A.
4. The aforesaid details should be uploaded within a period of 30 days from obtaining such separate registrations.
If the above conditions are satisfied, the input tax credit shall be transferred to the newly registered entities in
the ratio of the value of assets held by them at the time of registration. For this purpose, the ‘value of assets’ means
the value of the entire assets of the business whether (or not) input tax credit has been availed thereon.
 The newly registered person (transferee) shall accept the details so furnished by the registered person
(transferor) and, upon such acceptance, the unutilised input tax credit specified in Form GST ITC-02A shall be
credited to his electronic credit ledger.
499.7 When a registered person who has availed input tax credit opts for Composition Scheme or
Alternative Composition Scheme - Section 18(4) covers the following two cases –
1. When any registered person who has availed of input tax credit opts to pay tax under section 10 under
Composition Scheme or Alternative Composition Scheme.
2. Where the goods/services supplied by a registered person become wholly exempt.
In these two cases, the registered person shall pay an amount (by way of debit in the electronic credit ledger or
electronic cash ledger) equivalent to the credit of input tax in respect of –
d. capital goods.
739 Supply of capital goods Para 499.8
This payment shall be made in respect of inputs held on the day immediately preceding the date of exercising
of such option or, as the case may be, the date of such exemption. After payment of such amount, the balance
of input tax credit, if any, lying in his electronic credit ledger shall lapse.
X is a registered person. He purchases a plant and machinery on July 11, 2018 (GST paid @ 18% : Rs. 4 lakh). Input tax credit
is taken immediately. He pays normal GST up to March 31, 2019. With effect from April 1, 2019, he opts for Composition
Scheme. As he switches over to Composition Scheme (input tax credit is not available under Composition Scheme), input
tax credit availed of during July 2018 in respect of plant and machinery will have to be reversed. For this purpose,
computation shall be made as follows [it is assumed that input tax credit lying in electronic credit ledger of X on March 31,
2019 is Rs. 1,10,000 (Situation 1) or Rs. 4,10,000 (Situation 2)] –
Rs. Rs.
Period of use of plant and machinery (from July 11, 2018 to March 31, 2019) : 8 months
and 20 days
Useful life of a capital asset : 60 months (fixed by law)
Useful remaining life : 51 months and 10 days
Useful remaining life in months (a part of month is always ignored) : 51 months
Input tax on plant and machinery 4,00,000 4,00,000
Reversal of input tax credit (Rs. 4,00,000 × 51 ÷ 60) 3,40,000 3,40,000
Input tax credit in electronic credit ledger on March 31, 2019 1,10,000 4,10,000
Less: Reversal of input tax credit 3,40,000 3,40,000
Balance to be paid through electronic cash ledger 2,30,000 Nil
Balance of input tax credit in electronic credit ledger Nil 70,000
Credit which lapses on April 1, 2019 Nil 70,000
499.8 Supply of capital goods on which input tax credit has taken - Such a case is covered by section 18(6).
These provisions are given below –
1. The taxpayer is registered under GST.
2. He has availed input tax credit at the time of inward supply of capital goods/plant and machinery.
3. Subsequently, these capital goods/plant and machinery are supplied to another person.
4. Input tax credit will have to be reversed as follows –
a. input tax credit taken on the said capital goods (as reduced by the percentage points), or
b. GST on transaction value,
5. Where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay
tax on the transaction value of such goods [in such a case, point 4(a) above will be irrelevant].
6. The above provisions of section 18(6) for reversal of input tax credit availed on capital goods would be
applicable to banks only to the extent of the input tax credit availed by it. In case a banking company opts to avail
input tax credit to the extent of 50 per cent in terms of the second proviso to section 17(4), reversal of credit would
be calculated with reference to 50 per cent of the input tax credit availed by it on capital goods.
X Ltd. is a registered person. It purchases a machine for Rs. 10,00,000 (+ GST @ 28 per cent) on July 20, 2018. It avails of input
tax credit in July 2018. On April 5, 2019, X Ltd. transfers the machine for Rs. 8,00,000 (excluding GST) to Y Ltd. The GST rate
on supply is 18 per cent.
Amount of reversal of input tax credit will be calculated as follows –
Rs.
GST paid on machine by X Ltd. (28% of Rs. 10,00,000) 2,80,000
Input credit availed in July 2018 2,80,000
Date of invoice July 20, 2018
Date of outward supply of machine to Y Ltd. April 5, 2019
Number of quarters (or part thereof) between the above dates 4
Rs.
Credit reversal [Rs. 2,80,000 – (5% × 4 × Rs. 2,80,000)] (a) 2,24,000
GST at the time of supply of machine by X Ltd. to Y Ltd. on April 5, 2019 (18% of Rs. 8,00,000) (b) 1,44,000
Amount paid by Y Ltd. to X Ltd. (value of supply : Rs. 8,00,000 + GST : Rs. 1,44,000) 9,44,000
GST payable by X Ltd. under section 18(6) for April 2019 (due date for payment : May 20, 2019) [(a) or
(b), whichever is higher] 2,24,000
 HOW TO TAKE INPUT TAX CREDIT IN RESPECT OF INPUTS/CAPITAL GOODS SENT FOR
JOB WORK
500. The provisions of section 19 are given below –
 Input tax credit on inputs - Section 16(2)(b) requires that input tax credit is available only if the registered person
has received goods or services or both. In spite of this provision, the principal shall be entitled to take credit of
input tax on inputs even if the inputs are directly sent to a job worker for job work (without being first brought
to his place of business).
Where the inputs sent for job work are not received back by the principal after completion of job work or
otherwise within one year‡ of being sent out, it shall be deemed that such inputs had been supplied by the
principal to the job worker on the day when the said inputs were sent out. Where the inputs are sent directly to
a job worker, the period of one year shall be counted from the date of receipt of inputs by the job worker.
 Input tax credit on capital goods - The principal shall be allowed input tax credit on capital goods sent to a job
worker for job work. This rule is applicable even if the capital goods are directly sent to a job worker for job work
without being first brought to his place of business.
Where the capital goods sent for job work are not received back by the principal within a period of 3 years‡ of
being sent out, it shall be deemed that such capital goods had been supplied by the principal to the job worker
on the day when the said capital goods were sent out. Where the capital goods are sent directly to a job worker,
the period of 3 years shall be counted from the date of receipt of capital goods by the job worker.
 Moulds and dies, jigs and fixtures - The aforesaid rules are also applicable to moulds and dies, jigs and fixtures,
or tools sent out to a job worker for job work. However, the time-limit of one year/3 year is not applicable.
 Conditions and restrictions - The following conditions and restrictions are applicable as per rule 45 –
1. The inputs, semi-finished goods or capital goods shall be sent to the job worker under the cover of a challan
issued by the principal, including where such goods are sent directly to a job-worker.
2. Where the goods are sent from one job worker to another job worker, the challan may be issued either by the
principal or the job worker sending the goods to another job worker. However, this proposition is subject to the
following –
- The challan issued by the principal may be endorsed by the job worker, indicating therein the quantity and
description of goods where the goods are sent by one job worker to another or are returned to the principal.
- The challan endorsed by the job worker may be further endorsed by another job worker, indicating therein
the quantity and description of goods where the goods are sent by one job worker to another or are returned
to the principal.
3. The challan issued by the principal to the job worker shall contain the details specified in rule 55.
4. The details of challans in respect of goods dispatched to a job worker or received from a job worker during a
quarter shall be included in Form GST ITC-04. This form should be furnished on or before the 25th day of the
month succeeding the quarter. This period may be extended by the Commissioner†.
† The extended time-limit for making the declaration in respect of goods dispatched to a job worker or received from a job worker or sent from
one job worker to another, during July 1, 2017 to June 30, 2019 is August 31, 2019. Another concession is given pertaining to submission of GST
ITC-04 for the period July 2017-March 2019 (for this period the concerned person is not required to furnish GST ITC-04 provided the said persons
furnishes the details of all the challans in respect of goods dispatched to a job worker in the period July 2017 to March 2019 but not received from
a job worker or not supplied from the place of business of the job worker as on March 31, 2019, in serial number 4 of FORM ITC-04 for the quarter
April-June, 2019).
‡ The period of one year and 3 years may, on sufficient cause being shown, be extended by the Commissioner for a further period not exceeding
one year and 2 years respectively (these provisions are applicable from February 1, 2019).
741 Problems on input tax credit Problem 501-P3
5. Where the inputs are not returned (within one year‡) or capital goods are not returned (within 3 years‡), it shall
be deemed that such inputs or capital goods had been supplied by the principal to the job worker. The principal
would issue an invoice for the same and declare such supplies in his return for that particular month in which
the time period of one year/3 year has expired. The date of supply shall be the date on which such inputs or
capital goods were initially sent to the job worker.
Interest for the intervening period shall also be payable on the tax.
If such goods are returned by the job worker after the stipulated time period, the same would be treated as a fresh
supply by the job worker to the principal and the job worker would be liable to pay GST if he is liable for
registration. Further, there is no requirement of either returning back or supplying the goods from the job
worker’s place of business/premises as far as moulds and dies, jigs and fixtures, or tools are concerned.
 Problems on input tax credit

501-P1 X Ltd. is in the business of manufacture of paper laminating machines in Noida. For its factory, it purchases raw material during
October 2019 from different suppliers as follows –
- From A Ltd. - Invoice No. 218, dated October 7, 2019, value of taxable supply : Rs. 4,50,000.
- From B Ltd. - Invoice No. 107, dated October 11, 2019, value of taxable supply : Rs. 6,00,000.
- From C Ltd. - Invoice No. 554, dated October 20, 2019, value of taxable supply : Rs. 11,00,000.
These inputs are supplied from Nagpur. Applicable GST rate is 12 per cent (IGST is charged in all invoices).
X Ltd. has received the raw material in October 2019. Payment to A Ltd. and B Ltd. is made in December 2019. However, payment to
C Ltd. is not made so far. What is the correct time for claiming input tax credit in respect of aforesaid invoices. Assume that X Ltd. is
not affected by the operation of rule 36(4).
Solution :
X Ltd. can avail input tax credit pertaining to 3 invoices during October 2019. For this purpose, the relevant amount should
be credited in the electronic credit ledger. This can be done when GSTR-1 is uploaded by suppliers.
Law requires that X Ltd. should make payment to the supplier within 180 days from the date of issue of invoice by the
supplier. If payment is not made within 180 days, input tax credit will have to be reversed. Payment to A Ltd. and B Ltd.
has been made within 180 days. However, payment to C Ltd. is not made so far. The time-limit of 180 days expires in the
case of C Ltd. on April 18, 2020. In this case –
1. X Ltd. will have to show Rs. 1,32,000 (i.e., 12% of Rs. 11,00,000) as output tax for April 2020.
2. X Ltd. will have to pay interest at the rate of 18 per cent per annum from October 20, 2019 till the date of payment of tax
of Rs. 1,32,000.
3. X Ltd. can re-avail Rs. 1,32,000 as input credit when payment pertaining to Invoice No. 554 is made to C Ltd.
501-E1 In above problem, payment is made to C Ltd. on June 3, 2020. However, Invoice No. 554 pertains to purchase of a car (seating
capacity : 4 persons) by X Ltd. from C Ltd. The car is used by X Ltd. for its staff during office time. Discuss when input credit is required
to be reversed.
501-P2 X Ltd. purchases a machinery from A Ltd. The machine is installed in the factory of X Ltd. on February 6, 2020. Taxable value
of supply is Rs. 10,00,000. GST is charged by the supplier at the rate of 18 per cent. X Ltd. has claimed normal depreciation and additional
depreciation under section 32 of the Income-tax Act on “actual cost” of Rs. 11,80,000. Discuss when input tax credit is available to X
Ltd.
Solution :
Input tax credit is not available if GST is included in actual cost for the purpose of calculating depreciation under section
32.
501-E2 X Ltd. owns a chain of retail stores in Kerala. Its turnover is more than Rs. 100 crore. To celebrate its 25th foundation day,
it organises a personality development programme for its employees in Trivandrum on January 1, 2020. This programme is attended
by its employees as well as distributors. For this programme, a catering contract is given to A Ltd. Invoice of A Ltd. includes GST
of Rs. 11.30 lakh. Invoice is issued on January 10, 2020 and payment is made on February 5, 2020. Discuss when input credit is
available to X Ltd.—during January 2020 or February 2020.
A Ltd. has given a sub-contract to B Ltd. Invoice by B Ltd. to A Ltd. includes GST of Rs. 2.40 lakh. Bill is issued by B Ltd. on January
6, 2020. Payment is made to B Ltd. on July 2, 2020. Discuss when A Ltd. is eligible to claim input tax credit.
501-P3 X Ltd. is in the business of manufacture of freezing equipment for domestic market. It is located in Jamshedpur (Jharkhand).
During December 2019, it has acquired the following –
‡ The period of one year and 3 years may, on sufficient cause being shown, be extended by the Commissioner for a further period not exceeding
one year and 2 years respectively (these provisions are applicable from February 1, 2019).
Problem 501-P4 Input tax credit 742
Taxable value of GST charged

inward supply by supplier
Rs. Rs.
Steel (to be used as raw material in factory) 2,00,000 36,000
Spray guns (to be used in factory) 90,000 16,200
Solar lamps (to be used in office) 1,00,000 5,000
Soft drink concentrates (to be used in office canteen) 10,000 1,800
Soya milk drinks (to be used in factory canteen) 20,000 2,400
Truck (for transportation of manufacture goods from factory to godown) 19,00,000 5,32,000
Lift (installed in office premises and mainly used by office employees of X Ltd.) 17,50,000 3,15,000
Calculate the amount of input tax credit available to X Ltd. for December 2019. Assume that conditions for claiming input tax credit
[including conditions imposed by rule 36(4)] are satisfied. Annual turnover of X Ltd. is generally more than Rs. 40 crore.
Solution :
Computation of input tax credit available to X Ltd. for December 2019 –
Different items Reasons Rs.

Steel Used in factory in course of furtherance of business of X Ltd. (input tax credit available) 36,000
Spray guns Used in factory in course of furtherance of business of X Ltd. (input tax credit available) 16,200
Solar lamps Used in office in course of furtherance of business of X Ltd. (input tax credit available) 5,000
Soft drink Input tax credit on food and beverages not available under section 17(5)(b), even if it is
used for office canteen –
Soya milk Input tax credit on food and beverages not available under section 17(5)(b), even if it is
used for factory canteen –
Truck Truck (for transportation of goods) is eligible (this rule is applicable even if X Ltd. is not
in the business of transportation of goods) 5,32,000
Lift Used in office in course of furtherance of business of X Ltd. (input tax credit available) 3,15,000
Total 9,04,200
501-E3 Recalculate the amount of input tax credit in the above case for December 2019, if payment for steel, spray guns and lift is
made on April 1, 2020. Other payments are made in February 2020.
501-P4 X Ltd. is located in Coimbatore and engaged in manufacture of mechanical appliances. It submits the following information
pertaining to inward supply of inputs/input services/capital goods during December 2019 –
Taxable value GST charged
of inward supply by supplier
Rs. Rs.
Steel rods for manufacturing (received in factory on December 2, 2019) (invoice is
missing, not available in the records of X Ltd.) 7,50,000 1,35,000
Machine tools (received on December 7, 2019) (payment is made on April 10, 2020) 1,00,000 18,000
Stainless steel sheets (first instalment received on December 24, 2019, second and final
instalment will be received on January 10, 2020) (invoice for both instalments received
on December 26, 2019, taxable value + GST : Rs. 5,90,000) 5,00,000 90,000
Tax consultancy given by a chartered accountant (time of supply : December 10, 2019) 40,000 7,200
Air-conditioner for office (received in office on December 20, 2019) (for income-tax
purposes depreciation is claimed under section 32 on Rs. 32,000) 25,000 7,000
Heating system for canteen (received on December 28, 2019, depreciation is claimed on
taxable value excluding GST) 1,00,000 28,000
Corporate membership of Times Club (it will be used by directors to entertain foreign
collaborators only) 50,000 9,000
Calculate the amount of input tax credit available to X Ltd. for December 2019. Assume that conditions for claiming input tax credit
[including conditions imposed by rule 36(4)] are satisfied. Annual turnover of X Ltd. is generally more than Rs. 100 crore.
Solution :
Computation of input tax credit available to X Ltd. for December 2019 –
Steel rods Input tax credit not available, invoice is missing –
Machine tools Input tax credit is available for December 2019, date of payment is not irrelevant if
payment is made within 180 days from the date of invoice 18,000
Stainless steel When input is received in instalments, input tax credit is available only on receipt
sheets of last instalment, input tax credit will be available for January 2020 –
Tax consultancy Input services are eligible for input tax credit 7,200
Air-conditioner Input tax credit not available as GST is included in “actual cost” for calculating
depreciation under section 32 of Income-tax Act –
Heating system Input tax credit is available even if it is installed in canteen 28,000
Corporate GST on club membership is not eligible for input tax credit –
membership
Total 53,200
501-E4 Make the following changes in the above problem and recalculate the quantum of input tax credit available for December
2019 –
- Air-conditioner is installed in the office on April 1, 2020.
- Corporate membership is taken as it was required under the agreement with the foreign collaborator.
- Machine tools are not used during December 2019 (though the tools were received in the factory during December 2019).
501-P5 X Ltd. is a chemical manufacturing company. It is located in Tiruchirappalli (Tamil Nadu). From the data given below, find
out input tax credit for February 2020.
Rs. Rs.
Graphite (an input for factory, received in factory on January 29, 2020, actually used for
manufacturing taxable supplies during February 2020) 2,00,000 10,000
Magnesia (an input for factory, received on February 6, 2020, used only for exempt supplies) 3,00,000 15,000
Potash (an input for factory, received on February 22, 2020, used only for taxable supplies) 6,00,000 1,08,000
Silica bricks (an input for factory, received on February 20, 2020) 4,00,000 72,000
Tempo for transportation of goods (received on February 1, 2020) 9,00,000 2,52,000
Food packets for employees 46,000 8,280
Carpet for office (received on February 11, 2020) 40,000 4,800
Other information –
1. Magnesia is used in Madurai factory which manufactures goods which are exempt from GST.
2. Silica bricks are used in Chennai factory. The entire input is used during February 2020. Chennai factory manufactures goods (some
of which are exempt under GST). Assume that value of taxable supply from Chennai factory is Rs. 10 crore and value of exempt supply
is Rs. 2 crore for February 2020.
3. Food packets are used for office employees who work overtime.
4. Tempo is used only for transportation of taxable goods.
5. Assume that conditions for claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
Solution :
Computation of input tax credit available to X Ltd. for February 2020 –
Graphite Input is received during January 2020, it is eligible for credit for January 2020 (it is assumed
that input tax credit was claimed for January 2020, consequently, it is not available for
February 2020) Nil
Magnesia It is used only for manufacturing items which are exempt from GST (input tax credit not
available) Nil
Potash Input tax credit available (as it is used only for manufacture of items taxable under GST) 1,08,000
Silica bricks It is used for manufacture of taxable as well as exempt goods [input tax credit is available
on proportionate basis, Rs. 72,000 × Rs. 10 crore ÷ Rs. 12 crore] 60,000

Tempo Motor vehicles used for transportation of goods is eligible for input tax credit (even if the
taxpayer is not in the business of transportation of goods) (in the case of capital goods,
entire input tax credit is available when goods are received) 2,52,000
Food packets Inward supply pertaining to food and beverages (not eligible for input tax credit) –
Carpet If cost of carpet is part of capitalised value of immovable property, it is not eligible for input
tax credit (it is assumed that carpet cost is claimed as revenue expenditure in books of
account) 4,800
Total 4,24,800
501-E5 Make the following changes in the above problem and recalculate the quantum of input tax credit available for February
2020 –
1. In the case of graphite, input tax credit was not claimed for January 2020.
2. Cost of carpet is not claimed as revenue expenditure. It is shown as capital asset in books of account. However, GST is not part
of capitalised cost of office building.
3. Food packets are provided to employees within the parameters of service contract.
501-P6 X and Co., a partnership firm, is in the business of manufacture of perfumes in Madhya Pradesh. It submits the following
information pertaining to March 2020 –
Rs.
Input tax credit balance in electronic credit ledger as on March 1, 2020 –
- IGST 4,00,000
- CGST 1,90,000
- SGST 1,87,000
Purchases (i.e., inward supply of goods/services) for March 2020
- Supply of raw material received from A Ltd., Kolkata (taxable value of supply : Rs. 1,00,000 + GST @ 12 per cent) 1,12,000
- Supply of raw material received from B Ltd., Indore (taxable value of supply : Rs. 2,00,000 + GST @ 5 per cent) 10,000
- Rent of Indore office paid to C Ltd., Mumbai (taxable value of supply : Rs. 60,000 + GST @ 18 per cent) 70,800
- Rent of Indore factory paid to D Ltd., Bhopal (taxable value of supply : Rs. 1,80,000 + GST @ 18 per cent) 2,12,200
- Packing material received from E Ltd., Nagpur (taxable value of supply : Rs. 20,000 + GST @ 18 per cent) 23,600
- Consultancy fee paid to a local chartered accountant (taxable value of supply : Rs. 10,000 + GST @ 18 per cent) 11,800
- Fridge (for Indore office staff) received from F Ltd., a retailer in Indore (taxable value of supply before 3.50 per
cent discount : Rs. 75,500 + GST @ 28 per cent) 93,258
Sales (i.e., outward supply of manufacture goods) for March 2020
- 1,000 units supplied to G Ltd., New Delhi (taxable value of supply : Rs. 10,00,000 + GST @ 18 per cent) 11,80,000
- 6,000 units supplied to H Ltd., Bhopal (taxable value of supply before 10 per cent discount : Rs. 70,00,000 +
GST @ 18 per cent) 74,34,000
Find out the amount of GST payable through electronic cash ledger for March 2020. Give breakup of CGST, SGST and IGST. Assume
that all relevant conditions [including conditions imposed by rule 36(4)] are satisfied but consultancy fee (to the extent of 50 per cent)
is utilised for personal benefits of X, one of the partners of the firm.
Solution :
Computation of GST payable on outward supply for March 2020 –
CGST SGST IGST
Rs. Rs. Rs.
Supply to G Ltd. (inter-State supply) – – 1,80,000
Supply to H Ltd. (intra-State supply) 5,67,000 5,67,000 –
Total 5,67,000 5,67,000 1,80,000
Computation of input tax credit –

CGST SGST IGST
Rs. Rs. Rs.
Opening balance on March 1, 2020 1,90,000 1,87,000 4,00,000
Add: Inward supply during March 2020 –
- Supply from A Ltd., Kolkata (inter-State supply) – – 12,000
- Supply from B Ltd., Indore (intra-State supply) 5,000 5,000 –
- Rent of office (inter-State supply) – – 10,800
- Rent of factory (intra-State supply) 16,200 16,200 –
- Packing material from E Ltd., Nagpur (inter-State supply) – – 3,600
- Consultancy (intra-State supply) (50% used for personal purposes of a
partner is not eligible for input tax credit) 450 450 –
- Fridge (intra-State supply) 10,200 10,200 –
Total 2,21,850 2,18,850 4,26,400
Computation of GST payable for March 2020 –

IGST CGST SGST
Rs. Rs. Rs.
= Rs. 2,46,400) 1,80,000 – –
Balance Nil 5,67,000 5,67,000
Less: IGST on inward supply – 2,46,400 –
Balance Nil 3,20,600 5,67,000
Balance payable by electronic cash ledger Nil 98,750 3,48,150
501-E6 In above problem, assume that G Ltd. is situated in Indore and H Ltd. is located in Noida. Calculate the amount of CGST,
SGST and IGST payable for March 2020.
501-P7 X Ltd. is located in Vadodara, Gujarat. It owns two manufacturing units - Unit A (it manufactures saree fall, which is subject
to GST at the rate of 5 per cent) and Unit B (it manufactures pappad for domestic market, which is exempt from GST). These two units
are located in the same building in Vadodara. The following data is taken from the records of X Ltd. pertaining to February 2020 –
Rs.
Input tax credit balance in electronic credit ledger as on February 1, 2020 –
- IGST 51,000
- CGST 3,685
- SGST 10,343
Purchases (i.e., inward supply of goods/services) for February 2020
- Supply of raw material for Unit A received from P Ltd., Ahmedabad (taxable value of supply : Rs. 20,000 + GST
@ 5 per cent) 21,000
- Supply of raw material for Unit B received from Q Ltd., Coimbatore (taxable value of supply : Rs. 30,000 + GST
@ 12 per cent) 33,600
- Supply of raw material for Unit A received from R Ltd., Nagpur (taxable value of supply : Rs. 80,000 + GST @
18 per cent) 94,400
- Consultancy fee paid to a vastu consultant for factory building in Vadodara (taxable value of supply :
Rs. 40,000 + GST @ 18 per cent) 47,200
Sales from Unit A (i.e., outward supply of manufactured goods) for February 2020
- 90,000 units supplied to S Ltd., Kanpur (taxable value of supply : Rs. 10,00,000 + GST @ 5 per cent) 10,50,000
- 60,000 units supplied to T Ltd., Surat (taxable value of supply before 20 per cent discount : Rs. 10,00,000 +
GST @ 5 per cent) 8,40,000
Rs.
Sales from Unit B (i.e., outward supply of manufactured goods) for February 2020
- 8,000 units supplied to U Ltd., Patna (taxable value of supply : Rs. 3,00,000 + GST : Nil) 3,00,000
- 4,000 units supplied to V Ltd., Vadodara (taxable value of supply : Rs.1,50,000 + GST : Nil) 1,50,000
Find out the amount of GST payable through electronic cash ledger for February 2020. Assume that all relevant conditions are satisfied.
On November 20, 2019, X Ltd. purchased a Kirloskar generator for Unit A for Rs. 3,50,000 (+ GST @ 18 per cent) from W
Ltd., Ahmedabad. Full input tax credit is taken in November 2019. However, during February 2020, it is used by Unit A as well as
Unit B. Assume that conditions for claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
Solution :
Computation of GST payable on outward supply for February 2020 –
CGST SGST IGST

Rs. Rs. Rs.
Supply to S Ltd. (inter-State supply) – – 50,000
Supply to T Ltd. (intra-State supply) 20,000 20,000 –
Supply to U Ltd. and V Ltd. (exempt from GST) – – –
Total 20,000 20,000 50,000

CGST SGST IGST
Rs. Rs. Rs.
Opening balance on February 1, 2020 3,685 10,343 51,000
Add: Inward supply during February 2020 –
- Supply from P Ltd., Ahmedabad (intra-State supply) 500 500 –
- Supply from Q Ltd., Coimbatore (inter-State supply; input credit not
available as input is used for making exempt supply) – – –
- Supply from R Ltd., Nagpur (inter-State supply) – – 14,400
- Consultancy fee paid to a vastu consultant (intra-State supply, used
partly for Unit A and party for Unit B, input credit is available to
the extent of 80% as calculated in Note 1) 2,880 2,880 –
Total 7,065 13,723 65,400
Less: Reversal of input tax credit on account of use of generator for Unit B (as
calculated in Note 2) 105 105 –
Input tax credit available on February 29, 2020 6,960 13,618 65,400
Computation of GST payable for February 2020 –
IGST CGST SGST
Rs. Rs. Rs.
GST on outward supply (as computed earlier) 50,000 20,000 20,000
Less: IGST on inward supply (balance IGST : Rs. 65,400 – Rs. 50,000 = Rs. 15,400) 50,000 – –
Balance Nil 20,000 20,000
Less: IGST – 15,400 –
Less: CGST on inward supply (balance CGST : Rs. 6,960 – Rs. 4,600 = Rs. 2,360) – 4,600 –
Less: SGST on inward supply – – 13,618
SGST payable for February 2020 is Rs. 6,382. Unutilised input tax credit of CGST of Rs. 2,360 cannot be utilised for payment
of Rs. 15,400 can be utilised in the above case partly for payment of CGST and partly for payment of SGST as follows –
IGST CGST SGST

Rs. Rs. Rs.
Less: IGST (balance of Rs. 15,400 to be utilised to the extent of Rs. 13,040†
towards payment of CGST and the balance of Rs. 2,360 towards payment
of SGST) – 13,040 2,360
Less: CGST on inward supply – 6,960 –
Notes –
1. X Ltd. owns two units. Outward supply from Unit A is subject to GST. However, supply from Unit B is exempt from GST.
Turnover of February 2020 of Unit A is Rs. 18,00,000 [i.e., Rs. 10,00,000 + Rs. 8,00,000 (after discount of 20%)]. Turnover of
Unit B is Rs. 4,50,000. The aggregate turnover of February 2020 of X Ltd. is Rs. 22,50,000. If inward supply of goods/services
is used partly for Unit A and partly for Unit B, then proportionate amount [which comes to 80% (i.e., Rs. 18,00,000 ÷
Rs. 22,50,000)] is subject to the benefit of input tax credit.
2. Generator was purchased for Unit A on November 20, 2019. Full input tax credit was availed during November 2019.
However, in February 2020, it is used partly by Unit A and partly by Unit B. As supply from Unit B is exempt from GST,
partial reversal of input tax credit pertaining to generator is required during February 2020 which will be calculated as
follows –
CGST SGST
Rs. Rs.
Input credit availed during November 2019 (18% of Rs. 3,50,000, out of which 50% is CGST
and 50% is SGST) (a) 31,500 31,500
Life of generator or any capital goods in months (for GST purposes it is always 60 months)
ITC attributable for one month [(a) ÷ 60] 525 525
ITC attributable to Unit B (20% of Rs. 525) 105 105
501-E7 In above problem, assume that there is no power cut during February 2020. Consequently, the generator is not used at all
during February 2020. Recalculate the amount of GST payable.
501-P8 X Ltd. is in the business of manufacture of kitchen appliances for domestic market. It is located in Hyderabad. During January
2020, it has acquired the following –
Rs. Rs.
Steel from a Mumbai supplier (to be used as raw material in factory) 3,00,000 54,000
Steel rods from a Hyderabad supplier (to be used in factory) 70,000 12,600
50 LED lamps from a Hyderabad supplier (to be used in office) 50,000 6,000
Machinery for gym from a Vijayawada supplier (gym is used by employees of X Ltd.) 6,50,000 78,000
Group mediclaim insurance policy (taken for employees and their family members) 3,00,000 54,000
Calculate the amount of GST payable for January 2020 taking into consideration the following additional information –
1. On January 1, 2020, electronic credit ledger has opening balance of Rs. 2,000 (CGST), Rs. 7,000 (SGST) and Rs. 3,000 (IGST).
† It can be utilised (in any manner) for payment of CGST and SGST. As no restriction is imposed by the relevant legal provision as given in rule
88A, the amount to be utilised towards payments of CGST, in this case, should not be more than Rs. 13,040 (i.e., Rs. 20,000 – Rs. 6,960) to make
minimum payment in cash.
2. On outward supply during January 2020, quantum of GST is as follows –

CGST SGST IGST
Rs. Rs. Rs.
Invoice issued pertaining to outward supply effected during January 2020 80,000 80,000 600
Advance received : Rs. 1,00,000 (supply of goods to be made during March 2020)
(no GST charged) – – –
3. Apart from manufacturing kitchen appliances, X Ltd. also provides technical consultancy pertaining to manufacture of kitchen
appliances. For consultancy service, it has received an advance of Rs. 50,000 from Y Ltd., Hyderabad. However, consultancy work will
be completed only during March 2020. No GST is charged in amount received as advance (although GST rate is 18 per cent).
4. Out of 50 LED lamps, 10 lamps are stolen by an unknown person before installation.
Solution :
Computation of GST payable on outward supply for January 2020 –
CGST SGST IGST

Rs. Rs. Rs.
Supply of goods effected during January 2020 80,000 80,000 600
Advance received for supply of goods (in case of supply of goods, time of supply
does not depend upon date of advance) – – –
Advance received for supply of services (in case of supply of services, time of
supply is either date of invoice or date of payment, whichever is earlier) (out of
advance of Rs. 50,000, CGST is Rs. 50,000 × 9 ÷ 118, similar amount is SGST) 3,814 3,814 –
Total 83,814 83,814 600
CGST SGST IGST

Rs. Rs. Rs.
Opening balance on January 1, 2020 2,000 7,000 3,000
Add: Inward supply during January 2020 –
- Supply of steel from a Mumbai supplier (inter-State supply) – – 54,000
- Supply of steel rods from Hyderabad supplier (intra-State supply) 6,300 6,300 –
- Supply of 40 LED lamps (intra-State supply) (no input credit available for
stolen goods) (Rs. 6,000 × 40 ÷50) 2,400 2,400 –
- Supply of gym machinery (not eligible for input tax credit) – – –
- Mediclaim insurance policy (not eligible for input tax credit) – – –
Input tax credit available on January 31, 2020 10,700 15,700 57,000
Computation of GST payable for January 2020 –
IGST CGST SGST

Rs. Rs. Rs.
GST on outward supply (as computed earlier) 600 83,814 83,814
Less: IGST on inward supply (balance IGST : Rs. 57,000 – Rs. 600 = Rs. 56,400) 600 – –
Less: IGST on inward supply – 56,400 –
Balance payable by electronic cash ledger Nil 16,714 68,114
501-E8 In the above problem, assume that X Ltd. maintains health club facility in factory campus. There is no legal requirement but
it is obligatory for the company under service contract to maintain health club for its employees. The facility is made available
uniformly to all employees. This health club was started in 2012. Likewise, company has taken group mediclaim insurance policy
under contractual obligation and it is part of CTC.
Keeping in view the aforesaid consideration, recalculate GST payable for January 2020 through electronic cash ledger.
501-P9 X Ltd. is located in Bengaluru (Karnataka). It is in the business of manufacture and trading of electronic ignition magnetos for
domestic market. On December 1, 2019, electronic credit ledger has opening balance of Rs. 12,600 (CGST), Rs. 17,500 (SGST) and Rs.
18,000 (IGST). On outward supply during December 2019, quantum of GST is as follows –
CGST SGST IGST

Rs. Rs. Rs.
Supply of 1,000 units to D Ltd., Kolkata – – 18,000
Supply of 8,000 units to E Ltd., Andaman – – 18,700
Supply of 11,000 units to F Ltd., Bengaluru 1,90,000 1,90,000 –
The following information is noted from the records of the company –

1. D Ltd. paid 50 per cent advance on November 20, 2019.
2. On December 30, 2019, X Ltd. received an advance of Rs. 5,00,000 from G Ltd., Mumbai for supply of 7,000 units. This supply will
be made during January 2020. Invoice will be issued at the time of dispatch of goods.
3. During December 2019, X Ltd. gets the following inward supplies –
CGST SGST IGST
Rs. Rs. Rs.
Raw material A from P Ltd., Cochin – – 6,000
Raw material B from Q Ltd., Chandigarh – – 58,500
Raw material C from R Ltd., Bengaluru 87,000 87,000 –
120 units of Bone China dinner sets from RAK Ltd., Noida (for the purpose of distribu-
tion as new year gift to employees and distributors) 1,11,200
Raw material D from S Ltd., Ranchi (S Ltd. is not registered GST dealer) – – –
Raw material E from T Ltd., Bengaluru (T Ltd. is a dealer under Composition Scheme) – – –
4. On December 24, 2019, X Ltd. spends Rs. 24,000 (+ 18 per cent GST) for repair of factory building. This amount is not capitalised
and claimed as revenue expenditure. This supply is made by a local contractor.
5. 50 per cent of raw material A is used for manufacture of goods which are distributed as free samples to retailers.
Calculate the amount of GST payable through electronic cash ledger for December 2019.
Solution :
Computation of GST payable on outward supply for December 2019 –
CGST SGST IGST
Rs. Rs. Rs.
Supply to D Ltd., Kolkata (GST was not paid at the time of advance received
during November 2019) – – 18,000
Supply to E Ltd., Andaman – – 18,700
Supply to F Ltd., Bengaluru 1,90,000 1,90,000 –
Advance received from G Ltd. (in case of supply of goods, time of supply
does not depend upon date of advance) – – –
Total 1,90,000 1,90,000 36,700
CGST SGST IGST

Rs. Rs. Rs.
Opening balance on December 1, 2019 12,600 17,500 18,000
Add: Inward supply during December 2019 –
- Supply of raw material from P Ltd. (inter-State supply) – – 6,000
- Supply of raw material from Q Ltd. (inter-State supply) – – 58,500
- Supply of raw material from R Ltd. (intra-State supply) 87,000 87,000 –
Input tax credit 750
CGST SGST IGST

Rs. Rs. Rs.
- Supply of dinner set to be distributed as new year gift (input credit
not available on inward supply used for distribution as free gift) – – –
- Supply from S Ltd. [unregistered dealer, input credit not available, reverse
charge mechanism under section 9(4) not applicable – see para 483] – – –
- Supply from T Ltd. (supply from a dealer covered under Composition
Scheme is not eligible for input tax credit) – – –
- Supply from a local work contractor (as the amount is not capitalised to
the cost of building, input credit is available) 2,160 2,160 –
Total 1,01,760 1,06,660 82,500
Less: Raw material A from P Ltd. utilised for manufacture of goods which
are used for distribution as free samples – – 3,000
Input tax credit available on December 31, 2019 1,01,760 1,06,660 79,500
Computation of GST payable for December 2019 –

IGST CGST SGST
Rs. Rs. Rs.
GST on outward supply (as computed earlier) 36,700 1,90,000 1,90,000
Balance Nil 1,90,000 1,90,000
Less: IGST – 42,800 –
Balance Nil 1,47,200 1,90,000
Balance Nil 45,440 1,90,000
Balance payable by electronic cash ledger – 45,440 83,340
501-E9 Make the following changes in the above problem and recalculate the amount payable by electronic cash ledger –
1. Raw material received from T Ltd. is entirely used for manufacture of samples (for distribution to retail dealers).
2. New year gift is distributed to employees under a contractual obligation.
3. Raw material supplied by R Ltd. is not utilised at all during December 2019. Most probably it will be used for manufacturing
purposes only in the financial year 2020-21.
Test your knowledge

1. At what point of time, one can avail input tax credit. [para 493.6]
2. A Ltd. avails the benefit of input tax credit at the time of receipt of inward supply. However, it does not make payment
to the supplier. Discuss the consequences. [para 493.7]
3. Prepare a list of items which are not eligible for input tax credit. [para 493.9]
4. A company claims depreciation on plant and machinery for the purpose of income-tax by including GST in “actual cost”.
Is it possible for the company to avail input tax credit pertaining to GST paid on inward supply of plant and machinery.
[para 493.8]
5. Discuss the following –
- Whether input tax credit of IGST can be utilised to pay SGST.
- Whether input tax credit of IGST can be utilised to pay CGST.
- Whether input tax credit of CGST can be utilised to pay SGST.
- Whether input tax credit of SGST can be utilised to pay CGST.
- Whether input tax credit of CGST can be utilised to pay IGST.
- Whether input tax credit of SGST can be utilised to pay IGST. [para 494]
6. Discuss whether SGST paid in Tamil Nadu can be utilised to pay SGST in Maharashtra. [para 492]
7. Prepare a report of 2000 words pinpointing necessary conditions for taking the benefit of input tax credit. [para 493]
8. What is the GST treatment of common credits ? [para 495.2]
9. Discuss the mode of computation of input tax credit pertaining to capital goods. Is there any provision which requires
reversal of such credit ? [para 496]
10. What are the special provision governing to distribution of credit by Input Service Distributor. [para 497]
11. Discuss the special mode pertaining to claim of input tax credit by a financial institution [para 498]
12. How input tax credit is available in the case of fresh registration ? [para 499.1]
13. Discuss the mode of input tax credit in the following cases –
- When an exempt supply becomes a taxable supply? [para 499.4]
- Change in constitution of registered person. [para 499.5]
- When a composition dealer becomes regular taxpayer ? [para 499.3]
14. How input tax credit is available when inputs/capital goods are sent for job work. [para 500]
Composition Scheme and
CHAPTER 29 Alternative Composition
Scheme
C
omposition levy is an alternate method of levy of GST for small taxpayers. This levy
is popularly known as Composition Scheme and is applicable for supplier of goods/
restaurant service. Relevant conditions and procedures pertaining to Composition
Scheme is discussed in Part A of this chapter.
A service provider (except restaurant service provider) cannot opt for the aforesaid
Composition Scheme. GST Council (in its 32nd Meeting) has recommended an Alternative
Composition Scheme for mixed suppliers (who are engaged in supply of services as well as
goods). Under the Alternative Composition Scheme, a supplier of service (and/or goods) can
opt for payment of GST at the rate of 6 per cent, if a few conditions are satisfied. Relevant
conditions and procedures pertaining to Alternative Composition Scheme is discussed in
Part B of this Chapter.
PART A : COMPOSITION SCHEME

 IS THERE ANY THRESHOLD LIMIT FOR SMALL TAXPAYERS
511. Small taxpayers having turnover up to Rs. 20 lakh [Rs. 10 lakh in the case of specified States or Rs. 40 lakh
in case the taxpayer is exclusively engaged in supply of goods, if a few conditions are satisfied – see para
522.2-4] are not required to register under GST. Once a person obtains registration, he is liable for GST even if
his turnover is less than Rs. 20 lakh (or Rs. 10 lakh/Rs. 40 lakh).
 WHAT IS COMPOSITION LEVY

512. Composition levy is an alternative method of levy of GST designed for small taxpayers whose turnover is
less than the amount specified below. The objective of Composition Scheme is to bring simplicity and to reduce
the compliance cost for the small taxpayers. Moreover, it is optional and the eligible person opting to pay tax
under this scheme can pay tax at a prescribed percentage of his turnover every quarter, instead of paying tax at
normal rate.
 WHAT ARE THE CONDITIONS WHICH ONE HAS TO SATISFY

513. Composition Scheme is applicable if a few conditions are satisfied –
513.1 Turnover - Aggregate turnover of the taxpayer in the immediately preceding financial year should not
exceed the amount given below –
Applicable from April 1, 2019
Eligible registered person (in any State other than given below) Rs. 1.5 crore [see Note 1]
Eligible registered person in Arunachal Pradesh, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura and Uttarakhand [see Note 2] Rs. 75 lakh [see Note 3]
Notes -
1. This limit was Rs. 75 lakh up to October 12, 2017 and Rs. 1 crore during October 13, 2017 and March 31, 2019.
752
753 Eligible person Para 513.2
2. Prior to April 1, 2019, these States are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim,
Tripura and Himachal Pradesh.
3. This limit was Rs. 50 lakh up to October 12, 2017.
513.1-1 HOW TO DETERMINE AGGREGATE TURNOVER - To become eligible for Composition Scheme, aggregate turnover
of the taxpayer in the immediately preceding financial year is considered. For this purpose, aggregate turnover
means the aggregate value of –
1. All taxable supplies.
2. Exempt supplies.
3. Exports of goods/services.
4. Inter-State supplies.
 Turnover on all India basis - These supplies shall be determined for all units/branches of the taxpayer having the
same Permanent Account Number (PAN) and aggregate turnover is computed on all India basis.
 Not to be included in turnover - Aggregate turnover does not include the following –
- Value of inward supplies on which tax is payable under reverse charge mechanism.
- Amount of GST (i.e., IGST, CGST, SGST/UTGST).
 Exempt supplies - Aggregate turnover includes exempt supply. However, aggregate turnover does not include
exempt supply of services provided by way of extending deposits, loans or advances where consideration is
represented by way of interest or discount [Explanation 2(ii) to sec. 10(5)].
513.2 Eligible person - An eligible person is as follows –
513.2-1 SUPPLY OF GOODS - A registered person, who is in the business of supply of goods, can opt for Composition
Scheme. However, a manufacturer of the following goods is not eligible for Composition Scheme –
- Ice-cream and other edible ice, whether or not containing cocoa.
- Pan masala.
- Aerated water.
- Tobacco and manufactured tobacco.
513.2-2 SUPPLY OF SERVICES - The relevant provision is given below –
 Supply of food - If the taxpayer is engaged in supply of services [being supply of food/any other article for human
consumption/any drink (other than alcoholic liquor) for cash, deferred or any other valuable consideration],
then he can opt for Composition Scheme, if other conditions are satisfied.
 Supply of any other service - If the taxpayer is engaged in supply of any other service, he cannot opt for
Composition Scheme. As a result, a manufacturer/trader (who is also engaged in supply of services) is unable
to opt for the Composition Scheme even if his turnover from supply of services is very small as compared to the
supply of goods. With a view to enable such taxpayer to avail of the benefit of Composition Scheme, the relevant
provision has been amended (with effect from February 1, 2019). However, after the amendment, one can opt
for Composition Scheme only if the value supply of services does not exceed 10 per cent of the turnover in the
preceding financial year in a State/Union Territory or Rs. 5 lakh, whichever is higher‡.
For this purpose, “value of supply of services” does not include value of supply of exempt services (by way of
extending deposits, loans or advances where consideration is represented by way of interest or discount). To put
it differently, for calculating the limit of Rs. 5 lakh or 10 per cent of turnover, value of exempt supply of services
(i.e., interest on loan or deposit) will not be considered.
 Case 1 - X is engaged in manufacture of pens and pencils in Bhopal. He also provides consultancy services pertaining to
manufacture of pens/pencils to others for setting up manufacturing units. During the financial year 2018-19, turnover of
X from intra-State supply of pens/pencils is Rs. 30 lakh. From consultancy services, turnover is Rs. 4 lakh. With effect from
April 1, 2019, he wants to opt for Composition Scheme.
In this case, the total turnover of the preceding financial year (i.e., 2018-19) is Rs. 34 lakh. 10% of turnover is Rs. 3.4 lakh. Value
of supply of services of the preceding year should not be more than 10% or turnover or Rs. 5 lakh, whichever is more. The
higher figure is Rs. 5 lakh. As turnover of the preceding year for supply of services does not exceed Rs. 5 lakh, he can opt
for Composition Scheme from April 1, 2019.
‡ GST Council (in its 32nd Meeting held on January 10, 2019) has extended the scope of Composition Scheme to service providers who have
turnover up to Rs. 50 lakh during the previous financial year. Under this scheme, the service provider shall be liable to pay GST @ 6 per cent. This
scheme shall be applicable to both service providers as well as supplier of goods who are not eligible for the presently available Composition
Scheme for goods. The proposal of 32nd GST Council Meeting have become effective from April 1, 2019 and are given in Part B of this Chapter.
Para 513.2 Composition scheme 754
 Case 2 - Suppose in Case 1, turnover of X from supply of pens/pencils is Rs. 1.35 crore and turnover from supply of services
is Rs. 14 lakh.
The total turnover of the preceding financial year (i.e., 2018-19) is Rs. 1.49 crore (which is not more than Rs. 1.5 crore). Value
of services should not be more than 10% of turnover (i.e., Rs. 14.9 lakh) or Rs. 5 lakh, whichever is higher. The higher figure
is Rs. 14.9 lakh. In this case, turnover of services of the preceding year is Rs. 14 lakh. He can opt for Composition Scheme
from April 1, 2019.
 Case 3 - Suppose in Case 1, turnover of X from supply of pens/pencils is Rs. 1 crore and turnover from supply of services
is Rs. 12 lakh.
The total turnover of the preceding financial year (i.e., 2018-19) is Rs. 1.12 crore. Value of services should not be more than
10% of turnover (i.e., Rs. 11.2 lakh) or Rs. 5 lakh, whichever is higher. The higher figure is Rs. 11.2 lakh. In this case, turnover
of services of the preceding year is Rs. 12 lakh. He cannot opt for Composition Scheme from April 1, 2019.
 Case 4 - Y is engaged in intra-State supply of goods and supply of services in Odisha. Some of these supplies are exempt
vide Exemption Notification Nos. 2/2017 and 12/2017, dated June 28, 2017. Y wants to opt for Composition Scheme from
April 1, 2019. His turnover for the financial year 2018-19 is as follows –
Rs. in lakh Rs. in lakh Rs. in lakh
Taxable Exempt Total
Supply of goods 90 5 95
Interest on loan/deposits (i.e., supply of services by way of extending
deposits, loans or advances where consideration is represented by way
of interest or discount) – 60 60
Supply of other services 10 7 17
Total 100 72 172
Y can opt for Composition Scheme if –

- aggregate turnover of the preceding year does not exceed Rs. 1.5 crore;
- value of supply of services of the preceding year does not exceed Rs. 5 lakh or 10% of aggregate turnover of the preceding
year, whichever is higher.
For the purpose of determining aggregate turnover, the limit of Rs. 5 lakh and 10% of turnover, value of taxable as well as
exempt supplies are considered. However, interest on deposit, loan or advances (which is exempt from GST) is not taken
into consideration. Consequently, in the above table, Rs. 60 lakh (being interest on deposit) will be ignored and the above
table can be redrafted as follows –
Supply of services (ignoring interest on deposits) 10 7 17
Total 100 12 112
Aggregate turnover is Rs. 1.12 crore. 10% of the turnover is Rs. 11.2 lakh. Value of supply of services should not be more
than 10% of aggregate turnover (or Rs. 5 lakh, whichever is higher). The higher figure is Rs. 11.2 lakh. Value of supply of
services is more than Rs. 11.2 lakh. Consequently, Y cannot opt for Composition Scheme with effect from April 1, 2019.
 Case 5 - Z is engaged in intra-State supply of goods and services in Kolkata. He wants to opt for Composition Scheme from
April 1, 2019. His turnover for the financial year 2018-19 is as follows –
Interest on loan/deposits (i.e., supply of services by way of extending
deposits, loans or advances where consideration is represented by way
of interest or discount) – 93 93
Supply of other services 6 5 11
Total 102 118 220
Z can opt for Composition Scheme, if the aggregate turnover of the preceding year does not exceed Rs. 1.5 crore and turnover
pertaining to supply of services of the preceding year does not exceed Rs. 5 lakh or 10% of turnover, whichever is higher.
Interest on deposit/loan/advance is not considered for these limits. After ignoring interest on deposit/loan/advance, the
data given in the above table will be as follows –
755 Rates under composition scheme Para 514

Supply of services (ignoring interest on deposits) 6 5 11
Total 102 25 127
Aggregate turnover of the preceding year is Rs. 1.27 crore. 10% of the turnover is Rs. 12.7 lakh. Turnover pertaining to supply
of services is Rs. 11 lakh. Aggregate turnover is not more than Rs. 1.5 crore and turnover pertaining to supply of services
is not more than Rs. 12.7 lakh. Consequently, Z can opt for Composition Scheme with effect from April 1, 2019.
513.3 Conditions and restrictions - The person exercising option for Composition Scheme shall comply with
the following conditions –
 He is neither a casual taxable person nor a non-resident taxable person.
 He is not engaged in making any supply of goods which is not leviable to tax under GST.
 He is not engaged in making any inter-State outward supply of goods.
 He was not engaged in the manufacture of goods [as mentioned in para 513.2.1] during the preceding financial
year.
 He is not engaged in making any supply of goods through an e-commerce operator who is required to collect
tax under section 52.
 Goods held in stock by him on the day (when he becomes eligible for Composition Scheme) should not have
been purchased in the course of inter-State trade/commerce or imported from a place outside India. Likewise,
he should not have received goods from his branch situated outside the State or from his agent/principal outside
the State.
 The goods held in stock by him should not have been purchased from an unregistered supplier. Where such
goods are purchased from unregistered supplier, he has to pay tax under reverse charge mechanism under
section 9(4) [provisions of section 9(4) are not applicable during October 13, 2017 and March 31, 2019. From April
1, 2019, section 9(4) is applicable in a few notified cases [see para 483].
 If any inward supply is covered by reverse charge mechanism, the registered person opting for Composition
Scheme will have to pay tax under reverse charge mechanism.
 He shall mention the words “Composition taxable person, not eligible to collect tax on supplies” at the top of
the bill of supply issued by him.
 He shall mention the words “composition taxable person” on every notice or signboard displayed at a
prominent place at his principal place of business and at every additional place or places of business.
 The registered person paying tax under Composition Scheme may not file a fresh intimation every year and
he may continue to pay tax under the said scheme subject to relevant conditions.
 A registered person who has opted for Composition Scheme is not permitted to collect GST. He will have to
pay GST (at the rates given below) out of his pocket (in other words, he cannot collect GST from his customers,
GST will have to be borne out of sale proceeds).
 A registered person opting for Composition Scheme, cannot avail the benefit of input tax credit.
 All registered persons having the same permanent account number (PAN) will have to opt for Composition
Scheme.
 WHAT ARE SPECIFIED GST RATES UNDER COMPOSITION SCHEME

514. A registered person, who has opted for Composition Scheme, cannot collect GST from his customers. He
will have to pay GST (at the rates given below) out of his own pocket –
Category of registered person Rate of tax†
Manufacturers (other than manufacturers of ice-cream, pan masala, 1% (i.e., CGST : 0.05% + SGST : 0.05%) of turn-
aerated water, tobacco products, etc.) over in the State or Union territory
Restaurant services 5% (i.e., CGST : 2.5% + SGST : 2.5%) of turnover
in the State or Union territory
Traders or any other supplier eligible for composition levy 1% (i.e., CGST : 0.5% + SGST : 0.5%) of turnover
of taxable‡ supplies of goods and services in
the State or Union territory
†Input tax credit pertaining to inward supply of goods/services, not available.
‡ With effect from January 1, 2018, turnover includes only turnover of taxable supplies.
Para 514 Composition scheme 756
Problems
514-P1 X & Co., a partnership firm, is engaged in intra-State supply of goods and services in Bengaluru. Its turnover for the financial
year 2018-19 and the first quarter of the financial year 2019-20 is given below –
(Rs. in lakh)
Financial year 2018-19 First quarter : April 1, 2019-
June 30, 2019
Taxable Exempt Total Taxable Exempt Total
Supply of vegetable fertilisers manufactured by X & Co. 60 20 80 16 7 23
Supply of plugs and sockets as a trader (manufactured by others) 30 – 30 9 – 9
Supply of food/drinks in a restaurant (restaurant services) 10 – 10 3 – 3
Interest on loan/deposit (i.e., supply of services by way of extending
deposits, loans or advances where consideration is represented by
way of interest or discount) – 70 70 – 17 17
Supply of other services 9 2 11 1 6 7
Total 109 92 201 29 30 59
X & Co. wants to opt for Composition Scheme with effect from April 1, 2019. Is it possible? If yes, find out the tax liability of it for the
first quarter of 2019-20 under Composition Scheme.
Solution:
X & Co. can opt for Composition Scheme, if the aggregate turnover of the preceding year does not exceed Rs. 1.5 crore and
turnover pertaining to supply of services of the preceding year does not exceed Rs. 5 lakh or 10% of turnover, whichever
is higher. Interest on deposit/loan/advance is not considered for these limits. After ignoring interest on deposit/loan/
advance, the data given in the above table will be as follows –
(Rs. in lakh)
Financial year 2018-19 First quarter : April 1, 2019-
June 30, 2019
Supply of vegetable fertilisers manufactured by X & Co. 60 20 80 16 7 23
Supply of goods as a trader (manufactured by others) 30 – 30 9 1 10
Supply of food/drinks in a restaurant (restaurant services) 10 – 10 3 – 3
Supply of other services (ignoring interest on deposits) 9 2 11 1 6 7
Total 109 22 131 29 13 42
Aggregate value of turnover of X & Co. for preceding financial year 2018-19 is Rs. 1.31 crore (i.e., less than Rs. 1.50 crore).
10% of the preceding year’s turnover or Rs. 5 lakh, whichever is higher is Rs. 13.1 lakh. Value of turnover pertaining to
services (other than restaurant service) of the preceding financial year is Rs. 11 lakh (which is less than Rs. 13.1 lakh).
Consequently, the taxpayer can opt for Composition Scheme with effect from April 1, 2019.
Tax liability of X & Co. under Composition Scheme for the quarter ending June 30, 2019 will be as follows –
(Rs. in lakh)
Turnover of the first GST Turnover for the purpose of Amount Out of which
quarter of 2018-19 rate Composition Scheme of GST
Taxable Exempt Total CGST SGST
Supply of goods manufactured by 16 7 23 1% All supplies : Rs. 23 lakh 0.23 0.115 0.115
X & Co.
Supply of food/drinks (restaurant 3 – 3 5% All supplies : Rs. 3 lakh 0.15 0.075 0.075
services)
Supply of goods as a trader 9 1 10 1% Taxable supplies : Rs. 9 lakh 0.09 0.045 0.045
Supply of other services 1 6 7 1% Taxable supplies : Rs. 1 lakh 0.07 0.035 0.035
Total 0.54 0.27 0.27
Tax liability of X & Co. under Composition Scheme for the quarter ending June 30, 2019 is Rs. 54,000 (nothing will be charged
from the customers, it will be paid by the taxpayer out of its pocket).
514-E1 X owns a famous restaurant on Chennai-Madurai highway. Its turnover for the financial year 2018-19 is Rs. 60 lakh. Besides,
he provides consultancy services pertaining to operation of restaurants. His turnover from consultancy service is Rs. 6.1 lakh for
the financial year 2018-19. With effect from April 1, 2019, he wants to opt for Composition Scheme. If yes, find out the tax liability
of it for the first quarter of 2019-20 under Composition Scheme (turnover is given below) –
Restaurant service : Rs. 20 lakh, consultancy service : Rs. 3 lakh.
757 Compulsory withdrawal from Composition Scheme Para 515.5
 WHAT ARE OTHER RELEVANT CONSIDERATIONS WHICH ONE HAS TO KEEP IN MIND
515. The following are other considerations relevant for a registered person who has opted for Composition
Scheme –
515.1 A person who was registered under central excise/service tax/VAT under pre-GST regime - A person
(who was registered under central excise/service tax/VAT) has been granted registration under GST on
provisional basis. Such a person can opt for Composition Scheme prior to July 22, 2017 (i.e., appointed day : June
22, 2017 + 30 days) or such period as may be extended.
Such person is required to furnish the details of stock (including the inward supply of goods received from
unregistered persons) held by him on the day preceding the date from which he opts to pay tax under the
Composition Scheme. This statement is to be submitted electronically in Form GST CMP-03. It should be
submitted within a period of 60 days from the date on which the option for composition levy is exercised (this
period may be extended by the Commissioner).
515.2 Fresh registration - A person making application for fresh registration under GST can opt for
Composition Scheme at the time of making application for registration. Such option can be exercised in Part B
of Form GST REG-01. This will be considered as an intimation to pay tax under the Composition Scheme. If a
person (having same PAN) wants registration in multiple States, he cannot opt for payment of tax under
Composition Scheme only in one State. The option for registration under Composition Scheme will have to be
exercised for all States.
515.3 A registered person opting for Composition Scheme - A person registered under normal provisions of
GST can opt for Composition Scheme. Such option can be exercised electronically in Form GST CMP-02 but only
for beginning of the financial year.
 Concession available till March 31, 2018 - However, a concession is provided under rule 3(3A). Any registered
person can opt to pay tax under Composition Scheme with effect from the first day of the month immediately
succeeding the month in which such person files an intimation in Form GST CMP-02. This concession is available
till March 31, 2018. Such person is required to file Form GST ITC-03 (declaring stock as on the date of switching
to the Composition Scheme) within 180 days# from the effective date of opting Composition Scheme.
 Reversal of input tax credit - The registered person opting to pay tax under Composition Scheme is required to
pay an amount equal to the input tax credit in respect of inputs held in stock and inputs contained in semi-
finished or finished goods held in stock. For computation of reversal of input tax credit, see para 499.7.
 Multiple registration - If a person has registration in multiple States, he cannot opt for payment of tax under
Composition Scheme only in one State. The option to pay tax under Composition Scheme will have to be
exercised for all States.
515.4 Voluntary withdrawal from Composition Scheme - A registered person under Composition Scheme can
withdraw from the Composition Scheme voluntarily. For withdrawal, one has to file a duly signed or verified
application in Form GST CMP-04. In such a case, the effective date of withdrawal shall be the date indicated by
the taxpayer in his intimation/application filed in Form GST CMP-04 (but such date may not be prior to the
commencement of the financial year in which such intimation/application for withdrawal is being filed). Any
intimation or application for withdrawal in respect of any place of business in any State or Union Territory, shall
be deemed to be an intimation in respect of all other places of business registered on the same Permanent Account
Number.
 Input tax credit - Every person who has filed an application for withdrawal from the Composition Scheme, may
electronically furnish, a statement in Form GST ITC-01 containing details of the stock of inputs and inputs
contained in semi-finished or finished goods held in stock by him on the date of withdrawal, within a period of
30 days† of withdrawal. For computation of input tax credit, see para 499.3.
515.5 Compulsory withdrawal from Composition Scheme - Compulsory withdrawal is required, if a person
(availing Composition Scheme) crosses the turnover of Rs. 75 lakh/Rs. 1.5 crore [as mentioned in para 513.1]
during the financial year. Suppose, he crosses the turnover of Rs. 75 lakh /Rs. 1.5 crore on December 10, 2019.
The option to pay tax under Composition Scheme lapses with effect from December 10, 2019. He is required to
file an intimation for withdrawal from the scheme in Form GST CMP-04 within 7 days from December 10, 2019.
# Prior to January 23, 2018, it was 90 days.

† If withdrawal application is submitted during March 2, 2018 and March 31, 2018, this period has been extended. The extended period is 30 days
from the date of publication of Notification No. 42/2018, dated September 4, 2018.
 Input tax credit - Every person who has filed an application for withdrawal from the Composition Scheme, may
electronically furnish, a statement in Form GST ITC-01 containing details of the stock of inputs and inputs
contained in semi-finished or finished goods held in stock by him on the date of withdrawal, within a period of
30 days† of withdrawal. For computation of input tax credit, see para 499.3.
515.6 Quarterly/annual return - A person who has opted for Composition Scheme or Alternative Composition
Scheme is required to upload quarterly return and annual return as follows –
 Quarterly return - Quarterly return shall be uploaded in Form GST CMP-08 on or before 18th day of succeeding
the quarter‡. For example, return in respect of supplies made during October 1, 2020 to December 31, 2020 is
required to be uploaded by January 18, 2021.
 Annual return - Annual return shall be uploaded for every financial year in Form GSTR-9A, on or before April
30 following the end of such financial year.

515.7 Action which can be taken for contravention of any provisions of composition levy - Where any
contravention is observed by the proper officer wherein the registered person was not eligible to pay tax under
the Composition Scheme, he may issue a notice to such person in Form GST CMP-05 to show cause within 15
days of the receipt of such notice as to why the option to pay tax under the Composition Scheme shall not be
denied.
Upon receipt of the reply to the said show cause notice in Form GST CMP-06, the proper officer shall issue an
order in Form GST CMP-07 within a period of 30 days of the receipt of such reply, either accepting the reply, or
denying the option to pay tax under the Composition Scheme from the date of the option or from the date of the
event concerning such contravention, as the case may be.
If a taxable person has paid tax under the Composition Scheme though he was not eligible for the scheme then
the person would be liable to penalty and the provisions of section 73 or 74 shall be applicable for determination
of tax and penalty.
515.8 Supply to SEZ not possible - Supplies to SEZ from domestic tariff area is treated as inter-State supply.
A person paying tax under Composition Scheme cannot make inter-State outward supply of goods. Thus, for
making supplies to an SEZ unit, a person needs to take registration as a regular taxpayer.
It may be noted that supplies to SEZ is treated as “zero rated” and the supplier is entitled to make supplies
without payment of tax (or if he pays tax, he will be entitled to refund of tax so paid).
Problems on Composition Scheme

516-P1 X (P.) Ltd. is registered in Agra. It has a branch in Indore. X and Y are two shareholders. The company gets certificate of
registration on November 1, 2019 and on the same day it starts a trading business in computer hardware in Agra as well as Indore. It
wants GST registration for Agra office under normal provisions. For Indore branch, it wants registration under Composition Scheme.
Discuss whether it is possible. Company’s tax consultant is of the view that a joint stock company cannot opt for Composition Scheme.
Solution :
A company or any other person can opt for Composition Scheme if relevant conditions are satisfied. It is not possible to opt
for Composition Scheme for Indore branch only. All the units having same permanent account number (PAN) will have to
opt for Composition Scheme. If X (P.) Ltd. wants to pay tax under Composition Scheme, it will have to opt the same even
for Agra office.
516-E1 In Problem 516-P1, assume that taxpayer is X and Agra office is wholly owned and managed by him. Branch office at Indore
is owned by Mrs. X and she is the sole proprietor. Mrs. X has introduced a capital of Rs. 1.5 lakh to establish Agra office, out of which
Rs. 30,000 is given by X as a loan. Discuss whether it is possible to opt for Composition Scheme only for Agra unit.
516-P2 Discuss whether payment of GST under Composition Scheme is possible in the cases given below –
1. X is a painter. A Trade Fair is organised by Maharashtra Government in Mumbai from December 20, 2019 to December 28, 2019.
X wants to display and sell his paintings in the Mumbai Trade Fair. He has not sold any of his paintings earlier. His turnover in Trade
Fair is not likely to be more than Rs. 40 lakh. He wants to opt for Composition Scheme.
2. Y and Co. is a partnership firm of two equal partners, A and B. It deals in motor parts in Gurugram. Stock is purchased from Delhi
and Haryana. The firm is registered under GST under normal provisions. The turnover of the firm for the financial year 2019-20 is not
likely to exceed Rs. 90 lakh. In the preceding financial year, the turnover of the firm was Rs. 84 lakh. With effect from January 1, 2020,
the firm wants to opt for Composition Scheme. Discuss whether it is possible.
† If withdrawal application is submitted during March 2, 2018 and March 31, 2018, this period has been extended. The extended period is 30 days
from the date of publication of Notification No. 42/2018, dated September 4, 2018.
‡ Extended for the quarter July-September 2019 (or part thereof) to October 22, 2019.
759 Problems on Composition Scheme Problem 516.P5
Solution :
1. X is a “casual taxable person”. “Casual taxable person” means a person who occasionally undertakes transactions
involving supply of goods/services in the course or furtherance of business (whether as principal, agent or in any other
capacity) in a State/Union Territory where he has no fixed place of business. A casual taxable person making taxable supply
in India has to compulsorily take registration under normal provisions. There is no threshold limit for registration. A casual
taxable person cannot exercise the option to pay tax under Composition Scheme. X must apply for registration at least 5 days
prior to the date of commencement of Trade Fair.
2. Y and Co. wants to opt for Composition Scheme with effect from January 1, 2020. If closing stock on December 31, 2019
includes stock purchased from a State other than Haryana, then it cannot opt for Composition Scheme. Rule 5(1)(b) requires
that a person who holds stock purchased in the course of inter-State trade, cannot opt for Composition Scheme.
516-E2 In Problem 516-P2, make following changes and reconsider whether Composition Scheme is possible –
1. X wants to display his paintings in Mumbai Trade Fair on the invitation of the Government of Maharashtra.
2. In the case of Y and Co., stock held on December 31, 2019 consists of goods purchased in the course of inter-State trade only to the
tune of Rs. 10,000 (out of the total stock of Rs. 20 lakh).
516-P3 Discuss whether the Composition Scheme is possible in the cases given below –
1. X is in the business of manufacture of pan masala. With effect from December 1, 2019, he wants to manufacture biscuits for rural market
along with pan masala. He wants to opt for Composition Scheme with effect from December 1, 2019. His annual turnover (even after
commencement of biscuits manufacture) will not be more than Rs. 50 lakh.
2. Y imports home appliances from Singapore. These appliances are sold in his store in Krishna Market, Jodhpur. As his annual turnover
is not more than Rs. 40 lakh, he wants to opt for Composition Scheme with effect from January 10, 2020.
Solution :
1. X manufactures pan masala. A manufacturer of ice-cream, pan masala, aerated water and tobacco products, cannot opt
for Composition Scheme.
2. Y wants to opt for Composition Scheme with effect from January 10, 2020. If stock held by him on January 10, 2020 includes
goods imported from other countries, he cannot opt for Composition Scheme. It appears from the information given in the
problem that his stock includes only goods imported from Singapore. Consequently, law does not permit him to opt for
Composition Scheme.
1. In the case of X, turnover of biscuits will be more than 90 per cent of the total turnover with effect from December 1, 2019.
2. With effect from January 10, 2020, Y will also deal in appliances manufactured in Rajasthan. The quantum of local stock is likely
to be more than 70 per cent of the total stock from January 2020 onwards.
516-P4 Discuss whether the Composition Scheme is possible in the cases given below –
1. X is in the business of manufacture of garments. He is registered under GST under normal provisions. His annual turnover is not
more than Rs. 60 lakh. With effect from April 1, 2020, he wants to opt for Composition Scheme. He owns a flat in a commercial building
and gets monthly rent of Rs. 2,50,000.
2. Y is in the business of manufacture of hand bags (made of synthetic leather). His turnover is not more than Rs. 1.5 crore. He sells his
entire stock through Amazon, an electronic commerce operator. He is registered under normal provisions of GST. His consultant advises
him to opt for Composition Scheme. Can he do so with effect from November 1, 2019 ?
Solution :
1. X has income from manufacture of garments. Besides, he has rental income from commercial property which is chargeable
to GST. He supplies goods as well as services. His total turnover is Rs. 90 lakh [being supply of garments : Rs. 60 lakh + supply
of services : Rs. 30 lakh (i.e., Rs. 2.5 lakh × 12)]. If a person supplies goods and services, Composition Scheme is applicable
only if value of supply of services does not exceed 10% of the turnover or Rs. 5 lakh, whichever is higher (in this case, 10%
of turnover is Rs. 9 lakh which is higher than Rs. 5 lakh). As value of supply of services is more than Rs. 9 lakh, X cannot
opt for Composition Scheme.
2. Y cannot opt for Composition Scheme. Section 10(2)(d) debars a person who is engaged in making any supply of goods
through an electronic commerce operator to opt for Composition Scheme.
1. In the case of X, rental income from commercial flat is only Rs. 25,000 per month.
2. Hand bags manufactured by Y are sold directly to departmental stores. Only 2 per cent goods are sold through Amazon.
516-P5 X deals in retail trade of jackets/accessories. Goods are purchased from manufacturers/wholesalers and sold in store located in
TDI mall, Bhubaneshwar. His annual turnover is not more than Rs. 1.50 crore. He is registered under normal provisions of GST. Some
of his fellow merchants have opted for Composition Scheme. As a tax consultant to X, prepare a report to highlight pricing mechanism
under Composition Scheme vis-à-vis normal provision if he wants to earn 10 per cent of cost as profit. Assume that applicable GST rate
is 18 per cent.
Problem 516-P5 Composition scheme 760
Solution :
To compare tax incidence and its impact on pricing under normal provisions and Composition Scheme, the following case
study is made on the assumption that for X, value of inward supply is Rs. 1,00,000 and outward supply to Y is made to keep
a net margin of 10% –
Normal Composition
provisions Scheme
Rs. Rs.
Taxable value of inward supply from manufacturers/wholesalers 1,00,000 1,00,000
Add: GST charged by supplier 18,000 18,000
Amount paid by X 1,18,000 1,18,000
Add: Profit margin of 10% for X 10,000 10,000
Taxable value of outward supply by X to Y 1,10,000 1,28,000
Add: GST on supply by X to Y @ 18% 19,800 Nil
Total 1,29,800 1,28,000
Add: Tax @ 1% under Composition Scheme (although it is to be paid by X out of his
pocket, yet he will like to include it in selling price to keep a net margin of 10%), i.e.,
[Rs. 1,28,000 ÷ (1 – GST : 1%)] minus Rs. 1,28,000 – 1,293
Amount charged by X from Y 1,29,800 1,29,293
Profit earned by X –
Amount charged by X from customers 1,29,800 1,29,293
Less:
Paid to manufacturers/wholesalers 1,18,000 1,18,000
Normal provisions - GST paid by X to Government [GST on outward supply : Rs. 19,800 –
input credit on inward supply : Rs. 18,000] 1,800 –
Composition Scheme - GST @ 1% by X out of his own pocket (i.e., 1% of 1,29,293) – 1,293
Net margin of X 10,000 10,000
Amount charged by X from Y is slightly lower in the case of Composition Scheme (although net margin of X in both the cases
is Rs. 10,000). Tax revenue to the Government is lesser under Composition Scheme.
The aforesaid conclusion is valid only in the case of B2C transactions. If, however, transaction between X and Y is B2B, the
conclusions will be different (as is evident from the datasheet given below, assuming that Y is not a consumer but a dealer
under normal GST provisions and sell goods to consumers at the same margin) –
Normal Composition
provisions Scheme
Rs. Rs.
Taxable value of inward supply in the hands of Y 1,10,000 1,29,293
Add: GST charged by X 19,800 Nil
Amount paid by Y 1,29,800 1,29,293
Add: Profit margin of 10% for Y [*for comparison purposes, profit margin under
Composition Scheme is taken as equivalent to Rs. 11,000 only] 11,000 11,000*
Taxable value of outward supply by Y to consumer 1,21,000 1,40,293
Add: GST on supply by Y to consumer @ 18% 21,780 25,253
Amount charged by Y from consumer 1,42,780 1,65,546
Profit earned by Y –
Amount charged by Y from consumer 1,42,780 1,65,546
Less:
Paid to X 1,29,800 1,29,293
GST paid by Y to Government (*GST on outward supply : Rs. 21,780 – input credit on
inward supply : Rs. 19,800, **no input credit as on inward supply from X, no GST is
paid) 1,980* 25,253**
Net margin of Y 11,000 11,000
Revenue to Government –
Paid by supplier to X 18,000 18,000
Paid by X 1,800 1,293
Paid by Y 1,980 25,253
Total revenue to Central Government and State Government/Union Territory 21,780 44,546
761 Special GST rate 6 per cent Para 518.6
Amount charged by Y from consumers is more if X is under Composition Scheme (although net margin of Y in the two cases
is Rs. 11,000). Revenue to Government is more if transaction between X and Y is B2B and X is covered by Composition
Scheme.
516-E5 In Problem 516-P5, prepare the report again on the assumption that GST rate is 5 per cent.
PART B : ALTERNATIVE COMPOSITION SCHEME

 WHAT IS ALTERNATIVE COMPOSITION SCHEME FOR SMALL SERVICE PROVIDERS
517. GST Council (in its 32nd Meeting) has recommended an Alternative Composition Scheme for mixed
supplier to pay GST at the rate of 6 per cent. To give effect to this recommendation, the Government has issued
Notification No. 2/2019, dated March 7, 2019. The Finance (No. 2) Act, 2019 has inserted sub-section (2A) in
section 10 of CGST Act for this purpose.
 WHAT ARE SALIENT FEATURES OF ALTERNATIVE COMPOSITION SCHEME

518. Salient features of the Alternative Composition Scheme are given below –
518.1 Effective date - The Alternative Composition Scheme is applicable with effect from April 1, 2019.
518.2 Intra-State supply - The Alternative Composition Scheme is applicable for intra-State supply of goods
or services or both.
518.3 Turnover not more than Rs. 50 lakh of preceding year - The Alternative Composition Scheme is available
to registered persons whose “aggregate turnover” in the preceding financial year is Rs. 50 lakh (or less). The
aggregate turnover has to be calculated on PAN-India basis. “Aggregate turnover”, for this purpose, includes
all taxable supplies (excluding the value of inward supplies on which GST is payable by the recipient under
reverse charge mechanism), exempt supplies, export of goods/services, inter-State supplies having the same
PAN, to be computed on all India basis but excludes CGST, SGST, UTGST, IGST and cess. However, “aggregate
turnover” does not include the value of supply of exempt services by way of extending loan/deposit/advance
(if consideration is represented by way of interest or discount).
518.4 Not applicable to a person covered by Composition Scheme - The Alternative Composition Scheme
applies to a registered person only if he is not eligible for Composition Scheme (discussed in this book in Part
A of this Chapter).
518.5 Ineligible person - The registered person (who wants to avail of the benefit of Alternative Composition
Scheme) –
- should not be engaged in making any supply which is not leviable to GST;
- should not be engaged in making any inter-State outward supply;
- should not be a casual taxable person or a non-resident taxable person;
- should not be engaged in making supply through e-commerce operator (who is liable to TDS under section
52), and
- should not be engaged in making supply of a few goods [i.e., ice cream and other edible ice (HSN 21050000),
pan masala (HSN 21069020), aerated water (HSN 22021010) or tobacco and manufactured tobacco substitutes
(Chapter 24)].
518.6 Special GST rate 6 per cent - GST is payable under the Alternative Composition Scheme at the rate of 6
per cent (i.e., CGST : 3 per cent + SGST : 3 per cent).
 Applicable only for first supplies of Rs. 50 lakh - GST at the aforesaid rate of 6 per cent under the Alternative
Composition Scheme is applicable for the first supplies of goods or services or both up to an aggregate turnover
of Rs. 50 lakh made on or after April 1 in any financial year by a registered person.
Problems
518.6-P1 X is engaged in intra-State supply of goods and services in Chennai. His turnover for the financial years 2018-19 and 2019-
20 is given below –
(Rs. in lakh)
Financial year 2018-19 Financial year 2019-20
Supply of goods (stationery items/books) 10 5 15 11 6 17
Supply of services by way of extending deposits, loans or
advances where consideration is represented by way of
interest or discount) – 42 42 – 44 44
Total 32 55 87 31 60 91
Up to March 31, 2019, X is a registered person who has not opted for Composition Scheme/Alternative Composition Scheme under section
10. He wants to opt for Alternative Composition Scheme with effect from April 1, 2019. Is it possible? If yes, find out the tax liability
of X for the financial year 2019-20 under Alternative Composition Scheme. X is not engaged in making inter-State supply. He does not
supply through e-commerce operator.
Solution :
Taxpayer is not engaged in making inter-State supply. He does not supply through e-commerce operator. From the
information given in the problem it appears that the taxpayer is not a casual taxable person/non-resident taxable person.
Apart from satisfying these conditions, a taxpayer can opt for Alternative Composition Scheme, if he satisfies the following
criteria –
Criteria 1 - The aggregate turnover of the preceding financial year does not exceed Rs. 50 lakh. Aggregate turnover, for this
purpose, includes all taxable and exempt supplies but does not include the value of exempt supply by way of extending
loan/advance/deposit (if consideration is payable by way of interest or discount).
Criteria 2 - The taxpayer is not eligible for normal Composition Scheme under section 10(1) (i.e., he is not engaged in supply
of services or quantum of supply of services is not more than 10% of total turnover or Rs. 5 lakh, whichever is higher).
To find out whether X satisfies these criteria, one has to redraft the table given in the problem (after ignoring interest on
deposit/loan/advance, which is not included in turnover for this purpose). After excluding interest on deposits, the data
given in the above table will be as follows –
(Rs. in lakh)
Financial year 2018-19 Financial year 2019-20
Supply of goods (stationery items/books) 10 5 15 11 6 17
Total 32 13 45 31 16 47
On April 1, 2019, X wants to opt for Alternative Composition Scheme. His turnover for the preceding financial year
2018-19 does not exceed Rs. 50 lakh. He satisfies Criteria 1. Moreover, turnover of supply of services of the preceding year
is Rs. 30 lakh out of the total turnover of Rs. 45 lakh. Turnover of supply of service is more than 10% of total turnover.
Consequently, he satisfies Criteria 2 [i.e., he is not eligible for normal Composition Scheme under section 10(1)].
X can opt for Alternative Composition Scheme with effect from April 1, 2019. His tax liability for the financial year 2019-20
will be as follows –
Rs.
Turnover of the financial year 2019-20 47,00,000
CGST (3% of Rs. 47,00,000) 1,41,000
SGST (3% of Rs. 47,00,000) 1,41,000
GST 2,82,000
Note - X is required to pay GST of Rs. 2,82,000 out of his pocket. He cannot collect any GST from the recipients of supply made
by him.
518.6-E1 Recalculate GST liability of X in the above problem on the assumption that normal GST rates are as follows –
Supply of stationery items : 18%,
Supply of books : Nil,
Supply of services : 18%.
X wants to opt for Alternative Composition Scheme with effect from April 1, 2019.
763 GST at 6 per cent applicable on first supplies of goods Para 519.2
518.7 How to opt for Alternative Composition Scheme - A registered person who wants to opt for the aforesaid
Alternative Composition Scheme, may do so by uploading an intimation in Form GST CMP-02† latest by July
31, 2019. A person who applies for new registration and who wants to opt for the aforesaid scheme may do so
by uploading Form GST REG-01‡ at the time of filing of application for registration. The option to pay tax under
the aforesaid Alternative Composition Scheme would be effective from the beginning of the financial year or
from the date of registration in cases where new registration has been obtained during the financial year.
 All GSTIN (having same PAN) are covered - If a registered person is having more than one GSTIN (but PAN is
same), then Alternative Composition Scheme is applicable to all.
 WHAT ARE SPECIAL FEATURES FOR GST PAYMENTS UNDER ALTERNATIVE COMPOSI-
TION SCHEME
519. The registered person who satisfies the aforesaid conditions, can opt for the Alternative Composition
Scheme. The following points should be noted –
519.1 GST not to be collected from outward supply - A registered person (who has opted for the Alternative
Composition Scheme) is required to pay (out of his pocket) GST at the rate of 6 per cent of value of all outward
supplies. Such person shall not collect any GST from the recipients of supply made by him.
519.2 GST at 6 per cent applicable on first supplies of goods/services up to Rs. 50 lakh - Under the Alternative
Composition Scheme, GST at the rate of 6 per cent is applicable for the first supplies of goods or services or both
up to an aggregate turnover of Rs. 50 lakh made on or after April 1 in any financial year. GST is payable at the
rate of 6 per cent of all outward supplies of goods/services (including value of supply which is exempt by
notifications issued under sections 9 and 11).
The expression “first supplies of goods or services or both” shall, –
- for the purposes of determining eligibility of a person to pay tax under the Alternative Composition Scheme,
include the supplies from the first day of April of a financial year to the date from which he becomes liable
for GST registration;
- for the purpose of determination of tax payable under the Alternative Composition Scheme, shall not include
the supplies from the first day of April of a financial year to the date from which he becomes liable for GST
registration.
Problems
519.2-P1 The following information is noted from the records of X (a technical consultant located in Mumbai) and Y (a software
developer located in Pune) –
X Y
Date of commencement of technical consultancy operation by X and software development
activity by Y July 25, 2017 April 1, 2019
Turnover of the financial year 2018-19 43 Nil
Invoices issued by X and Y on or after April 1, 2019 –
-Invoice No. 1/2019 on April 6, 2019 3 3
-Invoice No. 2/2019 on May 20, 2019 17 17
-Invoice No. 3/2019 on June 12, 2019 18 18
-Invoice No. 4/2019 on August 5, 2019 12 12
-Invoice No. 5/2019 on September 30, 2019 56 56
X got GST registration on July 1, 2017. Y is not registered in GST on April 1, 2019. He applies for registration by uploading the relevant
form on May 20, 2019 (registration is granted on May 23, 2019). With effect from April 1, 2019, X and Y want to avail the benefit of
Alternative Composition Scheme notified vide Notification No. 2/2019, dated March 7, 2019. Discuss the tax consequences for the half
year ending September 30, 2019. The above figures are exclusive of GST. Normal GST rate is 18 per cent. Assume that X and Y provide
technical consultancy service/software development service only in the State of Maharashtra.
† It can be done by selecting the category of registered person as “Any other supplier eligible for composition levy” as listed at Sl. No. 5(iii) of
the said form.
‡ The option may be indicated at Serial Nos. 5 and 6.1(iii) of Form GST REG-01.
Solution :
Turnover of X and Y for the preceding financial year 2018-19 is not more than Rs. 50 lakh. None of them is engaged in making
any inter-State outward supply. Other conditions of Notification No. 2/2019, dated March 7, 2019 are satisfied. Therefore,
X and Y are entitled to take the benefit Alternative Composition Scheme as notified by the aforesaid notification.
Consequently, X and Y cannot charge any GST from the recipients of supply. GST at the rate of 6 per cent will have to be
paid by them out of their pocket. Input tax credit benefit is not available.
However, the concessional GST rate of 6 per cent (and other consequences given above) are applicable for the first supplies
of services up to an aggregate turnover of Rs. 50 lakh (made on or after April 1, 2019) during the financial year 2019-20. Y
is not registered up to May 20, 2019 (i.e., till the time the threshold turnover of Rs. 20 lakh is achieved). GST for the half year
ending September 30, 2019 will be calculated as follows –
X Y
Turnover GST* Turnover GST*
Invoice No. 1/2019 on April 6, 2019 3 0.18 3 Nil Note 1
Invoice No. 2/2019 on May 20, 2019 17 1.02 17 Nil Note 1
Invoice No. 3/2019 on June 12, 2019 18 1.08 18 1.08 Note 2
Invoice No. 4/2019 on August 5, 2019 12 0.72 12 0.72 Note 2
Invoice No. 5/2019 on September 30, 2019 56 10.08 56 10.08 Note 3
* 50% of GST is CGST and 50% is SGST.
Notes –
1. Y is not a GST registered person on April 1, 2019. Aggregate value of supply of Invoice No. 1/2019 and Invoice No. 2/
2019 is Rs. 20 lakh. Y is not required to pay any GST up to May 20, 2019. Registration is required after May 20, 2019. It is given
in the problem that GSTN is allotted to Y on May 23, 2019. In the case of Y, GST is applicable after May 20, 2019.
2. Under the Alternative Composition Scheme as notified vide Notification No. 2/2019, dated March 7, 2019, GST is payable
at the rate of 6% for the first supplies of goods/services up to an aggregate turnover of Rs. 50 lakh made on or after April
1 of the financial year (i.e., in this case, April 1, 2019). Turnover of Rs. 50 lakh is achieved by X (as well as by Y) immediately
after issue of Invoice No. 4/2019 on August 5, 2019 (i.e., Rs. 3 lakh + Rs. 17 lakh + Rs. 18 lakh + Rs. 12 lakh). GST at the rate
of 6% is payable by X on Invoice No. 1/2019, Invoice No. 2/2019, Invoice No. 3/2019 and Invoice No. 4/2019. Y is not
registered up to May 20, 2019. He will pay GST at the rate of 6% on Invoice No. 3/2019 and Invoice No. 4/2019. GST at the
rate of 6% will be payable by X and Y out of their pocket (without charging any GST in invoices issued to the recipients of
supply).
3. GST at the regular rate of 18% (as given in the problem) is applicable on the turnover exceeding Rs. 50 lakh. As stated above,
turnover of first Rs. 50 lakh is achieved by X (and as well as by Y) on issue of Invoice No. 4/2019. On Invoice No. 5/2019,
the applicable GST rate is 18%. Amount of GST is Rs. 10.08 lakh. It can be charged in the invoice issued by X and Y. After
GST, amount payable by a recipient of supply pertaining to Invoice No. 5/2019 is Rs. 66.08 lakh.
519.2-E1 In problem 519.2-P1, assume that supplies are inter-State supplies. Determine the amount of IGST, CGST and SGST in
the case of X and Y for the half year ending September 30, 2019.
519.3 Input tax credit, not available - A person (covered by Alternative Composition Scheme) shall not be
entitled to claim the benefit of input tax credit.
519.4 Bill of supply - The aforesaid registered person shall issue bill of supply (instead of tax invoice) under rule
49. At the top of bill of supply, the following words should be printed –
Taxable person paying tax in terms of Notification No. 2/2019-Central Tax (Rate), dated March 7, 2019,
not eligible to collect tax on supplies
519.5 Liable for payment of GST under reverse charge mechanism (wherever applicable) - A person (covered
by Alternative Composition Scheme) is liable to pay GST under reverse charge mechanism [whenever it is
applicable under the provisions of section 9(3)/(4)].
519.6 GST at 6 per cent applicable even on exempt supplies - A person who has opted for Alternative
Composition Scheme (as discussed above) is liable to pay GST at the rate of 6 per cent on first supplies of goods/
services up to an aggregate turnover of Rs. 50 lakh made on or after April 1 of the relevant financial year. GST
under this scheme is liable even on exempt supplies [i.e., even on those supplies which are exempt via Exemption
Notification No. 2/2017, dated June 28, 2017 or Exemption Notification No. 12/2017, dated June 28, 2017 and
given in paras 436 and 437 in this book].
519.7 When a registered person who has availed input tax credit opts for Alternative Composition
Scheme - When any registered person who has availed of input tax credit opts to pay tax under the aforesaid
Alternative Composition Scheme, he shall be liable for the provisions of section 18(4). Under this section, the
registered person shall pay an amount (by way of debit in the electronic credit ledger or electronic cash ledger)
equivalent to the credit of input tax in respect of –
d. capital goods.
For computation of reversal of input tax credit, see para 499.6.
●
Test your knowledge

1. What is the maximum turnover which one should have to opt for Composition Scheme or Alternative Composition
Scheme ? [paras 513.1 and 518]
2. What are the components of “aggregate turnover” under Composition Scheme and Alternative Composition
Scheme ? [paras 513.1 and 518]
3. Who is eligible person to opt for Composition Scheme or Alternative Composition Scheme ? [paras 513.2 and 518]
4. Law has imposed certain conditions and restrictions in the case of a taxpayer who has opted for Composition Scheme/
Alternative Composition Scheme. [paras 513.3, 518 and 519]
5. What are specified GST rates under Composition Scheme and Alternative Composition Scheme ? [paras 514 and 518]
6. A registered person under normal provisions, wants to opt for Composition Scheme. Discuss the mechanism for this
purpose. [paras 515.1 and 515.3]
7. A registered person under Composition Scheme, wants to withdraw from the scheme. Discuss the mechanism for this
purpose. [paras 515.4 and 515.5]
CHAPTER 30 Registration
I
n any tax system, registration is the most fundamental requirement for identification of
taxpayers ensuring tax compliance in the economy. Registration of any business entity
under the GST regulations implies obtaining a unique number from the Government.
Provisions governing registration are discussed in this chapter.
 WHAT IS THE SIGNIFICANCE OF REGISTRATION

521. For identification of a taxpayer, registration is must for ensuring tax compliance. Under GST, registration
of any business entity implies obtaining a unique number (GSTIN) from the GST authorities for the purpose of
collecting GST on behalf of the Central Government/State Government/Union Territory and to avail input tax
credit on inward supplies. Without registration, a person can neither collect tax from his customers nor claim any
input tax credit of tax paid by him.
Registration confirms the following advantages to a taxpayer –
- A GST registered person is legally recognized as supplier of goods or services.
- He is legally authorized to collect taxes from his customers and pass on the credit of the taxes paid on the
goods/services supplied to the purchaser/recipient.
- He can claim input tax credit pertaining to GST paid on inward supply and can utilize the same for payment
of taxes due on outward supply of goods/services.
- Seamless flow of input tax credit from suppliers to recipients at the national level.
 WHO IS LIABLE FOR REGISTRATION UNDER GST [SEC. 22]

522. GST is a tax which arises on the event of “supply” of goods/services. Section 22 requires that a supplier of
goods/services should get himself/itself registered under GST. However, the following points should be kept
in view –
522.1 Compulsory registration if aggregate turnover exceeds threshold limit [Sec. 22] - If “aggregate
turnover” of a financial year exceeds threshold limit, registration is required on compulsory basis under section
22.
 Threshold limit - Threshold limit is as follows –
Aggregate turnover in the State/Union Territory (other than special category States) Rs. 20 lakh [see Note 1]
Aggregate turnover in special category States (i.e., Manipur, Mizoram, Nagaland and Rs. 10 lakh
Tripura) [see Note 2]
Notes –
1. With effect from April 1, 2019, registration is not required in the case of a person who is engaged in exclusive supply of
goods and whose aggregate turnover in the financial year does not exceed Rs. 40 lakh, if a few conditions are satisfied [see
para 522.2-4].
2. Prior to February 1, 2019, special category of States were Arunachal Pradesh, Assam, Himachal Pradesh, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.
 Voluntary registration - Small businesses (having aggregate turnover below the threshold limit given above) can,
however, voluntarily opt for registration under section 25(3).
766
767 Persons not liable for registration Para 522.2
 Aggregate turnover - For this purpose, aggregate turnover means the aggregate value of –
- All taxable supplies.
- Exempt supplies†.
- Exports of goods/services.
- Inter-State supplies.
- All supplies made by the taxable person, whether on his own account or made on behalf of all his principles.
These supplies shall be determined for all units/branches of the taxpayer having the same Permanent Account
Number (PAN) and aggregate turnover is computed on all India basis.
However, aggregate turnover does not include the following –
- Value of inward supplies on which tax is payable under reverse charge mechanism.
- Amount of GST (i.e., IGST, CGST, SGST/UTGST).
- Supply of goods, after completion of job work, by a registered job worker shall be treated as the supply of
goods by the principal and the value of such goods shall not be included in the aggregate turnover of the
registered job worker.
522.2 Persons not liable for registration [Sec. 23] - The following persons are not liable for registration even
if aggregate turnover exceeds the threshold limit given above –
522.2-1 ENGAGED EXCLUSIVELY IN MAKING EXEMPT SUPPLIES [SEC. 23(1)(a)] - Any person who is engaged exclusively in the
business of supplying goods/services that are not liable to GST or wholly exempt† from GST, is not required to
get registration.
 Case 1 - X is a salaried employee (salary income being Rs. 90 lakh). Besides, he owns a residential property which is let out
for residential purposes (annual rent being Rs. 40 lakh).
In this case, aggregate turnover is Rs. 40 lakh. However, registration is not required as he is exclusively engaged in making
exempt supplies. Service by an employee is neither treated as supply of goods or supply of services. Services by way of
renting of residential dwelling for use as residence, is exempt vide Exemption Notification (Entry 12). Since X does not make
any taxable supply of goods/services, he is not liable for registration.
 Case 2 - Y, a chartered accountant, is Tax Head of A Ltd. (salary income being Rs. 95 lakh). He owns a residential property
which is let out for residential purposes (annual rent being Rs. 45 lakh). Besides, he gives tax consultancy on part time basis
(annual consultancy income being Rs. 10,000).
In this case, aggregate turnover is Rs. 45,10,000. It is calculated by taking into consideration taxable supply (i.e., Rs. 10,000)
and exempt supply (i.e., Rs. 45 lakh). Salary income is not part of aggregate consideration (as service by an employee is
neither treated as supply of goods or supply of services). Since aggregate turnover is more than Rs. 20 lakh, GST registration
is required (even if value of taxable supply is only Rs. 10,000).
 Case 3 - Z is a retired person. He gets pension of Rs. 40,000 per month. Besides, he has fixed deposit in a few banks and
annual interest from these deposits is Rs. 19,99,600. Occasionally, he provides consultancy in flower decoration (annual
receipt being Rs. 500).
In this case, aggregate turnover is Rs. 20,00,100 (i.e., bank interest of Rs. 19,99,600 + consultancy income of Rs. 500) (pension
income is not from supply of goods or services, interest on deposits is not subject to GST but it is included in aggregate
turnover). Since aggregate turnover is more than Rs. 20,00,000, GST registration is required.
522.2-2 AGRICULTURIST [SEC. 23(1)(b)] - An agriculturist is not liable for registration to the extent of supply of produce
out of cultivation of land. “Agriculturist” means an individual/HUF who undertakes cultivation of land –
a. by own labour, or
b. by the labour of family, or
c. by servants on wages payable in cash or kind or by hired labour under personal supervision or the personal
supervision of any member of the family.
522.2-3 ENGAGED ONLY IN MAKING TAXABLE SUPPLIES, GST ON WHICH IS PAYABLE BY RECIPIENT UNDER REVERSE CHARGE MECHANISM
[SEC. 23(2)] - If a person is engaged only in making taxable supply of goods/services, GST on which is liable to be
paid on reverse charge basis by the recipient, registration is not required (even if aggregate turnover is more than
the threshold limit of Rs. 20 lakh/Rs. 10 lakh).
† “Exempt supply” means supply of any goods/services which attracts nil rate of GST or which may be wholly exempt from tax under Exemption
Notification and includes non-taxable supply [e.g., petroleum products (i.e., petroleum crude, high speed diesel, motor spirit or petrol), natural
gas and aviation turbine fuel].
Para 522.2 Registration 768
 Case 1 - B is an advocate. He provides legal services to Tata Chemicals (annual receipt from consultancy being Rs. 35 lakh).
He does not have any other income. In this case, aggregate turnover is more than Rs. 20 lakh. However, registration is not
required (B is only engaged in providing legal services, GST on which is payable by Tata Chemicals, the recipient of supply,
under reverse charge mechanism).
 Case 2 - C is an advocate. He provides legal services to Tata Chemicals (annual receipt from consultancy being Rs. 35 lakh).
Besides, he has rental income of Rs. 500 from letting out of commercial property. He does not have any other income. In
this case, aggregate turnover is Rs. 35,00,500. Registration is required. C is not exclusively engaged in making taxable supply,
GST on which is payable by recipient. Apart from providing legal service, C is also engaged in renting of immovable
property.
522.2-4 ENGAGED EXCLUSIVELY IN SUPPLY OF GOODS AND AGGREGATE TURNOVER DOES NOT EXCEED Rs. 40 LAKH [SEC. 23(2)] - If the
following conditions are satisfied registration is not required (with effect from April 1, 2019) by virtue of
Notification No. 10/2019, dated March 7, 2019 –
 Condition 1 : Engaged in supply of goods only - The person is engaged in exclusive supply of goods.
 Condition 2 : Aggregate turnover up to Rs. 40 lakh - Aggregate turnover of the aforesaid person in the financial
year does not exceed Rs. 40 lakh.
 Condition 3 : Compulsory registration under section 24 not required - The aforesaid person is not required to take
compulsory registration under section 24 [see para 522.3]. For instance, if the aforesaid person is engaged in inter-
State supply of goods, GST registration is required under section 24(i), even if aggregate turnover is not more
than Rs. 40 lakh [see para 522.3-1].
 Condition 4 : Not engaged in supply of certain goods - The aforesaid person is not engaged in making supplies of
ice-cream (and other edible ice), pan masala or tobacco goods (and manufactured tobacco substitutes).
 Condition 5 : Not engaged in making intra-State supply in certain States - The aforesaid person is not engaged in
making intra-State supplies in the State of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland,
Puducherry, Sikkim, Telangana, Tripura and Uttarakhand.
 Condition 6 : Not opted for voluntary registration - The aforesaid person has not opted for voluntary registration
under section 25(3).
 Case 1 - X Ltd. (incorporated on February 26, 2019) is engaged in manufacture of garments in Ludhiana. Turnover of X Ltd.
for the period ending on March 31, 2019 is Rs. 6 lakh. Its turnover for the financial year 2019-20 is Rs. 40 lakh (no inter-State
supply).
In this case, the above conditions given by Notification No. 10/2019, dated March 7, 2019, are satisfied. Registration is,
therefore, not required under GST.
 Case 2 - Y is engaged in supply of taxable goods and taxable supply of services. His turnover for the financial year 2019-
20 is Rs. 38 lakh (supply of goods : Rs. 18 lakh, supply of services : Rs. 20 lakh).
In this case, Y is not exclusively engaged in supply of goods. Threshold limit for registration in this case is Rs. 20 lakh (not
Rs. 40 lakh as given by Notification No. 10/2019, dated March 7, 2019). Registration is, therefore, required.
 Case 3 - Z is engaged in supply of taxable goods and exempt goods [turnover of the financial year 2019-20 : Rs. 9 lakh (taxable
goods) + Rs. 10 lakh (exempt goods)]. He owns a residential house property which is let out for residential purposes (annual
rent being Rs. 4 lakh).
In this case, the aggregate turnover is Rs. 23 lakh. Threshold limit for registration is Rs. 20 lakh. Threshold limit of Rs. 40
lakh as given by the aforesaid Notification No. 10/2019, dated March 7, 2019, is not applicable (Z is not exclusively engaged
in supply of goods). Therefore, registration is required.
522.3 Compulsory registration in a few cases, even if aggregate turnover is less than Rs. 20 lakh/Rs. 10 lakh/
Rs. 40 lakh [Sec. 24] - The following persons are required to get registration on compulsory basis. These cases
are given by section 24. In these cases, compulsory registration is required [even if aggregate turnover is not more
than Rs. 20 lakh (or Rs. 10 lakh in specified States) (or Rs. 40 lakh in cases covered by para 522.2-4)] –
522.3-1 INTER-STATE TAXABLE SUPPLY OF GOODS [SEC. 24(i)] - If a person is engaged in inter-State taxable supply of goods,
GST registration is required. Registration is required, even if the aggregate turnover is not more than Rs. 20 lakh
(or Rs. 10 lakh in specified States). However, the following points should be noted –
1. Persons engaged in supply of handicraft goods† making inter-State supply have been exempted from
registration. Exemption is applicable only if –
† Handicraft goods are defined in the Explanation in Notification No. 21/2018, dated July 26, 2018. Similar benefits are available in the case of
persons making inter-State supply of products mentioned in Notification No. 56/2018, dated October 23, 2018 when made by craftsmen
predominantly by hand even though some machinery may also be used in the process.
769 Compulsory registration in a few cases Para 522.3
- If the aggregate value of all their supplies on all India basis is less than Rs. 20 lakh (or Rs. 10 lakh in specified
States).
- They are required to have income-tax PAN.
These persons are also not required to obtain casual registration if they supply goods outside the State where they
are having their fixed establishment.
2. If a person is engaged in inter-State supply of services, registration is not required, if aggregate turnover is not
more than Rs. 20 lakh (Rs. 10 lakh in specified States).
3. A job worker (with turnover of less than Rs. 20 lakh‡/ Rs.10 lakh) has been exempted from registration, even
if he makes inter-State supply to registered persons. However, this exemption is not available to jewellery,
goldsmiths’ and silversmiths’ wares and other articles (Chapter 71) manufactured on job work basis.
A person is engaged in making inter-State taxable supply of goods/services. Requirement of registration is as follows –
Different situations Inter-State supply Inter-State supply

of goods of services
Situation 1- Supplier of handicraft goods (aggregate turnover Registration not required –
not more than Rs. 20 lakh/Rs. 10 lakh, having PAN)
Situation 2- Job worker (aggregate turnover not more than Registration not required –
Rs. 20 lakh/Rs. 10 lakh) (not being jewellery, goldsmiths’
and silversmiths’ wares)
Situation 3 - Any other supplier (aggregate turnover not more Registration required Registration not required
than Rs. 20 lakh/Rs. 10 lakh)
Situation 4 - Any other supplier (aggregate turnover more
than Rs. 20 lakh/Rs. 10 lakh) Registration required Registration required
522.3-2 CASUAL TAXABLE PERSON MAKING TAXABLE SUPPLY [SEC. 24(ii)] - If supply is made by a casual taxable person, GST
registration is required. Registration is required, even if the aggregate turnover is not more than Rs. 20 lakh (or
Rs. 10 lakh in specified States). [or Rs. 40 lakh in cases covered by para 522.2-4].
“Casual taxable person” means a person who occasionally undertakes transactions involving supply of goods/
services in the course or furtherance of his business (maybe as principal/agent/in any other capacity), in a State/
Union Territory where he has no fixed place of business. A casual taxable person making taxable supply in India
must compulsorily take registration. There is no threshold limit for registration. A casual taxable person cannot
exercise the option to pay tax under Composition Scheme or Alternative Composition Scheme. He must apply
for registration at least 5 days prior to commencing his business in India.
522.3-3 PERSONS WHO ARE REQUIRED TO PAY TAX ON INWARD SUPPLY UNDER REVERSE CHARGE MECHANISM [SEC. 24(iii)] - If a
person is required to pay GST on inward supplies under reverse charge mechanism, GST registration is required.
In such a case, registration cannot be avoided even if aggregate turnover of outward supply of goods/services
is not more than the threshold of Rs. 20 lakh/Rs. 10 lakh/Rs. 40 lakh.
X Ltd. is a short film producer for a Bangla TV Channel. He is located in Kolkata and his annual turnover is always less than
Rs. 20 lakh. For using copyright of Y, a photographer, for his production house, he pays a royalty of Rs. 30,000. This royalty
is chargeable to GST. However, GST is payable by X Ltd., the recipient of supply, under reverse charge mechanism.
Consequently, X Ltd. is required to get registration. This rule is applicable even if aggregate turnover of X Ltd. is less than
the threshold limit of Rs. 20 lakh/Rs. 10 lakh.
522.3-4 ELECTRONIC COMMERCE [SEC. 24(iv)/(ix)/(x)/(xi)] - Electronic commerce operators (as well as supplier to
electronic commerce operators) are required to get registration on compulsory basis in a few cases given by
section 24(iv)/(ix)/(x)/(xi). These cases are summarized in the table given below –
‡ A job worker is required to obtain registration only in cases where his aggregate turnover, to be computed on all India basis, in a financial year
exceeds the threshold limit regardless of whether the principal and the job worker are located in the same State or in different States.
Cases Supplier to electronic commerce operator Electronic Representa- Registration under section 24 is
commerce tive of ECO required by the persons given
operator in India below (even if their aggregate
(ECO) turnover is not more than the
threshold limit of Rs. 20 lakh/
Rs. 10 lakh/Rs. 40 lakh)
Case 1 X (he owns a radio taxi/motor cab/maxi cab/ Inois Taxicab A & Co., - Inois Taxicab USA
motor cycle) provides his service in Mumbai USA Mumbai - A & Co., Mumbai
through Inois Taxicab USA.
Case 2 Y Ltd. (it owns a hotel/inn/guest house/club/ Clearroomkey B & Co., - Clearroomkey Inc., USA
campsite/any other commercial place for lodg- Inc., USA Hyderabad - B & Co., Hyderabad
ing) provides lodging facility in Bengaluru
through clearroomkey.com (a USA based website)
Aggregate turnover of Y Ltd. is not more than
threshold limit
Case 3 Z [a house-keeping (such as plumbing, car- Housekeeping C, an - Housekeeping Ltd.,
pentering, etc.) service provider in Chennai] Ltd., Dubai individual Dubai
provides services through housekeeping.com (a located in - C of Ranchi
Dubai based website) Ranchi
Aggregate turnover of Z is not more than
threshold limit
Case 4 PQ Ltd. [a supplier of any taxable goods (not Anazon Ltd., D Ltd., - Anazon Ltd.
covered by Case 1, Case 2 or Case 3)] supplies Singapore Chandigarh - D Ltd.
goods in India through Anazon (a Singapore - PQ Ltd.
based website)
Case 5 ST Ltd. [a supplier of any services (not covered Tanzon Ltd., GH Ltd., See Note 5
by Case 1, Case 2 or Case 3)] supplies services in Malaysia Pune
India through Tanzon (a Malaysia based
website)
Notes -
1. In Case 1, X is required to get registration under section 22 only if his aggregate turnover is more than the threshold limit
of Rs. 20 lakh/Rs. 10 lakh.
2. Y Ltd. in Case 2 and Z in Case 3 are not required to get registration under section 22 (their aggregate turnover is not more
than the threshold limit).
3. In Case 1, Case 2 and Case 3, GST on supplies shall be paid by the electronic commerce operator (through his/its Indian
representative). All the provisions of GST shall apply to such electronic commerce operator as if he is the supplier liable for
paying the tax in relation to the supply of such services. This rule is given by section 9(5).
4. In Case 4, PQ Ltd. is a supplier of taxable goods through e-commerce operator. PQ Ltd. is required to get compulsory
registration under section 24 (even if its turnover is lower than the threshold limit of Rs. 20 lakh/10 lakh/Rs. 40 lakh).
Anazon Ltd., the electronic commerce operator, is required to collect an amount at the rate of one per cent of the “net value
of taxable supplies” (i.e., net of supply returned) made through it, where the consideration with respect to such supplies is
to be collected by such operator. This amount is collected under section 52 and is called as tax collection at source (TCS).
Compulsory registration is required for Anazon Ltd under section 24.
5. In Case 5, ST Ltd. is a supplier of services. Compulsory registration is required for ST Ltd. under section 22 only if its
turnover is more than the threshold limit of Rs. 20 lakh/10 lakh. Tanzon Ltd., the electronic commerce operator, is required
to get compulsory registration under section 22 if its turnover is more than the threshold limit of Rs. 20 lakh/Rs. 10 lakh.
Tanzon Ltd. is also required to get registration under section 24 if it is liable for tax collection at source under section 52. Tax
collection at source (in the case of supply of services through e-commerce operator) is required only if the supplier (i.e., ST
Ltd. in this case) is a registered dealer.
522.3-5 NON-RESIDENT TAXABLE PERSON [SEC. 24(v)] - “Non-resident taxable person” means any person who
occasionally undertakes transactions involving supply of goods/services (maybe as principal or agent or in any
other capacity) but who has no fixed place of business or residence in India. A non-resident taxable person
making taxable supply in India has to compulsorily take registration. There is no threshold limit for registration.
A non-resident taxable person cannot exercise the option to pay tax under composition levy. He has to apply for
registration at least 5 days prior to commencing his business in India using a valid passport (and need not have
a PAN number in India). A business entity incorporated or established outside India, has to submit the
771 Compulsory registration in a few cases Para 522.3
application for registration along with its tax identification number or unique number on the basis of which the
entity is identified by the Government of that country or its Permanent Account Number (if available).
522.3-6 A PERSON WHO IS REQUIRED TO DEDUCT TAX AT SOURCE [SEC. 24(vi)] - Section 51 prescribes the authority and
procedure for tax deduction at source (TDS). The Government has instructed the following persons (the
deductor) to deduct tax at source –
- A department or an establishment of the Central Government or State Government.
- Local authority.
- Governmental agencies.
- An authority/board/any other body set up by an Act of Parliament or a State Legislature.
- An authority/board/any other body established by any Government with 51 per cent (or more) participation
by way of equity or control, to carry out any function.
- Society established by the Central Government or the State Government or a Local Authority under the
Societies Registration Act, 1860.
- Public sector undertakings.
The tax would be deducted @ 2 per cent of the payment made to the supplier (the deductee) of taxable goods/
services, where the total value of such supply, under a contract, exceeds Rs. 2,50,000 (excluding the amount of
GST). If supplier (as well as the place of supply) are in State A and the recipient is located in State B, TDS is not
applicable.
Registration of TDS deductors - A TDS deductor has to compulsorily register under GST without any threshold
limit. The deductor has a privilege of obtaining registration under GST without requiring PAN. He can obtain
registration using his TAN (issued under the Income-tax Act).
A person required to deduct tax at source under section 51 shall electronically submit an application for
registration in Form GST REG-07. The proper officer may grant registration after due verification and issue a
certificate of registration in Form GST REG-06 within a period of 3 working days from the date of submission
of the application.
Provisions applicable from October 1, 2018 - The aforesaid provisions of section 51 are applicable only from
October 1, 2018.
522.3-7 AGENT [SEC. 24(vii)] - A person makes taxable supply of goods/services on behalf of other taxable persons.
He may be an agent or otherwise. Such a person is required to get compulsory register under GST without any
threshold limit.
 Case 1 - X appoints Y to precure certain goods from Tamil Nadu. Y prepares a list of various suppliers who can provide
goods as desired by X. Finally, he identifies Z (one of the suppliers) and directs him to send 1,000 units to X. Z will issue
invoice directly to X. In this case, Y has in no way involved himself in supply or receipt of goods on behalf of X. Technically,
Y is not an “agent” under CGST Act. He is not liable for registration under section 24(vii). If, however, turnover of Y is more
than the threshold limit of Rs. 20 lakh/Rs. 10 lakh/Rs. 40 lakh, registration is required under normal provisions.
 Case 2 - A, a well-known artist, appoints B (auctioneer) to auction his painting. B arranges for the auction and identifies
the potential bidders. The highest bid is accepted, and the painting is sold to the highest bidder. The invoice for the supply
of the painting is issued by B (in his own name) on the behalf of A and the painting is delivered to the successful bidder. In
this scenario, B is not merely providing auctioneering services, but is also supplying the painting on behalf of A to the bidder,
and has the authority to transfer the title of the painting on behalf of A. This scenario is covered by section 24(vii). In other
words, B is liable for registration even if his turnover is lower than the threshold limit of Rs. 20 lakh/Rs. 10 lakh/Rs. 40 lakh.
 Case 3 - P sells agricultural produce by utilizing the services of Q who is a commission agent as per Agricultural Produce
Marketing Committee Act. Q identifies the buyers and sells the agricultural produce on behalf of P for which he charges a
commission from P. Invoice is issued by Q (in his own name) to the ultimate buyers. Q is an “agent” under CGST Act. Now
a question arises whether Q is covered by the provisions of section 24(vii) and compulsory registration is required
(regardless of his turnover).
According to section 24(vii), a person is liable for mandatory registration if he makes taxable supply of goods/services on
behalf of other taxable persons. Accordingly, the requirement of compulsory registration (even if turnover is lower than
threshold limit of Rs. 20 lakh/Rs. 10 lakh/Rs. 40 lakh) for commission agent, under the aforesaid provisions of section 24(vii),
shall arise when both the following conditions are satisfied –
a. the principal should be a taxable person; and
b. the supplies made by the commission agent should be taxable.
Under section 23, an agriculturist who supplies produce out of cultivation of land is not liable for registration. Therefore,
P does not fall within the ambit of the term “taxable person”. Moreover, services by any Agricultural Produce Marketing
Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce, is exempt from
GST vide Exemption Notification (Entry 54). Services provided by Q in this case is exempt from GST. Q, the commission agent
is not liable for compulsory registration under section 24(vii). However, where a commission agent is liable to pay GST under
reverse charge mechanism, he will be required to get registered compulsorily under section 24(iii).
522.3-8 INPUT SERVICE DISTRIBUTOR [SEC. 24(viii)] - Input Service Distributor (ISD) means an office of the supplier of
goods/services which receives tax invoices towards receipt of input services and issues a prescribed document
for the purposes of distributing the credit of CGST, SGST/UTGST or IGST paid on the said services to a supplier
of taxable goods/services having same PAN as that of the ISD. ISD mechanism is meant only for distributing the
credit on common invoices pertaining to input services only and not goods (inputs or capital goods).
An ISD is required to take a separate registration as ISD. There is no threshold limit for ISD.
522.3-9 ONLINE INFORMATION AND DATABASE ACCESS SERVICE [SEC. 24(xi)] - A person supplies online information and data
base access or retrieval services from a place outside India to an unregistered person in India. He is required to
get compulsory register under GST without any threshold limit.
522.4 Registration in other cases - Other cases where registration is required are given below –
 A person who was registered under pre-GST regime - A person who is registered under pre-GST regime (i.e., under
excise duty, VAT, service tax, etc.) is liable to be registered under GST. A person already registered under pre-
GST regime is migrated to GST by issue of provisional GSTIN. It can be converted into regular GSTIN by
submitting necessary documents. If a person so migrated is not liable for registration in GST regime, he can apply
for cancellation of registration. Application for cancellation of registration of migrated taxpayers can be
uploaded in Form GST REG-29 on or before March 31, 2018.
 Registration on transfer of business - Where a business carried on by a registered taxable person is transferred,
the transferee/successor is liable to be registered with effect from the date of transfer/succession. This rule is
applicable whether the business is transferred on account of succession (or otherwise) to another person as a
going concern.
 Registration in the case of merger/amalgamation - In a case of transfer, pursuant to sanction of a scheme for
amalgamation/demerger of two or more companies, the resulting company or the amalgamated company is
liable to be registered. This rule is applicable if amalgamation/demerger takes place in pursuant to an order of
a High Court, Tribunal or otherwise. Registration is required by the transferee with effect from the date on which
the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or
Tribunal.
 WHAT IS THE PROCEDURE FOR REGISTRATION

523. The registration in GST is PAN based and State specific. Supplier has to register in each of such State or
Union Territory from where he effects supply. In GST registration, the supplier is allotted a 15-digit GST
identification number called “GSTIN”, and a certificate of registration incorporating therein this GSTIN is made
available to the applicant on the GSTN common portal.
A given PAN based legal entity would have one GSTIN per State, that means a business entity having its
branches in multiple States will have to take separate State-wise registration for the branches in different States.
But within a State, an entity with different branches would have single registration wherein it can declare one
place as principal place of business and other branches as additional place of business. However, one can have
more than one registration in one State/Union Territory if he has multiple places of business within a State or
Union Territory.
Procedure for registration is given below –
523.1 Verification before registration - Every person shall (before applying for registration) declare his PAN,
mobile number, e-mail address, State/Union Territory in Part A of Form GST REG-01 on the GST portal (i.e.,
www.gst.gov.in). It can be done either directly or through a Facilitation Centre. On successful verification of the
PAN, mobile number and e-mail address, a temporary reference number shall be generated and communicated
to the applicant on his mobile number and e-mail address.
523.2 Registration application - Using the aforesaid reference number, the applicant shall electronically submit
an application in Part B of Form GST REG-01, duly signed (or verified through electronic verification code), along
with the documents specified in the said Form at the GST common portal. On receipt of an application, an
773 Registration certificate Para 523.4
acknowledgement shall be issued electronically to the applicant in Form GST REG-02. A person applying for
registration as a casual taxable person shall be given a temporary reference number by the common portal for
making advance deposit of tax. The above acknowledgement in Form GST REG-02 shall be issued electronically
only after the said deposit.
 Time-limit - Every person who is liable to be registered, shall apply for registration in every such State/Union
Territory in which he is so liable within 30 days from the date on which he becomes liable to registration. A casual
taxable person or a non-resident taxable person shall apply for registration at least 5 days prior to the
commencement of business.
 Separate application - A person who owns a SEZ unit or who is SEZ developer shall make a separate application
for registration as a business distinct from his other units located outside SEZ. Likewise, a person being an Input
Service Distributor (ISD) shall make a separate application for registration as such ISD. Every person who makes
a supply from the territorial waters of India shall obtain registration in the coastal State/Union Territory where
the nearest point of the appropriate base line is located. The above procedure is also applicable in the case of a
person who is required to deduct/collect tax at source, a person supplying online information and database
access or retrieval services from a place outside India to a non-taxable online recipient and every person seeking
registration under section 25(3).
 Registration application to collect tax at source or deduct tax at source - A person required to deduct tax at source
under section 51 or a person required to collect at source under section 52, shall electronically submit an
application for registration in Form GST REG-07.
A person applying for registration to deduct or collect tax in accordance with the provisions of section 51/52,
in a State/Union territory where he does not have a physical presence, shall mention the name of the State/Union
territory in Part A of the application in Form GST REG-07 and mention the name of the State/Union territory
in Part B thereof in which the principal place of business is located which may be different from the State/Union
territory mentioned in Part A.
523.3 Examination of application - The application shall be forwarded to the proper officer who shall examine
the application and the accompanying documents and if the same are found to be in order, approve the grant
of registration to the applicant within a period of 3 working days from the date of submission of the application.
 Deficiency in application - If the application is found to be deficient, the proper officer may issue a notice to the
applicant electronically in Form GST REG-03 within a period of 3 working days from the date of submission of
the application. In such a case, the applicant shall furnish such clarification, information or documents
electronically, in Form GST REG-04, within a period of 7 working days from the date of the receipt of such notice.
If the proper officer is satisfied with the clarification, information, etc., he may approve the grant of registration
to the applicant within a period of 7 working days from the date of the receipt of such clarifications. Where no
reply is furnished by the applicant (or where the proper officer is not satisfied with the clarifications), the proper
officer may reject such application and inform the applicant electronically in Form GST REG-05.
 Registration - If the proper officer fails to take any action within the time limit of 3 days (7 days in the case of
deficiency), the application for grant of registration shall be deemed to have been approved.
523.4 Registration certificate - Where the application for grant of registration has been approved, a certificate
of registration in Form GST REG-06 will be issued. The registration certificate shows the principal place of
business and additional place or places of business and is made available to the applicant on the common portal
and a Goods and Services Tax Identification Number (GSTIN) shall be assigned.
GSTIN contains the following characters –
- 2 characters for the State code
- 10 characters for PAN or TAN
- 2 characters for the entity code
- 1 checksum character.
 Furnishing of bank account details [Rule 10A] - After a certificate of registration in Form GST REG-06 has been
made available on the common portal and a GSTIN has been assigned, the registered person (except those who
have been granted registration to deduct or collect tax at source or who has been granted registration suo motu)
shall furnish information with respect to details of bank account (or any other information, as may be required
on the common portal in order to comply with any other provision). It shall be done by the registered person
within 45 days of grant of registration or the date on which the return required under section 39 is due to be
furnished, whichever is earlier.
 Effective date of registration - The registration shall be effective from the date on which the person becomes liable
to registration where the application for registration has been submitted within a period of 30 days from such
date. Where, however, the application for registration is submitted after the expiry of 30 days, the effective date
of registration shall be the date of grant of registration.
The aggregate turnover of X Ltd. (engaged in taxable supply of services in the State of Orissa) exceeds Rs. 20 lakh on August
25, 2019. Consider the following 2 situations –
Situation 1 - X Ltd. applies for registration on September 19, 2019 and is granted registration certificate on September 29, 2019.
Situation 2 - X Ltd. submits the application for registration on September 27, 2019 and is granted registration on October 5,
2019.
In this case, X Ltd. becomes liable for registration on August 25, 2019. The time-limit of 30 days for submitting registration
application expires on September 24, 2019. If registration application is submitted on September 19, 2019 (i.e., within 30
days), effective date of registration is August 25, 2019. If, however, registration application is submitted on September 27,
2019 (i.e., after the expiry of 30 days), effective date of registration is the date on which registration is granted (i.e., October
5, 2019).
 State-wise registration - A person seeking registration under GST shall be granted a single registration in a State/
Union Territory. A person having multiple places of business within a State/Union Territory may be granted
a separate registration for each place of business. A person who has obtained more than one registration shall,
in respect of each such registration, be treated as distinct persons for the purposes of GST.
X Ltd. is a paper manufacturing company. Head office and manufacturing unit of the company are situated in Kolkata. The
company has 3 branches – Mumbai, Indore and Surat. The company has taken 4 registrations under GST (i.e., Kolkata head
office, Mumbai branch, Indore branch and Surat branch). In this case, head office, Mumbai branch, Indore branch and Surat
branch are treated as distinct persons. Supply of goods/services between head office and branches or supply of goods/
services between branches will be subject to GST, as if supplier and recipient are distinct persons. In the case of supply
between distinct persons, GST is applicable even if such supply is made without any consideration.
 Multiple places of business within a State - Any person (having multiple places of business within a State or Union
Territory), who requires a separate registration (for any such place of business), shall be granted separate
registration in respect of each such place of business. However, separate registration is granted if the following
conditions (given by rule 11) are satisfied –
Condition 1 - Such person has more than one place of business in a State or Union Territory. “Place of business”
for this purpose includes –
a. a place from where the business is ordinarily carried on (and includes a warehouse, a godown or any other
place where a taxable person stores his goods, supplies or receives goods/services); or
b. a place where a taxable person maintains his books of account; or
c. a place where a taxable person is engaged in business through an agent (by whatever name called).
Condition 2 - Such person shall not pay tax under Composition Scheme/Alternative Composition Scheme for any
of his places of business if he is paying tax under normal provisions for any other place of business. Where any
place of business of a registered person (that has been granted a separate registration) becomes ineligible to pay
tax under Composition Scheme/Alternative Composition Scheme, all other registered places of business of the
said person shall become ineligible to pay tax under the said scheme.
Condition 3 - All separately registered places of business of such person shall pay GST on supply of goods/
services made to another registered place of business of such person and issue a tax invoice or a bill of supply,
for such supply.
Condition 4 - A registered person (opting to obtain separate registration for a place of business) shall submit a
separate application in Form GST REG-01 in respect of such place of business.
 Voluntary registration - A person (who is not otherwise required to get registration) may get himself registered
voluntarily. In such a case, all GST provisions as are applicable to a registered person, shall apply to such person.
 PAN based registration - Every person shall have a Permanent Account Number (PAN) issued under the Income-
tax Act in order to be eligible for grant of GST registration. The following are a few exceptions –
1. A person who is required to deduct tax at source (TDS) under section 51 can get registration by using his TAN
(issued under the Income-tax Act).
775 Amendment of registration Para 523.5
2. A non-resident taxable person can apply for registration by using a valid passport (and need not have a PAN
number in India). A business entity incorporated or established outside India, has to submit the application for
GST registration along with its tax identification number or unique number on the basis of which the entity is
identified by the Government of that country or its Permanent Account Number (if available).
 UNO - Any specialised agency of the UNO or any Multilateral Financial Institution and Organisation notified
under the United Nations (Privileges and Immunities) Act, Consulate or Embassy of foreign countries, shall be
granted a Unique Identity Number.
 Special provision relating to casual taxable person and non-resident taxable person - The certificate of registration
issued to a casual taxable person or a non-resident taxable person shall be valid for the period specified in the
application for registration or 90 days from the effective date of registration, whichever is earlier. Such person
shall make taxable supplies only after the issuance of the certificate of registration. The period of 90 days may
be extended by a further period of 90 days by the proper officer.
 Advance deposit - A casual taxable person or a non-resident taxable person shall (at the time of submission of
application for registration) make an advance deposit of tax in an amount equivalent to the estimated tax liability
of such person for the period for which the registration is sought. In case of extension of time, such taxable person
shall deposit an additional amount of tax equivalent to the estimated tax liability of such person for the period
for which the extension is sought.
 Registration to persons required to deduct tax at source or to collect tax at source - The proper officer may grant
registration after due verification and issue a certificate of registration in Form GST REG-06 within a period of
3 working days from the date of submission of the application.
 Registration to non-resident taxable person - A non-resident taxable person shall electronically submit an
application, along with a self-attested copy of his valid passport, for registration, duly signed or verified through
electronic verification code, in Form GST REG-09, at least 5 days prior to the commencement of business at the
common portal. In the case of a business entity incorporated or established outside India, the application for
registration shall be submitted along with its tax identification number or unique number on the basis of which
the entity is identified by the Government of that country or its PAN, if available.
A person applying for registration as a non-resident taxable person shall be given a temporary reference number
by the common portal for making an advance deposit of tax. The application for registration made by a non-
resident taxable person shall be duly signed or verified through electronic verification code by his authorised
signatory who shall be a person resident in India having a valid PAN.
 Registration to a person supplying online information and database access or retrieval services from a place outside India
to a non-taxable online recipient - For these persons, application should be submitted electronically in Form GST
REG-10. The applicant shall be granted registration in Form GST REG-06.
 Suo motu registration - Where, pursuant to any survey, enquiry, inspection, search or any other proceedings, the
proper officer finds that a person (liable to registration) has failed to apply for such registration, such officer may
register the said person on a temporary basis and issue an order in Form GST REG-12.
Every person to whom a temporary registration has been granted shall, within a period of 90 days from the date
of the grant of such registration, submit an application for registration (this limit of 90 days will be counted from
the date of appellate order, in case the concerned person has filed an appeal challenging the proper officer’s order
of granting suo motu registration).
523.5 Amendment of registration - Where there is any change in any of the particulars furnished in the
application for registration, the registered person shall, within a period of 15 days of such change, submit an
application electronically in Form GST REG-14, along with the documents relating to such change.
 Within 15 days, the proper officer can issue electronically amendment order in Form GST REG-15. This
amendment order is possible where the change relates to –
- Legal name of business.
- Address of the principal place of business or any additional place(s) of business.
- Addition, deletion or retirement of partners or directors, Karta, Managing Committee, Board of Trustees, Chief
Executive Officer or equivalent, responsible for the day to day affairs of the business.
 Where a change in the constitution of any business results in the change of the PAN of a registered person, the
said person shall apply for fresh registration in Form GST REG-01.
 Where the proper officer is of the opinion that the amendment sought is not warranted (or the documents
furnished therewith are incomplete), he may, within a period of 15 working days serve a notice in Form GST
REG-03. This show cause notice can be replied within a period of 7 working days (reply can be sent in Form GST
REG-04).
 The proper officer can reject the application (if the reply not satisfactory or if there is no reply).
 If the proper officer fails to take action within the time-limits given above, the certificate of registration shall
stand amended to the extent applied for and the amended certificate shall be made available to the registered
person on the common portal.
523.6 Cancellation or suspension of registration - The proper officer may cancel GST registration. It can be
done by him either on his own motion or on an application filed by the registered person or by his legal heirs (in
case of death of such person).
 Application - Application for cancellation of registration shall be submitted electronically in Form GST REG-
16.†
 Cancellation of registration under section 29(1) - The registration can be cancelled‡ in the following circum-
stances –
1. The business has been discontinued, transferred fully for any reason (including death of the proprietor,
amalgamated with other legal entity, demerged or otherwise disposed of).
2. There is any change in the constitution of the business.
3. The taxable person (not being a person who has taken voluntary registration) is no longer liable to be registered
under section 22 or section 24.
 Cancellation or suspension of registration under section 29(2) in case of a default - In the cases given below, the proper
officer may cancel‡ registration from such date (including a retrospective date) as he may deem fit –
1. Where a registered person has contravened such provisions of the Act or the rules made thereunder as may
be prescribed.
2. Where a person covered by Composition Scheme/Alternative Composition Scheme has not furnished returns
for 3 consecutive tax periods.
3. Where any registered person (not being a Composition Scheme/Alternative Composition Scheme taxpayer)
has not furnished returns for a continuous period of 6 months.
4. Where any person (who has taken voluntary registration) has not commenced business within 6 months from
the date of registration.
5. Where registration has been obtained by means of fraud, wilful misstatement or suppression of facts.
In these cases, the proper officer shall not cancel the registration without giving the person an opportunity of
being heard.
 Registration to be cancelled under rule 21 in a few cases - The registration granted to a person is liable to be cancelled,
if –
- The registered person does not conduct any business from the declared place of business.
- The registered person issues invoice or bill without supply of goods/services in violation of the provisions of
the Act.
- The registered person violates the provisions pertaining to Anti-profiteering measure of section 171.
- The registered person violates the provision of rule 10A pertaining to submission of bank details after getting
registration.
 Cancellation does not discharge liability of taxpayer - The cancellation of registration shall not affect the liability of
the person to pay tax and other dues under GST or to discharge any obligation under GST regulations for any
period prior to the date of cancellation (whether or not such tax and other dues are determined before or after
the date of cancellation).
 Concurrent cancellation under all GST Acts - The cancellation of registration under SGST Act/UTGST Act shall
be deemed to be a cancellation of registration under CGST Act.
† In case of cancellation of voluntary registration, cancellation application cannot be submitted before the expiry of a period of 1 year from the
effective date of registration. However, this rule is applicable only up to January 22, 2018.
‡ Law has been amended (with effect from February 1, 2019) to provide that in these cases the proper officer may temporarily suspend registration
till the procedural formalities for cancellation are completed. This measure would relieve the taxpayer of continued compliance burden under
the law till such time as the process of allowing cancellation of registration is completed.
777 Procedure for change of email and mobile number Para 523.8
 Payment of dues - Every registered person whose registration is cancelled shall pay an amount pertaining to
reversal of input tax credit which he has already claimed in respect of inputs held in stock and inputs contained
in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately
preceding the date of such cancellation.
 Procedure for cancellation - Where the proper officer has reasons to believe that the registration of a person is
liable to be cancelled, he shall issue a notice to such person in Form GST REG-17, requiring him to show cause,
within a period of 7 working days, as to why his registration shall not be cancelled.
The reply to the show cause notice can be given in Form REG-18. Where the reply furnished is found to be
satisfactory, the proper officer shall drop the proceedings and pass an order in Form GST REG-20. Where,
however, the person instead of replying to the notice, furnishes all the pending returns and makes full payment
of tax dues (along with applicable interest and late fee), the proper officer shall drop the proceedings and pass
an order in Form GST REG-20.
Where a person who has submitted an application for cancellation of his registration is no longer liable to be
registered or his registration is liable to be cancelled, the proper officer shall issue an order in Form GST REG-
19, within a period of 30 days from the date of application or the date of the reply to the show cause notice.
523.7 Revocation of cancellation of registration - Any registered person, whose registration is cancelled by
the proper officer on his own motion, may apply to such officer for revocation of cancellation of the registration.
Such application can be submitted in Form GST REG-21. The application has to be submitted electronically
within a period of 30 days from the date of the service of the order of cancellation of registration†. However, no
application for revocation shall be filed, if the registration has been cancelled for the failure of the registered
person to furnish returns, unless such returns are furnished and tax due is deposited with interest, penalty and
late fee in respect of the said returns.
 Where the proper officer is satisfied that there are sufficient grounds for revocation of cancellation of
registration, he shall revoke the cancellation of registration by an order in Form GST REG-22 within a period of
30 days from the date of the receipt of the application. Conversely, if the proper officer is not satisfied, revocation
application may be rejected by passing an order in Form GST REG-05. However, before rejecting revocation
application, a show cause notice in Form GST REG-23 should be issued. Show cause notice can be replied by the
taxpayer in Form GST REG-24 within 7 days. Reply to show cause notice can be disposed of within 30 days by
the proper officer.
 All returns due for the period from the date of the order of cancellation of registration (or effective date of
cancellation of registration) till the date of the order of revocation of cancellation shall be furnished by the
taxpayer within a period of 30 days from the date of order of revocation of cancellation of registration.
 The revocation of cancellation of registration under the SGST Act/UTGST Act shall be deemed to be a
revocation of cancellation of registration under CGST Act.

523.8 Procedure for change of email and mobile number of authorised signatory by taxpayers - The email
and mobile number can be updated by the concerned jurisdictional tax authority of the taxpayer as per the
following procedure –
- Taxpayer is required to approach the concerned jurisdictional Tax Officer to get the password for the GSTIN
allotted to the business (jurisdiction can be checked through Search Taxpayer option available on https://
www.gst.gov.in).
- Taxpayer would be required to provide valid documents to the Tax Officer as proof of his/her identity and
to validate the business details related to his GSTIN.
- Tax Officer will check if the said person is added as a Stakeholder or Authorized Signatory for that GSTIN
in the system.
- Tax Officer will upload necessary proof on the GST portal in support to authenticate the activity.
- Tax Officer will enter the new email address and mobile phone number provided by the taxpayer.
- After upload of document, Tax Officer will reset the password for the GSTIN in the system.
† In a few cases where registration was cancelled up to March 31, 2019 (due to non-submission of return for a continue speed of 6 months or non-
commencement of business within 6 months from the date of registration) application for revocation of registration can be filed up to July 22, 2019
– Order No. 5/2019, dated April 23, 2019.
- Username and temporary password reset will be communicated to the email address as entered by the Tax
Officer.
- Taxpayer need to login on GST Portal https://www.gst.gov.in/using the first time login link.
- After first time login with the username and temporary password that was emailed to him, system would
prompt the taxpayer to change username and password. The said username and password can now be used
by the taxpayer.
523.9 Method of authentication - All applications, including reply, if any, to the notices, returns including the
details of outward and inward supplies, appeals or any other document required to be submitted shall be
so submitted electronically with digital signature or through e-signature or verified by any of the following
modes –
- Aadhaar based Electronic Verification Code (EVC).
- Electronic verification code generated through net banking login on the common portal.
- Electronic verification code generated on the common portal.
However, a corporate taxpayer shall furnish documents/application verified through digital signature only.
523.10 Who will verify the registration application - Each document/return furnished online shall be signed
or verified by the following persons –
Individual By the individual himself or where he is absent from India, by some other person duly
authorised by him in this behalf.
Where the individual is mentally incapacitated from attending to his affairs, by his
guardian or by any other person competent to act on his behalf.
Hindu undivided family By the Karta and where the Karta is absent from India or is mentally incapacitated from
attending to his affairs, by any other adult member of such family or by the authorised
signatory of such Karta.
Company By the chief executive officer or authorised signatory.
Government/government By an officer authorised in this behalf.
agency/local authority
Firm By any partner thereof, not being a minor or authorised signatory.
AOP/BOI By any member of the association or persons or authorised signatory thereof.
Trust By the trustee or any trustee or authorised signatory thereof.
Any other By some person competent to act on his behalf, or by a person authorised in accordance with
the provisions of section 48.
●
Test your knowledge

1. What is threshold limit for registration ? [para 522]
2. Discuss the significance of “aggregate turnover” in the case of registration. [para 522]
3. Aggregate turnover of a person is more than threshold limit. Narrate the circumstances, when such a person is not
liable for registration. [para 522.2]
4. Aggregate turnover of a person is not more than threshold limit. Narrate the circumstances, when such a person is
liable for registration. [para 522.3]
5. Who is a casual taxable person ? [para 522.3-2]
6. Prepare a note explaining registration requirement in the case of persons connected with electronic commerce. [para
522.3-4]
7. Explain the registration requirement in the following cases –
- Non-resident taxable person.
- A person who is required to deduct tax at source.
- Agent.
- Input Service Distributor.
- Online information and database access service. [para 522.3]
8. What is the registration requirement in the case of transfer of business/merger/amalgamation ? [para 522.4]
9. Write a note on registration application. [para 523.2]
10. What is registration certificate ? [para 523.4]

11. What is suo motu registration ? [para 523.4]
12. “Registration once granted, cannot be amended”, discuss ? [para 523.5]
13. What are the circumstances when registration certificate is required to be cancelled ? [para 523.6]
14. Discuss the rule pertaining to revocation of cancellation of registration. [para 523.7]
15. What is the mode of authentication of registration application ? [para 523.9]
16. Who will verify registration application? [para 523.10]
CHAPTER 31
Tax invoice, credit and
debit notes
A
n invoice is a commercial instrument issued by a seller to a buyer. It identifies the
trading parties, describes, and quantifies the items sold, shows the date of shipment
and mode of transport, prices and discounts, if any, and the delivery and payment
terms. This chapter explains provisions regulating tax invoice, credit and debit notes and
other related issues.
 WHAT IS INVOICE UNDER GST

531. Under the GST regime, an “invoice” or “tax invoice” means the tax invoice referred to in section 31. This
section mandates the issuance of an invoice or a bill of supply for every supply of goods or services. It is not
necessary that only a person supplying goods or services needs to issue an invoice. The GST law mandates that
any registered person buying goods or services from an unregistered person needs to issue a payment voucher
as well as a tax invoice. The type of invoice to be issued depends upon the category of registered person making
the supply. For example, if a registered person is making or receiving supplies (from unregistered persons), then
a tax invoice needs to be issued by such registered person. However, if a registered person is dealing only in
exempted supplies or is availing the Composition Scheme/Alternative Composition Scheme (composition
dealer), then such a registered person needs to issue a bill of supply in lieu of invoice. The invoice should contain
description, quantity and value and such other prescribed particulars (in case of supply of goods), and the
description and value and such other prescribed particulars (in case of supply of services). An invoice or a bill
of supply need not be issued if the value of the supply is less than Rs. 200, subject to specified conditions.
 WHAT IS IMPORTANCE OF TAX INVOICE UNDER GST

532. Under GST, a tax invoice is an important document. It not only evidences the supply of goods or services,
but is also an essential document for the recipient to avail input tax credit. A registered person cannot avail input
tax credit unless he is in possession of a tax invoice or a debit note.
GST is chargeable at the time of supply. Invoice is an important indicator of the time of supply. Broadly speaking,
the time of supply of goods is the date of issuance of an invoice. In the case of supply of services, the time of supply
of services is the date of issuance of an invoice or receipt of payment, whichever is earlier.
Thus, the importance of an invoice under GST cannot be over-emphasised. Suffice it to say, the tax invoice is the
primary document evidencing the supply and vital for availing input tax credit.
 WHEN TAX INVOICE/BILL OF SUPPLY BE ISSUED BY A REGISTERED PERSON

533. Time for issuing an invoice depends upon the nature of supply (viz., whether it is supply of goods or supply
of services).
533.1 Time for issue of tax invoice in the case of taxable supply of goods - Section 31(1) covers time of issue
of invoice in the case of supply of goods. Invoice is required to be issued before or at the time of –
780
781 What are the contents of tax invoice Para 534
The obligation of the supplier of goods is to issue the invoice latest by performance of any of the above 3 activities.
For instance, X dispatches goods to Y from his depot on December 10, 2019. X can issue invoice on or before
December 10, 2019. The following points should be kept in view –
 Continuous supply of goods - In case of continuous supply of goods, where successive statements of accounts or
successive payments are involved, the invoice shall be issued before or at the time each such statement is issued
or each such payment is received.
 Goods on approval - Invoice of goods sent on approval is required to be issued –
a. within 6 months from the date of removal of goods, or

b. the date when recipient indicates that he has accepted the supply of goods,
533.2 Time for issue of tax invoice in the case of taxable supply of services - Rule 47 covers time of issue of
invoice in the case of taxable supply of services. Such invoice should be issued before the provision of service.
Alternatively, it can be issued after the provision of service but within 30 days from the date of supply of service.
However, different time-limit is applicable in the following cases –
1. When supplier of services is an insurer/banking company/financial institution/non-banking financial
company, invoice can be issued within 45 days from the date of the supply of service.
2. An insurer/banking company/financial institution/non-banking financial company/telecom operator,
making taxable supplies of services between distinct persons (i.e., service provided by one branch to another
branch) may issue the invoice before or at the time such supplier records the same in his books of account or
before the expiry of the quarter during which the supply is made.
 Continuous supply of services - “Continuous supply of services” means a supply of services which is provided
(or agreed to be provided) continuously or on recurrent basis, under a contract. Such a contract is for a period
exceeding 3 months with periodic payment obligations.
In the case of continuous supply of service –
- Where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the
due date of payment.
- Where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at
the time when the supplier of service receives the payment.
- Where the payment is linked to the completion of an event, the invoice shall be issued on or before the date
of completion of that event.
 Where supply of services ceases under a contract before completion - In a case where the supply of services ceases
under a contract before the completion of the supply, the invoice shall be issued at the time when the supply
ceases and such invoice shall be issued to the extent of the supply made before such cessation.
 Case 1 - X Ltd. manufactures computer hard disk in its factory in Bhiwadi Industrial Area, Haryana. It supplies 100 units
of hard disk to Y Ltd. These hard disks are removed from factory on November 3, 2019 for the purpose of delivery to Y Ltd.
In this case, tax invoice should be issued on or before November 3, 2019.
 Case 2 - Z Ltd. provides event management service to fashion designers. All India fashion designing competition is
organised by Wills Lifestyle in Mumbai at ITC Maratha on February 10, 2020. Event management service is provided by Z
Ltd. for a consideration of Rs. 5 lakh + GST. In this case, invoice can be issued on or before March 12, 2020 (i.e., within 30
days from February 10, 2020).
 Case 3 - B provides software maintenance service to C Ltd. for the financial year 2019-20 (monthly charges being Rs. 40,000,
due date of payment is 10th day of each month). This is a continue service. Due date of payment is ascertainable. For the
month of April 2019, invoice should be issued on or before April 10, 2019.
 Case 4 - Assume in the above case, due date of payment is not ascertainable from the contract between B and C Ltd.
However, for the month of April 2019, C Ltd. makes payment on April 15, 2019. Invoice should be issued by B on or before
April 15, 2019.
 WHAT ARE THE CONTENTS OF TAX INVOICE

534. There is no format prescribed for an invoice under CGST Act. However, rule 46 makes it mandatory for an
invoice to have the following fields (only applicable field are to be filled) –
Para 534.1 Tax invoice, credit and debit notes 782
a. Name, address and GSTIN of the supplier.

b. A consecutive serial number (not exceeding 16 characters, in one or multiple series, containing alphabets or
numerals or special characters – hyphen or dash and slash symbolised as “-” and “/” respectively, and any
combination thereof, unique for a financial year).
c. Date of its issue.
d. If recipient is registered - Name, address and GSTIN or UIN of the recipient.
e. If recipient is unregistered and value of taxable supply is Rs. 50,000 or more - Name and address of the recipient and the
address of delivery, along with the name of the State and its code.
f. If recipient is unregistered and value of taxable supply is less than Rs. 50,000 - Name and address of the recipient and
the address of delivery, along with the name of the State and its code (if the recipient requests that such details be
recorded in the tax invoice).
g. Harmonised System of Nomenclature (HSN) code for goods or services [see para 534.1].
h. Description of goods or services.
i. Quantity in case of goods and unit or Unique Quantity Code thereof.
j. Total value of supply of goods or services or both.
k. Taxable value of the supply of goods or services or both taking into account discount or abatement, if any.
l. Rate of tax (CGST, SGST, IGST, UTGST or GST cess).
m. Amount of tax charged in respect of taxable goods or services (CGST, SGST, IGST, UTGST or GST cess).
n. Place of supply† along with the name of the State, in the case of a supply in the course of inter-State trade or
commerce.
o. Address of delivery where the same is different from the place of supply.
p. Whether the tax is payable on reverse charge basis.
q. Signature or digital signature of the supplier or his authorised representative.
534.1 Harmonized System of Nomenclature (HSN) - Harmonized System of Nomenclature (HSN) was
developed by the World Customs Organization (WCO) with the vision of classifying goods all over the World
in a systematic manner. HSN contains six digit uniform code that classifies 5,000+ products and which is
accepted worldwide. India is using HSN in indirect taxes since 1986. Indian version is a much more detailed
classification that added another two digits to the 6-digit structure. Under GST regime, suppliers of goods/
services are required to follow a 3-tiered structure of HSN as follows –
If annual turnover of the supplier (in the immediately preceding financial year) is –
- up to Rs. 1.50 crore, the supplier need not mention HSN in the invoice,
- more than Rs. 1.50 crore but up to Rs. 5 crore, the supplier shall use 2 digit HSN code,
- more than Rs. 5 crore, the supplier should use 4 digit HSN codes
Those persons who are in the business of imports or exports, shall mandatorily follow 8 digit HSN codes.
534.2 If taxable value is less than Rs. 200 - A registered person may not issue a tax invoice if the value of
goods/services supplied is less than Rs. 200, if the following conditions are satisfied (these conditions are
cumulative) –
1. The recipient is not a registered person.
2. The recipient does not require such invoice.
3. The registered person (who supplied goods/services) shall issue a consolidated tax invoice for such supplies
at the close of each day in respect of all such supplies.
 This provision is not applicable in the case of a supplier who is engaged in making supply of services by way
of admission to exhibition of cinematograph films in multiplex screens (applicable with effect from July 18, 2019)
[see also para 540.6].
† GST is a destination-based consumption tax. It is essential to ensure that the tax paid by a registered person accrues to the State in which the
consumption of goods/services takes place. In case of inter-State supply, this is ensured by capturing the details of the place of supply along with
the name of the State in the tax invoice. Therefore, place of supply should be correctly mentioned in the tax invoice. These rules are given in sections
10 and 12 of IGST Act [see paras 448 and 449] – Circular No. 90/09/2019-GST, dated February 18, 2019.
783 Other relevant points pertaining to tax invoice Para 534.3
X owns a departmental store in Hapur. Grocery items and cosmetic goods of all brands are available in his store. The
following information is noted from his records pertaining to December 8, 2019 –
Items Purchaser Amount charged in Rs. (before GST)
Bath oil Y (unregistered dealer) 180
Hair cream Z Ltd. (registered dealer) 10,500
Shampoo A (unregistered dealer) 1,400
Eau-de-cologne B (unregistered dealer) 250
Shaving cream C (unregistered dealer) 110
Nail polish D (unregistered dealer) 190
Face powder E (registered dealer) 95
Toothpaste F (registered dealer under Composition Scheme) 120
Nail polish remover G (unregistered dealer) 200
C wants tax invoice. No other recipient of goods is interested in taking tax invoice.
In this case, consolidated tax invoice can be issued in the case of Y (value of supply : Rs. 180) and D (value of supply :
Rs. 190) only. Y and D are unregistered dealers and they do not want tax invoice. In all other cases, tax invoice will have to
be issued to each recipient separately. Consolidated tax invoice is not possible in the case of –
- Z Ltd. (value of supply is not less than Rs. 200 and recipient is not unregistered),
- A (value of supply is not less than Rs. 200).
- B (value of supply is not less than Rs. 200).
- C (he wants tax invoice).
- E (value of supply is less than Rs. 200 but E is registered dealer).
- F (value of supply is less than Rs. 200 but F is registered dealer).
- G (value of supply is not less than Rs. 200).
534.3 Other relevant points pertaining to tax invoice - One should also keep in view the following points –
 Revised invoice in the case of new registration - A registered person may, within 1 month from the date of issuance
of certificate of registration, issue a revised invoice against the invoice already issued during the period
beginning with the effective date of registration till the date of issuance of certificate of registration to him [see
para 539].
 Bill of supply - A registered person supplying exempted goods/services or paying tax under Composition
Scheme/Alternative Composition Scheme shall issue, instead of a tax invoice, a bill of supply [see para 535].
However, a consolidated bill of supply may be issued if conditions given in para 534.2 are satisfied.
 Receipt voucher in case payment is received in advance - A registered person shall, on receipt of advance payment
with respect to any supply of goods/services, issue a receipt voucher or any other document, evidencing receipt
of such payment [see para 536].
Advance payment is received by a registered dealer and receipt voucher is issued by him to the recipient of
supply. But subsequently no supply is made and no tax invoice is issued. The said registered person may issue
to the other party, a refund voucher against such payment [see para 537].
 Invoice/consolidated invoice/payment voucher if tax is payable by recipient under reverse charge mechanism - There are
two types of reverse charge scenarios provided in law –
Section 9(3) Section 9(4)
Under this section, tax is payable by Under this section, GST in respect of the supply of taxable goods/services by a
recipient of supply. This section supplier (who is unregistered) to a registered person shall be paid by the reci-
covers a few cases depending upon pient under reverse charge mechanism. However, section 9(4) has two excep-
nature of supply and/or nature of tions (reverse charge mechanism not applicable in cases given below) –
supplier [see para 482] - Where the aggregate value of supplies of goods/ services received by a
registered person from any (or all) unregistered suppliers is less than Rs. 5,000
in a day.
- Provisions of section 9(4) are not applicable during October 13, 2017 and
March 31, 2019. From April 1, 2019, section 9(4) is applicable in a few notified
cases [see para 572.2].
Invoice - A registered person [who is liable to pay tax under reverse charge mechanism under section 9(3)/(4)]
shall issue an invoice in respect of goods/services received by him from the supplier who is not registered on
the date of receipt of goods/services.
Para 535 Tax invoice, credit and debit notes 784
Consolidated invoice in cases covered by section 9(4) - A consolidated invoice may be issued at the end of a month
for supplies covered under section 9(4) (the aggregate value of such supplies exceeds Rs. 5,000 in a day from all
or any suppliers).
Payment voucher - A registered person [who is liable to pay tax under reverse charge mechanism under section
9(3)/(4)] shall issue a payment voucher at the time of making payment to the supplier [see para 538].
 Export of goods/services - In the case of the export of goods/services, the invoice shall carry an endorsement given
below (any one of the two) –

SUPPLY MEANT FOR EXPORT/SUPPLY TO SEZ UNIT OR “SUPPLY MEANT FOR EXPORT/SUPPLY TO SEZ UNIT
SEZ DEVELOPER FOR AUTHORISED OPERATIONS ON OR SEZ DEVELOPER FOR AUTHORISED OPERATIONS
PAYMENT OF INTEGRATED TAX UNDER BOND OR LETTER OF UNDERTAKING WITH-
OUT PAYMENT OF INTEGRATED TAX”
Besides, the tax invoice should contain the following details – name and address of the recipient, address of
delivery, and name of the country of destination.
 Invoice-cum-bill of supply - Notwithstanding anything contained in rule 46 or rule 49 or rule 54, where a
registered person is supplying taxable as well as exempted goods or services or both to an unregistered person,
a single “invoice-cum-bill of supply” may be issued for all such supplies.
 Manner of issuing invoice - The invoice shall be prepared in triplicate, in the case of supply of goods, in the
following manner –
- Original copy being marked as ORIGINAL FOR RECIPIENT.
- Duplicate copy being marked as DUPLICATE FOR TRANSPORTER.
- Triplicate copy being marked as TRIPLICATE FOR SUPPLIER.
The invoice shall be prepared in duplicate, in the case of the supply of services, in the following manner –
- Original copy being marked as ORIGINAL FOR RECIPIENT.
- Duplicate copy being marked as DUPLICATE FOR SUPPLIER.
The serial number of invoices issued during a tax period shall be furnished electronically through the common
portal in Form GSTR-1.
 Electronic invoice - Signature or digital signature of the supplier or his authorised representative shall not be
required in the case of issuance of an electronic invoice in accordance with the provisions of the Information
Technology Act, 2000.
 WHAT ARE THE CONTENTS OF BILL OF SUPPLY

535. A registered person supplying exempted goods/services or paying tax under Composition Scheme/
Alternative Composition Scheme shall issue, instead of a tax invoice, a bill of supply. A bill of supply contains
the following –
d. Name, address and GSTIN or UIN, if registered, of the recipient.
e. Harmonised System of Nomenclature Code (HSN) for goods or services.
f. Description of goods/services.
g. Value of supply of goods/services taking into account discount or abatement, if any.
h. Signature or digital signature of the supplier or his authorised representative.

1. HSN - See para 534.1.
2. If taxable value is less than Rs. 200 - See para 534.2.
3. Similar document - Any tax invoice or any other similar document issued under any other Act for the time being
in force in respect of any non-taxable supply shall be treated as a bill of supply for the aforesaid purpose.
785 What are the Contents of Refund Voucher Para 537
4. Electronic bill of supply - Signature or digital signature of the supplier or his authorised representative shall not
be required in the case of issuance of an electronic bill of supply in accordance with the provisions of the
Information Technology Act.
 WHAT ARE THE CONTENTS OF RECEIPT VOUCHER

536. A registered person shall, on receipt of advance payment with respect to any supply of goods/services,
issue a receipt voucher or any other document, evidencing receipt of such payment. A receipt voucher shall
contain the following particulars –
e. Description of goods or services.
f. Amount of advance taken.
g. Rate of tax (CGST, SGST, ITGST, UTGST or GST cess).
h. Amount of tax charged in respect of taxable goods or services (CGST, SGST, ITGST, UTGST or GST cess).
i. Place of supply along with the name of State and its code, in case of a supply in the course of inter-State trade or
commerce.
j. Whether the tax is payable on reverse charge basis.
k. Signature or digital signature of the supplier or his authorised representative.

1. Rate of tax not determinable - If the rate of tax is not determinable, the tax shall be paid at the rate of 18 per cent.
2. Nature of supply not determinable - If the nature of supply is not determinable, the same shall be treated as inter-
State supply.
3. GST on advance payment - GST is payable on receipt of advance payment. However, the Government has given
a concession in the case of small taxpayers (having turnover of Rs. 1.5 crore or less) (with effect from October 13,
2017) and in the case of all taxpayers (with effect from November 15, 2017). After this concession, GST is not
payable on receipt of advance payment in the case of supply of goods (no such concession is given in the case
of supply of services).
 WHAT ARE THE CONTENTS OF REFUND VOUCHER

537. Advance payment is received by a registered dealer and receipt voucher is issued by him to the recipient
of supply. But subsequently no supply is made and no tax invoice is issued. The said registered person may issue
to the other party, a refund voucher against such payment. A refund voucher shall contain the following
particulars –
e. Number and date of receipt voucher issued.
f. Description of goods or services in respect of which refund is made.
g. Amount of refund made.
h. Rate of tax (CGST, SGST, ITGST, UTGST or GST cess).
i. Amount of tax paid in respect of such goods or services (CGST, SGST, ITGST, UTGST or GST cess).
j. Whether the tax is payable on reverse charge basis.
k. Signature or digital signature of the supplier or his authorised representative.
Para 538 Tax invoice, credit and debit notes 786
 WHAT ARE THE CONTENTS OF PAYMENT VOUCHER

538. A registered person (who is liable to pay tax under reverse charge mechanism) shall issue a payment
voucher at the time of making payment to the supplier. A payment voucher shall contain the following
particulars –
a. Name, address and GSTIN of the supplier, if registered.
d. Name, address and GSTIN of the recipient.
e. Description of goods or services.
f. Amount paid.
g. Rate of tax (CGST, SGST, ITGST, UTGST or GST cess).
h. Amount of tax payable in respect of taxable goods or services (CGST, SGST, ITGST, UTGST or GST cess).
i. Place of supply along with the name of State and its code, in case of a supply in the course of inter-State trade or
commerce.
j. Signature or digital signature of the supplier or his authorised representative.
 WHAT ARE THE CONTENTS OF REVISED TAX INVOICE

539. A registered person may, within 1 month from the date of issuance of certificate of registration, issue a
revised invoice against the invoice already issued during the period beginning with the effective date of
registration till the date of issuance of certificate of registration to him. A revised tax invoice shall contain the
following particulars –
a. The word “Revised invoice”, wherever applicable, indicated prominently.
b. Name, address and GSTIN of the supplier.
c. A consecutive serial number (not exceeding 16 characters, in one or multiple series, containing alphabets or
d. Date of issue of the document.
e. Name, address and GSTIN or UIN, if registered, of the recipient.
f. Name and address of the recipient and the address of delivery, along with the name of State and its code, if such
recipient is unregistered.
g. Serial number and date of the corresponding tax invoice/bill of supply.
h. Signature or digital signature of the supplier or his authorised representative.
539.1 Other relevant points - The following points should be noted –

1. Every registered person who has been granted registration with effect from a date earlier than the date of
issuance of certificate of registration to him, may issue revised tax invoices in respect of taxable supplies effected
during the period starting from the effective date of registration till the date of the issuance of the certificate of
registration.
2. The registered person may issue a consolidated revised tax invoice in respect of all taxable supplies made to
a recipient who is not registered during such period.
3. In the case of inter-State supplies, where the value of a supply does not exceed Rs. 2,50,000, a consolidated
revised invoice may be issued separately in respect of all the recipients located in a State, who are not registered.
4. Any invoice issued in pursuance of any tax payable in accordance with the provisions of section 74 or section
129 or section 130 shall prominently contain the words “INPUT TAX CREDIT NOT ADMISSIBLE”.
787 Service supplied by insurer, bank, etc. Para 540.3
X & Co. is a partnership firm of two partners X and Y. It commences the business of providing consultancy services of interior
decoration on July 20, 2019 as unregistered person. The turnover of the firm between July 20, 2019 and October 20, 2019 is
Rs. 20 lakh. It becomes liable for registration under GST with effect from October 21, 2019. It applies for registration on
November 2, 2019 (i.e., within statutory time of 30 days). Registration is granted with GSTIN on November 4, 2019. Since
it applies for registration within 30 days from October 21, 2019, registration is granted with effect from October 21, 2019.
X & Co. can issue revised invoices pertaining to taxable supplies effected during October 21, 2019 and November 4, 2019.
These revised invoices should contain the details given above. These revised invoices can be issued within 1 month from
November 4, 2019 (i.e., on or before December 3, 2019).
 WHAT ARE THE PROVISIONS REGARDING TAX INVOICE IN SPECIAL CASES GIVEN
UNDER RULE 54
540. The following special cases are given in rule 54 –
540.1 Input Service Distributor - An Input Service Distributor invoice (or an Input Service Distributor credit
note) issued by an Input Service Distributor shall contain the following details –
a. Name, address and GSTIN of the Input Service Distributor.
d. Name, address and GSTIN of the recipient to whom the credit is distributed.
e. Amount of the credit distributed.
f. Signature or digital signature of the Input Service Distributor or his authorised representative.
Note - Where the Input Service Distributor is an office of a banking company or a financial institution, including
a non-banking financial company, a tax invoice shall include any document in lieu thereof, by whatever name
called. It may (or may not) be serially numbered but it should contain the information as mentioned above.
540.2 Transfer of common credit to Input Service Distributor - A registered person (having the same PAN and
State code as an Input Service Distributor) may issue an invoice (or a credit or debit note) to transfer the credit
of common input services to the Input Service Distributor, which shall contain the following details —
i. Name, address and GSTIN of the registered person (having the same PAN and same State code as the Input Service
Distributor).
ii. A consecutive serial number (not exceeding 16 characters, in one or multiple series, containing alphabets or
iii. Date of its issue.
iv. GSTIN of supplier of common service and original invoice number whose credit is sought to be transferred to the
Input Service Distributor.
v. Name, address and GSTIN of the Input Service Distributor.
vi. Taxable value, rate and amount of the credit to be transferred.
vii. Signature or digital signature of the registered person or his authorised representative.
Note - The taxable value in the above invoice shall be the same as the value of the common services.
540.3 Service supplied by insurer, bank, etc. - Rule 54(2) covers the case when supplier of taxable service is
an insurer or a banking company or a financial institution or a non-banking financial company. In these cases,
supplier may issue a consolidated tax invoice (or any other document in lieu thereof) for the supply of services
made during a month. This invoice should be issued at the end of the month. It may be issued/made available
in paper format or electronically. It may (or may not) be serially numbered. It may (or may not) contain the
address of the recipient of taxable service. However, other information given in para 534 should be included.
Signature or digital signature of the supplier or his authorised representative shall not be required in the case
of issuance of a consolidated tax invoice or any other document in lieu thereof in accordance with the provisions
of the Information Technology Act, 2000.
540.4 Goods transport agency - Rule 54(3) covers the case when supplier of taxable service is a goods transport
agency. It supplies services in relation to transportation of goods by road in a goods carriage. The said supplier
shall issue a tax invoice (or any other document in lieu thereof). It should contain the following –
- Gross weight of the consignment.
- Name of the consigner and the consignee.
- Registration number of goods carriage in which the goods are transported.
- Details of goods transported.
- Details of place of origin and destination.
- GSTIN of the person liable for paying tax (whether as consigner, consignee or goods transport agency).
- Other information as mentioned in para 534.
540.5 Passenger transport service - Rules 54(4) covers the case when a person is supplying passenger
transportation service. In this case, a tax invoice shall include ticket in any form (by whatever name called)
whether (or not) serially numbered. It may (or may not) contain the address of the recipient of service but it
should contain other information given in para 534.
Signature or digital signature of the supplier or his authorised representative shall not be required in the case
of issuance of ticket in accordance with the provisions of the Information Technology Act, 2000.
540.6 Exhibition of cinematograph films service - Rule 54(4A) covers the case of registered person who
supplies services by way of admission to exhibition of cinematograph films in multiplex screens. Such person
is required to issue an electronic ticket and the said electronic ticket shall be deemed to be a tax invoice for all
purposes of the GST Act. Electronic ticket shall be taken as invoice, even if such ticket does not contain the details
of the recipient of service but contains the other information as mentioned under rule 46 [given in para 534 in
this book].
 A supplier of above service in a screen other than multiplex screens may, at his option, follow the above
procedure.
 WHAT ARE PROVISIONS OF TRANSPORTATION OF GOODS WITHOUT ISSUE OF INVOICE

541. Rule 55 provides special provisions which are applicable in the following cases –
1. Supply of liquid gas where the quantity at the time of removal from the place of business of the supplier is not
known.
2. Transportation of goods for job work.
3. Transportation of goods for reasons other than by way of supply.
4. Such other supplies as may be notified by the Board.
 Delivery challan - In these cases, the consignor may issue a delivery challan in lieu of invoice. Delivery challan
should be issued at the time of removal of goods for transportation. It should be serially numbered (not exceeding
16 characters, in one or multiple series). The delivery challan should contain the following—
i. Date and number of the delivery challan.
ii. Name, address and GSTIN of the consigner, if registered.
iii. Name, address and GSTIN or UIN of the consignee, if registered.
iv. Harmonised System of Nomenclature (HSN) code and description of goods.
v. Quantity (provisional, where the exact quantity being supplied is not known).
vi. Taxable value.
vii. Tax rate and tax amount – CGST, SGST, ITGST, UTGST or GST cess, where the transportation is for supply to the
consignee.
viii. Place of supply, in case of inter-State movement.
ix. Signature.
 Manner of issuing delivery challan - The delivery challan shall be prepared in triplicate, in the case of supply of
goods, in the following manner –

- Original copy being marked as ORIGINAL FOR CONSIGNEE.
- Duplicate copy being marked as DUPLICATE FOR TRANSPORTER.
- Triplicate copy being marked as TRIPLICATE FOR CONSIGNOR.
789 Credit notes Para 543.1
 Tax invoice after delivery of goods - Where the goods being transported are for the purpose of supply to the
recipient but the tax invoice could not be issued at the time of removal of goods for the purpose of supply, the
supplier shall issue a tax invoice after delivery of goods.
 Goods in SKD/CKD condition - The following rules are applicable if goods are transported in a semi knocked
down or completely knocked down condition or in batches or lots—

1. The supplier shall issue the complete invoice before dispatch of the first consignment.
2. The supplier shall issue a delivery challan for each of the subsequent consignments, giving reference of the
invoice.
3. Each consignment shall be accompanied by copies of the corresponding delivery challan along with a duly
certified copy of the invoice.
4. The original copy of the invoice shall be sent along with the last consignment.
 Tax invoice or bill of supply to accompany transport of goods - The person-in-charge of the conveyance shall carry
a copy of the tax invoice or the bill of supply in a case where such person is not required to carry an e-way bill
under the aforesaid rules.
 WHAT ARE PROVISIONS PERTAINING TO COLLECTION OF TAX AND ITS INDICATION IN

INVOICE [SECS. 32 AND 33]
542. The following provisions are given by sections 32 and 33 –
 Unauthorized collection of tax - A person who is not a registered person shall not collect in respect of any supply
of goods/services any amount by way of GST. Moreover, a registered person shall not collect tax except in
accordance with the provisions of CGST Act, SGST Act, UTGST Act, IGST Act or the rules made thereunder.
 Amount of tax to be indicated in invoice - Where any supply is made for a consideration, every person who is liable
to pay tax for such supply shall prominently indicate in all documents relating to assessment, tax invoice and
other like documents, the amount of tax which shall form part of the price at which such supply is made.
 WHAT ARE CREDIT AND DEBIT NOTES
543. Section 34 regulates provisions pertaining to issue of credit and debit notes –
543.1 Credit notes - A credit note may be issued in the following circumstances –
1. Where a tax invoice has been issued for supply of any goods/services and the taxable value (or tax charged)
in that tax invoice is found to exceed the taxable value (or tax payable) in respect of such supply.
2. Where the goods supplied are returned by the recipient (or where goods/services supplied are found to be
deficient).
In the above two cases, the registered person (who is supplier) may issue to the recipient a credit note. Law has
been amended (with effect from February 1, 2019) to permit a registered person to issue consolidated credit note
in respect of multiple invoices issued in a financial year without linking the same to individual invoices. Barring
the two cases given above, credit note cannot be issued (e.g., credit note cannot be issued for bad debts). A credit
note should contain the details as prescribed by rule 53 [see para 543.2].
 Declaration of credit note in return - Any registered person who issues a credit note in relation to a supply of
goods/services shall declare the details of such credit note in the return for the month during which such credit
note has been issued. However, credit note cannot be issued later than –
a. September following the end of the financial year in which such supply was made, or
b. the date of furnishing of the relevant annual return,
The tax liability shall be adjusted in such manner as may be prescribed. However, no reduction in output tax
liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed
on to any other person.
X Ltd. is a registered person under GST. It supplies 100 laptops to Y Ltd. on February 8, 2019. Out of this supply, 3 laptops
are returned. Credit note can be issued in the month in which these laptops are returned. Annual return for the financial
year 2018-19 can be submitted on or before December 31, 2019 (suppose, annual return is submitted on October 9, 2019). In
this case, credit note cannot be issued later than –
a. September 30, 2019, or
b. October 9, 2019,
Consequently, if these laptops are returned during September 2019 (or earlier), credit note can be issued and the relevant
detail can be uploaded in the return pertaining to the month in which credit note is issued. If laptops are returned after
September 2019, credit note cannot be issued.
543.2 Debit notes - A debit note may be issued in the following case –
Where a tax invoice has been issued for supply of any goods/services and the taxable value (or tax charged in
that tax invoice) is found to be less than the taxable value (or tax payable in respect of such supply).
In the aforesaid case, the registered person (who is the supplier) shall issue to the recipient a debit note.
Law has been amended (with effect from February 1, 2019) to permit a registered person to issue consolidated
debit note in respect of multiple invoices issued in a financial year without linking the same to individual
invoices.
A debit note should contain the details as prescribed by rule 53 [see para 543.2].
 Declaration of debit note in return - Any registered person who issues a debit note in relation to a supply of goods/
services shall declare the details of such debit note in the return for the month during which such debit note has
been issued. Tax liability shall be adjusted in such manner as may be prescribed.
543.3 Contents of credit or debit note - A credit or debit note shall contain the following details –
a. Name, address and GSTIN of supplier.
b. Nature of the document.
c. A consecutive serial number (not exceeding 16 characters, in one or multiple series, containing alphabets or
numerals or special characters-hyphen or dash and slash symbolised as “-” and “/” respectively, and any
d. Date of issue of the document;
e. Name, address and GSTIN or Unique Identity Number, if registered, of the recipient.
f. Name and address of the recipient and the address of delivery, along with the name of State and its code, if such
recipient is unregistered.
g. Serial number(s) and date(s) of the corresponding tax invoice(s) or, as the case may be, bill(s) of supply.
h. Value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be,
debited to the recipient.
i. Signature or digital signature of the supplier or his authorised representative.
 Problems on tax invoice, credit and debit notes

544-P1 When tax invoice should be issued in the following case –
1. X Ltd. and Y Ltd. entered into an agreement on July 18, 2019. Under the agreement, X Ltd. will sell 1,000 UPS manufactured by
it at the rate of Rs. 6,750 per unit.
2. On the approval of Y Ltd., X Ltd. purchased raw material on July 20, 2019.
3. Production of UPS started in the factory of X Ltd. on July 24, 2019.
4. Sample product is approved by Y Ltd. on July 27, 2019.
5. Production is completed on August 3, 2019.
6. Before packing, inspection done and goods are approved by team of Y Ltd. on August 4, 2019.
7. Goods are ready for delivery on August 5, 2019 (3:30 pm).
8. Delivery given to Y Ltd. on August 6, 2019.
9. Payment received on August 28, 2019.
Solution :
As per section 31(1), invoice is required to be issued before or at the time of –
The obligation of X Ltd., the supplier of goods, is to issue the invoice latest by performance of any of the above 3 activities.
In this case, goods are delivered on August 6, 2019. Consequently, invoice should be issued on or before August 6, 2019.
544-E1 In Problem 544-P1, assume that Rs. 10,000 is received in advance on August 1, 2019 and final payment is received on August
28, 2019. When tax invoice should be issued?
544-P2 When tax invoice should be issued in the following case –

1. A Ltd. is supplier of goods. B Ltd. is recipient of goods.
2. Date of removal of goods from the godown of A Ltd. for sending for approval to B Ltd. : January 6, 2020.
791 Problems on tax invoice, credit and debit notes Problem 544-P4
3. Acceptance indicated by B Ltd. : July 28, 2020.

4. Payment by B Ltd. : July 29, 2020.
Solution :
Section 31(7) requires that invoice should be issued within 6 months from the date of removal of goods, or the date when
recipient indicates that he has accepted the supply of goods, whichever is earlier. In this case, goods are removed from the
godown of A Ltd. on January 6, 2020. 6 month time-limit expires on July 5, 2020. However, goods are approved on July 28,
2020. Therefore, invoice should be issued on or before July 5, 2020.
544-E2 In Problem 544-P2, assume that acceptance for approval is given by B Ltd. on January 10, 2020. When tax invoice should
be issued.
544-P3 When tax invoice should be issued in the case given below –
On October 16, 2019, C Ltd. gives a building construction contract to A Ltd. (contractor). A Ltd. will construct the building by using
its own material and labour. The construction would be completed as per plan and design supplied by C Ltd. Agreed consideration for
this work is Rs. 1.5 crore + GST. The payment schedule is as follows—
Instalment 1 - 20 per cent is payable within 5 days from signing of agreement.
Instalment 2 - 25 per cent is payable on casting of first floor slab.
Instalment 3 - 35 per cent is payable on casting of second floor slab.
Instalment 4 - 10 per cent is payable on completion of flooring, stone work, wooden work and fixing of electrical fittings.
Instalment 5 - 10 per cent is payable on completion of building.
Casting of first floor and second floor slabs is completed on November 2, 2019 and December 8, 2019, respectively. Flooring, stone work,
etc. are completed on April 8, 2020. Construction of building is completed on June 9, 2020.
Solution :
In the case of continuous supply of services, parameters for due date of issue of invoice are given by section 31(5). As per
this section, if due date is ascertainable from the contract, invoice shall be issued on or before the due date. Instalment 1 is
due for payment on October 21, 2019 (i.e., date of agreement : October 16, 2019 + 5 days). Therefore, invoice for Instalment
1 shall be issued by A Ltd. on or before October 21, 2019.
Other instalments are linked to the completion of building. In case payment is linked to the completion of an event, the
invoice shall be issued on or before the date of completion of that event. Invoice for other instalments shall be issued on or
before the dates given below –
Event Completion of milestone for payment Invoice to be issued on or before the dates given below
Casting of first floor slab November 2, 2019 November 2, 2019
Casting of second floor slab December 8, 2019 December 8, 2019
Completion of flooring April 8, 2020 April 8, 2020
Completion of building June 9, 2020 June 9, 2020
544-E3 In Problem 544-P3, assume that payment is received by A Ltd. as follows –

Instalment 1 : October 26, 2019.
Instalment 2 : November 3, 2019.
Instalment 3 : December 10, 2019.
Instalment 4 : April 20, 2020.
Instalment 5 : July 31, 2020.
544-P4 X Ltd. is in the business of maintenance of computers. It provides services to large sized companies having more than 500
computers in their offices/work place in Maharashtra. On September 20, 2019, it enters into computer maintenance contract with Z Ltd.
Under this contract, X Ltd. will maintain office and factory computers of Z Ltd. during October 1, 2019 and December 15, 2019.
Maintenance service for software and hardware (along with parts) will be provided to Z Ltd. for an agreed consideration of Rs. 2 crore
+ applicable GST. Due date of payment is October 20, 2019 (first instalment of 40 per cent), November 20, 2019 (second instalment of
40 per cent) and December 20, 2019 (third instalment of 20 per cent). Provision of service is completed on December 15, 2019. Payment
is, however, made by Z Ltd. on March 1, 2020.
When tax invoice should be issued in this case?
Solution :
As per section 2(33), “continuous supply of services” means a supply of services which is provided, or agreed to be provided,
continuously or on recurrent basis, under a contract, for a period exceeding 3 months with periodic payment obligations.
In this case, services provided by X Ltd. for the period commencing October 1, 2019 and ending with December 15, 2019 (i.e.,
2.5 months). The service provided by X Ltd. is not “continuous supply of services”. Rules pertaining to “continuous supply
of services” are not applicable.
General rule provided by rule 47 are applicable. Invoice can be issued before the provision of service or after the provision
of service (but within 30 days from date of supply of service). In this case, invoice can be issued on or before January 14, 2020
(i.e., December 15, 2019 + 30 days).
Tax invoice, credit and debit notes 792
544-E4 In Problem 544-P4, assume that payment of Rs. 50,000 is received on November 30, 2019. Balance is received on January
31, 2020. When tax invoice should be issued ?
544-P5 DLH Ltd., a real estate developer company, is located in Chennai. On August 1, 2019, it enters into an agreement with Z to
transfer a 1,000 square feet commercial flat in a building under construction in Madurai. As per agreement, the possession of the flat
will be handed over in March 2020. Agreed consideration is Rs. 90,00,000 + GST. GST rate is 18 per cent. Tax invoice issued by DLH
gives the following data. Z pays Rs. 70,00,000 by cheque at the time of signing the agreement.
Taxable value
of supply
Rs. Rs.
Super structure of 1,000 square feet (along with undivided share of land) 90,00,000 90,00,000
Less: Value of land (or undivided share of land) (it is always deemed to be 1/3rd of total
amount charged) 30,00,000 –
Taxable value 60,00,000 –
Add: GST –
- CGST @ 9 per cent of Rs. 60,00,000 5,40,000
- SGST @ 9 per cent of Rs. 60,00,000 5,40,000
Total 1,00,80,000
Possession is handed over on March 10, 2020. Z is not satisfied with the quality of stone and wood used by DLH. Consequently, against
the balance payment of Rs. 30,80,000, Z pays Rs. 24,00,000 on March 20, 2020 which is accepted by DLH as full and final payment.
Discuss the treatment of balance of Rs. 6,80,000 for the purpose of GST.
Solution :
Where the goods supplied are found to be deficient, the taxpayer can issue a credit note. Credit note should include the
amount of tax credited to the recipient. In this case, GST liability would be recalculated as follows –
Rs.
Super structure of 1,000 square feet (along with undivided share of land) x
Less: Value of land (or undivided share of land) (it is always deemed to be 1/3rd of total amount charged) 0.3333x
Taxable value 0.6667x
Add: GST –
- CGST @ 9% of Rs. 0.6667x 0.06x
- SGST @ 9% of Rs. 0.6667x 0.06x
Total 1.12x
Total consideration is 1.12x which is equal to Rs. 94,00,000 (i.e., the amount paid by Z is Rs. 70,00,000 + Rs. 24,00,000). x is
equal to Rs. 83,92,857 (i.e., Rs. 94,00,000 ÷ 1.12). Credit note can be prepared with the help of data given below –
Original Amount Data for

invoice paid by X credit note
[(1) – (2)]
Rs. Rs. Rs.
(1) (2) (3)
Super structure (a) 90,00,000 83,92,857 6,07,143
Less : Value of land [1/3rd of (a)] (b) (30,00,000) (27,97,619) (2,02,381)
Taxable value for the purpose of GST (c) (60,00,000) (55,95,238) (4,04,762)
Add : GST –
- CGST @ 9% of (c) (d) 5,40,000 5,03,571 36,429
- SGST @ 9% of (c) (e) 5,40,000 5,03,571 36,429
Total [(a) + (d) + (e)] 1,00,80,000 94,00,000 6,80,000
544-E5 In Problem 544-P5, assume that Z pays Rs. 26,00,000 on March 20, 2020 as final payment which is accepted by DLH Ltd.
Find out the amount of CGST and SGST credit.
●
Test your knowledge

1. What is the difference between tax invoice and bill of supply ? [paras 533 and 535]
2. What is the time-limit to issue tax invoice ? [para 533]

3. What are the contents of tax invoice and bill of supply ? [paras 534 and 535]
4. Write a note on HSN. [para 534.1]
5. Is there any requirement to issue tax invoice to an unregistered person if value of supply is Rs. 100 ? [para 534.2]
6. Is there any requirement to issue tax invoice to a registered person if value of supply is Rs. 100 ? [para 534]
7. What is a receipt voucher ? [para 536]
8. What is the requirement of issue of refund voucher ? [para 537]
9. When a person is required to issue revised tax invoice ? [para 539]
10. What is an Input Service Distributor invoice ? [para 540.1]
11. What is a delivery challan ? Is it correct to state that a delivery challan is prepared in duplicate ? [para 541]
12. Write a note on credit and debit notes ? [para 543]
CHAPTER 32
Returns, tax payment and
interest
P rovisions relating to preparation and uploading of GST returns, payment of GST, compu-
tation of interest, etc., are discussed in this chapter.
 WHAT ARE THE BASIC FEATURES OF GST RETURNS MECHANISM

551. The basic features of the returns mechanism in GST include electronic filing of returns, uploading of invoice
level information and auto-population of information relating to input tax credit from returns of supplier to that
of recipient, invoice-level information matching and auto-reversal of input tax credit in case of mismatch. The
returns mechanism is designed to assist the taxpayer to file returns and avail input tax credit.
Under GST, a regular taxpayer needs to furnish monthly/quarterly returns and one annual return. There are
separate returns for a taxpayer registered under the Composition Scheme/Alternative Composition Scheme,
non-resident taxpayer, taxpayer registered as an input service distributor, a person liable to deduct or collect the
tax (TDS/TCS) and a person granted Unique Identification Number. It is important to note that a taxpayer is not
required to file all types of returns. In fact, taxpayers are required to file returns depending on the activities they
undertake.
All the returns are to be filed online. Returns can be filed using any of the following method –
- GSTN portal (www.gst.gov.in).
- Offline utilities provided by GSTN.
- GST Suvidha Providers (GSPs) [if a taxpayer uses the services of enterprise resource planning (ERP) providers
(such as Tally, SAP, Oracle, etc.), there is a high likelihood that these ERP providers would provide inbuilt
solutions in the existing ERP systems].
551.1 Different returns (as provided in the original version applicable from July 1, 2017) - The table given
below gives various types of returns under GST regulations (as originally drafted with effect from July 1,
2017) –
Return Description Who files Filing date
GSTR -1 Monthly statement of outward supplies Registered person 10th of the next month
of goods or services
GSTR-2 Monthly statement of inward supplies Registered person 15th of the next month
of goods or services
GSTR-3 Monthly return for a normal taxpayer Registered person 20th of the next month
GST Quarterly return Taxable person opting for 18th of the month succeeding
CMP-08 Composition Scheme or Alter- the quarter’
native Composition Scheme
GSTR-5 Monthly return for a non-resident tax- Non-resident taxpayer 20th of the month succeeding
payer the tax period and within 7
days after expiry of registra-
tion
GSTR-6 Monthly return for an input service dis- Inputs service distributor 13th of the next month
tributor (ISD)
GSTR -7 Monthly return for authorities deduc- Tax deductor 10th of the next month
ting tax at source
794
795 Calendar for GST return filing Para 551.2
Return Description Who files Filing date

GSTR-8 Monthly statement by e-commerce E-commerce operator 10th of the next month
operator depicting supplies effecting
through it
GSTR-9 Annual return Registered person (other than 3lst December of next finan-
an ISD, TDS/TCS taxpayer, cial year
casual taxable person and
non-resident taxpayer)
GSTR-10 Final return Taxable person whose regis- Within 3 months of the date
tration has been surrendered of cancellation or date of
or cancelled order of cancellation, which-
ever is later
GSTR-9A Annual return Taxable person opting for April 30 after the end of fin-
Composition Scheme or ancial year
Alternative Composition
Scheme
551.2 Calendar for GST return filing - In the GST return mechanism given above, a few modifications have
been incorporated (some of them are only for temporary period). The following modifications have been noti-
fied up to November 20, 2019–
Return Category of taxpayers Time period Due date
GSTR-3B All taxpayers [see Note 1] to file along Every month till March 2020 20th of succeeding month
with payment of tax [see Note 2]
GSTR-1 Taxpayers [see Note 1] with annual July - September 2017 October 31, 2018 [see Note 3]
aggregate turnover up to Rs. 1.5 crore October - December 2017 October 31, 2018 [see Note 3]
in the preceding financial year (or in January - March 2018 October 31, 2018 [see Note 3]
current year) to file on quarterly basis April - June 2018 October 31, 2018 [see Note 3]
July - September 2018 October 31, 2018 [see Notes 3,
4, and 5]
October - December 2018 January 31, 2019 [see Note 3]
January - March 2019 April 30, 2019
April - June 2019 July 31, 2019
July-September 2019 October 31, 2019 [see Note 9]
October-December 2019 January 31, 2020
January-March 2020 April 30, 2020
GSTR-1 Taxpayers [see Note 1] with annual agg- July 2017 - September 2018 October 31, 2018 [see Notes 3
regate turnover more than Rs. 1.5 crore in and 6]
the preceding financial year (or in cur- October 2018 - February 2019 11th of succeeding month [see
rent year) need to file on monthly basis Notes 3 and 6]
March 2019 April 13, 2019 [see Notes 3
and 6]
April 2019 - March 2020 11th of succeeding month
[Notes 6 and 8]
GSTR-4 Taxpayer who have opted for Composi- July-September 2017 December 24, 2017
tion Scheme to file on quarterly basis Oct. - Dec. 2017 January 18, 2018
July-September 2018 (if princi-
pal place of business is in
Srikakulam district, Andhra
Pradesh) November 30, 2018
GSTR-5 Non-resident taxable person July 2017
August 2017
September 2017 January 31, 2018
October 2017
November 2017
December 2017
Para 551.2 Returns, tax payment and interest 796
Return Category of taxpayers Time period Due date

GSTR-5A Person providing online information July 2017
database access or retrieval services August 2017
from a place outside India to a person in September 2017
India other than a registered person October 2017 January 31, 2018
November 2017
December 2017
GSTR-6 Input service distributor July 2017 - August 2018 September 30, 2018
GSTR-7 Monthly TDS return by persons deduc- October 2018 – July 2019 August 31, 2019 [see Note 7]
ting tax under section 51
GSTR-8 Monthly statement by e-commerce October 2018, November 2018 February 7, 2019
operator and December 2018
GSTR-8 Monthly statement by e-commerce ope- October 2018 Details of TCS for October
rators who have collected tax at source 2018 can be uploaded in the
under section 52 in the month of October first return (in GTSR-8 to be
2018 (but could not obtain registration in filed after obtaining registra-
the month of October 2018) tion)
GST Quarterly return - Composition Scheme April - June 2019 August 31, 2019
CMP-08 July-September 2019 October 22, 2019
GSTR-9 Annual return (by a registered person - Annual return for July 1, December 31, 2019 [see
other than an ISD, TDS/TCS taxpayer, 2017 to March 31, 2018 Note 10]
casual taxable person and non-resident - Annual return for the March 31, 2020 [see Note 10]
taxpayer) financial year 2018-19
GSTR-9A Annual return for taxable person who - Annual return for July 1, See Note 11
has opted for Composition Scheme or 2017 to March 31, 2018
Alternate Composition Scheme - Annual return for the See Note 11
financial year 2018-19
GSTR-10 Final return (in the case of cancellation If registration is cancelled on December 31, 2018
of registration) or before September 30, 2018
Notes
1. Taxpayers (other than covered under Composition Scheme/Alternative Composition Scheme, non-resident taxpayers,
input service distributors and taxpayers liable to pay tax TDS/TCS under sections 51 and 52).
2. Extended due dates for uploading GSTR-3B for different months –
July 2017 All taxpayers August 25, 2017
December 2017 All taxpayers January 22, 2018
April 2018 All taxpayers May 22, 2018
July 2018/August Registered persons in Kerala, registered persons whose principal place October 5, 2018/
2018 of business is in Kodagu district, Karnataka; and registered persons October 10, 2018
whose principal place of business is in Mahe, Puducherry
September 2018 All taxpayers October 25, 2018
September 2018 Registered persons whose principal place of business is in Srikakulam November 30, 2018
and October 2018 district, Andhra Pradesh
October 2018 For registered persons whose principal place of business is in Cuddalore, December 20, 2018
Thiruvarur, Puddukottai, Dindigul, Nagapatinam, Theni, Thanjavur,
Sivagangai, Tiruchirappalli, Karur and Ramanathapuram in the State of
Tamil Nadu
January 2019 All taxpayers February 22, 2019
January 2019 Registered persons whose principal place of business is in the State of February 28, 2019
Jammu and Kashmir
March 2019 All taxpayers April 23, 2019
797 What are different GST returns Para 552
April 2019 For registered persons whose principal place of business is in the districts June 20, 2019
of Angul, Balasore, Bhadrak , Cuttack , Dhenkanal , Ganjam, Jagatsinghpur,
Jajpur, Kendrapara, Keonjhar, Khordha, Mayurbhanj, Nayagarh and Puri
in the State of Odisha
July 2019 to For registered persons whose principal place of business is in the State November 30, 2019
October 2019 of Jammu and Kashmir
July 2019 For registered persons whose principal place of business is in notified September 20, 2019
districts (given in Notification No. 37/2019-CT, dated August 21, 2019)
Moreover, for certain persons (who did not file complete Form GST Reg-26 but received only provisional identification till
December 31, 2017 and who have completed registration formalities later on), GSTR-3B return from July 2017 to February
2019 can be uploaded up to March 31, 2019.
3. For certain persons (who did not file complete Form GST Reg-26 but received only provisional identification till December
31, 2017 and who have completed registration formalities later on), monthly GSTR-1 return from July 2017 to February 2019
can be uploaded up to March 31, 2019. Likewise, quarterly GSTR-1 return from July 2017 to December 2018 can be uploaded
up to March 31, 2019.
4. Extension is granted for the quarter July - September 2018 for registered persons in Kerala, registered persons whose
principal place of business is in Kodagu district in the State of Karnataka; and registered persons whose principal place
of business is in Mahe in the Union Territory of Puducherry (quarterly return in GSTR-1 can be uploaded on or before
November 15, 2018).
5. Extended to November 30, 2018 for registered persons whose principal place of business is in Srikakulam district, Andhra
Pradesh.
6. Further extension is granted for uploading monthly GSTR-1 for certain taxpayers as follows –
- For September 2018 and October 2018 : For registered persons whose principal place of business is in Srikakulam district,
Andhra Pradesh. Return can be uploaded up to November 30, 2018.
- For October 2018 : For registered persons whose principal place of business is in Cuddalore, Thiruvarur, Puddukottai,
Dindigul, Nagapatinam, Theni, Thanjavur, Sivagangai, Tiruchirappalli, Karur and Ramanathapuram in the State of
Tamil Nadu. Return can be uploaded up to December 20, 2018.
- For April 2019 - For registered persons whose principal place of business is in the districts of Angul, Balasore, Bhadrak,
Cuttack, Dhenkanal , Ganjam, Jagatsinghpur, Jajpur, Kendrapara, Keonjhar, Khordha, Mayurbhanj, Nayagarh and Puri
in the State of Odisha can be uploaded up to June 10, 2019.
7. Extension is given for return for the months of July 2019 to October 2019 for registered persons whose business is in the
State of Jammu and Kashmir. GSTR-7 can be uploaded on or before November 30, 2019. Moreover, extension is given for
the return for the month of July 2019 for registered persons whose principal place of business is in notified districts (given
in Notification No. 26/2019-CT, dated June 28, 2019, as amended), GSTR-7 can be uploaded on or before September 20, 2019.
8. Extension is given for return for the months of July 2019 to October 2019 for registered persons whose business is in the
State of Jammu and Kashmir. Monthly GSTR-1 can be uploaded on or before November 30, 2019.
9. Extension is given for return for the quarter of July-September 2019 for registered persons whose business is in the State
of Jammu and Kashmir. Quarterly GSTR-1 can be uploaded on or before November 30, 2019.
10. It is optional to furnish the annual return in GSTR-9 for financial years 2017-18 and 2018-19 for those registered persons
whose aggregate turnover in a financial year does not exceed Rs. 2 crore. In such a case, if GSTR-9 is not uploaded before
the due date, it shall be deemed to have been furnished on the due date. It is clarified by the Government that taxpayers,
may, at their own option upload Form GSTR-9 for the said financial years before the due date. After the due date of
furnishing the annual return for the year 2017-18 and 2018-19, the common portal shall not permit uploading of Form
GSTR-9 for the said period.
11. It is optional to furnish the annual return in GSTR-9A for financial years 2017-18 and 2018-19 for those registered persons
who have opted for Composition Scheme/Alternate Composition Scheme. In such cases, if GSTR-9A is not uploaded before
the due date, it shall be deemed to have been furnished on the due date. It is clarified by the Government that taxpayers,
may, at their own option upload Form GSTR-9A for the said financial years before the due date. After the due date of
furnishing the annual return for the year 2017-18 and 2018-19, the common portal shall not permit uploading of Form
GSTR-9A for the said period.
 WHAT ARE DIFFERENT GST RETURNS

552. Sections 37 to 45 cover different GST returns. A brief description for these provisions is given below. All
GST returns are to be filed electronically –
552.1 Furnishing details of outward supplies in Form GSTR-1 [Sec. 37] - Section 37 is applicable for furnishing
details of outward supplies in Form GSTR-1. This section is applicable for all registered persons (other than an
input service distributor, a non- resident taxable person, a person covered by Composition Scheme/Alternative
Composition Scheme and a person paying TDS/TCS under section 51/52).
All registered persons (except a few given above) shall furnish, electronically, in Form GSTR-1, the details of
outward supplies of goods/services effected during a tax period.
552.1-1 INVOICE WISE DETAILS OR CONSOLIDATED DETAILS - The details of outward supplies of goods/services furnished
in Form GSTR-1 shall include the following —
Invoice wise details - Inter-State and intra-State supplies made to registered persons See Note 1
- Inter-State supplies with invoice value more than Rs. 2,50,000 made to
unregistered persons See Note 2
Consolidated details - Intra-State supplies made to unregistered persons for each rate of tax See Note 2
- State-wise inter-State supplies with invoice value up to Rs. 2,50,000 See Note 2
made to unregistered persons for each rate of tax
Debit/credit note details - Debit and credit notes, if any, issued during the tax period –
Notes -
1. These supplies are B2B (business to business transactions). Recipient is registered person. Recipient will take input tax
credit. Invoice wise details are required for matching purposes.
2. These supplies are generally B2C (business to consumer transactions). Generally, recipient is consumer or unregistered
person and input tax credit is not available to him. GST is a destination based tax. In order to implement this principle, invoice
wise details are required (pertaining to invoices of value of more than Rs. 2,50,000). For inter-State invoices (below Rs.
2,50,000) State-wise summary is required to be uploaded. For intra-State supplies, only consolidated details are required.
3. Invoices can be uploaded at any time during the tax period (and not just at the time of submission of the return). Invoices
can be deleted/modified at any time till submission of Form GSTR-1 for a tax period. In other words, uploaded invoice
details are kept in the website in a draft version (which can be modified at any number of times) till Form GSTR-1 is
submitted.
552.1-1a CONTENTS OF FORM GSTR-1 - There is no requirement of submission of scanned copies of invoices. Only
details prescribed in Form GSTR-1 is required to be uploaded. The table given below briefly highlights the
contents of Form GSTR-1.
Different tables in Form GSTR-1 Contents of table
Table 4 - Taxable outward supplies made to GSTIN of recipient Rate Amount of
registered persons Invoice No. Taxable value SGST/UTGST
Invoice date Amount of IGST Cess
Invoice value Amount of CGST Place of supply
Table 5 - Taxable outward inter-State supp- Place of supply Invoice value Amount of IGST
lies to un-registered persons where the Invoice No. Rate Amount of cess
invoice value is more than Rs. 2.5 lakh Invoice date Taxable value
Table 6 - Zero rated supplies and deemed GSTIN of recipient Invoice value IGST rate
exports Invoice No. Shipping Bill No. IGST taxable value
Invoice date Shipping Bill date IGST amount
Table 7 - Taxable supplies (net of debit notes Total taxable value Amount of SGST/
and credit notes) to unregistered persons Amount of IGST UTGST
other than the supplies covered in Table 5 Amount of CGST Cess
Place of supply
Table 8 - Nil rated, exempted and non-GST Nil-rated supplies Exempted supplies Non-GST supplies
outward supplies
Table 9 - Amendments to taxable outward
supply furnished for earlier period in Tables
4/5/6
Table 10 - Amendments to taxable outward
supplies to unregistered persons furnished for
earlier periods in Table 7
Table 11 - Statement of advance received
799 Furnishing details of inward supplies in Form GSTR-2 Para 552.2

Table 12 - HSN wise summary of outward HSN Total value Amount of
supply Description Total taxable value SGST/UTGST
UQC Amount of IGST Cess
Total quantity Amount of CGST
Table 13 - Documents issued during the tax Documents wise details
period of Serial No. (from, to),
total number, cancelled,
net issued of
Invoices for outward Receipt voucher Payment Voucher
supply Revised invoice Refund voucher
Invoices for inward Debit note/credit Delivery Challan
supply from unregis- note
tered person
552.1-1b OTHER POINTS - The following points should be noted –

1. Form GSTR-1 for the current tax period is possible only when Form GSTR-1 for the previous tax period has
been filed.
2. Even if there is no business activity during the current tax period, Form GSTR-1 has to be uploaded.
3. All values are to be declared up to 2 decimal digits. Rounding off of tax liability to the nearest rupee will be
done in Form GSTR-3. If a taxpayer has opted for cancellation of GSTIN, he will have to file Form GSTR-1 for
the active period.
4. If a taxpayer under normal provisions has been converted into a Composition Scheme/Alternative Compo-
sition Scheme dealer, Form GSTR-1 will be uploaded only up to the period during which he was registered as
a normal taxpayer.
552.1-2 FORM GSTR-2A TO BE AUTO POPULATED FROM FORM GSTR-1 - The details of outward supplies furnished by the
supplier in Form GSTR-1 shall be made available electronically to the concerned registered persons (recipients)
in Part A of Form GSTR-2A, in Form GSTR-4A and in Form GSTR-6A through the common portal after the due
date of filing of Form GSTR-1.
 The details of inward supplies added, corrected or deleted by the recipient in his Form GSTR-2 or Form GSTR-
4 or Form GSTR-6 shall be made available to the supplier electronically in Form GSTR-1A through the common
portal and such supplier may either accept or reject the modifications made by the recipient and Form
GSTR-1 furnished earlier by the supplier shall stand amended to the extent of modifications accepted by him.
552.2 Furnishing details of inward supplies in Form GSTR-2 - Section 38 is applicable for furnishing details
of inward supplies in Form GSTR-2. This section is applicable for all registered persons (other than an input
service distributor, a non- resident taxable person, a person covered by Composition Scheme/Alternative
Composition Scheme and a person paying TDS/TCS under sections 51/52). To comply with the provisions of
section 38, one has to proceed as follows –
1. Examination of data auto populated in Form GSTR-2A - Data furnished by suppliers in Form GSTR-1 is transferred
automatically to Form GSTR-2A of recipient registered dealer (for him it becomes data pertaining to inward
supplies). The recipient registered dealer is required to examine the data auto populated in Form GSTR-2A. He
can verify, validate, modify or delete the information auto populated in Form GSTR-2A.
2. Preparation of Form GSTR-2 - On the basis of details contained in Part A, Part B and Part C of Form GSTR-2A,
the recipient registered person shall prepare and furnish Form GSTR-2.
552.2-1 CONTENTS OF FORM GSTR-2 - The table given below briefly highlights the contents of Form GSTR-2 –
Table 3 - Inward supplies received It covers details of inward supplies received from registered persons (other than
from a registered person other supplies which attract GST under reverse charge mechanism). The recipient can
than the supplies attracting accept, reject, modify (if information provided by supplier is incorrect). If he
reverse charge accepts, he will have to indicate whether he is eligible for input tax credit. This
information has to be given separately against each tax invoice. If an invoice is not
uploaded by the supplier, the recipient can also add such invoice.

Table 4 - Inward supplies on It covers invoice wise details of inward supplies on which tax is to be paid under
which tax is to be paid on reverse reverse charge mechanism. Table 4A gives information pertaining to inward
charge supplies from a registered dealer (attracting reverse charge) (it is auto populated).
Table 4B contains information pertaining to inward supplies from under regis-
tered supplier. Table 4C contains data pertaining to input of services.
Invoice wise details has to be given. The taxpayer will have to indicate whether he
is eligible for input tax credit.
Table 5 - Inputs/capital goods Data has to be given separately for each bill of entry (i.e., date, value, rate, taxable
received from overseas or from value, amount of IGST/GST cess). The taxpayer will have to indicate whether he
SEZ units on a bill of entry is eligible for input tax credit.
Table 6 - Amendments to details of
inward supply furnished for earlier
period in Tables 3/4/5
Table 7 - Supplies received from Data has to be given separately for inter-State supplies and intra-State supplies.
composition taxable person and
other exempt/Nil rated/non GST
supplies received
Table 8 - ISD credit received Data pertaining to input service distributor invoice/credit note has to be given
separately for each invoice/credit note. The taxpayer will have to indicate whether
he is eligible for input tax credit.
Table 9 - TDS and TCS credit re-
ceived
Table 10 - Consolidated statement Data has to be given separately for intra-State supplies (rate wise) and inter-State
of advances paid/advance adjus- supplies (rate wise)
ted on account of receipt of supply
Table 11 - Input tax credit rever- It contains data pertaining to input tax credit reverse/reclaim (separately informa-
sal/reclaim tion has to be given in respect of reversal of input tax credit and addition to input
tax credit which is available). Besides, one has to give amendment of information
furnished in an earlier return.
Table 12 - Addition and reduction Addition and reduction of amount in tax on outward supplies for mismatch,
of amount in output tax for mis- duplication, rectification, etc., has to be given.
match and other reasons
Table 13 - HSN summary of inward
supplies
552.3 Furnishing of returns in Form GSTR-3, Form GSTR-4 and Form GSTR-5 - The following returns are
required to be furnished by virtue of section 39 –
Form No. Who has to submit it
GSTR-3 Every registered person (other than an input service distributor, a non- resident taxable person, a person
covered by Composition Scheme/Alternative Composition Scheme and a person paying TDS/TCS under
section 51/52)
GSTR-4 Registered person who has opted for Composition Scheme/Alternative Composition Scheme
GSTR-5 Registered non-resident taxable person
552.3-1 CONTENTS OF FORM GSTR-3 - Form GSTR-3 is generated only when Form GSTR-1 and Form GSTR-2 have
been uploaded for the same tax period. The following points should be noted –
1. Part A of the return shall be electronically generated on the basis of information furnished through Form GSTR-
1, Form GSTR-2 and based on other liabilities of preceding tax periods.
2. Every registered taxpayer person furnishing the return shall discharge his liability towards tax, interest,
penalty, fees or any other amount payable under the Act by debiting the electronic cash ledger or electronic credit
ledger and include the details in Part B of the return in Form GSTR-3.
3. A registered person, claiming refund of any balance in the electronic cash ledger, may claim such refund in
Part B of the return in Form GSTR-3 and such return shall be deemed to be an application filed under section 54.
801 Furnishing of returns in Form GSTR-3, GSTR-4 and GSTR-5 Para 552.3
4. Basically, Form GSTR-3 is a consolidated return. It consolidates the following details –

- Details of outward supplies (auto-populated from Form GSTR-1).
- Details of inward supplies (auto-populated from Form GSTR-2).
- Details of input tax credit availed.
- Details of tax payable.
- Details of tax paid (by using electronic cash ledger and electronic credit ledger).
5. The table given below briefly highlights the contents of Form GSTR-3 –
Part-A (auto populated from Form GSTR-1, Form GSTR-1A and Form GSTR-2
Table 3 - Turnover Type of turnover - Taxable, zero rated supply on payment of tax, zero rated supply
without payment of tax, deemed exports, exempted, nil rated, non-GST supply
Table 4.1 - Inter-State supplies Taxable supplies, reverse charge, zero rated supplies made through e-commerce
(net supply for the tax period) operator
Table 4.2 - Intra-State supplies Taxable supplies, reverse charge, zero rated supplies made through e-commerce
(net supply for the tax period) operator
Table 4.3 - Tax effect of amend- It includes supplies other than reverse charge and zero rated
ments made in respect of out-
ward supplies
Table 5 - Inward supplies Attracting reverse charge including import of services (net of advance adjustments)
Table 5A - Reverse charge Rate wise break-up of intra-State and inter-State inward supply
Table 6 - Input tax credit Input tax credit on inward taxable supplies, including imports and input tax credit
received from input service distributor, break-up pertaining to inputs, input
services and capital goods
Table 7 - Addition and reduction
of amount in output tax for mis-
match and other reasons
Table 8 - Total tax liability Break-up of tax on outward supplies, inward supplies under reverse charge, input
tax credit reversal, tax on account of mis-match/rectification
Table 9 - Credit of TDS and TCS
Table 10 - Interest liability
Table 11 - Late fees
Part-B
Table 12 - Tax payable and paid If tax payable is more and tax paid is lesser, the return will not be valid return. If tax
is paid later on, the assessee will have to file Part B of Form GSTR-3 again
Table 13 - Interest, late fee and any
other amount (other than tax) pay-
able and paid
Table 14 - Refund claimed from
electronic cash ledger
Table 15 - Debit entries in elec- To be auto populated after payment of tax and submissions of return
tronic cash/credit ledger for tax/
interest payment
552.3-2 CONTENTS OF FORM GSTR-4 - Form GSTR-4 is to be furnished by a registered person who has opted for
Composition Scheme/Alternative Composition Scheme. Contents of Form GSTR-4 are briefly given below –
Table 4 - Inward supplies It also includes supplies on which tax is paid under reverse charge. Break-up has to
be given for inward supplies from registered supplier and unregistered supplier
and import of service
Table 5 - Amendment details It includes amendment details of inward supplies in earlier returns pertaining to
Table 4 (including debit note, credit note, etc.)
Table 6 - Tax on outward supplies
Table 7 - Amendment details of It includes amendment pertaining to detail furnished in Table 6 in earlier tax periods
outward supplies
Table 8 - Consolidated statement
of advance
Table 9 - TDS credit received
Table 10 - Tax payable and paid
Table 11 - Interest, late fee payable
and paid
Table 12 - Refund claimed from
electronic cash ledger
Table 13 - Debit entries in cash To be auto populated after payment of tax and submissions of return
ledger for tax/interest payment
552.3-3 CONTENTS OF FORM GSTR-5 - Form GSTR-5 is applicable in the case of non-resident taxable person. Contents
of Form GSTR-5 are briefly given below –
Table 3 - Inputs/capital goods It consists of details of import of goods, bill of entry wise and taxpayer has to specify
received from overseas (import the amount of input tax credit eligible on such import of goods.
of goods)
Table 4 - Amendment in the de-
tails furnished in any earlier re-
turn
Table 5 - Taxable outward supp- Invoice wise details to be given
lies made to registered persons
(including UIN holders)
Table 6 - Taxable outward inter- It includes supplies of unregistered person where invoice value is more than Rs.
State supplies 2,50,000
Table 7 - Taxable supplies to
other unregistered persons
Table 8/9 - Amendment (out- It pertains to detail furnished for earlier tax period
ward supplies)
Table 10 - Total tax liability
Table 11 - Tax payable
Table 12 - Interest, late fees
Table 13 - Refund
552.4 Furnishing of return in Form GSTR-3B - Where time-limit for furnishing of details in Form GSTR-1 and
in Form GSTR-2 has been extended, the Commissioner may specify the manner and conditions subject to which
return shall be furnished in Form GSTR-3B electronically.
Form GSTR-3B is a simplified return form. Currently, it is applicable from July 2017 till March 2019. It contains
details of outward supplies and inward supplies. However, invoice wise break-up is not required. If a company
(or any other person) has taken more than one registration under GST, each GSTIN will have to submit separate
Form GSTR-3B. Tax payable has to be paid before uploading of GSTR-3B. GSTR-3B should be uploaded by 20th
day of succeeding month. For instance, Form GSTR-3B for November 2018, should be uploaded on or before
December 20, 2018. Every registered person will have to submit Form GSTR-3B (even if quantum of inward
supply and/or outward supply is nil.
 Form GSTR-3B is not applicable in the case of input service distributor, registered persons opted for
Composition Scheme/Alternative Composition Scheme and non-resident taxable person. Form GSTR-3B cannot
be revised.
552.5 Furnishing of annual return - Annual return should be uploaded in Form GSTR-9, GSTR-9A, GSTR-9B
or GSTR-9C as follows –
Form No. Who is required to file
GSTR-9 1. Every registered person under GST (including SEZ units/SEZ developers) is required to file annual
return except –
a. Input Service Distributor
803 Furnishing of annual return Para 552.5
Form No. Who is required to file

b. Person paying TDS under section 51
c. Person collecting TCS under section 52
d. Casual taxable person
e. Non-resident taxable person
2. Person whose GST registration has been cancelled
3. Person who has opted out of Composition Scheme/Alternative Composition Scheme and now he is a
regular taxpayer
4. Person who has opted out as a regular taxpayer and now he is in for Composition Scheme/Alternative
Composition Scheme
 Taxpayer must have filed all applicable returns (i.e., Form GSTR-1 and Form GSTR-3B) of the relevant
financial year before filing the annual return.
 Form GSTR-9 is required to be filed at GSTIN level (i.e., for each GST registration). To put it differently,
if a taxpayer has obtained multiple registrations (with same PAN) (whether in the same State/Union
Territory or different States/Union Territory), he is required to file annual return for each registration
separately.
 Form GSTR-9 is not required to be filed by a person supplying online information and data base access
or retrieval services from a place outside India to an unregistered person in India.
GSTR-9A All taxpayers registered under Composition Scheme/Alternative Composition Scheme for any period
during the financial year is required to furnish annual return in Form GSTR-9A. This annual return is
required in the case of following persons –
- Who has opted for Composition Scheme/Alternative Composition Scheme since registration and has
never opted out subsequently
- Who has opted for Composition Scheme/Alternative Composition Scheme any time during the
financial year
- Who has opted for Composition Scheme/Alternative Composition Scheme but subsequently opted out
any time during the financial year.
 If a person is normal taxpayer for a part of the financial year and Composition Scheme/Alternative
Composition Scheme taxpayer for remaining part of the financial year, he has to file both Form GSTR-9 and
Form GSTR-9A (Form GSTR-9 for the period during which he is normal taxpayer and Form GSTR-9A for
the period under Composition Scheme/Alternative Composition Scheme).
GSTR-9B Every E-commerce operators are required to collect tax at source shall furnish annual return in Form GSTR-
9B.
GSTR-9C 1. Every registered person (whose turnover during a financial year exceeds Rs. 2 crore) except –
a. Input Service Distributor
b. Person paying TDS under section 51
c. Person collecting TCS under section 52
d. Casual taxable person
e. Non-resident taxable person
f. Person who has opted for Composition Scheme/Alternative Composition Scheme
g. Person supplying online information and data base access or retrieval services from a place outside India
to an unregistered person in India.
2. Person whose GST registration has been cancelled and whose turnover during a financial year exceeds
Rs. 2 crore
3. Person who has opted out of Composition Scheme/Alternative Composition Scheme (and opted in as
regular taxpayer) whose turnover during a financial year exceeds Rs. 2 crore.
 Every registered person# whose aggregate turnover during a financial year exceeds Rs. 2 crore shall get
his accounts audited.
 Form GSTR-9C is a reconciliation statement. It is to be filed by a taxpayer whose annual turnover exceeds
Rs. 2 crore during the financial year. Basically, this form is an audit report under GST. It is a statement of
reconciliation between the annual return in Form GSTR-9 and audited annual financial statements of the
concerned registered taxable person. This form is to be prepared and audited by a chartered accountant or
cost accountant. This form is required to be filled for every GSTIN separately.
 Form GSTR-9C is divided into 2 parts (i.e., Part A: Reconciliation statement, Part B: Certification). Liability
due to non-reconciliation is to be reported in Part B by the auditor.
#This rule is not applicable to any department of the Central Government or a State Government or a local authority, whose books of account
are subject to audit by the Comptroller and Auditor-General of India or an auditor appointed for auditing the accounts of local authorities under
any law.
Note - Every registered person whose registration has been cancelled shall furnish a final return within 3 months of the date
of cancellation or date of order of cancellation, whichever is later‡. This return should be submitted electronically in Form
GSTR-10.
552.6 Other relevant points - The following points should be noted –
1. If any registered person (after furnishing a return) discovers any omission or incorrect particulars therein, he
shall rectify such omission or incorrect particulars. There is no provision for submission of revised return.
However, information pertaining to omission/incorrect particulars can be furnished in the subsequent tax
period during which such omission or incorrect particulars are noticed. Late tax payment interest will be
applicable. Disclosure of omission in subsequent return is not allowed after the due date for furnishing of return
for the month of September (or second quarter) following the end of the financial year, or the actual date of
furnishing of relevant annual return, whichever is earlier.
This procedure to disclose omission or incorrect particulars (in subsequent returns) is not applicable if such
omission, etc., is discovered as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities.
2. A registered person shall not be allowed to furnish a return for a tax period if the return for any of the previous
tax periods has not been furnished by him.
 WHAT IS MATCHING, REVERSAL AND RECLAIM OF INPUT TAX CREDIT

553. Details of every inward supply furnished by a recipient of supply for a tax period are matched as
follows –
- With the corresponding details of outward supply furnished by the corresponding supplier in his valid return
for the same tax period or any preceding tax period.
- With the IGST paid under section 3 of the Customs Tariff Act (in respect of goods imported).
- For duplication of claims of input tax credit.
 Claim of input tax credit accepted - The claim of input tax credit in respect of invoices (or debit notes) relating to
inward supply that match with the details of corresponding outward supply (or with the IGST paid on imports)
shall be finally accepted and such acceptance shall be communicated to the recipient in Form GST MIS-1 through
common portal.
 Subsequent acceptance - The claim of input tax credit in respect of any tax period which had been communicated
as mismatched but is found to be matched after rectification by the supplier or recipient shall be finally accepted
and made available electronically to the person making such claim in Form GST MIS-1 through the common
portal.
 Excess claim - Where the input tax credit claimed by a recipient in respect of an inward supply is in excess of
the tax declared by the supplier for the same supply (or the outward supply is not declared by the supplier) in
his valid returns, the discrepancy shall be communicated to both such persons. The following procedure is
followed –
- The above mis-match will be communicated electronically through common portal. Communication will be
in Form GST MIS-1 to the recipient and Form GST MIS-2 to the supplier.
- The duplication of claims of input tax credit shall be communicated to the recipient in GST MIS-1 in such
manner as may be prescribed.
- A supplier to whom any discrepancy is made available (as stated above) may make suitable rectifications in
the statement of outward supplies to be furnished for the month in which the discrepancy is made available.
- Likewise, the recipient to whom any discrepancy is made available (as stated above) may make suitable
rectifications in the statement of inward supplies to be furnished for the month in which the discrepancy is
made available.
- Where the discrepancy is not rectified, an amount to the extent of discrepancy shall be added to the output
tax liability of the recipient in his return to be furnished in Form GSTR-3 for the month succeeding the month
in which the discrepancy is made available.
- The amount claimed as input tax credit that is found to be in excess on account of duplication of claims shall
be added to the output tax liability of the recipient in his return for the month in which the duplication is
communicated.
‡ Final return pertaining to a person whose registration has been cancelled by the proper officer on or before September 30, 2018 can be uploaded
up to December 31, 2018.
805 What is electronic credit ledger Para 555
Provisions illustrated†
 Case 1 - X Ltd. is supplier of goods and Y Ltd. is recipient of goods. Goods are supplied in August 2018. Quantum of GST
is Rs. 5,500 which is eligible as input tax credit to Y Ltd. X Ltd. furnishes Form GSTR-1 pertaining to August 2018 on
September 10, 2018. Y Ltd. furnishes Form GSTR-2 on September 15, 2018. But amount of input tax credit claimed by Y Ltd.
is shown by mistake as Rs. 15,500. X Ltd. and Y Ltd. furnish Form GSTR-3 on September 20, 2018.
The mis-match report is generated during September 2018 and communicated to X Ltd. in Form GST MIS-2. It is also
communicated in September 2018 to Y Ltd. in Form GST MIS-1.
As discrepancy is communicated in September 2018, Y Ltd. should rectify it in Form GSTR-2 pertaining to September 2018
(which is to be filed latest by October 15, 2018).
If Y Ltd. does not report this mis-match (as stated above), then it shall be added to output tax liability of Y Ltd. in its return
for October 2018 (i.e., in Form GSTR-3 which is to be submitted by November 20, 2018).
 Case 2 - A Ltd. is supplier and B Ltd. is recipient. Goods are supplied in August 2018. Quantum of GST is Rs. 6,000 which
is eligible as input tax credit to B Ltd. A Ltd. furnishes Form GSTR-1 pertaining to August 2018 on September 10, 2018. B
Ltd. furnishes Form GSTR-2 on September 15, 2018. But B Ltd. wrongly claims input tax credit of Rs. 6,000 twice. A Ltd. and
B Ltd. furnish Form GSTR-3 on September 20, 2018.
The mis-match report is generated during September 2018 and excess claim because of duplication is communicated to B
Ltd. in Form GST MIS-1. It shall be added to output tax liability of B Ltd. for September 2018 (i.e., in Form GSTR-3 which
is to be submitted by October 20, 2018).
Interest payable by recipient - If because of aforesaid adjustments, output tax liability of recipient is increased,
he shall be liable to pay interest at the rate of 18 per cent per annum on the amount so added from the date of
availing the credit till the corresponding additions are made.
 WHAT IS ELECTRONIC LIABILITY LEDGER

554. All liabilities of a taxable person under GST shall be recorded and maintained in electronic liability ledger
in Form GST PMT-01. It shall be maintained for each person liable to pay tax, interest, penalty, late fee or any
other amount on the common portal and all amounts payable by him shall be debited to the said register.
 The electronic liability register of the person shall be debited by—
a. the amount payable towards tax, interest, late fee or any other amount payable as per the return furnished by
the said person;
b. the amount of tax, interest, penalty or any other amount payable as determined by a proper officer in
pursuance of any proceedings under the Act or as ascertained by the said person;
c. the amount of tax and interest payable as a result of mismatch under section 42 or section 43 or section 50; or
d. any amount of interest that may accrue from time to time.
 Payment of every liability by a registered person as per his return shall be made by debiting the electronic credit
ledger or the electronic cash ledger and the electronic liability register shall be credited accordingly.
 The amount of TDS/TCS or amount payable on reverse charge basis, or the amount payable by a Composition
Scheme/Alternative Composition Scheme dealer, any amount payable towards interest, penalty, fee or any other
amount under the Act shall be paid by debiting the electronic cash ledger and the electronic liability register shall
be credited accordingly.
 Any amount of demand debited in the electronic liability register shall stand reduced to the extent of relief
given by the appellate authority or Appellate Tribunal or court and the electronic tax liability register shall be
credited accordingly.
 The amount of penalty imposed or liable to be imposed shall stand reduced partly or fully, as the case may be,
if the taxable person makes the payment of tax, interest and penalty specified in the show cause notice or demand
order and the electronic liability register shall be credited accordingly.
 A registered person shall, upon noticing any discrepancy in his electronic liability ledger, communicate the
same to the officer exercising jurisdiction in the matter, through the common portal in Form GST PMT-04.
 WHAT IS ELECTRONIC CREDIT LEDGER

555. The electronic credit ledger shall be maintained in Form GST PMT-02 for each registered person eligible for
input tax credit on the common portal. Every claim of input tax credit shall be credited to the said ledger.
 The electronic credit ledger shall be debited to the extent of discharge of any liability.
†Based upon GST provision as on July 1, 2017.

Para 556 Returns, tax payment and interest 806
 Where a registered person has claimed refund of any unutilized amount from the electronic credit ledger in
accordance with the provisions of section 54, the amount to the extent of the claim shall be debited in the said
ledger.
 If the refund so filed is rejected, either fully or partly, the amount debited (as stated above), to the extent of
rejection, shall be re-credited to the electronic credit ledger by the proper officer by an order made in Form GST
PMT-03. A refund shall be deemed to be rejected, if the appeal is finally rejected (or if the claimant gives an
undertaking to the proper officer that he shall not file an appeal).
 A registered person shall, upon noticing any discrepancy in his electronic credit ledger, communicate the same
to the officer exercising jurisdiction in the matter, through the common portal in Form GST PMT-04.
 WHAT IS ELECTRONIC CASH LEDGER

556. The electronic cash ledger under shall be maintained in Form GST PMT-05 for each person, who is liable
to pay tax, interest, penalty, late fee or any other amount under GST. This ledger is maintained on the common
portal for crediting the amount deposited and debiting the payment therefrom towards tax, interest, penalty, fee
or any other amount.
 Challan - Any person shall generate a challan in Form GST PMT-06 on the common portal and enter the details
of the amount to be deposited by him towards tax, interest, penalty, fees or any other amount. Challan is
generally valid for a period of 15 days.
 Mode of deposit - The deposit of tax, interest, penalty, etc., shall be made through any of the following modes,
namely—
- Internet Banking through authorised banks.
- Credit card or Debit card through the authorised bank.
- National Electronic Fund Transfer or Real Time Gross Settlement from any bank.
- Over the counter payment through authorised banks for deposits up to Rs. 10,000 per challan per tax period,
by cash, cheque or demand draft.
However, the restriction for deposit up to Rs. 10,000 in the case of over the counter payment shall not apply to
deposit to be made by—
- Government Departments or any other deposit to be made by persons as may be notified by the Commis-
sioner.
- Proper officer or any other officer authorised to recover outstanding dues from any person (whether
registered or not) including recovery made through attachment or sale of movable/immovable properties.
- Proper officer or any other officer authorised for the amounts collected by way of cash, cheque or demand
draft during any investigation or enforcement activity or any ad hoc deposit.
 Payment by unregistered person - Any payment required to be made by a person who is not registered, shall be
made on the basis of a temporary identification number generated through the common portal.
 Challan Identification Number (CIN) - On successful credit of the amount to the concerned government account
maintained in the authorised bank, a CIN shall be generated by the collecting bank and the same shall be
indicated in the challan. On receipt of the CIN from the collecting bank, the said amount shall be credited to the
electronic cash ledger of the person on whose behalf the deposit has been made and the common portal shall
make available a receipt to this effect.
Where the bank account of the person concerned is debited but no CIN is generated or generated, the said person
may represent electronically in Form GST PMT-07 through the common portal to the bank or electronic gateway
through which the deposit was initiated.
 Transfer - A registered person may, on the common portal, transfer any amount of tax, interest, penalty, fee or
any other amount available in the electronic cash ledger to the electronic cash ledger for IGST, CGST, SGST/
UTGST or GST cess in Form GST PMT-09.
 Refund - Where a person has claimed refund of any amount from the electronic cash ledger, the said amount
shall be debited to the electronic cash ledger. If the refund so claimed is rejected (either fully or partly), the
amount debited to the extent of rejection, shall be credited to the electronic cash ledger by the proper officer by
an order made in Form GST PMT-03. A refund shall be deemed to be rejected, if the appeal is finally rejected (or
if the claimant gives an undertaking to the proper officer that he shall not file an appeal).
 Discrepancy - A registered person shall, upon noticing any discrepancy in his electronic cash ledger,
communicate the same to the officer exercising jurisdiction in the matter, through the common portal in Form
GST PMT-04.
807 Scrutiny of return Para 557.3
 WHAT ARE DIFFERENT ASSESSMENTS UNDER GST

557. Different GST assessments are given below –
557.1 Self-assessment - Every registered person shall self assess GST payable and furnish a return for each tax
period as specified under section 39.
557.2 Provisional assessment - One can avail the facility of provisional assessment in the two cases given
below –
1. When the taxable person is unable to determine the value of goods/services.
2. When the taxable person is unable to determine rate of GST applicable.
In these two cases, one can have provisional assessment. Procedures for such assessment is given below –
 Application for provisional assessment - A registered person requesting for payment of tax on a provisional basis
shall furnish an application in Form GST ASMT-01 on the common portal. The application should be submit-
ted along with documents giving reason for payment of tax on a provisional basis. The proper officer may, on
receipt of the application, issue a notice in Form GST ASMT-02 requiring the registered person to furnish
additional information/documents in support of his request. The applicant shall file a reply to the notice in
Form GST ASMT-03, and may appear in person before the said officer if he so desires.
 Order of proper officer - Within 90 days from the receipt of application, the proper officer shall issue an order in
Form GST ASMT-04 allowing the payment of tax on a provisional basis (indicating the value or the rate or both
on the basis of which the assessment is to be allowed on a provisional basis). Order will also indicate the
amount for which the bond is to be executed and security to be furnished (not exceeding 25 per cent of the
amount covered under the bond).
 Bond - The registered person shall execute a bond (as given above) in Form GST ASMT-05 along with a
security in the form of a bank guarantee for an amount as specified in the order of the proper officer. A bond
furnished to the proper officer under SGST or IGST Act shall be deemed to be a bond furnished under CGST
Act.
 Final assessment - The proper officer shall issue a notice in Form GST ASMT-06, calling for information and
records required for finalization of assessment. Within 6 months from the date of communication of provi-
sional order, final assessment should be completed (this period of 6 months may be extended by the Joint
Commissioner/Additional Commissioner for a further period not exceeding 6 months and by the Commis-
sioner for such further period not exceeding 4 years). The final assessment order should be passed in Form GST
ASMT-07. Final assessment order will specify the amount payable by the registered person or the amount
refundable, if any.
 Interest - The registered person shall be liable to pay interest on GST not paid on due dates.
 Release of security - The applicant may file an application in Form GST ASMT-08 for the release of the security.
This application may be made at any time after passing of final assessment. The proper officer shall release the
security, after ensuring that the applicant has paid due GST along with interest. This order should be passed in
Form GST ASMT-09 within a period of 7 working days from the date of the receipt of the application for release
of security.
557.3 Scrutiny of return - Law pertaining to scrutiny of return is given by section 61. The provisions in brief
are given below –
1. If the return furnished by the registered person is selected for scrutiny, the proper officer may scrutinize the
same return and related particulars furnished by the registered person to verify the correctness of return.
2. In case of any discrepancy, he shall issue a notice to the said person in Form GST ASMT-10, informing him of
such discrepancy and seeking his explanation thereto. The proper officer will also quantify the amount of tax,
interest and any other amount payable in relation to such discrepancy.
3. The registered person is required to submit his explanation within a period of 30 days from the date of
service of aforesaid notice (the period of 30 days may be extended).
4. The registered person may accept the discrepancy mentioned in the notice and pay the tax, interest and any
other amount arising from such discrepancy and inform the same.
5. Alternatively, the registered person may furnish an explanation for the discrepancy in Form GST ASMT-11
to the proper officer. If the explanation submitted by the registered person is found acceptable, the proper
officer shall inform him accordingly in Form GST ASMT-12 and no further action shall be taken
6. In case no satisfactory explanation is furnished within a period of 30 days (or extended period) or where the
registered person, after accepting the discrepancies, fails to take the corrective measure in his return for the
month in which the discrepancy is accepted, the proper officer may initiate appropriate action including those
under section 65/66/67 or proceed to determine the tax and other dues under section 73/74.
557.4 Best judgment assessment for non-filers of return - Where a registered person fails to furnish the
return under section 39 or section 45, even after the service of a notice under section 46, the proper officer may
proceed to assess the tax liability of the said person to the best of his judgment. The best judgment assessment
may be completed by the proper officer taking into account all the relevant material which is available or
which he has gathered. Best judgment assessment order may be issued in Form GST ASMT-13 (and a summary
thereof shall be uploaded electronically in Form GST DRC-07) within a period of 5 years from the due date of
furnishing of annual return.
 Withdrawal of best judgment assessment order - Where the registered person furnishes a valid return within 30
days of the service of best judgment assessment order, the said assessment order shall be deemed to have been
withdrawn. However, the liability for payment of interest under section 50(1) or for payment of late fee under
section 47 shall continue.
557.5 Assessment of unregistered person - Where a taxable person fails to obtain registration (even though
liable to do so) or whose registration has been cancelled but who is liable to pay tax, the proper officer may
proceed to assess the tax liability of such taxable person to the best of his judgment for the relevant tax periods.
In such cases, assessment order may be issued in Form GST ASMT-15 (and a summary thereof shall be up-
loaded electronically in Form GST DRC-07) within a period of 5 years from the due date of furnishing of annual
return.
 Show-cause notice before aforesaid assessment - The aforesaid assessment order shall not be passed without
giving the person an opportunity of being heard. The proper officer shall issue a notice to such person in Form
GST ASMT-14 containing the grounds on which the assessment is proposed to be made on best judgment basis
and shall also serve a summary thereof electronically in Form GST DRC-01, and after allowing a time of 15
days to such person to furnish his reply.
557.6 Summary assessment - Summary assessment is permitted only to protect interest of revenue (if delay is
likely to affect revenue adversely). The proper officer will have to take prior approval of the Additional Com-
missioner/Joint Commissioner. Summary assessment can be completed by the proper officer only if he has
some evidence pertaining to tax liability of a person. Where the taxable person to whom the liability pertains is
not ascertainable and such liability pertains to supply of goods, the person in charge of such goods shall be
deemed to be the taxable person liable to be assessed and liable to pay tax. Summary assessment order shall be
issued in Form GST ASMT-16.
Withdrawal of summary assessment - On an application made by the taxable person in Form GST-ASMT-17
within 30 days from the date of receipt of summary assessment order, the Additional Commissioner/Joint
Commissioner may withdraw summary assessment order. Suo motu withdrawal is also possible. The order of
withdrawal (or rejection of assessee’s application for withdrawal) shall be issued in Form GST ASMT-18.
 WHEN INTEREST AND LATE FEE ARE APPLICABLE UNDER GST

558. Provisions pertaining to interest and late fee under GST are briefly given below –
558.1 Interest - Interest is applicable in the following cases –
Section Different situations Rate of
interest
50(1) A person who is liable to pay tax (in accordance with different provisions under GST) fails to
pay the tax (or part thereof) to the Government within the prescribed period 18%
50(3) A taxable person who makes an undue or excess claim of input tax credit under section 42(10) or
undue reduction in output tax under section 43(10) 24%
54(12) Where a refund is withheld, a taxable person shall be entitled to interest if as a result of an
appeal (or further proceedings) he becomes entitled to refund 6%
56 If any tax ordered to be refunded is not refunded within 60 days of the refund application made
by the taxpayer, interest will be paid by Government 6%
56, Where any claim of refund arises from an appellate order (which has attained finality) and the
proviso same is not refunded within 60 days from the date of receipt of application filed consequent to
such order, interest will be paid by the Government after the expiry of 60 days 9%
558.2 Late fee - Levy of late fee for submission of GST returns are governed by section 47. If a registered person
fails to furnish details of outward/inward supplies (as required by section 37/38/39/45) by due date, he is liable
809 Person is liable for penalty under GST Para 559
to pay late fee of Rs. 100 for every day during which default continues (maximum amount of late fee is Rs. 5,000).
Moreover, if a registered person fails to furnish annual return under section 44 by the due date, he shall be liable
to pay a late fee of Rs. 100 per day during which default continues (maximum quantum of late fee is 1/4 per cent
of his turnover in the State/Union territory).
 Waiver of late fee - The aforesaid late fee has been waived by the Government from time to time under different
notifications. The table below highlights the quantum of late fee as on January 11, 2019 (after waiver given under
different notifications) –
Late submission of return in Form GSTR-1,
Form GSTR-3B and Form GSTR-4)
If it is not nil return If it is nil return
Late fee (for everyday during which default continues) (not being the case Rs. 25 per day Rs. 10 per day
given below)
Late fee (if return for months/quarters from July 2017 to September 2018
not submitted within due date but submitted during December 22, 2018
and March 31, 2019) Nil Nil
 WHEN A PERSON IS LIABLE FOR PENALTY UNDER GST

559. The incidence of short payment of tax (or erroneous refund or wrong availment of input tax credit) may
be because of the following reasons –
- Normal cases - An inadvertent bona fide mistake.
- Fraud cases - It may be a deliberate attempt to evade the tax.
In these two cases, nature of offence is totally different. Consequently, separate provisions for recovery of the
tax and levy of penalty have been made. Moreover, there are provisions to encourage voluntary compliance
such as no penalty (or lesser penalty) if the due tax (along with interest) is paid within the specified time limit.
The table below summarises these provisions –
Action by taxpayer Quantum of penalty
Normal cases Fraud cases
Tax (along with interest) paid before No penalty and no notice shall be 15% of tax and no notice shall be
issue of notice issued issued
Tax (along with interest) paid within No penalty (all proceedings deemed 25% of the tax (all proceedings dee-
30 days of issue of notice to be concluded) med to be concluded)
Tax (along with interest) paid within 10% of the tax or Rs. 10,000, which- 50% of the tax (all proceedings dee-
30 days of communication of order ever is higher med to be concluded)
Tax (along with the interest) paid 10% of the tax or Rs. 10,000, which- 100% of the tax
after 30 days of communication of ever is higher
order
Note - No penalty is levied in cases where the self-assessed tax (or any amount collected as tax) is paid (with interest)
within 30 days from the due date of payment.
 Time for issue of notice and making order - Time-limit for issue of notice and issue of order pertaining to penalty
is as follows –
Different cases Time-limit for issue of notice Time-limit for issue of order
Normal cases Within 2 years and 9 months from the due Within 3 years from the due date of filing of
date of filing annual return for the financial annual return for the financial year to which
year to which the demand pertains or from the demand pertains or from the date of
the date of erroneous refund erroneous refund
Fraud cases Within 4 years and 6 months from the due Within 5 years from the due date of filing of
date of filing annual return for the financial annual return for the financial year to which
year to which the demand pertains or from the demand pertains or from the date of
the date of erroneous refund erroneous refund
Amount collected No time-limit Within one year from the date of issue of
as tax but not paid notice
Different cases Time-limit for issue of notice Time-limit for issue of order
Non-payment of No need to issue a show cause notice Recovery proceedings can be started directly
self-assessed tax
 WHAT IS THE SIGNIFICANCE OF NATIONAL ANTI-PROFITEERING AUTHORITY IN GST

560. Any reduction in rate of tax on any supply of goods/services or the benefit of input tax credit should have
been passed on to the recipient by way of commensurate reduction in prices. However, in a few cases, suppli-
ers are not passing on the benefit to the consumer and thereby indulging in illegal profiteering. To check such
practices, Government has constituted National Anti-profiteering Authority. The authority will examine whether
input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a
commensurate reduction in the price of the goods/services supplied by him.
 Constitution of the authority - The National Anti-Profiteering Authority (hereinafter referred to as Authority)
shall be a five-member committee consisting of a Chairman who holds (or has held) a post equivalent in rank
to a Secretary to the Government of India; and four Technical Members who are (or have been) Commissioners
of State tax or central tax or have held an equivalent post under existing laws.
An officer not below the rank of Additional Commissioner (working in the Directorate General of Anti-
profiteering) shall be the Secretary to the Authority.
The Authority shall cease to exist after the expiry of 4 years from the date on which the Chairman enters upon
his office unless the Council recommends otherwise.
 Power to determine the methodology and procedure - The Authority can determine the methodology and proce-
dure for determination as to whether the reduction in the rate of tax on the supply of goods or services or the
benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate
reduction in prices.
 Duties of the Authority - The Authority has the following duties –
a. to determine whether any reduction in the rate of tax on any supply of goods/services or the benefit of input
tax credit has been passed on to the recipient by way of commensurate reduction in prices;
b. to identify the registered person who has not passed on the benefit of reduction in the rate of tax on supply
of goods/services or the benefit of input tax credit to the recipient by way of commensurate reduction in
prices;
c. to order,
- reduction in prices;
- return to the recipient, an amount equivalent to the amount not passed on by way of commensurate
reduction in prices (along with interest at the rate of 18 per cent from the date of collection of the higher
amount till the date of the return of such amount or recovery of the amount including interest not returned);
- the deposit of an amount equivalent to 50 per cent of the amount determined under the above clause in the
Consumer Welfare Fund (Central Government) and the remaining 50 per cent of the amount in the
Consumer Welfare Fund (of the concerned State, where the eligible person does not claim return of the
amount);
- imposition of penalty; and
- cancellation of registration;
d. to furnish a performance report to the GST Council by the 10th day of the close of each quarter.
 Application to the Authority - All applications from interested parties† on issues of local nature (or those
forwarded by the Standing Committee) shall first be examined by the State level Screening Committee‡.
The Screening Committee on being satisfied that the supplier has not passed on the reduction in rate of tax on
any supply of goods/services or the benefit of input tax credit on to the recipient by way of commensurate
reduction in prices, will forward the application (within 2 months# from the date of receipt of written
application) with its recommendations to the Standing Committee on Anti-profiteering‡‡.
† Interested parties include suppliers/recipients of goods/services under the aforesaid proceedings. Besides, it includes any other person who
alleges that a registered person has not passed on the benefit of reduction in the rate of tax on any supply of goods or services or the benefit of
input tax credit to the recipient by way of commensurate reduction in prices.
‡ State level Screening Committees will be constituted in each State by the State Governments consisting of an officer of the State Government,
to be nominated by the Commissioner, and an officer of the Central Government, to be nominated by the Chief Commissioner.
‡‡ It consists of such officers of the State Government and Central Government as may be nominated by the GST council, for further action.
# Or within such extended period not exceeding a further period of 1 month (for reasons to be recorded in writing) as may be allowed by the
authority.
811 National anti-profiteering authority in GST Para 560
If the Standing Committee is satisfied that there is a prima facie evidence to show that the supplier has not
passed on the benefit of reduction in the rate of tax on the supply of goods/services or the benefit of input tax
credit to the recipient by way of commensurate reduction in prices, it shall refer the matter to the Directorate
General of Anti-profiteering for a detailed investigation.
 Investigation - The Directorate General of Anti-profiteering shall conduct investigation and collect evidence
necessary to determine undue profiteering and before initiation of the investigation, issue a notice to the inter-
ested parties (and to such other persons as deemed fit for a fair enquiry into the matter) containing, inter alia,
information on the following, namely –
a. the description of the goods or services in respect of which the proceedings have been initiated;
b. summary of the statement of facts on which the allegations are based; and
c. the time limit allowed to the interested parties and other persons who may have information related to the
proceedings for furnishing their reply.
The evidence or information presented to the Directorate General of Anti-profiteering by one interested party
can be made available to the other interested parties, participating in the proceedings.
The Directorate General of Anti-profiteering can seek opinion of any other agency or statutory authorities in
the discharge of his duties. The Directorate General of Anti-profiteering, or an officer authorised by him will
have the power to summon any person necessary either to give evidence or to produce a document or any
other thing. He will also have same powers as that of a civil court and every such inquiry will be deemed to be
a judicial proceeding.
The Directorate General of Anti-profiteering will complete the investigation within a period of 6 months of the
receipt of the reference from the Standing Committee. This period may be extended for a further period of 3
months for reasons to be recorded in writing as may be allowed by the Authority. Upon completion of the
investigation, the Directorate General of Anti-profiteering shall furnish to the Authority, a report of its findings
along with the relevant records.
 Order of the Authority - The Authority shall (after granting an opportunity of hearing to the interested parties
if so requested) within a period of 6 months from the date of the receipt of the report from the Directorate
General of Anti-profiteering, determine whether a registered person has passed on the benefit of the reduction
in the rate of tax on the supply of goods/services or the benefit of input tax credit to the recipient by way of
commensurate reduction in prices.
Where the Authority determines that a registered person has not passed on the benefit, the Authority may
order—
a. reduction in prices;
b. return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction
in prices along with interest at the rate of 18 per cent (from the date of collection of the higher amount till the
date of the return of such amount or recovery of the amount including interest not returned);
c. the deposit of an amount equivalent to 50 per cent of the amount determined under the above clause along
with interest at the rate of 18 per cent from the date of collection of the higher amount till the date of deposit
of such amount in the Consumer Welfare Fund (under CGST Act) and the remaining 50 per cent of the amount
in the Consumer Welfare Fund (under SGST Act) where the eligible person does not claim return of the
amount or is not identifiable;
d. imposition of penalty as specified under the Act; and
e. cancellation of registration under the Act.
If the report of the Directorate General of Anti-profiteering recommends that there is contravention (or even non-
contravention) of anti-profiteering measure (of section 171 or the aforesaid rules) but the Authority is of the
opinion that further investigation or inquiry is called for in the matter, it may (for reasons to be recorded in
writing) refer the matter to the Directorate General of Anti-profiteering to cause further investigation/inquiry.
 Decision to be taken by majority - A minimum of 3 members of the Authority shall constitute quorum at its
meetings. If the Members of the Authority differ in their opinion on any point, the point shall be decided
according to the opinion of the majority of the members present and voting, and in the event of equality of votes,
the Chairman shall have the second or casting vote.
 Compliance by the registered person - Any order passed by the Authority shall be immediately complied with by
the registered person failing which action shall be initiated to recover the amount in accordance with legal
provisions contained in GST. The Authority can direct any authority of CGST, SGST or UTGST to monitor the
implementation of the order passed by it.
 WHAT ARE THE PROVISIONS REGULATING E-WAY BILL IN GST

561. A way bill is a receipt or a document issued by a carrier giving details and instructions relating to the
shipment of a consignment of goods. Electronic Way Bill (E-Way Bill) is basically a compliance mechanism.
Under this mechanism, by way of a digital interface, the person causing the movement of goods uploads the
relevant information.
 Applicability of e-way bill provisions under GST - E-way bill is compulsory on inter-State supply effect from
April 1, 2018. However, on intra-State supply, States can opt to follow it at any time before June 1, 2018. From
June 1, 2018, e-way bill rules will uniformly apply to all States.
 How e-way bill is generated - An e-way bill contains two parts. Part A of Form GST EWB-01 is to be furnished
by the person who is causing movement of goods of consignment value exceeding Rs. 50,000.* Part B (trans-
port details) to be furnished by the person who is transporting the goods. Where the goods are transported by
a registered person (whether as consignor or recipient), the said person shall have to generate the e-way bill by
furnishing information in Part B on the GST common portal. Where the e-way bill is not generated by regis-
tered person and the goods are handed over to the transporter for transportation by road, the registered person
shall furnish the information relating to the transporter in Part B of Form GST EWB-01 on the common portal
and the e-way bill shall be generated by the transporter on the said portal. The following points should be
noted –
1. Every registered person who causes movement of goods of consignment value exceeding Rs. 50,000* shall
(before commencement of such movement) electronically upload information relating to the said goods as
specified in Part A of Form GST EWB-01 on the common portal (along with such other information as may be
required on the common portal). A unique number will be generated on the said portal. This uploading is
required whether movement of goods is –
a. in relation to a supply; or
b. for reasons other than supply; or
c. due to inward supply from an unregistered person.
2. For computation of the aforesaid limit of Rs. 50,000*, the consignment value shall be the value, determined in
accordance with the provisions of section 15, declared in an invoice/bill of supply/delivery challan issued in
respect of the said consignment. It includes CGST/SGST/IGST/UTGST/GST cess charged, if any, in the
document. However, it excludes the value of exempt supply of goods where the invoice is issued in respect of
both exempt and taxable supply of goods.
3. The above information can be uploaded by the transporter if an authorization is received from the registered
person.
4. Where the goods to be transported are supplied through an e-commerce operator (or courier agency), the
above information can be uploaded by such e-commerce operator (or courier agency) if an authorization
received from the consignor.
5. Where goods are sent by a principal located in one State/Union Territory to a job worker located in another
State/Union Territory, the e-way bill shall be generated either by the principal or the job worker, if registered,
irrespective of the value of the consignment.
6. Where handicraft goods are transported from one State/Union Territory to another State/Union Territory by
a person who has been exempted from the requirement of obtaining registration under section 24(i)/(ii) [see para
522.3-1], the e-way bill shall be generated by the said person, irrespective of the value of the consignment.
7. If the goods are transported by the registered person as a consignor (or the recipient of supply as the consignee),
whether in his own conveyance or a hired one (or a public conveyance), by road, the said person shall generate
the e-way bill in Form GST EWB-01 electronically on the common portal after furnishing information in Part
B of the said form.
8. If the goods are transported by railways or by air or vessel, the e-way bill shall be generated by the registered
person (being the supplier or the recipient). The e-way bill shall be generated before (or after) the commencement
of movement, after furnishing the information in Part B of Form GST EWB-01. If the goods are transported by
railways†, the railways shall not deliver the goods unless the e-way bill is produced at the time of delivery.
*However, for intra-State supply a few States have notified different threshold limit for mandatory generation of e-way bill (e.g., Delhi/Tamil
Nadu/West Bengal : Rs. 1,00,000, Bihar : Rs. 2,00,000). Moreover, for intra-State supply a few States require generation of e-way bill only in case
of prescribed goods.
813 E-way bill in GST Para 561
9. If the e-way bill is not generated under the aforesaid provisions and the goods are handed over to a transporter
for transportation by road, the registered person shall furnish the information relating to the transporter on the
common portal and the e-way bill shall be generated by the transporter on the said portal on the basis of the
information furnished by the registered person in Part A of Form GST EWB-01.
10. The registered person or, the transporter may, at his option, generate and carry the e-way bill even if the value
of the consignment is less than Rs. 50,000.
11. Where the movement of goods is caused by an unregistered person (either in his own conveyance or a hired
one or through a transporter), he or the transporter may, at their option, generate the e-way bill in Form GST
EWB-01 on the common portal. For this purpose, the movement of goods shall be deemed to be caused by
recipient if goods are supplied by unregistered supplier to a registered recipient (if recipient is known at the time
of commencement of movement of goods).
12. Where the goods are transported for a distance of up to 50 kilometers within the State or Union Territory from
the place of business of the consignor to the place of business of the transporter for further transportation, the
supplier or the recipient, or the transporter may not furnish the details of conveyance in Part B of Form GST
EWB-01.
13. The e-way bill shall not be valid for movement of goods by road unless the information in Part-B of Form GST
EWB-01 has been furnished (except in the case of movement of goods for a distance up to 50 kilometers).
14. Upon generation of the e-way bill on the common portal, a unique e-way bill number (EBN) shall be made
available to the supplier, the recipient and the transporter on the common portal. If there is a mistake, incorrect
or wrong entry in the e-way bill, then it cannot be edited or corrected. Only option is cancellation of e-way bill
and generate a new one with correct details.
15. Where the goods are transferred from one conveyance to another, the consignor/recipient (who has provided
information in Part A of the Form GST EWB-01) or the transporter shall, before such transfer and further
movement of goods, update the details of conveyance in the e-way bill in Part B of Form GST EWB-01. However,
this updating is not required in case of movement of goods for a distance up to 50 kilometers.
16. The consignor/recipient (who has furnished the information in Part A of Form GST EWB-01) or the
transporter, may assign the e-way bill number to another registered/enrolled transporter for updating the
information in Part B of Form GST EWB-01 for further movement of the consignment. However, after the details
of the conveyance have been updated by the transporter in Part B of Form GST EWB-01, the consignor/recipient
shall not be allowed to assign the e-way bill number to another transporter.
17. After e-way bill has been generated, where multiple consignments are intended to be transported in one
conveyance, the transporter may indicate the serial number of e-way bills generated in respect of each such
consignment electronically on the common portal and a consolidated e-way bill in Form GST EWB-02 may be
generated by him prior to the movement of goods.
18. Where the consignor or the consignee has not generated the e-way bill in Form GST EWB-01 and the
aggregate of the consignment value of goods carried in the conveyance is more than Rs. 50,000, the transporter
in respect of inter-State supply shall generate the e-way bill in Form GST EWB-01 on the basis of invoice/bill of
supply/delivery challan and may also generate a consolidated e-way bill in Form GST EWB-02 on the common
portal prior to the movement of goods. However, this rule is not applicable in the case of transportation of goods
by railways†, air and vessel. Moreover, where the goods to be transported are supplied through an e-commerce
operator/courier agency, the information in Part A of Form GST EWB-01 may be furnished by such e-commerce
operator/courier agency.
19. The information furnished in Part A of Form GST EWB-01 shall be made available to the registered supplier
on the common portal who may utilize the same for furnishing the details in Form GSTR-1. If, however, the
information is furnished by an unregistered supplier/unregistered recipient in Form GST EWB-01, he shall be
informed electronically, if the mobile number or the e-mail is available.
20. Where an e-way bill has been generated but goods are either not transported (or are not transported as per
the details furnished in the e-way bill), the e-way bill may be cancelled electronically on the common portal
within 24 hours of its generation. However, an e-way bill cannot be cancelled if it has been verified by the
Commissioner/Officer empowered in transit in accordance with the provisions of rule 138B.
21. The unique e-way bill number generated under the above provisions, shall be valid for a period of 15 days
for updation of Part B of Form GST EWB-01.
22. After generation of e-way bill/a consolidated e-way bill, it shall be valid for the period given below (to be
counted from the relevant date) –
Over dimensional cargo (or multimodal shipment in In any other case

which at least one leg involves transport by ship)
Distance Validity period Distance Validity period
Up to 20 km One day Up to 100 km One day
For every 20 km One additional day For every 100 km (or part thereof) One additional day
(or part thereof)
The Commissioner may, on the recommendations of the GST Council, by notification, extend the aforesaid
validity period for certain categories of goods. If under circumstances of an exceptional nature (including trans-
shipment), the goods cannot be transported within the validity period, the transporter may extend the validity
period after updating the details in Part B of Form GST EWB-01.
For the aforesaid purpose, the “relevant date” shall mean the date on which the e-way bill has been generated.
The period of validity shall be counted from the time at which the e-way bill has been generated (i.e., when first
entry is made in Part B, validity is not re-calculated for subsequent entries in Part B) and each day shall be counted
as the period expiring at midnight of the day immediately following the date of generation of e-way bill. For
instance, if e-way bill is generated on August 27, 2018 at 8:30 am, “one day” will expire on August 28, 2018 at
11:59:59 pm.
This can be further explained by the following examples –
- Suppose an e-way bill is generated at 00:01 hrs. on March 8. Then first day would end on 12:00 midnight of March 9-10.
Second day will end on 12:00 midnight of March 10-11 and so on.
- Suppose an e-way bill is generated at 23:59 hrs. on March 8. Then first day would end on 12:00 midnight of March 9-10.
Second day will end on 12:00 midnight of March 10-11 and so on.
23. The details of the e-way bill (which is generated under the aforesaid provisions) shall be made available to
the following persons –
Different situations To whom e-way bill is made available on the
common portal
Where the information in Part A of Form GST EWB-01 has been furnished Supplier, if registered*
by the recipient or the transporter
Where the information in Part A of Form GST EWB-01 has been furnished Recipient, if registered*
by the supplier or the transporter
* The supplier or the recipient shall communicate his acceptance or rejection of the consignment covered by the e-way bill.
24. Where the person to whom the aforesaid information has been made available, does not communicate his
acceptance or rejection within 72 hours of the details being made available to him on the common portal, or the
time of delivery of goods whichever is earlier, it shall be deemed that he has accepted the said details.
25. The e-way bill generated in any State shall be valid in every State and Union Territory.
26. Generation of e-way bill is not required in the following cases –
- Where the goods being transported are specified in Annexure to rule 138 (i.e., LPG for supply to household
and NDEC customers, kerosene oil sold under PDS, postal baggage transported by Department of Posts,
natural or cultured pearls (and precious or semi-precious stones), precious metals and metals clad with
precious metal, jewellery, goldsmiths’ and silversmiths’ wares (and other articles), currency, used personal
and household effects, coral, unworked and worked coral)
- Where the goods are being transported by a non-motorised conveyance.
- Where the goods are being transported from the customs port, airport, air cargo complex and land customs
station to an inland container depot or a container freight station for clearance by customs.
- In respect of movement of goods within such areas as are notified under rule 138(14)(d) of the GST Rules of
concerned State/Union Territory.
- Where the goods (other than de-oiled cake) being transported, are specified in Exemption Notification No.
2/2017 [see para 436].
- Where the goods being transported are alcoholic liquor for human consumption, petroleum crude, high speed
diesel, motor spirit (commonly known as petrol), natural gas or aviation turbine fuel.
- Where the supply of goods being transported is treated as no supply under Schedule III [see para 415.1].
815 E-way bill in GST Para 561
- Where the goods are being transported—

a. under customs bond from an inland container depot (or a container freight station) to a customs port (or
airport, air cargo complex and land customs station) or from one customs station (or customs port) to
another customs station (or customs port), or
b. under customs supervision or under customs seal.
- Where the goods being transported are transit cargo from/or to Nepal or Bhutan.
- Where the goods being transported are exempt from tax under Notification No. 7/2017, dated June 28, 2017
or Notification No. 26/2017, dated September 21, 2017 as amended from time to time (these notifications cover
supplies of goods by Canteen Stores Department (CSD) under Ministry of Defence to unit run canteens and
supplies of goods by CSD/unit run canteens to authorised customers, supply of heavy water and nuclear fuels
by the Department of Atomic Energy to the Nuclear Power Corporation of India).
- Any movement of goods caused by defence formation under Ministry of Defence as a consignor or consignee.
- Where the consignor of goods is the Central Government/State Government/local authority for transport of
goods by rail.
- Where empty cargo containers are being transported.
- Where the goods are being transported up to a distance of 20 kilometers from the place of the business of the
consignor to a weighbridge for weighment (or from the weighbridge back to the place of the business of the
said consignor) subject to the condition that the movement of goods is accompanied by a delivery challan.
- Where empty cylinders for packing of LPG are being moved for reasons other than supply.
 Unique common enrolment number - With effect from June 19, 2018, a transporter who is registered in more than
one State (or Union Territory) having the same PAN, may apply for a unique common enrolment number. This
can be done by uploading the details in Form GST ENR-02 using any one of his Goods and Services Tax
Identification Numbers (GSTIN). After validation of the details furnished, a unique common enrolment number
shall be generated and communicated to the said transporter.
If a transporter has obtained a unique common enrolment number, he shall not be eligible to use any of the
GSTINs for the purposes of e-way bill(s).
 Documents and devices to be carried by a person-in-charge of a conveyance - The person in charge of a conveyance
shall carry the following documents –
Invoice or bill of supply or delivery challan Applicable in all cases
- Copy of the e-way bill in physical form; or Applicable when goods are transported by road
- e-way bill number in electronic form; or (not applicable in case of movement of goods
by rail or by air or vessel).
- e-way bill number mapped to a Radio Frequency Identification
Device (RFID) embedded on to the conveyance in the prescribed
manner

1. In case of imported goods, the person in charge of a conveyance shall also carry a copy of the bill of entry (filed
by the importer of such goods) and shall indicate the number and date of the bill of entry in Part A of Form GST
EWB-01.
2. A registered person may upload on the common portal a tax invoice issued by him in Form GST INV-1 and
generate an Invoice Reference Number. Invoice Reference Number may be produced for verification by the
proper officer in lieu of the tax invoice and such number shall be valid for a period of 30 days from the date of
uploading. Where the registered person uploads the invoice, the information in Part A of Form GST EWB-01 shall
be auto-populated by the common portal based on the information furnished in Form GST INV-1.
3. The Commissioner may, by notification, require a class of transporters to obtain a unique RFID and get the said
device embedded on to the conveyance and map the e-way bill to the RFID prior to the movement of goods.
4. The Commissioner may, by notification, require the person-in-charge of the conveyance to carry the following
documents instead of the e-way bill –
- Tax invoice or bill of supply or bill of entry; or
- Delivery challan, where the goods are transported for reasons other than by way of supply.
 Verification of documents/conveyance/goods and inspections - The Commissioner (or an officer empowered by him)
may authorize the proper officer to intercept any conveyance to verify the e-way bill in physical or electronic
form for all inter-State and intra-State movement of goods. Moreover, the Commissioner shall get RFID readers
installed at places where the verification of movement of goods is required to be carried out and verification of
movement of vehicles shall be done through such RFID readers where the e-way bill has been mapped with the
said device. The physical verification of conveyances shall be carried out by the proper officer as authorised by
the Commissioner or an officer empowered by him in this behalf. On receipt of specific information on evasion
of tax, physical verification of a specific conveyance can also be carried out by any other officer after obtaining
necessary approval of the Commissioner or an officer authorised by him in this behalf.
1. A summary report of every inspection of goods in transit shall be recorded online by the proper officer in Part
A of Form GST EWB-03 within 24 hours of inspection and the final report in Part B of Form GST EWB-03 shall
be recorded within 3 days of such inspection (the Commissioner or any other officer authorised by him may
extend the period of 3 days for a further period not exceeding 3 days).
The aforesaid period of 24 hours/3 days shall be counted from the midnight of the date on which the vehicle was
intercepted.
2. Where the physical verification of goods (being transported on any conveyance) has been done during transit
at one place within the State/Union Territory or in any other State/Union territory, no further physical
verification of the said conveyance shall be carried out again in the State/Union territory, unless a specific
information relating to evasion of tax is made available subsequently.
3. Where a vehicle has been intercepted and detained for a period exceeding 30 minutes, the transporter may
upload the said information in Form GST EWB-04 on the common portal.
 Restriction on furnishing of information in Part A of Form GST EWB-01 - The following persons (including a
consignor, consignee, transporter, an e-commerce operator or a courier agency) are not allowed to furnish
the information in Part A of Form GST EWB-01 in respect of a registered person (maybe as a supplier or a
recipient) –
a. a person paying tax under Composition Scheme or Alternative Composition Scheme who has not furnished
statement in Form GST CMP-08 for 2 consecutive quarters; or
b. a person (not under Composition Scheme/Alternative Composition Scheme) who has not furnished the
returns for a consecutive period of 2 months.
However, the Commissioner may, on sufficient cause being shown and for reasons to be recorded in writing, by
order in Form GST EWB-06, allow furnishing of the said information in Part A of Form GST EWB 01. Such order
can be passed by the Commissioner on receipt of an application from a registered person in Form GST EWB-05.
The Commissioner may impose such conditions and restrictions as may be specified by him. An order rejecting
the request of such person to furnish the aforesaid information shall not be passed without affording a reasonable
opportunity of being heard.
 Consequences of non-conformance to E-way bill rules - As per section 122, a taxable person who transports any
taxable goods without the cover of specified documents (e-way bill is one of the specified documents) shall be
liable to a penalty of Rs. 10,000 or tax sought to be evaded (wherever applicable) whichever is greater. As per
section 129, where any person transports any goods or stores any goods while they are in transit in contravention
of the provisions, all such goods and conveyance used as a means of transport for carrying the said goods and
documents relating to such goods and conveyance, shall be liable to detention or seizure
However, only such goods and/or conveyances should be detained/confiscated in respect of which there is a
violation of the provisions of the CGST/SGST Acts or the rules made thereunder. For instance, if a conveyance
carrying 10 consignments is intercepted and the person-in-charge of such conveyance produces valid e-way bills
and/or other relevant documents in respect of 6 consignments, but is unable to produce the same with respect
to the remaining 4 consignments, detention/confiscation can be made only with respect to the 4 consignments
and the conveyance in respect of which the violation of the relevant GST provisions has been established by the
proper officer.
 WHAT ARE THE PROVISIONS REGULATING E-COMMERCE

562. E-commerce has been defined under section 2(44) to mean the supply of goods or services or both, includ-
ing digital products over digital or electronic network. E-commerce operator has been defined under section
2(45) to mean any person who owns, operates or manages digital or electronic facility or platform for electronic
commerce.
562.1 Special provisions - The following special provisions have been provided under GST (however, these
provisions are applicable from October 1, 2018).
817 Payment of tax under section 9(5) Para 562.2
1. Payment of tax by e-commerce operators on behalf of suppliers under section 9(5).

2. Tax collection at source by e-commerce operators under section 52.
3. Registration requirement for suppliers and e-commerce operators.
562.2 Payment of tax under section 9(5) - By virtue of section 9(5), an e-commerce operator is liable to pay
GST in respect of supply of services made through it, instead of actual suppliers. In such cases, GST shall be
paid by the electronic commerce operator (if such services are supplied through it) and all the provisions of the
Act shall apply to such electronic commerce operator as if he is the supplier liable to pay GST in relation to the
supply of such services. However, provisions of section 9(5) are applicable only in respect of the following 3
notified services –
Supply Description of supply Exception
Radio taxi service Services by way of transportation of passen-
gers by a radio-taxi, motorcab, maxicab and
motor cycle.
Hotel booking Services by way of providing accommoda-
through web tion in hotels, inns, guest houses, clubs, camp-
sites or other commercial places meant for resi- Where the person supplying such service
dential or lodging purposes through electronic commerce operator is
liable for registration (turnover exceeds
House-keeping Services by way of house-keeping, such the threshold limit of Rs. 20 lakh/10 lakh)
service through as plumbing, carpentering etc.
web
In the aforesaid 3 cases, the e-commerce operator is liable to pay GST, instead of actual suppliers. However, in
the case of hotel booking and house-keeping services, if supplier is a registered person, provisions of section
9(5) are not applicable.
 Case 1 - X owns a radio-taxi/cab. He provides his services in Chennai through Asia Taxi Cab, Singapore (an e-commerce
operator in South India). Turnover of X in the preceding financial year is Rs. 6,00,000.
Provisions of section 9(5) are applicable in this case. Asia Taxi Cab, Singapore (through its Indian representative) is liable
to pay GST instead of X, the actual supplier of services.
 Case 2 - Suppose in Case 1, turnover of X in the preceding financial year is Rs. 25,00,000 and X is a registered person under
GST.
Even in this case, provisions of section 9(5) are applicable. Asia Taxi Cab, Singapore (through its Indian representative) is
liable to pay GST instead of X, the actual supplier of services.
 Case 3 - B Ltd. owns a hotel (or inn/guest house/club/campsite/any other commercial place for lodging). It provides
lodging facility in Mumbai through cleanroom.com (a Hong Kong based website owned by Cleanroom Inc., Hong Kong).
Turnover of B Ltd. in the preceding financial year is Rs. 6,00,000.
Provisions of section 9(5) are applicable in this case. Cleanroom Inc., Hong Kong (through its Indian representative) is
liable to pay GST instead of B Ltd., the actual supplier of services.
 Case 4 - Suppose in Case 3, turnover of B Ltd. in the preceding financial year is Rs. 35,00,000 and B Ltd. is a registered
person under GST.
Provisions of section 9(5) are not applicable. GST will be paid by B Ltd. itself.
 Case 5 - C is a house-keeping (such as plumbing, carpentering, etc.) service provider in Nagpur. He provides services in
Nagpur through houseclean.com (a Singapore based website owned by Houseclean Ltd., Singapore). Turnover of C in the
preceding financial year is Rs. 6,00,000.
Provisions of section 9(5) are applicable in this case. Houseclean Ltd., Singapore (through its Indian representative) is
liable to pay GST instead of C, the actual supplier of services.
 Case 6 - Suppose in Case 5, turnover of C in the preceding financial year is Rs. 28,00,000 and C is a registered person under
GST.
Provisions of section 9(5) are not applicable. GST will be paid by C himself.
 Case 7 - D is a supplier and manufacture of cosmetic goods. These goods are sold in his showroom at Andheri, Mumbai.
He also provides technical consultancy in Maharashtra, pertaining to manufacture of cosmetic goods through Dezon, a
Dubai based website (owned by Dezon Ltd., Dubai).
Provisions of section 9(5) are not applicable. This is not a notified service for the purpose of section 9(5). Regardless of the
fact whether (or not) D is a person registered under GST, section 9(5) is not applicable. In other words, Dezon Ltd., Dubai
(or its Indian representative) is not liable to pay GST pertaining to supplies made by D through its website. However, Dezon
Ltd., Dubai may be subject to TCS provisions under section 52 which are given below.
562.3 Tax collection at source (TCS) under section 52 - The e-commerce operator is required to collect an
amount at the rate of 1 per cent of the net value of taxable supplies (net of goods return) made through it, where
the consideration with respect to supplies of goods/services is to be collected by such operator. The amount so
collected is called as tax collection at source (TCS). However, the provisions of section 52 are not applicable in
the two cases given below –
Case 1 [supply of services notified under section 9(5) through e-commerce operator] - The provisions of section 52 are
not applicable in the case of supply of services notified for the purpose of section 9(5).
Case 2 [supply of services by unregistered person through e-commerce operator] - Every person supplying goods or
services through an e-commerce operator is mandatorily required to register. However, vide Notification 65/
2017, dated November 15, 2017, a person supplying services [other than supplier of services under section 9(5)]
through an e-commerce platform were exempted from obtaining compulsory registration provided their
aggregate turnover does not exceed Rs. 20 lakh (or Rs. 10 lakh in case of specified special category States) in a
financial year. Since such suppliers are not liable for registration, e-commerce operators are not required to
collect TCS on supply of services being made by such suppliers through their portal.
Out of the 7 cases given in para 562.2, only in Case 7 section 52 is applicable. In other words, Dezon Ltd., Dubai will collect
tax at source at the rate of 1 per cent of the net value of taxable supply of services through it. If, however, D is an unregistered
person (because his turnover is less than Rs. 20 lakh/Rs. 10 lakh), provisions of section 52 are not applicable.
 Other points - The following other points should be noted –

1. The e-commerce operator should collect tax at source at the time of supply (where the business model is that
the consideration is to be collected by the e-commerce operator irrespective of the actual collection of the
consideration). For example, if the supply has taken place through the e-commerce operator on October 30, 2018
but the consideration for the same has been collected in the month of November 2018, then tax should be
collected and reported in the statement for the month of October 2018.
2. TCS is not required to be collected on exempt supplies.
3. TCS is not required to be collected on supplies on which the recipient is required to pay tax on reverse charge
basis.
4. A taxpayer, who is under Composition Scheme/Alternative Composition Scheme, cannot make supplies
through e-commerce operator. Consequently, question of collecting TCS in respect of supplies made by the
composition taxpayer does not arise.
5. An e-commerce company is required to collect tax only on the net value of taxable supplies made through
it. In other words, value of the supplies which are returned (supply return) may be adjusted from the aggregate
value of taxable supplies made by each supplier (i.e., on GSTIN basis). To put it differently, if two suppliers X
and Y are making supplies through an e-commerce operator, the “net value of taxable supplies” would be
calculated separately in respect of X and Y. If the value of returned supplies is more than supplies made on
behalf of any of such supplier during any tax period, the same would be ignored in his case [e.g., if net value
of taxable supplies is Rs. (–) 1,40,000 in the case of X and Rs. 6,00,000 in the case of Y for December 2018, no tax
will be collected in the case of X but tax will be collected in the case of Y on net value of taxable supply of Rs.
6,00,000].
6. The amount collected by the operator is to be paid to the Government within 10 days after the end of the
month in which amount was so collected.
7. The amount of TCS paid by the operator to the Government will be reflected in the GSTR-2 of the actual
registered supplier (on whose account such collection has been made) on the basis of the statement filed by the
operator. The same can be used at the time of discharge of tax liability in respect of the supplies made by the
actual supplier.
8. Every operator is required to upload a statement, containing the details of outward supplies of goods or
services effected through it, including the supplies of goods or services returned through it, and the amount
collected by it as TCS during a month within 10 days after the end of such month.† The statement will be
uploaded in Form GSTR-8. The operator is also required to file an annual statement by December 31 following
the end of the financial year in which the tax was collected.
9. The details of supplies furnished by every operator in his statement for the month will be matched with the
corresponding details of outward supplies furnished by the concerned supplier in his valid return for the same
month or any preceding month. Where the details of outward supplies declared by the operator in his state-
ment do not match with the corresponding details declared by the supplier, the discrepancy shall be communi-
cated to both persons.
†The due date for uploading Form GSTR-8 for the month of October 2018, November 2018 and December 2018 is February 7, 2019.
819 Persons liable for TDS Para 563.1
10. The amount in respect of which any discrepancy is communicated and which is not rectified by the supplier
in his valid return or the operator in his statement for the month in which discrepancy is communicated, shall
be added to the output liability of the said supplier in his return for the month succeeding the month in which
the discrepancy is communicated. The concerned supplier in whose output tax liability any amount has been
added, shall be liable to pay the tax payable in respect of such supply along with interest.
11. If the supplier sells his own goods through a website hosted by himself, section 52 is not applicable. Section
52 is applicable only if the supplier and e-commerce operator are different. Under section 52, TCS is required to
be collected by e-commerce operator on the net value of taxable supplies made through it by other suppliers
(i.e., where the consideration pertaining to other supplier is to be collected by e-commerce operator). In a case
where e-commerce operator sells his own goods/services through his own website, there is no requirement to
collect tax at source under section 52.
562.4 Registration requirement - If the aggregate turnover of a person exceeds the threshold limit of Rs. 20 lakh
[or Rs. 10 lakh in special category States or Rs. 40 lakh in cases covered by para 522.2-4], GST registration is
required on compulsory basis. However, in the following cases (connected with e-commerce operations)
registration is required even if turnover is less than the threshold of Rs. 20 lakh/Rs. 10 lakh/Rs. 40 lakh –
If GST is payable by e-commerce If TCS is required under
operator under section 9(5) section 52
E-commerce operator Registration is required* Registration is required†
Person representing e-commerce operator Registration is required* –
Supplier of goods through e-commerce operator – Registration is required*
Supplier of services through e-commerce operator – Registration is not required**
† Registration is required (irrespective of turnover). Registration for tax collection at source is required in each State/Union
Territory. If a foreign e-commerce operator does not have physical presence in a particular State/Union Territory, it may
appoint an agent on its behalf. E-Commerce operator has to obtain separate registration for tax collection at source
(irrespective of the fact whether the e-Commerce operator is already registered under normal provisions of GST as a supplier
or otherwise and has GSTIN).
*In these cases, GST registration is required even if turnover is less than the threshold of Rs. 20 lakh/Rs. 10 lakh/Rs. 40
lakh.
**However, registration is required under normal provisions if turnover exceeds Rs. 20 lakh/Rs. 10 lakh/Rs. 40 lakh.
 WHAT IS THE MECHANISM OF TAX DEDUCTION AT SOURCE (TDS) UNDER GST

563. Tax deduction at source (TDS) is a system, initially introduced for income-tax purposes. It is one of the
modes to collect tax on ad hoc basis. The payer deduct tax out of the amount payable to the recipient. Recipient
gets credit of the same at the time of his assessment. Similar rules have been incorporated under GST under
section 51. These rules of section 51 are briefly given below (however, these provisions are applicable only
from October 1, 2018).
563.1 Persons liable for tax deduction at source (TDS) - Under section 51, the Government has instructed
the following persons (the deductor) to deduct tax at source –
- A department or an establishment of the Central Government or State Government.
- Local authority.
- Governmental agencies.
- An authority/board/any other body set up by an Act of Parliament or a State Legislature (when Govern-
ment has 51 per cent or more participation by way of equity or control to carry out any function).
- An authority/board/any other body established by any Government (when Government has 51 per cent or
more participation by way of equity or control to carry out any function).
- Society established by the Central Government or the State Government or a Local Authority under the
Societies Registration Act, 1860.
- Public sector undertakings.
 Other points -The following points should be noted –
1. The above provisions shall apply to the authorities under the Ministry of Defence, only in the cases specified
in Annexure A to the Notification No. 57/2018, dated October 23, 2018.
2. The above provision shall not apply to the supply of goods/services from a public sector undertaking to
another public sector undertaking (whether or not a distinct person).
3. The above provisions shall not apply to supply of goods/services by one person to another person provided
the supplier and recipient fall in the list given in section 51(1) [i.e., persons given in para 563.1] (this amendment
is applicable with effect from December 31, 2018).
563.2 Rate of TDS and threshold limit - The tax will be deducted at the rate of 2 per cent of the payment made
to the supplier (the deductee) of taxable goods/services. However, tax is deductible only when the total value
of such supply, under a contract, exceeds Rs. 2,50,000 (excluding the amount of GST). Thus, individual sup-
plies may be less than Rs. 2,50,000, but if contract value is more than Rs. 2,50,000, TDS provisions will be
applicable.
X Ltd. is supplier of goods. Recipient is a Governmental agency. Taxable value of supply is Rs. 10 lakh. GST is Rs. 1.80 lakh.
Total amount payable to X Ltd. is Rs. 11.8 lakh. In this case, TDS would be 2 per cent of Rs. 10 lakh. In other words, amount
payable by the Governmental agency (deductor) to X Ltd. (deductee) is as follows –
Amount before GST Total
GST
Rs. Rs. Rs.
Supply by X Ltd. to the Governmental agency 10,00,000 1,80,000 11,80,000
Less: TDS under GST @ 2% 20,000 – 20,000
Amount payable by Governmental agency to X Ltd. 9,80,000 1,80,000 11,60,000
Note - X Ltd. can claim the credit of Rs. 20,000 on the basis of TDS certificate issued by the deductor.
563.3 Contract value exceeds Rs. 2,50,000 but still TDS is not applicable - TDS provisions are not appli-
cable if the location of the supplier and the place of supply is in a State/Union Territory, which is different from
the State/Union Territory of registration of the recipient.
Consider the following cases (in these cases, supplier is one which is mentioned in para 563.1, contract value is more than
Rs. 2,50,000) –
Different Location Place of Registration TDS applicability
cases of supplier supply of recipient
Case 1 State A State A State A Intra-State supply. TDS applicable @ 2% (i.e., CGST: 1%, SGST: 1%)
Case 2 State A State B State A Inter-State supply. TDS applicable @ 2% (i.e., IGST: 2%)
Case 3 State A State A State B TDS not applicable*
*In Case 3, the supply is intra-State supply. CGST and SGST will be levied. In such a case, transfer of TDS [i.e., CGST + SGST
(State B)] to the cash ledger of the supplier [i.e., CGST + SGST (State A)] would be difficult. Therefore, in such cases, TDS
provisions of section 51 are not applicable.
 Cases when TDS is not required - Apart from the case given above, tax deduction is not required in the following
situations –
1. When total value of taxable supply is Rs. 2,50,000 (or less) under a contract.
2. When contract value is more than Rs. 2,50,000 (for both taxable supply and exempted supply) but the value
of taxable supply under the said contract is Rs. 2,50,000 or less.
3. When supply of goods/services is exempt under Exemption Notification.
4. When on supply of goods GST is not leviable (e.g., petrol, diesel, petroleum crude, natural gas, aviation
turbine fuel and alcohol for human consumption).
5. Where the activity/transaction is covered by Schedule III.
6. Where the payment relates to a tax invoice that has been issued before October 1, 2018.
7. Where any amount was paid in advance prior to October 1, 2018 and the tax invoice has been issued on or
after October 1, 2018 (to the extent of advance payment made before October 1, 2018).
8. Where the tax is to be paid on reverse charge by the recipient (i.e., deductee).
9. Where the payment is made to an unregistered supplier.
10. Where the payment relates to “cess” component.
821 What are provisions regulating audit in GST Para 564
563.4 Registration requirement - A TDS deductor has to compulsorily register itself without any threshold
limit. The deductor has a privilege of obtaining registration under GST without requiring PAN. He can obtain
registration using his TAN issued under the Income-tax Act.
563.5 Other procedures - These are given below –
1. Deposit - The amount of TDS should be deposited to the Government account by the deductor by 10th of the
succeeding month. The deductor would be liable to pay interest if the tax deducted is not deposited within the
prescribed time limit.
2. TDS certificate - A TDS certificate is required to be issued by deductor (the person who is deducting tax) in
Form GSTR-7A to the deductee (the supplier from whose payment TDS is deducted). The certificate shall be
issued within 5 days of crediting the amount to the Government. In case, the certificate is not issued within the
time limit, deductor would be liable to pay a late fee of Rs. 100 per day from the expiry of the 5th day till the
certificate is issue (maximum late fee will be Rs. 5,000).
3. TDS return - The deductor is also required to file a return in Form GSTR-7 within 10 days from the end of the
month. If the supplier is unregistered, name of the supplier rather than GSTIN shall be mentioned in the return.
The details of tax deducted at source furnished by the deductor in Form GSTR-7 shall be made available to
each of the deductee electronically through the common portal and the said supplier may include the same in
Form GSTR-2. The amounts deducted by the deductor get reflected in the GSTR-2 of the supplier (deductee).
The supplier can take this amount as credit in his electronic cash register and use the same for payment of tax
or any other liability.
4. Consequences of defaults - Consequences of not complying with TDS provisions are given below –
Event Consequence
TDS not deducted Interest to be paid along with the TDS amount; else the amount shall be
determined and recovered as per the law
TDS certificate not issued within Late fee of Rs. 100 per day subject to a maximum of Rs. 5,000
time-limit of 5 days
TDS deducted but not paid to the Interest to be paid along with the TDS amount; else the amount shall be
Government within the time-limit determined and recovered as per the law
(i.e., later than 10th of the succeeding
month)
Late filing of TDS returns Late fee of Rs. 100 for every day during which such failure continues, sub-
ject to a maximum amount of Rs. 5,000.
Any excess or erroneous amount deducted and paid to the Government account shall be dealt for refund under
section 54. However, if the deducted amount is already credited to the electronic cash ledger of the supplier,
the same shall not be refunded.
 WHAT ARE PROVISIONS REGULATING AUDIT IN GST

564. Audit as per section 2(13) means the examination of records, returns and other documents maintained or
furnished by the registered person under the GST Acts (or rules made thereunder or under any other law for
the time being in force) to verify the correctness of turnover declared, taxes paid, refund claimed and input tax
credit availed, and to assess his compliance with the provisions of the GST Acts (or rules made thereunder).
GST is a trust based taxation regime wherein the assessee is required to self-assess his returns and determine
tax liability without any intervention by the tax official. Therefore, a tax regime that relies on self-assessment
must put in place a robust audit mechanism to measure and ensure compliance of the provisions of law by the
taxable person.
 Different types of audit - GST has three different types of audit –
Audit if turnover exceeds Rs. 2 crore - The first audit is by a chartered accountant/cost accountant. Every regis-
tered person† whose aggregate turnover during a financial year exceeds Rs. 2 crore has to get his accounts
† Law has been amended (with effect from February 1, 2019) to provide that a department of the Central Government/State Government/local
authority which is subject to audit by CAG (or an auditor appointed for auditing the accounts of local authority under any law for the time being
in force), need not get its books of account audited again under the aforesaid provisions by a chartered accountant or cost accountant.
Returns, tax payment and interest 822
audited by a chartered accountant/cost accountant and furnish a copy of audited annual accounts and a recon-
ciliation statement, duly certified, in Form GSTR-9C.
Normal audit - In the second type which is the normal audit, the Commissioner (or any officer authorised by
him), can undertake audit of any registered person for such period, at such frequency and in such manner as
may be prescribed.
Special audit - The third type of audit is called the special audit. In special audit, the registered person can be
directed to get his records (including books of account) examined and audited by a chartered accountant/cost
accountant during any stage of scrutiny, inquiry, investigation or any other proceedings; depending upon the
complexity of the case. During the scrutiny (inquiry, investigation or any other proceedings of a registered
person), the Assistant Commissioner (or any officer senior to him), having regard to the nature and complexity
of the case and the interest of revenue, might be of the opinion that the value has not been correctly declared or
the credit availed is not within the normal limits.
In such cases (with the prior approval of the Commissioner), the Assistant Commissioner or any officer senior
to him can direct the registered person in Form GST ADT-03 to get his records (including books of account)
examined and audited by a specified chartered accountant/cost accountant. The chartered accountant/cost
accountant will be nominated by the Commissioner. The chartered accountant/cost accountant has to submit
a report of such audit within the period of 90 days (extension for another 90 days is possible) to the Assistant
Commissioner. Special audit is possible even if the accounts of the registered person have been audited under
any other provisions of the GST Act (or any other law for the time being in force).
The registered person shall be given an opportunity of being heard in respect of any material gathered on the
basis of special audit and which is proposed to be used in any proceedings against him under this Act (or the
rules made thereunder). The expenses of the examination and audit of records, including the remuneration of
such chartered accountant/cost accountant, shall be determined and paid by the Commissioner. On conclu-
sion of the special audit, the registered person shall be informed of the findings of the special audit in Form
GST ADT-04.
Where the special audit results in detection of tax not paid (or short paid or erroneously refunded, or input tax
credit wrongly availed or utilised), the process of demand and recovery will be initiated against the registered
person.
●
Test your knowledge

1. What are the time-limit for submission of different returns (as applicable on November 15, 2018) ? [para 551.2]
2. Write a note on Form GSTR-1. [para 552.1]
3. Who is required to file Form GSTR-2 ? Write a note on the contents of Form GSTR-2. [para 552.2]
4. Who is required to furnish Form GSTR-3. [para 552.3-1]
5. Write a note on Form GSTR-4 and Form GSTR-5. [paras 552.3-1 and 552.3-2]
6. What is the significance of Form GSTR-3B ? [para 552.4]
7. What is annual return ? [para 552.5]
8. What is the mechanism of matching, reversal and reclaim of input tax credit ? [para 553]
9. What is electronic liability ledger ? [para 554]
10. What is electronic credit ledger ? [para 555]
11. What is electronic cash ledger ? [para 556]
12. What are different types of assessment under GST ? [para 557]
13. When interest is applicable under GST ? [para 558]
14. Write a note on different types of penalties under GST regulations ? [para 559]
15. Write a note on National Anti-profiteering Authority ? [para 560]
16. What are provisions regulating e-commerce ? [para 562]
17. Write a note on TDS and TCS provisions under GST ? [paras 562 and 563]
18. What is the role of e-way bill in GST ? [para 561]
19. When and how e-way bill is generated ? [para 561]
20. What are different types of audit under GST ? [para 561]
CHAPTER 33
Provisions governing
Real Estate Services
T
he provisions in respect of GST on construction of residential and commercial
complex have been completely modified with effect from April 1, 2019. Even ongoing
projects are expected to shift to new GST regime. All these provisions are discussed
with suitable case studies.
 WHAT ONE SHOULD KNOW BEFORE BEGINNING STUDY OF GST LAW PERTAINING TO
REAL ESTATE SERVICES
570. To have better understanding, one should read the following summarised provisions pertaining to GST on
real estate services –
 Provisions comprehensively modified with effect from April 1, 2019 - The GST structure on real estate projects
pertaining to residential and commercial apartments has been comprehensively modified with effect from April
1, 2019. Under the new GST regime on real estate projects, GST rate is lower, but input tax credit is not available.
Under the old regime, GST rate is higher, but input tax credit is available.
 New GST regime compulsory for new projects (but optional for ongoing projects) - The new GST regime is compulsory
for real estate projects which commence on or after April 1, 2019. In case of ongoing projects as on April 1, 2019,
an option is given to the promoters to opt for old GST regime (i.e., higher GST rate and utilisation of input tax
credit). If a promoter (of ongoing projects) wants to continue under old GST regime, he/it will have to submit
a declaration to the jurisdictional Commissioner before May 20, 2019† (if such declaration is not submitted, he
is deemed to have opted for the new regime).
 Rate of GST under new regime - Broadly, these rates are as follows –
- Affordable residential apartments : 1 per cent.

- Other residential apartments : 5 per cent.
- Commercial apartments (shops, offices, godown, etc.) in residential real estate project (RREP) : 5 per cent.
These rates apply where supply of services involves transfer of land (or undivided share of land) and its charges
are included in the amount charged to customers. Where, however, supply of service does not involve transfer
of land (or undivided share of land), the aforesaid GST rate will be 1.5 per cent (for affordable residential
apartments), 7.5 per cent (for other residential apartments) and 7.5 per cent (for shops, offices, godowns in RREP).
These rates are applicable in the case of real estate project which commences on or after April 1, 2019. These rates
are also applicable in the case of ongoing projects, where the promoter has not exercised the aforesaid option to
continue under the old GST regime.
If GST is payable at the aforesaid rates, the following restrictions are applicable –
- Input tax credit is not available. GST shall be paid in cash by debiting the electronic cash ledger only.
- 80 per cent of value of input and input services [other than services by way of grant of development rights,
long-term lease of land (against upfront payment in the form of premium, salami, development charges, etc.)
or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas], used in supplying
the service shall be received from registered supplier only. If not received by the promoter, he is required to
pay GST at the rate of 18 per cent under reverse charge mechanism under section 9(4) to the extent of
difference.
† Declaration has to be given for each project separately.
823
Para 571 Provisions governing real estate services 824
- Where cement is received from an unregistered person, the promoter shall pay GST at the applicable rate (i.e.,
28 per cent) under reverse charge mechanism under section 9(4)†.
- Where input capital goods is received from an unregistered person, the promoter shall pay GST at the
applicable rate under reverse charge mechanism of section 9(4).
 Affordable residential apartment - It means an apartment having carpet area not exceeding 60 square meter in
metropolitan cities or 90 square meter in other cities and for which the gross amount charged is not more than
Rs. 45 lakh.
 Residential real estate project (RREP) - It means a real estate project in which the carpet area of commercial
apartments is not more than 15 per cent of the total carpet area of all apartments in the project.
 No GST if entire consideration is received after completion certificate - GST is not payable if the entire consideration
is received after –
This rule is applicable under new GST regime as well as under old GST regime (this rule is equally applicable
in the cases narrated above as well as in the cases given below).
 Transfer of development rights (TDR) or floor space index (FSI) - If a landowner transfers development right or FSI
(including additional FSI) to a developer against a consideration (wholly or partly, in the form of construction
of apartments), the developer shall charge GST on supply of construction of apartments to the landowner. The
landowner can take the benefit of input tax credit, if the landowner further supplies such apartments to his
buyers.
 WHAT ARE IMPORTANT DEFINITIONS

571. Some of the important definitions are given below –
571.1 Affordable residential apartment - It means a residential apartment which satisfies the following
conditions –
- The residential apartment is in a project which commences on or after April 1, 2019 (or in an ongoing project
in respect of which the promoter has not exercised option up to May 20, 2019 to continue in old GST regime).
- The residential apartment has a carpet area not exceeding 60 square meter in metropolitan cities or 90 square
meter in cities or towns other than metropolitan cities.
- The gross amount charged is not more than Rs. 45 lakh.
 Metropolitan cities - Metropolitan cities are Bengaluru, Chennai, Delhi National Capital Region (NCR) (limited
to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai [whole of
Mumbai Metropolitan Region (MMR)].
 Gross amount charged - It is consideration charged by promoter including amount charged for transfer of land
(or undivided share of land) and amount charged for lease/sub-lease. Besides, it includes any other amount
charged by the promoter from the buyer of the apartment including preferential location charges, development
charges, parking charges, common facility charges, etc. However, the value shall not include stamp duty payable
to the statutory authority, maintenance charges/deposits for maintenance of apartment or maintenance of
common infrastructure – Circular F.No. 354/32/2019-TRU, dated May 14, 2019.
571.2 Apartment booked on or before March 31, 2019 - An apartment booked on or before March 31, 2019
shall mean an apartment which meets all the following three conditions –
- It is part of supply of construction of which has time of supply on or before March 31, 2019.
- At least one instalment has been credited to the bank account of the registered person on or before March 31,
2019.
- An allotment letter or sale agreement or any other similar document evidencing booking of the apartment has
been issued on or before March 31, 2019.
571.3 Project - It means a real estate project (REP) or a residential real estate project (RREP).
† With effect from October 1, 2019, procurement of cement by a promoter from unregistered suppliers, is subject to reverse charge mechanism
[even in the case of a promoter who is not eligible for the benefit of concessional GST rate as given above]. In other words, reverse charge
mechanism is applicable in all cases (with effect from October 1, 2019) whenever a promoter procures cement from unregistered suppliers.
825 GST Provisions Regulating Real Estate Projects Para 572
571.4 Promoter - It means –

- A person who constructs an independent building (or a building consisting of apartments) or converts an
existing building into apartments, for selling all or some of the apartments to other persons.
- A person who develops land into a project (whether or not the person also constructs structures on any of the
plots) for the purpose of selling to other persons all or some of the plots in the said project, whether with or
without structures thereon.
- Any development authority (or any other public body in respect of allottees of building constructed by such
authority) for the purpose of selling all or some of the apartments or plots.
- An apex State level co-operative housing finance society and a primary co-operative housing society which
constructs apartments or buildings for its members or in respect of the allottees of such apartments or
buildings.
- Any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or by any
other name or power of attorney holder from the owner of the land on which the building or apartment is
constructed or plot is developed for sale.
- Such other person who constructs any building or apartment for sale to the general public.
Where the person who constructs or converts a building into apartments (or develops a plot for sale) and the
person who sells apartments or plots are different persons, both of them shall be deemed to be the promoters.
571.5 Real estate project (REP) - Real estate project means the development of a building (or a building
consisting of apartments) or converting an existing building (or a part thereof) into apartments. Further, it
includes the development of land into plots or apartments for the purpose of selling and includes the common
areas, the development works, all improvements and structures thereon, and all easement, rights and appurte-
nances belonging thereto.
571.6 Residential real estate project (RREP) - Residential real estate project (RREP) shall mean a REP in which
the carpet area of the commercial apartments is not more than 15 per cent of the total carpet area of all the
apartments in the REP.
571.7 Ongoing project (on April 1, 2019) - “Ongoing project” shall mean a project which satisfies the following
conditions –
a. commencement certificate in respect of the project, where required to be issued by the competent authority,
has been issued on or before March 31, 2019 and it is certified by an architect or chartered engineer or license
surveyor that construction of the project has started on or before March 31, 2019;
b. where commencement certificate in respect of the project, is not required to be issued by the competent
authority, it is certified by any of the authorities given above that construction of the project has started on
or before March 31, 2019;
c. completion certificate has not been issued (or first occupation of the project has not taken place) on or before
March 31, 2019;
d. apartments (being constructed under the project) have been, partly or wholly, booked on or before March 31,
2019.
For the above purpose, construction of a project shall be considered to have started on or before March 31, 2019,
if the earthwork for site preparation for the project has been completed and excavation for foundation has started
on or before March 31, 2019.
571.8 Carpet area - “Carpet area” means the net usable floor area of an apartment, excluding the area covered
by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace
area, but includes the area covered by the internal partition walls of the apartment.
571.9 Project which commences after April 1, 2019 - “Project which commences on or after April 1, 2019” shall
mean a project other than an ongoing project.
571.10 Floor space index - Floor space index (FSI) shall mean the ratio of a building’s total floor area (gross floor
area) to the size of the piece of land upon which it is built.
 WHAT ARE GST PROVISIONS REGULATING REAL ESTATE PROJECTS WITH EFFECT FROM
APRIL 1, 2019
572. GST provisions for real estate projects (applicable with effect from April 1, 2019) are as follows –
Para 572.1 Provisions governing real estate services 826
572.1 Rate of GST under new regime - Broadly, these rates are as follows –
Different situations Whether project GST rate Conditions
is – Where supply Where supply
(a) Residential involves does not
real estate transfer of land involve
project (RREP), (or undivided transfer of
or share of land) land (or
(b) Real estate and charges undivided
project (REP) for same are share of land)
included in the
amount charged
to customers
A. Construction by a promoter in a  GST payable in cash (by debiting elec-
project which commences on or tronic cash ledger only).
after April 1, 2019 or in an ongo-
 Credit of input tax charged on goods
ing project in respect of which
and services is not available (however,
the promoter has not exercised
in the case of ongoing projects as on
the option to continue in the old
March 31, 2019, input tax credit can be
GST regime [as specified in B and
availed to the extent as prescribed in
C (below)] intended for sale to a
Annexure I/II to Notification No. 3/
buyer (wholly or partly) –
2019, dated March 29, 2019).
- Affordable residential apart-
 Reversal of input tax credit pertaining
ments RREP or REP 1% 1.5%
to a project, time of supply of which is
- Other residential apartments RREP or REP 5% 7.5% on or after April 1, 2019.
- Commercial apartments  80 per cent of value of input and input
(shops, offices, godowns, etc.) RREP 5% 7.5% services (in the case of cement : 100 per
cent) used in supplying the service shall
be received from registered supplier
only. If not received by the promoter,
he is required to pay GST under reverse
charge mechanism under section 9(4)
to the extent of difference [see para
572.2].
 GST on capital goods supplied by un-
registered supplier to a promoter shall
be payable by the promoter under re-
verse charge mechanism under section
9(4).
B. Construction of apartment in an  In the case of ongoing projects, one-
outgoing project as specified in time option shall be exercised on or
Note 2 (below) in respect of which before May 20, 2019† to continue to pay
the promoter has exercised the tax in the old GST regime (i.e., the rate
option to continue in the old GST specified in B in this entry).
regime (i.e., the rate given in this  If the above option is not exercised by
entry). – 8% 12% May 20, 2019, option to pay tax appli-
C. Construction [not covered by A cable to items given in A (supra) shall be
and B (supra)] of a complex, build- deemed to have been exercised.
ing, civil structure, intended for  In the case of commercial apartments in
sale to a buyer (wholly or partly), REP (other than RREP), there is no
including – change in GST rate with effect from
- Commercial apartments April 1, 2019 (GST is same in the old
(shops, offices, godowns, REP (other GST regime and new GST regime).
etc.) by a promoter than RREP) 12% 18% There is no need to exercise the above
option.
- Residential apartments in an
outgoing project (other than
affordable resident apart-
ments) in respect of which the
promoter has exercised the
option to continue in the old
GST regime (i.e., the rate given
in this entry) – 12% 18%
† Declaration has to be given for each project separately.

827 Rate of GST under new regime Para 572.1
Different situations Whether project GST rate Conditions

is – Where supply Where supply
(a) Residential involves does not
real estate transfer of land involve
project (RREP), (or undivided transfer of
or share of land) land (or
(b) Real estate and charges undivided
project (REP) for same are share of land)
included in the
amount charged
to customers
D. Composite supply of works con-  Carpet area of the affordable residen-

tract [not covered by A, B and C tial apartments is not less than 50 per
(supra)] by way of construction, cent of the total carpet area of all the
erection, commissioning, instal- apartments in the project.
lation, repair, maintenance or
alteration of affordable residen-
tial apartments in a project which
commences on or after April 1,
2019 or in an ongoing project in
respect of which the promoter
has not exercised the option to
pay tax in the old GST regime [as
specified in B and C (supra)] – NA 12%
E. Composite supply of works con-
tract [as given in items (iii), (iv),
(v), (vi), (vii), (viii), (ix), (x), (xi),
against Serial No. 3 of the Notifi-
cation No. 11/2017, dated June
28, 2017 – see para 429.1]. – NA 5%/12%
F. Any other construction service – 12% 18%
Notes -
1. In A, B and C, GST is not payable where the entire consideration has been received after issuance of completion certificate, where required
by the competent authority or after its first occupation, whichever is earlier.
2. In B (supra), the following projects are covered.
- Civil structure pertaining to JLN National Urban Renewal Mission or Rajiv Awas Yojana.
- Civil structure works pertaining to a scheme under the housing for All (Urban) Mission/PM Awas Yojana (Urban).
- Similar work pertaining to “Beneficiary led individual house construction/enhancement”.
- Civil structure or any other original works pertaining to the “Economically Weaker Section (EWS) houses” constructed under the
Affordable Housing in partnership by State or Union Territory or local authority or urban development authority under the Housing
for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban).
- Civil structure or any other original works pertaining to the “houses constructed or acquired under the Credit Linked Subsidy Scheme
for EWS/LIG/MIG- 1/MIG-2” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (Urban).
- Single residence (not being a part of residential complex).
- Low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority under “Scheme
of Affordable Housing in Partnership” framed by the Ministry of Housing/”Affordable Housing in Partnership” component of the
Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana/any housing scheme of a State Government/affordable housing
project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance.
- A residential complex predominantly meant for self-use of Government/Union Territory, etc. or for the use of their employees or for
MPs/Member of State Legislature, etc.
Problems
572.1-P1 X Ltd. is a real estate construction company located in Bengaluru. It owns a residential plot of 2000 square meter in Pune.
Construction of residential apartments is started on August 1, 2019 (300 residential apartments will be constructed, each apartment
will have carpet area of 6000 square feet). Discuss whether X Ltd. can opt for old GST regime and claim the benefit of input tax credit
for this profit.
Solution :
In the case of real estate residential project which commences on or after April 1, 2019, it is not possible to opt for old GST
regime and claim the benefit of input tax credit. GST rate for sale to a buyer will be 7.5% (if supply does not involve transfer
of undivided share of land). Conversely, if the supply involves transfer of undivided share of land, effective GST rate will
be 5% (i.e., after deduction of one-third for transfer of land).
572.1-E1 What will be GST rate in the above problem, if supply involves transfer of undivided share of land and the project is owned
by X & Co., a partnership firm which deals in development of real estate projects?
572.1-P2 X Ltd. is a real estate development company. It is engaged in construction of different residential and commercial projects.
Find out applicable GST rate (and other requirements) in the case of following projects owned by the company. Residential apartments
and commercial apartments will be sold to buyers along with undivided shares of land (gross amount charged for an apartment will be
more than Rs. 45 lakh).
Project Nature of project Date of commencement of construction
Station Road, Chennai 100 per cent commercial July 7, 2019
Mall Road, Chandigarh 91 per cent residential, 9 per cent commercial September 6, 2019
Silk Road, Madurai 70 per cent residential, 30 per cent commercial October 1, 2019
Tarun Street, Kolkata 100 per cent residential October 5, 2019
Solution :
Station Road, Chennai (100% commercial) - It is construction of commercial apartment in a real estate project (REP). Applicable
GST rate on sale of apartments to buyers will be 12% (i.e., 18% – 1/3 of 18% for transfer of undivided share of land). X Ltd.
can take benefit of input tax credit.
Mall Road, Chandigarh (91% residential, 9% commercial) - As the carpet area of commercial apartments is not more than 15%,
it is a residential real estate project (RREP). On transfer of residential apartments in RREP, applicable GST rate is 5% (i.e.,
7.5% – 1/3 of 7.5% for transfer of undivided share of land). On transfer of commercial apartments (i.e., shops, office,
godowns, etc.) in RREP, the same GST rate of 5% is applicable. The benefit of input tax credit is not available to X Ltd. for
this project. Moreover, the reverse charge mechanism under section 9(4) is applicable if input goods, input services and input
capital goods are procured by X Ltd. for this project from unregistered suppliers [in some cases, at least 80% input should
be procured from registered dealers, for detailed discussion, see para 572.2].
Silk Road, Madurai (70% residential, 30% commercial) - As carpet area of commercial apartments is more than 15%, the
project cannot be treated as residential real estate project (it is not RREP). It is a real estate project (REP). GST rate will be
as follows –
- On transfer of residential apartments in REP - Applicable GST rate is 5% (i.e., 7.5% – 1/3 of 7.5% for transfer of undivided
share of land). The benefit of input tax credit is not available to X Ltd. for transfer of residential apartments in this project.
Moreover, the reverse charge mechanism under section 9(4) is applicable if input goods, input services and input capital
goods are procured by X Ltd. for construction of residential apartments in this project from unregistered suppliers [in
some cases, at least 80% input should be procured from registered dealers, for detailed discussion, see para 572.2].
- On transfer of commercial apartments in REP - Applicable GST rate is 12% (i.e., 18% – 1/3 of 18% for transfer of undivided
share of land). Input tax credit is available. Reverse charge mechanism under section 9(4) is not applicable.
Tarun Street, Kolkata (100% residential) - It is a real estate project (RREP). On transfer of residential apartments in RREP,
applicable GST rate is 5% (i.e., 7.5% – 1/3 of 7.5% for transfer of undivided share of land). The benefit of input tax credit is
not available to X Ltd. for this project. Moreover, the reverse charge mechanism under section 9(4) is applicable if input
goods, input services and input capital goods are procured by X Ltd. for this project from unregistered suppliers [in some
cases, at least 80% input should be procured from registered dealers, for detailed discussion, see para 572.2].
572.1-E2 What will be GST rate in the above problem in the case of Kolkata project, if gross amount charged for an apartment is not
more than Rs. 45 lakh and carpet area is not more than 60 square meter?
572.1-P3 X owns a residential plot of land of 1000 square meter in Coimbatore. It was purchased in 1996-97.
- He enters into a joint development agreement with A Ltd. (a developer) on April 20, 2019 (cash consideration paid immediately : Rs.
20 lakh, total area to be developed : 30,000 sq. ft., share of X in the constructed area : 60 per cent, share of A Ltd. : 40 per cent). Entire
construction cost will be borne by A Ltd. After completion, 60 per cent constructed area will be given to X and remaining 40 per cent
(along with 40 per cent share of land) will go to A Ltd.
- Construction of the project is completed on December 1, 2020. Completion certificate is issued by the appropriate authority on June
20, 2021. However, the first person occupied his apartment in the project on April 24, 2021.
- Stamp duty value of 60 per cent of the developed area (i.e., 18000 square feet) given to X is Rs. 48 crore. Stamp duty value of the
constructed portion retained by A Ltd. (i.e., 12000 square feet) is Rs. 32 crore on the date of issue of completion certificate.
- On April 23, 2021, A Ltd. enters into an agreement to transfer a residential apartment of 2000 square feet to a buyer at the rate of
Rs. 21,000 per square feet. There is no other transaction nearest to April 24, 2021.
Discuss GST application in this case.
Solution : GST application in the aforesaid case will be as follows –
Signing of joint development agreement on April 20, 2019 - There is no GST application for X and A Ltd.
Receipt of advance of Rs. 20 lakh on April 20, 2019 - It is advance sale consideration received by X from A Ltd. for transfer of
40% share in the plot. GST is not applicable on transfer of immovable property.
Supply of constructed area to X - Time of supply is April 24, 2021 (i.e., the date of issue of completion certificate or the date of
first occupation, whichever is earlier). Service pertaining to construction of apartments (i.e., 18000 square feet) is completed
on April 24, 2021. Value of supply would be calculated on the basis of apartments booked by X or A Ltd. on a date which
829 Tax payable by promoter under reverse charge mechanism u/s 9(4) Para 572.2
is nearest to April 24, 2001. Accordingly, value of construction services provided by A Ltd. to X for construction of 18000
square feet will be Rs. 25.20 crore [i.e. (Rs. 21,000 × 18000 square feet) – 1/3 on account of land]. The value of taxable supply
provided by A Ltd. to X is Rs. 25.20 crore on which GST will be charged (amount of GST (@ 7.5% : Rs. 1.89 crore).
Sale of apartments by A Ltd. before April 24, 2021 - GST is applicable at the rate given in A in the table [see para 572.1]. Input
tax credit is not available.
Sale of apartments by A Ltd. on or after April 24, 2021 - GST is not applicable.
Sale of apartments by X before April 24, 2021 - If X is a registered person, GST is applicable.
Sale of apartments by X on or after April 24, 2021 - GST is not applicable.
Transfer of 40% area of plot by X to A Ltd. - GST is not applicable. Income-tax on capital gains generated by X will be calculated
according to the provisions of section 45(5A) of the Income-tax Act.
572.1-E3 What will be GST amount in the above problem for supply of constructed area to X, if it is a commercial plot and the
constructed apartments are only for commercial use?
572.2 Tax payable by promoter under reverse charge mechanism under section 9(4) - Tax is payable by
promoter under reverse charge mechanism under section 9(4) in the following cases if input, input services or
capital goods are procured by him from unregistered suppliers –
 Procurement of input (other than cement) or input services by a promoter from unregistered suppliers (if promoter wants
to avail of the benefit of concessional GST rate) - If a promoter wants to avail the benefit of concessional rate of GST
[as given in A (supra)], then 80 per cent of value of input and input services†, used in supplying the service, shall
be received from registered suppliers only. However, this rule of 80 per cent procurement from registered
suppliers is not applicable in the case of following inputs/input services –
- Input service by way of grant of development rights (TDR), long-term lease of land (against upfront payment
in the form of premium, salami, development charges etc.) or floor space index (FSI) (including additional
FSI).
- Electricity, high speed diesel, motor spirit, natural gas.
Where value of input and input services received from registered suppliers during the financial year (or part of
the financial year till the date of issuance of completion certificate or first occupation of the project, whichever
is earlier) falls short of the said threshold of 80 per cent, tax shall be paid by the promoter on value of input and
input services comprising such shortfall at the rate of 18 per cent on reverse charge mechanism under section 9(4)
and GST provisions shall apply to him as if he is the person liable for paying the tax in relation to the supply of
such goods/services.
 Procurement of cement by a promoter from unregistered suppliers (if promoter wants to avail of the benefit of concessional
GST rate) - In the case of cement, the reverse charge mechanism [for availing of the benefit of concessional rate
as given in A (supra)] is applicable whenever cement is received from unregistered persons (whether total supply
received from unregistered persons is less than or more than 80 per cent). GST is payable under reverse charge
mechanism at the applicable rate (which is currently 28 per cent in the case of cement). This rule is applicable
during April 1, 2019 and September 30, 2019. The rule applicable with effect from October 1, 2019 is given below.
 Procurement of cement by a promoter from unregistered suppliers [whether (or not) promoter wants to avail of the benefit
of concessional GST rate] - With effect from October 1, 2019, procurement of cement by a promoter from
unregistered suppliers, is subject to reverse charge mechanism [even in the case of a promoter who is not eligible
for the benefit of concessional GST rate as given in A (supra)]. In other words, reverse charge mechanism is
applicable in all cases (with effect from October 1, 2019) whenever a promoter procures cement from
unregistered suppliers.
 Procurement of capital goods by a promoter from unregistered suppliers (if promoter wants to avail of the benefit of
concessional GST rate) - In the case of capital goods (falling under any chapter in the first schedule to the Customs
Tariff Act), the reverse charge mechanism [for availing of the benefit of concessional rate as given in A (supra)]
is applicable whenever capital goods are received from unregistered persons (whether total supply received
from unregistered persons is less than or more than 80 per cent). GST is payable under reverse charge mechanism
at the applicable rate.
572.2-1 PROCEDURAL REQUIREMENT FOR REVERSE CHARGE MECHANISM UNDER SECTION 9(4) - The following points should
be noted –
 Project-wise annual records - The promoter shall maintain project-wise account of inward supplies from
registered and unregistered suppliers.
† Input supply of exempted goods/services shall be included.

 Calculation of tax - The promoter shall calculate tax payments on the shortfall at the end of the financial year.
 Submission of records and payment of tax - The aforesaid computation of shortfall shall be uploaded in the
prescribed form on or before June 30 after the end of financial year. The tax liability on the shortfall of inward
supplies from unregistered person so determined shall be added to his output tax liability in the month not later
than the month of June following the end of the financial year. However, tax on cement received from
unregistered person shall be paid for the month in which cement is received.
Problems
572.2-P1 X Ltd. is a promoter of different real estate projects in Maharashtra. The following information is noted from the records of
the company for the financial year 2019-20 (pertaining to one of its residential projects in Pune, construction of which was started on
April 10, 2019) –
Different items Procurement of input goods and services from – Normal GST
Registered Unregistered suppliers rate
suppliers (otherwise
Rs. in lakh Rs. in lakh Supplied by unregistered suppliers applicable)
as % of total input supply
of Rs. 1,000 lakh
Input goods (other than cement) 800 40 4% 5%, 12%
Cement 20 100* 10% 28%
Input services 30 10 1% 18%
Total (Rs. 1,000 lakh) 850 150 15%
*Cement supplied by different unregistered suppliers in the month of December 2019.

Discuss whether reverse charge mechanism of section 9(4) is applicable.
Solution :
X Ltd. is a promoter of real estate project (REP). The project is started on or after April 1, 2019. GST rate, as given in Point
A of the table [see para 572.1], is applicable. One of the conditions for the applicability of this GST rate is that at least 80%
of value of input and input services used in supplying the service shall be received from registered supplier only. If not so
received by the promoter, he is required to pay GST under reverse charge mechanism under section 9(4) to the extent of
difference. However, in the case of procurement of cement from unregistered suppliers, reverse charge mechanism is always
applicable (even if value of such procurement is less than or more than 80%). Moreover, with effect from October 1, 2019,
procurement of cement by a promoter from unregistered suppliers, is subject to reverse charge mechanism [even in the case
of a promoter who is not eligible for the benefit of concessional GST rate as given in A (supra)].
In this case, total procurement from registered suppliers is more than 80% during the financial year 2019-20. However, in
the month of December, cement of Rs. 100 lakh is purchased by the promoter from unregistered suppliers. Consequently,
GST liability of X Ltd. for the month of December 2019 under reverse charge mechanism of section 9(4) will be Rs. 28 lakh
(i.e., 28% of Rs. 100 lakh). Cement will be deemed to have been purchased from registered supplier, after payment of GST
under reverse charge mechanism.
572.2-E1 What will be GST amount under reverse charge mechanism under section 9(4), if the entire quantity of cement is purchased
from registered suppliers?
572.2-P2 Y Ltd. is a promoter of different real estate projects in Tamil Nadu. The following information is noted from the records of the
company for the financial year 2019-20 (pertaining to one of its residential projects in Madurai, construction of which was started on
May 10, 2019) –
of Rs. 1,000 lakh
Cement 70 – – 28%
Total (Rs. 1,000 lakh) 800 200 20%

831 Tax payable by promoter under reverse charge mechanism u/s 9(4) Para 572.2
Solution :
Y Ltd. has procured 80% of input goods/input services from registered supplies. Cement is not procured from unregistered
suppliers. If input capital goods for this project are not purchased from unregistered suppliers, reverse charge mechanism
of section 9(4) is not applicable for this project for the financial year 2019-20.
572.2-E2 What will be GST amount under reverse charge mechanism under section 9(4), if all input services are procured from
unregistered suppliers?
572.2-P3 Z Ltd. is a promoter of different real estate projects in Noida. The following information is noted from the records of the company
for the financial year 2019-20 (pertaining to one of its residential projects, construction of which was started on June 1, 2019) –
of Rs. 1,000 lakh
Cement 120 60* 6% 28%
Input services – 10 1% 18%
Total (Rs. 1,000 lakh) 720 280 28%
*Cement supplied by different unregistered suppliers in the month of November 2019.

Solution :
Z Ltd. has procured only 72% of inputs and input services (used in supplying the service) from registered suppliers. Reverse
charge mechanism under section 9(4) is applicable as follows –
- Cement - Cement is procured in November 2019 from unregistered suppliers. GST liability of Z Ltd. for November 2019
under reverse charge mechanism under section 9(4) is Rs. 16.8 lakh (i.e., 28% of Rs. 60 lakh). Cement will be deemed to
have been purchased from registered supplier, after payment of GST under reverse charge mechanism.
- Input goods/services (other than cement) - After payment of GST on cement under reverse charge mechanism, it will be
deemed that cement of Rs. 60 lakh is procured from registered suppliers during November 2019. Consequently,
purchases from registered suppliers will be 78% (i.e., 72% + 6%). It is less than 80%. Value of shortfall is Rs. 20 lakh (i.e.,
80% of Rs. 1,000 lakh – Rs. 720 lakh, purchased from registered suppliers – Rs. 60 lakh, cement purchased from
unregistered suppliers but tax is paid under reverse charge mechanism). GST liability under reverse charge mechanism
will be Rs. 3.6 lakh (i.e., 18% of Rs. 20 lakh). It can be added to the GST liability of Z Ltd. for any month but not later than
June 2020.
572.2-E3 What will be GST amount under reverse charge mechanism under section 9(4) in the above problem, if the above data
pertains to a commercial project of Z Ltd.?
572.2-P4 A Ltd. is a promoter of different real estate projects in Ahmedabad. The following information is noted from the records of the
company for the financial year 2019-20 (pertaining to one of its residential projects, construction of which was started on April 2,
2019) –
of Rs. 1,000 lakh
Cement 130 40* 4% 28%
Total (Rs. 1,000 lakh) 760 240 24%
*Cement supplied by different unregistered suppliers in the month of June 2019.

Besides, A Ltd. purchases a machine of Rs. 3 lakh on August 10, 2019 from an unregistered supplier for completing the aforesaid project
(normal GST rate is 12 per cent).
Para 573 Provisions governing real estate services 832
Solution :
A Ltd. has procured 76% of inputs and input services (used in supplying the service) from registered suppliers. Reverse
charge mechanism under section 9(4) is applicable as follows –
Cement - Cement is procured in June 2019 from unregistered suppliers. GST liability of A Ltd. for June 2019 under reverse
charge mechanism under section 9(4) is Rs. 11.2 lakh (i.e., 28% of Rs. 40 lakh). Cement will be deemed to have been purchased
from registered supplier, after payment of GST under reverse charge mechanism.
Input goods/services (other than cement) - After payment of GST on cement under reverse charge mechanism, it will be deemed
that cement of Rs. 40 lakh is procured from registered suppliers during June 2019. Consequently, purchases from registered
suppliers will become 80% (i.e., 76% + 4%). Reverse charge mechanism under section 9(4) is, therefore, not applicable for
inputs/input services (other than cement).
Machine purchased from unregistered suppliers - On purchase of input capital goods from unregistered supplier, reverse charge
mechanism of section 9(4) is applicable (GST liability of A Ltd. will be Rs. 0.36 lakh, i.e., 12% of Rs. 3 lakh).
572.2-E4 What will be GST amount under reverse charge mechanism under section 9(4) in the above problem, if the above data
pertains to a project in which all the apartments are affordable residential apartments? Does it make any difference if cement is
procured from unregistered suppliers during December 2019 ?
572.2-P5 B Ltd. is a promoter of real estate commercial project in Mumbai. One of its projects is situated near Nariman Point (it is a
commercial complex having 27 floors). During December 2019, A Ltd. procures the following from unregistered suppliers —
- Procurement of cement from unregistered suppliers : Value of supply being Rs. 5 lakh.
- Procurement of other inputs from unregistered suppliers : Value of supply being Rs. 60 lakh.
- Procurement of services from unregistered suppliers : Value of supply being Rs. 40 lakh.
Applicable GST rate in the case of supply made by B Ltd. is 18 per cent. As A Ltd. is in the business of construction of commercial projects,
it is not eligible for concessional GST rate.
Solution :
B Ltd., the promoter, is not eligible for concessional GST rate as given in Point A of the table [see para 572.1]. In such a case,
procurement of inputs (other than cement), input services and/or capital goods from unregistered suppliers, is not subject
to reverse charge mechanism of section 9(4). However, procurement of cement by a promoter from unregistered supplier
is subject to reverse charge mechanism (even if concessional GST rate is not applicable in this case). Consequently, GST
liability of B Ltd. under reverse charge mechanism under section 9(4) for December 2019 is Rs. 1,40,000 (i.e., 28% of Rs.
5,00,000).
572.2-E5 Recompute GST liability under reverse charge mechanism in the above problem on the assumption that procurement from
registered suppliers by B Ltd. during the financial year 2019-20 is only 68 per cent of total input supplies.
 WHAT IS GST ON TRANSFER OF DEVELOPMENT RIGHTS (TDR), FSI, UPFRONT AMOUNT

IN REAL ESTATE TRANSACTIONS
573. Development right is a right given by land owner to a developer to develop the land without transfer of
property in land. GST is payable on transfer of development right (TDR), floor space index (FSI) and upfront
amount. Legal position is summarised below –
573.1 Exemption - For agreements (signed on or after April 1, 2019), exemption is granted by the Government
for transfer of development rights for construction of residential apartments by a promoter in a project intended
for sale to a buyer (wholly or partly). This exemption is provided by Entry 41A of Exemption Notification No.
12/2017, dated June 28, 2017. This exemption is applicable if the following conditions are satisfied –
- Supply pertains to service by way of transfer of development rights (TDR), floor space index (FSI) (including
additional FSI).
- The aforesaid transfer takes place on or after April 1, 2019.
- The aforesaid transfer of TDR/FSI is for construction of residential apartments by a promoter in a project
intended for sale to a buyer, wholly or partly.
- Exemption is not available where the entire consideration for sale of residential apartments to buyers is
received after –
833 Tax payable under reverse charge mechanism Para 573.2
 Premium, salami, development charges - If the aforesaid conditions are satisfied, exemption is also available for
upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in
respect of service by way of granting of long-term lease of 30 years (or more). This exemption is given by Entry
41B of Exemption Notification No. 12/2017, dated June 28, 2017.
 Exemption only when consideration for sale of apartment is received before completion certificate - Government has
given exemption to transfer of development rights (TDR)/FSI/upfront amount for construction of residential
apartments in those cases where consideration is received before issuance of completion certificate (or building’s
first occupation, whichever is earlier). In such cases, the aforesaid exemption is available. However, in these
cases, transfer of apartments to buyers is “supply” as given in Schedule II and GST is applicable [see para 413.11].
It appears that the policy of the Government is to levy GST in the case of residential apartments only once (either
at the stage of transfer of development rights/FSI/upfront amount or at the event of transfer of apartments to
buyers).
573.2 Tax payable under reverse charge mechanism (when the above exemption not available) - GST is
payable by promoter under reverse charge mechanism in the following cases –
 When above exemption is not available - When the above exemption given by Entry 41A/Entry 41B of Exemption
Notification No. 12/2017, dated June 28, 2017, is not available, GST is payable by the promoter under reverse
charge mechanism.
 When exemption is available but residential apartments remains un-booked - If the above exemption is taken at the
time of transfer of development rights/FSI/upfront amount, but the residential apartments remains un-booked
on the date of issuance of completion certificate (or first occupation of project), then GST is not payable at the time
of transfer of development rights/FSI/upfront amount as well as at the time of transfer of apartments to buyers
[transfer of apartments after issuance of completion certificate is not treated as “supply” – see para 413.11]. To
compensate revenue loss, exemption given by Entry 41A/Entry 41B is subject to the condition that the promoter
shall be liable to pay GST under reverse charge mechanism, on proportionate value of development rights/FSI
(including additional FSI)/upfront amount, as is attributable to the residential apartments, which remain un-
booked on the date of issuance of completion certificate (or first occupation of the project).
Mode of computation of exemption and other related issues are discussed in the cases studies given below –
 X owns a commercial plot of land of 2000 square meter. He transfers development rights (or grants of long-term lease for
30 years) for a consideration of Rs. 2.5 crore to A Ltd. (A Ltd. is a promoter and located in Mumbai). A Ltd. will construct
commercial apartments for sale to buyers.
In the case of construction of commercial apartments, the above exemption given by Entry 41A/Entry 41B is not available.
Consequently, transfer of development rights (or grant of long-term lease for 30 years) is subject to GST. A Ltd. will pay GST
on Rs. 2.5 crore under reverse charge mechanism. The liability to pay GST arises on the date of issuance of completion
certificate for the project by the competent authority (or on its first occupation, whichever is earlier).
 Y owns a plot of land of 1000 square meter in a posh residential area in Bengaluru. He transfers development rights (or
grants of long-term lease for 30 years) for a consideration of Rs. 3 crore to B Ltd. B Ltd. will construct residential apartments
for sale to buyers (consideration to be received from buyers before issuance of completion certificate).
In this case, the above exemption given by Entry 41A/Entry 41B is available. Transfer of development rights (or grant of long-
term lease for 30 years) to B Ltd. is not subject to GST [if the entire consideration is received from buyers (and no apartment
remains un-booked) before issuance of completion certificate or before first occupation of the project, whichever is earlier].
 Z owns a plot of land of 6100 square meter in Chennai. On April 10, 2019, he transfers development rights (or grants long-
term lease of 30 years) to C Ltd. for construction of residential and commercial apartments as follows –
Value of supply of transfer of development rights (TDR) (or grant of long-term lease) Rs. 600 crore
GST payable at the rate of 18 per cent Rs. 108 crore
Carpet area of residential apartments in the project 21000 square meter
Carpet area of commercial apartments in the project 9000 square meter
Total carpet area in the project 30000 square meter
GST on TDR (or grant of long-term lease) attributable to residential apartments [Rs. 108 crore
× 21000 ÷ 30000] Rs. 75.6 crore
GST on TDR (or grant of long-term lease) attributable to commercial apartments [Rs. 108 crore
× 9000 ÷ 30000] Rs. 32.4 crore
Date of issuance of completion certificate December 10, 2020
Date when the first person occupied an apartment in the project October 28, 2020
Provisions governing real estate services 834
In this case, exemption is available for payment of Rs. 75.6 crore pertaining to TDR (or grant of long-term lease) attributable
to residential apartments [on the assumption that the entire consideration is received from buyers (and no apartment
remains un-booked) on October 28, 2020].
C Ltd. (i.e., promoter of the project) will have to pay Rs. 32.4 crore pertaining to TDR (or grant of long-term lease) attributable
to commercial apartments) under reverse charge mechanism. This liability arises on October 28, 2020 (i.e., for the month of
October 2020).
Suppose in the above case, 20 residential apartments of equal size (aggregate carpet area : 3150 square meter) remain un-
booked on October 28, 2020. Value of these apartments is Rs. 140 crore (this is calculated on the basis of amount charged by
C Ltd. from a buyer on October 26, 2020, no other transaction is made by C Ltd. which is nearer to October 28, 2020).
GST payable by C Ltd. under reverse charge mechanism will be as follows –
Rs. in crore Rs. in crore

GST pertaining to TDR (or grant of long-term lease) 108
Less: Exemption given by Entry 41A/41B of Exemption Notification No. 12/2017, dated
June 28, 2017
GST on TDR (or grant of long-term lease) attributable to residential apartments (Rs. 108
crore × 21000 ÷ 30000) 75.6
GST pertaining to commercial apartments (a) 32.4
GST pertaining to residential apartments which remain un-booked on October 28, 2020
(Rs. 75.6 crore × 3150 ÷ 21000) (b) 11.34
Value of un-booked apartments (c) 140
5% of value of un-booked apartments (in the case of affordable residential apartments :
1%) (5% of Rs. 140 crore) (d) 7
GST pertaining to un-booked residential apartments [(b) or (d), whichever is lower] (e) 7
GST payable by C Ltd. under reverse charge mechanism for the month of October 2020
[(a) + (e)] 39.4
Test your knowledge

1. What is the meaning of affordable residential apartment ? [para 571.1]
2. What is the difference between real estate project (REP) and residential real estate project (RREP) ? [paras 571.5 and 571.6]
3. A promoter wants to construct residential apartments. Construction will be started after April 2019. What is the
applicable GST rate pertaining to sale of these apartments to buyers ? Is there any restriction for claiming input tax credit
and purchase of raw material from unregistered suppliers ? [paras 572.1 and 572.2]
4. When and how reverse charge mechanism is applicable under section 9(4) ? [para 572.2]
5. What is GST on transfer of development rights, premium, salami ? [para 573]
CHAPTER 34
Problems on GST
A few practical problems are given in this chapter covering different aspects of GST.
 Problems on GST
581-P1 Y Ltd. is a chemical manufacturing company, it gives the following information pertaining to December 2019 –
Rs.
GST on outward supply A (taxable value : Rs. 8,00,000, GST rate : 18%) 1,44,000
GST on outward supply B (taxable value : Rs. 28,00,000, GST rate : 12%) 3,36,000
GST on outward supply C (taxable value : Rs. 11,00,000, GST rate : 5%) 55,000
Y Ltd. supplies 80 units of a chemical to Z Ltd. on a nominal consideration of Rs. 100. Market value of this transaction is Rs. 3,00,000.
GST rate is 12 per cent. X holds 27 per cent equity share capital in Y Ltd. and 29 per cent share capital in Z Ltd.
Input tax credit balance in electronic ledger as on December 1, 2019 is Rs. 8,000. During December 2019, Y Ltd. has purchased raw
material from A Ltd. (taxable value of supply : Rs. 2,00,000, GST rate : 18%). However, goods purchased from A Ltd. are not utilised
for manufacture purposes during December 2019.
Find out the GST payable for December 2019. Assume that conditions for claiming input tax credit [including conditions imposed by
rule 36(4)] are satisfied.
Solution :
Computation of GST payable for December 2019 –
Rs.
GST on outward supply A 1,44,000
GST on outward supply B 3,36,000
GST on outward supply C 55,000
GST on outward supply to Z Ltd. 36,000
Total GST on outward supplies 5,71,000
Less:
Input tax credit balance in electronic ledger 8,000
GST on inward supply for December 2019 (18% of Rs. 2,00,000) 36,000
Balance payable 5,27,000
Notes –
1. Y Ltd. and Z Ltd. are “related persons”. Y Ltd. supplies goods/services without consideration to Z Ltd. If supply is
made in the course or furtherance of business of Y Ltd., GST is applicable on market value (not on transaction value).
Consequently, for this purpose, “value of supply” shall be determined according to the provisions of section 15 (which
comes to Rs. 3,00,000). GST on taxable value will be Rs. 36,000.
2. GST paid on purchase of raw material is eligible for input tax credit for December 2019. Input tax credit cannot be denied
even if the raw material is not used during the month of December 2019.
581-E1 In the above problem, assume that X holds 1 per cent equity share capital in Y Ltd. and 3 per cent equity share capital in
Z Ltd. There is another common shareholder C. He holds 40 per cent equity share capital in Y Ltd. and 25 per cent equity share
capital in Z Ltd.
Recalculate GST payable by Y Ltd. for December 2019.
835
Problem 581-P2 Problems on GST 836
581-P2 X is an architect. From the information given below, find out GST payable for the month of October 2019 –
1. Balance available in electronic credit ledger on October 1, 2019 : Rs. 42,000.
2. GST on taxable value of outward supplies for October 2019 : Rs. 7,85,000.
3. On October 10, 2019, X purchases a Toyota Corolla car (seating capacity : 5 persons). GST paid is Rs. 5,60,000. Car is fully used by
X and his staff for official purposes.
4. On October 12, 2019, X purchases a printer. GST paid is Rs. 2,800. Printer will be used in office for printing building plans.
5. X has prepared building plans of a new Taj Hotel in Dubai. Rs. 2,00,000 is received on the promise of X not to provide similar
drawings to any other company in hospitability industry in India or abroad. On this promise, X gets Rs. 2,00,000 from Taj Hotels. X
intends that GST is not applicable.
6. X has engaged B, an architect. He pays salary of Rs. 40,000 per month to B.
7. X has paid a consultancy fee of Rs. 50,000 (+ GST of Rs. 9,000). This consultancy is utilised for making outward supply.
Solution :
A promise not to do a particular act is “service” chargeable to GST. Consequently, amount received from Taj Hotels (on the
promise not to provide similar services to any other person) is subject to GST. As GST is not paid separately, value of
taxable supply will be Rs. 1,69,492 (i.e., Rs. 2,00,000 × 100 ÷ 118).
GST payable for October 2019 will be calculated as follows –
Rs.
GST on taxable value of outward supplies 7,85,000
GST on amount received from Taj Hotels (18% of Rs. 1,69,492) 30,508
Total 8,15,508
Less: Input tax credit –
Balance available in electronic credit ledger 42,000
Purchase of car (not eligible) –
Purchase of printer 2,800
Salary to an employee (no input tax credit on payment of salary) –
Consultancy fee 9,000
581-E2 In the above problem, assume that Taj Hotel has paid Rs. 2,00,000 + applicable GST to X.
Recalculate GST payable by X for October 2019.
581-P3 X Ltd. owns a manufacturing unit in Karnataka. From the information given below, find out GST payable by X Ltd. for
January 2020 –
1. Balance available in electronic credit ledger on January 1, 2020 : Rs. 90,000.
2. Purchase of raw material A for Rs. 2,00,000 (+ GST of Rs. 24,000). 40 per cent of the raw material is used during January 2020 for
manufacture of goods which are exempt from GST. The balance 60 per cent is not used during January 2020. However, it will be used
during February 2020 for manufacture of goods which are chargeable to GST.
3. Purchase of raw material B for Rs. 50,000 (+ GST of Rs. 9,000). This raw material is fully utilised for manufacture of articles during
January 2020. These articles will be distributed as gift to distributors and agents.
4. Purchase of raw material C for Rs. 30,00,000 (+ GST of Rs. 5,40,000). This raw material is not used during January 2020. However,
it will be used during the first quarter of next financial year for manufacture of those articles which are chargeable to GST.
5. Instalment paid to DLF of Rs. 10,00,000 (+ GST of Rs. 1,20,000). This instalment pertains to a commercial flat which will be utilised
as office of X Ltd. Construction is likely to be completed during March 2020.
6. Value of taxable outward supplies for January 2020: Rs. 90,00,000 (+ GST @ 18 per cent).
7. Value of outward supplies for January 2020 : Rs. 3,00,000 (GST : nil).
Solution :
GST payable for January 2020 will be calculated as follows –
Rs.
GST on taxable value of outward supplies (18% of Rs. 90,00,000) 16,20,000
GST on exempt supplies Nil
Total 16,20,000
Balance available in electronic credit ledger 90,000
Purchase of raw material A (60% of Rs. 24,000) 14,400
837 Problems on GST Problem 581-P5
Rs.
Purchase of raw material B (not eligible, as the raw material is used for manufacture of articles
meant for free distribution) Nil
Purchase of raw material C (eligible, even if the same will be used for manufacture of taxable
goods in future) 5,40,000
GST on instalment paid for office (not eligible) –
581-E3 In the above problem, assume that DLF has given possession of commercial flat on January 30, 2020 and it is put to use by
X Ltd. on the same day.
Recalculate GST payable by X Ltd. for January 2020.
581-P4 X owns a warehouse in a small town in Madhya Pradesh. His turnover is more than Rs. 20 lakh. He has taken GST registra-
tion from Madhya Pradesh. From the information given below, find out GST payable by X for November 2019 –
1. Invoice No. 202 issued to A Ltd. Value of taxable supply is Rs. 40,000. A Ltd. has utilised warehouse for storage of oranges.
2. Invoice No. 203 issued to B Ltd. Value of taxable supply is Rs. 2,45,000. B Ltd has utilised warehouse for storage of manufactured
goods.
3. Invoice No. 204 issued to C Ltd. Value of taxable supply is Rs. 90,000. C Ltd. has utilised warehouse for storage of potato chips.
4. Invoice No. 205 issued to D Ltd. X has provided consultancy to D Ltd. on maintenance of warehouse buildings. Consultancy fee is
Rs. 1,00,000.
Above figures are exclusive of GST. GST rate is 18 per cent. X wants to avail input tax credit pertaining to the following –
- Balance available in electronic credit ledger on November 1, 2019 : Rs. 18,000.
- Salary paid to a manager : Rs. 25,000 per month.
- Fees paid to an advocate on November 28, 2019 pertaining to recovery of disputed rent : Rs. 10,000 (advocate does not charge any
GST).
- Air-conditioner purchased for office : Rs. 30,000 (+ GST @ 28 per cent : Rs. 8,400).
Assume that conditions for claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
Solution :
Rs.
Invoice No. 202 (orange is an agricultural produce. GST is not applicable) Nil
Invoice No. 203 (18% of Rs. 2,45,000) 44,100
Invoice No. 204 (18% of Rs. 90,000) 16,200
Invoice No. 205 (18% of Rs. 1,00,000) 18,000
GST on outward supply 78,300
Less: Input tax credit
Balance available in electronic credit ledger on November 1, 2019 18,000
Payment of salary (no GST is involved) –
Fees paid to advocate on November 28, 2019 (GST on this input supply is payable by X for November 2019
under reverse charge mechanism. It will be eligible for input tax credit only in December 2019) –
Air-conditioner 8,400
Balance 51,900
Add: GST payable on reverse charge mechanism (fees paid to an advocate is subject to reverse charge
mechanism, 18% of Rs. 10,000) 1,800
Balance payable through electronic cash ledger 53,700
581-E4 In the above problem, assume that X owns 70 per cent equity share capital in A Ltd. Value of invoice issued to A Ltd. is
Rs. 40,000. However, market value is not less than Rs. 65,000.
Recalculate GST payable by X for November 2019.
581-P5 X is located in Andhra Pradesh. He is in the business of supply of labour and renting of generators. He gives the following
information pertaining to May 2019.
1. Supply of labour for the farms of B Ltd. (taxable value of supply : Rs. 1,00,000).
2. Supply of labour for the factory of C Ltd. (taxable value : Rs. 24,00,000).
3. Supply of domestic labour to farmers of a village in Andhra Pradesh (taxable value : Rs. 30,000).
4. Supply of labour to a construction company in Andhra Pradesh (taxable value : Rs. 6,00,000).
5. Renting of generators to farmers for using in farms (taxable value : Rs. 45,000).
6. Renting of generators to farmers for domestic use (taxable value : Rs. 60,000).
7. Renting of a generator to a relative (no rent is charged, market value of supply is Rs. 10,000, generator is used by his relative for his
factory).
8. Renting of a generator to another relative (no rent is charged, market value of supply is Rs. 12,000, generator is used by his relative
for domestic purposes).
9. Renting of a generator to a friend (no rent is charged, market value of supply is Rs. 20,000, generator is used by the friend for
domestic purposes).
Above figures are exclusive of GST. GST rate is 18 per cent. Calculate the amount of GST payable by X for May 2019. He wants to
avail input tax credit –
- Balance available in electronic credit ledger on May 1, 2019 : Rs. 1,000.
- Fees paid to a chartered accountant pertaining to GST liability of X (taxable value : Rs. 10,000, GST : Rs. 1,800).
- GST paid on LTC given to employees (amount of GST being Rs. 3,000).
- GST paid on a TV set (amount of GST being Rs. 7,000). TV is used in the drawing room of X.
Solution :
Rs.
Supply of labour for the farms of B Ltd. [supply of farm labour is not chargeable to GST. It is covered
by Exemption Notification (Entry 54)] Nil
Supply of labour for the factory of C Ltd. (18% of Rs. 24,00,000) 4,32,000
Supply of domestic labour to farmers (it is chargeable to tax, aforesaid exemption not available, 18% of
Rs. 30,000) 5,400
Supply of labour to a construction company (18% of Rs. 6,00,000) 1,08,000
Renting of generators to farmers for using in farms (exempt from tax) Nil
Renting of generators to farmers for domestic use (18% of Rs. 60,000). 10,800
Renting of a generator to a relative without rent (taxable even if no rent is charged, 18% is Rs. 10,000) 1,800
Renting of a generator to another relative without rent (taxable even if no rent is charged, 18% is Rs. 12,000) 2,160
Renting of a generator to a friend without rent (18% of Rs. 20,000) 3,600
Total 5,63,760
- Balance available in electronic credit ledger 1,000
- Fees paid to a chartered accountant 1,800
- LTC given to employees (not eligible for input tax credit) Nil
- TV set for personal use (not eligible for input tax credit) Nil
Balance payable through electronic cash ledger 5,60,960
Note - Where goods held (or used) for the purposes of the business are put to any private use, such activity/transaction is
treated as supply of services. This rule is applicable even if no consideration is charged. In this case, generator is given on
rent to a friend without any consideration. As it is a business asset put to private use, GST is applicable. For this purpose,
market value will be taken as taxable value of supply.
581-E5 In the above problem, assume that LTC is given to employees as per contractual obligation. It is part of CTC.
Recalculate GST payable for May 2019.
581-P6 X is a chartered accountant by profession. He gives the following information pertaining to April 2019 –
1. Consultancy given to different clients during April 2019 (but not including the transactions given below) (invoice value :
Rs. 35,70,000).
2. Consultancy given to A Ltd. (invoice value : Rs. 8,000, market value of supply : Rs. 50,000, X holds 40 per cent shares in A Ltd.).
3. Consultancy given to B (invoice value : nil, market value of supply : Rs. 48,000, B is not a relative of X).
4. Consultancy given to Mrs. X (invoice value : nil, market value of supply : Rs. 75,000, Mrs. X is not dependent upon X).
5. Consultancy given to C, younger brother of X (invoice value : nil, market value of supply : Rs. 60,000, C is not dependent upon X).
6. Consultancy given to D, elder brother of X (invoice value : nil, market value of supply : Rs. 70,000, D is dependent upon X).
7. Consultancy given to E, an employee of X (invoice value : nil, market value of supply : Rs. 80,000).
Above figures are exclusive of GST. GST rate is 18 per cent. Calculate the amount of GST payable by X for April 2019. He wants to
avail input tax credit –
- Balance available in electronic credit ledger on April 1, 2019 : Rs. 22,000.

- Fees paid to a chartered accountant pertaining to tax audit of X (taxable value : Rs. 20,000, GST : Rs. 3,600).
- GST paid on food and beverages for employees/clients (amount of GST being Rs. 8,000).
- Motor vehicle (seating capacity : 14 persons) purchased for official use of employees (amount of GST being Rs. 2,80,000).
- Motor vehicle (seating capacity : 15 persons) purchased for private use of X and his family (amount of GST being Rs. 7,00,000).
- Membership of a club taken by X for entertaining official guests (amount of GST being Rs. 18,000).
- Fees paid to a consultant pertaining to transfer pricing matter of a client (amount of GST being Rs. 20,000).
Solution :
Rs.
Consultancy given to different clients 35,70,000
Consultancy given to A Ltd. (A Ltd. is “related person”, market value to be considered) 50,000
Consultancy given to B (B is not a relative of X, price is sole consideration, transaction value to be
considered) Nil
Consultancy given to Mrs. X (Mrs. X is “related person”, market value to be considered) 75,000
Consultancy given to C, younger brother not dependent upon X (C does not come in the list of “related
persons”, GST applicable on transaction value on the assumption that price is sole consideration) Nil
Consultancy given to D, elder brother dependent upon X (related person, GST on market value) 70,000
Consultancy given to E, an employee of X (employer and employee are related persons, gift to
employees which is not covered by employment agreement is chargeable to GST on the basis of market
value. Exemption of Rs. 50,000 is available) invoice value : nil, market value of supply : Rs. 80,000). 30,000
Total 37,95,000
GST on outward supply (18% of Rs. 37,95,000) 6,83,100
Balance available in electronic credit ledger on April 1, 2019 22,000
Fees paid to a chartered accountant pertaining to tax audit of X 3,600
GST paid on food and beverages for employees/clients (not eligible) Nil
Motor vehicle (seating capacity : 14 persons) purchased for official use of employees 2,80,000
Motor vehicle purchased for private use of X and his family (not eligible) Nil
Membership of a club taken by X for entertaining official guests (not eligible) Nil
Fees paid to a consultant 20,000
Balance to be paid through electronic cash ledger 3,57,500
Note - Value of supply of goods/services for the purpose of charging GST is transaction value (i.e., the price actually paid/
payable for supply of goods/services). This rule is applicable only where the supplier and recipient are not related and
price is the sole consideration. In other words, if supplier and recipient are related, GST would be applicable on the market
value of goods/services (even if transaction value is nil). “Related persons” is defined by section 15 (it includes family
members, employees and a few more). For this purpose, family means spouse and children of the person (whether depen-
dent or otherwise). Family also includes the parents, grand-parents, brothers and sisters of the person if they are wholly or
mainly dependent on the said person.
In the above case, A Ltd., Mrs. X, D and E are related to X. In these cases, GST will be applicable on market value. In other
cases, GST is chargeable on transaction value.
581-E6 Make the following changes in the above problem and recalculate amount of GST payable through electronic cash ledger –
1. Mrs. X is dependent upon X.
2. X holds 25 per cent equity share capital and 5 per cent preference share capital in A Ltd.
3. C is dependent upon X.
4. Fees paid to the chartered accountant pertaining to tax audit is for the assessment year 2017-18.
581-P7 X Ltd. provides services pertaining to retail packing of goods. This service is provided in Punjab to manufacturing units and
plantation units. It gives the following information pertaining to January 2020 –
1. Service by way of waxing, retail packing, labelling of apples provided to A Plantation (P.) Ltd., Ludhiana (invoice value :
Rs. 17,10,000).
2. Service by way of packing and labelling of chemical goods provided to B Ltd. (invoice value : Rs. 28,00,000).
3. Service by way of packing of leather goods provided to C Ltd. (invoice value : Rs. 3,00,000, market value of similar service to
unrelated persons : Rs. 6,50,000).
4. Service by way of waxing and packing of wooden toys provided to D Ltd. (invoice value : Rs. 5,00,000).
X owns 60 per cent shares in X Ltd. and Mrs. X owns 40 per cent shares in C Ltd.
Above figures are exclusive of GST. GST rate is 18 per cent. The above invoices are issued during January 2020. Payment is received
from A Plantation (P.) Ltd. on January 27, 2020. Payment from B Ltd. and C Ltd. is received on February 12, 2020. Nothing is
received from D Ltd. so far. On January 31, 2020, X Ltd. gets an advance payment of Rs. 50,000 from E Ltd. for packing of goods which
will be manufactured during 2020-21 (GST rate is 18 per cent, Rs. 50,000 is for providing services in future, nothing is received on
account of GST).
Calculate the amount of GST payable by X Ltd. for January 2020. X Ltd. wants to avail input tax credit –
- Balance available in electronic credit ledger on January 1, 2020 : Rs. 61,000.
- Fees paid to an interior decorator for canteen of X Ltd. (taxable value : Rs. 10,000, GST : Rs. 1,800).
- Membership of health club for employees (amount of GST being Rs. 17,000).
Solution :
Rs.
Service by way of waxing, retail packing, labelling of apples provided to A Plantation (P.) Ltd. [it is exempt
from GST vide Exemption Notification (Entry 57)] Nil
Service by way of packing and labelling of chemical goods provided to B Ltd. 28,00,000
Service by way of packing of leather goods provided to C Ltd. (X Ltd. and C Ltd. are related, GST
applicable on market value) 6,50,000
Service by way of waxing and packing of wooden toys provided to D Ltd. 5,00,000
Advance payment from E Ltd. (Rs. 50,000 × 100 ÷ 118) 42,373
Total 39,92,373
GST (18% of Rs. 39,92,373) 7,18,627
Balance available in electronic credit ledger on January 1, 2020 61,000
Fees paid to an interior decorator for canteen 1,800
Membership of health club for employees (not eligible) Nil
Balance payable by electronic cash ledger 6,55,827
581-E7 Make the following changes in the above problem and recalculate amount of GST payable by X Ltd. through electronic cash
ledger (also indicate the due date for payment of GST) –
1. Mrs. X has purchased shares in C Ltd. out of gift made by X.
2. Shareholding of X in C Ltd. is nil.
3. Advance payment from E Ltd. is Rs. 80,000 (not Rs. 50,000).
581-P8 X & Co. is a partnership firm. It is registered under GST from Kerala. It is in the business of production of coconut oil. It also
provides technical consultancy pertaining to manufacture of coconut oil. The following information is given for December 2019 –
1. Supply of coconut oil to different parties in Kerala (taxable value of different invoices issued during December 2019 : Rs. 43,94,000).
2. Consultancy given to A Ltd., Kerala (taxable value : Rs. 4,00,000).
3. Rent of Cochin commercial property received from B Ltd. (amount of rent being : Rs. 60,000).
The above figures are exclusive of GST. GST rate is 5 per cent for coconut oil, 18 per cent for consultancy and rent. Besides, the firm
gives the following information –
- An advance of Rs. 6,30,000 is received from C Ltd., Kerala. Coconut oil will be supplied to C Ltd. in April 2020. Tax invoice will be
issued at the time of supply.
- An advance of Rs. 1,77,000 is received from D Ltd., Kerala. D Ltd. will set-up a coconut oil manufacturing unit in January 2020. X
& Co. will provide technical consultancy for this purpose during January 2020.
- Balance available in electronic credit ledger on December 1, 2019 : Rs. 8,000 (CGST), Rs. 10,000 (SGST) and Rs. 80,000 (IGST).
- Purchase of inputs (i.e., coconut) during December 2019 from different parties in Kerala (invoice value : Rs. 5,00,000, GST : 5 per
cent).
- Purchase of inputs (i.e., coconut) during December 2019 from different parties located in other States (invoice value : Rs. 3,00,000,
GST : 5 per cent).
- Purchase of furniture for office from a local supplier (invoice value : Rs. 90,000, GST : 18 per cent).
Determine the amount of CGST, SGST and IGST payable for December 2019 (indicate due date of payment).
Solution :
IGST CGST SGST
Rs. Rs. Rs.
Supply of coconut oil to Kerala parties (intra-State supply) (CGST : 2.5% of
Rs. 43,94,000, SGST : 2.5% of Rs. 43,94,000) – 1,09,850 1,09,850
Consultancy given to A Ltd. (intra-State supply) (CGST : 9% of Rs. 4,00,000,
SGST : 9% of Rs. 4,00,000) 36,000 36,000
Rent of Cochin commercial property (intra-State supply) (CGST : 9% of
Rs. 60,000, SGST : 9% of Rs. 60,000) 5,400 5,400
Advance received for supply of goods (supply to be made in April 2020) (in the
case of supply of goods, time of supply is date of invoice, GST not applicable
on advance) – – –
Advance received for supply of consultancy services (supply to be made in
January 2020) (in case of supply of services, time of supply is date of payment or
date of invoice, whichever is earlier) (as GST is not received separately, it is
assumed that Rs. 1,77,000 is inclusive of GST) (Rs. 1,77,000 × 18 ÷ 118 = Rs. 27,000,
out of which 50% is CGST and 50% is SGST) – 13,500 13,500
GST on outward supply – 1,64,750 1,64,750
Input tax credit
- Balance available in electronic credit ledger on December 1, 2019 80,000 8,000 10,000
- Purchase of inputs (2.5% of Rs. 5,00,000 and 2.5% of Rs. 5,00,000) – 12,500 12,500
- Purchase of inputs (5% of Rs. 3,00,000) 15,000 – –
- Purchase of furniture (9% of Rs. 90,000, 9% of Rs. 90,000) – 8,100 8,100
Input tax credit available 95,000 28,600 30,600
Utilization of input tax credit – 1,64,750 1,64,750
GST on outward supply (as computed earlier)
Less: Input tax credit of IGST – 95,000 –
Balance Nil 69,750 1,64,750
Less: Input tax credit of CGST – 28,600 –
Balance Nil 41,150 1,64,750
Less: Input tax credit of SGST – – 30,600
Balance payable through electronic cash ledger (due date of payment : January
20, 2020) Nil 41,150 1,34,150
581-E8 Make the following changes in the above problem and recalculate amount of CGST, SGST and IGST payable by X & Co.
through electronic cash ledger –
1. Furniture is purchased from a dealer in Mumbai.
2. C Ltd. is located in Karnataka.
581-P9 X Ltd. in the business of manufacture of hand bags in Maharashtra. It has a GST registration from Maharashtra. It submits
the following information for February 2020 –
1. Supply of hand bags to different registered dealers in Maharashtra during February 2020 (invoice value : Rs. 17,40,000).
2. Supply of hand bags to different registered dealers outside Maharashtra during February 2020 (invoice value : Rs. 27,00,000).
3. Rent of residential building owned by X Ltd. (rent of February 2020 being Rs. 1,10,000).
4. Gift of 5 hand bags to a person known to managing director of X Ltd. (input credit was availed for manufacture of these bags) (market
value being Rs. 50,000).
5. Rent of Chennai commercial building owned by X Ltd. (rent of February being Rs. 30,000).
The above figures are exclusive of GST. GST rate is 18 per cent. Besides, X Ltd. gives the following information –
- An advance rent of Rs. 2,20,000 is received for residential property.
- An advance of Rs. 80,000 is received from A Ltd., Kolkata for supply of hand bags (no invoice issued, supply to be completed during
April 2020).
- Balance available in electronic credit ledger on February 1, 2020 : Rs. 3,00,000 (CGST), Rs. 40,000 (SGST) and Rs. 70,000 (IGST).
- Purchase of inputs during February 2020 from different parties in Maharashtra (invoice value : Rs. 7,00,000, GST : 12 per cent).
- Purchase of music system for conference room of X Ltd. from a supplier located in Nagpur (invoice value : Rs. 40,000, GST : 28 per
cent).
Determine the amount of CGST, SGST and IGST payable for February 2020 (indicate due date of payment). Assume that conditions
for claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
Solution :
IGST CGST SGST

Rs. Rs. Rs.
Supply of hand bags in Maharashtra (intra-State supply) (9% of Rs. 17,40,000,
9% of Rs. 17,40,000) – 1,56,600 1,56,600
Supply of hand bags outside Maharashtra (inter-State supply) (18% of
Rs. 27,00,000) 4,86,000 – –
Rent of residential building owned by X Ltd. (exempt from GST) – – –
Gift of 5 hand bags to a person known to managing director (input tax credit
was availed, it is treated as supply under Schedule I) (9% of Rs. 50,000, 9% of
Rs. 50,000) – 4,500 4,500
Rent of Chennai commercial property (inter-State supply) (18% of Rs. 30,000) 5,400 – –
Advance rent of residential property (GST not applicable) – – –
Advance received for future supply of goods (in case of supply of goods, time
of supply is date of invoice, date of receipt of payment is not considered) – – –
GST on outward supply 4,91,400 1,61,100 1,61,100
Input tax credit
Balance available in electronic credit ledger on February 1, 2020 70,000 3,00,000 40,000
Purchase of inputs (6% of Rs. 7,00,000 and 6% of Rs. 7,00,000) – 42,000 42,000
Purchase of music system (14% of Rs. 40,000, 14% of Rs. 40,000) – 5,600 5,600
Total input tax credit available 70,000 3,47,600 87,600
GST payable
Less: Input tax credit of IGST 70,000 – –
Balance 4,21,400 1,61,100 1,61,100
Less: Input tax credit of CGST (balance CGST : Rs. 3,47,600 – Rs. 1,61,100
= Rs. 1,86,500) – 1,61,100 –
Balance 4,21,400 Nil 1,61,100
Less: Input tax credit of CGST 1,86,500 – –
Balance 2,34,900 Nil 1,61,100
Less: Input tax credit of SGST – – 87,600
Balance payable through electronic cash ledger (due date of payment :
March 20, 2020) 2,34,900 Nil 73,500
581-E9 Make the following changes in the above problem and recalculate amount of CGST, SGST and IGST payable by X Ltd.
through electronic cash ledger –
1. Residential property is given on rent to E Ltd., E Ltd. is a manufacturing company and utilises the property for residential
purpose of its production head.
2. Music system which is purchased during February 2020 is installed on March 25, 2020 (although it is received on February 24,
2020).
581-P10 X owns a garments whole selling unit in Aurangabad, Maharashtra. He submits the following information pertaining to
June 2019 –
Rs.
Input tax credit balance in electronic credit ledger as on June 1, 2019 –
- IGST 20,000
- CGST 22,000
- SGST 17,000
Sales (i.e., outward supply of garments) for June 2019
- 2,500 units supplied to A Ltd., Kolkata (taxable value of supply before 10 per cent discount : Rs. 30,00,000 +
GST @ 12 per cent) 30,24,000
- 900 units supplied to B Ltd., Mumbai (taxable value of supply before 30 per cent discount : Rs. 7,20,000 +
GST @ 5 per cent) 5,29,200
- 700 units supplied to C Ltd., Indore (taxable value of supply : Rs. 35,00,000 + GST @ 12 per cent) 39,20,000
Rs.
Purchases (i.e., inward supply of goods/services) for June 2019
- Supply of garments from P Ltd., Chennai (taxable value of supply : Rs. 6,00,000 + GST @ 5 per cent) 6,30,000
- Supply of garments from Q Ltd., Mumbai (taxable value of supply : Rs. 2,00,000 + GST @ 12 per cent) 2,24,000
- Supply of garments from R Ltd., Pune (taxable value of supply : Rs. 3,00,000 + GST @ 5 per cent) 3,15,000
- Rent of Aurangabad store paid to U Ltd., Mumbai (taxable value of supply : Rs. 1,60,000 + GST @ 18 per
cent) 1,88,800
- Rent of Aurangabad godown paid to V Ltd., Aurangabad (taxable value of supply : Rs. 60,000 + GST @ 18
per cent) 70,800
- Computer purchased for Aurangabad store (taxable value of supply : Rs. 1,00,000 + GST @ 18 per cent) 1,18,000
Find out the amount of GST payable through electronic cash ledger for June 2019. Give breakup of CGST, SGST and IGST. Assume
that all relevant conditions are satisfied. The following additional information is available –
1. Out of his business stock, X gives 10 coats free of cost to a friend. Input credit was availed when these coats were purchased. Normal
sale price of these coats is Rs. 7,000 per piece (normally a discount of 10 per cent is given to a customer). GST rate is 12 per cent.
2. For the aforesaid supply to the friend, nothing is recovered from the friend (directly or indirectly).
Solution :
Computation of GST payable on outward supply for June 2019 –
IGST CGST SGST
Rs. Rs. Rs.
Supply to A Ltd. (inter-State supply) 3,24,000 – –
Supply to B Ltd. (intra-State supply) – 12,600 12,600
Supply to C Ltd. (inter-State supply) 4,20,000 – –
Supply to friend (intra-State supply) – 3,780 3,780
Total 7,44,000 16,380 16,380

IGST CGST SGST
Rs. Rs. Rs.
Opening balance on June 1, 2019 20,000 22,000 17,000
Add: Inward supply during June 2019 –
- Supply from P Ltd., Chennai (inter-State supply) 30,000 – –
- Supply from Q Ltd., Mumbai (intra-State supply) – 12,000 12,000
- Supply from R Ltd., Pune (intra-State supply) – 7,500 7,500
- Rent of Aurangabad store (intra-State supply) – 14,400 14,400
- Rent of Aurangabad godown (intra-State supply) – 5,400 5,400
- Computer (intra-State supply) – 9,000 9,000
Total 50,000 70,300 65,300
Computation of GST payable for June 2019 –
IGST CGST SGST
Rs. Rs. Rs.
GST on outward supply (as computed earlier) 7,44,000 16,380 16,380
Less: IGST on inward supply 50,000 – –
Balance 6,94,000 16,380 16,380
Less: CGST on inward supply (balance CGST : Rs. 70,300 – Rs. 16,380
= Rs. 53,920) – 16,380 –
Balance 6,94,000 Nil 16,380
Less: CGST on inward supply 53,920 – –
Balance 6,40,080 Nil 16,380
Less: SGST on inward supply (balance SGST : Rs. 65,300 – Rs. 16,380 = Rs. 48,920) – – 16,380
Balance 6,40,080 Nil Nil
Less: SGST on inward supply 48,920 – –
Balance payable by electronic cash ledger 5,91,160 Nil Nil
581-E10 In above problem, assume that P Ltd. is situated in Kolkata and Q Ltd. is located in Pune. Calculate the amount of CGST,
SGST and IGST payable for June 2019.
581-P11 The following information is given by X –

Supplier to electronic commerce operator X (he owns a radio taxi/motor cab/maxi cab/motor cycle) provides his service in
Mumbai through Inois Taxicab USA. Aggregate turnover of X is –
- More than threshold limit (Situation 1)
- Not more than threshold limit (Situation 2)
Electronic Commerce Operator (ECO) Inois Taxicab USA
Representative of ECO in India A & Co., Mumbai
Discuss the following –
1. Whether compulsory registration is required under section 24 in the case given above ?
2. Who will pay GST under section 9(5) ?
3. Whether provisions of collection of tax at source at the rate of 1 per cent under section 52 is applicable in the above case ?
Solution:
1. Registration - Compulsory registration is required in the case of –
- Inois Taxicab USA
- A & Co., Mumbai.
In these two cases, registration is required even if their aggregate turnover is not more than the threshold limit of Rs. 20
lakh/Rs. 10 lakh/Rs. 40 lakh.
X is required to get registration only if his aggregate turnover is more than the threshold limit of Rs. 20 lakh/Rs. 10 lakh.
2. Applicability of section 9(5) - In this case, GST on supplies shall be paid by Inois Taxicab USA, the electronic commerce
operator (through his/its Indian representative : A & Co., Mumbai). All the provisions of GST shall apply to the electronic
commerce operator as if it is the supplier liable for paying the tax in relation to the supply of such services. This rule is
given by section 9(5).
3. Tax collection at source (TCS) under section 52 - TCS provisions under section 52 are not applicable when electronic com-
merce operator is required to pay tax under section 9(5) (as given above). Consequently, TCS is not required by electronic
commerce operator.
The above provisions are applicable from October 1, 2019.
581-E11 In the above problem, assume that value of supply made by X through Inois Taxicab during November 2019 is Rs.
6,80,000. GST rate is 5 per cent. Determine the amount of GST payable by X and A & Co., Mumbai.
581-P12 The following information is given by Y Ltd. –
Supplier to electronic commerce operator Y Ltd. (it owns a hotel in Bengaluru) provides lodging facility in Bengaluru through
clearroomkey.com (a USA based website)
Aggregate turnover of Y Ltd. is not more than threshold limit
Electronic commerce operator (ECO) Clearroomkey Inc., USA
Representative of ECO in India B & Co., Hyderabad

Solution:
- Clearroomkey Inc., USA
- B & Co., Hyderabad.
2. Applicability of section 9(5) - In this case, GST on supplies shall be paid by Clearroomkey Inc., USA, the electronic com-
merce operator (through his/its Indian representative : B & Co., Hyderabad). All the provisions of GST shall apply to the
electronic commerce operator as if it is the supplier liable for paying the tax in relation to the supply of such services. This
rule is given by section 9(5).
commerce operator.
581-E12 In the above problem, assume that aggregate turnover of Y Ltd. is always more than Rs. 10 crore. Value of supply made
by Y Ltd. through Clearroomkey Inc. during November 2019 is Rs. 8,00,000. GST rate is 18 per cent. Determine the amount of
GST payable by Clearroomkey Inc. (or its Indian representative B & Co., Hyderabad) under section 9(5). Also indicate whether
TCS provisions of section 52 are applicable.
581-P13 The following information is given by Z –
Supplier to electronic commerce operator Z [a house-keeping (such as plumbing, carpentering, etc.) service provider in Chen-
nai] provides services through housekeeping.com (a Dubai based website)
Aggregate turnover of Z is not more than threshold limit
Electronic commerce operator (ECO) Housekeeping Ltd., Dubai
Representative of ECO in India C, an individual located in Ranchi

Solution:
- Housekeeping Ltd., Dubai
- C of Ranchi.
Z is not required to get registration (his aggregate turnover is not more than the threshold limit).
2. Applicability of section 9(5) - In this case, GST on supplies shall be paid by Housekeeping Ltd., Dubai, the electronic
commerce operator (through his/its Indian representative : C of Ranchi). All the provisions of GST shall apply to the
electronic commerce operator as if it is the supplier liable for paying the tax in relation to the supply of such services. This
rule is given by section 9(5).
commerce operator.
581-E13 In the above problem, assume that aggregate turnover of Z is always more than Rs. 2 crore. Value of supply made by Z
through Housekeeping Ltd. during December 2019 is Rs. 3,00,000. GST rate is 18 per cent. Determine the amount of GST payable
by Housekeeping Ltd. (or its Indian representative C) under section 9(5). Also indicate whether TCS provisions of section 52 are
applicable.
581-P14 The following information is given by PQ Ltd. –
Supplier to electronic commerce operator PQ Ltd. (a supplier of garments or a provider of technical consultancy) in India
through Anazon (a Singapore based website)
Aggregate turnover of PQ Ltd. is –
- More than threshold limit
- Not more than threshold limit
Electronic commerce operator (ECO) Anazon Ltd., Singapore
Representative of ECO in India D Ltd., Chandigarh
Solution:
- Anazon Ltd.
- D Ltd.
- PQ Ltd. (if it is supplier of goods).
In these three cases, registration is required even if their aggregate turnover is not more than the threshold limit of Rs. 20
If PQ Ltd. is supplier of services and its aggregate turnover is not more than the threshold limit of Rs. 20 lakh/Rs. 10 lakh,
registration is not required.
2. Applicability of section 9(5) - Provisions of section 9(5) are not applicable in this case.
3. Tax collection at source (TCS) under section 52 - Anazon Ltd., Singapore, the electronic commerce operator, is required to
collect an amount at the rate of 1 per cent of the “net value of taxable supplies” (i.e., net of supply returned) made through
it, where the consideration with respect to such supplies is to be collected by such operator. The amount so collected is
called as tax collection at source (TCS) and the relevant provisions are given by section 52.
TCS provisions under section 52 are applicable, when electronic commerce operator is not required to pay tax under
section 9(5).
581-E14 In the above problem, assume that –
1. Turnover of PQ Ltd. on all India basis is approximately Rs. 7 crore every year.
2. During December 2019, supply of goods by PQ Ltd. through Anazon Ltd. is Rs. 11,10,000 before GST.
3. Value of supply returned to PQ Ltd. during December 2019 is Rs. 90,000.
4. GST rate in the above case is 12 per cent.
Determine the amount of GST payable by Anazon Ltd. (or its Indian representative D Ltd.) under section 9(5) and TCS under
section 52.
581-P15 X Ltd. is a paper manufacturing company having a GST registration from Telangana. Its manufacturing unit is situated in
Hyderabad. It gives the following information pertaining to April 2019 –
1. Inter-State supply of paper manufactured by X Ltd. (invoice value : Rs. 36,00,000).
2. Intra-State supply of paper manufactured by X Ltd. (invoice value : Rs. 8,00,000).
3. Rent of agricultural land let out to ITC Ltd. (it is used for agriculture purposes by ITC, rent of April 2019 being Rs. 11,00,000).
4. Rent of commercial property located near Vijayawada let out to TDI Mall (rent of April being Rs. 6,00,000).
The above figures are exclusive of GST. GST rate is 18 per cent. Besides, X Ltd. gives the following information –
- A computer was purchased from a local supplier for Rs. 3,20,000 (GST rate : 18 per cent) on September 1, 2018 for office purposes.
Full input tax credit was taken in September 2018. However, on April 18, 2019 it is gifted by X Ltd. to D (D is a friend of managing
director of X Ltd.).
- Advance rent of Rs. 6,00,000 pertaining to commercial property for May 2019 is received on April 29, 2019 (GST is not received
separately, it will be paid by the tenant only during May 2019).
- On April 25, 2019, X Ltd. pays advance consultancy fee to a consultant of Rs. 1,00,000. The consultant will provide his service only
during July 2019. Invoice will be issued after completion of job.
- Balance available in electronic credit ledger on April 1, 2019 : Rs. 10,000 (CGST), Rs. 8,00,000 (SGST) and Rs. 2,90,000 (IGST).
- Purchase of inputs during April 2019 from different parties in Andhra Pradesh (invoice value : Rs. 1,00,000, GST : 5 per cent).
- Purchase of inputs during April 2019 from different parties in Telangana (invoice value : Rs. 80,000, GST : 12 per cent).
Determine the amount of CGST, SGST and IGST payable for April 2019 (indicate due date of payment). Assume that conditions for
claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
Solution :
IGST CGST SGST
Rs. Rs. Rs.
Inter-State supply of goods (18% of Rs. 36,00,000) 6,48,000 – –
Intra-State supply of goods (9% of Rs. 8,00,000, 9% of Rs. 8,00,000) – 72,000 72,000
Rent of agricultural land (exempt from GST) – – –
Rent of Vijayawada commercial property (18% of Rs. 6,00,000) 1,08,000 – –
Advance rent of commercial property (Rs. 6,00,000 × 18 ÷ 118) 91,525 – –
Reversal of input credit pertaining to computer gifted to a friend [period of use
from September 1, 2018 to April 17, 2019 : 7 months and 17 days, remaining
useful life out of fixed life of 60 months : 52 months and 13 days, input tax credit
IGST CGST SGST

Rs. Rs. Rs.
availed : Rs. 57,600 (being 18% of Rs. 3,20,000), reversal required : Rs. 57,600 ×
52 ÷ 60, which comes to Rs. 49,920, 50% is CGST and 50% is SGST] – 24,960 24,960
GST on outward supply 8,47,525 96,960 96,960
Input tax credit
Balance available in electronic credit ledger on April 1, 2019 2,90,000 10,000 8,00,000
Advance consultancy fee (invoice not received, input credit not available) – – –
Purchase of inputs through inter-State supply (5% of Rs. 1,00,000) 5,000 – –
Purchase of inputs through intra-State supply (6% of Rs. 80,000, 6% of
Rs. 80,000) – 4,800 4,800
Total input tax credit 2,95,000 14,800 8,04,800
GST payable
Less: Input tax credit of IGST 2,95,000 – –
Balance 5,52,525 96,960 96,960
Less: Input tax credit of CGST – 14,800 –
Balance 5,52,525 82,160 96,960
Less: Input tax credit of SGST (balance SGST : Rs. 8,04,800 – Rs. 96,960
= Rs. 7,07,840) – – 96,960
Balance 5,52,525 82,160 Nil
Less: Input tax credit of SGST (balance SGST : Rs. 7,07,840 – Rs. 5,52,525
= Rs. 1,55,315) 5,52,525 Nil Nil
Balance payable through electronic cash ledger (due date of payment : May 20,
2019) Nil 82,160 Nil
Balance left in electronic credit ledger on April 30, 2019 Nil Nil 1,55,315
581-E15 In the above problem, assume that –

1. In respect of computer gifted to D, full input tax credit was availed in January 2019 (not in September 2018).
2. On April 10, 2019, X Ltd. pays municipal tax of Rs. 47,000 pertaining to Vijayawada commercial property.
3. In respect of advance consultancy fee, the consultant will pay GST during April 2019.
Determine the amount of CGST, SGST, IGST payable for the month of April 2019.
Appendix 1 Tax rates
ASSESSMENT YEAR 2020-21
 TAX LIABILITY - HOW TO FIND OUT

Tax liability for the assessment year 2020-21 shall be calculated as follows :—
Rs. Rs.
1. Find out gross total income —
2. Less: Deductions under sections 80C to 80U —
3. Find out net income [(1) – (2)] —
4. Divide the net income into the following—
4.1 Income subject to special tax rates mentioned in para 0.1-6 —
4.2 Remaining income subject to normal rates —
5. Find out income-tax on net income—
5.1 Tax on income specified in 4.1 (supra) at the rates given in para 0.1-6 —
5.2 Tax on remaining income at the normal rate given in para 0.1-1 or 0.1-2 or 0.1-3 or 0.1-4
or 0.1-5 — —
6. Less: Rebate under section 87A [applicable in the case of a resident individual having net income
not exceeding Rs. 5 lakh] —
7. Income-tax after rebate under section 87A [(5) – (6)] —
8. Add : Surcharge2 @ 0%, 2%, 5%, 7%, 10%, 12%, 15%, 25% or 37% of (7) —
9. Find out the total [(7)+(8)] —
10. Add : Health and education cess (HEC) [4% of (9)]
11. Find out the total [(9) + (10)] —
12. Deduct : Rebate under section 86, 89, 90, 90A or 91 —
13. Tax liability [(11)–(12)]* —
14. Add: Interest/penalty, etc. —
15. Less: Pre-paid taxes [i.e., advance tax, self-assessment tax, TDS, TCS, MAT/AMT credit] —
16. Tax payable [(13) + (14) – (15)] —
Notes :
1. (2) cannot exceed (1).
2. Surcharge is applicable as a % of income-tax [i.e., (7)]. These rates are—
* In the case of a corporate-assessee, it cannot be less than minimum alternate tax. In the case of any other taxpayer, it cannot be less than alternate
minimum tax.
848
849 Income-tax Para 0.1
Net income range Surcharge as % of

income-tax
Domestic company 0 – Rs. 1 crore Nil [see Note 2]
Notes –
1. Surcharge is 15% of income-tax pertaining to income which is chargeable under section 111A or 112A.
2. Surcharge is 10% if income is chargeable to tax under section 115BAA or 115BAB.
 INCOME-TAX
0.1-1 Individuals, Hindu undivided families, AOPs, BOIs - The tax rates applicable to individuals are also applicable to
a Hindu undivided family, an association of persons, body of individuals or an artificial juridical person. The rates
applicable for the assessment year 2020-21 are as follows :
 For a resident senior citizen (who is 60 years or more at any time during the previous year but less than 80 years on the
last day of the previous year, i.e., born on or after April 2, 1940 but before April 2, 1960)–
Net income range Income-tax rates‡ Surcharge Health and education

cess (HEC)
Up to Rs. 3,00,000 Nil Nil Nil
Rs. 3,00,000 – Rs. 5% of (total income minus Nil 4% of income-tax
5,00,000 Rs. 3,00,000) [see Note 1]
Rs. 5,00,000 – Rs. Rs. 10,000 + 20% of (total Nil 4% of income-tax
10,00,000 income minus Rs. 5,00,000)
Rs. 10,00,000 – Rs. Rs. 1,10,000 + 30% of (total Nil 4% of income-tax
50,00,000 income minus Rs. 10,00,000)
Rs. 50,00,000 - Rs. Rs. 13,10,000 + 30% of (total 10% of income- 4% of income-tax
1,00,00,000 income minus Rs. 50,00,000) tax [see Note 2] and surcharge
Rs. 1,00,00,000 - Rs. Rs. 28,10,000 + 30% of (total 15% of income-tax 4% of income-tax
2,00,00,000 income minus Rs.1,00,00,000) [see Note 2] and surcharge
Rs. 2,00,00,000 - Rs. Rs. 58,10,000 + 30% of (total 25%* of income-tax 4% of income-tax
5,00,00,000 income minus Rs. 2,00,00,000) [see Note 2] and surcharge
Above Rs. 1,48,10,000 + 30% of (total 37%* of income-tax 4% of income-tax
Rs. 5,00,00,000 income minus Rs. 5,00,00,000) [see Note 2] and surcharge
 For a resident super senior citizen (who is 80 years or more at any time during the previous year, i.e., born before April
2, 1940)—
cess (HEC)
10,00,000 Rs. 5,00,000)
‡See also para 0.1-6.

*Surcharge is 15% of income-tax pertaining to income which is chargeable under section 111A or 112A.
Para 0.1 Tax rates 850

cess (HEC)

50,00,000 income minus Rs. 10,00,000)
Rs. 1,00,00,000 – Rs. Rs. 28,00,000 + 30% of (total 15% of income- 4% of income-tax
2,00,00,000 income minus Rs.1,00,00,000) tax [see Note 2] and surcharge
Rs. 2,00,00,000 – Rs. Rs. 58,00,000 + 30% of (total 25%* of income- 4% of income-tax
5,00,00,000 income minus Rs. 2,00,00,000) tax [see Note 2] and surcharge
Above Rs. 5,00,00,000 Rs. 1,48,00,000 + 30% of (total 37%* of income- 4% of income-tax
income minus Rs. 5,00,00,000) tax [see Note 2] and surcharge
 For any other resident individual (born on or after April 2, 1960), any non-resident individual, every HUF/AOP/BOI/
artificial juridical person—

cess (HEC)
5,00,000 Rs. 2,50,000) [see Note 1]
Rs. 5,00,000 – Rs. Rs. 12,500 + 20% of (total Nil 4% of income-tax
10,00,000 income minus Rs. 5,00,000)
50,00,000 income minus Rs. 10,00,000)
Rs. 1,00,00,000 – Rs. Rs. 28,12,500 + 30% of (total 15% of income- 4% of income-tax and
2,00,00,000 income minus Rs.1,00,00,000) tax [see Note 2] surcharge
Rs. 2,00,00,000 – Rs. Rs. 58,12,500 + 30% of (total 25%* of income- 4% of income-tax
5,00,00,000 income minus Rs. 2,00,00,000) tax [see Note 2] and surcharge
Above Rs. 5,00,00,000 Rs. 1,48,12,500 + 30% of (total 37%* of income- 4% of income-tax
income minus Rs. 5,00,00,000) tax [see Note 2] and surcharge
Notes :
1. Rebate under section 87A - A resident individual (whose net income does not exceed Rs. 5,00,000) can avail rebate under
section 87A. It is deductible from income-tax before calculating health and education cess. The amount of rebate is 100 per
cent of income-tax or Rs. 12,500, whichever is less.
2. Surcharge - Surcharge is 10 per cent of income-tax if net income is more than Rs. 50 lakh but not more than Rs. 1 crore. If
net income is more than Rs. 1 crore but not more than Rs. 2 crore, surcharge is 15 per cent of income-tax. If net income is more
than Rs. 2 crore but not more than Rs. 5 crore, surcharge is 25 per cent* of income-tax. If net income is more than Rs. 5 crore,
surcharge is 37 per cent* of income-tax. Surcharge is subject to a marginal relief. If net income exceeds Rs. 50 lakh, the amount
payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 50 lakh
by more than the amount of income that exceeds Rs. 50 lakh. Moreover, if net income is in the range of Rs. 1 crore – Rs. 2
crore, the amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and
surcharge on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore. Similarly, if net income
is in the range of Rs. 2 crore – Rs. 5 crore, the amount payable as income-tax and surcharge shall not exceed the total amount
payable as income-tax and surcharge on total income of Rs. 2 crore by more than the amount of income that exceeds Rs. 2
crore. Likewise, if net income is above Rs. 5 crore, the amount payable as income-tax and surcharge shall not exceed the total
‡See also para 0.1-6.
amount payable as income-tax and surcharge on total income of Rs. 5 crore by more than the amount of income that exceeds
Rs. 5 crore.
3. Health and education cess (HEC) - It is 4 per cent of income-tax and surcharge.
 Alternate minimum tax - Tax payable by a non-corporate assessee cannot be less than 18.5 per cent† (+SC+HEC) of “adjusted
total income” as per section 115JC
0.1-2 Firms - A firm is taxable at the rate of 30 per cent for the assessment year 2020-21 [see also para 0.1-6].
Surcharge - Surcharge is 12 per cent of income-tax if net income exceeds Rs. 1 crore. It is subject to marginal relief (in the case
of a firm having a net income of exceeding Rs. 1 crore, the amount payable as income tax and surcharge shall not exceed the
total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore).
Health and education cess - It is 4 per cent of income-tax and surcharge.
 Alternate minimum tax - Tax payable by firm cannot be less than 18.5 per cent† [+ SC + HEC] of “adjusted total income”
as per section 115JC.
0.1-3 Companies - For the assessment year 2020-21 the following rates of income-tax are applicable:
Company Rate of income-tax (per cent)
[see also para 0.1-6]
In the case of a domestic company -
- where its total turnover or gross receipt during the previous year 2017-18 does not
exceed Rs. 400 crore 25
- any other domestic company 30
In the case of a foreign company -
- royalty received from Government or an Indian concern in pursuance of an agree-
ment made by it with the Indian concern after March 31, 1961, but before April 1, 1976,
or fees for rendering technical services in pursuance of an agreement made by it after
February 29, 1964 but before April 1, 1976 and where such agreement has, in either
case, been approved by the Central Government 50
- other income 40
Surcharge - Surcharge is applicable at the rates given below—
If net income does not If net income is in the range If net income exceeds
exceed Rs. 1 crore of Rs. 1 crore – Rs. 10 crore Rs. 10 crore
Domestic company Nil 7%* 12%**
Foreign company Nil 2%* 5%**
*Marginal relief - In the case of a company having a net income of exceeding Rs. 1 crore, the amount payable as income-tax
and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount
of income that exceeds Rs. 1 crore.
**Marginal relief - In the case of a company having a net income of exceeding Rs. 10 crore, the amount payable as income-
tax and surcharge shall not exceed the total amount payable as income-tax and surcharge on total income of Rs. 10 crore by
more than the amount of income that exceeds Rs. 10 crore.
0.1-3a MINIMUM ALTERNATE TAX - The following rate of minimum alternate tax shall be applicable—
If book profit does not exceed If book profit is in the range of If book profit exceeds
Rs.1 crore Rs. 1 crore – Rs. 10 crore Rs. 10 crore
IT SC HEC Total IT SC HEC Total IT SC HEC Total

Domestic company 15† – 0.60 15.60 15† 1.05 0.642 16.692 15† 1.80 0.672 17.472
Foreign company 15† – 0.60 15.60 15† 0.30 0.612 15.912 15† 0.75 0.63 16.38
Note - If book profit of a company exceeds Rs. 1 crore but does not exceed Rs. 10 crore, the minimum alternate tax cannot
exceed the following : (Rs. 15 lakh + book profit – Rs. 1 crore) + HEC. If, however, book profit exceeds Rs. 10 crore, the
minimum alternate tax cannot exceed the following –
a. in the case of domestic company, (Rs. 160.50 lakh + book profit – Rs. 10 crore) + HEC; or
b. in the case of a foreign company, (Rs. 153 lakh + book profit – Rs. 10 crore) + HEC.
† 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange.
0.1-4 Co-operative societies - The following rates are applicable to a co-operative society for the assessment year 2020-21—
(Per cent)
Net income range Rate of income-tax
[See also 0.1-6]
Up to Rs. 10,000 10
Rs. 10,000 - Rs. 20,000 20
Above Rs. 20,000 30
of a co-operative society having a net income of exceeding Rs. 1 crore, the amount payable as income tax and surcharge shall
not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that
exceeds Rs. 1 crore).
0.1-5 Local authorities - Local authorities are taxable at the rate of 30 per cent.
of a local authority having a net income of exceeding Rs. 1 crore, the amount payable as income tax and surcharge shall not
exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds
Rs. 1 crore).
0.1-6 Tax rates specified in the Income-tax Act - The following incomes are taxable at the rates specified by the Income-
tax Act and not at the rates mentioned in paras 0.1-1 to 0.1-5 supra :
Section Income Income-tax
rates*
(1) (2) (3)
111A Short-term capital gains 15
112 Long-term capital gains 20‡
112A Long-term capital gain in excess of Rs. 1 lakh 10
115A(1) Dividend received by a foreign company or a non-resident non-corporate assessee
(a)(i) [*it is not applicable in the case of dividends referred to in section 115-O] 20*
115A(1) Interest received by a foreign company or a non-resident non-corporate assessee from
(a)(ii) Government or an Indian concern on moneys borrowed or debt incurred by Government
or the Indian concern in foreign currency 20
115A(1) Interest received from an infrastructure debt fund referred to in section 10(47) 5
(a)(iia)
115A(1) Interest received from an Indian company specified in section 194LC 5
(a)(iiaa)
115A(1) Interest of the nature and extent referred to in section 194LD or section 194LBA 5
(a)(iiab)/
(iiac)
115A Royalty or fees for technical services (not referred to in section 44DA) received by a
(1)(b) foreign company or non-resident non-corporate assessee from an Indian concern or Govern-
ment in pursuance of an agreement approved by the Central Government if such agreement
is made at any time after March 31, 1976 10
115AB Income of an overseas financial organisation on transfer of units purchased in foreign
currency being long-term capital gains 10
† 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign
exchange.
*These rates are subject to SC + HEC [see Notes at the end of Table].
‡In some cases, tax rate is 10%.

rates*
(1) (2) (3)
115AC Income from bonds or Global Depository Receipts1 or on bonds or Global Depository Receipts1
of a public sector company sold by the Government and purchased in foreign currency or
long-term capital gains arising from their transfer *[not applicable in the case of dividends
referred to in section 115-O] 10*
115ACA Income from Global Depository Receipts held by a resident individual who is an employee of
an Indian company engaged in information technology software/services††
❑ Dividend [other than dividend referred to in section 115-O] on Global Depository Receipts
issued under employees stock option scheme and purchased in foreign currency 10
❑ Long-term capital gain on transfer of such receipts 10
115AD Income in respect of securities received by a Foreign Institutional Investor as specified2 by the
Government
❑ Short-term capital gain covered by section 111A 15
❑ Any other short-term capital gain 30
❑ Long-term capital gain 10
❑ Long-term capital gain (referred to in section 112A) in excess of Rs. 1 lakh 10
❑ Interest referred to in section 194LD 5
❑ Other income [*not applicable in the case of dividends referred to in section 115-O] 20*
115B Profits and gains of life insurance business 12.5
115BA Income of certain manufacturing domestic companies‡ 25
115BAA Income of certain domestic companies 22
115BAB Income of certain new domestic manufacturing companies 15
115BB Winnings from lotteries, crossword puzzles, or race including horse race (not being income
from the activity of owning and maintaining race horse) or card game and other game of any
sort or from gambling or betting of any form or nature 30
115BBA(1) Income of a non-resident foreign citizen sportsman for participation in any game
(a)/(b) in India or received by way of advertisement or for contribution of articles relating to any game
or sport in India or income of a non-resident sport association by way of guarantee
money 20
115BBA(1) Income of non-resident foreign citizen (being an entertainer) for performance in India 20
(c)
115BBC Anonymous donation 30
††An employee of an Indian company engaged in specified knowledge based industry or service or an employee of its subsidiary engaged in
specified knowledge based industry or service.
1. Issued by an Indian company in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt
Mechanism) Scheme, 1993/Issue of Foreign Currency Exchangeable Bonds Scheme, 2008.
2. For notified Foreign Institutional Investor, see Taxmann’s Direct Taxes Circulars, 2011 edition.
‡ Under section 115BA, a domestic company (which satisfies the following conditions) may opt for tax rate of 25 per cent -
- It is a set-up and registered on or after March 1, 2016.
- The company is not engaged in any business other than the business of manufacture or production of any article or thing and research in
relation to (or distribution of) such article or thing manufactured or produced by it.
- Total income of the company is computed without claiming additional depreciation and deduction under sections 10AA, 32AC, 32AD,
33AB, 33ABA, 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB), 35AC, 35AD, 35CCC, 35CCD, sections 80H to 80TT (not being section 80JJAA).
- Total income of the company is calculated after claiming depreciation (rate cannot be more than 40 per cent) and without adjusting brought
forward loss from any earlier year (if such loss pertains to any deduction under the aforesaid sections). Moreover, such loss will not be carried
forward.
- This option shall be exercised on or before the due date for furnishing the first of the returns of income, which the company is required to
furnish under the Act. This option should be exercised by electronically furnishing Form No. 10-IB (under digital signature or electronic
verification code). Once the company has exercised the option for any previous year, it cannot be subsequently withdrawn for the same or
any other previous year (however, the option may be withdrawn if the company exercises option under section 115BAA).

rates*
(1) (2) (3)
115BBD Income of an Indian company by way of dividends declared, distributed or paid by a specified
foreign company (in which the Indian company holds 26 per cent or more of equity share
capital) 15
115BBDA Aggregate dividend from domestic companies in excess of Rs. 10 lakh [excluding deemed
dividend under section 2(22)(e)] 10
115BBE Income referred to in sections 68, 69, 69A, 69B, 69C and 69D 60
115BBF Income by way of royalty in respect of a patent developed and registered in India
(received by a resident assessee who is a patentee) 10
115BBG Income from transfer of carbon credits 10
115E Income from foreign exchange assets and capital gains of non-resident Indian
a. income from foreign exchange asset [*not applicable in the case of dividends referred to
in section 115-O] 20*
b. long-term capital gain 10
115JB Minimum alternate tax
- Book profit of a company (not being a company given below) 18.5
- Book profit of a company located in an International Financial Services Centre and derives
its income solely in convertible foreign exchange 9
115JC Alternative minimum tax in the case of non-corporate taxpayer –
- Adjusted total income (not being a unit given below) 18.5
- Adjusted total income of a unit located in an International Financial Services Centre and
derives its income solely in convertible foreign exchange 9
115TD Accreted income of certain trusts and institutions [*taxable at maximum marginal rate (MMR)
of tax which is 42.744 per cent] MMR*
115UB(4) Business income of a investment fund –
❑ Where investment fund is a domestic company or firm 30
❑ Where investment fund is a foreign company 40
❑ Where investment fund is any other person [*taxable at maximum marginal rate (MMR)
of tax which is 42.744 per cent] MMR*
161(1A) Profits and gains of a business in the case of a trust 30
164 Income of private discretionary trust where shares of beneficiaries are indeterminate 30
164A Income of an oral trust 30
167A Income of a firm 30
167B Income of an association of persons or body of individuals if shares of members are
unknown 30
167B(2) Income of an association of persons (AOP) or body of individuals (BOI) if total income of any
member (excluding share from AOP/BOI) exceeds the maximum amount not chargeable to
tax [*if total income of any member of the AOP /BOI is chargeable to tax at a rate higher than
maximum marginal rate, then tax shall be charged on that portion of the total income of the
AOP/BOI which is relatable to the share of such member at such higher rate and the balance
of the total income is taxable at a maximum marginal rate] [maximum marginal rate of tax is
42.744 per cent] 30*
Notes :
1. Surcharge - The above income-tax rates are subject to surcharge. Surcharge under sections 115BAA and 115BAB is 10 per cent of income-
tax. Surcharge under section 115BBE is 25 per cent of income-tax. In other cases, surcharge is calculated as a percentage (given below) of
income-tax –
855 Rates for TDS Para 0.6
Net income‡ range

Rs. 2 crore – Rs. 5 crore 25%*
Above Rs. 5 crore 37%*
Domestic company 0 – Rs. 1 crore Nil
‡or book profit (for the purpose of section 115JB) or adjusted total income (for the purpose of section 115JC).
2. Health and education cess - It is 4 per cent of income-tax and surcharge.
 COMPULSORY DEPOSIT
0.2 From the assessment year 1986-87, the scheme of compulsory deposit has been abolished.

 WEALTH-TAX
0.3 No wealth-tax from the assessment year 2016-17.

 GIFT-TAX
0.4 Gifts made after September 30, 1998 are not chargeable to gift-tax.

 ESTATE DUTY
0.5 The levy of estate duty has been abolished in respect of estates passing on death occurring on or after March 16, 1985.

 RATES FOR TAX DEDUCTION AT SOURCE

0.6 Tax is deductible at source at the rates given in table (infra). If PAN of the deductee is not intimated to the deductor, tax
will be deducted at source by virtue of section 206AA either at the rate given in the table or at the rate of 20 per cent, whichever
is higher†. Further, under section 94A(5), if payment or credit is made or given to a deductee who is located in a notified
jurisdictional area‡, tax is deductible at the rate given in the table or at the rate of 30 per cent, whichever is higher. TDS rates
for the financial year 2019-20 are as follows –
†However, this rule is subject to following modifications –

 Case 1 - The provisions of section 206AA are not applicable in respect of payment of interest on long-term bonds to a non-resident under section
194LC.
 Case 2 - Where tax is deductible on the strength of the provisions of DTAAs which is lower than 20 per cent, the provisions of section 206AA
cannot be invoked (to compel the assessee to deduct tax at the rate of 20 per cent) even if the recipient does not have PAN – DIT v. Serum Institute
of India Ltd. [2015] 56 taxmann.com 1 (Pune - Trib.), CIT (International Taxation) v. Infosys BPO Ltd. [2015] 60 taxmann.com 465 (Bang.).
 Case 3 - If the recipient does not furnish PAN, tax will be deducted under section 192A at the maximum marginal rate of tax (i.e., 42.744 per
cent) and not at the rate of 20 per cent given by section 206AA.
 Case 4 - The provisions of section 206AA are not be applicable, if a few conditions prescribed by rule 37BC are satisfied. Under this rule, the
deductee is required to submit the following to deductor (to avoid application of section 206AA) – (a) name, e-mail id, contact number; (b)
address in the foreign country; (c) tax residency certificate issued by the foreign Government; and (d) Tax Identification Number issued by the
foreign country.
‡ ‘Cyprus’ was specified as notified jurisdictional area for purposes of section 94A vide Notification No. SO 3307(E), dated November 1, 2013.
However, this notification has been rescinded with effect from November 1, 2013 (except as respects things done or omitted to be done before
such rescission) vide Notification No. SO 4033(E), dated December 14, 2016.
Category A - When recipient is resident
Nature of payment TDS (SC : Nil,

HEC : Nil)
● Sec. 192 - Payment of salary [normal tax rates are applicable – see para 0.1-1,
SC : 10% (if total income exceeds Rs. 50 lakh but does not exceed Rs. 1 crore), 15% (if total income
exceeds Rs. 1 crore but does not exceed Rs. 2 crore), 25% (if total income exceeds Rs. 2 crore but
does not exceed Rs. 5 crore) or 37% (if total income exceeds Rs. 5 crore), HEC : 4%] —
● Sec. 192A - Payment of taxable accumulated balance of provident fund 10
● Sec. 193 - Interest on securities—
a. interest on (a) debentures/securities for money issued by or on behalf of any local
authority/statutory corporation, (b) listed debentures of a company [not being listed
securities in demat form], (c) any security of the Central or State Government [i.e., 8%
Savings (taxable) Bonds, 2003 and 7.75% Savings (taxable) Bonds, 2018 but not any other
Government security] 10
b. any other interest on securities (including interest on non-listed debentures) 10
● Sec. 194 - Dividend—
a. deemed dividend under section 2(22)(e) Nil
b. any other dividend Nil
● Sec. 194A - Interest other than interest on securities 10
● Sec. 194B - Winnings from lottery or crossword puzzle or card game or other game of any
sort 30
● Sec. 194BB - Winnings from horse races 30
● Sec. 194C - Payment or credit to a resident contractor/sub-contractor—
a. payment/credit to an individual or a Hindu undivided family 1
b. payment/credit to any person other than an individual or a Hindu undivided family 2
● Sec. 194D - Insurance commission—
- if recipient is a resident (other than a company) 5
- if recipient is a domestic company 10
● Sec. 194DA - Payment in respect of life insurance policy [when exemption is not available
under section 10(10D)] –
- Up to August 31, 2019 : 1% of amount payable 1
- With effect from September 1, 2019 : 5% of the amount of income comprised in payment 5
● Sec. 194EE - Payment in respect of deposits under National Savings Scheme, 1987 10
● Sec. 194F - Payment on account of repurchase of units of MF or UTI 20
● Sec. 194G - Commission on sale of lottery tickets 5
● Sec. 194H - Commission or brokerage 5
● Sec. 194-I - Rent—
a. rent of plant and machinery 2

b. rent of land or building or furniture or fitting 10
● Sec. 194-IA - Payment/credit of consideration to a resident transferor for transfer of any
immovable property (other than rural agricultural land) 1
● Sec. 194-IB - Payment/credit of rent by an individual/HUF (if not subject to tax audit under
section 44AB in the immediately preceding financial year) 5
● Sec. 194-IC - Payment under joint development agreement to a resident individual/HUF
(who transfers land/building) 10
● Sec. 194J - Professional fees, technical fees, royalty or remuneration to a director –
- If payee is engaged only in the business of operation of call centre 2
- Any other payment/credit 10
● Sec. 194LA - Payment of compensation on acquisition of certain immovable property 10
● Sec. 194LBA(1) - Payment of the nature referred to in section 10(23FC) section 10(23FC)(a)/
(23FCA) by business trust to resident unit holders 10
Category A - When recipient is resident
Nature of payment TDS (SC : Nil,

HEC : Nil)
● Sec. 194LBB - Payment in respect of units of investment fund specified in section 115UB 10
● Sec. 194LBC(1) - Payment in respect of an investment in a securitisation trust specified in
clause (d) of the Explanation occurring after section 115TCA—
- if recipient is an individual or a Hindu undivided family 25
- if recipient is any other person 30
● Sec. 194M - Payment/credit to a resident contractor or resident professional or payment/
credit by way of commission/brokerage (applicable with effect from September 1, 2019) 5
● Sec. 194N - Payment from one or more accounts to an account holder in cash by bank/
co-operative bank/post office in excess of Rs. 1 crore in the financial year (applicable with
effect from September 1, 2019) 2
Category B - When recipient is non-resident or foreign company
Aggregate pay- If recipient is non-resident If recipient is non- If recipient is non-domestic

ment or credit individual/HUF/AOP/BOI/ resident co-opera- company
subject to TDS artificial juridical person tive society/firm
during the
0 – Rs. 50 Rs. 50 Rs. 1 Rs. 2 Above 0 – Rs. 1 Above 0 – Rs. 1 Rs. 1 Above
financial year
lakh lakh – crore – crore – Rs. 5 crore Rs. 1 crore crore – Rs. 10
2019-20 
Rs. 1 Rs. 2 Rs. 5 crore crore Rs. 10 crore
crore crore crore crore
TDS + TDS + TDS + TDS + TDS + TDS + TDS + TDS + TDS + TDS +
HEC : 4% SC : SC : SC : SC : HEC : SC : HEC : SC : SC :
10% + 15% + 25% + 37% + 4% 12% + 4% 2% + 5% +
HEC : 4% HEC : 4% HEC : 4% HEC : 4% HEC : 4% HEC : 4% HEC : 4%
Nature of payment
● Sec. 192 - Payment of

salary [normal tax rates
are applicable – see para
0.1-1, SC : 10% (if total
income exceeds Rs. 50
lakh but does not exceed
Rs. 1 crore), 15% (if total
income exceeds Rs. 1 crore
but does not exceed Rs. 2
crore), 25% (if total income
exceeds Rs. 2 crore but
does not exceed Rs. 5
crore) or 37% (if total in-
come exceeds Rs. 5 crore),
HEC : 4%] – – – – – – – – – –
● Sec. 192A - Payment of
taxable accumulated bal-
ance of provident fund 10.4 11.44 11.96 13 14.248 – – – – –
● Sec. 194B - Winnings
from lottery or crossword
puzzle or card game or
other game of any sort 31.2 34.32 35.88 39 42.744 31.2 34.944 31.2 31.824 32.76
● Sec. 194BB - Winnings
from horse races 31.2 34.32 35.88 39 42.744 31.2 34.944 31.2 31.824 32.76
● Sec. 194E - Payment to a
non-resident foreign citi-
zen sportsman/enter-
tainer or non-resident
sports association 20.8 22.88 23.92 26 28.496 20.8 23.296 20.8 21.216 21.84
● Sec. 194EE - Payment in
respect of deposits un-
der National Saving
Scheme, 1987 10.4 11.44 11.96 13 14.248 NA NA NA NA NA

during the
financial year
2019-20 
10% + 15% + 25% + 37% + 4% 12% + 4% 2% + 5% +
Nature of payment
● Sec. 194F - Re-purchase

of units of MF or UTI 20.8 22.88 23.92 26 28.496 NA NA NA NA NA
● Sec. 194G - Commis-
sion on sale of lottery
tickets 5.2 5.72 5.98 6.5 7.124 5.2 5.824 5.2 5.304 5.46
● Sec. 194LB- Payment/
credit by way of interest
by infrastructure debt
fund 5.2 5.72 5.98 6.5 7.124 5.2 5.824 5.2 5.304 5.46
● Sec. 194LBA(2) - Pay-
ment of the nature re-
ferred to in section
10(23FC) or section
10(23FC)(a) by business
trust to unit holders 5.2 5.72 5.98 6.5 7.124 5.2 5.824 5.2 5.304 5.46
● Sec. 194LBA(3) - Pay-
ment of the nature re-
ferred to in section
10(23FCA) by business
trust to unit holders 31.2 34.32 35.88 39 42.744 31.2 34.944 41.6 42.432 43.68
● Sec. 194LBB - Payment
in respect of units of in-
vestment fund specified
in section 115UB 31.2 34.32 35.88 39 42.744 31.2 34.944 41.6 42.432 43.68
● Sec. 194LBC(2) - Pay-
ment in respect of an in-
vestment in a securitisa-
tion trust specified in
clause (d) of the Explana-
tion occurring after section
115TCA 31.2 34.32 35.88 39 42.744 31.2 34.944 41.6 42.432 43.68
● Sec. 194LC - Payment/
credit of interest by an In-
dian specified company
on foreign currency
approved loan/long-
term bonds from outside
India 5.2 5.72 5.98 6.5 7.124 5.2 5.824 5.2 5.304 5.46
● Sec. 194LD - Interest on
a rupee denominated
bond of an Indian com-
pany or Government
security 5.2 5.72 5.98 6.5 7.124 5.2 5.824 5.2 5.304 5.46
● Sec. 194N - Payment
from one or more accounts
to an account holder in
cash by bank/co-opera-
tive bank/post office in
excess of Rs. 1 crore in the
financial year (applicable
with effect from Sep-
tember 1, 2019) 2.08 2.288 2.392 2.6 2.8496 2.08 2.3296 2.08 2.1216 2.184

during the
financial year
2019-20 
10% + 15% + 25% + 37% + 4% 12% + 4% 2% + 5% +
Nature of payment
● Sec. 195 - Payment/

credit of other sum to a
non-resident —
a. income of foreign ex-
change assets payable
to an Indian citizen 20.8 22.88 23.92 26 28.496 NA NA NA NA NA
b. income by way of
long-term capital
gains referred to in
section 115E or section
112(1)(c)(iii) 10.4 11.44 11.96 13 14.248 10.4 11.648 10.4 10.608 10.92
c. income by way of
long-term capital
gains referred to in
section 112A 10.4 11.44 11.96 11.96 11.96 10.4 11.648 10.4 10.608 10.92
d. short-term capital
gains under section
111A 15.6 17.16 17.94 17.94 17.94 15.6 17.472 15.6 15.912 16.38
e. any other long-term
capital gains [not be-
ing covered by sec-
tions 10(33), 10(36)
and 112A] 20.8 22.88 23.92 26 28.496 20.8 23.296 20.8 21.216 21.84
f. income by way of in-
terest payable by Gov-
ernment/Indian con-
cern on money bor-
rowed or debt in-
curred by Govern-
ment or Indian con-
cern in foreign cur-
rency (not being inter-
est referred to in
section 194LB or
194LC) 20.8 22.88 23.92 26 28.496 20.8 23.296 20.8 21.216 21.84
g. royalty [see Note 5] 10.4 11.44 11.96 13 14.248 10.4 11.648 10.4 10.608 10.92
h. royalty [not being roy-
alty of the nature re-
ferred to in (f) supra]
[see Note 6] –
❑ where the agree-
ment is made after
March 31, 1961
but before April 1,
1976 10.4 11.44 11.96 13 14.248 10.4 11.648 52 53.04 54.6
ment is made on or
after April 1, 1976 10.4 11.44 11.96 13 14.248 10.4 11.648 10.4 10.608 10.92
i. fees for technical ser-
vices [see Note 7] –
ment is made after
February 29, 1964
but before April 1,
1976 10.4 11.44 11.96 13 14.248 10.4 11.648 52 53.04 54.6

during the
financial year
2019-20 
10% + 15% + 25% + 37% + 4% 12% + 4% 2% + 5% +
Nature of payment

ment is made on or
after April 1, 1976 10.4 11.44 11.96 13 14.248 10.4 11.648 10.4 10.608 10.92
j. any other income 31.2 34.32 35.88 39 42.744 31.2 34.944 41.6 42.432 43.68
● Sec. 196B - Payment/
credit of income from
units (including long-
term capital gains on
transfer of such units) to
an offshore fund 10.4 11.44 11.96 13 14.248 10.4 11.648 10.4 10.608 10.92
● Sec. 196C - Payment/
credit of interest of for-
eign currency bonds or
GDR (including long-term
capital gains on transfer
of such bonds) (not be-
ing dividend referred to
in section 115-O) 10.4 11.44 11.96 13 14.248 10.4 11.648 10.4 10.608 10.92
● Sec. 196D - Payment/
credit of income from
securities (not being divi-
dend, short-term or long-
term capital gain) to
Foreign Institutional
Investors 20.8 22.88 23.92 26 28.496 20.8 23.296 20.8 21.216 21.84
Notes :
1. Under section 192 tax is deductible from salary. The payer shall calculate salary taxable in the hands of recipient. The amount
so determined is subject to tax deduction under section 192. Under section 192A, tax is deductible on taxable accumulated balance
of provident fund. Under section 195, tax is deductible only if income is taxable in the hands of recipient in India. In any other case,
gross payment or credit (without GST, if GST is shown separately) is subject to tax deduction.
2. In Category B, tax is deductible at the above rates or the rates specified in ADT agreements entered into by the Central Government
under section 90 (whichever is lower) [section 2(37A)(iii)].
3. Tax is not deductible under section 192A, 193, 194, 194A, 194D, 194DA, 194-I, or 194EE if the recipient makes a declaration in Form
No. 15G/15H under the provisions of section 197A [see para 289.8].
4. Under section 197 the recipient can apply the Assessing Officer in Form No. 13 to get a certificate of lower/no tax deduction. This
benefit is, however, not available if tax is deductible under section 192A, 194B, 194BB, 194E, 194EE, 194F, 194-IA, 194LB, 194LBA,
194LC, 194M, 196B, 196C or 196D [see para 289.7].
5. Royalty payable by Government or an Indian concern in pursuance of an agreement made by non-resident with the Government
or the Indian concern after March 31, 1976, where such royalty is in consideration for the transfer of all or any rights (including the
granting of a licence) in respect of copyright in any book on a subject referred to in the first proviso to section 115A(1A) to the Indian
concern or in respect of computer software referred to in the second proviso to section 115(1A), to a person resident in India.
6. Not being royalty of the nature referred to above, payable by Government or an Indian concern in pursuance of an agreement
made by non-resident with the Government or the Indian concern and where such agreement is with an Indian concern, the
agreement is approved by the Central Government or where it relates to matter included in the industrial policy, the agreement
is in accordance with that policy.
7. Fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by non-resident with
the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the
Central Government or where it relates to matter included in the industrial policy, the agreement is in accordance with that policy.
861 Rates for TCS Para 0.7
 RATES FOR TAX COLLECTION AT SOURCE

0.7 During the financial year 2019-20, tax shall be collected under section 206C at the rates given in the table (infra). If PAN
of collectee is not intimated to the collector, tax will be collected by virtue of section 206CC either at twice the rate specified
in the table (infra) or at the rate of 5 per cent, whichever is higher†.
Status of purchaser or licensee or lessee

Aggregate pay-
ment or credit Resident Non-resident individual/HUF/ Non-resident Non-domestic company
subject to TDS AOP/BOI/artificial juridical person co-operative
during the society/firm
financial year Any 0 – Rs. 50 Rs. 50 Rs. 1 Rs. 2 Above 0 – Rs. 1 Above 0 – Rs. 1 Rs. 1 Above
2019-20  amount lakh lakh – crore – crore – Rs. 5 crore Rs. 1 crore crore – Rs. 10
TCS TCS + TCS + TCS + TCS + TCS + TCS + TCS + TCS + TCS + TCS +
HEC : SC : SC : SC : SC : HEC : SC : HEC : SC : SC :
Different nature 4% 10% + 15% + 25% + 37% + 4% 12% + 4% 2% + 5% +
of goods HEC : HEC : HEC : HEC : HEC : HEC : HEC :
4% 4% 4% 4% 4% 4% 4%
Category A (sale of the follow-
ing) -
A1. Alcoholic liquor for
human consumption
(other than Indian made
foreign liquor) 1 1.04 1.144 1.196 1.3 1.4248 1.04 1.1648 1.04 1.0608 1.092
A2. Indian made foreign
liquor 1 1.04 1.144 1.196 1.3 1.4248 1.04 1.1648 1.04 1.0608 1.092
A3. Tendu leaves 5 5.2 5.72 5.98 6.5 7.124 5.2 5.824 5.2 5.304 5.46
A4. Timber obtained under a
forest lease 2.5 2.6 2.86 2.99 3.25 3.562 2.6 2.912 2.6 2.652 2.73
A5. Timber obtained by any
mode other than a forest
lease 2.5 2.6 2.86 2.99 3.25 3.562 2.6 2.912 2.6 2.652 2.73
A6. Any other forest produce
(not being timber/tendu
leaves) 2.5 2.6 2.86 2.99 3.25 3.562 2.6 2.912 2.6 2.652 2.73
A7. Scrap 1 1.04 1.144 1.196 1.3 1.4248 1.04 1.1648 1.04 1.0608 1.092
A8. Minerals, being coal or
lignite or iron ore 1 1.04 1.144 1.196 1.3 1.4248 1.04 1.1648 1.04 1.0608 1.092
Category B (grant of lease/li-
cense of the following) -
B1. Parking lot, toll plaza,
mining and quarrying 2 2.08 2.288 2.392 2.6 2.8496 2.08 2.3296 2.08 2.1216 2.184
Category C (not applicable with
effect from April 1, 2017) – – – – – – – – – – –
Category D (sale of the follow-
ing whether payment is received
by cheque or by any other
mode) –
D1. Motor vehicle of the
value exceeding Rs. 10
lakh 1 1.04 1.144 1.196 1.3 1.4248 1.04 1.1648 1.04 1.0608 1.092
† However, the provisions of section 206CC shall not apply in the case of a non-resident collectee who does not have any permanent establishment
in India.
Questions† set for CA
Appendix 2 (Intermediate) Examina-
tions and Answers
Intermediate, November 2019 (New)1

 Q.1 Mrs. X (63 years), a resident individual, is a qualified medical practitioner. She runs her own clinic. Income and
expenditure account of Mrs. X for the year ending March 31, 2020 is as under :
Expenditure Rs. Income Rs.
Salary to staff 1,20,000 Consultation fees 12,00,000
Administrative expenses 2,90,000 Salary received from True Care
Conveyance expenses 24,000 Hospitals (P.) Ltd. 1,80,000
Power and fuel 24,000 Rental income from house property 78,000
Interest on housing loan 1,00,000 Dividend from foreign companies 10,000
Interest on education loan for son 26,000
Amount paid to research association
approved under section 35 25,000
Net profit 8,59,000
14,68,000 14,68,000
1. She is working part-time with True Care Hospitals (P.) Ltd. Her salary is calculated as follows – Basic salary :
Rs. 13,000 per month, transport allowance : Rs. 2,000 per month.
Further, during previous year 2019-20, her son had undergone a medical treatment in True Care Hospitals (P.) Ltd. free of
cost. The hospital would have charged a sum of Rs. 60,000 for a similar treatment to unrelated patients.
2. She owns a residential house. Ground floor of the house is self-occupied by her while first floor has been rented out since
October 1, 2019. The reconstruction of the house was started on April 1, 2019 and was completed on September 30, 2019. The
monthly rent is Rs. 10,000. The tenant also pays Rs. 3,000 p.m. as power back-up charges. She takes a housing loan of Rs.
12 lakh on April 1, 2019. Interest on housing loan for the period April 1, 2019 to September 30, 2019 is Rs. 60,000 and for the
period October 1, 2019 to March 31, 2020 is Rs. 40,000. During the year, she also paid municipal taxes for the financial year
2018-19 Rs. 5,000 and for financial year 2019-20 Rs. 5,000.
3. Conveyance expenses include a sum of Rs. 12,000 incurred for conveyance from house to True Care Hospitals (P.) Ltd.
and vice-versa in relation to her employment.
4. Power and fuel expenses include a sum of Rs. 6,000 incurred for generator fuel for providing power back-up to the tenant.
5. Administrative expenses include a sum of Rs. 10,000 paid as municipal taxes for her house.
6. Clinic equipment details are –
Opening written down value of clinic equipment as on April 1, 2019 is Rs. 1,00,000 and fresh purchase (paid in cash) on
August 28, 2019 is Rs. 25,000.
7. She also paid tuition fee of Rs. 40,000 for her granddaughter, which has been debited to her capital account.
8. She availed a loan of Rs. 8,00,000 from bank for higher education of her son. She repaid principal of Rs. 50,000 and interest
of Rs. 26,000 during previous year 2019-20.
Compute net taxable income and net tax liability of Mrs. X for the assessment year 2020-21.
† Income-tax questions are solved as per law applicable for the assessment year 2020-21. GST questions are solved as per law amended up to
November 20, 2019.
1. There are two sections [Section A (income-tax) : Q. No. 1 to Q. No. 4, Section B (GST) : Q. No. 5 to Q. No. 8]. In Section A, Q. No. 1 is compulsory
(one has to attempt any 2 income-tax questions from the remaining 3 questions of Section A). In Section B, Q. No. 5 is compulsory (one has to
attempt any 2 GST questions from the remaining 3 questions of Section B).
862
863 Questions set for CA (Intermediate) Examinations & Answers
 A.1 Computation of income from profession –

Rs.
Net profit as per income and expenditure account 8,59,000
Adjustments –
Add: Interest on housing loan 1,00,000
Add: Interest on education loan 26,000
Less: Weighted deduction pertaining to amount paid to research association (50% of Rs. 25,000) (–) 12,500
Less: Salary of Mrs. X (taxable under the head “Salaries”) (–) 1,80,000
Less: Rental income (taxable under the head “Income from house property”) (–) 78,000
Less: Dividend income (taxable under the head “Income from other sources”) (–) 10,000
Add: Conveyance expenses 12,000
Add: Power back-up expenditure 6,000
Add: Municipal tax of the house 10,000
Less: Depreciation (15% of Rs. 1,00,000, purchase of equipment in cash exceeding Rs. 10,000 is not
eligible for depreciation) (–) 15,000
Income from house property –

Self-occupied unit Let-out unit
Rs. Rs.
Gross annual value Nil 60,000
Less: Municipal tax – 5,000
Net annual value Nil 55,000
Less: Deduction under section 24 –
Standard deduction Nil 16,500
Interest on borrowed capital [aggregate interest is Rs. 1,00,000 (i.e., Rs. 60,000 +
Rs. 40,000), interest pertaining to self-occupied unit : 50% of Rs. 1,00,000 but
subject to a maximum of Rs. 30,000] 30,000 50,000
Income from house property (–) 30,000 (–) 11,500
Computation of income of Mrs. X –
Rs.
Salary income (Rs. 1,80,000 – standard deduction : Rs. 50,000, hospital medical expenses not taxable) 1,30,000
Property income [Rs. (–) 30,000 + Rs. (–) 11,500] (–) 41,500
Income from other sources –
- Dividend from foreign companies 10,000
- Facility of power back-up to tenant (amount collected Rs. 18,000 – expenditure incurred Rs. 6,000) 12,000
Under section 80C (tuition fees of granddaughter, not eligible for deduction) Nil
Under section 80E (interest on education loan) 26,000
Net income 8,02,000
Tax on net income
Income-tax 70,400
 Q.2 Discuss the following –

 1. X (61 years) has set-up his business in Thailand and resides in Thailand since last 20 years. He owns a house property in
Bangkok, half of which is used as his residence and half is given on rent (rent received, converted in INR is Rs. 6,00,000).
The annual value of the house in Thailand is Rs. 50,00,000 (i.e., converted value in INR).
Questions set for CA (Intermediate) Examinations & Answers 864
He purchased a flat in Pune during financial year 2015-16, which has been given on monthly rent of Rs. 27,500 since July
1, 2018. The annual property tax of Pune flat is Rs. 40,000 which is paid by X whenever he comes to India. X last visited India
in July 2018. He has taken a loan of Rs. 15,00,000 from Union Bank of India for purchase of the Pune flat. The interest on the
loan for the financial year 2019-20 is Rs. 84,000. However, interest for the quarter ending March 2020 quarter has not yet been
paid by X.
He has a house in Jaipur which was sold in May 2015. In respect of this house he gets arrear of rent of Rs. 96,000 in February
2020 (not taxed earlier).
Apart from income given above, he gets the following income during the financial year 2019-20 –
- Profit from business in Thailand : Rs. 2,75,000.
- Interest on bonds of a Japanese Co. : Rs. 45,000 (out of which 50 per cent is received in India).
- Income from Apple Orchid in Nepal given on contract and the yearly contract fee of Rs. 5,00,000, for financial year
2019-20 is deposited directly by the contractor in Kathmandu branch of Union Bank of India in X’s bank account
maintained with Union Bank of India’s Pune Branch.
Compute the total income of X for assessment year 2020-21 chargeable to income tax in India.
 2. Examine and explain the TDS implications in the following cases along with reasons thereof, assuming that the deductees
are residents and having a PAN which they have duly furnished to the deductors –
- Y gets a sum of Rs. 1,75,000 as pre-mature withdrawal from Employees Provident Fund Scheme before continuous service
of 5 years on account of termination of his employment due to ill-health.
- A sum of Rs. 42,000 has been credited as interest on recurring deposit by a banking company to the account of Z
(63 years).
- Ms. A gets a lucky draw prize of Rs. 21,000. The lucky draw is organized by Maximus Retail Ltd. for its customer.
- Finance Bank Ltd. sanctioned and disbursed a loan of Rs. 10 crore to B Ltd. on March 31, 2020. B Ltd. pays a sum of Rs.
1,00,000 as service fee to Finance Bank Ltd. for processing the loan application.
- C works in a private company. He is on deputation for 3 months (from December 2019 to February 2020) at Hyderabad
where he pays a monthly house rent of Rs. 52,000 for 3 months (total rent : Rs. 1,56,000). Rent is paid by him on the first
day of the relevant month.
 A.2 Pointwise answer –
 1. Computation of income of X - X last came to India during July 2018. During the previous year 2019-20, he does not come to
India. Consequently, for the previous year 2019-20 (i.e., assessment year 2020-21) X is non-resident in India. Tax treatment
of different income given in the problem, is as follows –
- Thailand business - Nothing is taxable in India.
- Bangkok property - Nothing is taxable in India.
- Pune property - Income from Pune property is taxable as follows –
Rs.
Annual value (Rs. 27,500 × 12) 3,30,000
Less: Municipal tax (not paid during the previous year) Nil
Interest on borrowed capital (deductible on accrual basis) 84,000
Income from Pune property 1,47,000
- Arrears of rent of Jaipur property - It is chargeable to tax. Amount taxable is Rs. 67,200 (i.e., Rs. 96,000 – standard deduction
@ 30%).
- Interest on bonds of Japanese company - Rs. 22,500 (being 50% of Rs. 45,000 received in India is taxable.
- Apple Orchid income from Nepal - Income is generated in Nepal. It is deposited in Nepal branch of Union Bank of India.
Consequently, nothing is taxable in the hands of X (who is non-resident).
Rs.
Income from house property (Rs. 1,47,000 + Rs. 67,200) 2,14,200
Net income 2,36,700
 2. Tax deduction at source - TDS provisions pertaining to given cases, are as follows –
- Premature withdrawal of provident fund - Since nothing is taxable in the hands of Y, TDS is not applicable under section 192
or 192A.
-Interest on recurring deposit - Recipient of interest is Z, a senior citizen. In the case of a senior citizen, interest on deposits,
payable by a bank, is not subject to TDS if such interest during the financial year does not exceed Rs. 50,000. Consequently,
TDS is not applicable in this case.
- Lucky draw prize - It is subject to TDS under section 194B (amount of TDS is Rs. 6,300, being 30% of Rs. 21,000).
- Processing fees to bank - It is not subject to TDS.
- Rent exceeding Rs. 50,000 per month - Tax is deductible under section 194-IB. In the given case, tax is deductible on February
1, 2020 @ 5% (amount of TDS being Rs. 7,800, i.e., 5% of Rs. 1,56,000).
 1. X is in the business of operating goods vehicles. On April 1, 2019, X has the following vehicles –
Vehicle Gross vehicle weight (in kgs.) Date of purchase Put to use during financial year 2019-20
A 8,500 April 2, 2018 Yes
B 13,000 May 15, 2018 Yes
C 12,000 August 4, 2018 No (as under repairs)
During previous year 2019-20, he purchases the following vehicles –

Vehicle Gross vehicle weight (in kgs.) Date of purchase Date on which put to use
D 11,000 April 30, 2019 May 10, 2019
E 15,000 May 15, 2019 May 18, 2019
Compute income of X under section 44AE for assessment year 2020-21.

 2. Y provides the following information pertaining to securities transferred by him during the previous year 2019-20 –
- Y transfers 10,000 shares in A Ltd. on April 5, 2019 at the rate of Rs. 650 per share A Ltd. is a listed company. These shares
were acquired by Y on April 5, 2016 at the rate of Rs. 100 per share. Securities transaction tax (STT) is paid both at the time
of acquisition as well as at the time of transfer which is affected through a recognized stock exchange. On January 31, 2018,
the shares in A Ltd. are traded on a recognized stock exchange (highest price : Rs. 300 per share, average price : Rs. 290
per share, lowest price : Rs. 280 per share).
- Y transfers 1,000 units of B Mutual Fund on April 20, 2019 at the rate of Rs. 50 per unit. B Mutual Fund is an equity oriented
fund. These units were acquired by Y on April 15, 2017 at the rate of Rs. 10 per unit. STT was paid only at the time of
transfer of these units. On January 31, 2018, the net asset value (NAV) of the units of B Mutual Fund is Rs. 55 per unit.
- Y transfers 100 shares in C Ltd. on April 25, 2019 at the rate of Rs. 200 per share. C Ltd. is an unlisted company. These
shares were issued by the company as bonus shares on September 30, 1997. The fair market value of these shares as on
April 1, 2001 is Rs. 50 per share.
Calculate the amount chargeable to tax under the head “Capital gains” and tax liability thereon assuming that the other
incomes of Y exceeds the maximum amount not chargeable to tax (ignore surcharge and cess).
 3. Z Investments (P.) Ltd. is incorporated during previous year 2017-18 having a paid-up capital of Rs. 10 lakh. In order to
increase its capital, the company further issues, 1,00,000 shares (having face value of Rs. 100 each) on August 1, 2019. Find
out the tax consequences for Z Investments (P.) Ltd. in the following three situations –
Situation 1 - Fair market value of these shares is Rs. 85 per share on August 1, 2019. However, Z Investments (P.) Ltd. issues
these shares at face value Rs. 100 per share.
Situation 2 - Fair market value on August 1, 2019 is Rs. 85 per share. However, shares are issued by the company at the rate
of 105 per share
Situation 3 - Fair market value on August 1, 2019 is Rs. 120 per share. However, shares are issued by the company at the rate
of 105 per share.
 1. Computation of income of X under section 44AE –
Vehicle Gross weight (in kgs.) Is it heavy goods vehicle Deemed income under section 44AE Income
Rs. Rs.
A 8,500 No 7,500 per month 90,000
B 13,000 Yes 1,000 per month per ton 1,56,000
C 12,000 No 7,500 per month 90,000
D 11,000 No 7,500 per month 90,000
E 15,000 Yes 1,000 per month per ton for 11 months 1,65,000
Total 5,91,000
 2. Capital gain of Y –
Shares in A Ltd. B Mutual Fund Shares in C Ltd.
Rs. Rs. Rs.
Full value of consideration 65,00,000 50,000 20,000
Less: Cost of acquisition of shares in A Ltd. (highest price on
January 31, 2018 : Rs. 300 × 10,000) 30,00,000 – –
Less: Cost of acquisition of mutual fund units (FMV on January
31, 2018 : Rs. 55, cost of acquisition cannot be more than sale
consideration : Rs. 50) – 50,000 –
Less: Cost of acquisition of shares in C Ltd. (Rs. 50 × 100 shares
× 289 ÷ 100) – – 14,450
Long-term capital gain 35,00,000 Nil 5,550
Tax under section 112A (10% of long-term capital gain in
excess of Rs. 1,00,000) 3,40,000 Nil –
Tax under section 112 (20% of long-term capital gain) – – 1,110
 3. Tax consequences for Z Investments (P.) Ltd. - Section 56(2)(viib) is applicable if a company (not being a company in which
the public are substantially interested) issues shares to residents at premium. In such a case, if issue price is more than fair
market value of shares, then income is taxable in the hands of recipient company under section 56(2)(viib). Amount taxable
is the excess of amount received for issue of such shares over fair market value of shares. Keeping in view this legal position,
tax implication in different situations given in the problem will be as follows –
Situation 1 - Section 56(2)(viib) is not applicable, as shares are issued at par (not at premium).
Situation 2 - Shares are issued at premium. Issue price is more than fair market value. Amount taxable in the hands of Z
Investments (P.) Ltd. under section 56(2)(viib) is Rs. 20,00,000 [i.e., 1,00,000 shares × (issue price : Rs. 105 per share – fair
market value : Rs. 85 per shares)].
Situation 3 - Shares are issued at premium. Issue price is not more than fair market value. Nothing is, therefore, taxable in
the hands of Z Investments (P.) Ltd. under section 56(2)(viib).
 1. X (a noted bhajan singer of Rajasthan) and his wife Mrs. X furnish the following information pertaining to the assessment
year 2020-21 –
Rs.
Professional income of X (from bhajan singing) (computed) 5,65,000
Salary income of Mrs. X (computed) 3,80,000
Loan received by Mrs. X from Y (P.) Ltd. [Mrs. X holds 35 per cent shares in Y (P.) Ltd. The company has
incurred losses since its inception 2 years back] 2,50,000
Income of their minor son Z from winning singing reality show on TV 2,50,000
Cash gift received by Z from friend of X on winning the show 21,000
Interest income received by minor married daughter A from deposit with Y (P.) Ltd. 40,000
Compute total taxable income of X and Mrs. X for the assessment year 2020-21.
 2. B gives the following information pertaining to his income/loss for the previous year 2019-20 –
Rs.
Salary income (computed) 3,60,000
Income from house property (computed) –
- House I (computed rental income) 1,20,000
- House II (computed rental income) (–) 3,40,000
Business income (computed) –
- Business P 2,30,000
- Business Q (–) 12,000
- Business R (speculative business) 15,000
- Business T (speculative business) (–) 25,000
Rs.
Income from other sources (computed) –

- From card games 16,000
- From owning and maintenance of race horses (–) 7,000
- Interest on securities 5,000
Find out the gross total income of B for assessment year 2020-21.
 3. What are the clarifications made by CBDT with respect to section 206C(1F) relating to following issues –
- Whether TCS on sale of motor vehicle is applicable only to luxury car ?
- Whether TCS is applicable on each sale or aggregate value of sale of motor vehicle, exceeding Rs.10 lakh ?
- Whether TCS is applicable in case of an individual ?
- Whether TCS on sale of motor vehicle is at retail level also or only by manufacturer to distributor or dealer ?
 4. Elaborate the conditions, non-fulfilment of which would render a return of income filed by an assessee not maintaining
regular books of accounts, defective.
 1. Computation of income –
X Mrs. X Minor son Z Minor married
daughter A
Rs. Rs. Rs. Rs.
Salary income – 3,80,000 – –
Income from profession 5,65,000 – – –
- Loan from Y (P.) Ltd. in which Mrs. X has substantial interest
(it is not deemed as dividend, as company does not have
accumulated profits) [now a days, even deemed dividend is
exempt under section 10(34)] – – – –
- Winning of minor son Z from TV show – – 2,50,000 –
- Cash gift received by Z (as the amount of gift does not exceed
Rs. 50,000, nothing is taxable) – – – –
- Interest income of minor daughter A [Rs. 40,000 – exemption
under section 10(32) : Rs. 1,500] 38,500 – – –
Total 6,03,500 3,80,000 2,50,000 Nil
 2. Computation of income of B –
Rs.
Income from house property [House I : Rs.1,20,000 + House II : Rs. (–) Rs. 3,40,000] (–) 2,20,000
Business income [Business P : Rs. 2,30,000 + Business Q : Rs. (–) 12,000] 2,18,000
Speculative business income [Business R : Rs. 15,000 + Business T : Rs. (–) 25,000, speculative loss of
Rs. 10,000 will be carried forward] Nil
- Card games 16,000
- Owning and maintenance of race horses (loss of Rs. 7,000 will be carried forward) Nil
- Interest on securities 5,000
Gross total income (house property loss of Rs. 2,00,000 can be set off against other incomes, balance
loss will be carried forward) 3,99,000
 3. Clarifications issued by CBDT for the application of section 206C(1F) –
Luxury car - TCS under section 206C(1F) is applicable if the amount of sale consideration of a motor vehicle is more than Rs.
10 lakh (irrespective of the fact whether the motor vehicle is a luxury car or any other car).
Each sale or aggregate sale - The above provision is applicable on each sale of motor vehicle exceeding Rs. 10 lakh (and not on
the aggregate sale made during the year).
When purchaser is individual - The above provision is applicable even if purchaser is an individual.
Retail sale or sale by manufacturer to distributor - The above tax collection provision is applicable only in the case of sale of motor
vehicles in transactions of retail sales. In other words, the above provision is not applicable on sale of motor vehicles by
manufacturers to dealers/distributors.
 Defective return - See para 248.
 Q.5 X, a GST registered taxable person under regular scheme, provides the following information in respect of supplies made
by it during April 2019 –
Rs.
Information pertaining to outward supply –
Inter-State supply of goods 1,00,000
Intra-State supply of 500 packets of detergent at the rate of Rs. 400 each along with a plastic bucket
worth Rs. 100 each with each packet, being a mixed supply (rate of GST on detergent is 18 per cent
and on plastic bucket is 28 per cent)
Supply of online educational journals to Pinnacle, a private coaching centre which provides tuitions to
students of class X and XII (being intra-State supply) 50,000
X has also received the following inward supplies –
Inter-State supply of goods (out of which invoice for goods worth Rs. 20,000 is missing and no other
taxpaying document is available) 70,000
Repairing of bus with seating capacity of 20 passengers used to transport his employees from their
residence (being intra-State supply) 50,000
Details of opening balances of ITC as on April 1, 2019 –
CGST 5,000
SGST 5,000
IGST 40,000
Additional information –
- Rate of GST in respect of all inward and outward supplies (except given above) is 18 per cent.
- All figures mentioned above are exclusive of GST.
- All the conditions for availing the input tax credit [including conditions of rule 36(4)] have been fulfilled except
specifically given and X is not eligible for any threshold exemption.
Compute the minimum net GST payable in cash by X for the month of April 2019.
 1. Computation of income –
IGST CGST SGST
Rs. Rs. Rs.
Inter-State supply of goods (18% of Rs. 1,00,000) 18,000 – –
Intra-State supply of goods (value of supply Rs. 400 × 500 : Rs. 2,00,000) (9%
of Rs. 2,00,000, 9% of Rs. 2,00,000) – 18,000 18,000
Intra-State supply of goods (value of supply Rs. 100 × 500 : Rs. 50,000) (14% of
Rs. 50,000, 14% of Rs. 50,000) – 7,000 7,000
Online education journals to private coaching centre (exemption is not avail-
able, as recipient of supply is a private coaching institute) (9% of Rs. 50,000,
9% of Rs. 50,000) – 4,500 4,500
Total 18,000 29,500 29,500

IGST CGST SGST
Rs. Rs. Rs.
Opening balance on April 1, 2019 40,000 5,000 5,000
Add: Inward supply during April 2019 –
- Inter-State purchase of goods (Rs. 70,000 – Rs. 20,000) (18% of Rs. 50,000) 9,000 – –
- Intra-State inward supply of bus repairing service (9% of Rs. 50,000, 9%
of Rs. 50,000) – 4,500 4,500
Input tax credit available on April 30, 2019 49,000 9,500 9,500
Computation of GST payable –
IGST CGST SGST

Rs. Rs. Rs.
Less: IGST on inward supply (balance IGST : Rs. 49,000 – Rs. 18,000
= Rs. 31,000) 18,000 – –
Less: IGST – 29,500 1,500
Less: CGST on inward supply (balance CGST : Rs. 9,500 – nil = Rs. 9,500) – Nil –
SGST payable for April 2019 is Rs. 18,500. Unutilised input tax credit of CGST of Rs. 9,500 cannot be utilised for payment
of Rs. 31,000 can be utilised in any manner for payment of CGST and SGST. Consider the following calculations –
IGST CGST SGST
Rs. Rs. Rs.
Less: IGST on inward supply (balance IGST : Rs. 49,000 – Rs. 18,000
= Rs. 31,000) 18,000 – –
Less: IGST (balance of Rs. 31,000 to be utilised to the extent of Rs. 20,000*
towards payment of CGST and the balance of Rs. 11,000 towards payment
of SGST) – 20,000 11,000
* It can be utilised (in any manner) for payment of CGST and SGST. As no restriction is imposed by the relevant legal
provision as given in rule 88A, the amount to be utilised towards payments of CGST, in this case, should not be more than
Rs. 20,000 (i.e., Rs. 29,500 – Rs. 9,500) to make minimum payment in cash.
 1. X of Assam, provides the following information for the preceding financial year 2018-19. Find out the aggregate turnover
for the purpose of eligibility of Composition Scheme and determine whether (or not) he is eligible for Composition Scheme
for the financial year 2019-20.
Rs. in lakh
Value of taxable outward supplies (out of which Rs. 10 lakh is in the course of inter-State transactions) 50
Value of exempt supplies (it includes interest of Rs. 30 lakh on loans and advances) 70
Value of inward supplies on which X is liable to pay tax under reverse charge 5
Value of exports 5
The above figures are exclusive of GST.

 2. P & Q Publishers, a registered dealer in India, pays an advance Rs. 50,000 to Z, an author, for the copyright covered under
section 13(1)(a) of the Copyright Act, 1957, of his original literary work on September 5, 2019. It pays the balance of Rs.
1,50,000 on December 12, 2019. Find out the time of supply if Z raises the invoice on –
- October 6, 2019, or
- December 17, 2019

 1. Computation of aggregate turnover for the purpose of eligibility of Composition Scheme –
Rs. in lakh
Value of taxable outward supplies of the preceding year (even inter-State transactions are included) 50
Value of exempt supplies of the preceding year (Rs. 70 lakh – Rs. 30 lakh) 40
Value of inward supplies on which X is liable to pay tax under reverse charge (not to be included) Nil
Value of exports 5
Aggregate turnover 95
Eligibility for Composition Scheme for the current year - Aggregate turnover of the preceding year is Rs. 95 lakh. It does not exceed
the threshold limit of Rs. 1.5 crore. Consequently, X has an option to opt for Composition Scheme for the financial year
2019-20. However, he should not make inter-State supplies. Moreover, goods held in stock by X on April 1, 2019 (when he
becomes eligible for Composition Scheme) should not have been purchased in the course of inter-State trade/commerce.
 2. Time of supply - Supply of service by an author to his publisher is covered by reverse charge mechanism. Time of supply
of service (which is covered by reverse charge mechanism) is determined on the basis of the following –
Criteria 1 The date of payment as entered in the books of account of the recipient of service.
Criteria 2 The date immediately following 60 days from the date of issue of invoice by the supplier (i.e., invoice
date + 61).
Time of supply Criteria 1 or Criteria 2, whichever is earlier.
In the given problem, time of supply is as follows –

Date of invoice : October 6, 2019 Date of invoice : December 17, 2019
Advance payment : Balance : Advance payment : Balance :
Rs. 50,000 Rs. 1,50,000 Rs. 50,000 Rs. 1,50,000
Date of payment September 5, 2019 December 12, 2019 September 5, 2019 December 12, 2019
Date of invoice + 61 days December 6, 2019 December 6, 2019 February 16, 2020 February 16, 2020
Time of supply September 5, 2019 December 6, 2019 September 5, 2019 December 12, 2019

 1. Explain the registration requirements under GST law in the different cases given below –
- X of Jammu engaged in the business of supplying tobacco based pan masala with an aggregate turnover of Rs. 24 lakh.
- Y of Mizoram is engaged in the supply of papers with an aggregate turnover of Rs. 13 lakh.
- Z of Meghalaya is engaged in the supply of papers with an aggregate turnover of Rs. 13 lakh.
 2. A, a consignor, is required to move goods from Ahmedabad (Gujarat) to Nadiad (Gujarat). He appoints B Transporter for
movement of goods. B Transporter moves the goods from Ahmedabad (Gujarat) to Kheda (Gujarat). For completing the
movement of goods from Kheda (Gujarat) to Nadiad (Gujarat), B Transporter now hands over the goods to C Transporter.
Explain the procedure regarding e-way bill to be followed by consignor and transporter as per provisions of GST law and
rules made thereunder.
 1. Registration requirement –
X of Jammu Threshold limit in this case is Rs. 20 lakh. Registration is required.

Y of Mizoram Threshold limit in this case is Rs. 10 lakh. Registration is required.
Z of Meghalaya Threshold limit in this case is Rs. 20 lakh. Registration is not required.
 2. E-way Bill - See para 561.

 1. Explain in brief the conditions to be fulfilled by a registered person under GST law for availing the option to pay
concessional tax at the rate of 6 per cent under GST as per the provisions of Notification No. 2/2019 CT(R) dated March 7,
2019, with effect from April 1, 2019.
 2. Discuss the provisions of section 39(9) relating to rectification of errors/omissions in GST returns already filed and also
state its exceptions. State the time-limit for making such rectification.
 3. Explain the consequences, if the taxable person under GST law files the GST return under section 39(1), but does not make
payment of self-assessment tax.
 4. State the items which are to be debited to electronic liability register of the taxable person under the CGST Act, 2017 and
rules thereunder.
 1. Alternative Composition Scheme - See paras 517 to 519.
 2. Rectification of errors - See para 552.6.
 3. Non-payment of self-assessment tax - Return cannot be uploaded without payment of GST.
 4. Electronic liability ledger - See para 554.
Intermediate (IPC), November 2019 (Old)1
 Q.1 Ms. X (61 years), a resident individual, provides the following information for the previous year 2019-20 –
1. She is partner in YZ & Associates and gets the following from the firm –
Rs.
Share of profit from the firm 31,100
Interest on capital @ 15 per cent per annum 2,85,000
Rent for an office 1,44,000
Salary as working partner (fully allowed in the hands of the firm) 1,20,000
2. She works as a sales manager in her friend’s showroom for 2 months at a salary of Rs. 30,000 per month.
3. She starts her own boutique on August 1, 2019. The net profit as per profit and loss account for the period of initial 8 months
is Rs. 3,50,000. The following items are debited to profit and loss account –
- Advance income-tax paid : Rs. 90,000
- Personal drawings : Rs. 80,000
The following items are credited to profit and loss account –
- Interest on savings bank account with PNB : Rs. 27,000
- Interest on savings account with post office : Rs. 11,000
- Interest on FD with Canara Bank : Rs. 25,000
4. She owns a house property which is sold in June 2019 for Rs. 80 lakh. This property is purchased for Rs. 31.5 lakh in January
2003. She gets Rs. 90,000 by way of arrear rent in respect of the said property in March 2020.
5. She makes the following investments –
- Life insurance premium on a policy in the name of her husband Rs. 87,000 (policy was taken on July 1, 2012 and the sum
assured is Rs. 8,00,000).
- Health insurance premium on a policy covering her mother aged 83. She is not dependent on Ms. X. Premium paid by
cheque is Rs. 54,000.
Compute the total income and the tax liability of Ms. X for the assessment year 2020-21.
 A.1 Computation of income of Ms. X –
Rs. Rs.
Income from salary (Rs. 30,000 × 2) 60,000
Income from salary 10,000
- Rent of office from firm (Rs. 1,44,000 – standard deduction @ 30% : Rs. 43,200) 1,00,800
- Arrears of rent (Rs. 90,000 – standard deduction @ 30% : Rs. 27,000) 63,000
Rs. Rs.
Business income
- Income from boutique (Rs. 3,50,000 + disallowance of advance tax : Rs. 90,000 + dis-
allowance of drawings : Rs. 80,000 – saving bank interest : Rs. 27,000 – post office
interest : Rs. 11,000 – FD interest : Rs. 25,000) 4,57,000
- Income from firm (interest on capital : Rs. 2,85,000 × 12 ÷ 15 + salary : Rs. 1,20,000) 3,48,000
Capital gains
- Full value of consideration 80,00,000
- Less: Indexed cost of acquisition (Rs. 31,50,000 × 289 ÷ 105) 86,70,000
Capital gains (to be carried forward) (–) 6,70,000
- Savings bank interest from PNB 27,000
- Post office savings bank interest [Rs. 11,000 – exemption under section 10(15)(i) :
Rs. 3,500] 7,500
- FD interest from Canara Bank 25,000
Less: Deductions
Under section 80C (life insurance premium : Rs. 87,000 subject to maximum of 10% of
sum assured) 80,000
Under section 80D (mediclaim insurance premium) 50,000
Under section 80TTB (interest from bank/post office, subject to maximum of Rs. 50,000) 50,000
Net income 8,58,300
 Q.2 Miss B, a Chinese citizen, gets married to A of India in Beijing on February 3, 2019. She comes to India for the first time
on February 14, 2019. She leaves for China on August 11, 2019. She returns to India again on February 20, 2020.
She gets the following gifts from her relatives and friends during April 1, 2019 to March 31, 2020 in India –
Rs.
From parents of husband 71,000
From married sister of husband 21,000
From 2 very close friends of her husband (Rs.1,41,000 and Rs. 1,21,000) 2,62,000
Determine her residential status and compute the total income chargeable to tax along with the amount of tax payable on
such income for the assessment year 2020-21. Is there any change in answer if she has returned to India again on January
20, 2020 (instead of February 20, 2020)?
 A.2 Residential status of Miss B –
If she returns to India If she returns to India

on February 20, 2020 on January 20, 2020
April 2019 30 days 30 days
May 2019 31 days 31 days
June 2019 30 days 30 days
July 2019 31 days 31 days
August 2019 11 days 11 days
January 2020 Nil 12 days
February 2020 10 days 29 days
March 2020 31 days 31 days
Total 174 days 205 days
Residential status of Miss B for the assessment year 2020-21 Non-resident Resident but not
ordinarily resident
Computation of income of Miss B – Rs. Rs.
Gift from husband (not taxable) Nil Nil
Gift from husband’s sister (not taxable) Nil Nil
Gift from close friends of husband 2,62,000 2,62,000
Net income 2,62,000 2,62,000
Income-tax 600 600
Less: Rebate under section 87A Nil 600
Tax after rebate 600 Nil
Add: Health and education cess 24 Nil
Tax liability (rounded off) 620 Nil
 Q.3 X gives the following information pertaining to the previous year ending March 31, 2020 –
- He retires on December 31, 2019 at the age of 58 years (after service of 25 years and 9 months), from a private company
in Delhi.
- He is paid a monthly salary of Rs. 25,000. Besides, he gets house rent allowance of Rs. 6,000 per month (rent paid by him
is Rs. 6,500 per month up to the date of retirement).
- On retirement, X is paid gratuity of Rs. 3,50,000. He is covered by the Payment of Gratuity Act, 1972.
- X has accumulated leave of 15 days per annum during the period of his service. This is encashed by him at the time of
his retirement (amount received on encashment of leave is Rs. 3,15,000). Employer allows 30 days leave per annum.
- The employer company gives him a gift voucher of Rs. 5,000 at the time of his retirement. His colleagues also gifted him
a mobile phone of Rs. 50,000 from their own contribution.
Compute salary income of X for the assessment year 2020-21.
 A.3 Computation of salary income of X (on the assumption that salary becomes due on the last day of each month) –
Rs.
Basic salary (Rs. 25,000 × 9) 2,25,000
Gratuity [see Note 2] 25,000
Leave encashment [see Note 3] 65,000
Gift voucher by employer (up to Rs. 5,000 is exempt) Nil
Mobile phone gifted by colleagues (not taxable as salary, as it is not given by employer) Nil
Notes –
1. House rent allowance - It is exempt under section 10(13A) on the basis of the following –
- Rs. 12,500 per month (being 50% of “salary”)
- Rs. 6,000 per month (being house rent allowance)
- Rs. 4,000 per month (being the excess of rent paid over 10% of salary)
Rs. 4,000 per month (being the least of the above) is exempt. Amount taxable will be Rs. 2,000 per month for 9 months (which
comes to Rs. 18,000).
2. Gratuity - Gratuity is exempt under section 10(10)(ii) on the basis of following –
- Rs. 3,25,000 (15 days salary which is Rs. 12,500 × length of service : 26 years)
- Rs. 20,00,000
- Rs. 3,50,000 (being the amount paid as gratuity)
The lowest of the above 3 figures is Rs. 3,25,000 which is exempt under section 10(10)(ii) and the balance of Rs. 25,000 is
chargeable to tax.
3. Leave encashment - It is exempt under section 10(10AA)(ii) on the basis of the following –
- Rs. 3,12,500 [being cash equivalent of earned leave standing to the credit of X at the time of retirement (i.e., 15 days as given
in the problem × length of service : 25 years (fraction is ignored) × Rs. 25,000 (being “average salary”) ÷ 30]
- Rs. 2,50,000 (being “average salary” of 10 months)

- Rs. 3,00,000 (being the amount notified by the Government)
- Rs. 3,15,000 (being the amount of leave encashment received from employer)
The lowest of the above 3 figures is Rs. 2,50,000 which is exempt under section 10(10AA)(ii) and the balance of Rs. 65,000
 1. X & Co., a partnership firm, starts its textile business on April 1, 2019. During the previous year 2019-20, it appoints the
following persons –
Date of appointment No. of employees Designation Emoluments
(in Rs. per person/month)
April 1, 2019 25 Accounting and office staff 22,000
May 1, 2019 25 Technical staff 25,200
August 1, 2019 100 Supervisors 28,000
September 1, 2019 200 Helpers 22,000
Total 350
Determine the amount of deduction available, if any, for the assessment year 2020-21, if the turnover of X & Co. for the
previous year 2019-20 is Rs. 4 crore and tax audit under section 44AB is applicable and all the employees participate in the
recognised provident fund. Does it make any difference if the business of X & Co. is of manufacture of leather products
instead of textile ? Assume that all the requirements under the relevant section, relating to the aforesaid deduction, have been
fulfilled.
 2. Ms. Y (32 years), a resident individual, furnishes the following information for the year ending on March 31, 2020 –
Rs.
Income from business of handloom trading 2,65,000
Long-term capital gain on transfer of jewellery 1,55,000
Long-term capital loss on transfer of shares listed in recognized stock exchange (STT paid both at the
time of sale and purchase of shares) 1,25,000
Ms. Y also has a brought forward loss of Rs. 4,500 of assessment year 2011-12 pertaining to handloom business and a brought
forward house property loss of Rs. 2,20,000 pertaining to the assessment year 2019-20.
Compute the total income of Ms. Y for the assessment year 2020-21 and the amount of loss, if any, to be carried forward.
 1. Amount deductible in the case of X & Co. –
Deduction available under different sections –
Section 37(1) Section 80JJAA
Textile business Manufacture of
leather products
Rs. Rs. Rs.
Accounting and office staff (Rs. 22,000 × 12 months × 25) 66,00,000 19,80,0001 19,80,0001
Technical staff (Rs. 25,200 × 11 months × 25) 69,30,000 Nil2 Nil2
Supervisors (Rs. 28,000 × 8 months × 100) 2,24,00,000 Nil2 Nil2
Helpers (Rs. 22,000 × 7 months × 200) 3,08,00,000 Nil3 92,40,0001
Total 6,67,30,000 19,80,000 1,12,20,000
Notes –
1. Amount deductible under section 80JJAA is 30% of total emoluments [i.e., 30% of amount deductible under section 37(1)
in this case].
2. If total emoluments payable to an employee exceeds Rs. 25,000 per month, deduction under section 80JJAA is not available.
3. Deduction under section 80JJAA is not available, in the case of an employee who is employed for a period of less than 240
days during the previous year. However, this period is 150 days in the case of an assessee who is engaged in manufacture
of leather products. Helpers are engaged during the previous year for 213 days. Consequently, deduction pertaining to
helpers is not available under section 80JJAA if X & Co. is engaged in textile business (conversely it is available if it is engaged
in leather manufacturing business).
 2. Computation of income of Ms. Y –
Rs. Rs.
Income from business of handloom trading 2,65,000
Long-term capital gain on transfer of jewellery 1,55,000
Less: Long-term capital loss on transfer of shares 1,25,000 30,000
Net income 2,95,000
Notes –
1. Brought forward business loss of Rs. 4,500 of the assessment year 2011-12 can be carried forward till the assessment year
2019-20 (i.e., up to 8 assessment years). It cannot be set off against income of the assessment year 2020-21.
2. Brought forward house property loss can be set off in the subsequent year only against income from house property.
 1. X, a resident individual, transfers a plot of land on March 20, 2020 and gets long-term capital gain of Rs. 5,00,000. Since
he has no other income during the previous year 2019-20, he does not pay any advance tax instalment. Calculate the amount
of advance tax payable by X and advise X suitably, so that the liability on late payment does not arise.
 2. Examine the applicability of tax deduction at source provisions, the rate and amount of tax deduction in the following cases
for the financial year 2019-20 –
- An insurance company pays Rs. 45,000 as insurance commission to its agent Y.
- Z & Co. (firm), engaged in wholesale business, gives a contract for construction of its godown building to A. The firm
pays an aggregate of Rs. 10,00,000 to A during the year.
- B & Co., engaged in real estate business, conducted a lucky dip and gives a Maruti car worth Rs. 5,00,000 to the prize
winner.
- An advertisement company pays Rs. 5,00,000 to a cricketer, P from England, for working in an advertisement film.
 3. Explain with brief reasons, whether the return of income can be revised under section 139(5) in the following cases –
- Defective or incomplete return filed under section 139(9).
- Return already revised once under section 139(5).
- Return of loss filed under section 139(3).
 1. Advance tax payable by X - Age of X is not given in the problem. The following calculation are given on the assumption that
(a) X is not a senior citizen, and (b) X is a senior citizen –
If X is not a If X is a
senior citizen senior citizen
Rs. Rs.
Any other income Nil Nil
Net income 5,00,000 5,00,000
Income-tax on net income [20% of (Rs. 5,00,000 – Rs. 2,50,000), 20% of
(Rs. 5,00,000 – Rs. 3,00,000) 50,000 40,000
Less: Rebate under section 87A 12,500 12,500
Balance 37,500 27,500
Tax liability 39,000 28,600
Advance tax payable (it can be paid at any time on or before March 31, 2020) 39,000 Nil
Note - In the case of a senior citizen, advance tax payment is not required [by virtue of section 207(2)], if the taxpayer does
not have any income chargeable under the head “Profits and gains of business and profession”. Consequently, advance tax
is not payable if X is a senior citizen. Conversely, if X is not a senior citizen, advance tax on long-term capital gain which
arises after March 15 of the financial year should be paid on or before March 31 of the financial year.
 2. Tax deduction at source - These provisions are given below –
Insurance commission - Tax is deductible under section 194D (commission exceeds the threshold limit of Rs. 15,000). Amount
of TDS is Rs. 2,250 (i.e., 5% of Rs. 45,000).
Payment to a contractor - Tax is deductible under section 194C @ 1% (amount of TDS will be Rs. 10,000).
Lucky dip draw - Tax is deductible under section 194B @ 30% (it comes to Rs. 1,50,000).
Payment to non-resident sportsman - Tax is deductible under section 194E @ 20% (it comes to Rs. 1,00,000).
 3. Revision of income-tax return - Return can be revised within the parameters of section 139(5) at any time after submission
of the return but before the end of relevant assessment year (or before the completion of assessment, whichever is earlier).
Even a return of loss can be revised. Revision of a return (which has been revised earlier) is also possible. Moreover, a
defective return (after rectifying the defect) can be revised. However, a defective return (defect is pointed out by the
Assessing Officer but not rectified by the assessee) which is declared as invalid, cannot be revised.
 Q.6 X Institute of Management (XIM), a private college, is registered under GST in the State of Punjab. XIM gives the
following information pertaining to the month of April 2019 –
Rs.
Tuition fee received from students pursuing management courses recognised by Punjab University,
established by an Act of State Legislature 18,00,000
Tuition fee received from students pursuing undergraduate courses recognised by Stan University,
London under dual degree programmes 8,50,000
Fee received from students of competitive exam training academy run by a department of XIM 5,40,000
Mess fees received from students (mess is run by XIM on its own) 3,20,000
Amount paid to local municipal corporation for premises taken on rent for conducting coaching classes
for competitive exams 50,000
Legal services availed from Y & Co., a partnership firm of advocates, for the competitive exam training
academy (intra-State transaction) 20,000
- Rate of CGST, SGST and IGST is 9 per cent, 9 per cent and 18 per cent (for both outward and inward supplies).
- All the amounts given above are exclusive of taxes wherever applicable.
- All the conditions necessary for availing the ITC have been fulfilled wherever applicable.
- No opening balance of ITC under any head of tax.
Calculate the value of taxable supply and net GST liability (CGST, SGST or IGST as the case may be) to be paid in cash, if
any, by XIM for the month of April 2019. Assume that conditions for claiming input tax credit [including conditions imposed
by rule 36(4)] are satisfied.
 A.6 GST liability of X Institute of Management –
IGST CGST SGST
Rs. Rs. Rs.
Liability under reverse charge mechanism –
Rent paid to local municipal corporation (9% of Rs. 50,000, 9% of Rs. 50,000) – 4,500 4,500
Legal fee paid to partnership firm of advocates (9% of Rs. 20,000, 9% of Rs. 20,000) – 1,800 1,800
GST liability under reverse charge (a) – 6,300 6,300
Liability under forward charge –
Tuition fees received from students pursuing Punjab University courses [exempt
under Exemption Notification (Entry 66)] – Nil Nil
Tuition fees received from students pursuing foreign university course (9% of
Rs. 8,50,000, 9% of Rs. 8,50,000) – 76,500 76,500
Fees receipt from students of competitive exam (9% of Rs. 5,40,000, 9% of
Rs. 5,40,000) – 48,600 48,600
Mess fees for providing mess services [exempt under Exemption Notification
(Entry 66)] – Nil Nil
Total – 1,25,100 1,25,100
Less: Input tax credit [i.e., (a)] – 6,300 6,300
GST under payable under forward charge (b) – 1,18,800 1,18,800
GST payable for April 2019 [(a) + (b)] – 1,25,100 1,25,100

 1. X Ltd., a registered supplier from Maharashtra, is engaged in the manufacturing of passenger auto. The company provides
the following information pertaining to purchases made (and services availed) by it during the month of March 2020 –
GST paid
Rs.
Purchase of iron which is used as a raw material (goods are received in two instalments, first instalment
in March 2020 and the second instalment is received in April 2020) 2,50,000
Purchase of accessories which are delivered directly to the dealers of the company (only invoice is
received by X Ltd.) 90,000
Purchase of bus (seating capacity 15) for the transportation of employees from their residence to company
and back 1,97,000
Input tax credit on general insurance taken on a car used by executives of the company for official
purposes 5,200
Payment made to Y Caterers for providing daily breakfast and lunch to the employees of the company,
as a voluntary staff welfare measure 54,700
Determine the amount of eligible input tax credit available to X Ltd. for the month of March 2020, by giving brief explanations
for treatment of various items. Apart from information given above, all the other conditions necessary for availing of input
tax credit [including conditions imposed by rule 36(4)] have been satisfied.
 2. Z Associates, a partnership firm, provides recovery agent service to A Credits Ltd., an NBFC and a registered supplier,
on January 15, 2020. Invoice for the same is issued on February 7, 2020 and the payment is made on April 18, 2020 by A Credits
Ltd. Bank account of company is debited on April 20, 2020. Determine the following – (i) person liable to pay GST (ii) time
of supply of service.
 1. Input tax credit available to X Ltd. for the month of March 2020 –
Rs.
Purchase of iron (when goods are received in lots or instalments, the registered person is entitled to take
input tax credit only on the receipt of last lot or instalment, X Ltd. can claim input tax credit in April
2020) Nil
Purchase of accessories (even if goods are delivered to an agent of the ecipient, input tax credit is
available) 90,000
Purchase of bus [by virtue of section 17(5)(a), input tax credit is blocked when a motor vehicle (having
approved seating capacity of 13 persons or less) is purchased, in this case, X Ltd. can claim input tax
credit] 1,97,000
General insurance of car [input tax credit is blocked in the case of motor vehicles (having approved
seating capacity of 13 persons or less), even input tax credit pertaining to insurance cover is not
available] Nil
Payment to Y Caterers [input tax credit is not available in respect of input supply of food and beverages
by virtue of section 17(5)(b)(i)] Nil
Total 2,87,000
 2. Recovery agent - Recovery agent service provided by Z Associates to A Credits Ltd. (i.e., NBFC) is subject to reverse charge
mechanism. Time of supply of service (which is covered by reverse charge mechanism) is determined on the basis of the
following –
Time of supply as given by section 13(3) Relevant date given
in the problem
Criteria 1 The date of payment as entered in the books of account of the recipient of service. April 18, 2020
Criteria 2 The date immediately following 60 days from the date of issue of invoice by the
supplier (i.e., invoice date + 61). April 8, 2020
Time of supply Criteria 1 or Criteria 2, whichever is earlier. April 8, 2020

 1. X & Co., a GST registered supplier, provides the following information regarding various tax invoices issued by it during
the month of March 2020 –
- Case 1 - Value of supply charged in an invoice is Rs. 2,50,000 against the actual taxable value of Rs. 2,30,000.
- Case 2 - Tax charged in an invoice is Rs. 32,000 against the actual tax liability of Rs. 68,000 due to wrong HSN code being
chosen while issuing invoice.
- Case 3 - Value charged in an invoice is Rs. 3,20,000 as against the actual value of Rs. 4,20,000 due to wrong quantity
considered while billing.
X & Co. wants to know –

- Who shall issue a debit/credit note under GST laws ?
- Whether debit note or credit note has to be issued in each of the above circumstances and, if so, quantify the amount for
which it is to be issued.
- What is the maximum time-limit available for declaring the credit note in the GST return ?
 2. Examine, with reason, whether registration is required under GST in the following different cases –
- Y Computers of Gujarat is providing computer maintenance service. Aggregate turnover of Y Computers is Rs. 15 lakh
which comprises both inter-State and intra-State supply.
- Z Wings of West Bengal exclusively deals in garments. It supplies taxable goods to various States in India. Aggregate
turnover of Z Wings is Rs. 35 lakh.
 1. Debit/credit note by X & Co. - Where a tax invoice has been issued for supply of any goods/services and the taxable value
(or tax charged) in that tax invoice is found to exceed the taxable value (or tax payable) in respect of such supply, a credit
note can be issued. In Case 1, X & Co. can issue credit note to the recipient.
Where a tax invoice has been issued for supply of any goods/services and the taxable value (or tax charged in that tax invoice)
is found to be less than the taxable value (or tax payable in respect of such supply), a debit note can be issued. In Case 2 and
Case 3, X & Co. can issue debit note to the recipient. The following points should be noted –
- X & Co. can issue consolidated credit note (or debit note) in respect of multiple invoices issued in a financial year without
linking the same to individual invoices.
- Any registered person who issues a debit note or credit note in relation to a supply of goods/services shall declare the
details of such note in the return for the month during which such note has been issued.
- Credit note cannot be issued after a specified time-limit [see para 543.1].
Y Computers of Gujarat - In the case of inter-State supply of goods, registration is required even if the aggregate turnover is
lower than the threshold limit. However, in the case of inter-State supply of services, registration is not required if the
aggregate turnover does not exceed the threshold limit. In this case, Y Computers is engaged in inter-State and intra-State
supply of services. The aggregate turnover does not exceed the threshold limit of Rs. 20 lakh. Consequently, registration is
not required.
Z Wings of West Bengal - In this case, Z Wings is engaged in inter-State supply of goods. Registration is required (regardless
of the quantum of aggregate turnover).
 1. X Electronics, a GST registered dealer, is engaged in supply of electronic appliances in the State of Karnataka. Its aggregate
turnover for the financial year 2019-20 of supply of appliances is Rs. 120 lakh.
The firm also expects to provide repair and maintenance service of electronic appliances from the financial year
2020-21. Keeping in view the latest amendments made in GST law, discuss whether the firm can opt for the Composition
Scheme for the financial year 2020-21, as the turnover may include supply of both goods and services. If yes, up to what
amount, the supply of service can be provided ?
 2. Y, a registered supplier of taxable goods, files GSTR-3B for the month of January 2020 on April 15, 2020. The prescribed
due date to file the said GSTR-3B is February 20, 2020. The amount of net GST payable on supplies made by him for the said
month is Rs. 36,500 which is paid on the same date of filing the return. Briefly explain the related provisions and compute
the amount of interest payable by Y.
 1. Composition Scheme - X Electronics can opt for Composition Scheme with effect from April 1, 2020. During the financial
year 2020-21 it can supply services but value of supply of services should not exceed 10% of the turnover of the preceding
financial year or Rs. 5 lakh, whichever is higher. 10% of turnover of the preceding year is Rs. 12 lakh. Consequently, value
of supply of services should not exceed Rs. 12 lakh during the financial year 2020-21. The moment value of supply of services
exceeds Rs. 12 lakh, it will become ineligible to continue in the Composition Scheme.
Vide Notification No. 2/2019, dated March 7, 2019, Alternative Composition Scheme has been introduced for registered
persons who are engaged in supply of goods as well as services. The same scheme has been incorporated in section 10(2A).
However, the Alternate Composition Scheme is available to registered persons whose “aggregate turnover” in the
preceding financial year is Rs. 50 lakh (or less). As the aggregate turnover of X Electronics of the preceding financial year
is more than Rs. 50 lakh, it cannot opt for Alternative Composition Scheme.
 2. Payment of interest - Y is liable for interest under section 50(1) @ 18% [see para 558.1].
 1. Discuss about the exemption available to the services provided by an Old Age Home under the CGST Act.
 2. Documents based on which ITC is taken should contain at least certain details. Discuss.
 3. Discuss about the late fee levied for delay in filing –

- Final return
- Annual return
 1. Old age home - Services by an old age home run by the Central Government/State Government/charitable institute
(registered under section 12AA of the Income-tax Act) to its residents (aged 60 years or more) against consideration up to
Rs. 25,000 per month per member (if the consideration charged is inclusive of charges for boarding/lodging/maintenance),
is exempt from GST. The exemption is given by Exemption Notification (Entry 9D).
 2. Documents for claiming input tax credit - See para 493.2.
 3. Late fee - See para 558.2.
Intermediate, May 2019 (New)1
 Q.1 The following particulars are given by X (59 years) for the assessment year 2020-21. Find out his taxable income and tax
liability –
- Basic salary @ Rs. 51,000 per month, dearness allowance @ Rs. 10,000 per month (part of salary for retirement benefits),
house rent allowance Rs. 4,000 per month and rent paid for house in Mumbai is Rs. 7,000 per month.
- He owns a commercial building at New Delhi, which is let out on July 1, 2019 at a monthly rent of Rs. 46,000. He pays
municipal tax of Rs. 27,000 and Rs. 25,000 for the previous years 2018-19 and 2019-20 on March 31, 2020 and April 20,
2020 respectively.
- He deals in shares. During the previous year 2019-20, X earns Rs. 1,70,000 from his share business and pays Rs. 30,000
as security transaction tax.
- He purchases 4000 unlisted shares in A Ltd. on January 16, 2008 for Rs. 80,000. A Ltd. declares bonus in the ratio of 1:1
on February 1, 2008. X transfers 3000 bonus shares on December 28, 2019 for Rs. 2,00,000 to his friend Y through
unrecognized stock exchange.
- X gets aggregate dividend of Rs. 13,00,000 from listed domestic companies (on which dividend distribution tax is paid).
Interest from savings bank account deposits with IDBI Bank is Rs. 15,000. Winnings from lottery (net of TDS @ 30 per cent)
is Rs. 21,000.
- X deposits Rs. 2,00,000 in his public provident fund account. Besides, he pays medical insurance premium of Rs. 19,000
for health of his wife and Rs. 12,000 for health of dependent son (payment is made by cheque).
 A.1 Computation of income of X –
Rs. Rs.
Salary income
Basic salary (Rs. 51,000 × 12) 6,12,000
House rent allowance : Rs. 48,000
Less: Exemption : Rs. 10,800 [see Note] 37,200
Less: Standard deduction 50,000 7,19,200
Gross annual value (Rs. 46,000 × 9) 4,14,000
Less: Municipal tax (paid during the previous year) 27,000
Less: Standard deduction [under section 24(a)] 1,16,100 2,70,900
Business income
Income from the business of share trading (Rs. 1,70,000 – securities transaction tax : Rs. 30,000)
(it is assumed that business income of Rs. 1,70,000, given in the question, is computed before
deduction of securities transaction tax) 1,40,000
Long-term capital gains
Sale proceeds of unlisted bonus shares 2,00,000
Less: Cost of acquisition Nil 2,00,000
Rs. Rs.

Dividend income from domestic companies [Rs. 13,00,000 – exemption under section 10(34) :
Rs. 10,00,000] 3,00,000
Interest on IDBI saving bank account 15,000
Winnings from lottery [Rs. 21,000 ÷ (1 – 0.3)] 30,000 3,45,000
Less: Deductions
Under section 80C (public provident fund contribution : Rs. 2,00,000, subject to a maximum of
Rs. 1,50,000) 1,50,000
Under section 80D (Rs. 19,000 + Rs. 12,000, subject to a maximum of Rs. 25,000) 25,000
Under section 80TTA (saving bank interest : Rs. 15,000, subject to a maximum of Rs. 10,000) 10,000 1,85,000
Tax on net income
Long-term capital gains under section 112 (20% of Rs. 2,00,000) 40,000
Dividend income under section 115BBDA (10% of Rs. 3,00,000) 30,000
Lottery income under section 115BB (30% of Rs. 30,000) 9,000
Tax on balance of Rs. 9,60,100 1,04,520
Income-tax 1,83,520
Note - House rent allowance is exempt under section 10(13A) as follows –

- Rs. 3,66,000 [being 50% of “salary” (salary for this purpose is Rs. 7,32,000, i.e., Rs. 6,12,000 + Rs. 1,20,000)];
- Rs. 48,000 (being house rent allowance);
- Rs. 10,800 [(Rs. 7,000 × 12) – 10% of Rs. 7,32,000].
Rs. 10,800, being the lowest of above three figures, is exempt under section 10(13A).
 1. X, a citizen of India, gives the following information for the previous year 2019-20 –
- Income from business in India : Rs. 2,00,000. The business is controlled from London and Rs. 60,000 is remitted to London.
- Profits from business earned in Japan : Rs. 70,000. Out of which Rs. 20,000 is received in India. This business is controlled
from India.
- Untaxed income of Rs. 1,30,000 for the year 2017-18 pertaining to a business in England. It is remitted to India on March
3, 2020.
- Royalty of Rs. 4,00,000 is received from K, a resident, for technical service provided to run a business outside India.
- Agricultural income of Rs. 90,000 is generated in Bhutan.
- X gets house property income of Rs. 73,000 from a property situated in Dubai. The entire income is deposited in a Dubai
bank account.
Compute gross total income of X for the assessment year 2020-21, if he is –
- A resident and ordinarily resident in India.
- A resident but not ordinarily resident in India.
 2. Examine TDS implications in the following cases (give brief reasons) –
- Ms. Y gets a sum of Rs. 95,000 on December 31, 2019 on account of maturity proceeds of LIC policy taken on October 1,
2014 (sum assured : Rs. 80,000, annual insurance premium : Rs. 10,000).
- Z transfers a residential house property to A for Rs. 45 lakh. The stamp duty value of the property is Rs. 55 lakh.
- B (P.) Ltd. makes the following payments to C during the financial year 2019-20 –
a. professional fees of Rs. 22,000, and
b. royalty of Rs. 18,000.
- ABC Ltd. pays Rs. 1,75,000 to D for purchase of calendars. These calendars are printed by D according to specifications
provided by ABC Ltd. However, no material is supplied for these calendars by ABC Ltd. to D.
- E (P.) Ltd. pays Rs. 12,000 to Ms. F, its director, towards sitting fee which is not taxable under section 192.
-H Ltd. engages G Ltd. which is in the business of operation of call centre. On March 18, 2020, the total amount credited
by H Ltd. in the ledger account of G Ltd. is Rs. 70,000 regarding service charges of call centre. This amount is paid by H
Ltd. by cheque on March 28, 2020.
 1. Computation of income of X –
Resident and Resident but
ordinarily not ordinarily
resident resident
Rs. Rs.
Income from business in India (it is earned in India, it is Indian income, Indian income
is always taxable) 2,00,000 2,00,000
Profit from business in Japan –
- Received in India (as Rs. 20,000 is received in India, it is Indian income, Indian
income is always taxable) 20,000 20,000
- Received outside India (Rs. 50,000 is received outside India, it is earned outside India,
it is foreign income. Foreign income is taxable in the case of resident and ordinarily
resident person. In the case of resident but not ordinarily resident person, foreign
income is taxable if it is business income and business is controlled from India) 50,000 50,000
Untaxed foreign income of earlier year (as it is not income of the current year, it is not
taxable for the assessment year 2020-21) — —
Royalty income [it is assumed that (a) technical service is provided outside India, (b)
Rs. 4,00,000 is received outside India and (c) the business of providing technical service
is not set-up in India] 4,00,000 Nil
Agricultural income in Bhutan [it is assumed that (a) income is not received in India and
(b) the business of generating agricultural income is controlled from Bhutan] 90,000 Nil
Property income [Rs. 73,000 – standard deduction under section 24(a) : Rs. 21,900] 51,100 Nil
 2. TDS implications –
Maturity proceeds of insurance policy - Tax is not deductible by LIC under section 194DA, as the payment is lower than the
threshold limit of Rs. 1,00,000 [see para 277A].
Transfer of residential house property - In the case of transfer of immovable property, tax deduction is required under section
194-IA. However, provisions of section 194-IA are not applicable if consideration paid or payable for transfer of immovable
property is less than Rs. 50 lakh (stamp duty value is not taken into consideration for this purpose). As in this case, sale
consideration is Rs. 45 lakh, tax deduction provisions of section 194-IA are not applicable. If, however, Z (transferor of the
property) is non-resident in India, tax is required to be deducted within the parameters of section 195.
Professional fees and royalty - In the case of professional fees and/or royalty paid or payable to a resident, tax deduction is
required under section 194J. Threshold limit for this section is Rs. 30,000 which is separately applicable for professional fees
and royalty. Consequently, on payment of professional fees of Rs. 22,000 to C, tax deduction is not required under section
194J. Likewise, payment of royalty of Rs. 18,000 to C is not subject to tax deduction under section 194J.
Purchase of calendars - Tax is deductible under section 194C if consideration is paid or payable for any “work contract”.
However, “work contract” does not include manufacturing or supplying a product according to the requirement or
specification of a customer (i.e., payer of income) by using material purchased from a person, other than such customer. In
this case, material is not supplied by ABC Ltd. Calendars are manufactured by D, by purchasing material from outsiders.
The transaction is nothing but sale of calendars by D to ABC Ltd. On purchase of goods, tax deduction provisions of section
194C are not applicable. These provisions are not applicable even if goods are manufactured by the supplier according to
the specifications given by the purchaser.
Payment of sitting fees to a director - Ms. F is not a whole-time director, as it is given in the problem that tax is not deductible
under section 192. Sitting fees payable to a part-time director is subject to tax deduction at source under section 194J (there
is no threshold limit). Consequently, in this case, tax is deductible at the rate of 10% of Rs. 12,000.
Payment to call centre - It is subject to tax deduction under section 194J. TDS rate is 2%. Tax is deductible on March 18, 2020.
 1. X is a finance manager in S (P.) Ltd. He gets salary of Rs. 30,000 per month. He owns two houses, one of which has been
let out to his employer and which is in turn provided to him as rent-free accommodation. The following information is
available for the previous year 2019-20 –
House 1 House 2
Rs. Rs.
Fair rent (FR) 75,000 1,95,000
Actual rent (AR) 65,000 2,85,000
Municipal valuation (MV) 74,000 1,90,000
Repairs 15,000 35,000
Building insurance premium 12,000 17,000
Ground rent 7,000 9,000
Nature of occupation Let out to S (P.) Ltd. Let out to Ms. P
Interest of Rs. 17,000 is paid on loan taken by mortgaging House 1 for construction of House 2. During the previous year
2019-20, X purchases a piece of rural agricultural land for Rs. 2,50,000 (stamp due value : Rs. 3,00,000).
Determine the taxable income of X for the assessment year 2020-21.
 2. Y owns a residential house in Noida (date of acquisition : September 9, 2009, cost of acquisition : Rs. 30,00,000). He transfers
it for Rs. 1,57,00,000 on January 7, 2017. He utilises the sale proceeds of the Noida property to acquire a residential house
in Panchkula for Rs. 2,05,00,000 on July 20, 2017.
The Panchkula house property is transferred on October 31, 2019 for Rs. 3,25,00,000. On March 2, 2020, Y purchases another
residential house in Delhi for Rs. 2,57,00,000.
Determine the amount of capital gain chargeable to tax for the assessment years 2017-18 and 2020-21.
Rs.
Basic salary (i.e., Rs. 30,000 × 12) 3,60,000
Perquisite in respect of rent-free house [see Note 1 infra] 54,000
Salary 3,64,000
Computation of property income -
House 1 House 2
Rs. Rs.
Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject
to maximum of SR] 75,000 1,95,000
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss
due to vacancy 65,000 2,85,000
Step III - Amount computed in Step I or Step II, whichever is higher 75,000 2,85,000
Step V - Gross annual value is Step III minus Step IV 75,000 2,85,000
Less: Municipal taxes 18,000 70,000
Net annual value 57,000 2,15,000
Standard deduction (30% of net annual value) 17,100 64,500
Interest on borrowed capital Nil 17,000
Income from house property 39,900 1,33,500
Computation of net income of X –

Income from house property (Rs. 39,900 + Rs. 1,33,500) 1,73,400
Income from other sources [see Note 2] Nil
Less: Deductions under Chapter VI-A Nil
Net income 5,47,400
Notes –
1. X has let out House I to the employer-company which provides the same to X as a rent-free accommodation. Rental income
received by X, as owner of House I from the tenant, is taxable under the head “Income from house property” under section
23(1). Besides, the value of perquisite in respect of rent-free house is taxable under the head “Salaries”. X is not entitled to
the benefits permissible under section 23(2), as he occupies the house not as owner but in his capacity as sub-tenant of the
employer company—D.R. Sunder Raj v. CIT [1979] 2 Taxman 458 (AP). Perquisite value of rent-free accommodation is
computed as under –
While 15% of salary of Rs. 3,60,000 is Rs. 54,000, lease rent of House I is Rs. 65,000. Consequently, Rs. 54,000 is taken as taxable
value of the perquisite.
2. Purchase of immovable property for inadequate consideration is taxable under section 56(2)(x). However, these
provisions are not applicable if the asset is not a “capital asset”. Rural agricultural land is not a “capital asset”. Nothing is,
therefore, taxable under section 56(2)(x).
 2. Computation of capital gain on transfer of Noida property (assessment year 2017-18) of Y –
Rs.
Sale proceeds 1,57,00,000
Less: Indexed cost of acquisition [Rs. 30,00,000 × CII of 2016-17 : 264 ÷ CII of 2009-10 : 148] 53,51,351
Long-term capital gain 1,03,48,649
Less: Exemption under section 54 (cost of Panchkula property or long-term capital gain, whichever is lower) 1,03,48,649
Long-term capital gain chargeable to tax Nil
Capital gain on transfer of Panchkula property (assessment year 2020-21) - Panchkula property is transferred within 3 years from
its acquisition. Exemption claimed under section 54 will be revoked. Cost of acquisition will be taken as Rs. 1,01,51,351 (i.e.,
original cost : Rs. 2,05,00,000 minus exemption to be taken back : Rs. 1,03,48,649). Since Panchkula property is transferred
after 2 years, it will be long-term capital asset and indexation benefit will be available. Indexed cost of acquisition will be
Rs. 1,07,85,581 [cost of acquisition : Rs. 1,01,51,351 × CII of 2019-20 being year of transfer : 289 ÷ CII of 2017-18 being year
of acquisition : 272].
Rs.
Sale proceeds of Panchkula property 3,25,00,000
Less: Indexed cost of acquisition of Panchkula property (as computed above) 1,07,85,581
Long-term capital gain 2,17,14,189
Less: Exemption under section 54 (cost of Delhi property of Rs. 2,57,00,000 or the amount of capital gain
on transfer of Panchkula property, whichever is lower) 2,17,14,189
Long-term capital gain chargeable to tax Nil
 1. Ms. X, a resident individual, provides following information pertaining to the previous year ending March 31, 2020 –
Rs.
Income from salary (computed) 41,20,000
Rent received from house property situated in Delhi 5,00,000
Interest on loan taken for purchase of above property (loan was taken from a friend) 7,50,000
Rent received from house property situated in Jaipur 3,20,000
Interest on loan taken for house property in Mumbai which is self-occupied (loan was taken from PNB
on January 1, 1999 for purchase of this property) 1,57,000
Interest on loan taken for repair of house properties situated in Mumbai and Delhi (loan was taken on
April 1, 2018 and utilized in 50:50 ratio for house properties situated in Mumbai and Delhi respectively) 1,50,000
Long-term capital gains on transfer of equity shares (computed in accordance with section 112A) 8,95,000
Interest on fixed deposits 73,000
Loss from textile business (–) 7,50,000
Speculation profit 2,30,000
Loss incurred by a firm in which Ms. X is a partner (–) 1,60,000
Salary received as a partner from the above firm (the same is allowed as deduction to the firm) 50,000
Brought forward short-term capital loss on sale of gold (–) 2,75,000
Brought forward loss on transfer of equity shares of the nature specified under section 111A (–) 25,000
Life insurance premium paid for her son who is 30 years of age and is working in USA 15,000
Compute the total income of Ms. X for the assessment year 2020-21 and the amount of loss that can be carried forward.
Amount of repayment of loan during the previous year 2019-20 is as follows –
- Repayment of loan taken for purchase of house property in Delhi : Rs. 2,50,000.
- Repayment of loan taken for purchase of house property in Mumbai : Rs. 50,000.
- Repayment of loan taken for repair of house properties in Delhi and Mumbai : Rs. 75,000.
 2. Discuss the provisions of section 139A(1) which provides the persons who are compulsorily required to apply for
allotment of Permanent Account Number (PAN) with the Assessing Officer.
 3. What is the fee for default in furnishing return of income under section 234F?
 4. To whom the provisions of section 139AA relating to quoting of aadhaar number do not apply ?
 1. Computation of house property income of Ms. X –
Delhi Jaipur Mumbai
property property property
Rs. Rs. Rs.
Gross annual value 5,00,000 3,20,000 Nil
Less: Municipal tax Nil Nil Nil
Net annual value 5,00,000 3,20,000 Nil
Standard deduction (@ of 30% of net annual value) 1,50,000 96,000 Nil
Interest on borrowed capital –
- for purchase/acquisition of property 7,50,000 – 1,57,000
- for repairs of property 75,000 – 75,000
Income from property (maximum deductible interest is Rs. 30,000
in the case of self-occupied property) (–) 4,75,000 2,24,000 (–) 30,000
Computation of income (without adjusting losses) –

Rs. Rs.
Income from house property [(–) Rs. 4,75,000 + Rs. 2,24,000 – Rs. (–) 30,000] (–) 2,81,000
Business income –
- Loss from textile business (–) 7,50,000
- Speculative business 2,30,000
- Loss incurred by the firm in which Ms. X is a partner (not to be considered) –
- Salary from the partnership firm 50,000 (–) 4,70,000
Long-term capital gain (as per section 112A) 8,95,000
- Fixed deposit interest 73,000
- Winnings from lottery 75,000 1,48,000
Adjustment of losses –
- Current year’s house property loss of Rs. 2,81,000 can be set-off to the extent of Rs. 2,00,000 against salary income. Balance
house property loss of Rs. 81,000 will be carried forward.
- Current year’s business loss of Rs. 4,70,000 can be adjusted to the extent of Rs. 73,000 against income from other sources
(i.e., fixed deposit interest) and the balance of Rs. 3,97,000 can be adjusted against long-term capital gain of Rs. 8,95,000.
- Brought forward short-term capital loss on transfer of gold of Rs. 2,75,000 can be adjusted against current year’s long-
term capital gain.
- Brought forward short-term capital gain under section 111A of Rs. 25,000 can be adjusted against current year’s long-
term capital gain.
Computation of income (after adjustment of losses) –

Rs.
Income from salary (Rs. 41,20,000 – house property loss : Rs. 2,00,000) 39,20,000
Long-term capital gain under section 112A (Rs. 8,95,000 – current year’s business loss : Rs. 3,97,000 –
brought forward short-term capital loss : Rs. 2,75,000 – brought forward short-term capital gain :
Rs. 25,000) 1,98,000
- Fixed deposit interest (Rs. 73,000 – current year’s business loss : Rs. 73,000) Nil
- Winnings from lottery 75,000
Less: Deduction under section 80C (life insurance premium : Rs. 15,000 + repayment of loan taken to
purchase Mumbai property from PNB : Rs. 50,000) 65,000
Note - Repayment of loan taken from a friend is not eligible for deduction under section 80C. Repayment of loan taken for
repair of a house property is also not deductible under section 80C.
 2. Allotment of PAN - See para 249.
 3. Fee under section 234F for default in furnishing return of income - See para 296.7.
 4. Quoting of aadhaar number - See para 249A.
 Q.5 X, a registered supplier of chemicals, pays GST under regular scheme. He is not eligible for any threshold exemption.
He gives the following information pertaining to September 2019 –
Rs.
Outward supply –
Intra-State supply of goods 25,00,000
Inter-State supply of goods 5,00,000
Inward supply –
Intra-State purchase of goods from registered dealer 14,00,000
Intra-State purchase of goods from unregistered dealer 2,00,000
Inter-State purchase of goods from registered dealer 4,00,000
Balance of input tax credit at the beginning of September 2019 –
CGST 95,000
SGST 60,000
IGST 50,000
Additional information –
- He purchases a car (intra-State supply) for business purpose for Rs. 6,72,000 (which includes CGST of Rs. 36,000 and SGST
of Rs. 36,000) on September 15, 2019. He capitalizes the full value (including GST) in the books on the same date to claim
depreciation.
- Out of inter-State purchase from registered dealer, goods worth Rs. 1,00,000 are received on October 3, 2019 due to road
traffic jams.
- Rate of CGST, SGST and IGST to be 9 per cent, 9 per cent and 18 per cent respectively.
- Both inward and outward supplies given above are exclusive of taxes, wherever applicable.
- All the conditions necessary for availing the input tax credit have been fulfilled except mentioned above.
Compute the net CGST, SGST and IGST payable in cash by X for the month of September 2019. Assume that conditions for
claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
 A.5 Computation of GST payable on outward supply for September 2019 –
IGST CGST SGST
Rs. Rs. Rs.
Intra-State supply of goods (9% of Rs. 25,00,000, 9% of Rs. 25,00,000) – 2,25,000 2,25,000
Total 90,000 2,25,000 2,25,000

IGST CGST SGST
Rs. Rs. Rs.
Opening balance on September 1, 2019 50,000 95,000 60,000
Add: Inward supply during September 2019 –
- Intra-State purchase of goods from registered dealer (9% of Rs. 14,00,000,
9% of Rs. 14,00,000) – 1,26,000 1,26,000
- Intra-State purchase of goods from unregistered dealer [reverse charge
mechanism of section 9(4) not applicable, no input tax credit] – – –
- Inter-State purchase of goods from registered dealer [18% of (Rs. 4,00,000 –
goods not received during September 2019 : Rs. 1,00,000)] 54,000 – –
- Purchase of car (not eligible) – – –
Input tax credit available on September 30, 2019 1,04,000 2,21,000 1,86,000
IGST CGST SGST

Rs. Rs. Rs.
Less: IGST on inward supply (balance IGST : Rs. 1,04,000 – Rs. 90,000 = Rs. 14,000) 90,000 – –
Balance Nil 2,25,000 2,25,000
Less: IGST – 14,000 –
Balance Nil 2,11,000 2,25,000
Less: CGST on inward supply (balance CGST : Rs. 2,21,000 – Rs. 2,11,000 =
Rs. 10,000) – 2,11,000 –
SGST payable for September 2019 is Rs. 39,000. Unutilised input tax credit of CGST of Rs. 10,000 cannot be utilised for
payment of SGST (it can be carried forward). However, after utilising input IGST for payment of outward liability of IGST,
the balance of Rs. 14,000 can be utilised in the above case partly for payment of CGST and partly for payment of SGST as
follows –
IGST CGST SGST

Rs. Rs. Rs.
Less: IGST on inward supply (balance IGST : Rs. 1,04,000 – Rs. 90,000 = Rs. 14,000) 90,000 – –
Balance Nil 2,25,000 2,25,000
Less: IGST (balance of Rs. 14,000 to be utilised to the extent of Rs. 4,000† towards
payment of CGST and the balance of Rs. 10,000 towards payment of SGST) – 4,000 10,000
Balance Nil 2,21,000 2,15,000

 1. X Bank Ltd. a scheduled commercial bank, furnishes the following information pertaining to the month of August
2019 –
† It can be utilised (in any manner) for payment of CGST and SGST. As no restriction is imposed by the relevant legal provision as given in rule
88A, the amount to be utilised towards payments of CGST, in this case, should not be more than Rs. 4,000 (i.e., Rs. 2,25,000 – Rs. 2,21,000) to make
minimum payment in cash.
Rs. in crore (excluding GST)

Extended housing loan to its customers 100
Processing fees collected from customers on sanction of loan 20
Commission collected from customers on bank guarantee 30
Interest income on credit card issued by the bank 40
Interest received on housing loan extended by the bank 25
Minimum balance charges collected from current account and saving account holders 1
Compute the Value of Taxable supply. Give reasons with suitable assumptions.
 2. Decide with reason whether the following independent services are exempt under CGST Act, 2017 –
- Gokul Resident Welfare Association collects Rs. 9,000 per month as contribution from each member for procuring of
goods and services from third persons for common use of its members.
- V, a performing artist, gets Rs. 1,58,000 for performance of classical dance and Rs. 90,000 for acting in TV Serial during
the month of June 2019.
 1. Computation of taxable supply of X Bank Ltd. –
Rs. in crore
Extended housing loan to customers [extending deposits/loans/advances in so far as the consideration
is represented by way of interest/discount, is exempt vide Exemption Notification (Entry 27)] Nil
Processing fees collected from customers on sanction of loan 20
Commission collected from customers on bank guarantee 30
Interest income on credit card issued by the bank (the above exemption given by Entry 27 is not
applicable in the case of interest charged on credit cards) 40
Interest received on housing loan extended by the bank (exemption given by Entry 27) –
Minimum balance charges collected from current account and saving account holders 1
Total 91
 2. Exemption under CGST Act –

- Amount collected by resident welfare association (RWA) - If amount collecting by RWA is not more than Rs. 7,500 per month
per member, the entire amount is exempt from GST vide Exemption Notification (Entry 77). Conversely, if amount
charged by RWA is more than Rs. 7,500 per month per member, then GST is applicable on the entire amount. In the given
case, Rs. 9,000 per month is chargeable to GST.
- Amount collected by V, a performing artist - Services by an artist by way of a performance in folk or classical art forms of
music, dance or theatre, is exempt from GST vide Exemption Notification (Entry 78). Exemption is, however, available
only if consideration charged for such performance is not more than Rs. 1,50,000. In this case, consideration charged for
performance of classical dance by V is Rs. 1,58,000. Therefore, the aforesaid exemption is not available to V. Moreover,
for acting in TV serial, exemption is not available.
 1. Examine the following independent cases of supply of goods and services and determine the time of issue of invoice under
each of the cases as per the provisions of CGST Act, 2017 –
- X Enterprise, Kolkata, enters into a contract with B Enterprise, Surat, for supply of goods on October 3, 2019. The goods
are removed from the factory at Kolkata on October 11, 2019. As per the agreement, the goods are to be delivered by
October 31, 2019. B Enterprise receives these goods on October 14, 2019.
- C and D Ltd., an event management company, provides its services for an event at K Film Agencies, Mumbai, on June
5, 2019. Payment for the event is made on June 19, 2019.
 2. Y Enterprise makes cash deposit of Rs. 10,000 under minor head “Tax” of major head “SGST”. It has a liability of Rs. 2,000
for minor head “Interest” under the major head “SGST”.
State whether Y Enterprise can utilise the amount available for payment of interest.
 3. State, with brief reason, whether following suppliers of taxable goods are required to register under the GST law –
- Z is engaged in wholesale-cum-retail trading of medicines in the State of Assam. His aggregate turnover during the
financial year is Rs. 9,00,000 which consists of Rs. 8,00,000 as intra-State supply and Rs. 1,00,000 as inter-State supply.
- A of Rajasthan is engaged in trading of taxable goods on his own account. Besides, he also acts as an agent of E of Delhi.
His turnover in the financial year 2018-19 is of Rs. 12 lakh on his own account and Rs. 9 lakh on behalf of principal (both
from intra-State supply).

 1. Time of issue of invoice - Time of issue of invoice is governed by section 31 and rule 47. These provisions are discussed in
paras 533.1 and 533.2. On the basis of these provisions, time of issue of invoice will be as follows –
- Supply of goods by X Enterprise - Invoice should be issued on or before October 14, 2019.
- Supply of services by C and D Ltd. - Invoice can be issued within 30 days from the date of supply of service (i.e., within 30
days from June 5, 2019).
 2. Cash deposit by Y Enterprise - It cannot be utilised.
 3. Registration requirement - Provisions regulating registration are given by sections 22 to 24 [see para 522]. On the basis of
these provisions, registration requirement for Z and A will be as follows –
- Z who is engaged in trading of medicines - Z is also engaged in inter-State supply of goods. Compulsory registration is
required under section 24(i), irrespective of turnover.
- A of Rajasthan - A makes taxable supply of goods/services on behalf of E of Delhi. He is required to get compulsory
registration, irrespective of turnover, under section 24(vii).
 1. Enumerate the persons who are not eligible to opt for Composition Scheme under section 10(2).
 2. List out the situations in which a credit note/debit note may be issued under the CGST Act.
 3. Answer the following questions with respect to casual taxable person –
- Who is a casual taxable person ?
- Can a casual taxable person opt for the Composition Scheme ?
- When is the casual taxable person liable to get registered ?
- What is the validity period of the registration certificate issued to a casual taxable person ?
- Can the validity of registration certificate issued to a casual taxable person be extended ? If yes, what will be the period
of extension ?
 1. Persons not eligible for Composition Scheme - See paras 513.2 and 513.3.
 2. Credit note/debit note - See paras 543.1 and 543.2.
 3. Casual taxable person –
- Meaning of casual taxable person - See para 522.2-2.
- Composition Scheme - A casual taxable person cannot exercise the option to pay tax under Composition Scheme.
- Time to get registration - He must apply for registration at least 5 days prior to commencing his business in India.
- Validity period of registration certificate - The certificate of registration issued to a casual taxable person shall be valid for
the period specified in the application for registration or 90 days from the effective date of registration, whichever is
earlier.
- Extension of validity of registration certificate - The above period of 90 days may be extended by a further period of 90 days
by the proper officer.
Intermediate (IPC), May 2019 (Old)1
 Q.1 X works in a private company for last 10 years. The following information is available pertaining to the previous year
2019-20 –
Basic salary : Rs. 1,50,000 per month.
Dearness allowance : Rs. 55,000 per month.
Commission : Rs. 35,000 per month.
Transport allowance : Rs. 5,000 per month.
Medical reimbursement : Rs. 20,000 paid during the year.
He resigns from service on September 30, 2019. He is paid gratuity of Rs. 20 lakh on his retirement. A lump sum amount
of Rs. 36 lakh is also paid from unrecognised provident fund. The provident fund amount consists of employer’s
contribution : Rs. 13.20 lakh and interest thereon Rs. 3 lakh. The employee’s contribution is Rs. 16.20 lakh and interest thereon
is Rs. 3.60 lakh.
He has taken possession of a house on February 28, 2020 after payment of final instalment of housing loan to the bank. Loan
was taken on April 1, 2018. The accumulated interest as on March 31, 2019 is Rs. 1.5 lakh. He pays Rs. 2,20,000 during the
year which includes interest Rs. 1,10,000 for 11 months.
He starts the business of hiring of goods vehicle during the financial year 2019-20. He purchases 3 small goods vehicle on
November 15, 2019 and 3 heavy vehicles (having gross weight of 15 MTs each) on December 1, 2019. He does not maintain
books of account for income and expenditure. One of his friends gifted him Rs. 6 lakh to purchase the vehicles.
X holds 25 per cent equity share capital in CMF Ltd., an Indian company. The paid-up share capital of company as on March
31, 2019 is Rs. 20 lakh (divided into 2 lakh shares of Rs. 10 each). These shares were issued at a premium of Rs. 30 each.
Company allotted shares to shareholders on October 1, 2013. CMF Ltd. buy backs 30 per cent of its share on November 30,
2019 within the parameters of the Companies Act, 2013, by making payment of Rs. 60 per share.
X pays insurance premium of Rs. 20,000 on his life policy during the previous year 2019-20 (policy taken on : April 1, 2011,
sum assured : Rs. 1,50,000). Further, he pays Rs. 25,000 to LIC pension fund. Mediclaim insurance premium (for insurance
policy of X and Mrs. X) paid by X is Rs. 40,000.
Compute total income and tax payable thereon for the assessment year 2020-21. There is no change in salary of X from last
two years.
 A.1 Complete information is not available to solve the above question. The following assumptions have been made for
calculating taxable income and tax liability thereon –
- X and Mrs. X are not senior citizens.
- Dearness allowance is part of salary for computation of retirement benefits.
- Gratuity is not paid under the Payment of Gratuity Act, 1972.
- Salary and allowances become due for payment on the last day of each month (as per employment agreement).
- Medical reimbursement is not for medical treatment in a Government hospital or in a hospital which is recognised by
Chief Commissioner of Income-tax.
- The house property (whose possession is taken on February 28, 2020) is self-occupied during the previous year ending
on March 31, 2020.
- Shares in CMF Ltd. are not listed in any recognised stock exchange in India.
Computation of income of X –
Rs. Rs.
Basic salary (Rs. 1,50,000 × 6) 9,00,000
Commission (Rs. 35,000 × 6) 2,10,000
Medical reimbursement 20,000
Gratuity [see Note 1] 9,75,000
Lump sum payment from unrecognised provident fund (employer’s contribution :
Rs. 13,20,000 + interest thereon : Rs. 3,00,000) 16,20,000
Annual value of house property Nil
Less: Interest on borrowed capital (current year’s interest : Rs. 1,10,000 + pre-construc-
tion period’s interest : Rs. 30,000, being 1/5th of Rs. 1,50,000) 1,40,000
Income from self-occupied property (–) 1,40,000
Business income under section 44AE [i.e., (Rs. 7,500 × 5 months × 3) + (Rs. 15,000 ×
4 months × 3)] 2,92,500
Capital gains [see Note 2] Nil
Income from other sources (accumulated interest on X’s contribution to unrecognised
provident fund : Rs. 3,60,000 + gift given by friends : Rs. 6,00,000) 9,60,000
Less: Deductions
Under section 80C (life insurance premium : Rs. 20,000 + repayment of housing loan
to bank : Rs. 1,10,000) 1,30,000
Under section 80CCC [LIC pension fund : Rs. 25,000, overall maximum limit for deduc-
tion under sections 80C, 80CCC and 80CCD(1) is Rs. 1,50,000] 20,000
Under section 80D (Rs. 40,000, maximum deductible amount in the case of non-senior
citizen : Rs. 25,000) 25,000
Rs. Rs.
Tax on net income
Income-tax 13,04,250
Notes –
1. Gratuity - Gratuity is exempt under section 10(10)(iii). Amount of exemption is as follows –
- Rs. 10,25,000 [half month’s salary for each completed year of service, i.e., (Rs. 1,50,000 + Rs. 55,000) × ½ × 10 years];
- Rs. 20,00,000 (notified amount);
- Rs. 20,00,000 (being gratuity received).
Rs. 10,25,000, the lowest of above 3 points, is exempt under section 10(10)(iii). Balance of Rs. 9,75,000 is chargeable to tax.
2. Buy-back of shares - If shares in CMF Ltd. are listed (or unlisted) in any recognised stock exchange in India, capital gain is
exempt in the hands of X under section 10(34A). However, CMF Ltd. will have to pay tax on distributed income under section
115QA.
 1. X provides the following information pertaining to his income for the year ending March 31, 2020 –
Rs.
Short-term capital gains on transfer of shares in an Indian company (received in Japan) 85,000
Dividend from a Chinese company (received in China) 30,000
Rent from property in Bangladesh deposited in a bank at Dhaka (later on remitted to India through
approved banking channels) 96,000
Dividend from ABC Ltd., an Indian company 22,000
Compute the total income of X for the assessment year 2020-21 if he is –

- Resident and ordinarily resident (ROR).
- Resident but not ordinarily resident (RNOR).
- Non-resident (NR).
 2. Discuss the liability of tax deduction in the following cases –
- An employee of the Central Government receives arrears of salary for the earlier 3 years. Discuss whether (or not) the
employee will receive the arrears after deduction of tax at source during the current year.
- A TV channel pays Rs. 10 lakh as prize money to the winner of a quiz programme.
- A nationalized bank pays Rs. 50,000 per month as rent to the Central Government for a building in which one of its
branches is situated.
- A television company pays Rs. 50,000 to a cameraman for shooting of a documentary film.
ROR RNOR NR
Rs. Rs. Rs.
Short-term capital gain on transfer of shares in an Indian company 85,000 85,000 85,000
Dividend from a Chinese company (received in China) 30,000 – –
Rent from property in Bangladesh deposited in a bank at Dhaka (later on remitted
to India through approved banking channels) [Rs. 96,000 – standard deduction
@ 30% under section 24(a)] 67,200 – –
Dividend from ABC Ltd., an Indian company [exempt under section 10(34)] – – –
Net income 1,82,200 85,000 85,000
 2. Tax deduction at source - Tax will be deducted as follows –

Arrears of salary to a Central Government employee - Tax will be deducted under section 192 and the employee will get arrears
only after tax deduction. Tax will be deducted in the current year at the time of payment of arrears.
Price money in a quiz programme - Tax will be deducted at the rate of 30% under section 194B.
Rent payable by bank to the Central Government - By virtue of section 196, tax is not deductible if the recipient is Central
Government. Consequently, in this case, nationalized bank will pay Rs. 50,000 per month as rent to the Central Government
without any tax deduction.
Payment to cameraman - Tax is deductible under section 194J @ 10%.
 1. X furnishes the following information for the previous years 2018-19 and 2019-20 in respect of an industrial undertaking
established in Special Economic Zone during the financial year 2014-15 –
2018-19 2019-20
Rs. Rs.
Total sales 60,00,000 85,00,000
Export sales 48,00,000 55,00,000
Domestic sales 12,00,000 30,00,000
Money received in or brought to India in convertible foreign exchange up to September
30, 2019/September 30, 2020 43,20,000 40,00,000
Profit from the above undertaking 6,00,000 10,00,000
Total sales of financial year of 2019-20 includes freight of Rs. 5 lakh for delivery of goods outside India. Compute the amount
of deduction available to X under section 10AA.
 2. Y Enterprise, a sole proprietary concern, owns 4 machines (put to use for business in March 2018). Depreciation on these
machines is charged at the rate of 15 per cent. The written down value of these machines as on April 1, 2019 is Rs. 7,70,000.
Two machines are sold on July 15, 2019 for Rs. 10,00,000. A second-hand plant is purchased for Rs. 6,10,000 on December
30, 2019. Determine the amount of depreciation and capital gain for the assessment year 2020-21.
What will be the amount of depreciation and capital gain if 2 machines are sold on July 15, 2019 for Rs. 15,00,000 (and not
for Rs. 10,00,000) ?
 1. Computation of deduction under section 10AA –
2018-19 2019-20
Rs. Rs.
Total turnover (*Rs. 85,00,000 – freight : Rs. 5,00,000) (c) 60,00,000 80,00,000*
Export sales (*Rs. 55,00,000 – freight : Rs. 5,00,000) 48,00,000 50,00,000*
Export turnover (being export sales or amount received in India in convertible foreign
exchange, whichever is lower) (b) 43,20,000 40,00,000
Profit from the above undertaking (a) 6,00,000 10,00,000
Amount of deduction under section 10AA –
- For the previous year 2018-19 [100% of (a) × (b) ÷ (c)] 4,32,000 –
- For the previous year 2019-20 [50% of (a) × (b) ÷ (c)] – 2,50,000
Note - One of the requirements for availing the benefit of deduction under section 10AA is that the consideration in respect
of export should be received in India (or brought into India) by the assessee. Section 10AA does not specify any time-limit
for this purpose. It is assumed that, in this case, export consideration received in India will not exceed the amount given in
(b) (supra).
 2. Depreciation and capital gain –
If 2 machines are transferred for –
Rs. 10 lakh Rs. 15 lakh
Rs. Rs.
Depreciated value of the block on April 1, 2019 7,70,000 7,70,000
Add: Actual cost of plant acquired during the year 6,10,000 6,10,000
Total (a) 13,80,000 13,80,000
Less: Sale proceeds of 2 machines [*not to exceed (a)] (–) 10,00,000 (–) 13,80,000*
Written down value 3,80,000 Nil
Depreciation (15% × ½ × Rs. 3,80,000) 28,500 Nil
Depreciated value of the block on April 1, 2020 3,51,500 Nil
If 2 machines are transferred for –

Rs. 10 lakh Rs. 15 lakh
Rs. Rs.
Capital gains
Sale proceeds of 2 machines 10,00,000 15,00,000
Less: Cost of acquisition as per section 50 [it is (a) in the second case] NA 13,80,000
Short-term capital gain NA 1,20,000
Note - In the case of transfer of a depreciable asset, capital gain is computed as per section 50. Under this section, capital gain
arises only if block is empty or written down value is nil on the last day of the previous year. In the first case (when sale
consideration of 2 machines is Rs. 10 lakh), written down value of the block is not nil on the last day of the previous year.
Even the block is not empty on the last day of the previous year. Consequently, there is not capital gain on transfer of 2
machines in the first case.
 1. X owns a residential house property (whose income is taxable under section 22). The property was acquired on August
12, 2005 for Rs. 2,00,000. The property is transferred for Rs. 23,00,000. The sub-registrar refuses to register the documents
for the said value, as according to him, stamp value valuation, based on State Government guidelines is Rs. 28,00,000. X
prefers an appeal to the revenue divisional officer who determines Rs. 25,00,000 as stamp duty value. X acquires another
residential house on March 31, 2020 for Rs. 17,00,000 for self-occupation. On March 1, 2021, he transfers the new residential
house for Rs. 30,00,000. Compute his capital gain for the assessment years 2020-21 and 2021-22.
 2. Briefly explain with example, the meaning of cross transfer, the objective to make such transactions and implications
thereof under the Income-tax laws.
 1. Computation of capital gain of X –
Assessment year 2020-21 - Date of transfer of residential house property for Rs. 23,00,000 is not given. It is assumed that the
property is transferred during the previous year 2019-20.
Rs.
Sale proceeds (stamp duty value of Rs. 25,00,000 exceeds 105% of sale consideration) 25,00,000
Balance 20,05,983
Less: Exemption under section 54 (being cost of new house or capital gain, whichever is lower) 17,00,000
Capital gain 3,05,983
Assessment year 2021-22 - New house property is transferred within 3 years. Capital gain will be calculated as follows –
Rs.
Sale proceeds (it is assumed that stamp duty value is not more than 105% of Rs. 30,00,000) 30,00,000
Less: Cost of acquisition [Rs. 17,00,000 – reversal of exemption under section 54 (as new property is
transferred within 3 years) : Rs. 17,00,000] Nil
Note - The aggregate tax liability of the aforesaid two assessment years will be lower if X does not claim the exemption under
section 54. If exemption under section 54 is not taken, long-term capital gain of the assessment year 2020-21 will be
Rs. 20,05,983 and short-term capital gain of the assessment year 2021-22 will be Rs. 13,00,000.
 2. Cross transfer - Consider the case of transfer without consideration a property of Rs. 5 lakh by X to Mrs. Y and transfer
without consideration a property of Rs. 5 lakh by Y to Mrs. X. There is no direct transfer by X to Mrs. X and by Y to Mrs. Y.
However, the transaction appears to be indirect transfer or cross transfer arranged to by-pass legal provisions. To check such
practice, section 64(1) covers even “indirect transfers”. Cross transfers which are so intimately connected as to form parts
of single transaction, are covered by section 64(1). Though, the transaction may not be mutual, i.e., in technical sense each
transaction may not constitute consideration for the others. Therefore, income arising to Mrs. X will be taxed in the hands
of X. Likewise, income arising to Mrs. Y will be taxable in the hands of Y.
 1. Ms. X (68 years) is a resident individual. For the assessment year 2020-21, she has income from long-term capital gain on
transfer of equity shares : Rs. 1,80,000 (securities transaction has been paid on acquisition and transfer of the said shares)
and income from other sources : Rs. 2,75,000. Compute her tax liability for the assessment year 2020-21.
 2. Y (65 years), a retired Government Officer, resides in Cochin. He gives the following information pertaining to the
previous year 2019-20 –
Rs.
Pension 6,60,000
Interest from bank on fixed deposits (gross) 55,000
Compute the total income of Y for the assessment year 2020-21 keeping in view the following additional information –
- Life insurance premium paid by cheque : Rs. 22,500 for insurance of his life. The insurance policy was taken on September
8, 2016 and the sum assured is Rs. 2,00,000.
- Premium of Rs. 26,000 is paid by cheque for the health insurance of Y and his wife.
- Rs. 1,500 paid in cash for his health check-up and Rs. 4,500 paid through cheque for preventive health check-up of his
parents, who are senior citizens.
- Y pays interest Rs. 6,500 on loan taken from bank for MBA course pursued by his daughter.
- A sum of Rs. 15,000 donated in cash to an institution approved for purpose of section 80G for promoting family planning.
 3. Z furnishes the following information for the previous year 2019-20 –
Rs.
Loss from Business A (speculative) 70,000
Profit from Business B (speculative) 30,000
Loss from self-occupied house property 2,20,000
Income from let out house property 4,20,000
Income from trading and manufacturing business @ 8 per cent 2,00,000
Interest on PPF deposit 65,000
Long term capital gain on sale of vacant site 1,10,000
Short term capital loss on sale of jewellery 50,000
Investment in tax saver deposit on March 31, 2020 60,000
Brought forward loss of business of the assessment year 2014-15 1,00,000
Donation to a charitable trust recognized under section 12AA and approved under section 80G 1,40,000
Enhancement compensation received from Government for compulsory acquisition of land in the
year 2006 3,00,000
Compute total income of Z for the assessment year 2020-21 and loss he is eligible to carry forward.
 1. Computation of tax liability of Ms. X - In this case, net income (as reduced by long-term capital gain) is Rs. 2,75,000. Exemption
limit is Rs. 3,00,000. Ms. X is unable to fully utilise her exemption limit. Unutilised exemption limit is Rs. 25,000 which will
be deducted from capital gain of Rs. 1,80,000. In other words, out of long-term capital gain of Rs. 1,80,000, amount chargeable
to tax under section 112A (it is assumed that all conditions of section 112A are satisfied) is Rs. 1,55,000. Tax will be calculated
as follows –
Rs.
Tax on long-term capital gain under section 112A [10% of (long-term capital gain exceeding Rs. 1,00,000)] 5,500
Tax on other incomes Nil
Total 5,500
Add: Health and education cess @ 4% 220
Tax liability 5,720
 2. Computation of total income of Y -

Rs.
Pension (gross pension : Rs. 6,60,000 – standard deduction : Rs. 50,000) 6,10,000
Interest from bank on fixed deposits (gross) 55,000
Less: Deductions
Under section 80C (LIP of Rs. 22,500, subject to a maximum of 10% of sum assured of Rs. 2,00,000) 20,000
Under section 80D [Rs. 26,000 + (preventive health check-up Rs. 1,500 + Rs. 4,500, subject to maximum
of Rs. 5,000)] 31,000
Under section 80E (interest on education loan) 6,500
Rs.
Under section 80G (donation in cash exceeding Rs. 2,000 is not eligible for deduction) Nil
Under section 80TTB (interest on fixed deposit : Rs. 55,000, subject to maximum of Rs. 50,000) 50,000
Net income 5,57,500
 3. Computation of total income of Z –

Rs. Rs.
Salary (it is assumed that salary given in the problem is gross salary before standard
deduction) (Rs. 3,70,000 – standard deduction : Rs. 50,000) 3,20,000
Income from let out property 4,20,000
Less: Loss from self-occupied property (maximum : Rs. 2,00,000) (–) 2,00,000 2,20,000
Income from speculative businesses [Business A : Rs. (–) 70,000 + Business B : Rs. 30,000,
the speculative loss of Rs. 40,000 will be carried forward] Nil
Income from trading and manufacturing business @ 8% 2,00,000
Total 2,00,000
Less: Brought forward business loss (–) 1,00,000
Long-term capital gain on sale of vacant site 1,10,000
Deemed long-term capital gain on receipt of enhanced compensation 3,00,000
Short-term capital gain loss (–) 50,000
Income from other sources (interest on PPF deposit is exempt) Nil
Less: Deductions
Under section 80G –
- Adjusted gross total income (gross total income : Rs. 10,00,000 – long-term capital gain :
Rs. 3,60,000 – amount deductible under section 80C : Rs. 60,000) 5,80,000
- Donation given to notified public charitable institution 1,40,000
- Qualifying amount (amount of donation or 10% of adjusted gross total income, which-
ever is lower) 58,000
- Amount of deduction (50% of Rs. 58,000) 29,000
Net income 9,11,000
Note - It is assumed that income from let out property of Rs. 4,20,000, given in the problem, is computed after giving standard
deduction under section 24(a).
 Q.6 X, a registered supplier of services in Kolkata, gives the following information pertaining to October 2019 –
Rs.
Intra-State taxable supply of services 6,40,000
Amount received from Y (P.) Ltd., for service provided to the company [X is a director in Y (P.) Ltd.]
(intra-State transaction) 5,00,000
Paid legal fee to a senior advocate for one legal matter (intra-State transaction) 50,000
Amount received for service provided by him as a commentator to a local recognized sports body (intra-
State transaction) 1,20,000
Amount received for acting as a coach in recreational activities relating to sports, from one local
charitable entity registered under section 12AA of the Income-tax Act (intra-State transaction) 30,000
Compute the net GST liability (CGST, SGST or IGST) of X for the month of October 2019. Assume that GST rate is 18 per cent.
Above figures are exclusive of CGST, SGST and IGST.
 A.6 Computation of GST –

IGST CGST SGST
Rs. Rs. Rs.
Intra-State taxable supply of services (9% of Rs. 6,40,000, 9% of Rs. 6,40,000) – 57,600 57,600
Amount received from Y (P.) Ltd. [it is assumed that amount charged from Y (P.) Ltd. is
not less than open market value of services] (9% of Rs. 5,00,000, 9% of Rs. 5,00,000) – 45,000 45,000
Payment of legal fee to a senior advocate [see Note 1] (9% of Rs. 50,000, 9% of Rs. 50,000) – 4,500 4,500
Services provided as a commentator [see Note 2] (9% of Rs. 1,20,000, 9% of Rs. 1,20,000) – 10,800 10,800
Service provided as a coach in recreational activities relating to sports, from one local
charitable entity registered under section 12AA of the Income-tax Act [see Note 3] – – –
Total – 1,17,900 1,17,900
Notes –
1. It is assumed that turnover of X of the preceding financial year is more than Rs. 20 lakh. On this assumption, exemption
is not available under Exemption Notification (Entry 45). Moreover, X, the recipient of supply, is required to pay GST under
reverse charge mechanism.
2. If an individual provides services to a recognised sports body as a player, referee, umpire, coach or team manager for
participation in a sporting event (organised by the recognised sports body), exemption is available under Exemption
Notification (Entry 68). In this case, service is provided as a commentator. Exemption is, therefore, not available.
3. It is exempt vide Exemption Notification (Entry 80).
 1. On October 12, 2019, X Ltd. supplies a machinery to Y Ltd. (dealer in the same State). The following information is noted
from the records of X Ltd. Determine the value of taxable supply of machinery.
Rs.
Price of machinery (exclusive of taxes and discounts) 5,50,000
One part is directly fitted in the machinery at place of Y Ltd. (amount paid by Y Ltd. directly to the
supplier, as per contract this amount should be paid by X Ltd. and not included in price) 20,000
Installation and testing charges for machinery, not included in price 25,000
Discount 2 per cent on machinery price (recorded in the invoice)
X Ltd. provides additional 1 per cent discount at year end, based on additional purchase of other machinery.
 2. Z Ltd., a registered person, is engaged in the business of spices. It provides the following information pertaining to GST
paid during October 2019.
Rs.
Raw spices purchase –
- Raw spices used for furtherance of business of spices 50,000
- Raw spices used for personal use of directors 20,000
Electric machinery purchased (to be used in the manufacturing process) 25,000
Motor vehicle used for transportation of employees 55,000
Payment made for material and to contractor for construction of staff quarter 1,25,000
Determine the amount of input tax credit available to Z Ltd. for the month of October 2019 with all related workings and
explanations. Assume that X Ltd. is not affected by the operation of rule 36(4).
 1. Computation of value of taxable supply of machinery –
Rs.
Price of machinery 5,50,000
Add: Cost of part which is installed in machinery at the place of Y Ltd. (being supplier’s obligation met
by recipient) 20,000
Add: Installation and testing 25,000
Total 5,95,000
Less: Discount (2% of machinery price) (–) 11,000
Note - X Ltd. provides an additional 1% discount at the end of the year if the recipient purchases another machine. This
discount is allowed after the supply of aforesaid machinery. Discount (which is allowed after the supply has been affected)
will not be included, as per section 15(3), in value of taxable supply if the following two conditions are satisfied—
a. such discount is given under an agreement entered into at (or before) the time of such supply and specifically linked to
relevant invoices; and
b. input tax credit (as is attributable to the discount on the basis of document issued by the supplier) has been reversed by
the recipient of the supply.
Even if it is assumed that the above two conditions are satisfied, this additional discount cannot be deducted from the
aforesaid invoice (as discount is given at the end of the year after making supply). X Ltd. cannot issue revised invoice to give
additional discount. However, X Ltd. can give a credit note to this effect under section 34(2), if the aforesaid two conditions
are satisfied.
 2. Input tax credit - Input tax credit available to Z Ltd. is as follows –
Rs.
Inward supply of raw spices (used for furtherance of business of spices) 50,000
Inward supply of raw spices (not eligible, as used for personal use of directors) Nil
Inward supply of electric machinery (eligible, as used for manufacturing process) 25,000
Inward supply of motor vehicle (not eligible, even if used for transportation of employees) Nil
Inward supply of construction material (not eligible) Nil
Total 75,000

 1. Examine the liability of compulsory registration under section 24 in each of the following independent cases –
- X, a supplier in Maharashtra, is engaged in supply of potatoes in Maharashtra (as well as outside Maharashtra). His
turnover is more than the threshold limit under GST law.
- Y Oils Enterprise, Gujarat, is engaged in supply of machine oil as well as petrol. Total turnover of machine oil is Rs. 20
lakh and of petrol is Rs. 15 lakh.
- Z is working as an agent. He supplies goods as an agent of A (who is registered taxable person) and Z’s aggregate turnover
does not exceed Rs. 20 lakh during the financial year.
 2. B provides continuous supply of services regarding annual maintenance contract (AMC) of air-conditioners and all
electronic items installed in the premises of C Ltd. He gives the following information –
- B and C Ltd. enters into AMC contract. As per contract, AMC starts from October 1, 2018. It is valid for one year. It ends
on September 30, 2019.
- B receives payment for the AMC on October 31, 2019.
Explain time of issue of invoice in continuous supply of service as per GST law. Determine time of issue of invoice in the
following different situations –
- Situation 1 - As mentioned in the contract, C Ltd. is required to make payment on November 5, 2019.
- Situation 2 - If terms of payment is not mentioned in annual maintenance contract. It is not even agreed by both the parties.
X who supplies potatoes Supply of potatoes is exempt from GST. Any person who is engaged exclusively in the
business of supplying goods/services that are not liable to GST or wholly exempt from
GST, is not required to get registration. Consequently, X is not required to get GST
registration.
Y Oils Enterprise who If “aggregate turnover” is more than the threshold limit of Rs. 20 lakh, GST registration is
supplies machine oil as required. “Aggregate turnover” includes taxable supplies, exempt supplies, supplies
well as petrol which are not leviable to GST (e.g., petrol), export, etc. “Aggregate turnover” of Y Oils
Enterprise is Rs. 50 lakh. GST registration is required.
Z (who is agent of A) A person who makes taxable supply of goods/services on behalf of other taxable
person, is required to get registration on compulsory basis under section 24(vii). In this
case, Z is required to get registration, even if his turnover is lower than the threshold
limit.
 2. Time of issue of invoice in the case of continuous supply of service –

Rule given by section 31(5) Due date of issue of invoice
Situation 1 Where the due date of payment is ascertainable from the contract, the in-
voice shall be issued on or before the due date of payment. November 5, 2019
Situation 2 Where the due date of payment is not ascertainable from the contract, the
invoice shall be issued before or at the time when the supplier of service
receives the payment. October 31, 2019

 1. Examine the following cases, keeping in view the provisions of GST law regulating Composition Scheme –
- X is a manufacturer of ice-cream and pan masala in State of Maharashtra. His turnover for the year does not exceed Rs.
1 crore. He wants to register for Composition Scheme. Is he eligible for it?
- Y of Gujarat opts for Composition Scheme during a financial year 2019-20. But on February 10, 2020 his turnover crosses
Rs. 1.5 crore. Can he continue under Composition Scheme ?
- Z Ltd. has 2 branches – Branch K and Branch L in Delhi (having same PAN). Branch K opts for normal scheme. Z Ltd.
wants to opt for Composition Scheme in case of Branch L. Is it possible ?
 2. Discuss the following cases keeping in view the provisions of section 37 (furnishing returns of outward supply) and rule
59 (return forms) –
- A is a registered supplier in the State of Gujarat. He uploads GSTR-1 every month. During the month of February 2019,
he is out of India and no transaction is made during this month. He is of the view that as there is no transaction, there
is no need to upload GSTR-1 for the month of February 2019. Is he correct ?
- B is a registered dealer in Kerala. He is registered as a normal taxpayer for the financial year 2019-20. But on January 15,
2020, he converts himself from normal taxpayer to Composition Scheme taxpayer. Is he liable to upload GSTR-1 for the
month of February 2020 ?
- Mrs. C, a registered dealer in Rajasthan, does not upload GSTR-1 for the month of June 2019 but she wants to upload
GSTR-1 for the month of July 2019. Is it possible?
 1. Composition Scheme –
X A manufacturer of ice-cream, pan masala, aerated water and tobacco products, cannot opt for
Composition Scheme.
Y of Gujarat Compulsory withdrawal is required, if a person (availing Composition Scheme) crosses the turnover of
Rs. 1.5 crore during the financial year. Y crosses the turnover of Rs. 1.5 crore on February 10, 2020. The
option to pay tax under Composition Scheme lapses with effect from February 10, 2020. He is required
to file an intimation for withdrawal from the scheme in Form GST CMP-04 within 7 days from February
10, 2020.
Z Ltd. It is not possible to opt for Composition Scheme for Branch L only. All the units having same permanent
account number (PAN) will have to opt for Composition Scheme. If Z Ltd. wants to pay tax under
Composition Scheme, it will have to opt the same even for Branch K.
 2. GST monthly return –
A Even if there is no transaction for February 2019, A will have to upload GSTR-1 (declaring nil transaction)
for the month of February 2019.
B A person registered under normal provisions of GST can opt for Composition Scheme. Such option can
be exercised electronically in Form GST CMP-02 but only for beginning of the financial year. In this case,
B can opt for Composition Scheme only with effect from April 1, 2020. Consequently, he will have to
upload monthly return in GSTR-1 for February 2020 [see Note].
Mrs. C Without uploading GSTR-1 for June 2019, Mrs. C cannot upload GSTR-1 for July 2019.
Note - However, a concession is provided under rule 3(3A). Any registered person can opt to pay tax under Composition
Scheme with effect from the first day of the month immediately succeeding the month in which such person files an
intimation in Form GST CMP-02. This concession is available till March 31, 2018.

 1. Explain the meaning of consignment note in relation to goods transport agency and state its contents as per provisions
of the CGST Act.
 2. Explain the services provided by way of tolerating non-performance of a contract and its chargeability under the
provisions of the CGST Act.
 3. What are the E-ledgers ? State the entries to be debited to electronic liability register.
 1. Consignment note - See para 540.4.
 2. Tolerating non-performance of a contract - See para 413.14.
 3. e-Ledgers - See para 554.
Intermediate, November 2018 (New)1
 Q.1 Ms. X (32 years), a resident individual, furnishes the following particulars pertaining to the year ending March 31,
2020 –
Analysis of her bank account in her ledger reveals the undermentioned data –
Rs.
Winnings from a TV game show (net) 70,000
Gift received from mother’s father 80,000
Gift received from Y, her close friend 60,000
Interest on capital received from Z & Co., a partnership firm in which she is a partner (at the rate of 15
per cent per annum) 3,00,000
Rent received for a vacant plot of land 2,00,000
Amount received from A (P.) Ltd., for a house at Salem for which she had been in negotiation for rent
enhancement since last 3 years (this has not been taxed in any earlier year. However, this house is
transferred during March 2019) 1,50,000
Amount received under keyman insurance policy 2,20,000
Amount forfeited (initially paid by a buyer of her vacant plot, since the buyer could not finalize the deal
as per agreement) 3,10,000
- Donation given in cash to a charitable trust registered under section 12AA 12,000
- She owns agricultural lands at Colombo, Sri Lanka. She has derived agricultural income therefrom 1,80,000
- Public Provident Fund paid in the name of her minor daughter 75,000
- Interest credited in the said PPF account during the year 8,900
- Share of profits received from Z & Co. 1,90,000
Compute the total income of Ms. X and the tax payable for the assessment year 2020-21.
 A.1 Computation of income of Ms. X –
Rs. Rs.
- Arrears of rent (Rs. 1,50,000 – standard deduction under section 25A @ 30%) 1,05,000
- Interest on capital from Z & Co. (amount deductible in the hands of firm is interest calculated
@ 12%, the same is taxable in the hands of partner, Rs. 30,000 × 12 ÷ 15) 2,40,000
- Income from agricultural activity in Colombo 1,80,000
- Share of profit from Z & Co. [exempt under section 10(2A)] Nil 4,20,000
- Winnings from TV game (Rs. 70,000 ÷ 0.7, assumed that tax is deduction at source @ 30%) 1,00,000
- Gift received from mother’s father (exempt, being received from a relative) Nil
- Gift received from a friend 60,000
Rs. Rs.
- Rent of vacant plot of land 2,00,000
- Keyman insurance policy 2,20,000
- Amount forfeited (paid by buyer of a capital asset) 3,10,000 8,90,000
Under section 80G (cash donation exceeding Rs. 2,000 is not eligible for deduction) Nil 75,000
Income-tax 2,14,500

 1. Following incomes are derived by X during the year ending March 31, 2020 –
Rs.
Pension received from the US Government 3,20,000
Agricultural income from lands in Malaysia 2,70,000
Rent received from let out property in Colombo, Sri Lanka 4,20,000
Discuss the taxability of the above items where the assessee is (i) resident, (ii) non-resident.
 2. Y wishes to purchase a residential house costing Rs. 60 lakh from Ms. Z. The house is situated at Chennai. He also wants
to purchase agricultural lands in a rural area for Rs. 65 lakh. He wants to know whether there will be any obligation to deduct
tax at source in these two situations. Both the buyer as well as the sellers are residents in India. Advise Y suitably.
 3. A & Co., a partnership firm, is having a car dealership show-room. It has purchased cars for Rs. 2 crore from PQR Ltd.,
car manufacturers, the cost of each car being more than Rs. 12 lakh.
It sells the cars to individual buyers at a price yielding 10 per cent margin on cost. State whether there will be any obligation
to collect tax at source in the above two situations.
 1. Computation of income of X - It is not given in the problem whether the aforesaid payments are (Situation 1) received in India,
or (Situation 2) first received outside India and later remitted (or not remitted) to India. Taxability of these receipts under
the two situations will be as follows –
X is resident X is non-resident
Rs. Rs. Rs.
Pension from the US Government (Rs. 3,20,000 – standard deduction :
Rs. 50,000) 2,70,000 2,70,000 Nil
Agricultural income from Malaysia 2,70,000 2,70,000 Nil
Rent received from foreign let out property (Rs. 4,20,000 – standard
deduction @ 30%) 2,94,000 2,94,000 Nil
Net income 8,34,000 8,34,000 Nil
 2. Tax deduction by Y - In the case of purchase of residential house from Ms. Z, tax is deductible by Y under section 194-IA
@ 1% of purchase consideration (i.e., 1% of Rs. 60 lakh). However, tax deduction under section 194-IA is not applicable if
a resident person purchases rural agricultural land in India. Consequently, no tax deduction is required when X purchases
agricultural land for Rs. 65 lakh.
 3. Tax collection at source - When A & Co. sells cars to individual buyers, tax is required to be collected at source under section
206C(1F). Rate of tax collection is 1% of sale consideration [i.e., 1% of Rs. 13.2 lakh (being Rs. 12 lakh + 10% profit margin)
per car]. However, this tax collection is applicable only in the case of sale of motor vehicles in transactions of retail sales. In
other words, the above provision is not applicable on sale of motor vehicles by manufacturers to dealers/distributors.
Consequently, PQR Ltd., car manufacturer, is not required to collect tax at source on sale of motor cars for Rs. 2 crore to A
& Co., car dealer.
 1. Ms. X, a resident, owns a house property at Bhiwani in Haryana. The municipal value of the property is Rs. 7,50,000. Fair
rent of the property is Rs. 6,30,000. Standard rent is Rs. 7,20,000 per annum.
The property is let out for Rs. 75,000 per month from April 1, 2019 to December 31, 2019.
Thereafter, the tenant vacates the property and it is used by Ms. X for her self-occupation. Rent for the months of November
and December 2019 could not be realized from the tenant. The tenancy is bona fide but the defaulting tenant is in occupation
of another property of the assessee, paying rent regularly. She pays municipal taxes at the rate of 12 per cent during the year.
Further, she pays during the year interest of Rs. 35,000 on capital borrowed for financing repairs of house property.
You are required to compute her income from house property for the assessment year 2020-21.
 2. Explain the quantum of late fees under section 234F for delay in furnishing return of income within the prescribed time-
limit under section 139(1) for the assessment year 2020-21.
 1. Computation of income of Ms. X –
Rs.
Gross annual value
Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to
vacancy (unrealized rent of 2 months cannot be deducted, as the defaulting tenant is in occupation
of another property of the assessee) 6,75,000
Less: Municipal tax (12% of Rs. 7,50,000) 90,000
Income from property 4,06,000
 2. Late fee under section 234F - See para 296.7.
 1. X transfers a house plot to Mrs. Y for Rs. 45 lakh on May 12, 2019. The valuation determined by the stamp valuation
authority is Rs. 53 lakh. Discuss the tax consequences of above, in the hands of X and Mrs. Y.
Mrs. Y transfers this plot to Ms. Z on March 21, 2020 for Rs. 55 lakh. The valuation as per stamp valuation authority remains
the same at Rs. 53 lakh.
Compute the capital gains arising on sale of the house plot by Mrs. Y (assume that X, Mrs. Y and Ms. Z are related to each
other).
 2. A resides in Delhi. As per new rule in the city, private cars can be plied in the city only on alternate days.
He purchases a car on September 21, 2019, for the purpose of his business as per following details –
Rs.
Cost of car (excluding GST) 12,00,000
Add: GST (CGST : Rs. 1,68,000 + SGST : Rs. 1,68,000) 3,36,000
Total price of car 15,36,000
He estimates the usage of the car for personal purposes will be 25 per cent. He is advised that since the car has run only on
alternate days, half the depreciation, which is otherwise allowable, will be allowed. He has started using the car immediately
after purchase.
Determine the depreciation allowable on car for the assessment year 2020-21 (if this is the only asset in the block, rate of
depreciation : 15 per cent).
If this car were to be used in the subsequent assessment year 2021-22 on the same terms and conditions above, determine
the amount of allowable depreciation (assume that there is no change in the legal position under tax laws).
 1. Tax consequences in the hands of X - Stamp duty value of Rs. 53 lakh exceeds 105% of sale consideration (i.e., 105% of
Rs. 45 lakh). Consequently, Rs. 53 lakh will be taken as full value of consideration for the purpose of calculating capital gain
in the hands of X for the assessment year 2020-21.
Tax consequences in the hands of Mrs. Y –

Rs.
Full value of consideration (stamp duty value is lesser, not considered) 55,00,000
Less: Cost of acquisition [Rs. 45,00,000 + deemed income under section 56(2)(x) : Rs. 8,00,000] 53,00,000
Income from other sources [see Note] 8,00,000
Note - During the previous year, Mrs. Y has purchased a house property for Rs. 53,00,000. Stamp duty value exceeds 105 per
cent of purchase price. The difference between stamp duty value and purchase price is more than Rs. 50,000. Consequently,
Rs. 8,00,000, the quantum of inadequate consideration (i.e., Rs. 53,00,000 – Rs. 45,00,000) will be taxable under section 56(2)(x)
under the head “income from other sources”.
 2. Computation of depreciation –
Rs.
Depreciated value of the block on April 1, 2019 Nil
Add: Actual cost of car acquired during the year (input GST credit is not available, it can be included in
“actual cost” for claiming depreciation) 15,36,000
Less: Sale proceeds of asset sold during the year Nil
Less: Depreciation actually allowed for the previous year 2019-20 [normal depreciation : Rs. 2,30,400 (i.e.,
15% of Rs. 15,36,000) – depreciation attributable towards personal use of the car : Rs. 57,600 (i.e., 25% of
Rs. 2,30,400), allowable depreciation : Rs. 1,72,800 (i.e., Rs. 2,30,400 – Rs 57,600)] 1,72,800
Depreciated value on April 1, 2021 13,63,200
Add: Actual cost of car acquired during the year Nil
Less: Sale proceeds of asset sold during the year Nil
Less: Depreciation actually allowed for the previous year 2020-21 (15% of Rs. 13,63,200 – 25%
disallowance for personal use) 1,53,360
Depreciation value on April 1, 2021 12,09,840
Note - In the above problem, car is purchased on September 21, 2019 and it is put to use on the same day. It is available for
business use for more than 180 days during the previous year. The expression ‘put to use’ does not mean exploited for 180
days—SIV Industries Ltd. v. CIT [2008] 306 ITR 114 (Mad.). If an asset is kept ready for use for more than 180 days before the
end of the first year in which it is purchased but actually used for less than 180 days, the restriction of 50% depreciation will
not apply. This view is in line with the interpretation of the Courts that “use” includes “ready for use”. In other words, the
word “used” in section 32 may be given a wider meaning and embrace passive as well as active user—Vishwanath Bhaskar
Sathe v. CIT 10 ITC 386 (Bom.), CIT v. Vindhyachal Distilleries (P.) Ltd. [2005] 147 Taxman 127 (MP).
 1. X, employed as General Manager in AR (P.) Ltd., furnishes the following information for the year ending March 31,
2020 –
- Basic salary up to November 30, 2019 : Rs. 70,000 per month.
- Basic salary from December 1, 2019 : Rs. 80,000 per month (salary is due and paid on the last day of every month).
- Dearness allowance at the rate of 50 per cent of basic salary (not forming part of salary for retirement benefits).
- Bonus equal to one month salary (paid in November 2019 on basic salary plus dearness allowance applicable for that
month).
- Contribution of employer to recognized provident fund : 18 per cent of basic salary (X also contributes an equivalent
amount).
- Professional tax paid : Rs. 6,000 (of which Rs. 3,000 is paid by the employer).
- Facility of laptop is provided to X for both official and personal use (cost of laptop : Rs. 65,000, purchased by the company
on October 11, 2019).
- Leave travel concession given to X, his wife and three children (one daughter aged 6 and twin sons aged 4). Cost of air
tickets (economy class) reimbursed by the employer Rs. 20,000 for adults and lump sum of Rs. 25,000 for three children.
X is eligible for availing exemption this year to the extent it is permissible under the Act.
Compute the taxable salary of X.
 2. Examine with brief reasons, whether the following are chargeable to income-tax and the amount liable to tax with
reference to the provisions of the Act –
-Allowance received by an employee Y working in a transport system at Rs. 12,000 per month which has been granted
to meet his personal expenditure while on duty (Y is not in receipt of any daily allowance from his employer).
- During the previous year 2019-20, Mrs. Z, resident, received a sum of Rs. 8,50,000 as dividend from Indian companies
and Rs. 4,00,000 as dividend from Indian equity oriented mutual fund units.
 1. Computation of income of X -
Rs.
Bonus (Rs. 70,000 + 50% of Rs. 70,000) 1,05,000
Employer’s contribution in excess of 12% of basic salary (6% of Rs. 8,80,000) 52,800
Professional tax paid by employer 3,000
Laptop (not taxable) Nil
Leave travel concession [exempt under section 10(5)] Nil
- Standard deduction 50,000
- Professional tax (not restricted to Rs. 2,500 under the Income-tax Act) 6,000
 2. Allowance received by Y - Y is employed by a transport undertaking. He gets an allowance to meet his personal expenditure
during his duty performed in the course of running of transport from one place to another place. He is not in receipt of daily
allowance. This transport allowance is exempt under section 10(14) to the extent of 70% of the allowance or Rs. 10,000 per
month, whichever is lower. Consequently, out of Rs. 12,000 per month, an exemption of Rs. 8,400 per month (being 70% of
the allowance) is available. Amount taxable is Rs. 43,200 [i.e., (Rs. 12,000 – Rs. 8,400) × 12].
Dividend received by Mrs. Z - If aggregate dividend received from Indian companies does not exceed Rs. 10,00,000, it is exempt
from tax under section 10(34). Income received from mutual fund is exempt under section 10(35) (without any monitory
ceiling). Consequently, nothing is taxable in the hands of Mrs. Z.
 1. X reports the following income/loss, for the previous year 2019-20 –
Rs.
Loss from let out house property 2,50,000
Loss from non-speculation business 3,20,000
Income from speculation business 12,45 000
Loss from specified business covered under section 35AD 4,10,000
Winnings from lotteries (gross) 1,50,000
Winnings from betting 90,000
Loss from card games 3,40,000
Compute the total income of X for the assessment year 2020-21, showing clearly the manner of set-off and the items eligible
for carry forward. The return of income will be filed on July 30, 2020.
 2. Y and Mrs. Y have two minor children M and N. The following are the receipts in the hands of M and N during the year
ending March 31, 2020 –
- M gets a gift of Rs. 70,000 from her friend’s father on the occasion of her birthday.
- M gets a prize money of Rs. 3,00,000 in national quiz competition.
- The aforesaid money is invested in debentures of a company [interest of Rs. 19,000 (gross) accrued during the year].
- N gets a lottery prize. The net amount received after deduction of tax at source is Rs. 1,05,000.
Y’s income before considering clubbing provisions is higher than that of his wife. Discuss how these items will be considered
for taxation under the provisions of the Act (detailed computation of income not required).
 3. Z (32 years) furnishes the following information pertaining to his income for the assessment year 2020-21 –
Rs.
Interest on fixed deposits 7,22,000
He has not claimed any deduction under Chapter VI-A. Find out the tax liability of Z.

Rs. Rs.
Business income –
Income from speculation business 12,45,000
Less: Loss from non-speculation business 3,20,000
Less: Loss from specified business covered under section 35AD (not eligible, can be set off
only against income from specified business) Nil
Less: House property loss (Rs. 50,000 to be carried forward) 2,00,000 7,25,000
Lottery winnings 1,50,000
Betting winnings 90,000
Less: Card games loss (cannot be set off) Nil 2,40,000
Less: Deduction under sections 80C to 80U Nil
Net income 9,65,000
 2. Computation of income of Y, M and N - As income of Y is higher than income of Mrs. Y, minor child’s income will be taxable
in the hands of Y as follows –
Y M N
Rs. Rs. Rs.
Gift received by M [Rs. 70,000 – exemption under section 10(32) : Rs. 1,500, taxa-
ble under section 56(2)(x) and clubbed in the hands of Y] 68,500 – –
Prize won by M in a national quiz competition (not to be clubbed in the hands of
father, as income arises on account of application of personal skill of minor child
M) – 3,00,000 –
Interest on debentures accrued to M (to be clubbed in the hands of Y) 19,000 – –
Lottery prize of N [Rs. 1,05,000 ÷ (1 – 0.30) – exemption under section 10(32) :
Rs. 1,500] 1,48,500 – –
Total 2,36,000 3,00,000 Nil
 3. Computation of tax liability of Z –
Rs.
Interest on fixed deposits 7,22,000
Income-tax on net income 13,39,500
Add: Surcharge @10% 1,33,950
Income-tax and surcharge under normal computation (a) 14,73,450
Computation for marginal relief –
Step 1 - Income-tax on Rs. 50 lakh 13,12,500
Step 2 - Tax @ 100% of income in excess of Rs. 50 lakh (100% of Rs. 90,000) 90,000
Tax under marginal relief computation (b) 14,02,500
Normal tax or tax under marginal relief, whichever is lower [(a) or (b), whichever is lower] (c) 14,02,500
Add: Health and education cess @ 4% of (c) 56,100
 1. Mrs. V, a resident individual, is running a SEZ unit, as well as a unit in Domestic Tariff Area (DTA). She furnishes the
following details relating to the year ending March 31, 2020, pertaining to these two units (Rs. in lakh).
DTA Unit SEZ Unit

Export turnover 100 1,000
Total turnover 400 1,100
Net profit 50 220
Compute the deduction available under section 10AA –
(i) When the SEZ unit had been set up on March 12, 2011, and
(ii)When the SEZ unit had been set up on August 12, 2016.
 2. Every person is required to file a return of income on or before due date in the prescribed form and manner as per section
139(1). What is the meaning of due date of filing income-tax returns for different categories of assessees as per section 139(1) ?
 1. Amount deductible in the hands of X Ltd. –
DTA unit SEZ unit
Total turnover 400 1,100
Export turnover 100 1,000
Net profit 50 220
Profit of SEZ unit for the purpose of section 10AA (Rs. 220 lakh × Rs. 1,000 lakh ÷
Rs. 1,100 lakh) – 200
Amount of deduction under section 10AA –
- If SEZ unit was set up on March 12, 2011 (50%* of Rs. 200 lakh) 100
- If SEZ unit was set up on August 12, 2016 (100%* of Rs. 200 lakh) 200
*100% deduction is available in first 5 years. 50% deduction is available in the next 5 years.
 2. Due date of filing income-tax return - See para 244.3.
 1. X, a registered supplier of services in Bangalore (Karnataka State), has provided the following information for the month
of February 2020 –
Rs.
Intra-State taxable supply of services 5,20,000
Legal fee paid to a lawyer located within the State of Karnataka 20,000
Rent paid to the State Government for his office building 30,000
Received for services towards conduct of exams to Loveall University, Pune (recognized by law), being
an inter-State transaction 16,000
Compute the net GST liability (CGST, SGST or IGST) of X for the month of February 2020.
Rate of CGST, SGST and IGST are 9 per cent, 9 per cent and 18 per cent respectively. All the amounts given above are exclusive
of taxes. Assume that X Ltd. is not affected by the operation of rule 36(4).
 2. Y Ltd., a registered supplier, is engaged in the manufacture of tanks. The company provides the following information
pertaining to GST paid on the purchases made/input services availed by it during the month of January 2020 –
GST paid
Rs.
Purchase of machinery (where debit note is issued) 1,15,000
Input purchased was directly delivered to Z, a job worker and a registered supplier 80,000
Computers purchased (depreciation was claimed on the said GST portion under the Income-tax Act) 50,000
Works contract services availed for construction of staff quarters within the company premises 4,25,000
Determine the amount of input tax credit available to Y Ltd. for the month of January 2020 by giving brief explanations for
treatment of various items. Subject to the information given above, all the conditions necessary for availing the input tax
credit [including rule 36(4)] have been fulfilled.

 1. GST liability of X –
IGST CGST SGST
Rs. Rs. Rs.
Liability under reverse charge mechanism –
Legal fee paid to a lawyer (9% of Rs. 20,000, 9% of Rs. 20,000) – 1,800 1,800
Rent paid to Karnataka Government (9% of Rs. 30,000, 9% of Rs. 30,000) – 2,700 2,700
GST liability under reverse charge (a) – 4,500 4,500
Liability under forward charge –
Intra-State supply of services (9% of Rs. 5,20,000, 9% of Rs. 5,20,000) – 46,800 46,800
Inter-State supply of services to Loveall University for conduct of examinations
[exempt vide Exemption Notification (Entry 66)] – – –
Total – 46,800 46,800
- Fees paid to a lawyer (it is assumed that legal service provided by the lawyer is
used for business purposes) – 1,800 1,800
- Rent of office building – 2,700 2,700
GST payable under forward charge (b) – 42,300 42,300
GST payable for February 2020 [(a) + (b)] – 46,800 46,800
 2. Input tax credit available to Y Ltd. –
Rs.
Purchase of machinery (eligible even if assessee has debit note is issued by supplier) 1,15,000
Purchase of input (eligible even if directly delivered to registered job worker) 80,000
Purchase of computers (not eligible as depreciation is claimed on GST portion) Nil
Works contract services [not eligible has not permitted by section 17(5)(c)] Nil
Total 1,95,000
 1. Ms. X, a registered supplier in Kochi (Kerala State), provides the following information pertaining to intra-State supplies
made by her during the month of March 2020 –
Rs.
List price of goods supplied intra-State (exclusive of items given below) 3,30,000
Swachh Bharat Cess levied on sale of the goods 12,500
Packing expenses charged separately in the invoice 10,800
Discount of 1 per cent on list price of goods was provided (recorded in the invoice of goods)
Subsidy received from State Government for encouraging women entrepreneurs. 5,000
Compute the value of taxable supply and the gross GST liability of Ms. X for the month of March 2020 assuming rate of CGST
to be 9 per cent and SGST to be 9 per cent. All the amounts given above are exclusive of GST.
 2. Explain the meaning of supply as per provisions of section 7(1) of CGST Act.
 1. Taxable value of supply made by Ms. X - Amount charged by Ms. X is not clearly given in the problem. It is assumed that
invoice prepared by Ms. X (and amount collected by her before GST) is as follows –
Rs.
List price of goods supplied (Rs. 3,30,000 – 1% discount) 3,26,700
Swachh Bharat Cess 12,500
Packing expenses 10,800
Subsidy received from State Government (–) 5,000
Total amount charged (before GST) 3,45,000
Computation of GST –
Rs.
Amount charged (as given above) 3,45,000
Add:
Swachh Bharat Cess (already included in Rs. 3,45,000) Nil
Packing expenses (already included in Rs. 3,45,000) Nil
Subsidy directly linked with supply (Government subsidy cannot be added, a non-government subsidy
can be added) Nil
Add: GST –
- CGST (9% of Rs. 3,45,000) 31,050
- SGST (9% of Rs. 3,45,000) 31,050
Total 4,07,100
 2. Meaning of supply - See para 411.
 1. From the following information, compute the net GST payable for the month of March 2020. Assume that X Ltd. is not
affected by the operation of rule 36(4).
GST on outward supply Input tax credit balance in electronic
credit ledger as on March 1, 2020
Rs. Rs.
CGST 2,000 Nil
SGST 15,000 1,000
IGST 24,000 37,000
 2. Decide with reason whether the following independent services are exempt under GST –
- F Trans, a goods transport agency, transported relief materials meant for victims of Kerala floods (being a natural
disaster) by road from Delhi to Ernakulam, for a company.
- K Enterprises, an event organizer, provides services to B Ltd. by way of organizing business exhibition at Pragati Maidan
in New Delhi as part of “Make in India” initiative.
 3. Discuss, who is liable to pay GST in the two cases given below ? Assume that the recipient is located in the taxable territory.
Ignore the aggregate turnover and exemption available.
- S provides sponsorship services to a cricket academy, an LLP.
- S Transporter, a goods transport agency, transports goods of K & Co. (a partnership firm which is not registered under
GST).
 1. Computation of net GST liability –
IGST CGST SGST
Rs. Rs. Rs.
GST on outward supply 24,000 2,000 15,000
Less: IGST on inward supply – 2,000 11,000
 2. Exemption from GST –

Transportation of relief material by F Transportation of relief material by a goods transport agency for victims of
Trans, a goods transport agency, for natural or man-made disasters, calamities, accidents or mishap, is exempt
victims of Kerala flood from GST vide Exemption Notification (Entry 21)
Event management service provided No exemption is available for event management service for exhibition in
by K Enterprises for exhibition in India India
 3. Reverse charge mechanism –

S provides sponsorship services to a Recipient of service is liable to pay GST under reverse charge mechanism in
cricket academy, an LLP case of sponsorship services provided to a body corporate/partnership
firm.
S Transporter, a goods transport agency, Recipient is liable to pay GST under reverse charge mechanism. This rule is
transports goods of K & Co. (a partner- applicable even if recipient is a partnership firm which is not registered
ship firm which is not registered under under GST. However, if the goods transport agency has paid GST @ 12%,
GST) reverse charge mechanism is not applicable.
 1. Determine with brief reasons, whether the following statements are True or False –
- Registration under the CGST Act can be cancelled by the proper officer, if the voluntarily registered person has not
commenced the business within 3 months from the date of registration.
- Electronic cash ledger balance of Rs. 5,000 under the major head of IGST can be utilized for discharging the liability of
major head of CGST.
 2. X provides continuous supply of services (CSS) to T Ltd. He furnishes the following further information –
- Date of commencement of providing continuous supply : October 1, 2019
- Date of completion of supply : January 31, 2020
- Date of receipt of payment by X : March 30, 2020
Determine the time of issue of invoice as per provisions of CGST Act, in the following situations –
- If no due date for payment is agreed upon by both under the contract of CSS.
- If payment is linked to the completion of service.
- If T Ltd. has to make payment on March 25, 2020 as per the contract with X.
 1. True or False statement –
False In the case of a voluntarily registered person, registration can be cancelled by the proper officer, if such person
has not commenced the business within 6 months from the date of registration.
False Electronic cash ledger balance of IGST cannot be utilized for discharging the liability of CGST (system does
not permit).
 2. Continuous supply of services –
If no due date for payment is Where the due date of payment is not ascertainable from the contract, the invoice shall
agreed be issued before or at the time when the supplier of service receives the payment. In this
case, date of receipt of payment is March 30, 2020. Invoice shall be issued on or before
March 30, 2020.
If payment is linked to the Where the payment is linked to the completion of an event, the invoice shall be issued
completion of service on or before the date of completion of that event. Date of completion of supply is January
31, 2020. Invoice shall be issued on or before January 31, 2020.
If recipient of services is Where the due date of payment is ascertainable from the contract, the invoice shall be
required to make payment issued on or before the due date of payment. Date of payment as per contract is March
on March 25, 2020 (as per 25, 2020. Invoice shall be issued on or before March 25, 2020.
contract)

 1. State the persons who are not liable for registration as per provisions of section 23 of CGST Act.
 2. X, a non-resident person, wants to provide taxable supply of goods. He has no fixed place of business or residence in India.
He wants clarifications on the following issues –
- When shall he apply for registration ?
- Is PAN mandatory for his registration ?
- What is the period of validity of registration certificate granted to him ?
- Will he be able to extend the validity of his registration ? If yes, what will be the period of extension ?
 3. List any four Central levies, which are subsumed in GST.
 4. Ms. Y wants to adjust input tax credit for payment of interest, penalty and payment of tax under reverse charge. Explain
whether she can do so.

 1. Persons not liable for registration - Under section 23, a few persons are not required to get registration even if the aggregate
turnover exceeds the threshold limit of Rs. 20 lakh/Rs. 10 lakh [see para 522.2].
 2. Registration by non-resident person - A non-resident taxable person making taxable supply in India has to take registration
compulsorily. The specific queries are discussed in the table given below –
Time of application of registration He has to apply for registration at least 5 days prior to commencing his business
in India.
Requirement of PAN He need not have a PAN in India. He can apply for registration by using a valid
passport.
Validity of registration certificate The certificate of registration issued to a non-resident taxable person shall be
valid for the period specified in the application for registration or 90 days from
the effective date of registration, whichever is earlier.
Extension of validity The period of 90 days may be extended by a further period of 90 days by the
proper officer.
 3. Central levies which are subsumed in GST - See para 402.
 4. Utilisation of input tax credit for payment of interest, penalty, etc. - If GST is payable by the recipient of goods/services under
reverse charge mechanism, input tax credit cannot be utilised for payment of GST. This is because for payment of GST on
outward supply, input tax credit on inward supply can be utilised. GST under reverse charge mechanism is not tax on
outward supply (it is tax on inward supply). After payment of tax under reverse charge mechanism, it can be utilised for
payment of GST on outward supply. Moreover, input tax credit cannot be utilised for payment of interest and penalty.
Intermediate (IPC), November 2018 (Old)1
 Q.1 X (48 years), a resident individual, provides accountancy consultancy services. His income and expenditure account for
the year ending March 31, 2020 is as follows –
Rs. Rs.
Salary 3,00,000 Consulting fees 8,00,000
Motor car expenses 58,000 Share of profit from HUF 25,000
Depreciation 47,500 Interest on saving bank deposits 15,000
Medical expenses 70,000 Interest on income-tax refund 8000
Purchase of computer 80,000
Bonus 10,000
Office and administrative 75,000
Excess of income over expenditure 1,52,500
8,48,000 8,48,000
Other information pertaining to the previous year 2019-20 –
1. Salary includes a payment of Rs. 12,000 per month to his brother-in-law who is in-charge of the marketing department.
However, in comparison to similar business, the reasonable salary of a marketing supervisor is Rs. 10,000 per month.
2. Interest on saving bank deposit belongs to his wife who has deposited the money out of the pocket money given to her
every month.
3. Written down value of the assets as on April 1, 2019 are as follows –
Motor car (40 per cent used for personal use) : Rs. 2,00,000
Furniture and fittings : Rs. 50,000
4. Medical expenses includes –
- Family planning expenditure Rs. 15,000 incurred for the employees which was revenue in nature.
- Medical expenses for his father Rs. 35,000. Father’s age is 65 years.
5. The computer is purchased on June 5, 2019 on credit. Mode of payment is as follows –
- Rs. 18,000 is paid in cash as down payment on the date of purchase.
- Remaining amount is paid by an account payee cheque on August 10, 2019.
6. Bonus is paid on September 30, 2020.
7. General expenses include commission payment of Rs. 22,000 to Y for the promotion of business on September 17, 2019
without deduction of tax at source.
8. X gets gold coins from a family friend on the occasion of his marriage anniversary on December 5, 2019 (the market value
of the coins being Rs. 55,000 on the date of gift).
Compute the total income and the tax liability of X for the assessment year 2020-21.
 A.1 Computation of income of X (it is assumed that X maintains books of account according to cash system of
accounting) –
Rs.
Excess of income over expenditure as per income and expenditure account 1,52,500
Adjustments –
Less: Share of profit from HUF (exempt) (–)25,000
Less: Interest on savings bank (not to be clubbed, as it belongs to Mrs. X, who has deposited money out
of her pocket money) (–)15,000
Less: Interest on income-tax refund (taxable under the head “Income from other sources”) (–)8,000
Add: Excess salary paid to brother-in-law (Rs. 2,000 × 12) 24,000
Add: Motor car expenses (40% disallowed pertaining to personal use) (40% of Rs. 58,000) 23,200
Add: Depreciation 47,500
Less: Depreciation on motor car (15% of Rs. 2,00,000 × 60%) (–)18,000
Less: Depreciation on furniture (10% of Rs. 50,000) (–)5,000
Add: Medical expenditure for employees [not deductible under section 36(1)(ix), as the assessee is not
a company; maybe claimed as deduction under section 37(1), no adjustment required] Nil
Add: Medical expenditure for X’s father 35,000
Add: Cost of computer 80,000
Less: Depreciation of computer [40% of “actual cost” (i.e., Rs. 80,000 – Rs. 18,000 being paid in cash)] (–)24,800
Add: Bonus (in cash system of accounting, amount not paid during the previous year is not deductible) 10,000
Add: Commission payment of Rs. 22,000 (Commission is paid without TDS to Y. Tax deduction
provision of section 194H is not applicable in the case of an individual, if his books of account are not
required to be audited under section 44AB in the preceding financial year. It is assumed that X is not
subject to tax audit under section 44AB in the preceding financial year) (no adjustment required) Nil
Income under section 28 2,76,400
- Interest on savings bank (not to be clubbed, as it belongs to Mrs. X, who has deposited money out
of her pocket money) Nil
- Interest on income-tax refund 8,000
- Gold coins received as gift 55,000
Less: Deduction under section 80D (medical expenditure for X’s father, who is a senior citizen) 35,000
Net income 3,04,400
Tax on net income
Income-tax 2,720
Less: Rebate under section 87A 2,720
Balance Nil
Add: Health and education cess @ 4% Nil
Tax liability (rounded off) Nil
 1. X, an Indian citizen, travels frequently out of India for his business trip as well as for his outings. He leaves India from
Mumbai airport on May 15, 2019 (as stamped in the passport). He is in India for less than 365 days during the 4 years
immediately preceding the previous year 2019-20 and he is not in India for at least 60 days during the previous year
2019-20.
Determine the residential status of X for the assessment year 2020-21. Also determine the total income of X by considering
the information given below –
- Dividend of Rs. 20,000 is received from S Ltd. (a Switzerland based company), which is transferred to his Swiss bank
account. He has borrowed money from Y (a non-resident Indian), for the abovementioned investment on April 2, 2019.
Interest on the borrowed money for the previous year 2019-20 is Rs. 2,500.
- Short-term capital gain on the sale of shares of T India Ltd. (a listed Indian company) is Rs. 35,000. The sale consideration
is credited to his Swiss bank account.
- Interest on fixed deposit with SBI (Mumbai) is Rs. 8,000 (it is credited to his saving account).
 2. Z (35 years), a resident, works as a deputy manager in D Ltd., Noida since April 2012. He owns two houses which are used
for his residential purposes. Information pertaining to these properties is given below for the previous year 2019-20 –
House I (Noida) (used by Z and House II (Gurgaon) (used
his family for residence) for parents residence)
Rs. Rs.
Municipal value (per annum) 8,00,000 9,00,000
Fair rent 9,20,000 8,80,000
Standard rent (per annum) 8,40,000 9,20,000
Actual rent Nil Nil
Municipal taxes paid during the year 8 per cent 10 per cent
Date of completion of construction March 31, 2012 May 25, 2019
Z has taken a loan of Rs. 18,00,000 for the construction of the House II on April 1, 2017. Interest is payable @ 10 per cent per
annum. Till date, no payment is made towards the principal amount.
Z, seeks your professional advice to plan his tax liability. Give suggestions to Z, which house should be considered and
treated as a self-occupied property so that his house property income is minimum for the assessment year 2020-21.
 1. Residential status of X and computation of income - During the previous year 2019-20, X is in India for less than 60 days. He
is, therefore, non-resident in India for the assessment year 2020-21. Income of X for the assessment year is calculated as
follows –
Rs.
Dividend from foreign company (dividend is transferred to Swiss bank account of X, it is foreign income
which is not taxable in the case of non-resident, when income is not taxable, interest on borrowed money
is not deductible) Nil
Short-term capital gain (income is accrued in India as property in shares is situated in India, it is
taxable even if the sale consideration is credited to a bank account outside India) 35,000
Interest on fixed deposit (it is taxable) 8,000
Net income 43,000
 2. House property income of Z - Z owns two house properties which are self-occupied (and not let out or lying vacant). These
two house properties will be treated as self-occupied properties and income will be calculated as follows –
House I House II
Rs. Rs.
Net annual value (municipal tax not deductible) Nil Nil
Standard deduction @ 30% Nil Nil
Interest on borrowed capital [Interest of the current year is Rs. 1,80,000. Interest of pre-
construction period of 2 years (i.e., April 1, 2017 to March 31, 2019) is Rs. 3,60,000 (i.e., Rs.
18,00,000 × 2 × 10%). Pre-construction period’s interest is deductible in 5 years in 5 equal
instalments. Interest deductible for the current year is Rs. 2,52,000 (i.e., current year interest of
Rs. 1,80,000 + 1/5 of pre-construction period’s interest of Rs. 3,60,000). In the case of self-
occupied properties, interest deductible cannot exceed Rs. 2,00,000] Nil 2,00,000
Income from self-occupied property Nil (–)2,00,000

 1. Ms. X (48 years), a resident individual, is an assistant manager of A Ltd. She was appointed on June 1, 2017 at a salary
of Rs. 32,000 per month. During the previous year 2019-20, she gets the following amounts from her employer –
- Dearness allowance (10 per cent of basic pay which forms part of salary for retirement benefits).
- Bonus of Rs. 32,000 (for the previous year 2018-19) is received on October 1, 2019.
- Fixed medical allowance of Rs. 20,000 for meeting medical expenditure.
- The employer-company also reimburses a medical bill of Rs. 3,000 of Ms. X’s father-in-law (who is dependent on her).
- The employer-company provides a laptop both for official and personal use of Ms. X (cost of laptop being Rs. 15,000,
acquired on June 1, 2017).
- Salary of domestic servant of Ms. X of Rs. 1,000 per month is reimbursed by the employer-company.
- Employer company has allotted 500 equity shares in the month of December 2019 @ Rs. 150 per share (fair market value
is Rs. 250 per share on the date of exercise of option by Ms. X). The fair market value is computed in accordance with the
method prescribed under the Act.
- Professional tax Rs. 2,500 (out of which Rs. 1,800 is paid by the employer).
Compute the total income of Ms. X for the assessment year 2020-21.
 2. Y (40 years), a resident individual, suffers from severe disability as certified by medical authority. He gives the following
information for the previous year 2019-20 –
- Y has written a book for Himalaya Publications on “Yoga and its benefits”. A lump sum amount of royalty income earned
in the previous year 2019-20 amounts to Rs. 6,00,000. Expenses incurred for writing the book is Rs. 20,000.
- A few friends of Y have gifted a statue of Lord Ganesh to Y’s daughter Ms. D (14 years) on the successful completion of
her secondary school. Fair market value of the statue is Rs. 55,000.
- Y’s minor son (10 years) has received a gift of gold chain (market value being Rs. 35,000) on the occasion of his thread
ceremony.
- Y has deposited Rs. 50,000 in fixed deposit with Bank of Baroda in the name of his son in March 2018. Interest earned on
such deposit is Rs. 5,000.
- Y donates Rs. 5,000 in cash to S, a NGO set up for the destitute (the association is registered under section 80G).
- Y pays life insurance premium on his life : Rs. 10,000 (sum assured : Rs. 1,00,000)
Compute the gross total income of Y for the assessment year 2020-21.
Rs.
Basic salary (salary at the beginning of the current previous year is not available, it is assumed that the
assessee does not get any annual increment since her joining the employer company) (Rs. 32,000 × 12) 3,84,000
Dearness allowance @ 10% of basic salary 38,400
Bonus of earlier year (on the assumption that it was not taxed earlier) 32,000
Fixed medical allowance 20,000
Reimbursement of medical bill of father-in-law 3,000
Laptop (not taxable) Nil
Reimbursement of salary of domestic servant 12,000
Allotment of shares [(Rs. 250 – Rs. 150) × 500] 50,000
Professional tax paid by employer 1,800
Standard deduction 50,000
Professional tax 2,500
Net income 4,88,700
 2. Computation of gross total income of Y –

Rs.
Royalty income (Rs. 6,00,000 – Rs. 20,000) (deduction under section 80QQB is available up to Rs. 3,00,000
if a few conditions are satisfied) 5,80,000
Gift of Lord Ganesh statue to minor daughter (Rs. 55,000 – Rs. 1,500) 53,500
Gold chain to minor son (not taxable as value of movable property in the hands of minor son is not more
than Rs. 50,000) Nil
Fixed deposit interest of minor son (Rs. 5,000 – Rs. 1,500) 3,500
Cash donation to NGO (it is not income but an application of income) (deduction under section 80G is
not available as donation exceeding Rs. 2,000 is given in cash) Nil
Payment of life insurance premium (it is not income but it is an application income, deduction is, how-
ever, available under section 80C) Nil
 1. X, a resident individual, is a dealer of food grains. During the previous year 2018-19, total turnover of his business is
Rs. 80 lakh (out of which Rs. 15 lakh is received by account payee cheques and balance in cash). He estimates similar turnover
for the previous year 2019-20. As suggested by his tax consultant, X wants to opt for computation of profit and gains of
business on presumption basis under section 44AD for the previous year 2019-20.
Guide X relating to the provisions of advance tax with its due date along with the amount payable, if he opts for the above
mentioned presumptive taxation mechanism.
 2. Y set up a manufacturing unit of detergent powder in notified backward area on April 20, 2019. He purchases the following
assets (depreciation rate being 15 per cent) during the previous year 2019-20.
Rs. in lakh
Machinery A, Machinery B and Machinery C from PQR Ltd. on credit (installed on June 20, 2019) 45
Machinery D from Z Ltd. (installed on September 5, 2019). The invoice is paid in cash on the same day 25
Machinery E from D Ltd. (a second-hand machine dealer) on December 15, 2019 (the payment for the
purchase invoice is made by NEFT on January 2, 2020) 5
Compute the depreciation allowance under section 32 for the assessment year 2020-21.
 1. Computation of advance tax liability of X –
Rs.
Business income under section 44AD (6% of Rs. 15 lakh + 8% of Rs. 65 lakh) 6,10,000
Net income 6,10,000
Income-tax on net income 34,500
Advance tax liability 35,880
X is required to pay advance tax of Rs. 35,880 on or before March 15, 2020. Since X has opted for presumptive taxation scheme
under section 44AD, he is not required to pay advance tax on June 15, 2019, September 15, 2019 and December 15, 2019.
 2. Computation of depreciation in the hands of Y –
Rs.
Written down value of the block on the first day of the previous year (i.e., April 20, 2019) Nil
Add: Actual cost of Machinery A, Machinery B and Machinery C 45,00,000
Add: Actual cost of Machinery D (since the entire amount is paid in cash, “actual cost” of the asset is
taken as zero) Nil
Add: Actual cost of second-hand Machinery E 5,00,000
Less: Sale proceeds Nil
Less: Normal depreciation for the previous year 2019-20 (15% of Rs. 45,00,000 + ½ × 15% of Rs. 5,00,000) 7,12,500
Less: Additional depreciation (20% of Rs. 45,00,000) 9,00,000
Note - It is not clear from the question whether Y has set up the manufacturing unit of detergent power in a notified area in
Andhra Pradesh, Bihar, Telangana or West Bengal. If the manufacturing unit of Y is situated in a notified backward area
in these states, additional depreciation under section 32 will be available at the rate of 35%. Consequently, in the above table
the quantum of additional depreciation will be Rs. 15,75,000 (and not Rs. 9,00,000).
 Q.5 X submits the following information for the previous year 2019-20 –
Rs.
Income from salary (before standard deduction) 6,50,000
Income from House I 55,000
Loss from House II (self-occupied property) (–)1,25,000
Loss from House III (–)1,90,000
Loss from leather business (–)68,000
Profit from cloth business 1,70,000
Business loss of chemical business acquired by inheritance (–)45,000
Brought forward loss of discontinued textile business pertaining to the previous year 2014-15 50,000
Long-term capital gain on transfer of listed equity shares [securities transaction tax (STT) is paid,
assume that capital gain is calculated as per section 112A] 75,000
Short-term capital loss on transfer of equity-oriented mutual fund units (STT is paid) (–)35,000
Income from crossword puzzles 12,000
Loss from the activity of owning and maintaining race horses (–)7,500
Income from the activity of owning and maintaining race bulls 9,000
X has taken an education loan from PQR Bank for his niece (who is dependent on him) for pursuing full-time MBA course
on April 2, 2019 (interest due for the previous year 2019-20 being Rs. 55,000). Principal and interest actually paid during the
year is Rs. 90,000 and Rs. 30,000 respectively.
Compute the gross total income (and losses to be carried forward) for the assessment year 2020-21.
 A.5 Computation of gross total income of X –
Rs. Rs.
Income under the head “Salaries” (Rs. 6,50,000 – standard deduction : Rs. 50,000) 6,00,000
- House I 55,000
- House II (–)1,25,000
- House III (–)1,90,000
Total (*Rs. 60,000 will be carried forward) (–)2,60,000* (–)2,00,000
- Leather business (–)68,000
- Cloth business 1,70,000
- Chemical business (–)45,000
- Textile business (brought forward loss) (–)50,000 7,000
Capital gains
- Long-term capital gain on equity shares (taxable under section 112A) 75,000
- Short-term capital loss on transfer of units (–)35,000 40,000
- Crossword puzzles 12,000
- Foreign company dividend 8,500
- Loss from the activity of owning and maintaining race horses (cannot be set off
against any other income, can be carried forward) Nil
- Income from the activity of owning and maintaining race bulls 9,000
- Payment of interest on education loan and the payment of principal (not income,
but applicable of income, deduction can be claimed under section 80E) Nil 29,500

 1. Examine the applicability of the provisions for tax deduction at source under Income-tax Act –
- Z, a resident, is due to receive Rs. 95,000 on October 1, 2019 towards maturity proceeds of LIC policy taken on October
1, 2012 (sum assured : Rs. 90,000 and the annual premium : Rs. 15,000).
- Y Ltd., an advertising company, has retained a sum of Rs. 15 lakh, towards charges for procuring and canvassing
advertisement, from payment of Rs. 1 crore due to cTV, a television channel. However, it remits the balance of Rs. 85 lakh
to the television channel. Discuss whether tax deduction at source under section 194H is attracted on the sum of Rs. 15
lakh retained by Y Ltd.
- X is a salaried employee. He pays rent of Rs. 55,000 per month to Y (who does not have PAN). Rent is paid from June 1,
2019 to December 31, 2019 (X vacates the property on December 31, 2019). Discuss whether X is required to deduct tax
at source. If yes, determine the amount of TDS and the time of tax deduction. Assume that rent of June 2019 is paid on
June 5, 2019 (likewise, rent of each month is paid in the first week on 5th day of each month).
 2. S, an assessee, fails to file his income-tax return for the assessment year 2019-20 (due to inadvertent reasons).
- Can he file the above return in financial year 2020-21 ? If yes, when is the last date to file the above return ?
- What are the consequences of non-filing the return within the due date under section 139(1) ?
 3. The following details are provided by P, an individual, for the assessment year 2020-21.
- Total estimated tax payable : Rs. 2,00,000.
- TDS (estimated but not deducted by the payers) : Rs. 55,000.
Determine the advance tax payable (with due dates) for the assessment year 2020-21.
 1. Tax deduction at source –
Maturity pro- Annual insurance premium is more than 10% of sum assured. In the hands of recipient, the exemption
ceeds of LIC of section 10(10D) is not available. TDS under section 194DA is required at the rate of 5% of the amount
policy paya- of income comprised in the maturity amount whenever the recipient is not entitled for exemption
ble to Z under section 10(10D). However, there is a threshold limit of Rs. 1,00,000 under section 194DA. Since,
in this case, the amount payable by the insurance company on maturity is Rs. 95,000, TDS under section
194D is not required.
Amount of Under section 194H, TDS is required on payment of brokerage at the time of payment of such income
Rs. 15 lakh or at the time of credit of such income to the account of the payee in the books of account of the payer,
retained by whichever is earlier. Even if the amount is transferred to suspense account (or any other account) by the
advertising payer of income in his books of account, it will be assumed that amount is credited by the payer in his
company books in the account of the recipient, and TDS is required at the time of passing of such book entry. In
the given problem, if Rs. 15 lakh is transferred by the advertising company in its books of account to the
account of recipient (or to suspense account or any other account), TDS under section 194H is applicable
at the time of passing of such book entry. If, however, no such entry is passed (and the amount is retained,
not actually paid) in the current financial year, TDS under section 194H is not applicable.
Payment of In this case, TDS is required under section 194-IB. Threshold limit is Rs. 50,000 per month. Rate of TDS
rent by sala- is 5% of rent. Tax is required to be deducted (for the entire financial year) at the time of payment of rent
ried employee for the last month of the financial year (or last month of tenancy, if property is vacated during the
financial year). In this case, X should deduct tax at source at the time of payment of rent for December
2019 (i.e., on December 5, 2019). Since the recipient of rent does not have PAN, tax will deductible at the
rate of 20% by virtue of section 206AA. Total rent of the financial year is Rs. 3,85,000 (i.e., Rs. 55,000 per
month for 7 months). 20% of Rs. 3,85,000 comes to Rs. 77,000. TDS of Rs. 77,000 cannot be deducted from
amount payable of Rs. 55,000 on December 5, 2019. For such a situation, section 194-IB(4) gives a relief
(tax deductible by virtue of section 206AA cannot exceed the amount of rent payable for the last month
of the financial year or last month of tenancy). To put it differently, X should deduct tax of Rs. 55,000
out of rent of Rs. 55,000 payable to the landlord on December 5, 2019. Consequently, TDS under section
194-IB is Rs. 55,000 (due date of deduction is December 5, 2019, being the date of payment of rent for the
last month of tenancy). Amount of rent after TDS (for the month of December 2019) payable to the
landlord is nil.
 2. Belated return in the case of S - Belated return for the assessment year 2019-20 can be submitted (or uploaded) on or before
March 31, 2020 or the date of completion of assessment, whichever is earlier. In other words, S cannot submit his return for
the assessment year 2019-20 after March 31, 2020. For consequences of belated return, see para 246.1.
 3. Advance tax payable by P –

Rs.
Total estimated tax payable (as given in the problem) 2,00,000
Less: TDS (estimated but not actually deducted by the payer) (only tax actually deducted/collected shall
be reduced. If tax is deductible or collectible but the payer or collector has not deducted/collected tax at
source, such tax cannot be reduced) Nil
Total advance tax payable during the financial year 2,00,000
Due dates –
- First instalment : June 15, 2019 (15% of tax) 30,000
- Second instalment : September 15, 2019 (30% of tax) 60,000
- Third instalment : December 15, 2019 (30% of tax) 60,000
- Fourth instalment : March 15, 2020 (25% of tax) 50,000
 1. X (P.) Ltd. is a GST registered person. Gross turnover of the company for the immediately preceding financial year is
Rs. 50 lakh. It provides the following information pertaining to its outward supply for the month of July 2019 –
Rs.
Running a boarding school 2,40,000
Fees from a prospective employer for campus interview 1,70,000
Education services for obtaining the qualification recognised by law of a foreign country 3,10,000
Renting of furnished flats for temporary stay to different persons (rent per day is less than Rs. 1,000 per
person) 1,20,000
Conducting modular employable skill course, approved by the National Council of Vocational Training 1,40,000
Providing private tuitions 3,00,000
Compute the value of taxable supply and the amount of GST payable. The above receipts are exclusive of GST. Rate of GST
is 18 per cent.
 2. Y & Co. is a firm of chartered accountants. The firm is registered in Mumbai. Head office of the firm is also located in
Mumbai. It is registered under the GST in the State of Maharashtra only. It does not have any branch in any other State. The
gross receipts of the firm for the financial year 2018-19 was Rs. 60 lakh. The firm submits the following information
pertaining to the month of August 2019 –
Rs.
Professional services provided (and bills raised) during the month for uploading of income-tax returns
and income-tax consultancy 1,00,000
Internal audit of Z (P.) Ltd. (service is provided at the office of client in Mumbai) 50,000
Statutory audit services provided to T Trading (P.) Ltd. (service is provided at the office of client in
Ahmedabad) 70,000
The above figures are exclusive of GST. The following information pertaining to inward supply of services availed from
registered dealers (and used for providing outward supplies) during August 2019 is noted from the records of Y & Co. –
Value of inward CGST SGST IGST
supply (exclusive
of GST)
Rs. Rs. Rs. Rs.
Services availed from a courier agency 5,000 450 450 Nil
Railway travelling expenses from Mumbai to Ahmedabad (and return
ticket) for conducting of audit of T Trading (P.) Ltd. in 3 Tier AC 12,000 Nil Nil 600
Service availed from a professional firm at Mumbai (bill is paid
without TDS under section 194J) 20,000 3,600 Nil Nil
- GST rate for outward supply is 18 per cent.
- Assume that conditions for claiming input tax credit [including conditions imposed by rule 36(4)] are satisfied.
- Opening balance of available input tax credit in electronic credit ledger on August 1, 2019 is nil for CGST, SGST and IGST.
Compute the net GST payable by Y & Co. for the month August 2019 (after adjusting input tax credit available in electronic
credit ledger).

 1. Computation of GST liability of X (P.) Ltd. –
Rs.
Running a boarding school [exempt vide Exemption Notification (Entry 66)] Nil
Fees from a prospective employer for campus interview 1,70,000
Education services for obtaining the qualification recognised by law of a foreign country 3,10,000
Renting of furnished flats for temporary stay (rent per day is less than Rs. 1,000 per person) [exempt
vide Exemption Notification (Entry 14)] Nil
Conducting modular employable skill course [exempt vide Exemption Notification (Entry 66)] Nil
Providing private tuitions 3,00,000
GST @ 18% 1,40,400
 2. Computation of GST payable on outward supply by Y & Co. –
Taxable value IGST CGST SGST
Rs. Rs. Rs. Rs.
Professional services (uploading income-tax return, tax consultancy)
(intra-State supply) 1,00,000 – 9,000 9,000
Internal audit of Z (P.) Ltd. (intra-State supply) 50,000 – 4,500 4,500
Statutory audit of T Trading (P.) Ltd. at Ahmedabad (inter-State supply) 70,000 12,600 – –
Total 2,20,000 12,600 13,500 13,500
Computation of input tax credit available in electronic credit ledger –
IGST CGST SGST
Rs. Rs. Rs.
Opening balance on August 1, 2019 Nil Nil Nil
Add: Inward supply during August 2019
- Services availed from a courier agency Nil 450 450
- Railway travelling from Mumbai to Ahmedabad 600 Nil Nil
- Service availed from a professional firm at Mumbai (eligible even if tax is not deducted
under section 194J) Nil 1,800 1,800
Total 600 2,250 2,250
Computation of GST payable for August 2019 –
IGST CGST SGST
Rs. Rs. Rs.
Less: IGST on inward supply 600 – –
Balance 12,000 13,500 13,500
Balance 12,000 11,250 13,500
Less: SGST – – 2,250
Balance payable by electronic cash ledger 12,000 11,250 11,250
 1. AB Charitable Institute (an entity registered under section 12AA of Income-tax Act and registered under GST regulations)
furnishes the following information pertaining to activities undertaken by it during January 2020. Compute taxable value
of supply (GST rate 18 per cent, figures given below are exclusive of GST).
Rs.
Membership fees received from members 10,00,000
Amount received for advancement of educational programs relating to abandoned or orphaned or
homeless children 4,00,000
Amount received for renting of commercial property owned by AB Charitable Institute 5,00,000
Rs.
Amount received for counselling of terminally ill person 3,50,000

Fees charged for yoga camp conducted by AB Charitable Institute 2,00,000
Amount received relating to preservation of forest and wildlife 6,00,000
 2. XYZ & Co., a firm of chartered accountants, issues invoice for services rendered to A on September 7, 2019. Determine
the time of supply in the different situations given below –
- Situation one : The provision of service is completed on August 1, 2019.
- Situation two : The provision of service is completed on August 14, 2019.
- Situation three : Payment is made by A on August 3, 2019 (provision of service remains to be completed).
- Situation four : Payment is made by A on September 15, 2019 (provision of service remains to be completed).
 1. Computation of GST liability of AB Charitable Institute –
Rs.
Membership fees received from members [see Note] 10,00,000
Amount received for advancement of educational programs relating to abandoned or orphaned or
homeless children [exempt vide Exemption Notification (Entry 1)] Nil
Renting of commercial property 5,00,000
Counselling of terminally ill person [exempt vide Exemption Notification (Entry 1)] Nil
Yoga camp [exempt vide Exemption Notification (Entry 1)] Nil
Preservation of forest and wildlife [exempt vide Exemption Notification (Entry 1)] Nil
GST @ 18% 2,70,000
Note - It is assumed that membership fee is more than Rs. 1,000 per member per year. In case membership fee is Rs. 1,000
(or less) per member per year, it is exempt from GST vide Exemption Notification (Entry 77A).
 2. Time of supply in the case of XYZ & Co. –
Different situations Time of supply Reasons
Situation one August 1, 2019 Invoice is not issued within the statutory period of 30 days. Time of supply is
provision of service or date of receipt of payment, whichever is earlier (it is
assumed that payment is received after August 1, 2019)
Situation two September 7, 2019 Invoice is issued within the statutory period of 30 days. Time of supply is date
of invoice or date of receipt of payment, whichever is earlier (it is assumed that
payment is received after September 7, 2019)
Situation three August 3, 2019 Date of completion of supply is after August 3, 2019. It is not possible to find
out whether invoice is issued within the statutory period (or not). If invoice is
issued within statutory period, time of supply is date of invoice or date of
payment, whichever is earlier. Earlier date is August 3, 2019.
Conversely, if invoice is not issued within statutory period, time of supply is
date of provision of service or date of payment, whichever is earlier. Earlier
date is August 3, 2019.
Situation four September 7, 2019 Invoice is issued within the statutory period of 30 days. Time of supply is date
of invoice or date of receipt of payment, whichever is earlier. Earlier date is
September 7, 2019.
 1. X (P.) Ltd. is a supplier of goods and services at Bangalore. It is registered in the State of Karnataka (turnover of the last
financial year : Rs. 200 lakh). It furnishes the following information for the month of June 2019 (figures given below are
exclusive of GST) –
Rs.
Intra-State services provided by way of labour contract for repairing a single residential unit (otherwise
than as a part of residential complex) 1,30,000
Intra-State sale of taxable goods (including Rs. 50,000 received as advance in April 2019). The invoice for
the entire sale value is issued on June 15, 2019 2,50,000
Rs.
Inter-State goods transport services received from goods transport agency (GTA). GTA pays tax @ 12 per
cent 1,80,000
Goods (i.e., plywood) purchased from unregistered dealer on June 20, 2019 (inter-State purchases :
Rs. 45,000, intra-State purchases : Rs. 35,000). 80,000
Compute net CGST, SGST and IGST liability of X (P.) Ltd. for the month of June 2019. Assume the GST rate is 18 per cent
(unless otherwise specified).
 2. Y (P.) Ltd., a GST registered supplier, is engaged in the manufacture of taxable goods. The company provides the following
information pertaining to GST paid on the purchases made/input services availed of it during the month of July 2019 –
GST paid
Rs.
Raw material (to be received in September 2019) 2,50,000
Membership of a club availed for employees working in the factory 1,45,000
Inputs to be received in 5 lots, out of which 3rd lot is received during the month 80,000
Trucks used for transport of raw material 40,000
Capital goods (out of 3 items, invoice for 2 items is missing and GST paid on that item is Rs. 80,000) 1,50,000
Determine the amount of input tax credit available to Y (P.) Ltd. for the month of July 2019 by giving the necessary
explanation for treatment of various items. Assume that conditions for claiming input tax credit [including conditions
imposed by rule 36(4)] are satisfied.
 1. GST liability of X (P.) Ltd. –
Taxable value CGST SGST IGST
Rs. Rs. Rs. Rs.
Labour contract for repairing a single residential unit [exempt vide
Exemption Notification (Entry 11)] Nil Nil Nil Nil
Intra-State supply of taxable goods (in the case of supply of taxable
goods, GST is not payable at the time of receipt of advance. Conse-
quently, GST was not paid in April 2019) 2,50,000 22,500 22,500 Nil
Goods transport services received from GTA (GTA pays tax @ 12%)
(reverse charge mechanism is not applicable, if GTA pays GST @ 12%) – Nil Nil Nil
Goods purchased from unregistered dealer on June 20, 2019 [reverse
charge mechanism of section 9(4) is not applicable [see para 483] – Nil Nil Nil
Total 2,50,000 22,500 22,500 Nil
 2. Input tax credit available to Y (P.) Ltd. for July 2019–
GST paid
Rs.
Raw material to be received in September 2019 (input credit is not available before receipt of raw material
in July 2019) Nil
Club membership for factory employees [not available as per section 17(5)(b)(ii)] Nil
3rd lot of inputs received during the month (input tax credit will be available only upon receipt of the last
lot or instalment) Nil
Trucks used for transport of raw material 40,000
Capital goods (invoice not available for 2 items, GST on such items : Rs. 80,000) Nil
Capital goods (invoice available for 3 items, GST on these items : Rs. 70,000) 70,000
Total 1,10,000
 1. A dairy farm supplies milk and milk products in Delhi. The turnover of the dairy farm is as below –
- Milk (exempted) : Rs. 19,90,000
- Butter (taxable) : Rs. 50,000
Discuss the registration requirement under GST for the above dairy farm (assume that dairy farm is owned by a person who
has one PAN for the above two activities).
 2. Y, a taxable person, operates in Tamilnadu, Punjab and West Bengal, with the same PAN. Can he operate with a single
GST registration in West Bengal ?
 3. Z is a consultant and provides consultancy services. Besides, he has a readymade garment showroom in Kolkata registered
in same PAN. Turnover of the showroom is Rs. 70 lakh and receipt of consultancy unit is Rs. 15 lakh in the preceding financial
year. Answer the following –
- Is X eligible for composition scheme ?
- Is it possible for X to opt for Composition Scheme only for showroom ?
 4. Differentiate between direct and indirect taxes (give any two points).
 5. Can a person get himself voluntarily registered though he may not be liable to pay GST ?
 1. Dairy farm - If aggregate turnover of the financial year is more than Rs. 20 lakh, GST registration is required. For this
purpose aggregate turnover includes even exempt supplies. In this given case, aggregate turnover is Rs. 20,40,000.
Consequently, registration is required (even if the value of taxable supply is Rs. 50,000).
 2. Registration requirement for Y - The registration in GST is PAN based and State specific. A supplier has to register in each
of such State or Union territory from where he effects supply. In other words, a business entity having its branches in multiple
States will have to take separate State-wise registration for the branches in different States. In the given problem, Y will have
to obtain separate registration in Tamil Nadu, Punjab and West Bengal.
 3. Composition Scheme for Z - Z supplies both goods and services. If a person supplies goods and services, Composition Scheme
is applicable only if value of supply of services does not exceed 10% of the turnover or Rs. 5 lakh, whichever is higher.
Turnover in this case is Rs. 85 lakh (i.e., showroom : Rs. 70 lakh + consultancy : Rs. 15 lakh). 10% of turnover is Rs. 8.5 lakh
(which is higher than Rs. 5 lakh). As value of supply of services is more than Rs. 8.5 lakh, Z cannot opt for Composition
Scheme. It is also not possible to opt for Composition Scheme only for showroom.
 4. Difference between direct and indirect taxes - See para 401.
 5. Voluntary registration - A person (who is not otherwise required to get registration) may get himself registered voluntarily.
In such a case, all GST provisions as are applicable to a registered person, shall apply to such person.
 1. X Ltd. is located in West Bengal. GST liability for the month of August 2019 is as follows –
Rs.
Output CGST payable 24,000
Output SGST payable 9,000
Output IGST payable 3,000
Input CGST 7.000
Input SGST 14,000
Input IGST 12,000
Calculate tax payable and carry forward for the month of August 2019. Assume that conditions for claiming input tax credit
[including conditions imposed by rule 36(4)] are satisfied.
 2. Y Software Ltd. reduces a sum of Rs. 2,00,000 from the output tax liability in contravention of provisions of section 42(10)
of the CGST Act in the month of December 2019, which is ineligible credit. A show cause notice is issued by the tax
department to pay tax (along with interest). Y Software Ltd. pays tax and interest on March 31, 2020. Calculate interest
liability (ignore penalty).
 3. The aggregate turnover of Z Enterprise of Mumbai exceeds Rs. 20 lakh on January 25, 2020. It submits an application for
registration on February 15, 2020. Registration certificate is granted on February 20, 2020. Determine the effective date of
registration under CGST Act.
 1. Computation of net GST liability of X Ltd. –
IGST CGST SGST
Rs. Rs. Rs.
GST on outward supply 3,000 24,000 9,000
Less: IGST – 9,000 –
Less: SGST on inward supply (balance SGST : Rs. 14,000 – Rs. 9,000 = Rs. 5,000) – – 9,000
Balance payable by electronic cash ledger Nil 8,000 Nil
Note - Balance SGST of Rs. 5,000 will be carried forward in the electronic credit ledger.
 2. Interest liability of Y Software Ltd. - A taxable person who makes an undue or excess claim of input tax credit under section
42(10) or undue reduction in output tax under section 43(10) is liable to pay interest under section 50(3) @ 24% per annum.
Interest is payable in this case from December 2019 to March 31, 2020.
 3. Effective date of registration - The registration shall be effective from the date on which the person becomes liable to
registration where the application for registration has been submitted within a period of 30 days from such date. In this case,
Z Enterprises becomes liable for registration on January 25, 2020. Registration application is uploaded on February 15, 2020
(i.e., within a period of 30 days). Registration certificate is granted on February 20, 2020. It becomes effective from January
25, 2020.
 1. What kinds of invoice details of outward supplies are required to be furnished in GSTR-1 for outward supplies ?
 2. Discuss the provisions relating to issuance of credit notes and debit notes under CGST Act and rules thereunder.
 3. State whether the following supplies would be treated as supply of goods or supply of services as per Schedule II –
- Renting of immovable property.
- Transfer of right in goods without transfer of title in goods.
- Works contract services.
- Temporary transfer of permitting use or enjoyment of any intellectual property right.
- Sale of personal car to a dealer.
 1. Outward supplies in GSTR-1 - See para 552.1.
 2. Credit and debit notes - See para 543.
 3. Supply of goods or supply of services as per Schedule II –
Renting of immovable property Supply of services
Transfer of right in goods without transfer of title in Supply of services
goods
Works contract services Supply of services
Temporary transfer of permitting use or enjoyment Supply of services
of any intellectual property right
Sale of personal car to a dealer It is not a supply made in the course or furtherance of business
of supplier.
Intermediate, May 2018 (New)1

 Q.1 X (55 years), a resident individual and practicing chartered accountant, furnishes the following receipt and payment
account for the previous year 2019-20 –
Rs. Rs.
Opening cash and bank balance on April 1, Staff salary, bonus and stipend to articled
2019 20,000 clerks 20,50,000
Fee from professional services 39,60,000 Other general and administrative expenses 12,00,000
Motor car loan from SBI @ 10 per cent interest Office rent 48,000
per annum 2,00,000 Life insurance premium 23,000
Motor car (acquired in January 2020 by way
of online payment) 4,00,000
Books bought (annual publication by credit
card) 22,000
Computer acquired on November 1, 2019 for
professional use 25,000
Domestic drawings 2,50,000
Motor car maintenance 12,000
Public provident fund subscription 1,40,000
Closing cash and bank balance on March 31,
2020 10,000
41,80,000 41,80,000
- Motor car is used for both official and personal purposes. 1/4 of the motor car is for personal purpose. No interest on car
loan was paid during the year.
- X purchased a flat in Jaipur for Rs. 15,00,000 in July 2013 cost of which was partly financed by a loan from State Bank of
India of Rs. 10,00,000 @ 10 per cent interest, his own savings Rs. 1,00,000 and a deposit from Bank of Baroda for Rs.
4,00,000. The flat was given to Bank of Baroda on lease for 10 years @ Rs. 40,000 per month. Municipal taxes paid by X
is Rs. 4,200 per annum. House insurance is Rs. 1,000.
- He earned Rs. 1,00,000 in share speculation business and lost Rs. 1,50,000 in commodity speculation business.
- X received a gift of Rs. 15,000 each from four of his family friends.
- He contributed Rs. 1,11,000 to Prime Minister’s Drought Relief Fund by way of bank draft.
- He donated to a registered political party Rs. 3,00,000 by way of cheque.
Compute the total income of X and the tax payable for the assessment year 2020-21.
 A.1 Computation of income of X –
Rs. Rs.
Gross annual value (Rs. 40,000 × 12) 4,80,000
Less: Municipal taxes 4,200
Interest on loan (10% of Rs. 10,00,000) 1,00,000
Fees from professional services 39,60,000
Less: Expenses –
Staff salary, bonus and stipend to articled clerks 20,50,000
Office rent 48,000
Depreciation on car (Rs. 4,00,000 × 15% × ½ × 0.75) 22,500
Books (40% of Rs. 22,000) 8,800
Depreciation on computer (Rs. 25,000 × 40% × ½) 5,000
Car maintenance (Rs. 12,000 × 0.75) 9,000
Income from speculative business (Rs. 1,00,000 – Rs. 1,50,000) (it is assumed that the loss of
Rs. 1,50,000 does not pertain to trading in commodity derivatives, the unadjusted speculative
loss of Rs. 50,000 cannot be adjusted against any other income and will be carried forward) Nil
Income under the head “Profits and gains of business and profession” 6,16,700
Income from other sources (gift of Rs. 15,000 from 4 friends) 60,000
Under section 80C (PPF : Rs. 1,40,000 + LIP : Rs. 23,000, subject to a maximum of Rs. 1,50,000) 1,50,000
Under section 80G (50% of Rs. 1,11,000) 55,500
Under section 80GGC 3,00,000
Net income 4,04,260
Tax on net income –
Income-tax 7,713
Add: Health and education cess 309
 Q.2 X Ent. has transferred its Unit R to A Ltd. by way of slump sale on January 23, 2020. The summarized balance sheet of
X Ent. as on that date is given below –

Own capital 1,750 Fixed assets –
Accumulated profit and loss account balance 670 - Unit P 200
Liabilities – - Unit Q 150
- Unit P 90 - Unit R 600
- Unit Q 160 Other assets –
- Unit R 140 - Unit P 570
- Unit Q 850
- Unit R 440
2,810 2,810
Compute the capital gain which arises from slump sale of Unit R for the assessment year 2020-21. Additional information
is given below –
- Slump sale consideration on transfer of Unit R is Rs. 930 lakh.
- Fixed assets of Unit R includes land which was purchased at Rs. 110 lakh in the year 2009 and was revalued at Rs. 140
lakh.
- Other fixed assets are reflected at Rs. 460 lakh. (i.e., Rs. 600 lakh less value of land). It represents written down value of
fixed assets as per books of account. The written down value of these assets is Rs. 430 lakh.
- Unit R was set up by X Ent. in October 2007.
 A.2 Computation of income under the head “Capital gains” –
Rs. in lakh
Full value of consideration 930
Less: Net worth of Unit R (i.e., land : Rs. 110 lakh + written down value of assets : Rs. 430 lakh + other
assets : Rs. 440 lakh – liabilities : Rs. 140 lakh) 840
Long-term capital gain (indexation benefit not available in the case of transfer by way of slump sale) 90
 Q.3 Compute the gross total income of X for the assessment year 2020-21, if he is (a) a resident and ordinarily resident in
India (ROR), or (b) a non-resident in India (NR).
Rs.
Interest from German Derivatives Bonds (1/3rd is received in India) 21,000
Income from agriculture land situated in Malaysia, remitted to India 51,000
Income earned from business in Dubai, controlled from India (Rs. 20,000 received in India) 75,000
Profit from business in Mumbai, controlled from Australia 1,75,000
Interest received from Y (a NRI) on loan provided to him for business in India 35,000
Dividend from Z Ltd., an Indian company under section 115-O 30,000
Profit from business in Canada controlled from Mumbai (60 per cent of profits deposited in a bank in
Canada and 40 per cent remitted to India) 60,000
Amount received from an NRI for the use of know-how for his business in Singapore 8,00,000
Dividend received from foreign company in India 25,000
Past years untaxed foreign income brought to India 50,000
 A.3 Computation of gross total income of X –
ROR NR
Assumption 1 Assumption 2
Rs. Rs. Rs.
Interest from German Derivatives Bonds –
- Amount received in India 7,000 7,000 7,000
- Amount received outside India 14,000 – –
Income from agriculture land situated in Malaysia, remitted to India – 51,000
- Assumption 1 (amount is first received outside India and later on
remitted to India) – Nil –
- Assumption 2 (amount is directly received in India) – – 51,000
Income earned from business in Dubai, controlled from India –
- Amount received in India 20,000 20,000 20,000
- Amount received outside India 55,000 Nil Nil
ROR NR
Assumption 1 Assumption 2
Rs. Rs. Rs.
Profit from business in Mumbai, controlled from Australia 1,75,000 1,75,000 1,75,000
Interest received from Y (a NRI) on loan provided to him for business in
India 35,000 35,000 35,000
Dividend from Z Ltd., an Indian company under section 115-O Nil Nil Nil
Profit from business in Canada controlled from Mumbai –
- Amount deposited in Canada 36,000 Nil Nil
- Amount remitted to India 24,000
 Assumption 1 (amount is first received outside India and later on
remitted to India) – Nil –
 Assumption 2 (amount is directly received in India) – – 24,000
Amount received from an NRI for the use of know-how for his business
in Singapore 8,00,000 – –
- Assumption 1 (amount is received outside India) – Nil –
- Assumption 2 (amount is received in India) – – 8,00,000
Dividend received from foreign company in India 25,000 25,000 25,000
Past years untaxed foreign income brought to India Nil Nil Nil
 Q.4 X is employed by a domestic company (which has a production unit in USA) for last 15 years. He visits India regularly
for export promotion of company’s product. He stays in India at least for 184 days every year. He submits the following
information –
Salary received outside India (for 6 months) : Rs. 50,000 per month
Salary received in India (for 6 months) : Rs. 50,000 per month
He has been given rent free accommodation in USA for which company pays Rs. 15,000 per month as rent. When he comes
to India, he stays in the guest house of the company. During this period, he is given free lunch facility and the company
incurred an expenditure of Rs. 48,000 on this facility.
He has been provided a car of 2000 cc capacity in USA which is used by him for both office and private purposes. The actual
cost of the car is Rs. 8,00,000. But when he is in India, the car is used by him and his family members only for personal
purposes. The monthly expenditure of car is Rs. 5,000. His elder son studies in India for which his employer spends Rs. 12,000
per year, where as his younger son studies in USA and stays in a hostel for which X gets Rs. 3,000 per month as combined
allowance.
The company has taken an accident insurance policy and a life insurance policy. During the previous year, the company
pays premium of Rs. 5,000 and Rs. 10,000 respectively.
Compute taxable salary income of X for the assessment year 2020-21.
 A.4 Computation of salary income –
Rs.
Salary received outside India (Rs. 50,000 × 6) 3,00,000
Salary received in India (Rs. 50,000 × 6) 3,00,000
Residential accommodation in USA [15% of (Rs. 3,00,000 + Rs. 3,00,000 + education allowance for younger
son: Rs. 36,000) or Rs. 15,000 per month, whichever is lower, it is assumed that the residential accommodation
in USA is occupied by X throughout the previous year] 95,400
Guest house facility in India Nil
Lunch facility in India [Rs. 48,000 – (Rs. 50 per meal for 26 working days × 6 months)] 40,200
Car facility in USA for 6 months used for office and private purposes (Rs. 2,400 × 6) 14,400
Car facility in USA for 6 months used only for private purposes [(10% of Rs. 8,00,000 × 6 ÷ 12) + (Rs. 5,000 × 6)] 70,000
Education expenditure in India for elder son 12,000
Education allowance for younger son [(Rs. 3,000 × 12) – exemption : nil (exemption of Rs. 100 per month
and Rs. 300 per month is available only when allowance is given for education in India)] 36,000
Accident insurance policy (not taxable on the assumption that policy was taken out by the employer-company
to safeguard its own interest) Nil
Rs.
Life insurance premium paid by employee 10,000
 1. Discuss the taxability of the following receipts in the hands of X for assessment year 2020-21 –
- Rs. 51,000 received from his sister living in US on June 1, 2019.
- Received a car from his friend on payment of Rs. 2,50,000, the FMV of which was Rs. 5,50,000.
Provisions of taxability or non-taxability must be discussed.
 2. Y (25 years) is resident India. He manufactures tea leaves from the tea plants grown by him in India. These are then sold
in the Indian market for Rs. 40 lakh. The cost of growing tea plants was Rs. 15 lakh and the cost of manufacturing tea leaves
was Rs. 10 lakh. Compute her tax liability for the assessment year 2020-21.
Amount received from Amount received exceeding Rs. 50,000 without consideration is taxable under section 56(2)(x).
sister However, this provision is not applicable if the amount is received from a “relative”. Nothing
is, therefore, taxable in this case.
Purchase of car for in- Receipt of “movable property” for inadequate consideration is chargeable to tax under section
adequate consideration 56(2)(x), if a few conditions are satisfied. Car does not come in the definition of “movable
property” given under section 56. Nothing is, therefore, chargeable to tax.
 2. Computation of tax liability of Y –
Rs.
Income from growing and manufacturing tea in India (Rs. 40 lakh – Rs. 15 lakh – Rs. 10 lakh) 15,00,000
- Out of which agricultural income in India (60% of Rs. 15 lakh) 9,00,000
- Out of which non-agricultural income (40% of Rs. 15 lakh) 6,00,000
Income-tax on Rs. 15,00,000 2,62,500
Income-tax on agricultural income + Rs. 2,50,000 (i.e., income-tax on Rs. 11,50,000) 1,57,500
Balance 1,05,000
 1. X made a gift of Rs. 2,50,000 to his handicapped son, Master A who was aged 12 years as on March 31, 2018, which he
deposited in a fixed deposit account in a nationalised bank at 10 per cent interest per annum compounded annually. The
balance in this account as on April 1, 2019 was Rs. 2,75,000 and the bank credited a sum of Rs. 27,500 as interest on March
31, 2020.
X’s father gifted equity shares worth Rs. 50,000 in an Indian company to Master B, another son of X (date of birth : April 10,
2012) in July 2012 which were purchased by him on December 8, 2004 for Rs. 80,000. Master B received a dividend of Rs.
5,000 on these shares in October 2019. He sold these shares on November 1, 2019 for Rs. 5,00,000 and deposited Rs. 3,00,000
in a company at 15 per cent interest per annum.
X has a taxable income of Rs. 3,50,000 from his profession during the previous year 2019-20. Compute his gross total income
 2. Briefly mention provisions of the Income-tax Act with regard to quoting Aadhaar Number under section 139AA.
 3. State whether quoting of PAN in the following transactions is mandatory or not, as per the provisions of the Income-tax
Act for the assessment year 2020-21 –
- A makes cash payment to a hotel Radisson Blu, Ahmedabad of Rs. 50,000 against a bill raised by the hotel.
- B, in a single transaction, makes contract of Rs. 1,20,000 for sale/purchase of securities (other than shares).
- Payment to mutual funds of Rs. 70,000 for purchase of its units.
 4. Briefly mention the concept of self-assessment tax under section 140A and its components.

 1. Computation of gross total income of X –
Rs.
Interest on bank deposit accrued to Master A [in the case of handicapped child, clubbing provisions of
section 64(1A) are not applicable, income will be taxable in the hands of Master A] Nil
Long-term capital gain of Master B [full value of consideration : Rs. 5,00,000 – indexed cost of acquisition :
Rs. 2,04,602 (i.e., Rs. 80,000 × 289 ÷ 113) 2,95,398
Dividend received by Master B [not chargeable to tax up to Rs. 10,00,000 by virtue of exemption given by
section 10(34)] Nil
Bank interest of Master B [(15% of Rs. 3,00,000 × 7 ÷ 12) – exemption of Rs. 1,500 under section 10(32)] 17,250
Gross total income of X 6,62,648
 2. Quoting Aadhaar Number - See para 249A.
 3. Quoting of PAN - A person is required to quote his PAN in a few documents/transactions specified in rule 114B. This rule,
inter alia, requires quoting PAN in the following cases –
Payment to hotel Payment in cash of an amount exceeding Rs. 50,000 to a hotel is covered by rule 114B. In the given
case, amount of cash payment is not more than Rs. 50,000. Therefore, A is not required to give his
PAN at the time of payment to Radisson Blu.
Sale/purchase of In the case of sale/purchase of securities (other than shares) quoting of PAN is required if the
securities transaction value is more than Rs. 1,00,000. This rule is applicable whether the payment is made
in cash or otherwise. Since the amount exceeds Rs. 1,00,000, quoting of PAN is required.
Payment to mutual Payment to a mutual fund for purchase of units attracts quoting of PAN by the purchaser if the
fund transaction value is more than Rs. 50,000. Since the amount exceeds Rs. 50,000, quoting of PAN
is required.
 4. Self-assessment - See para 251.
 1. Indicate the three situations where the return of income has to be compulsorily filed under section 139(1).
 2. Briefly explain the purpose for which the words “proviso” and “Explanation” are incorporated under various sections of
the Income-tax Act.
 1. Compulsory return of income - See para 244.
 2. Proviso/Explanation - A proviso is meant to be an exception to something within the main enactment or qualify something
enacted therein. Proviso is used to remove special cases from general enactment and provides for them separately.
On the other hand, Explanation is part of main section and it clears the ambiguity (if any) in the main section. Explanation
is generally added when something is not clear in the main section, then it can be made clear by inserting the Explanation.
The main function of an Explanation is to explain the meaning and effect of the main provision to which it is an Explanation
and to clear up any doubt or ambiguity in it.
 1. X, a registered supplier of goods, pays GST under regular scheme and provides the following information for the month
of August 2019 –
Rs.
Inter-State taxable supply of goods 10,00,000
Intra-State taxable supply of goods 2,00,000
Intra-State purchase of taxable goods 5,00,000
He has the following input tax credit at the beginning of August 2019 – CGST : Rs. 20,000, SGST : Rs. 30,000, IGST : Rs. 25,000.
Rate of CGST, SGST and IGST is 9 per cent, 9 per cent and 18 per cent respectively. Both inward and outward supplies are
exclusive of taxes wherever applicable. Assume that conditions for claiming input tax credit [including conditions imposed
by rule 36(4)] are satisfied.
Compute the net GST payable by X for the month of August 2019.
 2. Y Pharma (P.) Ltd., a registered supplier, is engaged in the manufacture of taxable goods. The company provides the
following information of GST paid on the purchases made/input services availed by it during the month of September
2019 –
GST paid in Rs.

Purchase of cabs used for the transportation of its employees 3,30,000
Inputs consisting of three lots, out of which first lot was received during the month 1,25,000
Capital goods (out of three items, invoice for one item was missing and GST paid on that item was
Rs. 25,000) 2,50,000
Outdoor catering service availed on Women’s day 72,000
Determine the amount of input tax credit available with Y Pharma (P.) Ltd. for the month of September 2019 by giving
necessary explanations for treatment of various items. Assume that conditions for claiming input tax credit [including
conditions imposed by rule 36(4)] are satisfied.
 1. GST payable by X –
IGST CGST SGST
Rs. Rs. Rs.
Inter-State supply of goods (18% of Rs. 10,00,000) 1,80,000 – –
Tax on outward supply 1,80,000 18,000 18,000
Opening balance on August 2019 25,000 20,000 30,000
Add: GST on inward supply during August 2019 (9% of Rs. 5,00,000, 9% of
Rs. 5,00,000) – 45,000 45,000
Input tax credit available on August 31, 2019 25,000 65,000 75,000
Balance 1,55,000 18,000 18,000
Less: CGST (balance CGST : Rs. 65,000 – Rs. 18,000 = Rs. 47,000) – 18,000 –
Balance 1,55,000 Nil 18,000
Less: CGST 47,000 – –
Balance 1,08,000 Nil 18,000
Less: SGST (balance SGST : Rs. 75,000 – Rs. 18,000 = Rs. 57,000) – – 18,000
Balance 1,08,000 Nil Nil
Less: SGST 57,000 – –
Balance payable through electronic cash ledger 51,000 Nil Nil
 2. Availability of GST credit –

Rs.
Purchase of cabs used for the transportation of employees (input tax credit not available) [sec. 17(5)(a)] Nil
Inputs consisting of three lots, out of which first lot is received during September 2019 (when input is
received in instalments, input tax credit is available only on receipt of last instalment) [first proviso to
sec. 16(2)] Nil
Capital goods (Rs. 2,50,000 – GST of missing invoice : Rs. 25,000) [sec. 16(2)(a)] 2,25,000
Outdoor catering service availed on Women’s day (input tax credit not available) [sec. 17(5)(b)(i)] Nil
Input tax credit available for September 2019 2,25,000
 1. X Ltd., Mumbai, a registered supplier, manufactures chocolates and biscuits. It provides the following details of taxable
inter-State supply made by it during October 2019 –
Rs.
(A) List price of goods supplied inter-state 12,40,000
Item already adjusted in the price given in (A) above –
- Subsidy from Central Government for supply of biscuits to Government school 1,20,000
- Subsidy from trade association for supply of quality biscuits 30,000
Rs.
Items not adjusted in the price given in (A) above –
- Tax levied by municipal authority 24,000
- Packing charges 12,000
- Late fee paid by the recipient of supply for delayed payment of invoice 5,000
Calculate the value of taxable supply made by X Ltd. for the month of October 2019.
 2. Explain the meaning of the term “recipient of supply of goods and/or services” under the CGST Act.
 1. Computation of taxable supply –
Rs.
List price (as given in the problem) 12,40,000
Add: Subsidy from Central Government (subsidy from Government is not included in value of supply)
[sec. 15(2)(e)] [as subsidy is already adjusted in the price given in (A), no adjustment is required] Nil
Add: Subsidy from trade association (subsidy which is directly linked to the price and received from a
non-Government entity is included in value of supply) [sec. 15(2)(e)] [as subsidy is already adjusted in
the price given in (A), it is included in value of supply] 30,000
Add: Tax levied by municipal authority (included in value of taxable supply, if charged separately by
supplier) [sec. 15(2)(a)] 24,000
Add: Packing charges (included in value of taxable supply, if charged separately by supplier) [sec.
15(2)(c)] 12,000
Add: Late fees (included in value of taxable supply, if charged separately by supplier) [sec. 15(2)(d)] 5,000
 2. Recipient of supply - See para 405.8.
 1. X & Y Trading Co., a registered supplier, is liable to pay GST under forward charge. Determine the time of supply from
the following information –
- Goods are supplied on October 3, 2019
- Invoice is issued on October 5, 2019
- Payment is received on October 9, 2019
 2. Examine whether the supply of following services is exempt from GST –
- Z & Co. a tour operator, provides services to a foreign tourist for tour conducted to Jammu and Kashmir (consideration
being Rs. 3,00,000).
- Ms. A acts as a Team Manager for Indian Sports League (ISL), a recognised sports body, for a tennis tournament organised
by a multi brand retail company and gets a remuneration of Rs. 2,00,000.
 3. Sai Trading Co. is an eligible registered dealer in goods. It makes intra-State supplies within the State of Andhra Pradesh.
The aggregate turnover of the preceding financial year is Rs. 78 lakh.
- Determine whether Sai Trading Co. is eligible for Composition Scheme as on October 31, 2019.
- Will your answer be different, if in the above scenario, Sai Trading Co. is making intra-State supply within the State of
Jammu and Kashmir ?
 1. Time of supply of goods in the case of X & Y Trading Co. - By virtue of section 12(2), time of supply of goods can be determined
on the basis of Event 1 or Event 2, whichever is earlier –
Event 1 Date of issue of invoice by the supplier (or the last date on which supplier is required to
issue invoice) October 3, 2019
Event 2 Date of receipt of payment : October 9, 2019 Irrelevant*
*Event 2 is not taken into consideration after November 14, 2017 in the case of supply of goods. Consequently, time of supply
in this case is October 3, 2019.
 2. Services exempt from GST - Different services given in the problem are as follows –
Service Z & Co. is a tour operator. It provides services to a foreign tourist in relation to a tour conducted in Jammu
provided by and Kashmir. It is not exempt from GST. GST exemption is available if a tour operator provides service
Z & Co. to a foreign tourist in relation to a tour conducted wholly outside India [see para 437.1].
Service Services provided by a team manager is exempt from GST vide Exemption Notification (Entry 68), if the
provided by following two conditions are satisfied –
Ms. A - Services provided to a recognised sports body.
- Services provided for participation in a sporting event organised by a recognized sport body.
In the given case, the sporting event is organised by a multi brand retail company (and not by a
recognised sports body). Consequently, GST exemption is not available.
 3. Sai Trading Co. - Composition Scheme is applicable if the aggregate turnover of the taxpayer in the immediately preceding
financial year does not exceed Rs. 1.50 crore (Rs. 75 lakh in the case of Arunachal Pradesh, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura and Uttarakhand). The aggregate turnover of Sai Trading Co. in the immediately preceding
financial year is Rs. 78 lakh. It is an eligible person for opting Composition Scheme. Even if Sai Trading Co. is in the business
of intra-State supply within the State of Jammu and Kashmir, it can opt for Composition Scheme.
 1. Determine the effective date of registration in the following cases –
- The aggregate turnover of X Ltd. (engaged in taxable supply of services in the State of Punjab) exceeds Rs. 20 lakh on
August 25, 2019. It applies for registration on September 19, 2019 and is granted registration certificate on September 29,
2019.
- What will be your answer, if in the above scenario, X Ltd. submits the application for registration on September 27, 2019
and is granted registration on October 5, 2019 ?
 2. Determine with reason whether the following statements are true or false –
- A registered person shall issue a separate invoice for supplying both taxable as well as exempted goods to an unregistered
person.
- A non-banking financial company can issue a consolidated tax invoice at the end of every month for the supply made
during that month.
 3. List any six State levies, which are subsumed in GST.
registration (where the application for registration has been submitted within a period of 30 days from such date). Where,
however, the application for registration is submitted after the expiry of 30 days, the effective date of registration shall be
the date of grant of registration. In the given case, X Ltd. becomes liable for registration on August 25, 2019. If registration
application is submitted on September 19, 2019 (i.e., within 30 days), effective date of registration is August 25, 2019. If,
however, registration application is submitted on September 27, 2019 (i.e., after the expiry of 30 days), effective date of
registration is the date on which registration is granted (i.e., October 5, 2019).
 2. Invoice - The following statements are given in the problem –
Separate invoice for supply of taxable as well False - As per rule 46A, a registered person (who supplies taxable as well
as exempted goods to unregistered person as exempted goods/services to an unregistered person) can issue a
single “invoice-cum-bill of supply” for all such supplies.
Consolidated invoice by non-banking finan- True - Rule 54(2) is applicable when supplier of taxable service is an
cial company at the end of each month insurer or a banking company or a financial institution or a non-
banking financial company. In these cases, supplier may issue a con-
solidated tax invoice (or any other document in lieu thereof) for the
supply of services made during a month. This invoice should be issued
at the end of the month.
 3. State levies which are subsumed in GST - See para 402.

 1. When interest shall be payable by a registered person and what is the maximum rate of interest chargeable for the same?
 2. List the inclusions and exclusions for computing the “aggregate turnover” under CGST Act.
 3. Who is required to furnish final return under CGST Act and what is the time limit for the same ? Discuss.
 1. Interest - See para 558.
 2. Aggregate turnover - See para 405.1.
 3. Final return - Every registered person whose registration has been cancelled shall furnish a final return within 3 months
of the date of cancellation or date of order of cancellation, whichever is later. This return should be submitted electronically
in Form GSTR-10.
Intermediate (IPC), May 2018 (Old)1

 Q.1 Mrs. X (who works as journalist with ABC Ltd.) provides the following information for the year ending March 31,
2020 –
Rs.
Basic salary (per month) 25,000
Dearness allowance (50 per cent is considered for computation of retirement benefits) 50 per cent of basic pay
Own contribution to recognized provident fund 30,000
Employer’s contribution to recognized provident fund 20 per cent of basic pay
Interest credited in the recognized provident fund (rate of interest being 15 per cent) 15,000
Arrears of rent received from ABC Ltd. 69,000
Other information -
- Mrs. X gets interest of Rs. 10,000 from Axis Bank savings account during the year and interest of Rs. 12,040 from the
debentures of Coal India Ltd.
- Mrs. X pays by cheque insurance premium of Rs. 12,500 for mediclaim insurance policy for her major daughter.
- Mrs. X contributes Rs. 1,196 per month towards Atal Pension Yojana and Rs. 5,000 per month towards Sukanya
Samriddhi account.
- ABC Ltd. has taken a residential house of Mrs. X as company’s guest house and later purchased from her in the year 2018
at market value for Rs. 75 lakh. Cost of acquisition was only Rs. 10 lakh in April 2004.
- During August 2019, Mrs. X has lost her gold chain and a diamond ring which she had purchased in April 2004 for Rs.
1,13,000 and market value of these two items were Rs. 2,50,000 and she has received insurance compensation of Rs.
2,75,000 during February 2020.
Compute total income for the assessment year 2020-21.
 A.1 Computation of income of Mrs. X –
Rs.
Basic salary (Rs. 25,000 × 12) 3,00,000
Employer’s contribution towards recognised provident fund in excess of 12% of “salary” [(20% of
Rs. 3,00,000) – 12% of (Rs. 3,00,000 + 50% of dearness allowance of Rs. 1,50,000)] 15,000
Interest credited in recognised provident fund in excess of 9.5% per annum (Rs. 15,000 × 5.5 ÷ 15) 5,500
Income from house property (Rs. 69,000 – 30% of Rs. 69,000) 48,300
Capital gains [full value of consideration : Rs. 2,75,000 – indexed cost of acquisition : Rs. 2,89,000 (i.e.,
Rs. 1,13,000 × 289 ÷ 113)] (-) 14,000
Income from other sources [savings bank interest : Rs. 10,000 + debenture interest : Rs. 12,040 (it is assumed
that TDS is nil)] 22,040
Less: Deductions
Under section 80C (provident fund contribution : Rs. 30,000 + amount deposited in Sukanya Samriddhi
Account : Rs. 60,000) 90,000
Under section 80CCD (contribution towards Atal Pension Yojana : Rs. 1,196 per month) 14,352
Under section 80D (medi-claim insurance premium for major daughter, it is assumed that daughter is
dependent upon Mrs. X) 12,500
Under section 80TTA (savings bank interest : Rs. 10,000) 10,000
 1. Ms. X, a resident and ordinarily resident in India, has the following income for the year ending March 31, 2020 –
Rs.
Income from sale of centrifuged latex processed from rubber plants grown in Darjeeling 1,00,000
Income from sale of coffee grown and cured in Yercaud, Tamil Nadu 2,00,000
Rs.
Income from sale of coffee grown, cured, roasted and grounded in Colombo (sale consideration was
received in Chennai) 5,00,000
Income from sale of tea grown and manufactured in Shimla 10,00,000
Income from sapling and seedling grown in a nursery at Cochin (basic operations were not carried out
by Ms. X on land) 2,00,000
Compute the business income and agricultural income of Ms. X for the assessment year 2020-21.
 2. Mrs. Y (68 years) mortgaged her residential property (purchased for Rs. 3 lakh on October 1, 2002) with a bank, under a
notified reverse mortgage scheme (amount of sanctioned a loan being Rs. 20 lakh). As per the said scheme, she received the
loan amount in equal monthly instalments of Rs. 30,000 per month from the bank. Mrs. Y was not able to repay the loan on
maturity and (in lieu of settlement of the loan) surrenders the residential property to the bank. Bank sold the property for
Rs. 25 lakh on February 22, 2020. She had no other income during the year. Discuss the tax consequences and compute tax
Business Agricultural
income income
Rs. Rs.
Income from sale of centrifuged latex processed from rubber plants grown in India (35%
business income, 65% agricultural income) 35,000 65,000
Income from sale of coffee grown and cured in India (25% business income, 75% agri-
cultural income) 50,000 1,50,000
Income from sale of coffee grown, cured, roasted and grounded in Colombo (entire
income is taxable as business income) 5,00,000 Nil
Income from sale of tea grown and manufactured in India (40% business income, 60%
agricultural income) 4,00,000 6,00,000
Income from sapling and seedling grown in a nursery at Cochin (entire income is agri-
cultural income even if basic operations are not carried out) Nil 2,00,000
Total 9,85,000 10,15,000
 2. Computation of income and tax of Mrs. Y –
Rs. Rs.
Monthly instalment of loan amount received during the previous year 2019-20 [exemption
given by section 10(43)] Nil
Capital gain on transfer of property by bank –
Full value of consideration 25,00,000
Tax on net income
Income-tax on long-term capital gain (20% of Rs. 13,74,290) 2,74,858
 1. Ms. X is a Hollywood actress. Her passport reveals the following information about her stay in India –
Previous years Period of stay in India
2019-20 April 3, 2019 to July 11, 2019
2018-19 June 22, 2018 to July 11, 2018
2017-18 February 10, 2018 to March 26, 2018
2016-17 September 7, 2016 to March 26, 2017
2015-16 May 17, 2015 to September 30, 2015
2014-15 April 3, 2014 to July 11, 2014
2013-14 April 3, 2013 to July 11, 2013
2012-13 April 3, 2012 to July 11, 2012
2011-12 April 3, 2011 to July 11, 2011
Find out her residential status for the assessment year 2020-21.
 2. Y, a resident individual, owns 3 houses in Chennai. One house is self-occupied by him, second house is self-occupied by
his major son and the third house is vacant during the year.
You are required to highlight the steps involved to compute income from house property for Y under deemed to be let out
concept.
 1. Residential status of Ms. X - Complete information about the citizenship of Ms. X is not given in the problem. The problem
is solved under different possible situations given below –
If Ms. X is a foreign citizen (not being a person of Indian origin) - She can become resident in India if she satisfies at least one of
the two basic conditions given by section 6(1). The first basic condition requires that an individual should be in India for a
period of 182 days or more. The second basic condition requires that an individual should be in India for at least 60 days
during the previous year and 365 days during 4 years immediately prior to the current previous year. During different years,
Ms. X is in India as follows –
Previous years Period of stay of Ms. X in India Previous years Period of stay of Ms. X in India
2019-20 100 days 2014-15 100 days
2018-19 20 days 2013-14 100 days
2017-18 46 days 2012-13 100 days
2016-17 201 days 2011-12 100 days
2015-16 137 days
During the previous year 2019-20, Ms. X is in India for 100 days. She cannot satisfy the first basic condition. However, she
satisfies the second basic condition (as she is in India for 100 days during the current year and 404 days during earlier 4 years).
She becomes resident in India. A resident individual is either ordinarily resident or not ordinarily resident. To become
ordinarily resident, one has to satisfy two additional conditions given by section 6(6)(a). The first additional condition
requires that an individual should be resident in India in at least 2 years out of preceding 10 years. The second additional
condition requires that an individual should be in India for at least 730 days during 7 years immediately prior to the current
previous year. Ms. X satisfies the first additional condition but she is unable to satisfy the second additional condition (as
she is in India for 704 days during earlier 7 years). She cannot satisfy the two additional conditions simultaneously.
Consequently, she is resident but not ordinarily resident for the previous year 2019-20 (i.e., assessment year 2020-21).
If Ms. X is an Indian citizen (and/or she is a person of Indian origin) - She can become resident in India if she satisfies the first basic
condition. As she is unable to satisfy the first basic condition, she is non-resident in India for the previous year 2019-20 (i.e.,
assessment year 2020-21).
 2. House property income of Y - First house will be taken as self-occupied property [annual value is nil, municipal tax is not
deductible, standard deduction under section 24(a) is not available, interest on borrowed capital is deductible under section
24(b) but subject to a maximum of Rs. 30,000/Rs. 2,00,000]. The second house will also be taken as self-occupied property
(aggregate interest liability pertaining to the first house and the second house cannot exceed Rs. 30,000/Rs. 2,00,000). If the
third house is meant for self-occupation (not purchased for the purpose of letting it out), it will be treated as deemed to be
let out property. If the third house is meant for the purpose of letting it out (but could not be let out, as suitable tenant is not
available), income will be calculated as if it is a let-out property (gross annual value will be zero, municipal tax is deductible,
interest liability is also deductible).
 Q.4 X is a businessman. During the year ending March 31, 2020, X is engaged in the business of hypermarket and
supermarket. He maintains proper books of account for both businesses in mercantile system. Turnover of the hypermarket
is Rs. 75 lakh (all receipts are in cash). Turnover of supermarket is Rs. 50 lakh during the year (the entire turnover is received
through online transactions in his bank account). The expenses are incurred in the ratio 65:35.
The following information is noted from debit side of profit and loss account –
Rs.
Salary 10,00,000
Repairs on building 1,81,000
Interest 1,10,000
Travelling 1,30,550
Net profit 3,93,950
In addition to the above, expenditure incurred by X on construction of a new room is Rs. 1,00,000. It is debited to profit and
loss account. Depreciation as per Income-tax Act is Rs. 7,17,000.
Rs. 75,000 is paid in cash on September 30, 2019 to A who is accountant for preparation of the accounts for the year ending
March 31, 2019 and adjusted under the head “expenses payable” account.
X was forced to shut down his furniture business in the year 2017 as his accountant absconded with cash of Rs. 5 lakh (which
was fully allowed in that year). Unabsorbed business loss of furniture business is Rs. 3 lakh. Rs. 4 lakh is received as insurance
compensation on March 31, 2020 for the cash theft.
X wants to declare income under “presumptive income” basis.
Compute the income chargeable under the head “Profits and gains of business or profession” of X under presumptive
income scheme under section 44AD and his total income for the year ending March 31, 2020.
 A.4 Computation of taxable income of hypermarket and supermarket on the basis of books of account –
Rs.
Adjustments –
Add: Capital expenditure on construction of new room 1,00,000
Less: Depreciation pertaining to new room (10% of Rs. 1,00,000) (–) 10,000
Add: Depreciation debited in books 8,12,000
Less: Depreciation as per income-tax provisions (–) 7,17,000
Add: Disallowance pertaining to cash payment 75,000
Taxable income (on the basis of books of account) of hypermarket and supermarket 6,53,950
Taxable income (on the basis of section 44AD) of hypermarket and supermarket (8% of Rs. 75,00,000 +
6% of Rs. 50,00,000) 9,00,000
Computation of total income –
Business income under section 44AD 9,00,000
Income of discontinued furniture business (insurance compensation : Rs. 4,00,000 – unabsorbed business
loss : Rs. 3,00,000) 1,00,000
Income under the head “Profits and gains of business or profession” 10,00,000
 1. X, a chartered accountant, has professional income of Rs. 10,00,000 for the previous year ending March 31, 2020. He
provides the following additional information for the previous year 2019-20 –
Rs.
Income of minor son B from company deposit 1,50,000
Income of minor daughter C (professional dancer) 20,00,000
Interest from SBI received by C on deposit made in 2017 out of her income from special talent 20,000
Gift received by C on September 30, 2019 from friends of X on winning National award 45,000
Short-term capital loss of X 6,00,000
Long-term capital gain of X 4,00,000
Long-term capital gains from shares (STT paid) of X (sale consideration on June 30, 2019: Rs. 40,00,000, cost
of acquisition on July 8, 2016: Rs. 3,80,000, fair market value on January 31, 2018: Rs. 30,00,000) 10,00,000
Short-term capital loss under section 111A of X 10,00,000
Compute the total income of X for assessment year 2020-21 and the losses to be carried forward assuming that he files his
income-tax returns every year before due date.
 2. XYZ Ltd., a domestic company, declares dividend of Rs. 150 lakh for the financial year 2018-19 and distributes the same
on July 31, 2019. A holds 10 per cent share in XYZ Ltd. and receives dividend of Rs. 15 lakh in July 2019. B holds 5 per cent
share in XYZ Ltd. and gets dividend of Rs. 7.50 lakh in July 2019.
Discuss the tax liability in the hands of A and B. Assume that A and B have not received any dividend from any other
domestic company during the year.
 3. Explain the amount of fees to be paid for default in furnishing return of income under section 234F.
Rs. Rs.
Capital gains –
- Long-term capital gain 4,00,000
- Long-term capital gain (securities transaction tax paid) 10,00,000
- Short-term capital loss (–) 6,00,000
- Short-term capital loss (securities transaction tax paid) (–) 10,00,000
Capital gains (*to be carried forward) (–)2,00,000* Nil
Rs. Rs.

- Interest of minor son B from company deposit [Rs. 1,50,000 – exemption under
section 10(32) : Rs. 1,500] 1,48,500
- Income of minor daughter C who is professional dancer [assuming that it is income
from the profession of dancing, it will be taxable as income of C, clubbing provisions
of section 64(1A) not applicable] Nil
- Interest from SBI received by C [Rs. 20,000 – exemption under section 10(32) :
Rs. 1,500] 18,500
- Gift received by C from friends of X [as aggregate amount is not more than Rs. 50,000,
it is not taxable under section 56(2)(x)] Nil 1,67,000
Note - Short-term capital loss of Rs. 2,00,000 will be carried forward.
 2. Computation of tax liability of A and B –
A B
Rs. Rs.
Aggregate dividend from domestic companies 15,00,000 7,50,000
Less: Dividend exempt under section 10(34) 10,00,000 7,50,000
Dividend taxable 5,00,000 Nil
Tax on dividend income under section 115BBDA –
Income-tax @ 10% 50,000 Nil
Add: Surcharge (it is assumed that total income of A does not exceed Rs. 50,00,000) Nil Nil
Tax and surcharge 50,000 Nil
Add: Health and education cess 2,000 Nil
Tax liability 52,000 Nil
 3. Fee for default in furnishing return of income under section 234F - See para 296.7.
 1. Discuss the applicability of provisions of tax deduction at source, the rate and amount of tax deduction to be made in the
following cases for the financial year 2019-20 –
B is resident. His turnover for the financial years 2018-19 and 2019-20 is Rs. 205 lakh and Rs. 80 lakh respectively. He makes
the following payments –
- Shop rent paid to R, a resident, of Rs. 20,000 per month.
- On November 1, 2019, B pays fee for technical services of Rs. 25,000 and royalty of Rs. 20,000 to S (a resident person who
has PAN). No other payment is made to S.
- On October 1, 2019, B pays a sum of Rs. 2,00,000 to A for purchase of diaries according to his specifications. However,
no material supplied by B for such diaries.
- B pays Rs. 25,000 on May 1, 2019 to Q on account of a contract for painting. Further, he pays Rs. 20,000 to Q on March
22, 2020 on account of another contract for interior furnishing.
T, an individual not assessed to tax, pays rent of Rs. 60,000 per month.
 2. Write any 4 cases where seller of certain goods is required to collect tax from buyers and also state the circumstances where
TCS is not applicable.
 3. State the minimum amount above which quoting of permanent account number (PAN) is mandatory in the cases given
below –
- Sale or purchase of car.
- Payment to a hotel or restaurant against a bill or bills at any one time.
- Payment in connection with travel to any foreign country.
- Payment to the RBI for acquiring bonds issued by it.
- A time deposit with a Post Office.
- Payment as life insurance premium to an insurer.
- Sale or purchase, of shares of a company (not listed in a recognized stock exchange).
- Sale or purchase of any immovable property.

 1. Tax deduction at source - Tax is deductible in the cases given in the problem as follows –
Payment of rent by B B is an individual. In the immediately preceding financial year, provisions of tax audit under
to R section 44AB are applicable. Consequently, B is required to deduct tax on payment of rent
under section 194-I. Amount of rent for the current financial year is Rs. 2,40,000 (threshold limit
is Rs. 1,80,000). If it is rent of land/building/furniture/fittings, tax is deductible @ 10%. If rent
is for use of plant and machinery, the applicable TDS rate is 2%.
Payment of technical Technical fees and royalty are covered by TDS provisions of section 194J. Threshold limit for
fees/royalty by B to S payment of technical fees is Rs. 30,000. As the amount of technical fees is not more than
Rs. 30,000, tax is not deductible under section 194J.
Threshold limit for payment of royalty is Rs. 30,000 (it is in addition to the threshold limit given
above even if the recipient is same). As the amount of royalty is not more than Rs. 30,000, tax
is not deductible under section 194J. One can give an alternate reasoning for non-deduction of
tax in the case of royalty in this case. If payer of royalty is an individual, TDS under section 194J
is not required, regardless of the quantum of royalty.
Payment by B for It is the case of purchase of diaries. Section 194C is applicable if a product is manufactured/
purchase of diaries fabricated according to the specifications given by the payer and the supplier has manufac-
tured it by using material supplied by the payer. In this case, material is not supplied by B.
Consequently, section 194C is not applicable. No TDS is required on payment of Rs. 2,00,000
to A.
Payment by B for These payments are covered by section 194C. However, section 194C is applicable only if
painting/interior consideration for a single contract is more than Rs. 30,000. It is also applicable if aggregate
furnishing consideration paid/payable (to the same person) for all contracts during the financial year is
more than Rs. 1,00,000. In the given problem, payment of Rs. 25,000/30,000 does not exceed
the threshold limit. Consequently, TDS is not applicable.
Payment of rent by T T is an individual. He is not assessed to income-tax. He pays rent of Rs. 60,000 per month. If
it is rent of land/building and recipient is a person resident in India, TDS under section
194-IB is required. Rate of TDS is 5%. Tax is to be deducted at the time of payment of rent for
last month of the financial year (or the last month of tenancy if the property is vacated during
the financial year).
 2. Tax collection at source - See para 290.1.
 3. Requirement of quoting PAN - The relevant provisions (given by rule 114B) are narrated below –
Different cases Quoting of PAN is required if transaction value exceeds
the amount given below
Sale or purchase of car All transactions (irrespective of sale or purchase price)
Payment to a hotel/restaurant against a bill/bills Rs. 50,000 (applicable only if paid in cash)
Payment for foreign travel Rs. 50,000 (applicable only if paid in cash)
Payment to the RBI for acquiring bonds issued by it Rs. 50,000
A time deposit with a Post Office Rs. 50,000
Payment as life insurance premium to an insurer Rs. 50,000
Sale/purchase of shares in a company (not listed) Rs. 1,00,000
Sale/purchase of any immovable property Rs. 10,00,000
 1. X, a supplier of goods, pays GST under regular scheme. He is not eligible for any threshold exemption. He gives the
following information pertaining to taxable inward/outward supplies for August 2019 –
Taxable outward supply Taxable inward supply (i.e., purchases made by X from
registered dealers)
Rs. Rs.
Intra-State supply of goods 6,00,000 Intra-State purchase of goods 4,00,000
Inter-State supply of goods 2,00,000 Inter-State purchase of goods 50,000
He has the following input tax credit at the beginning of August 2019 – CGST : Rs. 15,000, SGST : Rs. 35,000, IGST : Rs. 20,000.
Rate of CGST, SGST and IGST is 9 per cent, 9 per cent and 18 per cent respectively on both inward and outward supplies.
Both inward and outward supplies are exclusive of taxes wherever applicable. Assume that conditions for claiming input
tax credit [including conditions imposed by rule 36(4)] are satisfied.
Compute the net GST payable by X for the month of August 2019.
 2. K Ltd., a registered dealer, furnishes the following information relating to goods sold by it to B Ltd. in the course of intra-
State supply –
Rs.
(i) Price of the goods 1,00,000
(ii) Municipal tax 2,000
(iii) Inspection charges 15,000
(iv) Subsidy received from Shri Ram Trust (as the product is to be used by a blind association) 50,000
(v) Late fees for delayed payment (though B Ltd. made late payment but these charges are waived
by K Ltd.) 1,000
(vi) Weighment charges [B Ltd. pays to R Ltd. (on behalf of K Ltd.)] 2,000
Determine the value of taxable supply (as per GST law) made by K Ltd. Items given in (ii) to (vi) are not considered while
arriving at the price of the goods given in (i).
 1. GST payable by X –
IGST CGST SGST
Rs. Rs. Rs.
Tax on outward supply 36,000 54,000 54,000
Opening balance on August 2019 20,000 15,000 35,000
Add: GST on inward supply during August 2019 –
Intra-State purchase of goods – 36,000 36,000
Inter-State purchase of goods 9,000 – –
Input tax credit available on August 31, 2019 29,000 51,000 71,000
Balance 7,000 54,000 54,000
Less: CGST – 51,000 –
Balance 7,000 3,000 54,000
Less: SGST (balance SGST : Rs. 71,000 – Rs. 54,000 = Rs. 17,000) – – 54,000
Balance 7,000 3,000 Nil
Less: SGST (balance SGST : Rs. 17,000 – Rs. 7,000 = Rs. 10,000) 7,000 – –
Balance payable through electronic cash ledger Nil 3,000 Nil
Balance available in electronic credit ledger after aforesaid adjustments Nil Nil 10,000
 2. Computation of taxable supply –

Rs.
List price (as given in the problem) 1,00,000
Add: Municipal tax (included in value of taxable supply, if charged separately by supplier) [sec. 15(2)(a)] 2,000
Add: Inspection charges [sec. 15(2)(c)] 15,000
Add: Subsidy from Shri Ram Trust (subsidy which is directly linked to the price and received from a non-
Government entity is included in value of supply) [sec. 15(2)(e)] 50,000
Add: Late fees (included in value of taxable supply) [sec. 15(2)(d)] (as it is waived by supplier and no pay-
ment is received, it cannot be included) Nil
Add: Weighment charges [sec. 15(2)(c)] 2,000

 1. X Ltd., a registered GST dealer of Mumbai, furnishes the following information for the month of April 2019 –
Rs.
Intra-State supply of taxable goods (for this supply an advance of Rs. 50,000 was received in March 2019) 2,00,000
Goods purchased from unregistered dealers (purchased on April 20, 2019) (inter-State supply : Rs. 10,000,
intra-State supply : Rs. 40,000) 50,000
Received for services by way of labour contracts for repairing a single residential unit otherwise than as a
part of residential complex (it is intra-State transaction) 50,000
Professional fees paid to Ms. U located in a non-taxable territory (it amounts to inter-State transaction) 50,000
Compute GST liability (CGST, SGST or IGST, as the case may be) of X Ltd. for April 2019. Assume that GST rates is 18 per
cent (i.e., CGST : 9 per cent, SGST : 9 per cent and IGST : 18 per cent). For the previous financial year, turnover of X Ltd. is
Rs. 2 crore.
 2. List the activities to be treated as supply under CGST Act, even if made without consideration.
 1. GST liability of X Ltd. for April 2019 –
IGST CGST SGST
Rs. Rs. Rs.
Intra-State supply of goods (9% of Rs. 2,00,000, 9% of Rs. 2,00,000) (in the case of
supply of goods, GST is not payable at the time of receipt of advance in the case of
a supplier who is not covered by Composition Scheme) – 18,000 18,000
Goods purchased from unregistered dealers [by virtue of section 9(4), if a regis-
tered person procures supplies from an unregistered supplier, he is required to
pay GST under reverse charge basis. However, this rule is applicable only in some
notified cases – see para 572.2] – – –
Service by way of labour contract for repairing a single residential unit [by virtue
of Exemption Notification (Entry 11), service by way of pure labour contract of
construction of original work pertaining to a single residential unit is exempt from
GST. However, exemption is not available in case of contract for repairing) (9% of
Rs. 50,000, 9% of Rs. 50,000) – 4,500 4,500
Any service supplied by a person (located in a non-taxable territory) to a person
located in taxable territory is subject to reverse charge mechanism (X Ltd. will have
to pay GST under reverse charge mechanism) (18% of Rs. 50,000) 9,000 – –
Total 9,000 22,500 22,500
Amount payable for April 2019 9,000 22,500 22,500
Less: Input tax credit pertaining to IGST on professional fees paid to Ms. U (payable
under reverse charge as shown above, available as input tax credit) – 9,000 –
Net amount payable for April 2019 9,000 13,500 22,500
 2. Activities which are treated as “supply” even if consideration is absent - See paras 414, 413.7 and 413.8.
 1. On September 4, 2019, X, a famous music composer, gets Rs. 3 crore as consideration from Z Music Co. Ltd. for sale of
copyright of his original music album. He completes his work on July 20, 2019 and on the same day CD is made available
to the music company. Invoice is raised by him on July 24, 2019. What will be the time of supply ? GST is payable on this
case on reverse charge mechanism.
 2. State (with reasons) person liable to pay GST in the following different cases (assume that recipient is located in taxable
territory) –
- Rental income received by Tamil Nadu State Government from renting an immovable property to M Ltd. (turnover of
the company is Rs. 22 lakh in the preceding financial year).
- Legal fees received by S, a senior advocate, from T Trading Co. (turnover of the recipient is Rs. 50 lakh in the preceding
financial year).
 3. B Ltd. purchases a machine for Rs. 9,00,000 (+ GST @ 18 per cent) on July 20, 2019. It avails input tax credit in July 2019.
On March 5, 2020, B Ltd. transfers the machine for Rs. 7,00,000 (excluding GST) to H Ltd. The GST rate on sale is 18 per cent.
What will be the course of action for B Ltd. to follow under CGST Act ?

 1. Time of supply - This is the case of supply of services. Tax is payable by the recipient under reverse charge mechanism. Rule
pertaining to time of this supply is given by section 13(3) and time of supply will be determined as follows –
Criteria 1 Date of payment (as per books of account of Z Music Co. Ltd. or date of debit
entry in bank account of Z Music Co. Ltd., whichever is earlier). September 4, 2019
Criteria 2 Next date after (date of invoice + 60 days), i.e., date of invoice + 61 September 23, 2019
Time of supply Criteria 1 or Criteria 2, whichever is earlier. September 4, 2019
 2. Person liable to pay GST - GST is payable as follows –
Renting of immovable In the case of renting of immovable property by Government, GST is payable by the recipient
property by Tamil if the recipient is registered under GST. Consequently, M Ltd. is liable to pay GST under
Nadu Government reverse charge mechanism (if M Ltd. is registered under GST).
Legal service provided Service provided by a senior advocate to a business entity (whose aggregate turnover does not
by a senior advocate exceed Rs. 20 lakh/Rs. 10 lakh in the immediately preceding financial year) is exempt from
GST. In this case, aggregate turnover of the recipient in the preceding financial year is Rs. 50
lakh. It is chargeable to GST. However, tax is payable by T Trading Co. (the recipient business
entity) under reverse charge mechanism.
 3. Reversal of input tax credit - It is covered by section 18(6). These provisions are given below –
1. The taxpayer is registered under GST.
2. He has availed input tax credit at the time of inward supply of capital goods/plant and machinery.
3. Subsequently, these capital goods/plant and machinery are supplied to another person.
4. Input tax credit will have to be reversed as follows –
a. input tax credit taken on the said capital goods [as reduced by 5 percentage points for each quarter (or part thereof) from
the date of issue of invoice till the date of transfer (i.e., input tax credit pertaining to remaining useful life of capital asset)];
or
b. GST on transaction value at the time of supply of capital goods to another person,
5. Where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the
transaction value of such goods [in such a case, point 4(a) above will be irrelevant].
Amount of reversal of input tax credit will be calculated as follows –
Rs.
GST paid on machine (18% of Rs. 9,00,000) 1,62,000
Input credit availed in July 2019 1,62,000
Date of invoice July 20, 2019
Date of outward supply of machine March 5, 2020
Number of quarters (or part thereof) between the above dates 3
Credit reversal [Rs. 1,62,000 – (5% × 3 × Rs. 1,62,000)] (a) 1,37,700
GST at the time of sale of machinery on March 5, 2020 (18% of Rs. 7,00,000) (b) 1,26,000
GST payable under section 18(6) [(a) or (b), whichever is higher] 1,37,700
 1. Under what circumstances needs of issuance of debit note and credit note arise under section 34 of CGST Act ?
 2. What is CIN ?
 3. When interest is payable ?
 4. How do the new payment system benefit the taxpayer and the Commercial Tax Department ?
 1. Debit note and credit note - See para 543.
 CIN - See para 556.
 Interest - See para 558.
 Benefit of GST - See para 404.
 1. Determine the effective date of registration in the cases given below under CGST Act –
- The aggregate turnover of X Industries of Mumbai has exceeded Rs. 20 lakh on August 1, 2019. It submits the application
for registration on August 20, 2019. Registration certificate granted on August 25, 2019.
- Y InfoTech Services is the provider of internet services in Pune. The aggregate turnover of it exceeds Rs. 20 lakh on
September 25, 2019. It submits the application for registration on October 27, 2019. Registration certificate is granted on
November 5, 2019.
 2. Z Ltd. starts its business of supply of goods on August 1, 2019. Its turnover exceeds Rs. 20,00,000 on September 5, 2019.
It applies for registration on September 28, 2019 and registration certificate is granted on October 6, 2019. Advice the
company regarding invoices to be issued between September 5, 2019 to October 6, 2019 to registered dealers. Further, it has
also supplied goods to unregistered dealers during this period.
 3. State with reason whether following statement is true or false –
“When there is change in constitution of business results in change in PAN, the business entity can apply for amendment
of registration in prescribed manner within 15 days.”
registration where the application for registration has been submitted within a period of 30 days from such date. Where,
however, the application for registration is submitted after the expiry of 30 days, the effective date of registration shall be
the date of grant of registration. In the given cases, the effective date of registration will be as follows –
- X Industries becomes liable for registration on August 1, 2019. Registration application is uploaded on August 20, 2019
(i.e., within a period of 30 days). Registration certificate is granted on August 25, 2019. It becomes effective from August
1, 2019.
- Y InfoTech Services becomes liable for registration on September 25, 2019. Registration application is submitted after 30
days (i.e., on October 27, 2019). Registration certificate is granted on November 5, 2019. It becomes effective from
November 5, 2019 (and not from September 25, 2019).
 2. Revised invoice by Z Ltd. - Z Ltd. commences its business of supply of goods on August 1, 2019 as unregistered person. The
turnover of the company between August 1, 2019 and September 5, 2019 is Rs. 20 lakh. It becomes liable for registration under
GST with effect from September 6, 2019. It applies for registration on September 28, 2019 (i.e., within statutory time of 30
days). Registration is granted with GSTIN on October 6, 2019. Since it applies for registration within 30 days from September
6, 2019, registration is granted with effect from September 6, 2019.
Z Ltd. can issue revised invoices pertaining to taxable supplies to registered persons effected during September 6, 2019 and
October 6, 2019. These revised invoices should contain the details given in rule 53. These revised invoices can be issued
within 1 month from October 6, 2019 (i.e., on or before November 5, 2019). In respect of supplies made to unregistered persons
during September 6, 2019 and October 6, 2019, Z Ltd. may issue a consolidated revised invoice in respect of all supplies made
to an unregistered person during such period.
 3. Change in constitution of business - Where a change in the constitution of any business results in the change of the PAN of
a registered person, the said person shall apply for fresh registration in Form GST REG-01. Such an entity cannot apply for
amendment of registration.
 1. A & Co. is a partnership firm of interior decorators. It also runs a readymade garment showroom. The turnover of the
showroom is Rs. 80 lakh and total receipt of the interior decorators service is Rs. 72 lakh in the preceding financial year.
- Examine whether the firm can opt for the Composition Scheme.
- Will your answer change, if the turnover of the showroom is Rs. 70 lakh and total receipts of the interior decorator service
is Rs. 22 lakh in the preceding financial year ?
- Discuss whether it is possible for A & Co. to opt for Composition Scheme only for showroom.
 2. Ms. Y gets legal advice for her personal problems and pays 1,000 pounds as a legal fee to U of London.
Explain whether the above activity of import of service would amounts to supply under section 7 of the CGST Act. Further
discuss the following –
- If in above case, Y and U are real sisters and no consideration is paid, then the activity of taking advice amounts to
“supply”.
- Further in the above case, Y and U are real sisters. Y receives legal advice for her business and she does not pay any
consideration.
 3. Explain the provision relating to filing of annual return under section 44 of CGST Act and rules thereunder.
 1. Composition Scheme - A & Co. is in the business of supply of readymade garments. Besides, it has income from supply of
services of interior decorators. The aggregate turnover of the preceding financial year of A & Co. is more than Rs. 1.5 crore
(i.e., Rs. 80 lakh + Rs. 72 lakh). It cannot opt for Composition Scheme.
Even if aggregate turnover of the preceding financial year is Rs. 92 lakh (i.e., Rs. 70 lakh + Rs. 22 lakh), it cannot opt for
Composition Scheme. A & Co. supplies both goods and services. If a person supplies goods and services, Composition
Scheme is applicable only if value of supply of services does not exceed 10% of the turnover or Rs. 5 lakh, whichever is higher.
Turnover in this case is Rs. 92 lakh. 10% of turnover is Rs. 9.2 lakh (which is higher than Rs. 5 lakh). As value of supply of
services is more than Rs. 9.2 lakh, A & Co. cannot opt for Composition Scheme.
If a person (having same PAN) owns two different units, it is not possible to opt for Composition Scheme in respect of one
of them and pay GST under normal provisions for other unit. Even if A & Co. has two separate registration (having two
separate GSTIN) for interior decorator unit and garment showroom, it cannot opt for Composition Scheme for showroom.
 2. Import of service by Ms. Y - By virtue of section 7(1)(b) import of service for a consideration is “supply” for the purpose of
GST. This rule is applicable whether or not such supply is made by the supplier in the course or furtherance of his business.
In this case, legal advice is taken by Ms. Y from U for a consideration of 1,000 pounds. It is import of service and, normally,
it is chargeable to GST under reverse charge mechanism. However, legal service to a non-business entity is exempt from GST
vide Exemption Notification (Entry 45).
If Y and U are real sisters and no consideration is paid, GST for legal service would be attracted only if the following
conditions are satisfied –
- Service is imported in the course, or furtherance of, business (i.e., business of supplier U) [for detailed discussion on this
point, see para 416].
- Recipient of legal service is a business entity with an aggregate turnover of Rs. 20 lakh (Rs. 10 lakh in the case of special
category states) in the preceding financial year.
 3. Annual return - See para 552.5.
Intermediate (IPC), November 20171
 Q.1 X (45 years), a resident individual, is a chartered accountant in practice. He maintains his accounts on cash basis. His
profit and loss account for the year ending March 31, 2020 is as follows –
Rs. Rs.
Staff salary 18,25,000 Fees earned
Rent of the office premises 6,00,000 - Audit 23,00,000
Administrative expenses 5,75,000 - Taxation 14,50,000
Stipend to articled clerks 1,85,000 Consultancy services relating to syndication of
Meeting, seminars and conferences 36,500 loan from financial institution

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RECOMMENDATIONS BY PROFESSIONAL INSTITUTIONS

22 Deepali, Pitampura, Delhi - 110034. VKS

1 Basic concepts that one must know

1. What is an assessment year 1

2 Residential status and its effect on tax incidence

17. What is relevance of residential status 23

3 Income that is exempt from tax

32. What income is exempted under section 10 45

4 Income under the head “Salaries” and its computation

39. What do you understand by expression “salary” 67

66. What is the basis of charge 160

77. What is the basis of charge 192

7 Income under the head “Capital gains” and its computation

92. What is the basis of charge 293

107. What is basis of charge 359

10 Set off and carry forward of losses

11 Permissible deductions from gross total income

12 Meaning of agricultural income and its tax treatment

185. What is agricultural income 470

13 Individuals - Computation of taxable income

192. What is included in income of an individual 479

14 Hindu undivided families - Computation of taxable income

201. What is understood by Hindu undivided family 505

15 Firms and associations of persons - Computation of taxable income

212. What is partnership 511

17 Advance payment of tax

266. When a person becomes liable to pay advance tax 541

18 Deduction and collection of tax at source

269. What is the scheme of tax deduction at source (TDS) 546

19 Interest payable by assessee/Government

296. When interest becomes payable by assessee 575

20 Basic concepts of GST

410. What is taxable event 598

425. What is the basis of charge of GST 623

23 Exemptions from GST

435. Power to grant exemption - How to exercise 639

455. Time of supply - How to determine and its significance 687

26 Value of taxable supply

27 Reverse charge mechanism

481. What is reverse charge mechanism 712

28 Input tax credit

29 Composition Scheme and Alternative Composition scheme

511. Is there any threshold limit for small taxpayers 752

521. What is the significance of registration 766

31 Tax invoice, credit and debit notes

531. What is invoice under GST 780

32 Returns, tax payment and interest

33 Provisions governing Real Estate Services

581. Problems on GST 835

Tax rates 848

Questions set for CA (Intermediate) Examinations and Answers 862

Depreciation rates for power generating units 974

Answers to unsolved exercises 975

 WHAT IS AN ASSESSMENT YEAR [SEC. 2(9)]

 WHAT IS A PREVIOUS YEAR [SEC. 3]

 WHO ARE INCLUDED IN “PERSON” [SEC. 2(31)]

 WHO IS REGARDED AS ASSESSEE [SEC. 2(7)]

 HOW TO CHARGE TAX ON INCOME

 WHAT IS REGARDED AS “INCOME” UNDER THE INCOME-TAX ACT

7 $ ; 0 $ 1 1