Docstoc

TAXATION

Document Sample
TAXATION Powered By Docstoc
					                                     TAXATION
CHAPTER 1: TAX PRACTITIONER AND THE INDIAN TAX ENVIRONMENT

                Introduction
                      Taxation System In India
                      Investor Considerations
                      Principles Taxes
                      Direct and Indirect Tax Burden
                Legislative Framework
                Statute Law
                Case Law
                Anti Avoidance
                Form versus Substance
                Clearance Procedure
                Income Tax
                      Concept of income taxation
                      Geographical source of income
                      Classes of taxpayer
                      Taxable income
                      Tax year
                      Tax-free zones
                      Tax holidays
                      Companies
                      Individuals
                      Foreign operations
                      The taxation law in India
                      Dividends
                      Exempt income
                      Deductions
                      Losses
                      Tax administration in India
                      Permanent Account Number
                      Tax Deduction Account Number
                      Direct taxation in India
                      Taxable income
                      Indirect taxation in India


CHAPTER 2: TAXATION-USEFUL AND IMPORTANT DEFINITION

                Introduction
                      Income
                      Person
                      Assessment Year
                      Company
                      Indian company
                      Principal Officer
                      Convertible Foreign exchange
                      Foreign Exchange Asset
                      Investment Income
                      Long term capital gains
                      Non resident Indian
                      Specified Asset
                      Residential and non residential
                      Residential Status
                      Residential status of an Individual
                      Residential Status of a Hindu Undivided Family (HUF)
                      Residential Status of company
                 Taxation of Non-Residents
                      Resident and Non Resident
                      Certain Incomes of non-residents Taxable in India


CHAPTER 3: INDIRECT TAXATION

                 Introduction
                 Main Principles in State Sales Tax Laws
                 Inter State Trade or Commerce
                 Transactions not amounting to inter-state sales
                 Sales Tax ID number
                 Exception in the sales taxes


CHAPTER 4: TAXATION

                 Capital Gains for the NRIs
                 Concession and Set Off
                 The rates which are applicable
                 Incentives
                 General Tax Incentives
                 Five year tax holiday for
                 Investor considerations
                 Corporate tax payers
                       Tax returns
                       Assessments
                       Appeals
                       Payment and collection
                       Advance tax
                       Withholding taxes
                       Tax audits
                       Penalties
                       Statute of limitations
                       Individual taxpayers
                       Advance tax
                       Community property
                       Spouse
                       Minor
                       Other Taxes
                       Trusts and Partnerships
                       Investor considerations
                       Corporations and shareholders
                       Taxable entities
                       Territoriality
CHAPTER 5: GROSS INCOME

                Accounting methods
                Business profits
                Capital gains
                Inter company dividends
                Stock dividends
                Dividends-in-kind
                Royalties and service fees
                Nontaxable Income


CHAPTER 6: INCOME UNDER THE HEAD SALARY

                Introduction
                Accounting methods
                Business profits
                Capital gains
                Inter company dividends
                Stock dividends
                Dividends-in-kind
                Royalties and service fees
                Nontaxable Income


CHAPTER 7: ILLUSTRATION ON INCOME UNDER THE HEAD SALARY

CHAPTER 8: TUTORIALS

CHAPTER 9: INCOME FROM HOUSE PROPERTY
CHAPTER 1
TAX PRACTITIONER AND THE INDIAN TAX ENVIRONMENT


INTRODUCTION

Taxation System in India

        As you all Know, India is a federal republic comprising the Central Government, twenty-nine
self-governing States and six Union Territories. Tax legislation is enacted at both the Central level
and State level. The Central Government is empowered to levy almost all direct and some indirect
taxes. The State Governments are empowered to levy agricultural income tax and some indirect
taxes like sales taxes, property taxes, stamp duty, etc.



Investor Considerations

What are Investor Considerations according to you,

   

   
       deemed to arise) in India.

                                                                         olders upon distribution as
       dividends

   

   

   

                                     ered to residents through credits under the Income Tax Act and
       under the tax treaties



Principal Taxes

The principal taxes are as follows.

       1. Taxes on income:

              a. Income tax:
             b. Agricultural income tax (levied only by states);

             c. Interest tax (applicable to banking and financial companies).

      2. Taxes on transactions:

             a. Local sales tax (levied only by states);

             b. Central sales tax;

             c. Excise duty;

             d. Customs duty;

             e. Stamp duty;

             f. Gift tax;

             g. Expenditure tax.

      3. Taxes on property:

             a. Wealth tax;

             b. Property tax.



Direct and indirect tax burden

       The central budget for 1995/96 anticipates a total revenue collection of Rs 1,037.62 billion,
including revenue from the sources

                                Revenue     Collection,1995     /     96
                                           Rs billions     Percentage
                              Direct taxes 205.42             21.85
                              Income tax:
                              Companies 155.00
                              Others          39.41
                              Interest tax    10.00
                              Wealth tax       0.90
                              Gift tax and others0.11
                              Indirect taxes 734.86                  78.15

                              Customs duty 295.00
                              Excise duty     427.80
                              Others taxes and duties12.06
                                                   940.28          100.00



Legislative framework
Statute law

        The law relating to income tax is contained in the Income Tax Act 1961. There are specific
statutes for other taxes. Central tax statutes are passed by the central tax statutes are passed by the
central Parliament and state tax statutes by the state assemblies. Tax rates and duties are reviewed
annually when budgets are presented. Amendments to the statutes are made through the annual
Finance Acts or specific Amendment Acts almost every year. Although amendments are usually
prospective, retroactive amendments are permitted. Tax adm9inistrators have no authority to alter
legislation but are empowered by the statutes to make rules to carry out the provisions of law.



Case law

       Case law is a significant factor in the interpretation of the law. High Court decisions are binding
on subordinate appellate authorities of the state over which the concerned High Court has jurisdiction,
and they are persuasive for appellate authorities of other states. Supreme Court decisions are binding
on all appellate authorities and assessing officers. Indian courts in interpreting legislation have often
referred to memorandums explaining the provisions of the law and the amendments that were place
before the legislature when the law or amendments were introduced.



Anti avoidance

       No general anti avoidance provisions are pervasively applicable to all situations. However,
individual provisions apply to specific transactions. In certain cases, where the Tax authorities have
been able to prove that the primary reason behind the action was to avoid tax, the courts have looked
through the scheme and determined the issue on substance. Provisions for advance ruling with
respect to transactions involving nonresidents have been introduced.



Form versus substance

      In the absence of a challenge, form is respected. But substance takes precedence over form
where the purpose of using the form is to defeat the intent of the legislation.



Clearance procedures

      Advance clearance is required for certain specific transactions such as an amalgamation in
which the amalgamated company seeks to carry forward and set off the unabsorbed losses and
depreciation of the amalgamating company, transfer of immovable property above a specified price in
designated areas, creation of a charge on certain assets, and remittances outside India. Expatriates
who have been in India continuously for more than 120 days must also obtain a tax clearance before
they depart.
       Provisions for advance rulings on transactions involving nonresidents have been incorporated
into the law through the Finance Act 1993. An authority constituted by the central government
determines an advance ruling. An authority constituted by the central government determines the
advance ruling. The advance ruling is binding only with respect to the applicant that has sought it and
the particular transaction. It is also binding on the Income Tax authorities with jurisdiction over the
applicant.




Income Tax
Concepts of income taxation

       The income tax system in India is unitary. Income less permissible expenses from all sources
(other than long-term capital gains) of each taxpayer s aggregated and subject to tax at a flat rate in
the case of companies and partnership firms and at progressive rates in the case of other taxpayers.
Long-term capitals gains are taxed at concessional lower rates. Residents are taxed on their
worldwide income. Subject to treaty exemptions, nonresidents are taxed only on income that is
received in India or that arises in India or is deemed to arise in India. India follows the ―classical
system,‖ under which corporate income is taxed both to the corporation and upon distribution to the
shareholders as dividends. However, dividends received by one domestic company from another
domestic company are not taxed in the hands of the recipient company to the extent it distributes the
dividends to its shareholders within the time allowed for filing its tax return.



Geographical source of income

        Generally, income arises in India if it becomes due in India. This depends on here the income-
producing asset is located, where the services giving rise to the income are performed, where the
sale is effected, and other considerations. In addition, the Income Tax At specifically mentions that
the following income is deemed to arise in India.

   1. Income arising directly or indirectly through or from any business connection in India; through
      or from any property, asset or source of income in India; or through the transfer of a capital
      asset situated in India.

   2. Salaries earned in India, even if paid outside India.

   3. Dividends paid by Indian companies outside India.

   4. Interest, royalties or technical service fees payable by the government.

   5. Interest, royalties or technical service fees payable by persons other than the government
      unless the funds borrowed, the patent, the technical information, etc., are utilized in a business
      outside India or for earning income from a source outside India.

These categories of deemed Indian-source income are subject to the following qualifications.
   1. In the case of a business with some operations not performed in India, the income deemed to
      arise in India is only that part or the income reasonably attributable to the operations
      performed in India.

   2. In the case of nonresidents, no income is deemed to arise in India from operations that are
      confined to the following:

          a. Purchase of goods in India for the purpose of export;

          b. Collection of news for transmission out of India in the case of a nonresident publisher of
             newspapers, magazines or journals;

          c. Shooting of cinematographic films in India by foreigners and nonresident firms or
             companies not having any partner or shareholder who is an Indian citizen or Indian
             resent; and d. Transfer of rights in computers and software by a nonresident
             manufacturer along with computer-based equipment under an approves scheme of the
             government of India, against lump-sum payment.



Classes of taxpayer

The income tax law classifies taxpayers as follows.

      1. Companies.

      2. Firms (partnerships).

      3. Associations of persons or bodies of individuals.

      4. Individuals.

      5. Hindu undivided families.

      6. Local authorities (municipal bodies).

      7. Artificial juridical persons.



Taxable income

Income is classified into the following five heads, depending on its source.

      1. Income from salaries.

      2. Income from house properties.

      3. Profits and gains from business or profession.

      4. Capital gains.

      5. Income from other sources.
       Specific provisions govern the computation of net income from each source. Gains on the
transfer of capital assets (other than long-term capital gains) are aggregated with the net income from
other heads to arrive at the total taxable income. Longer-term gains are taxed at lower rates.



Tax year

       For tax year-end must be March 31. This is known as the previous year. The fiscal year,
starting on the April 1 immediately following the previous year, is known as the corresponding
assessment year. The taxable income of the previous year is subject to tax at the rates in force for
the corresponding assessment year.



Tax-free zones

      To encourage foreign exchange earnings, the following free-trade zones in which industrial
undertakings can be set up for manufacture and processing for exports, have been notified.

       1. Santa Cruz Electronics        Export   Processing     Zone   (SEEPZ).     Mumbai     (Bombay),
          Maharashtra.

       2. Kandala Free Trade Zone (KAFTZ), Gujarat.

       3. Falta Export Processing Zone (FEPZ), West Bengal.

       4. Cochin Export Processing Zone (CEPZ), Kerala.

       5. NOIDA Export Processing Zone (NEPZ), Uttar Pradesh (bordering New Delhi).

       6. Madras Export Processing Zone (MEPZ), Tamil Nadu.

       7. Surat Export Processing Zone, Gujarat.

       8. Vishakhapatnam Export Processing Zone, Andhra Pradesh. Industrial undertakings set up
          in these zones are exempt from income tax for any five consecutive years during the first
          eight years of their operation, provided they export at least 75 percent of their total turnover
          of each year. Similar exemption is also granted to 100 percent export-oriented undertakings
          (EOUs) set up elsewhere and to units set up in notified Software Technology Parks (STPs)
          and Electronic Hardware Technology Parks (EHTPs). Other exporters also enjoy specified
          deductions for export profits in computing their taxable income.



Tax holidays

       Both new industrial undertakings located in the specified ―backward states‖ or districts and new
industrial undertakings set up for generation or generation and distribution of power are entitled to full
tax exemption of profits for the first five years of operation, followed by partial tax exemption of 30
percent (for companies) of the profits of the next five years. Similar exemption is available to
enterprises carrying on the business of developing, maintaining and operating a notified
―infrastructure facility‖ with respect to profits land gains spread over any 10 consecutive years falling
within the first 12 years.



Companies

       No tax is payable on the basis of value of the company upon incorporation or issue of shares.
However, annual wealth tax is payable at 1 percent on the value of specified assets minus specified
debts to the extent the value exceeds in aggregate Rs 1.5 million.



Individuals

        Individuals are liable to annual wealth tax at 1 percent on the value of net wealth (specified
assets minus specified debts) in excess of Rs.1.5 million. Individuals are also liable for donor-based
gift tax upon transfer of assets made through gifts.



Foreign operations

       Residents are subject to tax on their worldwide income. They are allowed a tax credit up to the
amount of Indian income tax for foreign income taxes paid on foreign-source income. Double taxation
is also avoided through treaty provisions. Nonresidents are not subject to tax on income that arises
outside India and is received outside India (unless it is deemed to arise in India as described under
―Geographical source of income‖ above). Nonresidents are not allowed a foreign tax credit.



The Taxation Laws in India

       Income is taxed in India in accordance with the provisions of the Income-tax Act, 1961 (the
Act). The Ministry of Finance (Department of Revenue) through the Central Board of Direct Taxes
(CBDT), an apex tax authority, implements and administers direct tax laws. Issues involving
interpretation of tax laws are decided by the judiciary, which is independent of the legislature.
Circulars, Notifications and Clarifications issued by the CBDT supplement the Act. The ―tax year‖ runs
from 1 April to 31 March of the following calendar year for all taxpayers. Taxable income has to be
ascertained separately for different classes of income and is then aggregated to determine total
taxable income. The ―previous year‖ basis of assessment is used i.e any income pertaining to the ―tax
year‖ is offered to tax in the following year (known as assessment year). Income tax is levied on
―taxable income‖, comprising the following categories, referred to as ―Heads of Income‖

   1.

   2.

   3.
   4.

   5.

       Generally, domestic companies, partnerships and local authorities are subject to tax at flat
rates, whereas individuals and specified taxpayers are subject to progressive tax rates. Foreign
companies and non-resident individuals are subject to tax at rates, which depend upon the type of
income. Agricultural income is exempt from income tax at the Central level but is taken into account
for rate purposes. Income earned by specified organisations e.g., trusts, hospitals, universities,
mutual funds etc., is exempt from tax, subject to the fulfillment of certain conditions. India adopts the
self-assessment tax system. Taxpayers are required to file their tax returns and pay the tax. The Tax
Officer may choose to make a scrutiny assessment to assess the correct amount of tax by calling for
further details. Generally, taxpayers are liable to make income tax payments as advance tax, in three
or four installment, depending on the category they belong to, during the year in which the income is
earned. Employed individuals are subject to tax withholding by the employer on pay-as-you-earn
basis.



Dividends

        Dividends distributed by domestic companies on or after 1 April 2003 are subject to a dividend
distribution tax of 12.8125% (inclusive of surcharge of 2.5%). Dividends so distributed are, however,
not subject to tax in the hands of the shareholders (irrespective of their residential status).



Exempt Income

Certain types of income are excluded from the ambit of taxation, some of them being:

   1. Agricultural income earned from carrying out direct agricultural operations

   2. Income of approved mutual funds

   3. Income by way of dividends or long-term capital gains of an infrastructure capital fund or an
      infrastructure capital company from investments by way of shares or long-term finance in any
      enterprise wholly engaged in the business of developing, maintaining and operating any
      infrastructure facility, subject to certain prescribed conditions.



Deductions

       Generally, all expenses incurred for business purposes are deductible from taxable income.
The requisite for deductibility of expenses is that the expenses must be wholly and exclusively
incurred for business purposes; that the expenses must be incurred or paid during the previous year
and supported by relevant papers and records. Expenses of a personal or a capital nature are not
deductible. Income tax paid is not allowable as a deduction.
       Expenditure incurred on taxes (excluding income tax) and duties, bonus or commission to
employees, fees under any law, interest on loans or borrowings from public financial institutions and
interest on term loans from scheduled banks is deductible only if it is paid during the previous year, or
on or before the due date for furnishing the return of income, and the return is accompanied by
evidence of such payment. However, interest on capital borrowed for acquisition of assets acquired
for extension of existing business is not allowed as a deduction until the time such assets are actually
put to use. Employee‘s contributions to specified staff welfare funds – that is, provident funds, gratuity
funds, etc. – are allowed only if actually paid during the previous year on or before the applicable due
date.

       However, employer‘s contributions to these funds are deductible even if paid before the due
date of filing of the return of income. Salaries, interest, royalties, technical service fees, commissions
or any other amount payable outside India or in India to a nonresident (other than a foreign
company), on which the applicable withholding tax has not been withheld or paid are not deductible.
Such amounts are deductible in the year in which the withholding tax is paid. Where in respect of
these payments, tax has been deducted in the relevant year but paid in the subsequent year within
the prescribed time limit, the payments made are deductible in the relevant year. But if the tax so paid
in the subsequent year is not paid within the prescribed time limit, the deduction is allowed only in the
subsequent year.



Losses

        Unabsorbed business losses can be carried forward and set off against the business profits of
any business for a maximum of eight years. Business loss can be carried forward and set off against
the profits of any other business. Losses from a speculation business (as defined) can be set off only
against gains from speculation business. Losses are not allowed to be carried forward unless the
return of income is filed in time. Unlisted companies could lose the right to carry forward the business
loss if there is a substantial change in the shareholding. In the case of mergers and demergers, a
transferee company is entitled to carry-forward of select losses of the transferor company, subject to
satisfaction of certain conditions by both the transferee as well as the transferor company Carry back
of losses is not permitted.



Tax Administration in India

        Income Tax Returns and Payment of Corporate Tax Currently, corporate taxpayers are
required to file tax returns with the tax authorities on or before 31 October of the year following the
end of the tax year. There are no provisions for the extension of time to file the tax return. Failure to
file a tax return on or before the due date attracts interest at the rate of 1.25% per month on the final
tax due. Companies are required to pay advance tax in four-installment spread over the financial
year, by the due dates as shown below Percentage of total tax payable Payment on or before 15% 15
June 45% 15 September 75% 15 December 100% 15 March India adopts the self-assessment tax
system.
       All taxpayers are required to compute their taxable income, pay tax thereon and file the tax
return with the tax authorities on or before the due date for filing the same. The Assessing Officer
may choose to make a scrutiny assessment to assess the correct amount of tax by calling for further
details. India adopts the self-assessment tax system. All taxpayers are required to compute their
taxable income, pay tax thereon and file the tax return with the tax authorities on or before the due
date for filing the same. The Assessing Officer may choose to make a scrutiny assessment to assess
the correct amount of tax by calling for further details.



Permanent Account Number (PAN)

      All taxpayers must obtain a registration number known as the Permanent Account Number
(PAN) from the tax authorities. This number must be indicated on all returns, documents and
correspondence filed with the tax authorities.



Tax Deduction Account Number (TAN)

     All persons required to deduct tax at source from any kind of payments must obtain a Tax
Deduction Account Number (TAN) from the tax authorities. This number has to be indicated on all tax.



Direct Taxation in India

       An individual who is ―resident‖ in India is liable to tax on his world wide income. A ―non-
resident‖ individual is liable to tax in India only in respect of income earned or received in India. An
individual who is ―not ordinarily resident‖ in India is liable to tax in India in respect of income earned or
received in India and any income that accrues outside India from a business controlled in India or a
profession set up in India.

   1. Individual Taxation Structure in India: ―Salary‖ is the remuneration received by or accruing
      periodically to an individual for service rendered as a result of expressed or implied contract.
      Compensation or remuneration even in the following circumstances is chargeable to Income-
      tax under the head ‗Salaries‘

   2. Corporate Income Tax: A company has been defined as a juristic person having an
      independent and separate legal entity from its shareholders. Income of the company is
      computed and assessed separately in the hands of the company. However the income of the
      company which is distributed to its shareholders as dividend is assessed in their individual
      hands. Such distribution of income is not treated as an expenditure in the hands of company,
      the income so distributed is an appropriation of the profits of the company.

       The taxability of a company‘s income depends on its domicile. Indian companies are taxable in
India on their worldwide income. Foreign companies are taxable on income that arises out of their
Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains
from sale of capital assets located in India (including gains from sale of shares in an Indian company),
dividends from Indian companies and fees for technical services are all treated as income arising in
India. Income of companies is taxed at the following rates:



Type of company Old Rate (%) New Rate (%)

Domestic company

Widely held company          45   40

Closely held company         50   40

Foreign company              65   55

A surcharge of 15% of the amount of tax payable is levied on domestic companies, if taxable income
exceeds Rs.75,000.



Taxable income

       The main source of income of a company is generally from ―business‖. A company would also
earn income from under the following heads:

   1. Income from house property

   2. Income from capital gains

   3. Income from other sources

Taxable income is calculated according to the rules for each class of income and then aggregated to
determine total taxable income

   3. Other Taxes: India has entered into Double Taxation Avoidance Agreements (DTAA) with 65
      countries including countries like U.S.A., U.K., Japan, France, Germany, etc. These
      agreements provide for relief from double taxation in respect of incomes by providing
      exemption and also by providing credits for taxes paid in one of the countries. These treaties
      are based on the general principles laid down in the model draft of the Organisation for
      Economic Cooperation and Development (OECD) with suitable modifications as agreed to by
      the other contracting countries



Indirect Taxation in India

   1. Sales Tax: Sales Tax is a levy on purchase and sale of goods in India. Sales Tax is levied
      under authority of both Central Legislation (Central Sales Tax) and State Governments
      Legislations (Local Sales Tax). Central Sales Tax is governed by the Central Sales Tax Act,
      1956 which covers inter-state transactions of sale of goods as well as transactions of import of
      goods into or export of goods out of India. The Local Sales Tax is governed by the respective
   State Sales Tax Acts under which tax is levied on intra-state transactions of sales. Sales tax is
   payable by the seller to the Government.

4. Ordinarily, sales tax is recovered from the buyer as a part of consideration for sale of goods.
   Rates of sales tax vary from state to state. However, rate of sales tax on inter state sales
   between registered dealers is lower of 4% or the rate of sales tax applicable in the state of
   seller if the goods are for resale or use in manufacture of goods for resale. The rate of 4% is
   proposed to be reduced to 2% from a date to be notified. A specific declaration is required to
   be provided for the

      (1) Value Added Tax India does not have a classic VAT structure. However, there has been
          a proposal to introduce VAT at the state level. It was to be introduced with effect from 1
          April 2003 but the same has now been postponed (new date not firmed up). VAT, when
          introduced, will replace State Sales Tax. It is not likely to be much different from current
          local sales tax regime except that it would capture value addition at each level of
          distribution network. Draft VAT legislations of some States are available but they are
          undergoing changes.

2. Service Tax is levied on the notified services. It is a Union levy and is governed by Chapter V
   of Finance Act, 1994 (the Act) as amended from time to time. The rate of service tax till 13 May
   2003 was 5% and from 14 May 2003, it stands increased to 8%. Service tax is charged on the
   gross value of services. Generally, it is payable on receipt basis. It is an indirect tax - it is
   payable by the service provider but it is ordinarily, recovered from the recipient of services.

3. Octroi Duty: Octroi Duty is a municipal levy, which is levied on entry of goods into a municipal/
   local area for use, consumption or sale. The rate of Octroi Duty varies from local area to local
   area.

4. Entry Tax: Some of the States levy Entry Tax on entry of goods within the State limits for use,
   consumption or sale. Again, the rates vary from State to State.

5. Stamp Duty: is imposed on execution of specified instruments. The levy is governed by the
   Indian Stamp Act, 1899 or the State Stamp Acts. Some States have enacted separate
   legislations, whereas some have purpose. In other cases, the rate of sales tax applicable for
   inter-state transaction of sales is higher of 10% or the rate applicable in the state of seller.

3. Value Added Tax :India does not have a classic VAT structure. However, there has been a
   proposal to introduce VAT at the state level. It was to be introduced with effect from 1 April
   2003 but the same has now been postponed (new date not firmed up). VAT, when introduced,
   will replace State Sales Tax. It is not likely to be much different from current local sales tax
   regime except that it would capture value addition at each level of distribution network. Draft
   VAT legislations of some States are available but they are undergoing changes.

4. Service Tax is levied on the notified services. It is a Union levy and is governed by Chapter V
   of Finance Act, 1994 (the Act) as amended from time to time. The rate of service tax till 13 May
   2003 was 5% and from 14 May 2003, it stands increased to 8%. Service tax is charged on the
   gross value of services. Generally, it is payable on receipt basis. It is an indirect tax - it is
   payable by the service provider but it is ordinarily, recovered from the recipient of services.
5. Octroi Duty: Octroi Duty is a municipal levy, which is levied on entry of goods into a municipal/
   local area for use, consumption or sale. The rate of Octroi Duty varies from local area to local
   area.

6. Entry Tax: Some of the States levy Entry Tax on entry of goods within the State limits for use,
   consumption or sale. Again, the rates vary from State to State.

7. Stamp Duty: is imposed on execution of specified instruments. The levy is governed by the
   Indian Stamp Act, 1899 or the State Stamp Acts. Some States have enacted separate
   legislations, whereas some have adopted Indian Stamp Act with or without modifications.

8. Local Property Taxes: Property Tax is payable as per local municipal laws on commercial and
   residential property.
CHAPTER 2
TAXATION - USEFUL AND IMPORTANT DEFINITIONS
Income

       There is no specific definition of income but for statutory purposes there are certain items
which are listed under the head income. These items include those heads also which normally will not
be termed as income but for taxation we consider them as income. These items are included under
section 2(24) of the income tax act, 1961. As per the definition in section 2(24), the term income
means and includes:

   1.

   2.

   3.
         purposes or by an institution established wholly or partly for such purposes

   4.

   5. ue of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17 of
      the act

   6.
         where the duties of his office or employment of profits are ordinarily performed by him or at a
         place where he ordinarily resides or to compensate him for the increased cost of living

   7.

   8.

   9.                       lotteries, crossword puzzles, races, including horse races, card games and
         games of any sort or from gambling or betting of any form or nature whatsoever

   10.

   11. or superannuation fund or any fund for the welfare of employees or any other fund set up
       under the provisions of the employees state insurance act

   12.
         imports and exports (control) act, 1947



Person

   The income tax is charged in respect of the total income of the previous year of every ‗person‘.
Here the person means—

   1. an individual : a natural human being i.e male, female minor or a person of sound or unsound
      mind
   2. a Hindu undivided family (HUF)

   3. a company :

                 Indian company

          

                                                                          n Indian, which is declared by
              general or special order of the board to be a company

                            ssociation or body which is or was assessable or was assessed as a
              company for any assessment year under the Indian Income tax Act, 1922 or which is or
              was assessable or was assesses under this act as a company for any assessment year
              commencing on or before the 1st day of April. 1970

   4. a firm i.e a partnership firm

   5. an association of persons or a body of individuals whether incorporated or not

   6. a local authority— means a municipal committee, district board, body of port commissioners,
      or other authority legally entitled to or entrusted by the government with the control and
      management of a municipal or local fund.

   7. every artificial, juridical person, not falling within any of the above categories



Assessment year

       Assessment year means the period of twelve months commencing on 1st April every year and
ending on 31st March of the next year. Income of previous year of an assessee is taxed during the
following assessment year at the rates prescribed by the relevant Finance Act.



Company

Section 2(17) of the act defines company. The term company includes:

   1. any Indian company

   2. any corporate incorporated by or under the laws of country outside India

   3. any institution, association or body which is or was assessable or was assessed as a company
      for any assessment year under the 1922 Act or under the 1961 act

   4. any institution, association or body, whether incorporated or not and whether Indian or non
      Indian, which is declared by general or special order of the board to be a company only for
      such assessment year or assessment years
Indian company

       Indian company means a company formed and registered under the companies act, 1956. Any
company formed and registered under any law relating to companies formerly in force in any part of
India, other than Jammu and Kashmir and the union territories as specified or a corporation
established by or under a central, state or provincial act or any institution, association or a body which
is declared by the board to be company under section 2 (17) are referred as Indian company. In the
case of state of Jammu and Kashmir, a company formed and registered under any law for the time
being in force in the state. Similarly in case of union territories.



Principal Officer

       Any public body or association of persons or any body of individuals or a company or a local
authority is referred as the principle officer. They include the secretary, treasurer, manager or agent
of the authority, company, association or body. Also any person connected with the management or
administration of the local authority, company, association or body upon which the assessing officer
has served a notice of his intention of treating him as the principal officer.



Convertible Foreign exchange

       It means foreign exchange which is for the time being treated by the Reserve Bank of India as
convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 and any
rules made there under.



Foreign Exchange Asset

        It means any specified asset which the assessee has acquired, purchased with or subscribed
to, in convertible foreign exchange.



Investment Income

       It means any income other than dividends derived from a foreign exchange asset.



Long term Capital Gains

       It means income chargeable under the head ―capital gains relating to a capital asset being a
foreign exchange asset which is not a short term capital asset.
Non Resident Indian (NRI)

      It means an individual being a citizen of India or a person of Indian origin who is not a resident.
A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand
parents was born in undivided India.



Specified Asset

This includes any of the following assets—

   1. Shares in an Indian company

   2. debentures issued by an Indian company which is not a private company as defined in the
      companies act, 1956

   3. deposits with an Indian company which is not a private company

   4. any security of the central government

   5. units of the unit trust of India Such other assets as the central government may specify in this
      behalf by notification in the official gazette Under the Income-tax act, every person, who is an
      assessee and whose total income exceeds the maximum exemption limit, shall be chargeable
      to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be
      paid on the total income of the previous year in the relevant assessment year. But the total
      income of an individual is determined on the basis of his residential status in India.



Resident and Non Residents

      Having established the ‗source of income of the ‗person, the next step is to define the
residential status.



Residential Status

       Residential status of an assessee is important in determining the scope of income on which
income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a
given previous year. An individual or HUF assessee who is resident in India may be further classified
into

          (1) resident and ordinarily resident and

          (2) resident but not ordinarily resident.

       Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident
and lowest on a non-resident. Therefore, it is in the assesses advantage that he claims nonresident
status if he satisfies the conditions for becoming a non-resident.
Residential Status of an Individual

        Under section 6(1), an individual is said to be resident in India in any previous year if he
satisfies any one of the following basic conditions:-

          a. He is in India in the previous year for a period of at least 182 days or,

          b. He is in India for a period of at least 60 days during the relevant previous year and at
             least 365 days during the four years preceding that previous year. The aforesaid rule of
             residence is subject to the following     exceptions:-

   1. Where an individual, who is a citizen of India, leaves India in any year for the purpose of
      employment ( or where an individual, who is a citizen of India, leaves India as a member of the
      crew of an Indian ship), he is not to be treated as resident in India in that year unless he has
      been in India in that year for at least 182 Days.

   2. Where an Indian citizen or a person of Indian Origin, who has settled abroad, comes on a visit
      to India in the previous year, he is not to be treated as resident in India in that year unless he
      has been in India in that year for at least 182 Days. In other words, such individuals do not
      become resident in India if they are less than 182 days in India. For such individuals, the
      conditions mentioned in clause (b) above do not apply.

        Therefore, such individuals may stay in India upto 181 days in a given previous year without
becoming resident in India for that previous year. An individual who does not satisfy neither condition
(a) nor condition (b) is non-resident for that previous year. A resident individual may either be an
―Ordinarily Resident‖ mOR ―Not Ordinarily Resident‖ in India for a given previous year. In order to
determine whether a resident individual is ordinarily resident (ROR) or not ordinarily resident (RNOR),
the tests laid down under section 6(6) have to be applied. A resident individual is treated as ROR in
India in a given previous year if he satisfies the following additional conditions:-

   1. He has been resident in India in at least 9 out of 10 previous years (according to basic
      conditions noted above) preceding the relevant previous year; and

   2. He has been in India for a period of at least 730 days during 7 years preceding the relevant
      previous year.

        In brief it can be said that an individual becomes resident and ordinarily resident in India if he
satisfies at least one of basic conditions and both the two additional conditions. An individual who is
resident in India but does not satisfy both the additional conditions is RNOR for that previous year.

       Let us understand the above provisions with the help of a simple example. Mr. X, resident of
Mumbai left India for the first time for USA for higher studies on 7th June, 1996 and returned on 25th
March, 1997. For the previous year 1996-97 (Assessment Year 1997-98), X was in India for 73 days (
From 1st April, 96 to 6th June, 96 and 26th March, 97 to 31st March, 97) X has satisfied the condition
of being at least 60 days in India in P. Y. 1996-97 and of being at least 365 days in the preceding four
previous years (i.e. P. Y. 1992-93, 1993-94, 1994-95 and 1995-96) Therefore, he is resident in India
for previous year 1996-97.
       Since he has gone outside India for the first time, he satisfies the additional two conditions also
for becoming ROR. Accordingly, he is resident in India for P. Y. 1996-97.Let us take another
example. Mr. X, a citizen of India goes abroad for employment on 15th August, 1996 and comes back
on 10th June, 1997. For the previous year 1996-97, X was in India for 136 days ( From 1st April, 1996
to 14th August, 1996) Since X was not in India for at least 182 days in PY. 1996-97, he is non-
resident in India for PY. 1996-97. The second condition of 60 days in the relevant PY and 365 days in
the preceding four previous years is not applicable to him since he is an Indian citizen who has gone
abroad for employment. The following points are very important in determining the residential status
of an assessee:-

   1. The residential status may change from year to year depending on whether the condition for
      residency is satisfied in that year or not.

   2. The residential status under the Income Tax Act, 1961 have no connection with the provisions
      for residency under the Foreign Exchange Regulation Act or any other law in India. A person
      may be resident under FERA and yet be nonresident under the Income Tax Act and vice
      versa.

   3. Residential status must not be confused with the nationality or citizenship of the assessee.
      These are entirely different concepts.



Residential Status of a Hindu Undivided Family (HUF)

       A Hindu undivided family is said to be resident in India if control and management of its affairs
is wholly or partly situated in India. A resident Hindu undivided family is ordinarily resident in India if
the karta or manager of the family is a ROR in India in the relevant previous year. If karta or manager
of a resident Hindu undivided family does not satisfy the two additional conditions, the family is
treated as resident but not ordinarily resident in India. By implication, an HUF becomes non-resident if
the control and management of its affairs is entirely from outside India in the given previous year.
Residential Status of Partnership Firms or Association of Persons A partnership firm or an association
of persons are is said to be resident in India if control and management of their affairs are wholly or
partly situated within India during the relevant previous year. By implication, they will be treated as
nonresident in India if control and management of their affairs are situated wholly outside India.



Residential Status of company

       An Indian company is always resident in India irrespective of where the control or management
of the company is situated. A foreign company is resident in India only if, during the previous year,
control and management of its affairs is situated wholly in India. By implication, a foreign company is
treated as non-resident if, during the previous year, control and management of its affairs is either
wholly or partly situated out of India. Residential status of ―every other person‖ Every other person is
resident in India if control and management of his affairs is wholly or partly situated within India during
the relevant previous year. On the other hand, every other person is non-resident in India if control
and management of its affairs is wholly situated outside India. Scope of Total Income and Incidence
of Tax

        As already discussed, the incidence of income tax is highest in the case of ROR and lowest in
case of NR. While the residential status of an assessee will determine the scope of his income the
legal status (i.e. individual, HUF, firm, company, AOP, etc) will determine the rate of income tax
applicable to the assessee. The following chart indicates the tax incidence on income in different
situations depending on the residential status of the assessee:-

Whether tax incidence arises in the case of                    ROR RNOR NR

      Income received in India                                         Yes   Yes   Yes

      Income deemed to be received in India                            Yes   Yes   Yes

      Income accruing or arising in India                              Yes Yes     Yes

      Income deemed to accrue or arise in India                        Yes   Yes   Yes

      Income received/ accrued outside India from                      Yes   Yes   No

      a business in India

      Income received/ accrued outside India                           Yes   No    No

      from a business controlled outside India
       Income deemed to be received refers to income, which is not actually received in the hands of
the assessee but is nevertheless his income and is to be treated as if it has been actually received by
him. The following incomes are deemed to have been received in India:-

   1. Income Tax deducted at source from income received by the assessee

   2. Annual accretions to the balance of an employee-assessee with a recognized Provident Fund
      to the extent such accretions are taxable. Any contribution by the employer in excess of 12 per
      cent of the employee‘s salary to the PF and interest payable on the balance in excess of 12
      per cent paid accordingly deemed to be received in India and taxed though there is no actual
      receipt. Income deemed to accrue refers to income, which has not actually accrued in the
      hands of the assessee but is nevertheless his income and is to be treated as if it has actually
      accrued in his favor. The following types of incomes are deemed or assumed to accrue or
      arise in India:

   A. All income accruing or arising, whether directly or indirectly:

   B. Through or from any business connection in India

   C. Through or from any property in India

   D. Through / from an asset / source of income in India

   E. Through transfer of capital asset in India

   F. Salaries earned in India or for services rendered in India.
   G. Salaries payable by the government to an Indian citizen for service outside India. However any
      allowance or perquisite paid abroad is fully exempt from tax under section 10(7)

   H. Dividends paid by an Indian Company outside India.

   I. Interest/Royalty/Fees for Technical Services payable by:-

          a)

           b)                                                                            business or
   profession carried on by him outside India or for earning any income from any source outside
   India), or          -resident person, when the interest is payable on any debt incurred or moneys
   borrowed and used for a business or profession carried on by him in India. For example: A has the
   following income during financial year 1999-2000. Compute his taxable income if he is (i) ROR (ii)
   RNOR (iii) NR for that year.

          c)                                                             - Rs.6,000

          d)               operty in UK received in India - Rs.12,000

          e)                                                            - Rs.50,000

          f)                                                                          - Rs.25,000

          g)                                                                          a- Rs.50,000

Taxable Income in India will be as follows:-

                                                         ROR RNOR         NR
Interest from Bank Deposit in UK                         6000 2000       2000
Rent from property in UK                                 12000    0         0
Pension from Indian employer                             50000 50000      50000
Income from business in UK and                           25000     0        0
controlled from UK
Income from business in UK but                           50000 50000        0
controlled from India
______________________________________________________________
Total income                                            143000 102000       52000



      The income tax to be paid by an individual is determined by his residential status. An individual
can be termed as a ‗resident‘ if he stays for the prescribed period during a fiscal year i.e. 1 st April to
31st March either for—

      182 days or more, or
   
       or more in the previous four years. Any person who does not satisfy these norms is termed as
       a ‗non-resident‘.



Taxation of Non-Residents
Introduction

       In recent times Government of India has opened the Indian market and economy to attract
more and more foreign capital and technical know-how. The foreign investors may be Indian
Nationals who resided outside India and other foreign investors including corporations. A person who
resides outside India is technically known as ‗non-residents‘. The residential status of an individual
does not depend upon the nationality or domicile of that person but it depends upon his stay in India
during the previous year. In case of an assessee, other than an individual, the residence depends
upon the place from which its affairs are controlled and managed. If the control and management of
the affairs of a foreign company is, during the previous year, located wholly in India, it shall be treated
as resident in India. Where part of the control and management of the affairs of a foreign company is
situated outside India, it shall be treated as non resident company.

Resident and Non Residents

        An individual can be termed as a ‗resident‘ if he stays for the prescribed period during a fiscal
year i.e. 1st April to 31st March either for—

   

   
       or more in the previous four years.

       Any person who does not satisfy these norms is termed as a ‗non-resident‘. A resident
individual is considered to be ‗ordinarily resident‘ in any fiscal year if he has been resident in India for
nine out of the previous ten years and, in addition, has been in India for a total of 730 days or more in
the previous seven years. Residents who do not satisfy these conditions are called individuals ‗not
ordinarily resident‘. The table below gives the taxability of the individuals:

       Income received or deemed to be received in India in such year by him or on his behalf income
which accrues or arises or is deemed to accrue or arise to him in India during such year income
which is received in the first instance outside India and is subsequently remitted or otherwise
transferred to India is not treated as income received in India for taxation purposes ―Residents‖ and
―ordinarily resident‖ individuals pay tax in India on Indian and foreign incomes; ―non-residents‖ and
―ordinarily not residents‖ pay tax in India on Indian incomes only.

       A non resident is not liable to pay tax on his foreign income until and unless it is received in
India. Remuneration for work done in India is taxable irrespective of the place of receipt.
Remuneration includes salaries and wages, pension, fees, commissions, profits in lieu of or in
addition to salary, advance salary and perquisites. Allowances, deferred compensation and tax
equalization are also taxable. Remittances to India in any previous year out of earlier year‘s income
are not charged to Indian income tax. If a person is a non resident for any year whether he is an
Indian national or not, he is not liable to pay tax on remittances to India out of his income earned
outside India during that year. If a non resident has dealings with any person resident in India at arm‘s
length and on principle to principle basis and all operations are carried outside India, no income will
accrue or arise to him on such dealings. No Income is deemed to arise to him in India if he purchases
goods in India for export even if he maintains an, office in India for the purpose. The income tax act
also grants exemption to certain incomes in hand of the non-residents. In case of a non-resident
being a person engaged in the business of running a news agency or of publishing newspapers,
magazines or journals, no income shall be deemed to accrue or arise in India to him through or from
activities which are confined to the collection of news and views in India for the transmission outside
India.

Certain Incomes of non-residents Taxable in India:

      Profits of Business

      Income from property in India

      Income form any assets or source India

      Income form money brought into India and lent on interest

      Fees for technical services and royalties

       Double taxation relief— to avoid double taxation on the same income in two countries, the
central government may enter into an agreement with the government of any country outside India.

                 a. For grants of relief in respect of income on which income tax has been paid both
under this act and income tax has been paid both under this act in that country

                   b. For the avoidance of double taxation of income under this act and under the
corresponding law in force in that country Taxation - Tax Treaties: Withholding Tax Rates India has
signed tax treaties with various countries, most of which are based on the Organisation of Economic
Cooperation and Development (OECD) Model. These treaties provide a favourable method of
computing taxable business profits. India has tax treaties with over 40 countries including USA, UK,
Japan, Germany and France, with whom it has significant economic relationships. This results in a
relatively lower tax cost

                 c. for foreign companies doing business in India.

Rates for Dividends, Interest, Royalties and Technical Fees (in%)
CHAPTER 3
INDIRECT TAXATION
       So, students by now you must be familiar with the definitions in the Income tax act and hoe to
they imply: Now, I am going to tell you about Indirect taxation: Sales tax is levied on the sale of a
commodity which is produced or imported and sold for the first time. If the product is sold
subsequently without being processed further, it is exempt from sales tax. Sales tax can be levied
either by the Central or State Government, Central Sales tax department. Also, 4 per cent tax is
generally levied on all inter-State sales. State sales taxes, that apply on sales made within a State,
have rates that range from 4 to 15 per cent. Sales tax is also charged on works contracts in most
States and the value of contracts subject to tax and the tax rate vary from State to State. However,
exports and services are exempt from sales tax. Sales tax is levied on the seller who recovers it from
the customer at the time of sale.



The power to levy Sales tax :

   1. No state can levy sales tax on any sale or purchase where such sale or purchase takes place
      (a) outside the state and (b) in the course of import of goods into or export of goods outside
      India.

   2. Only the parliament can levy tax on inter-state sale or purchase of goods.



Main Principles in State Sales Tax Laws

   1. A sale or purchase of goods is said to take place when the transfer of property in the existing
      goods or future goods takes place for consideration of money.

   2. The goods have been divided into different categories and different rates of sales tax are
      charged for different categories of goods.

   3. In most of the cases related to the sales tax, the tax on the sale or purchase of goods is at
      single point.

   4. Under the provisions of some state laws the assesses are divided into several categories such
      as manufacturer, dealer, selling agent etc. and such as assess is required to obtain a
      registration certificate to that effect. The sales tax or the purchase tax is levied on that
      assessee on the basis of his category such as dealer, manufacturer etc. on production of
      certain forms or certificates (and differential rates of sales tax are levied).

   5. Generally , a quarter return of sales or purchases is insisted upon and the assessee is
      required to furnish the return in the prescribed form.
   6. At the time of assessment, the assessee has to furnish all the documentary evidence and
      satisfy the concerned sales tax / commercial tax officer.

   7. The sales tax laws of the states prescribe the procedure to be followed in case an assessee
      prefers to make an appeal.

   8. Every dealer should apply for registration and obtain a registration certificate to that effect. The
      registration certificate number should be quoted in all the bill / cash memos.



Inter State Trade or Commerce

    A sale or purchase of goods shall be deemed to take place in the course of interstate trade or
commerce if the sale or purchase—

          a. occasions the movement of goods from one state to another

          b. is effected by a transfer of documents of title to the goods during their movement from
             one state to another



Transactions not amounting to inter-state sales

       Not all dispatches of goods from one state to another result in inter state sales rather the
movement must be on account of a covenant or incident of the contract of sales. There are some
instances wherein the goods are moved out of the selling state and yet they are not considered inter
state sales

          -state sales

   

   

   

                                                 tract



Sales Tax ID number

       A state sales tax ID number is basically a business version of your Social Security number
under which you collect and pay tax for any service or product you sell that qualifies for taxation in
your state. The state department of taxation provides sales tax ID numbers and it takes about a
month to get one. The rule of thumb for sales tax is that most services are exempt and most products
are taxable except for food and drugs.
       However, states have been gradually adding to the list of services that are taxable for the last
few years. Check with your state department of taxation to determine if the product or service you sell
is taxable in your state.



Exception in the sales taxes :

   

                 -exempt institutions such as schools or charities.

Taxation - Capital Gains Tax

       Section 45 to 55A of the Income-tax act, 1961 deal with the capital gains. Section 45 of the
Act, provides that any profits or gains arising from the transfer of a capital asset effected in the
previous year shall, save otherwise provided in section 54, 54B, 54D, 54EA, 54EB, 54F 54G and 54H
[with effect from 1-4-1991] be chargeable to income-tax under the head ―Capital Gains‖ and shall be
deemed to be the income of the previous year in which the transfer took place.
CHAPTER 4
TAXATION
       Doubts may arise as to whether ‗Capital Gains‘ being capital receipt cab be brought to tax as
income. It may be noted that the ordinary accounting canons of distinctions between a capital receipt
and a revenue receipt are not always followed under the Income-tax Act. Section 2(24) of the Income-
tax Act specifically provides that ―income‖ includes ‗any capital gains chargeable under section
45‘.The requisites of a charge to income tax, of capital gains under section 45 are :-

        There must be a capital asset The capital asset must have been transferred The transfer must
have been affected in the previous year There must be a gain arising on such transfer of a capital
asset. Short-term and long-term capital gains: Gains on sale of capital assets held for more than
three years (one year for listed securities or mutual fund units) are treated as long-term capital gains
and are taxed at concessional rates compared short-term capital gains. While calculating taxable
long-term capital gains, the cost of acquisition and the cost of improvement are linked to a cost
inflation index. As a result, the indexed cost of acquisition is deducted from the sale consideration
received, to arrive at the capital gain. Long-term capital gains are taxed at a flat rate of 20 per cent for
individuals and foreign companies, and 30 per cent for domestic companies. Long-term capital gains
on the transfer of shares/ bonds issued in a foreign currency under a scheme notified by the Indian
Government are taxed at 10 per cent.



Capital Gains for the NRIs

       For non-residents, the capital gains arising from the transfer of shares and debentures are
calculated in the original currency of acquisition. Therefore, no tax is payable merely because of the
devaluation of the Indian Rupee vis-à-vis other currencies. However, no tax is payable on the transfer
of shares in an Indian company by one non-resident to another if the transfer is in pursuance of a
scheme of amalgamation and certain conditions are satisfied. Income of Offshore Funds and non-
residents from units purchased in foreign currency and capital gains on their transfer are taxed at 10
per cent. In the case of Foreign Institutional Investors, income from investment in securities (vis
dividends, interest) is taxed at 20 per cent, while capital gains on transfer of these securities are
taxed at 10 per cent (long-term) and 30 per cent (short-term).



Concession and Set Off

       The concessional treatment allowed to long-term capital gains is not applicable to short-term
capital gains. Short term capital gains are computed as the sale price or consideration less cost of
acquisition and related expenses. The taxable short term gain is aggregated with taxable income from
other income classes, and is taxed at the overall tax rate applicable to the assessee.
       Any capital losses made in a particular year can be set off only against capital gains made in
the same year. If set-off is not possible, these capital losses can be carried forward for a period of
eight years, and set off against the capital gains of subsequent years.



The rates which are applicable:

Description Long Term Short Term

Companies 20 % Normal Income Tax Rates

Individuals 20 % Normal Income Tax Rates

NRI‘s 10 % FII‘s 10 % 30 %

Taxation - Incentives, Rebates and Allowances - General Tax



Incentives

       In each section of Personal Tax (income tax), Indirect taxes(sales, excise & customs duty) and
the corporate taxes there are certain rebates given to the tax payer if he fits in the prescribed criteria.
These concessions or Tax Holidays as they call are meant to attract more and more people to pay
tax. These rebates also mean less ‗pinch‘ on the pockets and a good fast growth of economy.



General Tax Incentives

       The Government offers many incentives to investors in India with a view to stimulating
industrial growth and development. The incentives offered are normally in line with the government‘s
economic philosophy, and are revised regularly to accommodate new areas of emphasis. The
following are some of the important incentives offered, which significantly reduce the effective tax
rates for the beneficiary companies:



Five year tax holiday for:

Firms engaged in exports. New industries in notified states and for new industrial units established, in
electronic hardware/software parks. Export Oriented Units and units in Free Trade Zones.



Investor considerations

                                         aw is administered by the Department of Revenue under the
       Central Ministry of Finance

   
   

   

      The tax system is based on self-assessment.

                    -size and large taxpayers are subject to scrutiny assessment.

   

                                                           cified installments.

   
       Administration of the tax system

       Income tax on all income other than agricultural income is levied and collected by the central
government and shared with the states. The provisions relating to income tax (both the determination
of the taxable income and the administration of the law) are contained in the Income Tax Act 1961
and the Income Tax Rules 1962. The Department of Revenue under the Ministry of Finance of the
central government is responsible for administering the law and collecting the tax.



Corporate tax payers
Tax returns

        The accounting year for tax purposes must end on March 31.Every company is required to file
its income tax return for the accounting period ended March 31 by the following November 30. Failure
to file a return must be filed on a prescribed preprinted form, duly verified and signed, sic losing the
taxable income, showing the details of its computation and enclosing the audited accounts. In
specified cases, the form should also enclose a separate report from the auditors in a prescribed form
certifying various particulars necessary for the tax assessment. A late return can be filed within two
years from the end of the accounting year or before completion of the assessment, whichever is
earlier.

       However, failure to file the return by November 30 following the March 31 year end attract
interests for the period of default at the rate of 2 percent per month on the tax liability as finally
assessed less advance tax paid and taxes withheld. In addition, losses incurred cannot be carried
forward or set off against future profits unless the return is filled by that time. A return already filled
can be revised within two years from the end of the accounting year or before completion of
assessment, which ever is earlier. Since the full tax on the basis of the returned income must be paid
before the return is filed the system amount to one of self assessment.



Assessments

      As noted above the tax return constitutes a self-assessment. Generally, the return is accepted.
Subject to adjustments for arithmetical errors and prima facie additions and deletions, and the
shortfall or excess in the tax already paid is demanded or refunded, respectively. In the event of an
adjustment, an additional income tax equal to 20 percent of the tax on such adjustment is payable.
However, the notice of the shortfall cannot be sent after three years from the end of the accounting
year.

        If the assessing officer considers it necessary to scrutinize the return, a notice calling on the
taxpayer to appear and produce evidence in support of the return must be served on the taxpayer
within one year from the end of the month in which the return is furnished. In such as case, an
assessment order is passed after detailed scrutiny, determining the income or loss and the sum
payable. The assessment order cannot be passed beyond three years from the accounting year-end.
Cases may be opened or reopened if the assessing officer has reason to believe that income has
escaped assessment. Where a scrutiny assessment or reassessment has already been made, the
case can be reopened within four years from the end of the assessment year in any event, beyond
four years but within seven years if the escaped income is likely to be Rs 50,000 or more and within
ten years if the escaped income is likely to be Rs 100,000 or more. No reopening is possible beyond
our years unless the income has been overlooked because of failure to furnish the return or to
disclose fully and truly all material facts. Where no scrutiny assessment or reassessment has been
made, cases can be opened (e.g., where no return is filed) or reopened within four years from the end
of the assessment year in any event and beyond four years upto seven years if the escaped income
is likely to be Rs 50,000 or more. A reassessment must be completed within two years from the end
of the financial year (i.e., year ended March 31) in which the notice of opening or reopening is served.

       An obvious mistake in the assessment order may be rectified within four years from the end of
the financial year in which the order was passed. The Commissioner can revise the order passed by
an assessing officer within two years from the end of the financial year in which the order was
passed. Refunds arising form assessments and appellate orders are granted without any application.
In other cases, a refund application must be made within two years from the end of the accounting
year.



Appeals

        In the case of an over assessment, an appeal to the Commissioner of Income Tax (Appeals)
may be filed within 30 days. Either the assessing officer or the taxpayer may appeal from the
Commissioner‘s order to the Income Tax Appellate Tribunal within 60 days. From the Tribunal‘s
order, either party may appeal (only on points of law) to the High Court and from there to the
Supreme Court. Alternatively, a taxpayer may file a revision petition to the Commissioner of Income
Tax within one year from the receipt of the assessing officer‘s order. Each appellate authority passes
a written order after considering the arguments and evidence put forward. Generally, accountants can
appear t all levels below the High Court. Only lawyers can appear before the High Court or the
Supreme Court. If an adjustment results in double taxation contrary to treaty provisions, the taxpayer
is entitled to present its claim to the competent authority in the taxpayer‘s country of residence.
Payment and collection

      Taxes are collected through estimated advance tax payments, withholding at source and self-
assessment, i.e., balance payment with the return as filed. Additional amounts become due if the
assessed income is higher than the returned income.



Advance tax

       Corporate taxpayers are required to estimate their tax liability (less taxes withheld) and make
advance payments in four installments- at least 15 percent before June 15, at least 45 percent
(including the 15 percent) before September 15, at least 75 percent (including the 45 percent) before
December 15, and the balance before March 15 within the accounting year. If the advance tax paid is
less than 90 percent of the ultimate tax liability, interest is payable at the rate of 2 percent per month.
Deferral of installments of advance tax subjects the taxpayer to interest at the rate of 1.5 percent pr
month. If the advance tax paid plus the tax withheld falls short of the tax on the returned taxation
income, the difference (called self-assessment tax) must be deposited (along with all interest due)
before the return is filed. Additional taxes, interest, etc., demanded by the Tax authorities must paid
within 30 days, failing which interest is incurred at 1.5 percent per month.



Withholding taxes

       Taxes are required to be withheld at source from interest, dividends, payments exceeding
Rs.120,000 in a particular financial year by way of rent, and all payments to nonresidents (at the rates
indicated in Appendix IV). Tax is also required to be ducted from payments to contractors and sub-
contractors, fees for professional or technical services, winnings from lotteries and horse races, and
insurance commissions. Employers are responsible for with holding tax from wages, salaries and
other remuneration paid to employees, taking into account values of perquisites and certain
deductions and rebates to which the employees are entitled. Tax for the purpose of withholding is
calculated at the same rates as shown in Appendix VI.

       Taxes withheld must be deposited and information returns must be filed by the payer within the
specified time limits. The payee is granted full credit for the tax withheld against the final tax liability
upon production of tax deduction certificates obtained from the payer



Tax audits

       As notes above, an assessing officer who considers it necessary to scrutinize the return issues
a notice within a specified time requiring the taxpayer to appear and produce books and evidence in
support of the returned income and the claims made. Accountants or lawyers often appear on behalf
of the taxpayers before the assessing officer. The assessing officer in the assessor‘s office reviews
the books and evidence in various degrees of detail before the assessment order is passed. In
practice, most medium-size and large companies are selected for such scrutiny assessment every
year. Normally, the Tax authorities in the taxpayer‘s premises do not conduct audits.
Penalties

       The Income Tax Act provides for civil penalties for nonpayment of self-assessment tax,
deliberate filing of false returns, false statements, defaults in payments of taxes demanded, etc. In
addition, the Act provides for prosecution in specified cases.



Statute of limitations

       The Income Tax Act, sets various limitations periods for filing of returns, completion of
assessments, reopening of assessments, etc. These periods are discussed generally under ―Tax
returns‖ and Assessments‖ above.



Individual taxpayers

       Individuals are required to file their returns for the year ended March31 by the following June
30, unless there is income from a business or profession (in which case the due date is August 31) or
the accounts must be audited (in which case the due date is October 31). Other administrative
pro9cedures (except the system for payment of advance tax discussed below) are generally the same
as those for corporations discussed above. Residents and nonresidents are treated alike.



Advance tax

       Individuals are required to estimate their tax liability (less taxes withheld) and pay such taxes in
advance in three installments-at least 30 percent before September 15, at least 60 percent (including
the 30 percent) before December 15 and the balance before March 15.



Community property

       The tax laws do not recognize community property of husband and wife (except to a limited
extent in Goa and the very small territories of Daman and Diu - like Goa previously under Portuguese
administration- and Dadra and Nagar Haveli). However, there is in India a special indigenous
Concept called the Hindu undivided family (HUF) where, under Hindu laws, certain property can be
held in common by the family, in which case the HUF is treated as a separate entity and taxed
accordingly



Spouse

       Every individual who has a taxable income must file a separate return. Joint returns are not
permitted. However, as an ant avoidance measure, income from property transferred by an individual
to a spouse without adequate consideration or the spouse‘s remuneration from a concern in which
the individual has at least a 20 percent interest may, in certain circumstances, beincluded in the
individual‘s income.



Minor

       As an anti avoidance measure, a minor‘s income (except from manual work or exercise of skill
or talent) is included in the income of the parent having higher income. Foreign personnel / Exit
Permit The returns filing requirements, assessments and procedures for foreign personnel are the
same as those described above for individuals. An additional requirement is that a person not
domiciled in India must obtain a tax clearance certificate from the Tax authorities before leaving the
country if present in India continuously for more than 120 days.



Other Taxes

     An individual is liable to wealth tax on net wealth above a specified limit and gift tax on gifts
made beyond a specified aggregate amount.



Trusts and Partnerships

       A trust or partnership is required to file its return for the year ended March 31 by the following
June 30 unless it has income from business, in which case the due date is August 31, or it is required
to be audited, in which case the due date is October 31. If a partnership is required to be audited, the
due date for filing a partner‘s return is October 31. The partners pay tax on salaries and interest
received from the firm, and the firm pays tax on the balance profits. A trust is treated as an entity if
the shares of the beneficiaries are in determinative and as a conduit otherwise. Certain charitable
trust fulfilling specified conditions are exempt from tax. Other procedural matters relating to
assessments, appeals, etc., are the same as in the case of corporations. Procedures for payment of
advance tax are, however, the same as in the case of an individual taxpayer.



Investor considerations

   

   
        companies in certain cases.

   

                      ns apply to venture funds and venture capital companies.

           -term capital gains have lower tax incidence.
   
       setting up on new industrial undertakings under certain circumstances.

   
       operating new infrastructure facilities and power-generating units.

                                                                                      epreciation can be
       carried indefinitely. No carry back is allowed.

   

   

                               long-term capital gain income earned by an infrastructure fund or
       company from investments in shares or long-term finance in enterprises carrying on the
       business of developing, monitoring and operating specified infrastructure facilities or in units of
       mutual funds involved with the infrastructure of power sector is proposed to be tax exempt.



Corporations and shareholders

       India follows the ―classical‖ system: companies are taxed at flat rates and dividends distributed
are included in the taxable income of shareholders. However, a domestic company receiving
dividends from another domestic company is entitled to deduct the amount of dividends received to
the extent of the dividends it distributes to its own shareholders before the due date for filing the
return. Individual shareholders are permitted to deduct dividends received from Indian companies to a
specified extent. Tax is withheld from dividends distributed, and shareholders get full credit for that
amount against their tax liability, but they do not get credit for the underlying corporate tax paid by the
company. Residents receiving dividends from foreign companies get credit for foreign tax paid to the
extent of the extent of the Indian tax on the doubly taxed income, either unilaterally or under treaty.



Taxable entities

        A ―company‖ means an Indian company or a corporate body incorporated by or under the laws
of a foreign country. A company is treated as resident if its is an Indian company or if during the years
the control and management of its affairs are situated wholly in India.



Territoriality

       A resident company is taxed on its worldwide income. A nonresident company is taxed only on
income that is received in India, arises in India or is deemed to arise in India, subject, however, to
treaty provisions.
CHAPTER V
GROSS INCOME
Accounting methods

       Under the Indian Companies Act, accounting must be on an accrual basis, and this is adopted
for tax purposes. Dividends are taxed in the year in which they are declared, and capital gains are
taxed in the year in which the capital asset is transferred. However, certain deductions, such as
statutory dues, bonuses or commissions to employees, as well as interest on borrowings from public
financial institutions, are permitted only on a cash basis (however, they are allowed if paid within the
due date for filing the return), and deductions for contributions to approved retirements funds are
permitted only on a cash basis and if they are paid within the specified due dates applicable to the
funds. I is proposed under the Finance Bill 1996 that the rule for interest be applied to scheduled
banks as well.



Business profits

       Taxable profits are accounting profits as modified by specific statutory provisions (e.g.,
adjustment for non allowable terms, allowances and losses carried forward). Inter company
transactions Generally, inter company transactions are accorded the same tax treatment as
transactions with unrelated parties if they are negotiated at arm‘s length. However, note should be
taken of the following.

   1. In cases of payments to specified related parties, the assessing officer is empowered to
      disallow as much thereof as is considered excessive or unreasonable with respect to the fair
      market value, legitimate business needs and benefits derived (there is no specific provision for
      corresponding adjustment in the hands of the payee).

   2. Where, due to close connection with nonresident, the transaction produces less than ordinary
      profits to the resident, the assessing officer can substitute reasonable profits for the profits
      shown.

   3. Where by design an income-producing asset is transferred to a nonresident while the resident
      continues to have power to enjoy the income or obtains the income in the guise of a loan or
      repayment of a loan, the income in the guise of a loan or repayment of a loan, the income may
      be taxed in the hands of the transferor.

   4. No capital gain or loss is recognized on transfer of capital assets between a company and its
      100 percent subsidiary if the transferee is an Indian company, provided the relationship
      continues for at least eight years.

   5. The base for calculating depreciation remains unchanged in the case of transfer of depreciable
      assets between a company and its 100 percent subsidiary if the transferee is an Indian
      company, irrespective of the actual transfer price.
   6. Advances or loans given by a closely held company to its shareholders are treated as
      dividends. A closely held company is a private company, a company whose shares are not
      lasted on any stock exchange in India or a company more than 50 percent (60 percent in the
      case of manufacturing companies) of whose shares are beneficially held through out the year
      by other closely held companies. Inventory valuation Any method of inventory valuation that
      accords with sound commercial accounting principles can be followed for tax purposes,
      provided it is adopted consistently at the beginning and end of the accounting periods over the
      years. Subjected to this general proposition, in practice inventory is usually valued at (1) cost
      or (2) cost or market value, whichever is lower. For determining cost, FIFO or the average-cost
      methods is used. Reserves for obsolescence cannot be deducted. Obsolete items are usually
      reflected by lower year-end values where the valuation is at the lower of cost and market
      value.



Capital gains

        Gains arising on the transfer of capital assets are subject to tax as capital gains. Capital assets
include property of any kind, but exclude personal effects other than jewelry, inventories held for the
purpose of business and agricultural land situated more than eight kilometers from a town with a
population of 10,000 or more. Capital gains arising from the transfer of depreciable assets that form
part of a ―block of assets‖ are treated as short-term capital gains and computed by deducting from the
sale price the following amounts.

   1. Written-down value of the block of assets at the beginning of the previous year.

   2. Actual cost of assets falling within the particular block that were acquired during the previous
      year. Capital gains on other assets are computed by deducting from the sale price the
      following amounts.

             Actual cost of the asset.

             Cost of improvements made to the asset.

             Expenditure incurred in connection with the transfer.

       While computing capital gains from the transfer of shares and other specified securities held
for more than one year and other assets held for more than three years (long-term capital gains),
actual cost and cost of improvement are to be increased by a specified inflation factor (with fair
market value on April 1, 1981 as the base if the asset was held from before than date). In calculating
capital gains on shares and debentures in Indian companies, nonresidents have the benefit of
protection against falls in the value of the rupee vis-à-vis the foreign currency in which the asset was
acquired.

        However, in such cases, no indexation for inflation is available. Special rules and rates apply
for the computation of gains earned by approved foreign institutional investors. Short tem capital
gains are taxed at the same rate as other income. Long-term gains are taxed at 20 percent for
individuals, 30 percent for domestic companies and 20 percent for non domestic (i.e., foreign)
companies. However, the rate is 10 percent on long-term capital gains from the transfer of units of
Indian mutual funds purchased in foreign currency by specified overseas financial organizations and
from the transfer by nonresidents of shares or bonds issued abroad by Indian companies under
approved schemes. Concessional tax rates for computation of capital gains are applicable to
approved foreign institutional investors. Long -term capital gains income of venture capital funds or
venture capital companies from the transfer of equity shares of venture capital undertaking are wholly
exempt from taxation.

       No capital gains tax is assessed on the transfer of assets between a parent company and its
100 percent-owned subsidiary provided this relationship continues for at least eight years from the
date of transfer and the capital asset is not converted by the transferee company as its stock-in-trade
(inventory) at the time of transfer. Also there is no capital gains tax on transfers in cases of specified
amalgamations or when buildings, land, and plant and machinery are sold upon the relocation of an
industrial undertaking from an urban to a non urban area if the sale proceeds are reinvested in similar
assets in the new area within a specified period. Furthermore, no capital gains tax is imposed on
transfers abroad by one nonresident to another of shares or bonds issued abroad by Indian
companies under specified schemes or on transfers of shares in Indian companies by one foreign
company to another in an amalgamation if at least 25 percent of the shareholders of the
amalgamating company become shareholders of the amalgamated company and the transfer is
exempt from capital gains tax in treatment of losses arising on transfer of capital assets. Interest

Interest is taxable on an accrual basis. In the absence of any thin-capitalization rule, interest is never
treated as dividends.

Certain interest received by nonresidents is exempt from tax, including the following.

   1. Interest payable by industrial undertakings in India on Borrowings from approved foreign
      financial institutions.

   2. Interest at approved rates on debts incurred in a foreign country for the purchase outside India
      of raw materials or machinery and equipment.

   3. Interest on approved foreign currency loans from sources outside India.

   4. Interest payable by Indian financial institutions or banks at approved rates on borrowing from
      foreign sources. Any other interest from foreign borrowings where the funds are utilized in a
      business in India is subject to tax, which is withheld at rates shown in Appendix IV. A lower tax
      rate of 10 percent applies to interest on bonds issued abroad by Indian companies under
      approved schemes.



Inter company dividends

       A domestic company receiving dividends from another domestic company is entitled to deduct
them when computing its taxable income, to the extent covered by the dividends it distributes to its
own shareholders before the due date for filing its return. Dividends received by foreign companies
from Indian companies are taxed at 20 percent or a lower treaty rate. A lower tax rate of 10 percent
applies to dividends in certain cases. Dividends received by a venture capital funds or company from
venture capital undertakings are wholly exempt from taxation.
Stock dividends

      Bonus shares (stock dividends) are not taxed in the hands of the recipient shareholders.



Dividends-in-kind

      Dividends-in-kind are virtually unknown. If received, they are taxed like ordinary dividends.



Royalties and service fees

      Royalties and fees for technical services received by Indian companies from Indian concern
are taxable in full. Fifty percent of royalties and fees for technical services received by Indian
companies and other residents in convertible foreign exchange from foreign governments or foreign
concerns are exempt from tax.



Nontaxable Income

   1. Nontaxable income items that may be received by companies include the following.

   1. Interest on certain tax-free bonds.

   2. Agricultural income (but certain types are liable to agricultural income tax levied by state
      governments).

   3. Certain interest received by nonresidents.

   4. Payments made by an Indian company engaged in the business of operation of aircraft to a
      foreign enterprise in order to acquire an aircraft of aircraft engine on lease, provided the
      agreement is approved by the central government.

   5. Subsidies received by tea, rubber, coffee, and cardamom companies from their boards for
      replantation, replacement, rejuvenation, or consolidation.

   6. Income of nonresident companies and nonresident news agencies shooting cinematographic
      films in India not having an Indian shareholder or partner.

   7. Profits of new industrial undertakings set upon free-trade zones, Software / Hardware
      Technology Parks and 100 percent export-oriented undertakings for five consecutive years
      during the first eight years. It is proposed that interest income on foreign currency loans to
      industrial undertakings involved in the operation of ships or aircraft or in the construction and
      operation of rail system also be nontaxable.
CHAPTER 6

INCOME UNDER THE HEAD SALARY

Computation of taxable income under various head of income

An understanding of the Income-tax law requires a study of the following:

          A. The Income-tax Act, 1961 (amended up-to-date)

          B. The Income-tax Rules, 1962 (amended up-to-date)

          C. Circulars, clarifications issued from time to time by the CBDT

          D. Judicial decisions

       The Income-tax Act, 1961 (Amended upto date): The provisions of income-tax are contained in
the Income-tax Act, 1961 which extends to the whole of India1 and became effective from 1-4-1962
(Section 1). Scope of Income-tax Act: The Income-tax Act contains provisions for determination of
taxable income, determination of tax liability, procedure for assessment, appeals, penalties and
prosecutions. It also lays down the powers and duties of various Income-tax authorities.

        Since the Income-tax Act, 1961 is a revenue law, there are bound to be amendments from
time to time in this law. Therefore, the Income-tax Act has undergone innumerable changes from the
time it was originally enacted. These amendments are generally brought in annually along with the
Union Budget. Besides necessary, the Government introduces amendments in the form of various
Amendment Acts and Ordinances.



Annual amendments

       Every year a Budget is presented before the Parliament by the Finance Minister. One of the
most important components of the Budget is the Finance Bill, which declares the financial proposals
of the Central Government for the next financial year. The Bill contains various amendments which
are sought to be made in the areas of direct and indirect taxes levied by the Central Government. The
Finance Bill also mentions the rates of income-tax and other taxes which are given in the First
Schedule attached to such Finance Bill. The First Schedule gives the rates of income-tax in 4 parts:

Part-I : It gives the rates of income-tax for various assesses for the current assessment year e.g. the
Finance Act, 2003 has given the rates of Income-tax for the assessment year 2003-04 and the
Finance Act, 2004, shall give the rates of Income-tax for assessment year 2004-05.

Part-II : It gives the rates for deduction of tax at source from the income earned in the current
financial year e.g. the Finance Act, 2003 has given the rates at which tax is to be deducted at source
in the financial year 2003-04. Similarly, Finance Act, 2004 shall give the rates of TDS on the income
earned during the financial year 2004-05.
Part-III : It gives the rates for calculating income-tax for deducting tax from income chargeable under
the head ‗Salaries‘. The same rates are applicable for computation of advance tax to be paid in the
current financial year, e.g., Finance Act, 2003 has given the rates for the computation of advance tax
for the assessment year 2004-05 and the Finance Act, 2004 shall give the rates of advance tax for
assessment year 2005-06.

   1. When the Finance Bill is approved by both the Houses of Parliament and receives the assent
      of the President, it becomes the Finance Act. The provisions of such Finance Act are
      thereafter incorporated in the Income-tax Act.

   2. Part-III of Schedule I of a particular Finance Act, which gives the rates for computation of
      Advance Tax and TDS on salary, etc., generally becomes Part-1 of the subsequent Finance
      Act. e.g., Finance Act, 2003, Part-III has given the rates for computation of Advance tax for
      Assessment Year 2004-05. The same rates shall become the rates of income-tax for
      Assessment Year 2004-05, in the Finance Act, 2004. Similarly, rates given under Part III of
      Schedule I of Finance Act, 2004 will become Part I of Schedule I of Finance Act, 2005 and
      these will be the rates of income-tax for Assessment Year 2005-06.

   3. Besides the rates which are given in the Finance Act every year, there are certain incomes
      which are taxable at the special rates given in the Income-tax Act itself e.g. long-term capital
      gain is taxable @ 10%/20% and income from lotteries, crossword puzzles, etc. are taxable @
      30% for assessment year 2004-05. Existing Finance Act to have effect pending legislative
      provision for charge of tax [Section 294]: If on the first day of April in any assessment year, the
      provision has not yet been made by a Central Act for the charging of income-tax i.e. the
      Finance Act has not been enacted, the provisions of the previous Finance Act would continue
      to be effective. In case the Finance Bill is before the Parliament but has not yet been passed,
      then the rates at which the income is to be taxed shall be the rates prescribed in such Bill or
      the rates prescribed in the preceding Finance Act, whichever are more favorable to the
      Income-tax Rules, 1962 (amended up to date):

        Every Act normally gives power to an authority, responsible for implementation of the Act, to
make rules for carrying out purposes of the Act. Section 295 of the Income-tax Act has given power to
the Central Board of Direct Taxes to make such rules, subject to the control of Central Government,
for the whole or any part of India. These rules are made applicable by notification in the Gazette of
India. Circulars and Clarifications by CBDT: The CBDT in exercise of the powers conferred on it
under section 119 has been issuing certain circulars and clarifications from time to time, which have
to be followed and applied by the Income-tax Authorities.

       Such circulars or clarifications are binding upon the Income-tax Authorities, but the same are
not binding on the assessee and ITAT, although the assessee can claim benefit under such circulars.
[UCO Bank v CIT (1999) 237 ITR 889 (SC)]. Judicial decisions: Any decision given by the Supreme
Court becomes a law which will be binding on all the Courts, Appellate Tribunals, the Income-tax
Authorities as well as on all the assessees. Where there are apparently contradictory rulings by the
Supreme Court, the decision of larger bench (whether earlier or later in point of time) should always
prevail. However, where the apparently irreconcilable decisions are given by benches having equal
number of judges, the principle of the later decision being applicable would be attracted. Decisions
given by a High Court, Income-tax Appellate Tribunal, etc. are binding on all the assessees as well as
the Income-tax Authorities which fall under their jurisdiction, unless it is over-ruled by a higher
authority. The decision of a High Court is binding on the Tribunal and the Income-tax Authorities
situated in the area over which the High Court has jurisdiction.



Scheme of Taxation

       Every person, whose total income of the previous year exceeds the maximum amount which is
not chargeable to income tax, is an assessee and chargeable to income-tax at the rate or rates
prescribed in the Finance Act for the relevant assessment year. However, his total income shall be
determined on the basis of his residential status in India. An analysis of the above statement would
reveal the following important concepts, which are necessary for understanding the framework of the
Income-tax Act.

   1. Person;

   2. Assessee;

   3. Assessment year;

   4. Previous year;

   5. Rate or rates of tax;

   6. Charge of income-tax;

   7. Maximum amount which is not chargeable to income-tax;

   8. Total income;

   9. Residential status.



Important Concepts

Person [Section 2(31)]: Person includes:

   i.     An Individual;

   ii.    A Hindu Undivided Family (HUF);

   iii.   A Company;

   iv.    A Firm;

   v.     An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or
          not;

   vi.    A local authority;

   vii.   Every artificial juridical person not falling within any of the preceding sub-clauses.
      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.
[Explanation to section 2(31)].

a. An individual means a natural person i.e. a human being. It includes a male, female, minor
child and a lunatic or idiot. However, the income of a minor is now generally included in the income of
parent. The assessment of lunatic or idiot or minor whose income is taxable in his own hands is done
in accordance with the provisions of section 160 i.e. through representative assessee.

b. A Hindu undivided family has not been defined under the tax laws. However, as per the Hindu
law, it means a family which consists of all persons lineally descended from a common ancestor
including their wives and unmarried daughters.

c. Association of persons: The Income-tax Act does not define what constitutes an association of
persons which under section 2(31)(v) of the Income-tax Act, 1961 is an entity or unit of assessment.
In the absence of any definition, the words must be construed in their plain ordinary meaning.
Association of persons means two or more persons who join for a common purpose with a view to
earn an income. [CIT v Indira Balkrishna (1960) 39 ITR 546 (SC)] It need not be on the basis of a
contract. Therefore, if two or more persons join hands to carry on a business but do not constitute a
partnership, they may be assessed as an Association of Persons (AOP).

        An Association of Persons does not mean any and every combination of persons. It is only
when they associate themselves in an income-producing activity that they become an association of
persons. They must combine to engage in such an activity; the engagement must be pursuant to the
combined will of the persons constituting the association; there must be a meeting of the minds, so to
speak. In a nutshell, there must be a common design to produce income. Co -heirs, co-legatees or
co-donees joining together for a common purpose or action would be chargeable as an association of
persons. In the case of an association of persons, there were conflicting judgments whether the
Assessing Officer has the option, to assess the tax either on the association itself as a unit of
assessment or on the members of the association as individuals in respect of their respective share
of the profits made by the association. The Supreme Court in the case of ITO v Ch. Atchaiah (1996)
218 ITR 239 has held that no such option is provided to the Assessing Officer under the 1961 Act. If it
is the income of the Association of Persons in law, the Association of Persons alone has to be taxed;
the members of the Association of Persons cannot be taxed individually in respect of the income of
the Association of Persons.

d. Body of individuals (BOI) means a conglomeration of individuals who carry on some activity with
the objective of earning some income. It would consist only of individuals. Entities like companies or
firms cannot be members of a body of individuals. Income-tax shall not be payable by an assessee in
respect of the receipt of share of income by him from BOI and on which the tax has already been paid
by such BOI.

Distinction between AOP and BOI

1. An AOP may consist of non-individuals but a BOI has to consist of individuals only. If two or more
   persons (like firm, company, HUF, individual etc.) join together, it is called an AOP. But if only
   individuals join together then it is called a BOI. For example, where X, ABC Ltd. and PQ & Co. (A
   firm) join together for a particular venture then they may be referred to as an AOP. If X, Y and Z
   join together for a particular venture, but do not constitute a firm then they may be referred to as a
   body of individuals.

2. An AOP implies a voluntary getting together for a common design or combined will to engage in
   an income producing activities, whereas a BOI may or may not have such common design or will.

e. A local authority: The expression local authority means:

           i.      Panchayat as referred to in clause (d) of Article 243 of the Constitution; or

           ii.     Municipality as referred to in Article 243P of the Constitution; or

           iii.    Municipal Committee and District Board, legally entitled to, or entrusted by the
                   Government with, the control or management of a Municipal or local funds; or

           iv.     Cantonment Board as defined in section 3 of the Cantonments Act, 1924.

       Artificial juridical persons are entities which are not natural persons but are separate entities in
the eyes of law. Though they may not be sued directly in a court of law but they can be sued through
persons managing them. Therefore, God, idols and deities are artificial persons. Though they may not
be sued directly they can be legally sued through the priests or the managing committee of the place
of worship, etc.

       They are persons and their income, like offerings, is taxable. However, under the Income-tax
Act, they have been provided exemption from payment of tax under separate provisions of the Act, if
certain conditions mentioned therein are satisfied.

         Similarly, all other artificial persons, with a juristic personality, will also fall under this category,
if they do not fall within any of the preceding categories of persons e.g., University of Delhi is an
artificial person as it does not fall in any of the six categories mentioned above.



Computation of total income

       Now, we are going to study how the total income is computed:

Heads of income

Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax
and computation of total income, be classified under the following heads of income :—

      Salaries.

      Income from house property.

      Profits and gains of business or profession.

      Capital gains.

      Income from other sources.
Salaries

The following income shall be chargeable to income-tax under the head ―Salaries‖—

           a. any salary due from an employer or a former employer to an assessee in the previous
              year, whether paid or not;

           b. any salary paid or allowed to him in the previous year by or on behalf of an employer or
              a former employer though not due or before it became due to him;

           c. any arrears of salary paid or allowed to him in the previous year by or on behalf of an
              employer or a former employer, if not charged to income-tax for any earlier previous
              year. For the removal of doubts, it is hereby declared that where any salary paid in
              advance is included in the total income of any person for any previous year it shall not
              be included again in the total income of the person when the salary becomes due. Any
              salary, bonus, commission or remuneration, by whatever name called, due to, or
              received by, a partner of a firm from the firm shall not be regarded as ―salary‖ for the
              purposes of this section.]



Deductions from salaries

       The income chargeable under the head ―Salaries‖ shall be computed after making the
following deductions, namely:—

In the case of an assessee whose income from salary, before allowing a deduction under this
clause,—

           a. does not exceed one lakh rupees, a deduction of a sum equal to thirty-three and one-
              third per cent of the salary or twenty-five thousand rupees, whichever is less;

           b. exceeds one lakh rupees but does not exceed five lakh rupees, a deduction of a sum of
              twenty thousand rupees. For the purposes of this clause, where salary is due from, or
              paid or allowed by, more than one employer, the deduction under this clause shall be
              computed with reference to the aggregate salary due, paid or allowed to the assessee
              and shall in no case exceed the amount specified under this clause.



Computation of total income from salaries

           i.    as substituted for clauses (i) and (ia) by the Finance Act, 1997, w.e.f. 1-4-1998, read
                 as under : ―i. a deduction of a sum equal to thirty-three and one-third per cent of the
                 salary or twenty thousand rupees, whichever is less.
                 1.    Explanation.—For the removal of doubts, it is hereby declared that where, in the
                 case of an assessee, salary is due from, or paid or allowed by, more than one
                 employer, the deduction under this clause shall be computed with reference to the
                 aggregate salary due, paid or allowed to the assessee and shall in no case exceed the
                 amount specified under this clause;‖

          ii.       82 (a deduction) in respect of any allowance in the nature of an entertainment
                    allowance specifically granted to the assessee by his employer—

                     a. in the case of an assessee who is in receipt of a salary from the Government, a
                        sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other
                        perquisite) or five thousand rupees, whichever is less; and

                     b. in the case of any other assessee who is in receipt of such entertainment
                        allowance and has been continuously in receipt of such entertainment
                        allowance regularly from his present employer from a date before the 1st day of
                        April, 1955, the amount of such entertainment allowance regularly received by
                        the assessee from his present employer in any previous year ending before the
                        1st day of April, 1955, or a sum equal to one-fifth of his salary (exclusive of any
                        allowance, benefit or other perquisite) or seven thousand five hundred rupees,
                        whichever is the least;

       iii. a deduction of any sum paid by the assessee on account of a tax on employment within the
       meaning of clause

        The total amount payable in respect of any one person to the State or to any one municipality,
district board, local board or other local authority in the State by way of taxes on professions, trades,
callings and employments shall not exceed two thousand and five hundred rupees per annum.‖
―Salary‖, ―perquisite‖ and ―profits in lieu of salary‖ defined.

For the purposes of sections 15 and 16 and of this section,—

       1. ―salary‖ includes—

          i.        Wages;

          ii.       Any annuity or pension;

          iii.      Any gratuity;

          iv.       Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
                    wages;

          v.        Any advance of salary; 89[(va) any payment received by an employee in respect of
                    any period of leave not availed of by him;]

          vi.       The annual accretion to the balance at the credit of an employee participating in a
                    recognized provident fund, to the extent to which it is chargeable to tax under rule 6
                    of Part A of the Fourth Schedule; and
          vii.      The aggregate of all sums that are comprised in the transferred balance as referred
                    to in sub-rule

       (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized
provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; ―perquisite‖
includes—

                 i. The value of rent-free accommodation provided to the assessee by his employer;

                 ii. The value of any concession in the matter of rent respecting any accommodation
                 provided to the assessee by his employer;

                 iii. The value of any benefit or amenity granted or provided free of cost or at
                 concessional rate in any of the following cases:—

   a. By a company to an employee who is a director thereof;

   b. By a company to an employee being a person who has a substantial interest in the company;

   c. Any employer (including a company) to an employee to whom the provisions of paragraphs

   d. And, of this sub clause do not apply and whose income 92[under the head

       ―Salaries‖ (whether due from, or paid or allowed by, one or more employers), exclusive of the
value of all benefits or amenities not provided for by way of monetary payment, exceeds twenty-four
thousand rupees.] For the removal of doubts, it is hereby declared that the use of any vehicle
provided by a company or an employer for journey by the assessee from his residence to his office or
other place of work, or from such office or place to his residence, shall not be regarded as a benefit or
amenity granted or provided to him free of cost or at concessional rate for the purposes of this

      iii.a. The value of any specified security allotted or transferred, directly or indirectly, by any
person free of cost or at concessional rate, to an individual who is or has been in employment of that
person:

       Provided that in a case where allotment or transfer of specified securities is made in pursuance
of an option exercised by an individual, the value of the specified securities shall be taxable in the
previous year in which such option is exercised by such individual.

For the purposes of this clause,—

   a. ―cost‖ means the amount actually paid for acquiring specified securities and where no money
      has been paid, the cost shall be taken as nil;

   b. ―specified security‖ means the securities as defined in clause (h) of section 2 of the Securities
      Contracts (Regulation) Act, 1956 (42 of 1956) and includes employees‘ stock option and sweat
      equity shares; Substituted for ‗under the head ―Salaries‖, exclusive of the value of all benefits
      or amenities not provided for by way of monetary payment, exceeds eighteen thousand
      rupees;‘ by the Finance Act, 1985,

   c. ―sweat equity shares‖ means equity shares issued by a company to its employees or directors
      at a discount or for consideration other than cash for providing know how or making available
      rights in the nature of intellectual property rights or value additions, by whatever name called;
      and

   d. ―value‖ means the difference between the fair market value and the cost for acquiring specified
      securities;

      iv. Any sum paid by the employer in respect of any obligation which, but for such payment,
      would have been payable by the assessee; and

      v. Any sum payable by the employer, whether directly or through a fund, other than a
      recognized provident fund or an approved superannuation fund 94[or a Deposit-linked
      Insurance Fund established under section 3G of the Coal Mines Provident Fund and
      Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the
      Employees‘ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)], to effect
      an assurance on the life of the assessee or to effect a contract for an annuity :

Provided that nothing in this clause shall apply to,—

   1. The value of any medical treatment provided to an employee or any member of his family in
         any hospital maintained by the employer;

   2. Any sum paid by the employer in respect of any expenditure actually incurred by the employee
         on his medical treatment or treatment of any member of his family—

      a. In any hospital maintained by the Government or any local authority or any other hospital
approved97 by the Government for the purposes of medical treatment of its employees;

Any sum paid by the employer—

   a. In respect of any expenditure actually incurred by the employee on his medical treatment or
      treatment of any member of his family in any hospital maintained by the Government or any
      local authority or any other hospital approved by the Government for the purposes of medical
      treatment of its employees;

   b. Directly to a hospital, approved by the Chief Commissioner having regard to the prescribed
      guidelines for the purposes of medical treatment of the prescribed diseases or ailments, on
      account of such treatment of the employee or any member of his family;‖

   c. In respect of the prescribed diseases98 or ailments, in any hospital approved by the Chief
      Commissioner having regard to the prescribed guidelines99 : Provided that, in a case falling in
      sub-clause the employee shall attach with his return of income a certificate from the hospital
      specifying the disease or ailment for which medical treatment was required and the receipt for
      the amount paid to the hospital

      iii. Any portion of the premium paid by an employer in relation to an employee, to effect or to
      keep in force an insurance on the health of such employee under any scheme approved by the
      Central Government for the purposes of clause (ib) of sub-section (1) of section 36;
       iv. Any sum paid by the employer in respect of any premium paid by the employee to effect or
       to keep in force an insurance on his health or the health of any member of his family under any
       scheme approved by the Central Government for the purposes of section 80D;

       v. Any sum paid by the employer in respect of any expenditure actually incurred by the
       employee on his medical treatment or treatment of any member of his family [other than the
       treatment referred to in clauses (i) and (ii)]; so, however, that such sum does not exceed
       [fifteen] thousand rupees in the previous year;

       vi. Any expenditure incurred by the employer on—

               1. Medical treatment of the employee, or any member of the family of such employee,
                  outside India;

               2. Travel 2[and] stay abroad of the employee or any member of the family of such
                  employee for medical treatment;

               3. Travel and stay abroad of one attendant who accompanies the patient in connection
                  with such treatment, subject to the condition that—

A. The expenditure on medical treatment and stay abroad shall be excluded from perquisite only to
the extent permitted by the Reserve Bank of India; and ―subject to the condition that the expenditure
on travel referred to in sub-clauses (2) and (3) of this clause shall be excluded from perquisite only in
the case of an employee whose gross total income, as computed before including therein the said
expenditure, does not exceed two lakh rupees and subject to such further conditions and limits in
relation to such expenditure as the Board may, having regard to the guidelines, if any, issued by the
Reserve Bank of India in this behalf, prescribe;‖

B. The expenditure on travel shall be excluded from perquisite only in the case of an employee whose
gross total income, as computed before including therein the said expenditure, does not exceed two
lakh rupees;

       vii. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee for any of the purposes specified in clause (vi) subject to the conditions specified in or
under that clause.

Explanation.—For the purposes of clause (2),—

      ―hospital‖ includes a dispensary or a clinic 4[or a nursing home];

      ―family‖, in relation to an individual, shall have the same meaning as in clause (5) of section 10;
       and

      ―gross total income‖ shall have the same meaning as in clause (5) of section 80B;] ―profits in
       lieu of salary‖ includes—

          i.      The amount of any compensation due to or received by an assessee from his
                  employer or former employer at or in connection with the termination of his
                  employment or the modification of the terms and conditions relating thereto;
            ii.    Any payment (other than any payment referred to in clause (10) 7[, clause (10A)] 8[,
                   clause policy including the sum allocated by way of bonus on such policy.

Explanation.—For the purposes of this sub-clause, the expression ―Keyman insurance policy‖ shall
have the meaning assigned to it in clause (10D) of section 10.]

‘B.—Interest on securities

Interest on securities.—(1) The following amounts due to an assessee in the previous year shall be
chargeable to income-tax under the head ―Interest on securities‖,—

   i.       Interest on any security of the Central or State Government;

   ii.      Interest on debentures or other securities for money issued by or on behalf of a local
            authority or a company or a corporation established by a Central, State or Provincial Act.

(2) Nothing contained in sub-section (1) shall be construed as precluding an assessee from being
charged to income-tax in respect of any interest on securities received by him in a previous year if
such interest had not been charged to income tax for any earlier previous year. Deductions from
interest on securities.—Subject to the provisions

of section 21, the income chargeable under the head ―Interest on securities‖ shall be computed after
making the following deductions—

i. any reasonable sum expended by the assessee for the purpose of realizing such interest;

ii. any interest payable on money borrowed for the purpose of investment in the securities by the
assessee. Deductions from interest on securities in the case of a banking company.—

In the case of a banking company—

i. the sum to be regarded as a sum reasonably expended for the purpose referred to in clause (i) of
section 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the
provisions of sections 30, 31, 36 and 37 [other than clauses (iii), (vi), (vii) and (vii(a) of subsection (1)
of section 36] the same proportion as the gross receipts from interest on securities (inclusive of tax
deducted at source) chargeable to income-tax under section 18 bear to the gross receipts of the
company from all sources which are included in the profit and loss account of the company;

         ii. the amount to be regarded as interest payable on moneys borrowed for the purpose referred
         to in clause

          (ii) of section 19 shall be an amount which bears to the amount of interest payable on all
         moneys borrowed by the company the same proportion as the gross receipts from interest on
         securities (inclusive of tax deducted at source) chargeable to income-tax under section 18 bear
         to the gross receipts from all sources which are included in the profit and loss account of the
         company.

(2) The expenses deducted under clauses (i) and (ii) of subsection
      Shall not again form part of the deductions admissible under sections 30 to 37 for the purposes
of computing the income of the company under the head ―Profits and gains of business or
profession‖.

Explanation.—For the purposes of this section, ―moneys borrowed‖ includes money received by way
of deposits. Amounts not deductible from interest on securities— Notwithstanding anything contained
in sections 19 and 20, any interest chargeable under this Act which is payable outside India (not
being interest on a loan issued for public subscription before the 1st day of April, 1938) on which tax
has not been paid or deducted under Chapter XVII-B, and in respect of which there is no person in
India who may be treated as an agent under section 163 shall not be deducted in computing the
income chargeable under the head ―Interest on securities‖.
CHAPTER 7

ILLUSTRATIONS ON INCOME UNDER THE HEAD SALARY
Illustration: Determine the status of the following:

(i) Calcutta University. (ii) Essen Paints Pvt. Ltd. (iii) Punjab Bank Ltd. (iv) A and B who are legal heirs
of C (C died in 1994 and A and B carry on his business without entering into a partnership). (v) Shri
Krishna Enterprises, a firm consisting of S, K and P. (vi) A joint family consisting of P, Mrs. P and their
son S. (vii) Municipal Corporation of Delhi.

Solution

(i) Artificial Person (ii) A Company (iii) A Company (iv) A Body of Individuals (v) A Firm (vi) A Hindu
Undivided Family (vii)A Local Authority.

Assessee means a person by whom any tax or any other sum of money is payable under this Act and
includes the following:

i. Every person in respect of whom any proceeding under the Income-tax Act has been taken:

       a. for the assessment of his income or the income of any other person in respect of which he is
       assessable; or

       b. to determine the loss sustained by him or by such other person; or

       c. to determine the amount of refund due to him or to such other person.

ii. A person who is deemed to be an assessee under any provisions of this Act i.e. a person who is
treated as an assessee. This would include the legal representative of a deceased person or the
agent of a person who is a nonresident or the trustee of a trust.

iii. Every person who is deemed to be an assessee in default under any provisions of this Act. A
person is said to be an assessee in default if he fails to comply with the duties imposed upon him
under the Income-tax Act. For example: a person, paying interest to another person, is responsible
for deducting tax at source on this amount and to deposit the tax with the Government. If he fails in
either of these duties i.e., if he does not deduct the tax, or deducts the tax but does not deposit it with
the Government, he shall be deemed to be an assessee in default.

   1. Every assessee is a ‗person‘, but every person need not be an ‗assessee‘. For example, X, an
      individual has earned total income of Rs. 40,000 in the previous year. He is a person but not
      an assessee because his total income is less than the maximum exemption limit of Rs. 50,000
      and no tax or any other sum is due from him.
   2. A person may not have his own assessable income but may still be an assessee. For example,
      an assessee, who has earned an income of Rs.30,000 in a previous year, fails to deduct the
      tax at source on salary paid by him, which he was required to do under the Act, shall be
      deemed to be an assessee in default. Although, he is not assessable in respect of his own
      income, as it is below the maximum exemption limit, but shall still be an assessee for not
      deducting the tax at source, which he was obliged to do. Assessment year means the period of
      12 months commencing on the first day of April every year. It is, therefore, the period from 1st
      of April to 31st of March, for example, the assessment year 2004-05 will commence on 1-4-
      2004 and will end on 31-3-2005. The tax is levied, in each assessment year, with respect to or
      on the total income earned by the assessee in the previous year. As per section 2(34) previous
      year means the previous year as defined in section

   3. According to section 3, previous year means the financial year immediately preceding the
      assessment year.

                     -tax is payable on the income earned during the previous year and it is assessed
              in the immediately succeeding financial year which is called an assessment year.

Therefore, the income earned during the previous year 1-4-2003 to 31-3-2004 will be assessed or
charged to tax in the assessment year 2004-05.

                                                                                                 ar
                  (1st April to 31st March) as their previous year. Previous year, for Income Tax
                  purposes, will be financial year which ends on 31st of March although the assessee
                  can close his books of account on any other date e.g. an assessee may maintain
                  books of account on calendar year basis but his previous year, for Income Tax
                  purpose, will be financial year and not the calendar year.

       Each financial year is both, previous year as well as assessment year. It is the previous year
for the income earned during that financial year and assessment year for the income earned during
the preceding previous year e.g. financial year 2003-04 is the previous year for the income earned
during the year 2003-04 and assessment year for the income earned during the previous year 2002-
03.

        First previous year for a business/profession newly set-up during the financial year or for a new
source of income: In case a business or profession is newly set up or a new source of income comes
into existence during the financial year, the period beginning from the date of setting up of the
business or from the date the new source came into existence, and ending on the last day of that
financial year i.e. 31st of March shall be the first previous year for that business or source of income.
For example, if a new business is set up on 21-10-2003 then the first previous year for that business
will be the period starting from 21-10-2003 to 31-3-2004. Therefore, the first previous year of a newly
set-up business/profession or a new source of income will be either 12 months or less than 12
months. It can never exceed a period of 12 months.

Illustration: Ascertain the previous year of the income in relation to assessment year 2004-05 in the
following cases:

(i). Dr. Gupta was appointed as lecturer in Hindu College on 1-8-2003.
(ii). Dinesh started a cloth business on 27-2-2004.

(iii). Jai Kumar inherited a let out house property of two rooms on 5-7-2003.

(iv). An assessee spent Rs. 70,000 on his daughter‘s marriage on 24-11-2003. He could only explain
the source of Rs. 50,000 before the Income Tax Officer. Rs. 20,000 was deemed to be his income.

(v). A received a remuneration of Rs. 10,000 for acting as an arbitrator on 10-3-2004 for the first time.

Solution

                  i. 1-8-2003 to 31-3-2004

                 ii. 27-2-2004 to 31-3-2004

                 iii. 5-7-2003 to 31-3-2004

                 iv. Previous year 2003-04

                 v. 10-3-2004 to 31-3-2004.

        Where an assessee has an existing regular income from various sources and he earns an
income from a new source during the financial year, his previous year, for the existing income, will be
that relevant financial year and the previous year for the new source of income will start from the date
from which the new source of income came into existence and would end on 31st March next
following. Since he is assessable on the aggregate of the income from all the sources, therefore, all
the income will be included in the previous year. For example, X has regular income from salary and
house property. On 21-10-2003 he commences a business of trading in paper.

      The previous year for income from salary and house property will be the financial year 2003-04
and previous year for the new business will be 21-10-2003 to 31-3-2004. However, for computation of
income of the previous year 2003-04, we shall take the aggregate of income from salary and house
property of financial year 2003-04 and income earned from 21-10-2003 to 31-3-2004 for the business.

How to Compute Total Income: The steps in which the Total Income, for any assessment year, is
determined are as follows:

       1. Determine the residential status of the assessee to find out which income is to be included
       in the computation of his Total Income (Residential status and the need for determining the
       residential status are discussed in the next chapter)

       2. Classify the income under each of the following five heads. Compute the income under each
       head after allowing the deductions prescribed for each head of income. a Income from Salaries

            1.   Salary/Bonus/Commission, etc. ———

            2.   Taxable Allowance ———

            3.   Value of Taxable perquisites ———

            4.   Gross Salary ———
            5.   Less: Deductions under section 16 ———

            6.   Net taxable income from Salary ———

            c.   Income from House Property

            7.   Net annual value of House Property ———

            8.   Less: Deductions under section 24(1) ———

            9.   Income from House Property ———

            d.   Profit and Gains of Business and Profession

            10. Net profit as per P & L Account ———

            11. Less/Add: Adjustments required ——— to be made to the profit as per provisions of
                    Income-tax Act. Net Profit and Gains of Business and Profession ———

            e.   Capital Gains

            12. Capital Gains as computed ———

            13. Less: exemptions under section 54/54B/54D, etc. ———

            14. Income from Capital Gains ———

            f.   Income from Other Sources

            15. Gross Income ———

            16. Less: Deductions ———

            17. Net Income from Other Sources ——————

            18. Gross Total Income [(a) + (b) + (c) + (d) + (e)]

            19. Less: Deduction available under Chapter VIA———

            20. (Sections 80CCC to 80U) ——————



Total Income

       Rounding off of Total Income: The total income, as computed above, shall be rounded off to
the nearest multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be
ignored. Thereafter if such amount is not a multiple of ten, then, if the last figure is 5 or more, the
amount shall be increased to the next higher multiple of 10 and if the last figure of Total Income is
less than 5, the amount shall be reduced to the next lower multiple of 10. For example, if the total
income is Rs. 79,467, it shall be rounded off to Rs. 79,470 and if it is Rs. 79,464.90, it shall be
rounded off to Rs. 79,460.
How to compute tax liability on Total Income: On the Total Income, tax is calculated according to
the rates prescribed under the relevant Finance Act.

Certain rebates are allowed from the tax payable, on account of

   (i) certain eligible savings covered under section 88 in case of individuals and HUF
   (ii) rebate for senior citizens when they satisfy certain conditions under section 88B; and

    (iii) rebate for women who are less than 65 years of age, under section 88C.The amount arrived
   at, after allowing the rebates, shall be increased by a surcharge, if applicable, and the amount so
   arrived at is the tax liability of the person for that year. Rounding off of tax, etc.: The amount of tax
   (including tax deductible at source or payable in advance), interest, penalty, fine or any other sum
   payable, and the amount of refund due, under the provisions of the Income-tax Act, shall be
   rounded off to the nearest rupee and, for this purpose, where such amount contains a part of a
   rupee consisting of paise then, if such part is 50 paise or more, it shall be increased to one rupee
   and if such part is less than 50 paise it shall be ignored.

Illustration: X joins the service in the grade of Rs. 12,000 – 300 – 13,800 – 400 – 17,800 on 1-6-1993.
Compute his basic salary for the assessment year 2004-05.

Solution: For assessment year 2004-05 the previous year is 2003-04 i.e., 1-4-2003 to 31-3-
2004.Rs.His basic salary for April and May 2003 will be Rs. 15,000

             

                                                                   -04 1,84,000

Working notes: Basic Salary drawn

      1.6.1993 to 31.5.1994 Rs. 12,000 p.m.

      1.6.1994 to 31.5.1995 Rs. 12,300 p.m.

      1.6.1995 to 31.5.1996 Rs. 12,600 p.m.

      1.6.1996 to 31.5.1997 Rs. 12,900 p.m.

      1.6.1997 to 31.5.1998 Rs. 13,200 p.m.

      1.6.1998 to 31.5.1999 Rs. 13,500 p.m.

      1.6.1999 to 31.5.2000 Rs. 13,800 p.m.

      1.6.2000 to 31.5.2001 Rs. 14,200 p.m.

      1.6.2001 to 31.5.2002 Rs. 14,600 p.m.

      1.6.2002 to 31.5.2003 Rs. 15,000 p.m.

      1.6.2003 to 31.5.2004 Rs. 15,400 p.m.
Illustration: A joined a service on 1-8-2000 in the grade of Rs. 12,000 – 300 – 13,800 – 400 – 17,800
and his salary was fixed at

Rs. 14,200 from the date of joining. Compute his basic salary for the assessment year 2004-05.
Solution Rs.Salary from April, 2003 to July, 2003 Rs. 15,000



   1.

   2.

Working notes: Basic salary drawn

i. 1-8-2000 to 31-7-2001 Rs. 14,200 p.m.

ii. 1-8-2001 to 31-7-2002 Rs. 14,600 p.m.

iii. 1-8-2002 to 31-7-2003 Rs. 15,000 p.

iv. 1-8-2003 to 31-7-2004 Rs. 15,400 p.m

Illustration: X is an employee of ABC Ltd. getting a salary of Rs. 5,000 per month which is ‗due‘ on the
last day of the month but is paid on the 7th of next month. Salary for which months will be taxable for
assessment year 2004-05?

Solution:

       For assessment year 2004-05 the relevant previous year is 2003-04. Therefore, salary will be
taxable for the months of April, 2003 to March, 2004.

Illustration: In the above case, assume that salary becomes due on the 1st of next month and is paid
on the 7th of the next month. Salary for which months will be taxable for assessment year 2004-05?

Solution:

 The salary for the months of March, 2003 to February, 2004 will be taxable for assessment year
2004-05 because salary for March, 2003 will become due on 1-4-2003 and salary of March, 2004 will
become due on 1-4-2004 i.e., the next financial year.

Illustration: In the illustration No. 4.3, assume that he is paid the salary of April, 2004 and May, 2004
in advance in March, 2004. What will be his gross income for the assessment year 2004-05.

Solution:

Salary for the months of April, 2003 to March, 2004 will be taxable on ‗due‘ basis.

However, salary paid in advance in the month of March, 2004 for the months of April and May, 2004
will also be included in the income of the previous year 2003-04 because the same has been paid in
March, 2004 although it is not ‗due‘. The gross income shall be as under:
70,000

Illustration: A retired from his job w.e.f. 1-9-2003. He had joined the service on 1-1-1988. He gets an
increment in his basic salary amounting to Rs. 500 every year on January

1. At the time of his retirement he was getting a basic salary of Rs. 10,000 p.m. He was also entitled
to dearness allowance @10% of basic salary and a commission on turnover @1% of the total sales
achieved by him. His turnover for the 12 months ending on 31-8-2003 was Rs. 6,00,000, spread
evenly over the year. He received a sum of Rs. 1,60,000 as gratuity on the date of his retirement.
Compute his gross salary for the assessment year 2004-05.

Solution

Computation of Gross Salary of A for the assessment year 2004-05 Rs.



Actual amount of gratuity received 1,60,000

Less: Exemption u/s 10(10) 78,000 82,000

Gross Salary 1,39,500

Working Notes

1. Calculation of average monthly salary

Jan.-

Nov.-

Commission for 10 months 5,000

Salary for 10 months 1,04,000

Therefore, average salary = Rs. 10,400

2. The minimum of the following amounts will be exempt under section 10(10)

i. Gratuity Actually received Rs. 1,60,000

ii. Half month‘s average salary for every completed year of service i.e.

iii. Specified amount Rs. 3,50,000

Therefore Rs. 78,000 will be exempt.

3. Dearness allowance is not included for calculation of average salary because it has not been
mentioned that it forms part of salary for retirement benefits.

Illustration (Where there is no change in any factor during the previous year)A is entitled to a basic
salary of Rs. 5,000 p.m. and dearness allowance of Rs. 1,000 per month, 40% of which forms part of
retirement benefits. He is also entitled to HRA of Rs. 2,000 p.m. He actually pays Rs. 2,000 p.m. as
rent for a house in Delhi.

Compute the taxable HRA.



Solution: The minimum of the following three amounts shall be exempt under section 10(13A): Rs.



   Rent paid in excess of 10% of salary (24,000 – 6,480) 17,520 50% of salary 32,400

Therefore, Rs. 17,520 shall be exempt and the balance Rs. 6,480 shall be included in gross salary.
Working Note: Salary for the above purpose is calculated as under:



   Dearness Allowance 40% of 12,000 4,800 64,800

Illustration (Where there is change in the rent paid) X is employed at Delhi as the Finance Manager of
R Company Ltd. The particulars of his salary for the previous year 2003-04 are as under: Rs.

   Basic Salary 6,000 p.m.

   Dearness Allowance (forming part of basic salary) 2,000 p.m.

   Conveyance Allowance for personal purpose 1,000 p.m.

   Commission @ 2% of the turnover achieved which was Rs. 4,50,000 during the previous year and
       the same was evenly spread. 9,000

   House Rent Allowance 3,000 p.m.

The actual rent paid by him is Rs. 2,000 p.m. for an accommodation at Noida till 31-12-2003. From 1-
1-2004 the rent was increased to Rs. 4,000 p.m. Compute the taxable HRA.

Solution: The exemption would be calculated in two parts as rent paid has changed w.e.f. 1-1-2004.

Period of Period of 9 months 3months

1-4-2003 to 1-1-2004 to 31-12-2003 31-3-2004

Actual HRA received 27,000 9,000 Less: Exemption under section 10(13A)

i. Actual HRA received 27,000 9,000

ii. Rent paid – 10% of salary of relevant period 10,125 9,375

a. 18,000 – (10% of 78,750)

b. 12,000 – (10% of 26,250)

iii. 40% of salary 31,500 10,125 10,500 9,000
16,875 Nil

Taxable amount Rs. 16,875 + Nil = Rs. 16,875

Exemption amount Rs. 10,125 + Rs. 9,000 = Rs. 19,125

Meaning of salary from 1-4-2003 to 31-12-2003 —

Rs. 54,000 + 18,000 + 6,750 = Rs. 78,750

Meaning of salary from 1-1-2004 to 31-3-2004 —

Rs. 18,000 + 6,000 + 2,250 = Rs. 26,250
LESSON 8

TUTORIALS
Theoretical Questions

1. Explain the meaning of previous year. What would be the previous year for the new business
started during the financial year? Explain with examples.

2. Income-tax is assessed on the income of the previous year in the next assessment year. State the
exceptions to this rule.

3. ―Income-tax is charged on income of the previous year.‖ Do you fully agree with this statement? If
not, what are the exceptions?

4. Define the term ‗Income‘. Distinguish between Gross Total Income and Total Income.

5. Write short notes on the following terms used in the Income-tax Act, 1961:

(a) Person, (b) Gross Total Income, (c) Assessee.

6. Discuss the special provisions of the Income-tax Act, in respect of the assessment of:

a) Persons leaving India, and (b) Income from a discontinued business.

7. What are the essential features of the term ‗Income‘? Explain.

Practical Questions

1. An assessee commences his business on: (a) 4-9-2002; (b) 1-12-2003; (c) 1-2-2004. In each case,
what will be his assessment year?

2. What will be the previous year in relation to assessment year 2004-05 in the following cases—

(a) A businessman keeps his accounts on financial year basis

(b)A newly started business commencing its operation from 1-1-2004.

(c) A person gives Rs. 50,000 as loan @10% p.a. interest on 1-9-2003.

Ans.: (a) 1-4-2003 to 31-3-2004; (b) 1-1-2004 to 31-3-2004; and (c) 1-9-2003 to 31-3-2004

3. Which period will be treated as previous year for Income-tax purposes for the assessment year
2004-05 in the following cases?

(a) Sumit starts a new business on 1-11-2003 and prepares final accounts on 30-6-2004.

(b)Meenal joined service in a company on 1-1-2004 at Rs. 2,000 per month. His next increment in
salary will be on 1-1-2005. Prior to this he was unemployed.

(c) Ashish Maheswari keeps his accounts on the basis of financial year.
(d)Abhay Verma is a registered doctor and keeps his Income and Expenditure Account on calendar
year basis.

(e) Jyoti Gupta bought a house on 1-8-2003 and let it out at Rs. 800 per month.

Ans.: (a) 1-11-2003 to 31-3-2004; (b) 1-1-2004 to 31-3-2004

(c) 1-4-2003 to 31-3-2004; (d) 1-4-2003 to 31-3-2004; and (e) 1-8-2003 to 31-3-2004.

4. ‗X‘, who is a famous singer, came to India from America for the first time on 26-1-2004. He gave
many performances in India from which he got Rs. 1,00,000. When he was to return to America, the
Income-tax Officer gave him a notice and asked him to pay Income-tax immediately. He said in his
reply, ‗My previous year ends on 31-3-2004 and my tax liability will be in the assessment year 2004-
05.‘ What is your opinion in this regard?

Ans.: Under the exceptions, his assessment year will be 2003-04.

5. ‗R‘, who has been permanently in India, migrated to USA on 18-11-2003. Explain how he will be
taxed with regard to the income earned between 1-4-2003 and 18-11-2003.

Ans.: Under the exception, his assessment year will be 2003- 04.
LESSON 9

INCOME FROM HOUSE PROPERTY
      The annual value of property consisting of any buildings or lands appurtenant there to of which
the assessee is the owner, other than such portions of such property as he may occupy for the
purposes of any business or profession carried on by him the profits of which are chargeable to
income-tax, shall be chargeable to income-tax under the head ―Income from house property‖.

Annual value how determined The annual value of any property shall be deemed to be—

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) where the property is let and the annual rent received or receivable by the owner in respect
thereof is in excess of the sum referred to in clause (a), the amount so received or receivable :]
Provided that where the property is in the occupation of a tenant, the taxes levied by any local
authority in respect of the property shall, to the extent such taxes are borne by the owner, be
deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the
owner according to the method of accounting regularly employed by him) in determining the annual
value of the property of that previous year in which such taxes are actually paid by him. Provided
further that the annual value as determined under this sub-section shall,—

(a) in the case of a building comprising one or more residential units, the erection of which is begun
after the 1st day of April, 1961, and completed before the 1st day of April, 1970, for a period of three
years from the date of completion of the building, be reduced by a sum equal to the aggregate of—

      (i) in respect of any residential unit whose annual value as so determined does not exceed six
      hundred rupees, the amount of such annual value;

      (ii) in respect of any residential unit whose annual value as so determined exceeds six hundred
      rupees, an amount of six hundred rupees; ―Provided that where the property is in the
      occupation of a tenant, the taxes levied by any local authority in respect of the property shall,
      to the extent such taxes are borne by the owner, be deducted in determining the annual value
      of the property:‖

(b) in the case of a building comprising one or more residential units, the erection of which is begun
after the 1st day of April, 1961, and completed after the 31st day of March, 1970, 19[but before the
1st day of April, 1978,] for a period of five years from the date of completion of the building, be
reduced by a sum equal to the aggregate of—

      (i) in respect of any residential unit whose annual value as so determined does not exceed one
      thousand two hundred rupees, the amount of such annual value;

      (ii) in respect of any residential unit whose annual value as so determined exceeds one
      thousand two hundred rupees, an amount of one thousand two hundred rupees;

(c) in the case of a building comprising one or more residential units, the erection of which is
21[completed after the 31st day of March, 1978, but before the 1st day of April, 1982], for a period of
five years from the date of completion of the building, be reduced by a sum equal to the aggregate
of—

       (i) in respect of any residential unit whose annual value as so determined does not exceed two
       thousand four hundred rupees, the amount of such annual value;

       (ii) in respect of any residential unit whose annual value as so determined exceeds two
       thousand four hundred rupees, an amount of two thousand four hundred rupees;]

(d) in the case of a building comprising one or more residential units, the erection of which is
completed after the 31st day of March, 1982 23[but before the 1st day of April, 1992], for a period of
five years from the date of completion of the building, be reduced by a sum equal to the aggregate
of—

       (i) in respect of any residential unit whose annual value as so determined does not exceed
       three thousand six hundred rupees, the amount of such annual value;

       (ii) in respect of any residential unit whose annual value as so determined exceeds three
       thousand six hundred rupees, an amount of three thousand six hundred rupees.

Explanation 1.—For the purposes of this sub-section, ―annual rent‖ means— (a) in a case where the
property is let throughout the previous year, the actual rent received or receivable by the owner in
respect of such year; and

(b)in any other case, the amount which bears the same proportion to the amount of the actual rent
received or receivable by the owner for the period for which the property is let, as the period of twelve
months bears to such period.]

Explanation 2.—For the removal of doubts, it is hereby declared that where a deduction in respect of
any taxes referred to in the first proviso to this subsection is allowed in determining the annual value
of the property in respect of any previous year (being a previous year relevant to the assessment year
commencing on the 1st day of April, 1984 or any earlier assessment year), no deduction shall be
allowed under the first proviso in determining the annual value of the property in respect of the
previous year in which such taxes are actually paid by the owner.

Where the property consists of—

(a) a house or part of a house in the occupation of the owner for the purposes of his own residence,—

       (i) which is not actually let during any part of the previous year and no other benefit there from
       is derived by the owner, the annual value of such house or part of the house shall be taken to
       be nil; Where the property consists of—

       (ii) a house in the occupation of the owner for the purposes of his own residence, the annual
       value of such house shall first be determined in the same manner as if the property had been
       let and further be reduced by one-half of the amount so determined or [three thousand and six
       hundred] rupees, whichever is less ;

       (iii) more than one house in the occupation of the owner for the purposes of his own residence,
       the provisions of clause (i) shall apply only in respect of one of such houses, which the
       assessee may, at his option, specify in this behalf : Provided that for the purposes of clauses
       (i) and (ii), where the sum so arrived at exceeds ten per cent of the total income of the owner
       (the total income for this purpose being computed without including therein any income from
       such property and before making any deduction under Chapter VIA), the excess shall be
       disregarded.

Explanation.—Where any such residential unit as is referred to in the second proviso to sub-section
(1) is in the occupation of the owner for the purposes of his own residence, nothing contained in that
proviso shall apply in computing the annual value of that residential unit.‖

(ii)which is let during any part or parts of the previous year, that part of the annual value (annual value
being determined in the same manner as if the property had been let) which is proportionate to the
period during which the property is in the occupation of the owner for the purposes of his own
residence, or, as the case maybe, where such property is let out in parts, that portion of the annual
value appropriate to any part which was occupied by the owner for his own residence, which is
proportionate to the period during which such part is wholly occupied by him for his own residence
shall be deducted in determining the annual value

Explanation.—The deduction under this sub-clause shall be made irrespective of whether the period
during which the property or as the case may be, part of the property was used for the residence of
the owner precedes or follows the period during which it is let;

       (a) more than one house in the occupation of the owner for the purposes of his own residence,
       the provisions of clause

       (b) shall apply only in respect of one of such houses, which the assessee may, at his option
       ,specify in this behalf;

       (c) more than one house and such houses are in the occupation of the owner for the purposes
       of his own residence, the annual value of the house or houses, other than the house in respect
       of which the assessee has exercised an option under clause (b), shall be determined under
       sub-section (1) as if such house or houses had been let.

Explanation—Where any such residential unit as is referred to in the second proviso to sub-section
(1) is in the occupation of the owner for the purposes of his own residence, nothing contained in that
proviso shall apply in computing the annual value of that residential unit.Where the property referred
to in sub-section (2) consists of one residential house only and it cannot actually be occupied by the
owner by reason of the fact.

For the removal of doubt, it is hereby declared that, where the property consists of more than one
house and such houses are in the occupation of the owner for the purposes of his own residence, the
annual value of the houses, other than that the annual value of which is required to be determined
under clause ii) of sub-section

(2), shall be determined under sub-section

(1) as if such houses had been let.‖
Where the property referred to in sub-section (2) consists of one residential house only and it 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 shall—

       (a) if the house was not actually occupied by the owner during the whole of the previous year,
       be taken to be nil, or

       (b) if the house was actually occupied by the owner for a fraction of the previous year, be taken
       to be that fraction of the annual value determined under sub-section (2) : 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 shall be taken to
       be nil : Provided that the following conditions are fulfilled, namely:—

              i) such house is not actually let, and

              (ii) no other benefit there from is derived by the owner.



Deductions from income from house property

(1) Income chargeable under the head ―Income from house property‖ shall, subject to the provisions
of sub-section

(2), be computed after making the following deductions, namely:—

       (i) in respect of repairs of, and collection of rent from, the property, a sum equal to [one-fourth]
       of the annual value;]

       (ii) the amount of any premium paid to insure the property against risk of damage or
       destruction ;

       (iii) where the property is subject to an annual charge 35[(not being a charge created by the
       assessee voluntarily or a capital charge)], the amount of such charge ;

       (iv) where the property is subject to a ground rent, the amount of such ground rent ;

        (v) where the property has been acquired, constructed, repaired, renewed or reconstructed
       with borrowed capital, the amount of any interest payable on such capital. Provided that the
       following conditions are in either case fulfilled:-

                                          the house is not actually let, and

                                          no other benefit there from is derived by the owner.‖

―(i) in respect of repairs,—

       (a) Where the property is in the occupation of the owner, or where the property is let to a
       tenant and the owner has undertaken to bear the cost of repairs, a sum equal to one-sixth of
       the annual value ;
       (b) Where the property is in the occupation of a tenant who has undertaken to bear the cost of
       repairs,—

                     (i) The excess of the annual value over the amount of rent payable for a year by
                     the tenant; or

                     (ii) A sum equal to one-sixth of the annual value, whichever is less ;‖

Explanation.—Where the property has been acquired or constructed with borrowed capital, the
interest, if any, payable on such capital for the period prior to the previous year in which the property
has been acquired or constructed, as reduced by any part thereof allowed as a deduction under any
other provision of this Act, shall be deducted under this clause in equal installments for the said
previous year and for each of the four immediately succeeding previous years. -any sums paid on
account of land revenue 37[or any other tax levied by the State Government] in respect of the
property; where the property is let and was vacant during a part of the year, that part of the annual
value which is proportionate to the period during which the property is wholly unoccupied or, where
the property is let out in parts, that portion of the annual value appropriate to any vacant part, which is
proportionate to the period during which such part is wholly unoccupied.

Explanation.—The deduction under this clause shall be made irrespective of whether the period
during which the property or, as the case may be, part of the property was vacant precedes or follows
the period during which it is let; -subject to such rules as may be made in this behalf, the amount in
respect of rent from property let to a tenant which the assessee cannot realize. -any sums spent to
collect the rent from the property, not exceeding six per cent of the annual value of the property;‖

Rule 4 prescribes following conditions for deductibility of unrealized rent:

       (1) The tenancy must be bona fide.

       (2) The defaulting tenant should have vacated, or steps shouldhave been taken by the
       assessee to compel him to vacate the property.

       (3) The defaulting tenant should not be in occupation of anyother property of the assessee.

       (4) The assessee must either have taken all reasonable steps to institute legal proceedings for
       the recovery of the unpaid rent, or satisfy the Assessing Officer that legal proceedings would
       be useless.

       (5) The annual value of the property to which the unpaid rent relates must have been included
       in the assessed income of the previous year for which that rent was due, and tax should have
       been duly paid on such assessed income.

       (6) The deduction allowed should in no case exceed the income under the head ‗Income from
       house property‘ included in the total income, as computed without making this deduction.

       (7) If, after deduction has been allowed in one year, the assessee realizes the unpaid rent in a
       subsequent year, the amount so realised will be brought to tax under the head ‗Income from
       house property‘ in the year of receipt, irrespective of whether the assessee continues to be the
       owner of that property in that year or not. No deduction shall be allowed under sub-section
(1) in respect of property of the nature referred to in sub-clause

        (i) of clause(a) of sub-section

(2), or subsection

(3) of section 23 :Provided that nothing in this sub-section shall apply to the allowance of a deduction
under clause (vi) of sub-section (1) of an amount not exceeding 43[thirty] thousand rupees in respect
of the property of the nature referred to in sub-clause (i) of clause (a) of sub-section (2) of section 23
44[or sub-section (3) of section 23.

Provided further that where the property is acquired or constructed with capital borrowed on or after
the 1st day of April, 1999 and such acquisition or construction is completed before the 1st day of
April, 2001, the provisions of the first provision shall have effect as if for the words ―thirty thousand
rupees‖, the words ―seventy five thousand rupees‖ had been substituted. The total amount deductible
under sub-section.

1) in respect of property of the nature referred to in sub-clause

(ii) of clause (a) of sub-section

(2) of section 23 shall not exceed the annual value of the property as determined under that section.

       Amounts not deductible from income from house property Notwithstanding anything contained
in section 24, any annual charge or interest chargeable under this Act which is payable outside India
(not being interest on a loan issued for public subscription before the 1st day of April, 1938), on which
tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in
India who may be treated as an agent under section 163 shall not be deducted in computing the
income chargeable under the head ―Income from house property‖.

       Special provision for cases where unrealized rent allowed as deduction is realized
subsequently Where a deduction has been made under clause (x) of subsection (1) of section 24 in
the assessment for any year in respect of rent from property let to a tenant which the assessee
cannot realize and subsequently during any previous year the assessee has realized any amount in
respect of such rent, the amount so realized shall be deemed to be income chargeable under the
head ―Income from house property‖ and accordingly charged to income-tax (without making any
deduction under section 23 or section 24) as the income of that Property owned by co-owners Where
property consisting of buildings or buildings and lands appurtenant thereto is owned by two or more
persons and their respective shares are definite and ascertainable, such persons shall not in respect
of such property be assessed as an association of persons, but the share of each such person in the
income from the property as computed in accordance with shall be included in his total income.

Explanation.—For the purposes of this section, in applying the provisions of sub-section (2) of section
23 for computing the share of each such person as is referred to in this section, such share shall be
computed, as if each such person is individually entitled to the relief provided in that sub-section.
―Owner of house property‖, ―annual charge‖, etc., defined.

       (i) 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;

(ii) the holder of an impartible estate shall be deemed to be the individual owner of all the
properties comprised in the estate ;

(iii) a member of a co-operative society, company or other association of persons to whom a
building or part thereof is allotted or leased under a house building scheme of the society,
company or association, as the case may be, shall be deemed to be the owner of that building
or part thereof ;

(iii-a) 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 the Transfer of Property Act, shall be
deemed to be the owner of that building or part thereof ;

(iii-b) 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 clause (f) of section 269UA, shall be
deemed to be the owner of that building or part thereof;

―(iv) a member of a co-operative society to whom a building or part thereof is allotted or leased
under a house building scheme of the society shall be deemed to be the owner of that building
or part thereof;‖

(v) ―annual charge‖ means a charge to secure an annual liability, but does not include any tax
in respect of property or income from property imposed by a local authority, or the Central or a
State Government ;

(vi) ―capital charge‖ means a charge to secure the discharge of a liability of a capital nature ;

(vii) taxes levied by a local authority in respect of any property shall be deemed to include
service taxes levied by the local authority in respect of the property.

(viii) ―annual charge‖ means a charge to secure an annual liability, but does not include any tax
in respect of property or income from property imposed by a local authority, or the Central or a
State Government ;

(ix) ―capital charge‖ means a charge to secure the discharge of a liability of a capital nature ;

(x) taxes levied by a local authority in respect of any property shall be deemed to include
service taxes levied by the local authority in respect of the property. Taxes levied by any local
authority in respect of the property i.e. municipal taxes (including services taxes) to be
deducted: municipal; taxes, etc. levied by local authority are to be deducted from the gross
annual value calculated as above, if the following conditions are fulfilled:

       (a) the municipal taxes have been borne by the owner, and

       (b) these have been actually paid during the previous year Therefore deduction for
       municipal taxes, etc. levied by any local authority is allowed if they are borne and
       actually paid by the owner. It must be noted that the taxes are allowed as deduction
              only in the previous year in which these are paid. Municipal taxes, etc. due but not paid
              shall not be allowed as deduction.

       However, municipal taxes, etc. paid during the previous year are allowable even if they relate
to past years or future years.

      Even where the property is situated outside the country, taxes levied by local authority in that
country are deductible in deciding the annual value of the property. The value arrived at after
deducting the municipal taxes, if any, may be referred to as the Net Annual Value (Annual value as
per Income-tax Act). From such net annual value, deductions as permissible u/s 24(a) & (b) are
allowed and the balance is the income under the head ‗Income from house prope11y‘.

              1. Generally, the municipal taxes, etc. are to be paid by the occupier. In the case of let
              out property, the occupier is the tenant and therefore he should pay the municipal taxes,
              etc.. In such case no deduction of municipal tax, etc. will be allowed from gross annual
              value as these have not been paid and borne by the owner.

              2. Taxes levied by a local authority in respect of any property shall be deemed to
              include service taxes levied by the local authority in respect of the property.

              3. Taxation of refund of municipal tax: It was held that there was no provision in
              computation of property income corresponding to section 41 (1) which is available for
              taxing remission or waiver of liability, in respect of business income and as such it
              cannot be brought to tax either under this head or any other head. Illustration X owns
              three houses in Delhi, particulars of which are as under:

Particulars I House Rs. II House Rs. III House Rs.

Date of completion 1.1.1 991 1.1.1993 1.8.1991

No. of residential units 2 1 3

Municipal value 1 ;20,000 72,000 60,000

Fair Rental Value 1,50,000 75,000 75,000

Standard rent 1,30,000 80,000 72,000

Rent per unit per annum 70,000 84,000 21,000

Municipal taxes Rs. 12,000 (due but not paid)

Rs. 8,000 for last year paid in this year, and

Rs. 9,000 of current year due but not paid.

Rs. 60,000 (It includes Rs. 54,000 paid s advance fornext 9'years)

Compute the annual value of the above three houses for the assessment year 2004-05.

Solution
(Amount in Rupees)

Particulars I House Rs. II House Rs. III HouseRs.

Gross Annual Value 1 1,40,000 84,000

72,000

Less: Municipal Taxes - 8,000 60,000 Net Annual Value 1,40,000 76,000 12,000

House property which is let and was vacant during the whole or part of the previous year

According to section 23( 1), the annual value of such house property shall be deemed to be:-

      (a) the sum for which the property might reasonably be expected to let from year to year; or

      (b) where the property or any part of the property is let and the actual rent‖ received or
      receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the
      amount so received or receivable; or

      (c) where the property or any part of the property is let and was vacant during the whole or any
      part of the previous year and owing to such vacancy the actual rent received or receivable by
      the owner in respect thereof is less than the sum referred to in clause (a). the amount so
      received or receivable:

From the perusal of the above, the following two situations may emerge

Situation 1: Where the property is let and was vacant for part of the year and the actual rent received
or receivable is more than the sum determined under clause (a) in spite of vacancy period. (This
situation falls under clause (b) above)

Situation 2: Where the property is let and was vacant for whole or part of the year and the actual rent
received or receivable owing to such vacancy is less than the sum determined under clause (a). (This
situation falls under clause (c) above) The gross actual value in the above two cases shall be
determined as under:

Situation 1: Where the property is let and was vacant for part of the year and the actual rent received
or receivable is more thanm the sum determined under clause (a) in spite of vacancy period. In this
case, clause (c) shall not be applicable as it will be applicable only when actual rent received or
receivable is less than the sum referred under clause (a).

Hence the gross annual value in this case shall be:

(1) the sum for which the property might reasonably be expected to let from year to year; or

(2) actual rent received or receivable, whichever is higher. Illustration: Municipal value of a house is
Rs. 90,000, Fair rent, Rs. 1,40,000, Standard rent Rs. 1,20,000. The house property has been let for
Rs. 12,000 p.m. and was vacant for one month during the previous year 2003-04. Municipal taxes
paid during the year were Rs. 40,000. Compute the annual value for assessment year 2004-05.
Solution

Step I: Compute Gross Annual Value (which shall be higher of the following two)

(a) Expected rent which shall be municipal value (Rs. 90,000) or fair rent (Rs. 1,40,000) but limited to
standard rent (Rs.1,20,000) 1,20,000

(b) actual rent received or receivable Rs. 12,000 x 11 1,32,000 :.Gross annual value shall be Rs.
1,32,000

Step II: Less: Municipal Taxes paid 40,000

Net annual value. 92,000

Situation 2: Where the property is let and was vacant for whole or part of the year and the actual rent
received or receivable owing to such vacancy is less than the sum determined under clause (a). The
annual value of the property shall be determined under this situation if all the following 3 conditions
are satisfied:

(1) The property is let;

(2) It was vacant during the whole or part of the previous year;

(3) Owing to such vacancy, the actual rent received or receivable is less than the value determined
under section 23(1)(a) In this case, both clause (a) and clause (b) shall not be applicable and the
gross annual value shall be the actual rent received or receivable.

Illustration : Take the above illustration No. 5.3. Assume the - property was vacant for 3 months.
Determine the annual value for the assessment year 2004-05.

Solution

(a) Expected rent (as determined above) Rs. 1,20,000

(b) Actual rent received/receivable (12,000 x 9) Rs. 1,08,000 As the actual rent. received or
receivable owing to vacancy is less than the sum determined under clause (a), it will fall under
situation 2 i.e. section 23(1)(c) and therefore net annual value shall be determined as under:

                                  Rs.

Actual rent receive or receivable 1,08,000

Less: Municipal Taxes paid        40,000

Net annual value                  68,000

House Property which is part of the year let and part of the year occupied for own residence:

Where a house property is, part of the year let and part of the year occupied for own residence, its
annual value shall be determined as per the provisions of section 23(1) relating to let out property. In
this case, the period of occupation of property for own residence shall .be irrelevant and the annual
value of such house property shall be determined as if it is let. Hence, the expected rent as per
section 23(1)(a) shall be taken for full year but the actual rent received or receivable shall be taken
only for the period let.

Illustration: R has a house property in Delhi whose, Municipal Value is Rs. 1,00,000 and the Fair
Rental Value is Rs. 1,20,000. It was self-occupied by R. from 1-4-2003 to 31-7-2003. W.e.f. 1-8-2003
it was let out at Rs. 9,000 p.m. Compute the annual value of the house property for the assessment
year 2004-05 if the municipal taxes paid during the year were Rs. 20,000.

Solution: The gross annual value shall be higher of the following two

(a) Expected rent (Municipal value Rs. 1,00,000 or FRV Rs. 1,20,000 whichever is higher) Rs.
1,20,000

(b) Actual rent received/receivable for let out period i.e. 9,000 x 8 72,000

       Gross annual value 1,20,000

       Less: Municipal taxes 20,000

       Net annual value 1,00,000

Illustration : Take illustration No. 5.5. Determine the annual value assuming that the standard rent is
fixed at Rs. 1,08,000.

Solution: Gross annual value shall be higher of the following two:

a) Expected rent shall be limit to standard rent Rs.1,08,000

(b) Actual rent received or receivable             72,000

                                                                         1,08,000

                                                                          20,000

                                                                          88,000

Gross annual value

Less: Municipal taxes

Net annual value

Treatment of unrealized rent

As per the Explanation, the actual rent received or receivable mentioned in section 23(1)(b) and (c)
shall not include the amount of rent which the owner cannot realize, subject to the rules made in this
behalf.
Rules for unrealized rent

      The amount of rent which the owner cannot realize shall be equal to the amount of rent
payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where,-

       (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 assessee has taken all reasonable steps to institute legal proceedings for the recovery
       of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.

Illustration : R furnishes the following particular in respect of a house property owned by him in Delhi

                                     Rs.

Municipal value                      2,00,000

Fair rent                            2,40,000

Actual rent (per month)                21,000

Municipal tax paid during the year     20,000

The tenant vacated the property on 31-10-2003 and thereafter the property was let out for Rs. 25,000
p.m. R. could not realize the rent for the months of September and October, 2003 due to the death of
the earlier tenant.

(A) Compute the annual value of the property for the assessment year 2004-05.

(B) What will be your answer if the unrealized rent is for one month instead of two months.

Solution

Computation of annual value

Step I: Determine the value as per section 23(1)(a) It shall be Rs. 2,00,000 or Rs. 2,40,000 whichever
is higher

Step II: Actual rent received/receivable‖( Rs 71,000 x 7 + 25,000 x 5) 240000

Less: Unrealized rent

272000

In this case, the gross annual value shall

4200 230000

be Rs. 2,40,000.
         240000

Gross annual value

          20000

Less: Municipal tax paid              230000

Net annual value 240000

(B) 272000

Step I: Determine the value as per         21000 251000

section 23(1)(a)            251000

It shall be Rs. 2,00,000 or Rs. 2,40,000         20000

whichever is higher                231000

Step II: Actual rent received/receivable (21,000 x 7 -t 25,000 x 5)

Less: Unrealized rent

In this case, the gross annual value shall be Rs. 2,51,000.

Gross annul value

Less: Municipal tax paid

Net annual value



Deductions from income from house property

      Income chargeable ‗under the head ―Income from house property‖ shall be computed after
making the following deductions, namely:-

       (a) Statutory deduction: From the net annual value computed, the assessee shall be allowed a
       statutory deduction of a sum equal to 30% of the net annual value. This deduction is like
       standard deduction which is allowed from gross salary.

       (b) Interest on borrowed capital: Where the property has been acquired, constructed, repaired,
       renewed or reconstructed with borrowed capital, the amount of any interest payable on such
       capital is allowed as a deduction. The amount of interest payable yearly should be calculated
       separately and claimed as a deduction every year. It is immaterial whether the interest has
       been actually paid or not paid during the year. [Circular No. 363, dated 24-6-1983]. Interest
       attributable to the period prior to completion of construction: It may so happen that money is
       borrowed earlier and acquisition to completion of construction takes place in any subsequent
       year. Meanwhile interest becomes payable. In such a case interest paid/payable for the period
       prior to the previous year in which the property is acquired/ constructed (as reduced by any
       part thereof allowed as a deduction under any other provisions of the Income-tax Act) will be
       aggregated and allowed in five successive financial years starting from the year in which the
       acquisition/construction was completed. Interest will be aggregated from the date of borrowing
       till the end of the previous year prior to the previous year in which the house is completed and
       not till the date of completion of construction.

1. Where a fresh loan has been raised to repay the original loan if the second borrowing has really
been used merely to repay the original loan and this fact is proved to the satisfaction of the ITO, the
interest paid on the second loan would also be allowed as a deduction under section 24(1)(vl).
(Circular No. 28, dated 20-8-1969).

2. Interest on interest is not deductible. The assessee is entitled to deduct only the interest payable
by him on the capital borrowed, and not the additional interest which because of his failure to pay the
interest on the due date is considered as a part of the loan.

3. Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as
deduction. [Circular No. 28, dated 20-8-1969]. Any interest paid on outstanding amount of interest,
will not be allowed as deduction.

1. The assessee shall be not allowed any other deduction on account of any expenses incurred in
relation to such house property.

2. The deduction in respect of a self occupied house has been discussed<later in the Chapter.

Illustration : The assessee took a loan of Rs. 3,00,000 on 1-4- 2001 from a bank for construction of a
house on a piece of land he owns in Delhi. The loan carries an interest @ 20% per annum. The
construction is completed on 15-6-2003. The entire loan is still outstanding. Compute the interest
allowable for the assessment year 2004-05.

Solution

(i) Interest for the previous year 2003-04 on Rs. 3,00,000 @ 20% Rs. 60,000

(ii) Interest for the pre-construction period i.e. from1-4-2001 to 31-3-2003 (l/5th of Rs. 1,20,000)
              24,000

Total interest allowable              84,000

Although the property is completed on 15-6-2003, the interest for the entire previous year i.e. 1-4-
2003 to 31-3-2004 will be treated as current year‘s expenditure.

Deductions provided under section 24 are exhaustive The deductions under section 24 are
exhaustive with the result that if a particular: type of expenditure is not specifically provided to be
deductible under this section. deduction thereof cannot be claimed from net of the annual value.
Illustration R owns a house property in Delhi. From the particulars given below compare the income
from house property for the assessment year 2004-05.

                                          Rs.

Municipal value                              2,00,000
Fair rent                                     2,52,000

Standard rent                                 2,40,000

Actual rent (per month)                           23,000

Municipal taxes                 20% of municipal value

Municipal taxes paid during the year50% of tax levied

Expenses on repairs                               20,000

Insurance premium                                  5,000

R had borrowed a sum of Rs: 10,00,000 @ 12% p.a. on 1-7- 2001 and the construction of the
property was completed on 28-2-2003.

Solution: Gross annual value shall be higher of the following two:

                                            Rs.

(a) Expected rent

Municipal value                    (Rs. 2,00,000),

Fair rent (2,52,000) whichever is higher, but limited to standard rent (2,40,000)   2,40,000

(b) Actual rent received/receivable (23,000 x 12) 2,76,000

Gross annual value                     2,76,000

Less: Municipal taxes paid

[50% of (20% of Rs. 2,00,000)]                     20,000

2,56,000                                256000

Less: Deductions u/s 24

(a) Statutory deduction @ 30%                      76,800

(b) Interest on borrowed money (see note below)            1,38,0002,14,800

Income from house property                          41,200

(1) Interest for pre-construction period.

Pre-construction period shall be from 1-7-2001 to 31-3-2002 i.e. 9 months Interest for 9 months =
10,00,000 x 90,000

100



1/5 of Rs. 90,000 18,000
(2) Interest for previous year

(12% of Rs. 10,00,000) 1,20,000 1,38,000

Illustration: R has a house property in Delhi whose particulars are as under:

Municipal value Rs.

Standard rent. 3,00,000

Municipal taxes paid 3,12,000

Interest on money borrowed for acquiring the house after 1-4-2001 50,000

Period of occupation for own residence 1,60,000

Actual rent for 10 months 2 months Compute the income from house property for assessment year
2004-05. 35,00 p.m

Solution

Computation of income from house property Gross annual value‖ shall be higher of following two

(a) Expected rent (Municipal value Rs. or FRV Rs. 4,20,00.9 whichever is higher i.e. Rs. 4,20,000 but
restricted to standard rent i.e. Rs. 3,12,000) 3,12,000

(b) Actual rent received or receivable (35,000 x 10) 3,50,000 3,50,000

Less: Municipal taxes paid 50,000

Net annual value 3,00,000

Less: Deduction 24

(a) Statutory deduction @‖30% 90,000

(b) Interest on money borrowed of acquisition of house 1,60,000 2,50,000 Income from house
property 50,000

(1) FRV has been determined on the basis of actual rent i.e. Rs.35,000 x 12 = Rs. 4,20,000. (2) The
deduction on account of interest shall not be restricted to Rs. 1 ,50,000 as the property has been
treated as let out and not self occupied. Illustration: Take illustration above will be the answer if
standard rent is not applicable.

Solution

Computation of income from house property

Gross annual value shall be higher of following two

(a) Expected rent (Municipal value Rs. 3,00,000 or FRV Rs. 4,20,000 whichever is higher i.e. Rs.
4,20,000) 4,20,000
(b) Actual rent received or receivable (35,000 x 10) 3,50,000 4,20,000 Less: Municipal taxes paid
50,000

Net annual value 3,70,000

Less: Deductible u/s 24. 1,11,000

(a) Statutory deduction @ 30% 1,60,000 2,71,000

(b) Interest on money borrowed for acquisition of house Income from house property 99,000

Illustration : R owns 3 house properties situated in Delhi. The particular of the houses are as under

House I House II House III

Municipal value

Fair rent

Standard rent

Actual rent (per month)

Period of vacancy

Municipal taxes for the year

Municipal tax paid during the year

Rs.

1,00,000

1,40,000

1,20,000

12,000

Nil

20% of municipal value 20,000

Rs.1,50,000

1,80,000

2,00,000

17,5000

1 month

40,000
80,000

Rs.2,00,000

2,40,000

21,000

6 months

50,000

30,000

Compute the income under the head house property of all the 3 properties.

Solution

House I: As the house property is let through out the previous year the annual value shall be
determined as per clauses (a) and (b) of section 23(1).

Step I: Compute gross annual value The GAV shall be higher of the following

2: (a) Rs. 1,00,000 or Rs. 1,40,000 whichever is higher but subject to maximum Rs. 1,20,000 i.e.
1,20,000

(b) Actual rent received or receivable i.e.

Rs. 12,000 x 12 1,44,000

:. Gross annual value 20,000

Step II: Deduct Municipal tax paid during the previous year

Net annual value 1,24,000

Less: Statutory deduction @ 30% 37,200

Income from house property 86,800

House II

Step I: Determination of value as per section 23(1)(a) Municipal value 1,50,000

Fair rent 1,80,000

Standard rent 2,00,000

:. Value as per section 23(1)(a) 1,80,000

Step II: Actual rent received/receivable (17,500 x 11) = Rs 1,92,500

Since the actual rent received/receivable, in spite of vacancy is more than the value determined as
per clause (a), section 23(1)(c) will not be applicable and the gross annual value shall be Rs.
1,92,500 being higher of the amount determined as per section 23(1)(a) and section 23(1)(b). 38
11.316



TAXATION
Rs.Gross annual value 1,92,500

Less: Municipal tax paid 80,000

Net annual value 1,12,500

Less: Statutory deduction @ 30% 33,750

Income from house property 78,750

House III

Computation of Gross Annual Value

Step I: Determination of value as per section 23(1)(a) It will be Rs. 2,00,000 or Rs. 2,40,000
whichever is higher as standard rent is not applicable in this case Rs. :. Value as per section 23(1)(a)
2,40,000

Step U: Actual rent received/receivable (21,000 x 6) 1,26,000

Since the property is let and was vacant for part of the year and the actual rent received is less than
the value determined is applicable. Therefore, the gross annual value shall be the actual rent
received or receivable.

Rs. Gross annual value 1,26,000

Less: Municipal tax paid 30,000

Net annual value 96,000

Less: Statutory deduction @ 30% 28,800

Income from house property 67,200

Computation of Income of a property which is self-occupied for residential purposes or could not
actually be self occupied owing to employment. Where the annual value of such house shall be nil :
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 or. 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.
      Where the annual value of such house shall not be nil : The annual value of self-occupied
house shall not be nil:

(i) if such house or part of the house is actually let during the whole or any part of the previous year;
or (ii) any other benefit there from is derived by the owner from such house.

In the above cases, the annual value shall be determined as per provisions applicable for let out
properties i.e. under clause (a), (b) or (c) of section 23(1).

Where assessee has more than one house for self occupation:

      If there are more than one residential house, which are in the occupation of the owner for his
residential purposes then he may exercise an option to treat anyone of the houses to be self
occupied.

         The other house(s) will be deemed to be let out and the annual value of such house(s) will be
determined as per section 23(1)(a) i.e. the sum for which the property might reasonably be expected
to let from year to year. The assessee in this case, should exercise .his option in such a manner that
his taxable income is the minimum. Such option may be changed from year to year. However, if an
assessee has a,. house property which consists of two or more residential units and all such units are
self occupied, the annual value of the entire house property shall be taken as nil as there is only one
house property though it has more than one residential units.

       1. Annual value as per Income-tax is after deduction of municipal taxes, etc. paid, if any.

       2. The benefit of exemption of one self-occupied house is available only .to an individual/HUF.

       3. If the assessee lets out his house to his employer, which in turn allots the same to him, as
       rent free accommodation, such house will not be treated as self occupied for the above
       purpose, because he is not occupying his own house in the capacity of owner Deduction in
       respect of one self occupied house where annual value is nil: Where annual value of one self-
       occupied house is nil, the assessee will not be entitled to the statutory deduction of 30%, as
       the annual value itself is nil. However, the assessee will be allowed deduction on account of
       interest (including 1/ 5th of the accumulated interest of pre-construction period) as under:-

(a) Where the property has been acquired, constructed, repaired, renewed or reconstructed with
borrowed capital before 1-4-1999 Actual interest payable subject to maximum of Rs. 30,000 (b)
Where the property is acquired or constructed with capital borrowed on or after 1-4-1999 and such
acquisition or construction is completed within 3 years of the end of the financial year in which the
capital was borrowed Actual interest payable subject to maximum Rs. 1,50,000 if certificate
mentioned in point 2 in box given below is obtained (c) In any other case, i.e., money is borrowed
after 31-3-1999 for repairs or renewal Actual interest payable subject to maximum of Rs. 30,000 1. It
may be noted that the deduction of interest of RS.30,000 is allowed for purpose or construction or
repair or renewal or reconstruction of house property where as the deduction to the maximum of Rs.
,50,000 is allowed only for acquisition or construction of house property, subject to other conditions
being satisfied. 2. For getting ‗deduction of interest of maximum of Rs. 1,50,000, it will now be
necessary to obtain a certificate from the person to whom such interest is payable specifying the
amount of interest payable by the assessee for the purpose of acquisition/construction of the
property or conversion of the whole or any part of the capital borrowed which remains to be repaid as
a new loan.

      The expression 8new loan8 means the whole or any part of a loan taken by the assessee
subsequent to capital borrowed, for the purpose of repayment of such capital.

Illustration : Assessee has one house property at Vasant Kunj in Delhi. He stays with his family in this
house. The rent of similar property in the neighborhood is Rs. 56,000 per annum. The municipal
valuation is Rs. 28,000. Municipal taxes paid in respect of the property are Rs. 5,000 (including Rs.
1,000 for an earlier year). The house was constructed in 1998 with a loan of Rs. 12,00,000 taken
from HDPC. During the previous year 2003-04, the assessee refunded Rs. 2,30,000 which includes
Rs. 1,68,000 as interest. Compute the income from house property for assessment year 2004-05. (b)
What would be the deduction on account of interest if the loan was taken on or after 1-4-1999 and‘
the property was completed in December, 1999. Solution Rs.

a) Annual value of one house used for self-occupation nil

Less: Deductions u/s 24(1)

Interest on money borrowed (-) 30,000

Rs. 1,68,000 but restricted to flex. Rs. 30,000

Loss from house property. (-) 30,000

(b) The deduction in this case will be Rs. 1,68,000 subject to a maximum of Rs. 1,50,000.

Therefore the loss for house property shall be Rs. 1.50,000.

Illustration : X has two houses, both of which are selfoccupied.

The particulars of the houses are as under:

Municipal Value

Fair Rental Value

Standard rent

Date of completion

Municipal taxes

1st House (Rs.)

60,000

72,000

1-1-1992

6,000
paid during the year

llnd House (Rs.)

90,000

1,20,000

. 1,00,000

1-10-1992

9,000

paid during the year

Suggest which house should be opted by X to be assessed as self-occupied so that his tax liability is
minimum.

Solution: Assume both houses to be let out

Gross Annual Value

Less: Municipal taxes

Net Annual Value

Less: Statutory

deduction @ 30%

Net .annual value

Deemed. to be let out

1st House (Rs.)

72,000

6,000

66,000

19,800

46,200

Deemed to be let out

ll nd House (Rs.)

1,00,000

9,000
91,000

27,200

631700

If house I is opted to be self-occupied the income of house property shall be:

Rs. Nil

House I 63,700

House II 63,700

If house n is opted to be self-occupied the income of house

property shall be:

Rs.

House I 46,200

House II Nil

46,200

Therefore, he should opt for house II to be self-occupied.

Illustration : Take illustration above will be your answer if in case of house II, the interest on money
borrowed for repair of the property during the current year is Rs. 40,000.

Solution: Assume both houses to be let out Gross Annual Value

Less: Municipal taxes

Net Annual Value

Less: (a) Statutory deduction @ 30%

(b) Interest on money borrowed Net annual value Deemed to be let out 1st House

(Rs.)

72,000

6,000

66,000

19,800

46,200

Deemed to be let out
llnd House

(Rs.)

1,00,000

9,000

91,000

27,200 .

40,000

23,700

If house I is opted to be self-occupied the income of house property shall be:

Rs. Nil

House I 23,700

House II 23,700

If house II is opted to be self-occupied the income of house property shall be:

Rs.

House I 46,200

House II (-)

30,000

16,200

       Therefore, he should opt for house II to be self-occupied. Interest when not deductible from
―Income from House Property‖ Interest on borrowed ,money which is payable outside India shall not
be allowed as deduction u/s 24(b), unless the tax on the same has been paid or deducted at source
and in respect of which. there is no person in India, who maybe treated as agent of the recipient for
such purpose. Subsequent recovery of unrealized rent

(A) Recovery of unrealized rent allowed as deduction upto assessment year 2001-02 : Where a
deduction has been claimed and allowed to the assessee in respect of unrealized rent in assessment
year 2001-02 or prior to that and subsequently the assessee realizes any amount in respect of such
rent, the amounts so realised shall be deemed to be income chargeable under the head ―Income from
house property‖ and accordingly charged to tax as the income of that previous year, irrespective of
the fact whether the assessee is the owner of the property in that year or not. No deduction under
section 23 or section 24 whatsoever will be allowed to the assessee from such unrealized rent
recovered.
(B) Recovery of unrealised rent already reduced from the annual value for assessment year 2002-03
and onwards : Where the assessee cannot realize rent from a property let to a tenant and
subsequently the assessee has realised any amount in respect of 40 11.316 such rent, the amount so
realised shall be deemed to be income chargeable under the head ―Income from house property‖ and
accordingly charged to income-tax as the income of that previous year in which such rent is realised
whether or .not the assessee is the owner of that property in that previous year. Special provisions for
arrears of rent received

       Where the assessee: (a) is the owner of any property consisting of any buildings or lands,
appurtenant there to which has been let to a tenant; and (b) has received any amount, by way of
arrears of rent from such property, not charged to income-tax for any previous year; the amount so
received, after deducting a sum equal to 30% of such amount, shall be deemed to be the income
chargeable under the head income from house property. Further, it will be charged to income-tax as
the income of that previous year in which such rent is received, whether the assessee is the owner of
that property in that year or not.



Property owned by Co-owners

      Sometimes the property consisting of buildings or the buildings and lands appurtenant thereto
is owned by two or more persons, who are known as co-owners. In such cases, if their respective
shares are definite and ascertainable, such persons shall not be assessed as an AOP in respect of
such property, but the share of each such person in the income from the property, as computed in
accordance with sections 22-25, shall be included in his total income.

       Where the house property owned by the co-owners is self occupied by each of the co-owner,
the annual value of the property for each of such co-owner shall be nil and each of the co-owner shall
be entitled to the deduction of Rs. 30,000/ 1,50,000 under section 24(b) on account of interest on
borrowed money.

       As regards, the property or part of the property which is owned by co-owners is let out, the
income from such property or part thereof shall be first computed as if this property/part is owned by
one owner and thereafter the income so computed shall be apportioned amongst each co-owner as
per their definite share.

       Property owned by partners of the firm: It is true that in the ultimate analysis it is the partners of
the firm taken as a whole who are owners of the house property. But, when these partners go by a
firm-name in their collective capacity, and when a particular immovable property or properties happen
to be included in the assets of the firm, the income from such property can and should be assessed in
the hands of the firm.

       In law, the joint effects of a partnership firm belong to the firm; a partner has no individual right
in any specific asset of the firm and he has no exclusive right to possess or use the partnership
property. Hence it is not open to any partner to seek to be assessed as an individual qua his
fractional share in the firm.
Illustration: Three brothers A, Band C having equal share are co-owners of a house property
consisting of six identical units, the property was constructed on 31st May, 1992. Each of them
occupies one unit for his residence and the other three units are let out at a rent of Rs. 5,000 per
month per unit. The Municipal Value of the house property is Rs. 3,00,000 and the Municipal Taxes
are 40% of such Municipal Value, which were paid during the year. The other expenses were as
follows:

Rs.

(i) Repairs 20,000

(ii) Collection charges 5,000

(iii) Insurance Premium (paid) 11,000

(iv) Interest payable on loan taken for construction of house 1,20,000

       One of the let out units remained vacant for three months during the year. A could not occupy
his unit for six months as he was transferred to Mumbai. He does not own any other house. The other
income of A, Band Care Rs. 50,000; Rs. 60,000; and Rs. 70,000 respectively. Compute the income
under the head ―Income from House Property‖ and the total income of the three brothers for
assessment year 2004-05.

Solution

Let out Property (50% i.e. 3 units)

Gross annual value Rs. Rs.

(a) Municipal value (50% of

Rs. 3,00,000) 1,50,000

(b) Actual rent (5,000 x 12 x 3)

1,80,000 - 15,000 1,65,000 1,65,000

(vacancy of one unit for 3 months) 60,000

Less: Municipal taxes paid

(50% of Rs. 1,20,000) 1,05,000

Net annual value 31 ,500

Less: Deductions u/s 24 60,000 91,500

(a) Statutory deduction @ 30% 13,500

(b) Interest on loan (50%) 4,500

Income from let out property
Therefore, share of each co-owner is l/3rd of 13,500 Self occupied property

A B C (Rs.) (Rs.) (Rs.) Annual value Nil

Less Deduction u/s 24(b)

Interest on loan (Rs. 60,000 + 3 = 20,000)

restricted to maximum Rs. 30,000 for each co-owner 20,000

Income from self occupied property (-) 20,000 (-) 20,000 (-) 20,000

Computation of the total income of the three brothers

ABC

(Rs.) (Rs.) (Rs.)

Income from House Property

Let out portion 4,500

Self occupied portion (-) 20,000

Net income from house

property (-) 15,500

Other Income 50,000 60,000 70,000

Total Income 34,500 44,500 54,500

      Interest on borrowed capital is allowable subject to maximum of Rs. 30,000/1,50,000; even if
the assessee could not occupy the house property for part/entire previous year due to his
employment elsewhere, provided he does not own any other house property.

Can Annual Value (Net Annual Value) be negative?

      The Annual Value (NA V) can be negative only when the municipal taxes paid by the owner
are more than the gross annual value. Can there be any loss under the head income from house
property?

       This brings us to the question as to whether there can be any loss under this head. (i) In so far
as income from a self-occupied property is concerned, the annual value is taken as nil. No deductions
are allowed except for interest on borrowed funds up to a maximum of Rs. 30,000/1,50,000.
Naturally, therefore, there may be a loss in respect of such property up to a maximum of Rs.
30,000/1,50,000, as the case may be.

(ii) In respect of any other type of house property, namely a house property which is fully let out or
part of the year let out, etc., there are no restrictions on deductions and therefore, there can be loss
under this head in respect of such properties due to municipal taxes as well as deductions. Similarly,
deductions under section 24 in case of property deemed to be let out, can be more than net annual
value.

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:80
posted:9/14/2011
language:English
pages:92