Ch.1 BASIC CONCEPTS
Financial Year : The year starting from April 1 and ending on March 31 of the next year is known as a financial year.
Assessment Year: AY is a financial year in which the income earned during the previous year is taxed.
Previous Year (sec 3): The year in which the income is earned is called the previous year. E.g.:
1. Income earned by XYZ Ltd in the year 2007-2008 will be taxed in the year 2008-2009. The same would be taxable irrespective of the accounting year followed by the assessee. In the aforesaid the year 2007-08 is the previous year and the year 2008-09 is the assessment year.
2. The income of X comprises of only property income till March 10, 2006. On March 10, 2006 he starts a new business of computer hardware. From the date given below, find out the taxable income of X or the assessment years 2005-06 to 2007-08.
Property income: Rs. 42,000/- every year.
Business income: Rs 10,000/- for the period ending 31 March 2006 and Rs.56000/-for the period ending 31 march 2007.
What would be the taxable income of X for the AY 05-06, 06-07, 07-08?
Income earned during the previous year is taxed during the assessment year. Therefore a year is an assessment year and previous year simultaneously. However in certain cases the income is taxed in the year in which it is earned. The exceptions to the rule are as under:
1. Income of non-resident from shipping. (sec172)
2. Income of persons leaving India either permanently or for long period of time (sec174)
3.
Income of bodies formed for short duration. (sec174A)4.
Income of persons trying to alienate his assets with view to avoiding payment of his tax. (sec 175)5. income of discontinued business.(sec176)
“Person “sec 2(31): The term persons include:
a) an individual
b) a Hindu undivided family c) a company
d) a firm
e) an association of persons and a body of individuals whether incorporated or not f) a local authority
g)
Every artificial jurisdictional person not falling under any of the preceding category. The aforesaid is an inclusive list and the last category covers all those that do not fall in any of the preceding classification.Assessee [sec2 (7)]:
Assessee means a person by whom any tax or any other sum of money (i.e. penalty or interest is payable under the act. It includes:
1.
Every person in respect of whom any proceeding under the act has been taken for the assessment of his income or loss or the amount of refund due to him.2. any person who is deemed to be an assessee.(representative assessee) 3. an assessee in default ( advance tax and TDS not deducted)
Overview of tax on income:
Income Tax is an annual Tax charged at the tax rates applicable for the assessment year, which are fixed by the annual finance act.
Basic concept of Income:
1. Regular and definite source
2. Different form of income (cash/kind) 3. Receipt v/s accrual
4. Illegal income 5. Disputed title
6. Relief or reimbursement of expense is not income
7. Diversion of income by over riding title v/s application of income 8. Surplus from mutual activity not an income.
9. Temporary or permanent income 10. tax free income
11.
Receipt on account of dhrmada, gaushala etc is not an income. 12. devaluation of currency13.
Income includes loss.14.
Appropriation of payment between capital and interest. 15. same income cannot be taxed twice16. income should be real and not fictional 17. charge on person
18. Award receipt by sports man 19. revenue receipts v/s capital receipts 20. voluntary payment
21. prize of winning
Extended meaning of income sec 2(24): 1. profits and gains
2. Dividend: dividend declared by domestic company is taxable in the hands of company and not shareholders
3. Voluntary contribution received by trust. 4. Perquisites in the hands of employee 5. Any special allowance and benefits 6. City compensatory allowance 7. Benefits or perquisites of director
8. Benefit or perquisites to a representative assessee 9. Any sum chargeable u/s 28, 41 and 59
10. Capital gains 11. Insurance profit
12. banking income of a cooperative society 13. winning from lottery
15. amt received under keyman insurance policy 16. amount exceeding 50,000 by way of gift
Gross total income
As per section 14, the income is computed under five heads:
Rounding off total Income:
The total income is to be rounded off to the nearest multiple of ten rupees.
Rs Rs
Computation of total income: Income from salaries
Income from House properties
profit and gains from business and profession Capital gains
Income from other sources
Gross Total Income Less: deductions u/s 80 C to 80 U
Net total Income (rounded off)
--Computation of Tax Liability:
Tax on total income
Less: rebate u/s 88E
Balance
Add: surcharge
Total
Add: education cess
Tax
Less: Prepaid taxes
( TDS, self assessment and Advance tax)
Tax Liability
--Ch.2 RESIDENTIAL STATUS AND ITS TAX EFFECT Different Taxable Entity:
1. Individual
2. Hindu Undivided Family
3. A firm or an association of persons 4. a joint stock company
5. every other person Residential status:
1. Resident and ordinary resident in India 2. Resident but not ordinary resident in India 3. Non-resident in India.
Different residential Status for different Taxable entity:
Category Individual/ Hindu undivided Family Firm/association of persons, joint stock company and every other person. Category 1 Ordinary resident Resident In India Non-ordinary resident Resident in India
Category 2 Non resident in India Non resident in India
Residential status is to be determined for each previous year. A person can be a resident of two countries at once. Whether a person is a resident or non-resident is a question of fact and its duty of the assessee to place all relevant fact in front of the assessing officer
Residential status of individual (sec 6): Basic conditions:
To be an Indian resident a person should satisfy atleast one of the two conditions as under: 1. He is in India in the previous year for a period of 182 days or more.
2. He is in India for 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
Exceptions:
In the following two cases a person will be a resident if he satisfies only the first condition, the second condition is not applicable.
1. In case of an Indian citizen who leaves India for the purpose of employment or as a member of the crew of an Indian ship.
2. In the case of an Indian citizen or a person of Indian origin who comes on a visit to India in the previous year.
Additional Conditions:
For a resident to be classified as an ordinary resident the following two additional conditions should be fulfilled. In case any one of them is not fulfilled then the person will be under the category of resident but not an ordinary resident.
1. He should be resident in India for at least 2 years out of the preceding 10 years. 2. He should be in India for at least 730 days out of the immediately preceding 7 years. Eg:
X foreign citizen comes to India for the first time on March 20, 2006. On Sep 1, 2006 he leaves for Nepal on a business trip. He comes back on February 26, 2007. Determine the residential status of X for the AY 2007-08.
X left India for the first time on May 20, 2004. During the FY 2007-08, he comes back to India on May 27 for a period of 53 days. Determine the residential status for the AY 2008-09.
X a foreign citizen leaves India for the first time in the last 20 years on Nov20, 2004. During the calendar year 2005, he comes to India on Sep 1 for 30 days. During the calendar year 2006, he does not visit India at all but come on January 16, 2007. Determine the residential status for the AY 07-08.Residential Status of a Hindu undivided Family sec 6(2):
HUF is classified as a resident and non resident according to its control and management status. Control and management means the de facto control and management and not just the right to control and manage.
Control and mangt is wholly in India Resident Next table Control and mangt is wholly outside India Non-resident --Control and mangt is partly in India and partly
outside India Resident Next table
Condition for being ordinary resident:
Add condition 1 Karta has been resident in India at least 2 out of 10 previous years immediately preceding the relevant previous year.
Add condition 2 Karta has been present in India for a period of 730 days or more during the 7 years immediately preceding the previous year.
If karta or manager of a resident HUF does not satisfy the above two conditions then it would be treated as resident but not ordinary resident.
Eg:
X an individual, is resident but not ordinary resident in India for the AY 07-08. During the previous year 06-07, the affair of X (HUF), whose Karta is X is partly managed from India and partly from Nepal. Determine the residential status of X (HUF) for the financial year 07-08?Residential status of firm and association of persons: sec6 (2)
Place of control Residential
status Control and management of the affairs of a firm/association of persons
is-• Wholly in India
• Wholly outside India
• Partly in India and Partly outside India
Resident Non-resident Resident
Residential status of a company sec 6(3):
Place of control Residential status
Indian Company Other company Control and management of the affairs of the
company is
situated-• Wholly in India
• Wholly outside India
• Partly in India and Partly outside India
Resident Resident Resident Resident Non resident Non resident
The term control and management refers to head and brain that directs the affair of policy, finance, disposal of profits and vital things regarding the management of a company.
Residential status of every other person sec 6(4):
Place of control Residential status
Control and management of his affairs are
situated-• Wholly in India
• Wholly outside India
• Partly in India and Partly outside India
Resident Non- resident
Resident
Incidence of Tax for different Taxpayers:
Incidence of tax on taxpayers depends on his residential status and also on the place and time of accrual and receipt of his income.
Tax incidence on Individual and HUF is as under: Resident and
ordinary resident Resident but not ordinary resident Non resident Indian Income
Foreign Income
• Business is controlled wholly or party from India
• Income from profession set up in India
• Business is controlled from outside India
• Profession is set up outside India
• Any other foreign Income
Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Taxable in India Not taxable in India Not taxable in India Not taxable in India
Taxable in India
Not taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India
Tax incidence on any other taxpayer (company, firm etc) as under:
Resident in India Non- resident in India Indian Income
Foreign income
Taxable in India Taxable in India
Taxable in India Not Taxable in India
Agriculture Income:
Agriculture income is exempt from tax by virtue of sec 10(1). By virtue of sec 2(1A) the expression Agriculture Income means:
1. Any rent or revenue derived from land, which is situated in India and is used for agriculture purpose.
•
Rent or revenue should be derived from land (may be in cash or kind).• The land should be in India
• The land should be for agriculture purpose.
2. Any income derived from such land by agricultural operations including processing of the agriculture produce, raised or received as rent-in- kind so as to render it fit for the market or sale of such produce.
3. Income attributable to a farmhouse subject to certain conditions.
• The building should be occupied by a cultivator (as a landlord or tenant).
• He should be in immediate vicinity of agriculture land.
• The building is used as a dwelling house or as a store house or other out building.
• The land is assessed to land revenue or local rates or alternatively the land is situated outside “urban areas” i.e. any area which is comprised within the municipality jurisdiction having a population of not less than 10,000 persons or within 8 kms from the limits of any such municipality.
If the above conditions are satisfied then, income from a farm building is exempt from tax. Agriculture income is included for tax rate purposes only.
Special Provisions in respect for newly established undertaking Sec 10(A): Eligibility:
Any undertaking which satisfy the following conditions is eligible to get deduction: 1. It must begin manufacture or production in free trade Zone
2. It should not be formed by splitting/ reconstruction of business.
3. It should not be formed by transfer of old machinery. (Second hand imported and 20%) 4. Sale consideration should be remitted to India in convertible foreign exchange.
5. Books of account should be audited
Amount of deduction
The deduction under sec 10A is as under:
Profit of the business x Export turnover . of the undertaking Total turnover of the business carried on by the
undertaking
Export
turnover-It means the consideration in respect of export by the undertaking of articles or things or computer software received in or bought in India by the assessee in convertible foreign exchange within the prescribed period.
Period of Deduction:
The assessee can claim deduction for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce.
The aforesaid deduction is not available to any undertaking from the assessment year 2010-11. Special Provisions:
Incase of an undertaking, which begins to manufacture or produce things or computer software between 1April 2002 to March 31 2005 in any special economic zone, is available as follows for 10 assessment years:
First 5 years-100% of profit derived from the export of such articles or things or computer software. (First 5 consecutive years).
Next 2 years- 50% of such profits and gains in deductible.
Next 3 years- a further deduction is available to the extent of 50% of the profit provided an equivalent amount is created as Special Economic Zone re-investment Allowance Reserve. Charitable and Religious trusts and institutions:
Income of a charitable trust is exempt according to the provisions of section 11, 12 and 13. The trust should be one established in accordance with law and its objects should fall within the definition of the term “ charitable purpose”.
Here the charitable purpose includes relief to the poor, education, medical relief and the advancement of any other object of general utility.
Income of the trust:
• Income means the real income, which has been received by the assessee.
• The amount deducted as tax at source cannot be considered as income for this purpose.
• Depreciation should be allowed while computing income for this purpose.
• Voluntary contribution or donations are deemed to be a part of income derived from property held under trust.
• If a voluntary contribution is made with a specific direction than it shall form a part of the corpus of the trust and not deemed as the income of the trust.
Application of the income of the trust:
If the income applied to charitable or religious purposes, during the previous year fall short of 85% of the income derived during the year due to below mentioned reasons then the trust can us the income as below:
Reason for less than 85% application of
income When the income can be spend
Income has not been received during the previous year
Any other reason
The year in which the income is received or the following subsequent year.
During the previous year immediately following the year in which the income is derived.
If the income is not applied during the extended time then the income will be taxable in the next year.
Accumulation of income:
The trust or institution may accumulate or set apart either the whole or part of its income for future application for such purposes. Such income so accumulated will not form the income of the trust. Forfeiture of exemption:
If the benefits of any amenities or services are derived by any specified persons as per section 13 then the exemption given to trust stand forfeited.
The following income do not qualify for exemption: 1. Income for private religious purposes only
2. Income for the benefit of particular religious community 3. Income for the benefit of interested persons
4. Funds not invested in specified securities/ deposits Eg:
During the previous year 2006-07, a charitable trust gets the following income: a. Voluntary contribution (with specific direction that they Rs
shall form part of the corpus of trust 12,90,000 b. Voluntary contribution (without specific direction) 18,30,000 c. Income from property held in trust
During the previous year 2006-07, the trust spends Rs. 8,90,000 for charitable purpose in India. Besides it gives donation of Rs. 85,480/- to the charitable trusts. It sets apart Rs. 14,00,000 for the purpose of construction of a charitable hospital up to March 31,2012.
Ch.4 INCOME UNDER THE HEAD SALARIES Meaning of salary
1. Relationship of an employer and employee 2. Salary and wages not conceptually different 3. Salary can be from more than one source 4. It can be in cash or kind
Salary Sec 17(1):
Salary under 17(1), is defined to include the following: 1. wages
2. any annuity or pension 3. any gratuity
4. any fees, commission, perquisites, or profits in lieu of or in addition to any salary or wages.
5. any advance on salary
6. any payment received by an employee in respect of any period of leave not availed by him.
7. the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable.
8. the contribution made by the central government to the account of an employee under a pension scheme.
Basis of Charge Sec 15:
1. Any salary due from an employer whether actually received or not. 2. Any salary received in the previous year whether actually due or not.
3. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer, if not charged to income tax for any previous year.
Computation of income from Salary:
Income from Salary
Income by way of allowance Taxable value of perquisites
Gross Salary Less: deductions u/s 16
Entertainment Allowance Professional Tax
Income from salaries
Rs. Rs. -- ---Leave Salary:
Leave Salary refers to the encashment of the leave standing to the credit of an employee either at the time of his retirement/ or leaving his job or at any time during his service.
Tax treatment:
Nature of Leave encashment Status of employee Whether it is taxable Leave encashment during continuity
of employment
Government/ non government employee
Chargeable to Tax Leave encashment at the time of
retirement / leaving the job
Government employee Fully exempted
Leave encashment at the time of
retirement / leaving the job Non government employee Fully or partly exempted from tax in some cases.
Non government employee getting Leave encashment at the time of retirement / leaving the job: In case of a non-govt employee including a local authority or public sector undertaking, leave salary is exempt from tax on the basis of following:
1. Period of earned leave (in no. of months) to the credit of employee x Average Salary per month. (cannot exceed more than 30 days in a year)
2. 10 x average monthly salary
(Avg monthly salary= basic salary+ dearness allowance+ commission on turnover)
3. Amt specified by Govt. (300,000) 4. Leave encashment actually received Note: Any part of the year is to be ignored. Eg:
1.
Mr. Pradeepkumar retires on 1st July 2007 after serving 18yrs of service and receives Rs.80,000 as amount of leave encashment for 15 months. His employer allows 45 days leaves for every completed year of services. During service he has encashed leave for a period of 12 months. Calculate the taxable amount of leave encashment if his salary during 1/7/06 to 1/7/07 is Rs. 5000/- per month.
Gratuity Sec 10(10):
Gratuity is a retirement benefit and is generally payable at the time of cessation of employment and on the basis of duration of service.
Status of employee Tax treatment
Government Employee Fully exempted from Tax
Non government employee covered by the payment of Gratuity Act, 1972
Exempted to the Least of the following:
3,50,000/- Gratuity actually received
15 days last drawn salary x length of service/26
Non government employee not covered by the payment of Gratuity
Exempted to the Least of the following:
Note:
1. In case where the employee is covered by gratuity Act, 1972 then the year is to be rounded off to the nearest whole. (above 6 months the year to be rounded off to one.) 2. In case where the employee is not covered by the gratuity Act, 1972 then the years are
the completed years of service( any fraction is to be ignored). Eg:
1) X, an employee of PQ Co. Ltd, receives Rs. 78,000 as gratuity. He is covered by the payment of gratuity Act, 1972. He retires on December 12, 2006 after rendering services of 38 years and 8 months. At the time of retirement his monthly basic salary and dearness allowance was Rs.2,400/- and Rs. 800 respectively. Calculate the amount of exemption.
2) In the above example calculate the amount of exemption if X was not covered by the Gratuity Act, 1972.
3)
Mr. X retired on 1st April 2007 after serving for 30 years and 7 months. He was getting salaryRs. 5,000/- pm from 1/1/2006 to 31/12/2006 and thereafter Rs. 5,200/- pm. He received DA @ Rs. 1,000 pm (forming part of salary for computation of retirement benefits) and 2%commission on sales achieved by him. Turnover achieved by him during 10 months (preceding the month in which he retired) Rs. 8,00,000. He received a gratuity of Rs. 1,56,000. Compute the exempted amount of gratuity.
Pension Sec 17(1)(ii):
Uncommuted Pension: Periodical payment of pension.
Commuted Pension: Lump sum payment in lieu of periodical payment. Taxability of commuted pension:
Uncommuted Pension is always chargeable to tax for both government and non-government employee.
Status of employee Gratuity received/ not received
Exemption Government Employee Gratuity may or may not be
received Exempted from Tax
Non-Government Employee
Gratuity is received One-third of the pension, which he is normally entitled to receive, is exempt from tax.
Gratuity is not received One-half of the pension, which he is normally entitled to receive, is exempt from tax.
Eg:
1.
X retires from a private company on 30th April 2007. He gets a pension of Rs. 24000/- permonth. Upto 30th June 2007. From 1st July 2007 onwards he gets two-third of his pension
commuted for Rs. 1,50,000/-. He was not in receipt of any gratuity at the time of retirement. Compute the taxable amount of pension for the assessment year 2008-09. 2. Calculate the taxable pension of X for the AY 2008-09, in the above ex. if X was in receipt
of Gratuity as per gratuity Act 1972.
Pension Scheme for an employee joining Central Government on or after Jan 1, 2004: Under the new scheme it is compulsory for an employee to contribute 10% of salary every month towards their pension account and a matching contribution will be made by the government. Such contribution will be deductible under u/s 80 CCD. When the pension is received out of the aforesaid amount it will be taxable in the hands of recipient.
Different form of Allowances:
Allowances is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions for that service. It is fixed, predetermined and given irrespective of actual expenditure.
House rent Allowance:
The least of the following amount would be taxable:
1. An amount equal to 50% of the salary, where the residential house is situated at Mumbai, Kolkatta, Delhi or Chennai and an amount equal to 40% of salary where residential house is situated at any other place.
2. House Rent Allowance received by the employee. 3. The excess of rent paid over 10% of the salary.
Salary means basic salary and includes dearness allowance and commission based on the fixed percentage of turnover.
Eg:
Mr. X is employed in a company in Agra. He is getting a basic salary of Rs. 5000/- pm, Dearness allowance @10% of basic pay, commission based on fixed percentage of turnover Rs. 24,000/- pa. Actual rent paid by the assessee Rs. 2,500/- pm. Compute the taxable amount of HRA.
Entertainment Allowance:
Entertainment Allowance is first included in the salary income and thereafter a deduction is given on the following basis:
E.g.:
X, a government employee gets Rs. 40,000 per annum as basic pay. In addition, he receives Rs. 8,500 as entertainment allowance. His actual expenditure on entertainment for official purpose however exceeds Rs. 9000/-. What would be the amount of deduction?
Special Allowances:
When exemption depends upon actual expenditure by the employee:
In these below mentioned cases the amount of expenditure is the least of the Amount of allowance
The amount utilized pertaining to allowance List of the allowances is as under:
1. Traveling Allowance/ transfer allowance 2. Conveyance allowance
3. Daily allowance 4. Helper allowance 5. Research Allowance 6. Uniform Allowance
When exemption does not depend upon the expenditure: These allowances are exempt to the least of the following:
Amount of allowance
‘Amount specified in rule 2BB
Name of allowance Nature of allowance Exemption
Tribal Area/ scheduled
area allowance This allowance if given in Madhya Pradesh, Tamil Naidu, Uttar Pradesh, Karnatka, Tripura, Assam, West Bengal, Bihar, Orrisa.
Rs. 200 pm
Children Education
Allowance Given for children education Exemption limited for Rs. 100/- per month per child limited to a maximum of two children. Hostel Expenditure
Allowance This allowance is granted to an employee to meet the hostel expenditure on is child
Exemption limited for Rs. 300/- per month per child limited to a maximum of two children.
Status of Employee Exemption Amount
Government Employee
Least of the following is deductible: a) Rs. 5000
b) 20% of basic salary
c) actual amount of entertainment allowance Non-government employee Entertainment allowance is not deductible
Transport Allowance It is given to an employee to meet his expenditure for commuting from his office to his residence.
Exempted to the extent of Rs. 800/- per month
Special Compensatory
( Hill Areas) Allowance It includes any special allowance in the nature of special compensatory (hill areas) allowance or high altitude allowance or uncongenial climate allowance or avalanche allowance.
Amount exempt varies from Rs. 300 per month to Rs. 7000 per month.
Underground allowance Underground allowance is granted to an employee who is working in uncongenial, unnatural climate in underground mines.
Exemption limited to Rs.800 per month.
Perquisites:
Perquisites can be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. Therefore a perquisite to be taxable under the head salaries:
a. allowed by an employer to an employee
b. allowed during the continuance of his employment c. directly dependent upon service
d. resulting in the nature of personal advantage to the employee e. derived by virtue of employers authority
Perquisites: Sec 17(2)
The term perquisite is defined to include the following:
1. The value of rent –free accommodation provided to the assessee by his employer. 2. The value of any concession in rent for accommodation provided by the employee
3. Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the below cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee, having an substantial interest in the company
c) any person not included in any of the above two categories having a cash salary of more than
50,000/-4. any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee
5. any sum payable by the employer, to effect an assurance on the life of the assessee or to effect a contract for an annuity
6. the value of any other fringe benefits or amenity as may be prescribed. Taxability of perquisites:
When it is an obligation of Employee:
If the employer meets an obligation of an employee then the perquisite is always chargeable to tax.
If the employer, pays any bills which are in the name of employee, then they are taxable in the hands of employee.
When not an obligation of employee:
In any other case, where it is not an obligation of an employee, the below table list all perquisites which are taxable in the hands of the employee, Remaining perquisites are not taxable in employees hands regardless of the expenditure incurred by the employer.
Taxable Perquisites in the hands of the
employee Exceptions
Furnished/ unfurnished house without rent or at
concessional rent Exceptions are: A rent free house in a remote area,
hotel accommodation in case of transfer for not exceeding 15 days.
Services of a sweeper, gardener, watchman or
personal attendant Taxable in the hands of Specified person only Supply of gas, electricity or water for household
purpose Taxable in the hands of Specified person only Education Facility to employee’s family members Taxable in the hands of Specified
person only
Leave travel Concession Exempted if it is given twice in a block of four years.
Amount payable by an employer directly or indirectly to effect an assurance on the life of employee or to effect a contract of an annuity
Any contribution to recognized provident fund or super annuation fund is exempted.
Interest free or concessional loan Following are exempted:
Loan not exceeding 20,000, Loan for medical treatment Providing use of movable asset Providing use of computer/ laptop or
motor car
Transfer of movable asset None
Medical expenditure reimbursement in excess of
Rs. 15,000 Following are exempted: In employer/ govt hospital Expenditure in case of specified
treatment
Health insurance premium
Medical facilities outside India Specified/ Non specified Employee:The following are specified employees: a) An employee who is a director
b) An employee, having a substantial interest in the company: 20% or more voting power in the employer-company.
c) any person not included in any of the above two categories having a salary (excluding the value of all benefits/ amenities not provided by way of monetary payment) of more than 50,000/-.
Valuation of rent-free unfurnished accommodation:
a) Central and State Government Employees:
The value of such accommodation provided to employee is equal to the license fee, which would have been determined by the central or state government.
b) Private sector or other employees:
Value of the perquisite depends on salary of the employee and lease rent of the accommodation.
Population of city as per 2001 census where accommodation is provided
Where the accommodation is
owned by the employer Whereaccommodation is taken the on lease or rent by the employer
Exceeding 25 lakhs 15% of salary in respect of the period for which the accommodation is occupied by the employee
Lower of amount of lease rent paid/ payable or 15% of the salary
Exceeding 10 Lakhs but not
exceeding 25 lakhs 10% of salary in respect of the period for which the accommodation is occupied by the employee
Lower of amount of lease rent paid/ payable or 15% of the salary
Any other 7.5% of salary in respect of the period for which the accommodation is occupied by the employee
Lower of amount of lease rent paid/ payable or 15% of the salary
SALARY:
For the purpose of valuation the salary includes a) Basic salary
b) Dearness allowance, if terms of employment so provide c) Bonus
d) Commission e) Fees
f) All other taxable allowance (excluding amount not taxable) g) Any monetary payment which is chargeable to Tax Eg:
X, an employee of ABC(P) Ltd is posted in Ajmer( population 18 Lakhs), draws Rs. 300,000 basic salary, Rs. 10,000 as dearness allowance(forming part of salary), and Rs. 5000 as commission . Besides, the company provides a rent free accommodation in Ajmer. The house is owned by company and has a fair rent of Rs. 50,000 p.a. Determine the taxable value of perquisite.
Valuation of rent-free furnished accommodation: Accommodation is not in a hotel:
a) Find out the value of the perquisite on the assumption that the accommodation is unfurnished.
b) Valuation of furniture is done:
10% per annum of the original cost of the furniture if the furniture is owned by the employer
Accommodation in a hotel:
The perquisite is valued at the lower of the two amounts:
a) 24% of salary paid or payable for the period during which such accommodation is provided in the previous year.
b) Actual charges paid or payable by the employer to the hotel. Eg:
X received during the previous year ending March 31,2007, emolument consisting of basic pay: Rs. 162,000: special allowance: Rs 17,000 and reimbursement of medical expenditure: Rs. 3800/-. His employer has also provided a rent-free furnished flat in Mumbai. Lease rent of the unfurnished flat is Rs. 50,000. Some of the household appliance provided to X (with effect from June1 ,2006) are owned by the employer ( cost price Rs. 36000). Employer pays Rs. 10,000 as hire purchase charges for the three air conditioners installed. Compute the value of perquisite if:
a) X is a Secretary in the ministry of Law and Rs. 4000 is the license fee of unfurnished flat as per the Central Government rules.
b) X is the managing director of ABC(P) Ltd. What difference would it make if X was provided a hotel accommodation through out the year (tariff being Rs. 120,000 per annum)
Valuation provided at concessional rent:
The below rules will apply for furnished as well as unfurnished accommodation:
Find out the value of perquisites on the assumption that no rent is charged by the employer.
From the value so arrived deduct the rent charged by the employer from the employee. Valuation of perquisite in respect of free domestic servant :
The value of benefit to the employee (or any member of his household) resulting from the provision by the employer for services of a sweeper, a gardener, a watchman or a personal attendant, shall be the actual cost to the employer, that is, the total amount of the salary paid or payable by the employer (or any other person on his behalf) for such services as reduced by the amount paid by the employee for such services.
Valuation of perquisite in respect of gas, electricity or water provided free of cost :
This perquisite is taxable in the hands of specified employees only provided the connection is in the name of employer. If in the name of employee then the employer would be paying on behalf of the employee and is taxable in all cases.
Mode of valuation If purchased from outside If supplied by the employer from own sources
Cost to employer (A) Amount paid /payable by the employer to the outside agency
Manufacturing cost per unit incurred by the employer
Sub: Amount recovered
from the employee (B) Recovery from the employee Recovery from the employee Taxable Value of
perquisite (A-B)
Valuation in respect of free education:
This perquisite is taxable in the hands of a specified employee only and only in those cases where the educational institute is owned and maintained by the employer or where such education facility is provided in any institute by reason of employee’s employment with the employer. The valuation of the facility would be as under:
Different Situations Amount chargeable to tax Where the education facility is provided to
employees children
• Where the cost/ value of benefit does not exceed Rs. 1000 per child per month
• Where such amount exceeds Rs.
1000/-Where education facility is provided to other members of the household
NIL
Cost of education in a similar instituted in a similar locality – Rs 1000 – amount recovered by employee
Cost of education in a similar instituted in a similar locality – amount recovered by employee
If the fee is paid by the employer for employees children then there is no exemption available for both specified and non-specified employees. Similarly reimbursement of school fees is also taxable in the hands of both specified and non-specified employees.
Valuation in respect of providing use of movable assets:
The value of benefit to the employee resulting from the use by the employee (or any member of his household) of any movable asset (other than car, computer and laptop) belonging to the employer shall be determined at 10% per annum of the actual cost of such asset. It is taxable in the hands of all employees i.e. specified and non specified. The taxable amount shall be reduced by the amount, if any, recovered by the employee.
Mode of Valuation Perquisite in respect of movable asset
A. Find the cost to the employer
10% p.a of actual cost Amount of rent paid or payable
B. Amount recovered
from the employee Recovery from the employee Recovery from the employee Taxable Value of
perquisite (A-B) Balancing amount (if positive) Balancing amount (if positive)
Valuation in respect of Transfer of movable Asset: The valuation will be done as follows:
Mode of Valuation Perquisite in respect of sale of movable assets to employee Electronic Items/
computers
Motor car Any other asset Find out the cost to the
employer (A) Actual cost to the employer Actual cost to the employer Actual cost to the employer Normal wear and tear for
completed years for which the asset was used by the employer for his business. (B) 50% for each completed year by reducing balance method 20% for each completed year by reducing balance method 10% for each completed year of actual cost.
Amount recovered by the
employee (C) Paid by employee for acquiring such asset Paid by employee for acquiring such asset Paid by employee for acquiring such asset Taxable Value
(A-B-C) Balancing amount (if positive) Balancing amount (if positive) Balancing amount (if positive) Electronic Items refer to data storage and handling devices like computer, digital diaries and printers. They do not include household appliances.
Valuation of Medical Facilities:
Fixed medical Allowance is always chargeable to tax. But Medical expenditure reimbursed in excess of Rs. 15,000 is chargeable to tax. The following are the exemptions to the rule that is in the following cases there is no monetary ceiling:
In employer hospital government hospital
Expenditure in case of specified treatment Health insurance premium
Medical facilities outside India
Foreign Medical Facility:
For medical treatment outside of the employee or any member of the employee shall be excluded to the extent it is permitted by the Reserve Bank of India.
However the cost of travel of the employee/ any member of his family and his one attendant shall be excluded only for those employee whose gross total income excluding such traveling expenditure does not exceed Rs. 200,000/-.
Leave travel concession:
The leave travel concession is exempted twice in a block of four years. And the exemption is available to both Indian citizen and foreign citizen. Exemption is based on actual expenditure and is available only in respect of fare. If the journey is performed by the circuitous route then the amount of exemption is available in respect of the shortest route.
The exemption is available for the family meaning spouse and two children, parents, brothers and sisters of individual who are mainly or wholly dependent on him.
Any other Facility provided to employee:
Any other facility or perquisite like car, lunch, refreshment, traveling, touring gift, credit cards, clubs etc provided to employee is not taxable in the hands of employee.
Permissible deduction from Salary Income:
The following deductions are permitted from the head Income form salaries : 1. Entertainment Allowance
As discussed earlier the entertainment allowance is first included in the salary and then allowed as deduction.
2. Professional Tax
Professional Tax also known as tax on employment is allowed as deduction in the year in which it is paid. If the employer pays the professional tax, it is first included in the salary of the employee as a perquisite as it is an obligation of the employee and then allowed as deduction from the gross salary.
Provident Fund:
Provident Fund scheme is a retirement benefit scheme. Under this scheme, stipulated sum of money is deducted from the employee’s salary and an equal matching contribution is made by the employer. The contribution is invested in gilt-edged securities and interest is earned thereon. Thus the balance of provident fund consist of:
a) Employers contribution
b) Interest on employers contribution c) Employees contribution
d) Interest on employees contribution Kinds of Provident Fund:
Employees provident fund ca be divided into three a) Statuary Provident Fund:
It is set up under the provisions of Provident Fund Act, 1972. This fund is maintained by the Government, semi government organization, local authority, railway, university and recognized educational institutions.
b)
Recognized Provident Fund :A provident fund to which the provident Fund Act,1972 applies is a recognized provident fund. This fund is recognized by the commissioner of Income Tax.
c) Unrecognized Provident Fund:
If the commissioner of Income Tax does not recognize a provident fund then it will be under the category of unrecognized provident fund.
Public Provident Fund:
The central government has established a public provident fund with a view to benefit the general public and mobilize saving. Any person whether salaried or self employed can invest in the same.
Taxability of contribution to Provident fund. Statutory provident
Fund Recognized Provident Fund Unrecognized Provident Fund Employers
contribution to provident fund
Exempt from tax Exempt upto12% of salary. Excess is taxable
Exempt from tax
Deductions u/s 80C on employees contribution
Available Available Not Available
Interest credited to
provident fund Exempt from tax Exempt from tax up to 9.5%; excess of interest over this is taxable
Exempt from tax
Lump sum payment at the time of retirement
Exempt from tax Exempt from tax in some cases, when not exempt provident fund will be treated as unrecognized provident fund Employees contribution exempt Interest on employee contribution taxable under income from other sources
Employer’scontribution and interest thereon is taxable under the head income form salaries.
Note:
1. Salary includes basic salary, dearness allowance/ dearness pay, if terms of employment so provide and commission if received as fixed percentage of turnover achieved by employee. 2. The accumulated balance due and becoming payable to an employee participating in a
recognized provident fund will be excluded from his total Income in the following cases: If he has rendered continuous service with his employer for a period of 5 years or more. If the employee is not able to fulfill the conditions of such continues service due to his
service having been terminate by reason of his ill health or by reason of the contraction or discontinuance of the employers business or any other reason beyond the control of assessee.
If on the occasion of his retirement, the employee obtains employment, to the extent the accumulated balance due is transferred to another recognized provident fund maintained by such employer.
For the previous year 2006-07, X submits the following information- Basic Salary: 120,000; dearness allowance: 40,000 (46% forming part of salary for retirement benefits); commission: 6000 (i.e. 1% of turnover 600,000 achieved by him) and children education allowance for his 2 children Rs. 7200. The employer contributes Rs. 20,000 towards provident fund to which a matching contribution is made by X. Interest credited in the provident fund account on March 15, 2007 @ 11%comes to 93,500. Income of X from other source is Rs. 86,000. Find the net income of X for the assessment year 2007-08 if the provident fund is (a) statutory provident fund, (b) recognized provident fund, (c) unrecognized provident fund.
Deduction u/s 80C:
Section 80C is introduced from assessment year 2006-07 and it provides deduction in respect of specified qualifying amount paid or deposited by the assesses in the previous year.
• Deduction would be available from gross total income
• It is available for Hindu undivided family and individuals
•
Deduction is available on the basis of specified qualifying investment/ contribution/ deposit/ payment made by the assessee during the previous year.• Maximum amount deductible is Rs. 100,000 under sec 80C, 80CCC and 80 CCD.
Practical Problems:
Mrs. X (age 51 years) is a part time college lecturer in Delhi. During the year 2006-07. she gets basic salary of Rs. 12300 up to June 30,2006 and Rs. 12,700 afterwards. Besides she gets 30% of Basic salary as house rent allowance, Rs. 1630 per month as dearness allowance (71% of it forming part of salary for computation of retirement benefits and Rs. 500 per month as conveyance allowance which is entirely for personal purpose. On July 10,2006 the employer transfer a music system to Mrs. X on her completing 10 years of service( cost of music system purchased on sep 1, 2005: 22470) for Rs. 7500. She is a member of statuary provident fund to which both the employer and employee contributes @ 12% of basic salary. Apart from the minimum contribution, she makes an additional contribution of Rs. 600 per month to the provident fund. During the previous year 2006-07, Rs. 65698 is paid to her for checking answer sheet for different universities. Determine the taxable income and tax liability on the assumption that she is paying a rent of Rs. 4000/- per month.
X( age 26) is an employee of a cooperative society at Varanasi. During the previous year 2006-07, he gets Rs. 6500 per month as basic salary, Rs, 800 per month as bonus and Rs. 450 per month as dearness allowance( 32% is forming part of the salary for computation of retirement benefits) and Rs. 200 per month as medical allowance ( medical expense is however more than Rs 200 per month). He is a member of a recognized provident fund to which the employer contributes 11,162 (X also makes a matching contribution). X gets an interest free loan (repayable within 8 years) of Rs. 82,330 from the employer for purchasing a house. Besides he gets Rs. 10,30,760 as interest on company deposits from a private sector undertaking. Determine the taxable income and tax liability of X for the assessment year 2007-08.
Ch.5 INCOME FROM HOUSE PROPERTY
This chapter deals with any income falling under the head income from house property. Basis of Charge (Sec 22)
Income is taxable under this head “Income from House property” if the following three conditions are satisfied:
1. The property should consist of any building or land appurtenant thereto. 2. The assessee should be the owner of the property
3. he property should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which are chargeable to income tax.
All the above conditions should be satisfied for a property income to be made taxable under the head income from house property.
Exceptions:
In the below mentioned cases rental income is not charged to Tax: a. Income from farmhouse.
b. Annual value of ay one palace of any ex-ruler. c. Property income of any local authority.
d. Property income of an approved scientific research association. e. Property income of any educational institution and hospital f. Property income of a trade union.
g. House property held for charitable purposes. h. Property income of a political party
i. Property income used for own business or profession j. One self occupied property.
Basis of computing income for a let out house property:
Income under the head house Property Rs.
Gross Annual Value Less Municipal Taxes
Net Annual Value Less: Deduction u/s 24
- Standard Deduction
- Interest on borrowed capital Income under the head house property
-
----Gross Annual Value: Sec 23(1)
Tax under the head income from house property is a tax on the inherent capacity of the building to yield income and not a tax on rent. The standard selection of the measure of the income is the annual value.
Gross annual value depends upon the following factors: a) Municipal Valuation
b) Fair rent c) Standard rent
d) Annual Rent (i.e. rent for the previous year or that part of the previous year when the property is available for letting out and there is no vacancy and unrealized rent)
e) Unrealized rent
f) Loss of rent because of vacancy g) Actual rent received/ receivable (d-e-f)
Steps for determining the gross Annual Value:
.1 Determine the reasonable expected rent as a) or b) whichever is higher. If the amount so determined is higher then the amount in c) limit the amount to c).
.2 If Annual rent less unrealized rent is higher then the amount specified under step 1 then Annual rent less unrealized rent is substituted for the value in step 1.
.3 In case of vacancy the gross annual value so determined is adjusted for the period for which the house is occupied.
E.g.:
(Rs. In thousand)
Particular
A
B C D E F
Municipal valuation (a) Fair rent (b)
Standard rent (c)
Annual rent if property is let out through the year 06-07 (d)
Unrealized rent (e)
Period for which property remains vacant Loss due to vacancy (f)
140 145 142 168 14 1 7 180 185 175 168 -180 185 175 168 1 ½ 14 140 145 142 168 70 3 42 231 262 241 252 42 5 105 140 150 120 96 --10 80
When unrealized rent shall be excluded:
Unrealized rent shall be excluded from rent received/ receivable only if the following conditions are satisfied:
1. The tenancy is bona fide.
2. The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property.
3. The defaulting tenant is not in occupation of any other property of the assessee.
4. 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 proceeding would be useless.
Deduct municipal taxes:
From the gross annual value municipal taxes have to be deducted to arrive at net annual value. Municipal value are deductible only if
1. these taxes are borne by the owner.
2. are actually paid by him during the previous year. Deductions u/s 24:
The list of deductions u/s 24 is exhaustive that is no other deduction is allowed except whatever are explicitly mentioned. The following two deductions are allowed:
1. Standard deduction
2. Interest on borrowed capital Standard deduction:
30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer. Interest on borrowed capital:
Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewable or reconstruction of the house property.
Interest of pre-construction period:
Interest of pre-construction period is allowed as deduction in five equal installments.
Interest of the current period:
a. Capital is borrowed on or after April 1, 1999:
Interest on borrowed capital is allowed as deduction to the extent of Rs. 150,000/- provided the loan is taken for the acquisition or construction of the property. However the loan is taken for the any other purpose (e.g. Reconstruction, repair etc) the maximum amount deductible is Rs. 30,000.
b. Capital is borrowed before April 1, 1999:
The interest on borrowed capital is allowed as deduction up to Rs.
30,000/-Interest on borrowed capital is allowed as deduction even in those cases when the annual value of the house property is nil.
Taxable income from self-occupied property: When the property consist of:
a. Any house which is occupied for own business b. One house which is self occupied
c. A house property which is not actually occupied by the owner owing to employment or business/ profession, carried on at any other place.
In the aforementioned cases the annual value of the house property shall be taken as nil. When more than one property is occupied for residential purpose:
When more than one house is occupied by a person during the previous year for is residential purpose, only one house is treated as self- occupied and all other houses will be deemed to be let out.
In case of deemed to be let out the gross annual value is taken to be the higher of municipal valuation or fair rent whichever is higher to the maximum of standard rent.
When a part of property is self-occupied and a part is let out or a house is self- occupied for the part of year and let out for the part of the year:
In computing the income in the aforesaid situation the fair rent attributable to the self- occupied period/ portion should be excluded in determining the annual value. Similarly the house tax and interest in loan attributable to ®elf-occupied period/ portion should be ignored. It means the house tax and interest on loan attributable to self-occupied portion/period cannot be deducted to arrive at income from house property.
E.g.:
From the following information, compute the annual value of the house for AY 07-08 Municipal Value- Rs. 90,000
Municipal taxes paid- Rs. 20,000
House was occupied for the first six months and for remaining six months it was let out @ Rs. 8000 p.m.
Special provisions when unrealized rent is recovered subsequently:
When a deduction has been allowed to the assessee for any unrealized rent during the previous year and realized subsequently then that amount shall be deemed to be the income of the previous year and shall be chargeable to tax under the head “income from house property” as per the provisions of the act whether the assessee is an owner of that property or not.
Problems:
1. From the information given below, find out the income under the head “ Income under the house property” for the assessment year 2007-08 and 2008-09.
X (Rs) Y (Rs) Municipal valuation
Fair rent Standard rent Annual rent
Unrealized rent for the previous year 2006-07 Unrealized rent for the previous year 2007-0¸ Unrealized rent of 2006-07 realized during 2007-08 Interest on borrowed capital
1;0,000 185,000 170,°00 216,000 30,000 NIL 28,000 36,000 190,000 195,000 170,000 175,000 30,000 Nil 28,000 36000
The above properties have been let out throughout the previous years 2006-07 and 2007-08. Municipal taxes are paid at the rate of 20%.
Ch.6 Income under the head Business & Profession
This head is covered by sec 28 to sec 44D. This chapter deals with provisions which have a bearing on the computation of taxable income.
Basis of charge (sec 28):
The following income is chargeable to tax under the head “Profit and gains from business and profession”:
1. Profit and gain of any business and profession
2. any compensation or other payment due or received by any person specified in sec 28(ii)
• any compensation received on termination of a managing agency of a foreign company
• any compensation received on termination of a managing agency of a Indian company
• Any compensation received on termination of any agency or modification of terms of agency.
• Any compensation received from government or a corporation on taking over of management of property or business.
2. Income derived by a trade, professional or similar association from specific services performed for its members.
3. The value of any benefit or perquisites, whether convertible into any money or not, arising from the business or the exercise of any profession.
4. Profit on sale of license (export/ import license)
5. Cash assistance (subsidy received by any person against exports under any scheme of government
6. Any drawback of any duty of customs or excise.
7. Any interest, salary, bonus, commission or remuneration received by a partner from firm. 8. Any sum received for not carrying out any activity in relation to any business or not to
share any know-how, patents, copyrights, trademarks etc. 9. income from a speculative transaction
Meaning of term business:
The term business refers to any economic activity carried out with a view to earn profit. As per section 2(13) term business is defined as “any trade, commerce, manufacture or any adventure in the nature of trade, commerce or manufacture”. The definition covers every facet of an occupation carried on by a person with a view to earn profit. The term business is a word of wide import and in terms of fiscal statue it must be construed in a broad rather than in a restricted sense.
Thus Production of goods from raw material, buying and selling of goods to make profits and providing services to others are different form of business.
Profession and Vocation:
As per sec 2(36) profession includes vocation. The term profession is an occupation of requiring purely intellectual skill or manual skill attained in special knowledge. While the term vocation implies natural ability of a person for some work. The distinction between the term business, profession or vocation is not important for the purpose of income tax.
Basic Principles for arriving at business Income:
One has to keep in mind the following general principles for arriving at business income: 1. Business or profession should be carried on by assessee.
2. Business or profession should be carried on during the previous year. 3. Income of the previous year is taxable during the following assessment year. 4. Tax incidence arises in respect of all business or profession.
5. Legal ownership v/s beneficial ownership. 6. Real profit v/s anticipated profit
7. Recovery of sum already allowed as deduction. 8. Mode of book entries not relevant.
Loses incidental to business:
General commercial principles have to be kept in view while determining the real and true profits of a business and profession. Capital receipts are not taxable. Profits can only arise out of the trading receipts and only the profit element of such receipt can be made taxable.
Business losses can be allowed as deduction if the following conditions are satisfied: 1. Losses are revenue in nature.
2. Losses should be incurred during the previous year.
3. Losses should be incidental to the business and profession carried on by assessee. 4. It should not be notional or fictitious
5. It should have been actually incurred and not merely anticipated to incur in future.
6. There should not be any direct or indirect restriction under the act against the deductibility of such loss.
Specific deductions under the Act :
Section 30 to 37 cover expenses which are expressly allowed as deduction while computing business income, section 40, 40A and 43B cover expenses which are not deductible.
Rent, rates taxes repairs and insurance for building (Sec 30):
1. The rent of premises, the amount of repair (not being capital expenditure), if he has undertaken to bear the cost of repair.
2. Any sum on account of land revenue, local rates or municipal taxes. **
3. Amount of any premium in respect of insurance against risk of damage or destruction of the premises.
** The amount is deductible as per the provision of sec 43B.
Repairs and insurance of machinery, plant and furniture (sec31):
The expenditure incurred on current repair (not being capital expenditure) and insurance in respect of plant, machinery and furniture used for business purpose is allowed as deduction u/s 31.
Depreciation Allowance (Sec 32)
In order to avail depreciation u/s 32, the following conditions need to be satisfied: 1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or profession 3. It should be used for the relevant previous year
4. Depreciation is available on tangible as well as intangible asset. Use of the asset in the previous year:
The asset in respect of which depreciation is claimed must have been used for the purpose of the business. Normal depreciation (i.e. full year depreciation) is available if an asset is used is put to use at least for sometime during the previous year.
Depreciation allowance is limited to 50% of normal depreciation, if the following two conditions are satisfied:
• Where an asset is acquired during the previous year
• It is used for the purpose of business or profession for less than 180 days during that previous year.
If the above conditions are satisfied, the assessee would be entitled to 50% of normal depreciation, even if the asset is used for a single day.
Depreciation Available:
Under the Indian Income Tax, one can claim depreciation on the following assets: Tangible Asset Building, Plant, machinery or furniture Intangible Assets acquired after March 31,
1998 Know-how, patents, copyrights, trade marks, licenses, franchise, or any other business or commercial rights of similar nature.
Block of Assets sec 2(11):
The term block of assets means a group of assets falling within a class of assets comprising of:
• Tangible assets, being building, machinery, plant or furniture
• Intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchise, or any other business or commercial rights of similar nature
In respect of which the same percentage of depreciation is prescribed. Written down Value sec 43(6):
1.
Find out the depreciated value at the beginning of the year as on 1st of April.2. To this value add actual cost of the asset acquired during the year.
3. From the resultant year, deduct money received/ receivable (together with scrap value) in respect of that asset which is sold, discarded, demolished or destroyed during that year. 4. The resulting amount is the written down value of the block for that year.
5. The amount of reduction under step 3 cannot exceed the value of asset computed under step 1 and step 2.
Computation of depreciation
Depreciation is calculated at the prescribed rate on the written down value. However the following exceptions are there for the aforesaid:
Exception 1: When the written down value of a block of assets is reduced to zero.
No depreciation is admissible where written down value has been reduced to zero, though the block of assets does not cease to exist on the last day.
Exception 2: If the block of asset ceases to exist
If a block of assets ceases to exist or if all assets of the block have been transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such case.
Ex:
X owns the following assets on April 1, 2006:
Assets Written down value on
April 1, 2006 (Rs.)
Rate of depreciation (%) Furniture
Building
Plant and Machinery Plant and Machinery Plant and Machinery
20,170 900,500 210,000 6400,000 205,000 10 10 20 15 40 During the previous year 2006-07, the following assets are purchased by X:
Date of
Purchase Date when the asset is put to use Asset CostRs. Ratedepreciation (%) of 1/10/2006 20/06/2006 30/11/2006 6/12/2006 9/10/2006 22/06/2006 1/12/2006 10/12/206 Trade Mark Plant Furniture Books for professional use 15,000 190,000 140,000 2700 25 40 15 100
Determine the amount of depreciation for the assessment year 2007-08. Unabsorbed Depreciation:
When in the assessment of the assessee full effect cannot be given to depreciation allowance in any previous year owing to there being no profit/ gain or there being insufficient profit/ gain, the balance of depreciation allowance is called unabsorbed depreciation.
Step 1 Depreciation allowance of the previous year is first deductible from the income under the head “Profit & gains from business and Profession”.
Step 2 If depreciation cannot be fully deducted under the head “Profit & gains from business and Profession” because of inadequate or no profit, it is deductible from income chargeable under the other head of income (except income from salary) for the same assessment year.
Step 3 If depreciation allowance, is still unabsorbed then it can be carried forward to the subsequent assessment year(s).
There is no time limit for the purpose of carrying forward of unabsorbed depreciation, it can be carried forward for indefinite period.
The following priority order is to be followed when the unabsorbed depreciation is to be set off in subsequent year:
a. Current depreciation
b. Brought forward business loss c. Unabsorbed depreciation
For the above setoff continuity of the business is not necessary. Ex:
X submits the following details
Previous years
2006-07 2007-08 Income from salaries
Business Profit (before depreciation) Current depreciation
Income from other sources
100,000 16,000 134,000 10,000 200,000 18,000 132,000 80,000 Determine the taxable income of X for the assessment year 2007-08 and
2008-09.
Tea/ coffee/ rubber development account (Sec33AB)
To claim the deduction under this section the following conditions need to be satisfied: 1. The assessee must be engaged in tea, coffee or rubber plantation.
2. It must make a deposit in special Account opened with NABARD( National bank for Agriculture and rural development)
3. The amount has to be deposited within 6 months from the end of the previous year or before the due date of furnishing the return of income, whichever is earlier.
4. The accounts of the assessee should be audited. Amount of deduction:
The least of following is allowed as deduction:
1. A sum equal to the amount deposited in the special account as discussed above.
2. 40% of profit of such business computed under the head “profit and gains of business and profession” before making any deduction under section 33AB and also before adjusting any bought forward losses.
The below points are also to be kept in mind:
1. When a deduction is claimed under this section, no deduction shall be allowed in respect of such amount in any other year.
