What is a Tax?

Tax is a financial obligation, payable to the government for the cost of living in a society. It is a fee levied
by the government of the respective country or territory on income, activities, goods, and services. It is
broadly classified into direct tax and indirect tax

BASIS FOR
DIRECT TAX INDIRECT TAX
COMPARISON

Meaning Direct tax refers to financial Indirect tax is when the taxpayer is
charge, levied directly on the just the hands that deposit the amount
taxpayer, and paid outrightly to of tax to the authority imposing it,
the authority which imposes it, by while the burden of tax falls on the
the taxpayer. final consumer.

Governed by Central Board of Direct Taxes Central Board of Indirect Taxes and
(CBDT) Customs (CBIC)

Who pays the tax? Individuals, HUF, and Companies Final Consumer

Nature Progressive Regressive

Incidence and It falls on the same person. It falls on different persons.

Impact

Liability A person on whom the tax is The person receiving the benefits is
imposed is liable for its payment. liable for its payment and not the
person on whom it is imposed.

Evasion Tax evasion is possible. Tax evasion is hardly possible because

it is included in the price of the goods
and services.

Inflation Direct tax helps in reducing Indirect taxes promotes inflation.

inflation.

Imposition and Imposed on and collected from Imposed on and collected from
collection assessees, i.e. Individual, HUF consumers of goods and services but
(Hindu Undivided Family), paid and deposited by the assessee.
Company, Firm, etc.

Burden Cannot be shifted to another Can be shifted to another person.

person.

Taxable Event When the income or wealth of the Purchase, sale or manufacture of
assessee reaches the maximum
BASIS FOR
DIRECT TAX INDIRECT TAX
COMPARISON

limit. goods and provision of services.

Collection of Tax Difficult Easy

previous year. Section 3

For the purposes of this Act, "previous year" means the financial year immediately preceding the
assessment year :

Provided that, in the case of a business or profession newly set up, or a source of income newly coming
into existence, in the said financial year, the previous year shall be the period beginning with the date of
setting up of the business or profession or, as the case may be, the date on which the source of income
newly comes into existence and ending with the said financial year.

assessment year

"assessment year" means the period of twelve months commencing on the 1st day of April every year ;

“Assessment Year” means the period of 12 months commencing on the 1 St. day of April every year.

In India, the Govt. maintains its accounts for a period of 12 months i.e. from 1st April to 31st March every
year. As such it is known as financial year. The income tax department has also selected same year for its
assessment procedure.

The Assessment year is the financial year of the Govt. of India during which income of a person relating to
the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act. files
return of income by prescribed dates. These returns are processed by the income tax department officials
and officers. This processing is called assessment. Under this income returned by the assessee is checked
and verified.Tax is calculated and compared with the amount paid and assessment order is issued. The year
in which whole of this process is undertaken is called assessment year.

Person sec 2 (31)

"person" includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.—For the purposes of this clause, 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 was formed or established or incorporated with the object of deriving
income, profits or gains;

Assessee 2 31
"assessee" means a person by whom any tax or any other sum of money is payable under this Act, and
includes—

(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of
his income or assessment of fringe benefits or of the income of any other person in respect of which he is
assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him
or to such other person ;

(b) every person who is deemed to be an assessee under any provision of this Act ;

(c) every person who is deemed to be an assessee in default under any provision of this Act ;

Income 2.24

Application of Income and Diversion of Income by overriding Titles

1. Application of Income means spending of Income after it is being earned by the assessee. Such amount
shall not be excluded from total income of the assessee as it is merely application of earned income. In
other words, applied income shall be taxable in the hands of the assessee.

2. Diversion of Income is the process of diverting income before it is earned by the assessee. Such amount
shall be excluded from the Total Income of the assessee as the income is diverted to someone else before
being earned by the assessee. In case of diversion of Income there is an over- riding title of any other
person on such income. So the income before being earned by the assessee reaches such person and hence
not chargeable to tax in hands of the assessee.

Example of Application of Income: – Mr. A is liable to pay Rs. 2,000/- per month to Ms. B (his ex-wife)
as an alimony sum. Mr. A being an employee of Mr. C, instructs him to pay Rs.2,000/- per month out of
his salary and disburse the remaining salary to him. Whether this amount of Rs.2,000/- per month be
included in the Total Income of Mr. A or is it a case of diversion of income of Mr. A and not taxable in his
hands? This is a case of Application of Income by Mr.A and not diversion of Income and hence it will be
included in the Total Income of Mr. A. This is because this amount of Rs. 2,000/- per month is an
obligation of Mr. A to pay to Ms. B out of his income and not an income in which Ms. B had over riding
entitlement from Mr. C before being earned by Mr. A. In other words, this is an Income of Mr. A, which is
applied by him to fulfill an obligation and hence included in his Total Income and a mere arrangement to
make Mr. C make such payments directly to Ms. B won’t make it a case of Diversion of Income.

. Example of Diversion of Income: – M/s ABC is a partnership firm in which A and his two sons B & C
are partners. The partnership deed provides that after the death of Mr. A, B & C shall continue the business
of the firm subject to a condition that 20 % of profit of the firm shall be given to Mrs. D (Wife of Mr. A/
Mother of B & C). After the death of Mr. A, whether this 20% amount of profit be included in the Total
Income of Firm M/s ABC or is a case of diversion of income of M/s ABC and not taxable in its hands?
This is a case if Diversion of Income and the said 20% amount shall not be included in the Total Income of
M/s ABC (i.e.) it is deductible from its Total Income. This is because the clause mentioned in partnership
deed has given an overriding title of the 20% profit to Mrs. D and such income is a precondition for the
firm to continue its business. In other words, this 20% profit reaches Mrs. D before it becomes income of
the firm and hence it is a case of diversion of Income. I hope this would have given you some clarity on
these two basic concepts of Income Tax.

Various Assessments Under The Income Tax Law

Every taxpayer has to furnish the details of his income to the Income-tax Department. These details are to
be furnished by filing up his return of income. Once the return of income is filed up by the taxpayer, the
next step is the processing of the return of income by the Income Tax Department. The Income Tax
Department examines the return of income for its correctness. The process of examining the return of
income by the Income-Tax department is called as “Assessment”. Assessment also includes re-assessment
and best judgment assessment under section 144. Under the Income-tax Law, there are four major
assessments given below;

Assessment under section 143(1) i.e. Summary Assessment without calling the Assessee.

This is a preliminary assessment and is referred to as summary assessment without calling the assessee
(i.e., taxpayer).

Scope of assessment under section 143(1)

Assessment under section 143(1) is like preliminary checking of the return of income. At this stage no
detailed scrutiny of the return of income is carried out. At this stage, the total income or loss is computed
after making the following adjustments (if any), namely:-

(i) any arithmetical error in the return; or

(ii) an incorrect claim (*), if such incorrect claim is apparent from any information in the return;

For the above purpose “an incorrect claim apparent from any information in the return” means a claim on
the basis of an entry in the return :

(i) of an item which is inconsistent with another entry of the same or some other item in such return;

(ii) in respect of which the information is required to be furnished under the Act to substantiate such
entry and has not been so furnished; or

(iii) 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;

Procedure of assessment under section 143(1)

• After correcting arithmetical error or incorrect claim (if any) as discussed above, the tax and
interest, if any, shall be computed on the basis of the adjusted income.

• Any sum payable by or refund due to the taxpayer shall be intimated to him.

• An intimation shall be prepared or generated and sent to the taxpayer specifying the sum
determined to be payable by, or the amount of refund due to the taxpayer.

• An intimation shall also be sent to the taxpayer in a case where the loss declared in the return of
income by the taxpayer is adjusted but no tax or interest is payable by or no refund is due to him.

• The acknowledgement of the return of income shall be deemed to be the intimation in a case where
no sum is payable by or refundable to the assessee or where no adjustment is made to the returned income.

• The processing of a return under section 143(1) shall not be necessary, where a notice has been
issued to the assessee under section 143(2), i.e., a notice for scrutiny assessment has been issued to the
taxpayer.

Time-limit

Assessment under section 143(1) can be made within a period of one year from the end of the financial
year in which the return of income is filed.
2. Assessment under section 143(3) i.e., Scrutiny assessment

This is a detailed assessment and is referred to as scrutiny assessment. At this stage a detailed scrutiny of
the return of income will be carried out. At this stage a scrutiny is carried out to confirm the correctness
and genuineness of various claims, deductions, etc., made by the taxpayer in the return of income.

Procedure of assessment under section 143(3)

• If the Assessing Officer considers it necessary or expedient to ensure that the taxpayer has not
understated the income or has not computed excessive loss or has not underpaid the tax in any manner,
then he will serve on the taxpayer a notice requiring him to attend his office or to produce or cause to be
produced any evidence on which the taxpayer may rely, in support of the return.

• To carry out assessment under section 143(3), the Assessing Officer shall serve such notice in
accordance with provisions of section 143(2).

• Notice under section 143(2) should be served within a period of six months from the end of the
financial year in which the return is filed.

• The taxpayer or his representative (as the case may be) will appear before the Assessing Officer and
will place his arguments, supporting evidences, etc., on various matters/issues as required by the Assessing
Officer.

• After hearing/verifying such evidence and taking into account such particulars as the taxpayer may
produce and such other evidence as the Assessing Officer may require on specified points and after taking
into account all relevant materials which he has gathered, the Assessing Officer shall, by an order in
writing, make an assessment of the total income or loss of the taxpayer and determine the sum payable by
him or refund of any amount due to him on the basis of such assessment.

Time-limit

As per section 153, assessment under section 143(3) shall be made within a period of two years from the
end of the relevant assessment year.

3. Assessment under section 144 i.e., Best judgment assessment

This is an assessment carried out as per the best judgment of the Assessing Officer on the basis of all
relevant material he has gathered. This assessment is carried out in cases where the taxpayer fails to
comply with the requirements specified in section 144

Scope of assessment under section 144 As per section 144, the Assessing Officer is under an obligation
to make an assessment to the best of his judgment in the following cases:-

• If the taxpayer fails to file the return required within the due date prescribed under section 139(1) or
a belated return under section 139(4) or a revised return under section 139(5).

• If the taxpayer fails to comply with all the terms of a notice issued under section 142(1). Note: The
Assessing Officer can issue notice under section 142(1) asking the taxpayer to file the return of income if
he has not filed the return of income or to produce or cause to be produced such accounts or documents as
he may require and to furnish in writing and verified in the prescribed manner information in such form
and on such points or matters (including a statement of all assets and liabilities of the taxpayer, whether
included in the accounts or not) as he may require.

• If the taxpayer fails to comply with the directions issued under section 142(2A).

Note : Section 142(2A) deals with special audit. As per section 142(2A), if the conditions justifying
special audit as given in section 142(2A) are satisfied, then the Assessing Officer will direct the taxpayer
to get his accounts audited from a chartered accountant nominated by the principal chief commissioner or
Chief Commissioner or Principal Commissioner or Commissioner and to furnish a report of such audit in
the prescribed form.

• If after filing the return of income the taxpayer fails to comply with all the terms of a notice issued
under section 143(2), i.e., notice of scrutiny assessment.

• If the assessing officer is not satisfied about the correctness or the completeness of the accounts of
the taxpayer or if no method of accounting has been regularly employed by the taxpayer.

From the above criteria, it can be observed that best judgment assessment is resorted to in cases where the
return of income is not filed by the taxpayer or if there is no cooperation by the taxpayer in terms of
furnishing information / explanation related to his tax assessment or if books of accounts of taxpayer are
not reliable or are incomplete.

Procedure of assessment under section 144

• If the conditions given above calling for best judgment are satisfied, then the Assessing Officer will
serve a notice on the taxpayer to show cause why the assessment should not be completed to the best of his
judgment.

• No notice as given above is required in a case where a notice under section 142(1) has been issued
prior to the making of an assessment under section 144.

• If the Assessing Officer is not satisfied by the arguments of the taxpayer and he has reason to
believe that the case demands a best judgment, then he will proceed to carry out the assessment to the best
of his knowledge.

• If the criteria of the best judgment assessment are satisfied, then after taking into account all
relevant materials which the Assessing Officer has gathered, and after giving the taxpayer an opportunity
of being heard, the Assessing Officer shall make the assessment of the total income or loss to the best of
his knowledge/judgment and determine the sum payable by the taxpayer on the basis of such assessment.

Time-Limit

As per section 153, assessment under section 144 shall be made within a period of two years from the end
of the relevant assessment year.

4. Assessment under section 147 i.e., Income escaping Assessment

This assessment is carried out if the Assessing Officer has reason to believe that any income chargeable to
tax has escaped assessment for any assessment year Scope of assessment under section 147

• The objective of carrying out assessment under section 147 is to bring under the tax net any income
which has escaped assessment in original assessment.

• Original assessment here means an assessment under sections 143(1), 143(3), 144 and 147 (as the
case may be).

• In other words, if any income has escaped (*) from being taxed in the original assessment made
under section 143(1) or section 143(3) or section 144 or section 147, then the same can be brought under
tax net by resorting to assessment under section 147.

• (*) In the following cases, it will be considered as income having escaped assessment: Where no
return of income has been furnished by the taxpayer, although his total income or the total income of any
other person in respect of which he is assessable during the previous year exceeded the maximum amount
which is not chargeable to income-tax.

• Where a return of income has been furnished by the taxpayer but no assessment has been made and
it is noticed by the Assessing Officer that the taxpayer has understated the income or has claimed
excessive loss, deduction, allowance or relief in the return.

• Where the taxpayer has failed to furnish a report in respect of any international transaction which he
was required to do under section 92E.

• Where an assessment has been made, but:

i. income chargeable to tax has been under assessed; or

ii. income has been assessed at low rate; or

iii. income has been made the subject of excessive relief; or

iv. excessive loss or depreciation allowance or any other allowance has been computed;

• Where a person is found to have any asset (including financial interest in any entity) located outside
India.

Procedure of assessment under section 147

• For making an assessment under section 147, the Assessing Officer has to issue notice under
section 148 to the taxpayer and has to give him an opportunity of being heard. The time-limit for issuance
of notice under section 148 is discussed in later part.

• If the Assessing Officer has reason to believe that any income chargeable to tax has escaped
assessment for any assessment year, then he may assess or reassess such income and also any other income
chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course
of the proceedings under this section. He is also empowered to re-compute the loss or the depreciation
allowance or any other allowance, as the case may be, for the assessment year concerned.

• Items which are the subject matters of any appeal, reference or revision cannot be covered by the
Assessing Officer under section 147.

Time-limit for completion of assessment under section 147

As per section 153, assessment under section 147 shall be made within a period of one year from the end
of the financial year in which notice under section 148 is served on the taxpayer.

Time-limit for issuance of notice under section 148

Notice under section 148 can be issued within a period of 4 (*) years from the end of the relevant
assessment year. If the escaped income is Rs. 1,00,000 or more and certain other conditions are satisfied,
then notice can be issued upto 6 years from the end of the relevant assessment year.

In case the escaped income relates to any asset (including financial interest in any entity) located
outside India, notice can be issued upto 16 years from the end of the relevant assessment year.

Notice under section 148 can be issued by AO only after getting prior approval from the prescribed
authority.

Reassessment

The income tax department has the power to reassess or re-compute an individual’s previously
filed income tax returns. The Assessing Officer (AO) has the power to pick your ITR for reassessment
subject to fulfilment of prescribed conditions. The AO will send a notice under section 148 of income tax
act for income escaping assessment. The Finance Act 2021 has reduced the time limit to re-open income
tax assessment cases to 3 years from 6 years. However, in case of serious tax evasion, the assessment can
be reopened until ten years. However, here the concealment of income should be more than 50 lakhs.

What is Progressive tax?

A progressive tax can be understood as one wherein the rates of tax increase with a rise in the taxable
amount. Thus, the rates of tax are applied in a manner that higher income groups bear the tax burden, while
the lower income groups are taxed accordingly with lower tax rates. Therefore, essentially the primary
consideration in a progressive tax system is the assessee’s ability to meet the tax demands. It aims at taxing
people in accordance to their incomes and is more kind on the poor or low-income groups.

What is Regressive tax?

A regressive tax system is one wherein the rates of tax reduce as the taxable amount increases. Therefore,
in essence a regressive tax system seeks to burden lower income groups with higher rates of tax, while the
high-income groups enjoy lower tax rates. A regressive tax is imposed consistently across all income
groups since the assessee’s ability to meet the tax demands is not an active consideration in such a regime.
It is for this reason that regressive taxes are unfair to poor and low-income groups.

Difference between progressive tax and regressive tax

The following are the essential points of difference between progressive tax vis-à-vis regressive tax:

1. Progressive tax signifies a taxation policy wherein the rates of tax increase with an increase in the
amount being taxed. Regressive tax on the other hand refers to a taxation system wherein the rate of tax
reduces with an increase in the taxable amount.
2. Progressive taxation policy essentially imposes tax on the income earned or the profit made by the
assessee on the basis of an increasing schedule of rates. Conversely, under a regressive tax system, taxes
are charged as a proportion of the assets either purchased or owned by an assessee.
3. A progressive tax system witnesses lower income groups enjoying the benefits of lower taxation rates,
since the burden of tax collection is passed on to higher income groups. On the other hand, under a
regressive tax system the benefits of reduced tax rates are enjoyed by the higher income groups and the
burden is shifted to the lower income groups instead.
4. Progressive tax systems witness higher marginal tax rates as compared to the average tax rates. On the
other hand, regressive tax systems witness a lower marginal tax rate than the average rate of tax.
5. Progressive tax essentially covers all the direct taxes which are the taxes paid directly to the government
by assessees. Regressive tax on the other hand covers indirect taxes which although are also paid to the
government but through an intermediary.
6. In a progressive tax system, the primary consideration while setting the tax rates is the capability of the
assessee to meet the tax demands. In a regressive tax system on the other hand, the ability of an assessee to
meet the tax demands is not a consideration at all.

Agricultural Income
In India, agricultural income refers to income earned or revenue derived from sources that include farming
land, buildings on or identified with an agricultural land and commercial produce from a horticultural land.
Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961. According to this
Section, agricultural income generally means: (a) Any rent or revenue derived from land which is situated
in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture
operations including processing of agricultural produce so as to render it fit for the market or sale of such
produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified
in this regard in section 2(1A). (d) Any income derived from saplings or seedlings grown in a nursery shall
be deemed to be agricultural income.

The following are some of the examples of agricultural income:

 Income derived from sale of replanted trees.

 Income from sale of seeds.

 Rent received for agricultural land.

 Income from growing flowers and creepers.

 Profits received from a partner from a firm engaged in agricultural produce or activities.

 Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

The following are some of the examples of non-agricultural income:

 Income from poultry farming.

 Income from bee hiving.

 Any dividend that an organization pays from its agriculture income.

 Income from the sale of spontaneously grown trees.

 Income from dairy farming.

 Income from salt produced after the land has flooded with sea water.

 Purchase of standing crop.

 Royalty income from mines.

 Income from butter and cheese making.

 Receipts from TV serial shooting in farm house. B naga reddy vs cit

Agriculture: The meaning of agriculture though not covered in the Act, has been laid down by the
Supreme Court in the case CIT v. Raja Benoy Kumar Sahas Roy where agriculture has been explained
to consist of two types of operations –basic operations and subsequent operations.

 The basic operations would include cultivation of the land and consequently tilling of the
land, sowing of seeds, planting and all such operations that require the human skill and
effort directly on the land itself.

 The subsequent operations would include operations that are carried out for growth and
preservation of the produce like weeding, digging soil around the crops grown etc and also
those operations which would make the product fit for use in the market like tending,
pruning, cutting, harvesting, etc. Income derived from saplings or seedlings grown in a
nursery would also be considered to be agricultural income whether or not the basic
operations were carried out on land.

1. Through the performance of a process by the cultivator or the receiver of rent (in-
kind) that results in the agricultural produce being fit to be taken to the
market: Such processes involve manual or mechanical operations that are ordinarily
 employed to make the agricultural produce fit for the market and the original character
of such produce is retained.

2. Through the sale of such agricultural produce: Where the produce does not undergo
ordinary processes employed to become marketable, the income arising on sale would
generally be partly agricultural (exempt) income and part of it will be non-agricultural
(taxable) income.

The Income Tax has prescribed rules to make this bifurcation regarding agricultural
and non-agricultural produce for products like tea, coffee, rubber, etc

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The
central government cannot levy tax on the agricultural income received.

Taxability of Agricultural income post amendment by Finance (No.2) Act, 2014 Agricultural income is
considered for rate purposes while computing the income tax liability, if following two conditions are
cumulatively satisfied:

i. Net Agricultural income exceeds Rs. 5,000/- for previous year, and

ii. Total income, excluding net Agricultural income, exceeds the basic exemption limit.

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land and
use the sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B of the
Income Tax Act, the following conditions will have to be satisfied:

 This benefit can only be claimed by an individual or a HUF

 The agricultural land should be used by the individual or his or her parents for agricultural purpose
for at least two years immediately preceding the date on which the exchange of land occurred. In
case of HUF, the land should be used by any member of HUF.

 The taxpayer should purchase another agricultural land within two years from the date of selling
the old land. In case it is an incident of compulsory acquisition, the period of acquiring new
agricultural land will be assessed from the date of receipt of compensation. It must be noted that
under Section 10(37), capital gain shall not be chargeable to tax if agricultural land is compulsorily
acquired under any law, and the consideration of which is approved by the central government or
banking regulator and received on or after 01-04-2004.

What Are Capital Receipts?

Capital receipts are payments received by a company that are not income in nature and enhance the
company's overall capital. These are funds generated by a company's non-operating operations and appear
on the balance sheet rather than the income statement.

They are non-recurring, meaning they do not occur regularly and cannot be used for profit distribution.
Unlike revenue receipts, which can be used to fund reserves, capital receipts are not utilised to fund
reserves. They end up increasing a company's obligations or decreasing its assets. These types of receipts
have no impact on an organization's total profit or loss and are recorded on an accrual basis, which means
they are recorded as soon as the right of receipt is established.
Capital receipts must mandatorily satisfy the following conditions:

 Create a Liability: If your company obtains a loan from a bank or other financial
institution, a liability would be created. As a result, it is a capital receipt. However, if your
company received a commission for applying its knowledge to build a unique kind of
product for another business, that wouldn't be considered a capital receipt because
no liability was created.
 Reduce Company Assets: The asset would be reduced if your company sold all of its
shares to the public, which would lead to increased revenue in the future. You would
consider it as a capital receipt in this situation.

Capital Receipts Examples

 Cash received from the sale of fixed assets:- The Cash or Cash equivalent from fixed
tangible and intangible assets.
 Amount received from Shareholders and debenture holders
 Borrowings include loans, disinvestment, insurance claims, etc.:- These loans create
liability for the company. These loans are non-recurring in nature.

haracteristics of Capital Receipts

 Capital revenues are one-time events.

 Capital receipts produce funds for non-operating activities.
 It either increases the responsibility or decreases the asset.
 It makes no difference to the income statement.

What are Revenue Receipts?

Revenue receipts are funds a company receives due to its primary business operations. It leads to an
increase in the company's total revenue. Because a company's operating activities create these funds, they
are recorded in the trade and profit and loss account rather than the balance sheet. They are recurrent and
can be seen frequently and used for profit distribution.

Characteristics of Revenue Receipts

 Benefits from revenue receipts are available for a limited time, such as one accounting or
financial year.
 Revenue receipts provide benefits for a limited time; another trait is that they are recurring
in nature.
 Revenue is generated directly from a company's operational activity.
 It has a direct impact on a company's profit and loss. When a corporation receives income,
it either increases its profit or contributes to its loss.
 Disclosure occurs in the trading and profit or loss account rather than the balance sheet.

 Short-term money obtained: Revenue receipts are money received for a brief time.
Revenue receipts are only advantageous for one accounting year and never longer.
 Revenue receipts must be recurrent since they provide advantages for only a brief time.
The firm wouldn't be able to last very long without recurring revenue.
 Impacts the business's profit or loss: Getting paid directly impacts the company's profit or
loss. When the money is received, the profit or the loss changes.

Differences Between Capital Receipts and Revenue Receipts

Basis for Comparison Capital Receipts Revenue Receipts

Meaning Capital Receipts are the Revenue Receipts are the
 income generated from non- income generated from the
operating Activities of the operating activities of the
business. business.
Nature Non-Recurring Recurring
Term Long Term Short Term
Show in Position statement or Income Statement or profit
Balance Sheet and loss Statement
Matching Concepts These are not matched with These are matched with the
the capital expenditure. revenue Receipts to know the
profit/ loss for the year.
Value of asset or liability Decrease the value of the Increases or decreases the
asset or increase the value of value of asset or liability.
a liability.
Capitalised These receipts will be These receipts will not be
capitalised. capitalised.
Distribution These amounts are not Excess revenue receipts over
available for distribution as the revenue expenses can be
profits. used for distribution as
profits.
Future Obligations In the case of certain capital There are no future
receipts, there are future obligations to return the
obligations to return the amount.
amount along with interest.
Examples Loan by the government Tax receipts

Unit 2

residential status
Determining the residential status of any assesse is the first and foremost task for ascertaining the
taxable income of such assesse in India. As per section 6, the residential status of any taxpayer can be
classified into two parts: (a) Resident

(b) Non-Resident

In the case of a person being an Individual assesses, the Resident can be further classified as “Resident
and Ordinarily Resident” (ROR) or “Resident but not ordinarily resident” (RNOR). However, in case
of other persons, there are only two categories i.e. Resident and Non-Resident. SECTION 6(1):
BASIC CONDITIONS FOR CLASSIFICATION AS RESIDENT

An individual is said to be resident in India in any previous year, if he:

For that year, his period of stay in India is182 days or more (say ‘C1’) or

For that year, his period of stay in India is 60 days or more and in the 4 previous years prior to the
relevant previous year his period of stay in India is 365 days or more (say ‘C2’)

For the above purpose, period of stay in India shall include the day on which the person arrives and
leaves India. In other words, an individual is said to be resident in India, if he satisfies any of the C1 or
C2. C1 is a pretty simple text. An individual has to check whether he has stayed in India during the
previous year for more than 182 days or not. If he has stayed, then he is resident of India. If not, he has
to proceed to check C2 to decide the residential status.
 C2 stipulates two conditions to be satisfied to call an individual as resident during the previous year.
First, we need to check whether the period of stay in India is 60 days or more, during the year. If the
first one is satisfied, then we need to check whether period of stay in India during the preceding 4
years is 365 days or more. If both these conditions hold true, he will be considered as the resident
Individual.

Where both above C1 & C2 conditions are not met, he will be considered as the non-resident during
that previous year.

Further, as per the explanation to Section 6, only condition C1 shall be applicable and we need not to
check for the conditions as specified in C2, which are given as below:

1. Citizen of India, who leaves India in a previous year as a member of crew of an Indian
Ship, or
2. Citizen of India leaving India for the purposes of employment outside India, (However,
after the amendment made by the Finance Act, 2020; in case of an individual whose Total
Income exceeds 15 Lakh Rupees, 120 days shall be considered instead of 182 days.
Citizen of India or person of Indian origin, who is engaged in any employment or Business
or profession outside India, and is visiting India during the previous year.

Further, Finance Act, 2020 has also provided that where an individual who is a citizen of India who is not
liable to tax in any other country will be deemed to be a resident in India. The condition for deemed
residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil
tax liability in other countries or territories by reason of his domicile or residence or any other criteria of
similar nature. Such a provision has been inserted as it was noticed that certain individuals were using the
above relaxation as tax avoidance measure and planning visit and stay in India so that they do not meet the
threshold of 182 days.
SECTION 6(6): ADDITIONAL CONDITIONS FOR RNOR/ ROR:

After a person is classified is resident, we need to further test as to whether such person is regarded
ordinarily resident in India (ROR) or not ordinarily resident in India (NOR).
For a person to be regarded as RNOR, following additional conditions are required to be complied with,
which are as stated below:

If he was a non-resident in India in 9 out of 10 previous years, prior to the relevant previous year (say C3)
or

Has not during 7 previous years preceding relevant previous year stays in India for 729 days or more (say
C4)
If the individual satisfies any of the conditions C3 or C4, then he is said to be ‘not ordinary resident’ for
that previous year, otherwise, he will be regarded as ordinarily resident

Residential status of HUF, Firm or other association of person Residential status in case of HUF:

Section 6(2) read with section 6(6) “6(2) A Hindu Undivided Family is said to be a resident in India in any
previous year in every case except where during that year the control and management of its affairs is
situated wholly outside India.

6(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is a HUF
whose manager has been a non-resident in India in 9 out of 10 previous years preceding that year, or has
during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to,
729 days or less”

Analysis:
HUF is treated as “Resident” in India if the control and management of its affairs is situated wholly or
partly in India in the relevant previous year.

Thus, we can say that if in any previous year, the control and management of affairs of HUF is situated
wholly outside India, it would be “Non-Resident” in India.

If the residential status of HUF is “Resident”, it could be either ROR or RNOR. The residential status of
HUF as ROR or RNOR is determined on the basis of residential status of Karta. Karta is the person who
heads and manages the affairs of the Hindu Undivided Family (HUF). All the important decisions in
respect of affairs of HUF are generally taken by the Karta. This is the reason residential status of HUF as
ROR/RNOR depends upon residential status of Karta. Thus,

 If the Karta is Resident and ordinarily resident (ROR): then HUF is also ROR

 If the Karta is Resident but not ordinarily resident (RNOR): then HUF is also RNO

Residential status of Firms & AOP: Section 6(2)

“A firm or association of persons is said to be resident in India in any previous year in every case except
where during that year the control and management of its affairs is situated wholly outside India.”

Analysis:

A firm or an AOP shall be considered as “Resident” in India if the control and management of its affairs is
situated wholly or partly in India.

However, where the control and management of affairs is situated wholly outside India, the firm and AOP
shall be “Non-resident”.

A firm or an AOP can be only resident or non-resident. It can not be ROR or RNOR

The residential status of the partners or the firm or members of AOP are not relevant in determining the
residential status of firm or AOP.

Meaning of “Control and Management”:

The term “Control and management” refers to the central control and management and not to carrying on
of day-to-day business by servants, employees or agents. It implies the functioning of the controlling and
directing power at a particular place with some degree of permanence.

The business may be done from outside India and yet its control and management may be wholly within
India. Therefore, the control and management of the business is said to be situated at a place where the
head office and brain of the adventure is situated.
Residential status of a company section 6(3)

To determine the residential status of a company, the following two questions have to be answered :

Ø First – Is the company an Indian company ? If the answer is yes, the company is a resident (thus, an
Indian company cannot be a non-resident). If the answer is no, proceed to question 2.

Ø Second – Is the control and management of its affairs situated wholly in India ? If the answer is yes, the
company is resident. If no, the company is non-resident.

A company, other than an Indian company, the control and management of the affairs of which is partly
situated in India and partly outside India, is a non-resident.

A company cannot be a ‘resident and ordinarily resident’ or a ‘resident but not ordinarily resident’. A
company can either be a resident or a non-resident.

‘Control and management’ means the controlling and directive power. It means actual or de facto control
and management. Mere right to control and manage does not amount to control and management {CIT v.
Nandlal Gandalal [1960] 40 ITR 1 (SC)}. It means central control and management and not the carrying
out of routine day-to-day affairs.

The place of control and management is situated at a place where the head, the seat and the directive power
is situated {San Paulo (Brazilian) Railway Co. v. Carter [1896] AC 31 (HL)}.

Burden of proving that a company is resident in India is on the Revenue {Moosa S Madha & Azam S
Madha v. CIT [1973] 89 ITR 65 (SC)}.

Residential status of any other person section 6(4)

To determine the residential status of any other person, i.e., local authority, artificial juridical person, etc.,
the question that has to be answered is : Is the control and management of its affairs situated wholly
outside India ? If answer is yes, it is non-resident. If no, it is resident.

Under this category, the residential status can either be of a resident or of a non-resident. The concept of
‘resident and ordinarily resident’ or ‘resident but not ordinarily resident’ does not apply here.

Charge of income tax

Section-4 of the act provides for the charge of tax to be determined by central government. As by the
virtue of article 265 of the constitution provides the tax is to be not collected except under the authority of
the law. So, section 4 gives the power to central govt. to levy taxes on the assesse. This section is the
backbone of the law of income-tax insofar as it serves as the most operative provision of the Act. The tax
liability of a person arises from this section.

Essentials of section 4-

• Tax shall be charged at the rates prescribed for the year by the Annual Finance Act;

• The charge is on every person specified under section 2(31); definition of person

• Tax is chargeable on the total income earned during the previous year and not the assessment year.
(There are certain exceptions provided by sections 172, 174, 174A, 175 and 176);

• Tax shall be levied in accordance with and subject to the various provisions contained in the Act.

Let us understand by example-

EX-1. A operates a management firm. For the year 2017-18, he earned Rs.800000. he is liable to pay taxes
in accordance with the rate prescribed in the finance act, 2018. Because 2017-18 is the previous year and
2019-20 is the assessment year.

EX-2. If the income of the previous year 2002-03 [assessment year 2003-04] has not been assessed to in
the financial year 2003-04, but is being assessed in the financial year 2006-07, nevertheless tax is charged
at the rates prescribed by the Finance Act, 2003.

Caselaw

The Act, as it stands amended as on 1st April of any financial year, is applied to the assessment of that
year. Thus, any amendment made after 1st April of that financial year, is not applied in the assessment for
that year, even if the assessment is made after the amendment becomes effective {Karimtharuvi Tea Estate
Ltd. v. State of Kerala [1966] 60 ITR 262 (SC)}

Thus, with respect to the income of the previous year 2005-06, assessment is made in accordance with the
law as it stands on 1st April, 2006. Any amendment coming into effect subsequent to this date is wholly
irrelevant in assessing the income for the previous year 2005-06.

Charge for the 2022-23 assessment year

1. Tax rates for individuals (other than senior and super senior citizens) or HUF

Total income Tax Rates

Upto RS. 2,50,000 --------------------

Rs. 2,50,001 – Rs. 500000 5%

Rs. 5,00,001 to Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Tax rates for senior citizens (i.e., an individual whose age 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

Total income Tax Rates

Upto RS. 3,00,000 --------------------

Rs. 3,00,001 – Rs. 5,00,000 5%

Rs. 5,00,001 to Rs. 10,00,000 20%

Above Rs. 10,00,001 30%

1. Tax rates for Super senior citizens (i.e., an individual whose age is 80 years or more at any time
during the previous year)

Total income Tax Rates

Up to Rs. 5,00,000 -------

Rs. 5,00,001 to Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Scope of total income

Section 5 provides the scope of total income in terms of the residential status of the assessee because the
incidence of tax on any person depends upon his residential status. The scope of total income of an
assessee depends upon the following three important considerations:

(i) the residential status of the assessee;

(ii)the place of accrual or receipt of income, whether actual or deemed; and

(iii) the point of time at which the income had accrued to or was received by or on behalf of the
assessee.

The ambit of total income of the three classes of assessees would be as follows:

(1) Resident and ordinarily resident

The total income of a resident assessee would, under section 5(1), consist of:

(i) income received or deemed to be received in India during the previous year;

(ii)income which accrues or arises or is deemed to accrue or arise in India during the previous year; and
 (iii) income which accrues or arises outside India even if it is not received or brought into India during
the previous year. In simpler terms, a resident and ordinarily resident has to pay tax on the total
income accrued or deemed to accrue, received or deemed to be received in or outside India.

(2) Resident but not ordinarily resident

Under section 5(1), the computation of total income of resident but not ordinarily resident is the same as in
the case of resident and ordinarily resident stated above except for the fact that the income accruing or
arising to him outside India is not to be included in his total income.

However, where such income is derived from a business controlled in or profession set up in India, then it
must be included in his total income even though it accrues or arises outside India.

(3) Non-resident

A non-resident’s total income under section 5(2) includes:

(i) income received or deemed to be received in India in the previous year; and

(ii)income which accrues or arises or is deemed to accrue or arise in India during the previous year.

Scope of total income RoR RNoR NR

Received or deemed to be received in Yes Yes Yes

India

Accrues or arises or is deemed to be Yes Yes Yes

accrues or arises in India

Accrues or arises outside India Yes Yes, only if the No

income is derived
from business
controlled and
profession set

up in India

Incomes Exempted from Tax

Section 10 of the Income Tax Act, of 1961 states that salaried employees have the right to enjoy tax
exemption in certain cases. The intention of the provision is to alleviate the burden of various taxes such as
rent and travel allowances, gratuity, etc.

The following are the incomes that are subjected to an exemption under this respective section of the
Income Tax Act, of 1961.

1. Agricultural Income

Those individuals that derive their income from agriculture are entitled to a tax exemption. This includes
the income from farmhouses as well. To know if an income would fall under the category of agricultural
income, it is necessary to look into the definition put forward by Section 2(1A) of the Income Tax Act,
1961. Agricultural income is:
  Any revenue or rent derived from land which is situated in India and is used for agricultural
purposes

 Income derived from agricultural operations including processing of agricultural produce to sell in
the market

 Any income from the farmhouse subject to satisfaction of certain conditions mentioned in section
80 DDB

 Income from nursery saplings or seedlings.

2. The Income of Hindu Undivided Family (HUF)

Revenue received from family income or income from the impartible family estate or property by any
member of the Hindu undivided family (HUF) is exempted from income tax return.

For instance, if ₹ 500,000 is the total income earned by a member of a HUF, the total amount is exempted
from tax. Suppose, if ‘A’ is also a member of the HUF and has earned ₹ 20,000 individually, and has also
received ₹30,000 from the HUF, then A is liable to pay taxes only for the amount that was earned in an
individual capacity and not the amount that was received from the HUF income.

3. Tax Exemption on Profit Share from firm/LLP

The profit share received by a partner from a firm is exempt from tax in the hands of the partner. Similarly,
the profit share of a partner of LLP from the LLP will be exempt from tax in the hands of the
partner. However, such exemption is limited only to the profit share and is not extended to interest on
capital and remuneration received by the partner from the 80TTB

4. Income Earned by Non-Resident Indians (NRIs) by Way of Interest on Certain Bonds and
Securities

Income earned by NRIs by way of interest on security bonds or through bank accounts in India can avail
the tax exemption. In case of an individual’s income by way of interest on moneys standing to the credit
in a Non-Resident (External) Account in any bank in India following FEMA, 1999 is exempt from income
tax. However, the exemption is applicable only if a person is a resident outside India as defined under
FEMA, 1999, or a person who has been permitted by the RBI to maintain the account mentioned
above. This section bestows tax exemption on Indian citizens and persons of Indian origin, who are non-
residents and earn income from interest on notified savings certificate.

Further, any income on interest received by a non-resident or a foreign company in respect of Rupee
Denomination Bonds issued outside India from 17 September 2018 to 31 March 2019 by an Indian
company/ business is exempt from tax. Also, Capital gains arising out of the transfer of capital assets,
rupee denomination bonds, or Derivatives by Category-III are also exempted from tax.

5. Leave Travel Concession

Section 10 (5) of the Act states that an employee, whether an Indian or foreign citizen, is eligible to avail
of a tax exemption on leave travel to any place within India from the employer.

6. Remuneration Received by Diplomats and their Staff

This is a special provision for Indian representatives such as high commissioners, trade commissioners,
consulate representatives, etc working in other countries wherein they can avail of a tax exemption.
Employees of foreign countries can also enjoy the benefits of this provision provided Indian
employees enjoy a similar exemption in their countries.

7. Technical fees Received as Income by Foreign Companies

With respect to projects pertaining to the security of India, agreements are entered by the Government of
India with foreign countries. Here, the income is mostly received by way of royalties or fees for the
exchange of technical services as per the agreement between the countries, and the same is exempted from
taxes.

8. Allowances Paid by the Indian Government

The Indian government pays its employees various allowances and perquisites for rendering services
outside India. Such remuneration is exempt from taxes. The Indian citizens who work for the government
of India can avail of this exemption.

9. Voluntary Retirement Scheme

The amount received by an individual after having opted for voluntary retirement is exempt from taxes,
provided the individual is an employee of a public sector or any other company, an authority under a
central, state, or provincial Act, or local authority.

10. Life Insurance Policies

When an individual receives the amount after the maturation of a life insurance policy, the amount is
exempted from taxes.

11. Exemption to Gratuity

Gratuity received by the central and state government servants, and local authorities are exempted from tax
as per Section 10(10)(i) of the Act. The exemption is also available to non-governmental employees, if the
Payment of Gratuity Act, 1972 is applicable to them. The gratuity is exempt from taxes within a
maximum ceiling of 10 lakh rupees.

12. Pension Received by Employees

The monthly pension received by government employees is completely exempt from tax.

13. Leave Salary

The encashment of leave by government employees at the time of their retirement is exempt from tax.

14. Retrenchment Compensation

The compensation received by an employee at the time of retrenchment is exempt from tax to a certain
limit.

15. Amount received from Provident Fund

Under Section 10(11) of the Act, any amount of money received from a public or statutory provident fund
or unrecognized provident fund earns a tax exemption. Also, payment made towards the scheme Sukanya
Samriddhi Yojan is also exempt from tax as stipulated under this section.

16. Awards and Scholarships

Monetary assistance received in form 26 AS of awards or scholarships is exempted from income tax
returns online under Section 10 (16). There is no cap on the upper limit and the total money received as a
scholarship is entitled to tax exemption.

17. House Rent Allowance (HRA)

One of the most common allowances given by the employer to the employees is the House Rent
Allowance, to cover the rental expenses. The portion of the salary that is allocated as HRA is exempt from
taxes.

18. Allowances under Section 10 (14)

Special allowances such as daily allowance, uniform allowance, helper allowance, etc are provided to
employees during the course of their employment. Section 10(14)(i) covers these provisions and the
allowances under the respective section are exempted from taxes. Section 10(14)(ii) enlists allowances that
are offered to the employees that enable them to meet their day-to-day expenses. The allowances are
subjected to taxes when they exceed the stipulated limit. Allowances such as children education allowance,
tribal area allowance, border area allowance, special compensatory allowance, etc are covered under this
section.

Tax Exemption vs Tax Deduction

Both the terms 'tax deduction' and 'tax exemption' refer to a lowering of taxable income; they are forms of
tax relief or tax breaks provided by the government. However, tax exemptions may also include complete
relief from taxes, reduced rates and tax on only a portion of income. Tax exemption means you don't have
to pay tax for a particular income. E.g. you may get a tax exemption for donating to charitable institutions
and various relief funds.

In order to encourage investments, the government generally offers tax exempt entities to invest in. Such
entities are exempted from a single or multiple taxation laws. For example, investments in the Sukanya
Samriddhi Scheme are fully tax exempt. Money deposited under this scheme will be exempted from tax at
the time of investment, accumulation of interest and payout of returns (EEE).

In case of tax deduction, your income tax liabilities decrease by a specified amount for spending money in
particular avenues. You invest in various schemes to reduce your taxable income. For example, you can
get tax deduction by paying life insurance premiums and home loan EMI. Tax deductions are offered by
government to tempt taxpayers to participate in programs carrying societal benefits.

Benefits of Tax Deductions

There are a number of benefits associated with tax deduction which include:

 Tax deductions help you reduce an amount from your taxable income and save tax. When you
claim an income tax deduction, it reduces the amount of your income that is subject to tax.

 Reduced taxable income helps you save and invest money in other areas.

 Tax deduction first reduces the income subject to the highest tax brackets. So, you can claim
deduction for the amounts spent in tuition fees, medical expenses, and charitable contributions.

Various Types of Tax Deductions in India

You can reduce your taxable income by increasing your deductions. There are many investment options
and forms of expenditure which can help you get reductions on your taxable income. The Indian Income
Tax Act provides many provisions for this. Mentioned below are a number of different tax deduction
options.
1. Public Provident Fund (PPF)By contributing to your PPF account, you can get tax deduction
under Section 80C, the Indian Income Tax Act, 1961.

2. Life Insurance PremiumsYou can get income tax deduction for paying premium towards life
insurance policies for self, spouse and child under section 80C of the Indian Income Tax Act,
1961. The amount received on maturity of the policy is free from tax. However, it is subject to the
terms and conditions mentioned in your policy.

3. National Saving Certificate (NSC)The amount invested in NSC is eligible for tax deduction
under section 80C of the Indian Income Tax Act, 1961. National Saving Certificates is one of the
highly secured modes of investments in India. But, the interest earned from NSC is taxable. As an
NSC is a cumulative scheme, interest is reinvested and qualifies for tax deduction.

4. Bank Fixed Deposits (FDs)You can get tax deduction by investing in fixed deposits for a tenure
of 5 years, under section 80C of the Indian Income Tax Act, 1961. Many banks in India offer tax
saving fixed deposits. However, the interest accrued on FDs is subject to tax

5. Senior Citizen Savings Scheme (SCSS)Senior citizens can get tax deduction by investing in
Senior Citizen Savings Scheme offered by banks. These schemes are eligible for tax deduction
under Section 80C of the same act. The interest earned from these schemes is entirely taxable.

6. Post Office Time Deposit (POTD)Investing in a five-year POTD, you can get tax deduction
under Section 80C. However, interest accrued on the same is fully taxable.

7. Unit-linked Insurance Plans (ULIP)Investing in ULIPs for yourself, spouse and your children,
you can get tax deductions under Section 80C.

8. Home Loan EMIsEquated monthly installments paid to repay the principal amount of your home
loan are eligible for income tax deductions under section 80C of the same act.

9. Mutual Funds & ELSSInvesting in mutual funds and equity-linked savings scheme, you are
eligible for tax deductions under section 80C, the Indian Income Tax Act, 1961.

10. Stamp Duty and Registration Charges for a HomeStamp duty and registration fee paid for
transferring property are entitled for income tax deduction under section 80C, the Indian Income
Tax Act, 1961.

11. Retirement Savings PlanYou can also get income tax deductions by investing in retirement plans
offered by LIC or other insurance providers. Contribution to the National Pension Scheme is also
eligible for tax deduction.

12. Tuition Fees:Tuition fee paid for your children's education qualifies for income tax deduction
under section 80C. However, the fee needs to be paid for full-time education in an Indian
university, college and school for any two children. Tuition fee does not include any donations or
development fee towards education institutions.

13. Medical Insurance PremiumsHealth insurance premium paid for self, spouse and children
qualifies for income tax deduction under section 80D of the Indian income Tax Act, 1961. The
deduction allowed under this section is Rs. 25,000 for youngsters and Rs. 30,000 for senior
citizens.

14. Infrastructure BondsInvesting in infrastructure bonds, you become eligible for income tax
deductions under section 80CCF of the Indian Income Tax Act.
 15. Charitable ContributionDonating for charitable tasks will help you reduce your taxable income
under section 80G of the Indian Income Tax Act, 1961. However, make sure that you declare the
whole contribution before 31st December each year.

16. Treatment of Disabled DependentsUnder section 80DD of the Indian Income Tax Act, 1961,
you can get income tax deductions for medical expense incurred in the treatment of any disabled
dependent of yours.

17. Deduction for Preventive Health Check-upsAn amount of Rs.5000 spent for preventive health
check-ups of an individual or his/her family members qualifies for tax deduction under section
80D of the Indian Income Tax Act, 1961.

18. Interest Paid on Education LoanYou can get tax deduction on the interest paid for an
educational loan under section 80E of the Indian Income Tax Act, 1961. The loan can be taken to
pursue higher education by the employee, or for his/her spouse, children or a student to whom the
employee is a legal guardian.

19. Deduction on House Rent PaidAn employee can get income tax deduction for the house rent
paid, if the employee or his/her spouse does not own residential accommodation at the place of
employment. This deduction is usually applicable for salaried taxpayers under section 80GG of the
Indian Income Tax Act, 1961.

For example:

Your monthly basic salary is Rs 20,000. Your monthly house rent is Rs 5,000 for a flat in Bangalore. Your
actual HRA is Rs 8,000, and you are eligible for 40 % of the basic pay for HRA exemption. Now,

 Actual HRA received is Rs 8,000.

 40% of basic salary is Rs 8,000.

 Rent Paid in excess of 10% of salary is (5000-2000) 3000.

 Hence, Rs.3,000 will be the tax exemption amount for HRA paid.

What are the 5 types of income tax?

The 5 heads of income tax are:

1. Income from salary

2. Income from house property

3. Income from profits and gains from business or profession

4. Income from capital gains

5. Income from other sources

 Income from salary

Any income that you receive in terms of the service you provide on a contract of employment is applicable
for taxation under this head. This includes salary, advance salary, perquisites, gratuity, commission, annual
bonus and pension.

This tax head also includes some exemptions:

 1. House Rent Allowance (HRA): As a salaried individual, if you live in a rented house, you can
claim House Rent Allowance for partial or complete tax exemptions.

2. Conveyance Allowance: You can get a monthly tax exemption of up to Rs.800.

 Income from house property

An individual’s income from his or her property or land is taxable under the head of income from house
property. To put it simply, this head includes the policy for calculating tax on rental income that you
receive from your properties.

In case you own more than one self-occupied house, then only one house is considered to be occupied and
the rest are considered to be rented out. The taxation occurs on income received from both commercial and
residential property.

 Income from profits and gains from business or profession

The profits that you earn from any kind of business or profession are taxable under this head. You can
subtract your expenses from the total income in order to determine the amount on which tax is chargeable.

Here are the types of income that are chargeable under this head:

1. Profits generated from the sale of a certain license

2. Gains earned by an individual during an assessment year

3. The profits that an organisation makes on its income

4. Cash received on the export of a government scheme

5. The benefits that a business receives

6. Gains, bonuses or salary that an individual receives due to a partnership with a firm

 Income from capital gains

When you earn profits by transferring or selling an asset that was held as an investment, that income is
taxable under the head of income from capital gains. A large number of assets, like gold, bonds, mutual
funds, real estate, stocks, etc., fall under capital assets.

Now, you can subdivide capital gains into short-term capital gains and long-term capital gains.

When you sell your capital assets after holding them for a period of 36 months or more, they will fall
under long-term capital gain and will have a tax rate of 20%. Alternatively, if you sell your capital assets
within a period of 36 months, the tax deduction will be under short-term capital gain at the rate of 15%. In
the case of securities, this is applicable if you sell your holdings within 12 months from the purchase date.

 Income from other sources

Among the five heads of income tax, this one includes any other income that does not have any mention
in the above 4 heads. They fall under Section 56 sub-section (2) of the Income Tax Act and include income
from lottery, bank deposits, gambling, card games, sports rewards, etc.

Salary
What Does “Salary” Include

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries”
including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites or
profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund
to recognized provident fund (vii) Contribution of employer to a Recognised Provident Fund in excess of
the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract
etc. (x) Contribution made by the Central Government to the account of an employee under a notified
pension scheme.

Chargeability — S. 15 and S. 17

Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier and includes wages, annuity or
pension, gratuity, fees, commission, perquisites or profits in lieu of salary, advance salary, leave
encashment, etc
Deductions from Salary — S. 16

a. Standard Deduction (S. 16(i))

Standard deduction is Rs 50,000 allowed from A.Y. 2020-21 onwards

b. Entertainment Allowance (S. 16(ii))

For government employees, the least of —

1. Rs. 5,000; or

2. 20% of salary; or

3. actual amount of entertainment allowance.

Allowances and exemptions

a. Pension (S. 10(10A))

Pension is taxable as salary (S. 17(1)(ii)).

Commuted value of pension is exempt u/s. 10(10A).

i. for Government employees, fully exempt

ii. for other employees, following is exempt —
a. if employee has received gratuity then commuted value of 1/3rd of the pension which he is
entitled to receive and
b. in any other case, commuted value of 1/2 of the pension which he is entitled to receive.

iii. any payment in commutation of pension received from fund set up by LIC is exempt u/s. 10(23AAB).

b. Leave Travel Concession or Assistance [S. 10(5) — Rule 2B]

available to Indian as well as foreign citizen for himself/spouse/children/dependent parents, brothers and
sisters.

limited to amount actually spent on travelling of employee and his family members.

during employment or on retirement or on termination.

for travelling to any place in India.

allowed twice in a block of four calendar years. block commenced from calendar year 1986. (Current
block — 2018-21).

c. Gratuity [S. 10(10)]

Death-cum-retirement gratuity received by the Government employees or employees under Civil Services
— wholly exempt from tax.

i. Employees covered by Payment of Gratuity Act.

Amount received on termination, after continuous service of not less than five years qualifies for
exemption Exemption is least of the following : (aggregate maximum from any number of employers)
1. 15 days salary (denominator taken as 26 in case of monthly salary) for every completed year/part
thereof in excess of 6 months, or

2. Rs. 20,00,000

3. gratuity actually received whichever is less.

ii. ii. Other employees —

Amount received on retirement, incapacitation, death or termination — Exemption is least of the

following : (aggregate maximum from any number of employments)

1. Rs. 3,50,000/- (Rs. 10 Lakh w.e.f 24th May 2010)

2. half month’s salary for each completed year of service; (based on last ten months’ average salary),
or

3. gratuity actually received.

d. Retrenchment Compensation [S. 10(10B)]

i. Exempt to the extent of the lower of the following:

1. amount calculated in accordance with S. 25F(b) of the Industrial Disputes Act, 1947; or

2. Rs. 50,000/-

ii. ii. In cases where the scheme is approved by the Central Government the entire amount is
exempt.

g. House Rent Allowance [S. 10(13A) & Rule 2A]

The least of the following is exempt from tax: i. 50% of salary, (residential house situated at Mumbai,
Kolkata, Delhi or Chennai) and 40% of salary where residential house is situated at any other place; ii.
actual house rent allowance received by the employee; iii. excess of rent paid over 10% of salary.

h. Leave Encashment [S. 10(10AA)]

Encashment of earned leave while in service will be treated as income. S. 17(1)(va). Encashment of
earned leave on retirement would however, be exempt to the extent of least of: i. 10 months salary
calculated on the basis of last 10 months average salary or ii. Rs. 3,00,000 iii. Amount equivalent to
earned leave iv. Actual amount paid by the employer Entitlement to earned leave not to exceed 30 days
for every year of actual service. Limits provided for aggregate maximum from any number of
employers. Encashment of earned leave on retirement would be wholly exempt for employees of
Central/State Government.
 i. Medical benefits (S. 17)

Medical treatment provided to an employee or any member of his family (spouse, children and dependent
brothers, sisters and parents) will be exempt in the following cases: i. treatment in a hospital (including
dispensary or clinic or nursing home) maintained by the employer, ii. treatment in any hospital maintained
by the Government, or any local authority or any other hospital approved by Govt., iii. treatment in respect
of prescribed diseases in a hospital approved by the Chief Commissioner, provided certificate from the
hospital specifying the disease and receipt for amount paid is attached along with the return of income, iv.
medical insurance only under a Central Government approved scheme, v. reimbursement of Insurance
premium for mediclaim etc., vi. actual expenditure on medical treatment outside India, including
expenditure on travel and stay abroad as also on travel and stay abroad of one attendant, to the extent
permitted by RBI. Expenditure on travel abroad will be exempt only if the gross annual total income of the
employee excluding this perquisite is Rs. 2 lakhs or less.

Under the Act, the term “perquisites” is defined by section 17(2) as including the following items:

1. the value of rent-free accommodation provided to the assessee by his employer [sec. 17(2)(i)];

2. the value of any concession in the matter of rent respecting any accommodation provided to the
assessee by his employer [sec. 17(2)(ii)];

3. 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)];

4. 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)];

5. 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)];

6. 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)];

7. 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

8. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)(viii)].

Determination of the value of prescribed fringe benefit or amenity

i. Interest free or concessional loan Value of perquisite w.e.f. 1-4-2000, of the loan given to
the employee or any member of his household shall be at the rates charged by State Bank
of India in respect of the loans for the same purpose advanced by the employer, on the
maximum outstanding monthly balance as reduced by interest actually paid by employee –
 However, perquisite value for loans (net of amount reimbursed under medical insurance
scheme) given for medical treatment of specified disease or petty loans up to Rs. 20,000 is
not taxable.
ii. ii. Use of movable assets Value of benefit shall be 10% p.a. of the actual cost of asset or
the rent charges paid by the employer as reduced by amount paid by the employee.
iii. Transfer of movable assets Value of benefit on transfer of movable asset shall be the
actual cost of the asset to the employer as reduced by the amount calculated at 10% of
such cost for each completed year of use by the employer and further reduced by the
payments made by the employee. The normal wear and tear would be computed at 50% in
case of computers and electronic items, and 20% in case of motor cars on the reducing
balance method.

C. Perquisites taxable only in hands of specified employees

Other perquisites are taxable only in the hands of the following specified employees; i.e.,

i. Director-employee
ii. Employee having substantial interest in employer-company
iii. Employee drawing salary in excess of Rs. 50,000

D. Perquisites not taxable in all cases

The following perquisites are not taxable under CBDT instructions or by virtue of the Act/Rules:

i. The provision of medical facilities as per para 4(i).

ii. . Free meals provided to all employees in office up to Rs. 50 per employee provided by the
employer through paid vouchers usable at eating joints.
iii. iii. Telephone including mobile phone provided to the employee.
iv. iv. Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India.
v. v. Sum payable by an employer to pension or deferred annuity scheme.
vi. vi. Employer’s contribution to staff group insurance scheme.
vii. vii. Actual travelling expenses paid/reimbursed for journeys undertaken for business purposes.
viii. viii. Payment of annual premium on personal accident policy, if such policy is taken to safeguard
the employer’s interest. See CIT vs. Lala Shri Dhar (1922) 84 ITR 192 (Delhi).
ix. ix. Rent-free official residence to a High Court or Supreme Court Judge.
x. x. Rent-free furnished residence to official of Parliament.
xi. xi. Conveyance facility to High Court/Supreme Court Judges.

income from house property

1. Basis of Charge [Section 22]:

Income from house property shall be taxable under this head if following conditions are satisfied:

a) The house property should consist of any building or land appurtenant thereto;

b) The taxpayer should be the owner of the property;

c) The house property should not be used for the purpose of business or profession carried on by the
taxpayer.
Gross Annual value [Sec. 23(1)]

The Gross Annual Value of the house property shall be higher of following:
 a) Expected rent, i.e., the sum for which the property might reasonably be expected to be let out from year
to year. Expected rent shall be higher of municipal valuation or fair rent of the property, subject to
maximum of standard rent;

b) Rent actually received or receivable after excluding unrealized rent but before deducting loss due to
vacancy

Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and
the remaining sum so computed shall be deemed to the gross annual value.

(2) Where the property consists of a house or part of a house which—

(a) is in the occupation of the owner for the purposes of his own residence; or

(b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business
or profession carried on at any other place, he has to reside at that other place in a building not belonging
to him, the annual value of such house or part of the house shall be taken to be nil.

(3) The provisions of sub-section (2) shall not apply if— (a) the house or part of the house is actually let
during the whole or any part of the previous year; or (b) any other benefit there from is derived by the
owner.

(4) Where the property referred to in sub-section (2) consists of more than 54[two houses]— (a) the
provisions of that sub-section shall apply only in respect of 55[two] of such houses, which the assessee
may, at his option, specify in this behalf; (b) the annual value of the house or houses, 56[other than the
house or houses] in respect of which the assessee has exercised an option under clause (a), shall be
determined under sub-section (1) as if such house or houses had been let.

Treatment of unrealized rent and arrears of rent [Explanation to section 23(1)]

Deduction for unrealized rent: Unrealized rent is that portion of rental income which the owner could not
realize from the tenant. Unrealized rent is allowed to be deducted from actual rent received or 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;

d) The taxpayer 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.

Amount received in respect of arrears of rent or any subsequent recovery of unrealized rent shall be
deemed to be the income of taxpayer under the head “Income from house property” in the year in which
such rent is realized or received (whether or not the assessee is the owner of that property in that year).
Further, 30% of such rent shall be allowed as deduction.

Composite Rent:

If letting out of building along with movable assets i.e., machinery, plan, furniture or fixtures, etc. forms
part of a single transaction and are inseparable, the composite rent shall be taxable under the head “Profits
and gains from business or profession” or “Income from other sources”, as the case may be. On the other
hand, if the letting out of building is separable from letting of other assets, then income from letting out of
building shall be taxable under the head “Income from house property” and income from letting out of
other assets shall be taxable under the head “Profits and gains from business or profession” or “Income
from other sources”, as the case may be.

 Chennai Properties and Investments Ltd. v. Commissioner of Income Tax [2015] 373 ITR 673
(SC). Here the court had observed that if a taxpayer is having his/her house property and as part of
his/her business he/she is giving the property on rent, the rental income received should be treated
as “Business Income” because the taxpayer is having a business of renting his property.

 Based on the above, the court, in the case of Rayala Corporation, ruled that income from house
property received where the taxpayer is into the business of letting out property will be taxed as
“Income from Business” and not as “Income from House Property”.

Property owned by co-owners [Section 26]:

If house property is owned by co-owners and their share in house property is definite and ascertainable
than the income of such house property will be assessed in the hands of each co-owner separately. For the
purpose of computing income from house property, the annual value of the property will be taken in
proportion to their share in the property. In such a case, each co-owner shall be entitled to claim benefit of
self-occupied house property in respect of their share in the property (subject to prescribed conditions).
However, where the shares of co-owners are not definite, the income of the property shall be assessed as
that of an Association of persons.

Deemed owner [Section 27]:

Income from house property is taxable in the hands of its owner. However, in the following cases, legal
owner is not considered as the real owner of the property and someone else is considered as the deemed
owner of the property to pay tax on income earned from such house property:

1. An individual, who transfers otherwise than for adequate consideration any house property to his or her
spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a
married daughter, shall be deemed to be the owner of the house property so transferred;

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

3. A member of a co-operative society, company or other association of persons to whom a building or part
thereof is allotted or leased under a house building scheme shall be deemed to be the owner of that
building or part thereof;

4. A person who is allowed to take or retain possession of any building or part thereof in part performance
of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 shall be deemed
to be the owner of that building or part thereof;

5. A person who acquires any rights (excluding any rights by way of a lease from month to month or for a
period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such
transaction as is referred to in section 269UA(f), shall be deemed to be the owner of that building or part
thereof.

Deductions

Municipal Taxes

Municipal taxes including service-taxes levied by any local authority in respect of house property is
allowed as deduction, if:
a) Taxes are borne by the owner; and
 b) Taxes are actually paid by him during the year.
Standard Deduction 24 (a)

30% of net annual value of the house property is allowed as deduction if property is let-out during the
previous year.

Interest on Borrowed Capital 24(b

a) In respect of let-out property, actual interest incurred on capital borrowed for the
purpose of acquisition, construction, repairing, re-construction shall be allowed as
deduction
b) In respect of self-occupied residential house property, interest incurred on capital
borrowed for the purpose of acquisition or construction of house property shall be
allowed as deduction up to Rs. 2 lakhs. The deduction shall be allowed if capital is
borrowed on or after 01-04-1999 and acquisition or construction of house property
is completed within 5 years.
c) In respect of self-occupied residential house property, interest incurred on capital
borrowed for the purpose of reconstruction, repairs or renewals of a house
property shall be allowed as deduction up to Rs. 30,000.

Meaning of Capital Gains

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax
under the head “Capital Gains”. Meaning of Capital Asset Capital asset is defined to include:

(a) Any kind of property held by an assessee, whether or not connected with business or profession of the
assesse.

(b) Any securities held by a FII which has invested in such securities in accordance with the regulations
made under the SEBI Act, 1992.

(c). Any ULIP to which exemption under section 10(10D) does not apply on account of the applicability of
the fourth & fifth proviso thereof. However, the following items are excluded from the definition of
“capital asset”:

(i) any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials
held for the purposes of his business or profession ;

(ii) personal effects, that is, movable property (including wearing apparel and furniture) held for personal
use by the taxpayer or any member of his family dependent on him, but excludes— (a) jewellery; (b)
archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art.

“Jewellery" includes— 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 stones, 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;

(iii) Agricultural Land in India, not being a land situated:

a.Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and
which has a population of not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any municipality or
cantonment board:

i. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;

ii. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs;
or

iii. not being more than 8 KMs , if population of such area is more than 10 lakhs. Population is to be
considered according to the figures of last preceding census of which relevant figures have been published
before the first day of the year.

(iv) 61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds,
1980 issued by the Central Government;

(v)Special Bearer Bonds, 1991;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under
the Gold Monetisation Scheme, 2016.

Following points should be kept in mind:

The property being capital asset may or may not be connected with the business or profession of the
taxpayer. E.g. Bus used to carry passenger by a person engaged in the business of passenger transport will
be his capital asset.

Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance
with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be
treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

Illustration

Mr. Kumar purchased a residential house in January, 2018 for Rs. 84,00,000. He sold the house in April,
2022 for Rs. 90,00,000. In this case residential house is a capital asset of Mr. Kumar and, hence, the gain
of Rs. 6,00,000 arising on account of sale of residential house will be charged to tax under the head
“Capital Gains”.

Illustration

Mr. Kapoor is a property dealer. He purchased a flat for resale. The flat was purchased in January, 2019
for Rs. 84,00,000 and sold in April, 2022 for Rs. 90,00,000. In this case Mr. Kapoor is dealing in
properties in his normal business. Hence, flat purchased by him would form part of stock-in-trade of the
business. . In other words, for Mr. Kapoor flat is not a capital asset and, hence, gain of Rs. 6,00,000 arising
on account of sale of flat will be charged to tax as business income and not as capital gain.

Illustration

Mr. Kumar is a salaried employee. In the month of April, 2013 he purchased a piece of land and sold the
same in December, 2022. In this case, land is a capital asset for Mr. Kumar. He purchased land in April,
2013 and sold in December, 2022 i.e. after holding it for a period of more than 24 months. Hence, land
will be treated as long-term capital asset.
Adjustment of LTCG against the basic exemption limit

Basic exemption limit means the level of income up to which a person is not required to pay any tax. The
basic exemption limit applicable in case of an individual for the financial year 2022-23 is as follows :

For resident individual of the age of 80 years or above, the exemption limit is Rs. 5,00,000.

For resident individual of the age of 60 years or above but below 80 years, the exemption limit is Rs.
3,00,000.

For resident individual of the age of below 60 years, the exemption limit is Rs. 2,50,000.

For non-resident individual, irrespective of the age of the individual, the exemption limit is Rs. 2,50,000.
For HUF, the exemption limit is Rs. 2,50,000.

SECTION 28 – CHARGING SECTION

As per Section 28 of the Income Tax Act, 1961:

1. Any profit from any business/profession comes under income from PGBP (Profit & Gains from business
& profession)

2. Any perquisite/benefit arising from a business comes under income from PGBP (Profit & Gains from
business & profession)

3. Interest/Salary/Remuneration/Commission/Bonus received by Partner of a firm comes under income

from PGBP (Profit & Gains from business & profession)

4. Sums received under an agreement for forbearance, i.e., agreement for not doing something (eg: Non-
Compete Agreement), comes under income from PGBP (Profit & Gains from business & profession)

5. Sums received under Keyman Insurance Policy comes under income from PGBP (Profit & Gains from
business & profession)
INCOME FROM HOUSE RENT

In the case of Chennai Properties & Investment Ltd., it was laid out that the rental income from the
properties of a company whose main object is of letting out properties, shall be taxable under comes under
income from PGBP (Profit & Gains from business & profession) and not income from HP (House
Property)

SECTION 29 – COMPUTATION SECTION

As per Section 29 of the Income Tax Act, 1961, all the incomes which have been refereed to in Section 28
of the said act, shall be charged in accordance with the provisions laid out from Section 30 to 43D of the
Act.

SECTION 30 & 31 – ALLOWABLE DEDUCTIONS

As per Section 30 of the Income Tax act, 1961, the assessee is eligible for the following deductions:

The rent and cost of repairs for the premises, he/she occupies as a tenant for the purposes of Business or
Profession.

Any kind of payment in respect of land Revenue, Local Rates or Municipal Taxes for the purposes of
Business or Profession.

Any premium paid for insuring the premises for the purposes of Business or Profession, against damage or
destruction.

As per Section 31 of the Income Tax act, 1961,

the assessee is eligible for the following deductions: Any payment for the repair of machinery, plant and
furniture used for the purposes of Business or Profession. Any premium paid for insuring the machinery,
plant and furniture used for the purposes of Business or Profession against damage or destruction.

EXPENSES NOT ELIGIBLE FOR DEDUCTION

While calculating the income under PGBP, there are some expenses which are not eligible for deductions
under the Provisions of Income Tax. This includes:

 Any cash payment above Rs 10,000/- per day against single invoice to a single person.
 Any kind of personal Expenses (including Life Insurance Policy, Credit Card Expenses, Personal
use, etc.)
 Any kind of Bad debts which are not written in the books.
 Capital Expenditures (since they are considered to be more of an asset).
 Payments which have made because of non-compliance or breaking a law.
 Expenses which have been incurred in order to gain an illegal income.
 Expenses which have been prohibited by law.

SECTION 32 – DEPRECIATION SECTION

Section 32 of the Income Tax Act, 1961, talks about Depreciation. Depreciation means a fall that
takes place in the value of an asset. This fall may be because of various reasons including:

1. Usage, or

2. With Time, or

3. Some accident, or
4. because of being outdated

HOW CAN CLAIM DEPRECIATION?

An assessee can claim depreciation on an asset only if that asset is put into use and that assessee has
the beneficial ownership. For example, in the Mysore Minerals Ltd. Case, it was laid out that, an
assessee can claim depreciation even for those buildings which were not registered in his name but he
was using them for his business. In this case, the assessee was in possession of the building and was
putting it to use, hence he was the beneficial owner, therefore could claim depreciation. An assesse can
claim depreciation on the acquired asset only if he puts it into use. As it was laid out in the case of
Dinesh Gulabchand Agarwal, that depreciation cannot be claimed on an asset which was ready for use
but was not put into use. However, in case where the assesse wants to put the asset into use but is
unable to because of any extraneous situation, then in such cases he can claim the depreciation. For
example, as was laid out in the case of Chennai Petroleum Corporation Limited, it was laid out that the
assesse could claim depreciation on the gas plant which was built in the Previous Year but was not put
into use in that previous year because of unavailability of Raw Materials. Since in this case, the asset
was ready to be used but couldnot be put into use because of the extraneous situation of unavailability
of Raw Materials, Depreciation was allowed.

Judicial Decisions

Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500 (SC)

Rental income from the business of leasing out properties shall be taxable under the head ‘Profits
and gains from business or profession’ and not under the head ‘Income from house property’.

The Apex Court observed that the assessee was engaged only in the business of renting its
properties and earning rental income. The Supreme Court made reference to its decision in the
case Chennai Properties & Investments Ltd v. CIT (2015) (SC) where it was held that if an assessee is
engaged in the business of letting out house property on rent, then, the income from such property
should be treated as business income, even though it is in the nature of rent.

Therefore, the Apex Court held that since the business of the company is to lease out its property and
earn rent therefrom, the rental income earned by the company is chargeable to tax as its business
income and not income from house property.

CIT v. K and Co. (2014) 364 ITR 93 (Del)

Interest income earned on the margin money deposited with bank for obtaining bank guarantee to
carry on the lottery business shall be taxable as business income.

Facts: The assessee running a lottery business, deposited funds with a bank to obtain bank guarantee
to be furnished to the State Government of Sikkim. Such guarantee enabled the assessee to carry on
the business of printing lottery tickets and for conducting lotteries on behalf of the State Government
of Sikkim. The funds which were held as margin money, earned some interest.

Decision: The High Court noted that the interest income from the deposits made by the assessee is
inextricably linked to the business of the assessee and such income, therefore, cannot be treated as
income under the head ‘Income from other sources’. The margin money requirement was an essential
element for obtaining the bank guarantee which was necessary for the contract between the State
Government of Sikkim and the assessee. If the assessee had not furnished the bank guarantee, the
contract for running lottery business would have been denied to the assessee.

The High Court, accordingly, held that such interest income would be taxable under the head ‘Profits
and gains of business or profession’.
CIT v. Sree Rama Multi Tech Ltd. (2018) 403 ITR 426 (SC)

Interest income from share application money deposited in bank is eligible for set-off against public
issue expenses and should not be subject to tax under the head ‘Income from Other Sources’.

Facts: The assessee-company came out with an IPO and deposited the share application money in
banks. The interest of ` 1,71,30,202 earned on the deposits was shown in the ROI originally filed under
the head ‘Income from Other Sources’. Subsequently, the assessee-company raised an additional
ground before the Tribunal for allowing the set off of such interest against the public issue expenses.

Decision: The Supreme Court observed that the assessee-company was statutorily required to keep
share application money in a separate account till the allotment of shares was completed. The interest
earned was inextricably linked with the requirement of raising share capital. Only the surplus money
deposited in the bank for earning interest is liable to be taxed as “Income from Other Sources”. But,
here, the share application money was deposited with the bank not to make additional income but to
comply with the statute and the interest accrued on such deposit is merely incidental. Accordingly, the
accrued interest is not liable to be taxed as “Income from Other Sources” and the same is eligible to be
set-off against public issue expenses.

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

Facts: The assessee-company engaged in manufacturing of cement had made an agreement for
purchase of an additional cement plant. As per the agreement, any delay in delivery of the machinery
entitled the assessee for damages at 5% of the total price of the machinery without proof of actual loss.
The supplier delayed the supply of machinery and paid ` 8.50 Lakhs as liquidated damages.

Decision: It was held that the damages received, in this case, are directly attributable to and intimately
linked with the procurement of a capital asset, i.e. a cement plant. Therefore, it is a capital receipt in
the hands of the assessee and hence not taxable under any head of income.