Income from business/Profession
By
Prof. Augustin Amaladas
M.Com., AICWA.,PGDFM., B.Ed.
12/12/2007 1

INCOME FROM HOUSE PROPERTY

House property for this purpose means :
Any building which has the characteristic features of a building.
E.g.: residential building, cinema theatres etc.
12/12/2007 2

12/12/2007
Taxed on “Notional Basis”
3

Conditions for taxing income under the head house property.

There should be a building or a land appurtenant there to .
AND

The property should be owned by the assessee.
AND

Such building should not be used for own business or profession.
12/12/2007 4

Section 22(Charing Section)

“ The Annual Value of building or land appurtenant thereto is chargeable to tax in the hands of the owner provided the same is not used for own business or profession”.

E.g.: CASE 1: Mr. X lets out a HP to Mr. Y, who intends to carry on his private business. –
Income from HP.
12/12/2007 5


CASE 2: Mr. X uses his property to carry on his own private business. – No income from HP.
12/12/2007 6

Exceptions to the rule – that the rental income is taxable under HP.

Income from sub letting – Income from
OTHER SOURCES since the assessee is not the owner.

Composite rent – When a building has been let out along with the furniture , then such letting out is called composite letting.
As per sec 56(2) , when the rent is inseparable – income from other sources.
12/12/2007 7

As per CIT vs. SHAMBHU INVESTMENTS
PVT. LTD., (2003) (s.c) such inseparable composite rent is taxable under the head HP.
At present Supreme Court decision has to be followed.
12/12/2007 8

Section 23( Annual Value)

Sec 23(1)(a) –
AV = Rent at which the HP is reasonably expected to be let out.
12/12/2007 9

Sec 23( Annual Value)

Sec 23(1)(b) –
If the house property is actually let out and if rent received or receivable is higher than the reasonable rent as per sec 23(1)(a), then such rent received or receivable is taken as the
ANNUAL VALUE.
12/12/2007 10

Sec 23( Annual Value)

Sec 23(1)(c) –
If the property is actually let out and was vacant during the year and rent received or receivable is lesser due to vacancy then such lower rent shall be the annual value.
12/12/2007 11

Section 23( Annual Value)

Sec 23(2) –
If a HP is self occupied .
OR
If a HP couldn't be occupied for reasons of employment / profession elsewhere.
In such cases the AV= NIL.
12/12/2007 12

Sec 23( Annual Value)

Sec 23(3) –
Conditions for sec 23(2)-
Such HP shouldn't be let out during any part of the year.
AND
No other income is derived from such property.
12/12/2007 13

Section 23( Annual Value)

Sec 23(4) –
If the assessee owns more than one Sec
23(2) property then:
AV of one HP at the option of the assessee is NIL.
AND
All the other HP’s are Deemed Let Out
Property [DLOP] and annual value thereof is decided as per sec 23.
12/12/2007 14

Section 24 Deductions.


SEC 24(a)-Standard deductions @30% of NAV
– only for let out property and deemed let out property.
SEC 24(b)- interest on capital or loan borrowed for ACR 3 (acquisition ,construction, renewal
,repairs and reconstruction) in respect of
1. LOP/DLOP – any amount is allowed
2. SOP – Deductions is as follows:
12/12/2007 15

12/12/2007
SOP Deductions
- Normal deductions up to Rs
30000/-
- Special deduction up to Rs
150000/-
16

IMPORTANT NOTES

Interest deduction up to Rs 150000/-.It is available only for acquisition and construction. Provided:
(a) The loan taken on / after 01-04-1999. & construction completed within 3 years from the end of the financial year in which loan is borrowed.
(b) For claiming deduction’s interest certificate & details of principal outstanding, interest amount etc. Along with return of income.
12/12/2007 17

Pre- Construction Period Interest

Allowed in five equal installments commencing from the year of completion.

PCP means period commencing from the date of loan or immediately preceding the March 31 st of the year of completion which ever is earlier.
12/12/2007 18

Section 25( amounts not deductible)

Interest paid outside India without TDS or
Without having an arrangement for TDS in
India is disallowed.
12/12/2007 19

Section 25A( Unrealized rent recovered)

UR recovered is taxed in the year of receipt irrespective of whether assessee is the owner or not of such property in the year of such receipt
. No deduction is allowed against this income.
12/12/2007 20

Section 25B( Arrears of rent received)


It is taxable in the year of receipt irrespective of whether assessee is the owner or not of such property in the year of such receipt.
Deduction = 30%
12/12/2007 21

Section 26( Property owned by Co- Owners)


Share of co-owners definite, ascertainable respective share is taxable in the hands of the co owner.
Share of co-owners not definite, ascertainable entire income is taxed as the income of AOP.
12/12/2007 22

Important Points

Annual value of partly SO & partly vacant
Period based (i.e. 9 months
– SOP & 3 months – vacant) = ANNUAL VALUE
= NIL
Usage based (i.e. 75% used as – SOP & 25% as – vacant) = ANNUAL VALUE
= 25% .
12/12/2007 23

Important Points

Annual value of partly SO & partly LO
Period based (i.e. 9 months –
SOP & 3 months – LOP)
Usage based (i.e. 75% used as –
SOP & 25% as – LOP)
Treated as DLOP for entire period.
AV of SOP NIL.
12/12/2007
AV of LOP to be taken at 25%.
24

12/12/2007
Presented by :

Anirudh Prasad-05A078.

Amrut .V.Katwa-05A077.
25

Charging Section[Sec.28]





Profits and gains of any profession/profession
Any compensation received related business
Income received from members of similar profession
Any benefit or perquisites from business
/profession
Export incentives from government
12/12/2007 26

Charging -Continue

Any interest, salary, bonus, commission or remuneration received by a partner from firm.

Sum received(compensation) from other company not to carry on any business for know how, patent, copy right, trademark.

Profits and gains of managing agency
12/12/2007 27

Meaning of business

Profit motive

Business and rendering services to others

Business cannot be carried on with oneself
12/12/2007 28

Export incentives

Duty drawback import entitilement licences

Are taxable u/s 28-Business/profession
12/12/2007 29

Business income not taxable u/s 28

1. Rental income in case of dealer in property taxable under the head income from house property[u/s22].

2. Dividend on shares in case of a dealer in shares- taxed under income from other sources
[u/s 56].

3. winning from lotteries (lottery business) taxed u/s 56-income from other sources.
12/12/2007 30

Losses deductible from business income





Loss due to natural calamity
Loss due to non acceptance of goods
Reduction in value of foreign currency which is meant for purchase of stock.
Loss of cash/goods due to embezzelment, burglary, forfeiture of deposits.
Loss of forgoing advance given by sugar industries to formers due to monsoon failure
12/12/2007 31

Loss not deductible from business







Loss due to destruction of Capital asset.
Loss on sale of investments held as investment.
Loss of advance to set up a business but business could not be started.
Depreciation in value of foreign currency for capital purpose
Anticipated future losses.
Loss of discontinued business
Loss from illegal business[T.A.Qureshiv.CIT(2006)SC]
12/12/2007 32

Computation of assessable profits/loss for tax






Net profit as per P/L Account
Add : Amount debited to P/L A/c in respect of the following
Loss of earlier years
Capital losses
Personal expenses (such as drawings)
Income tax, surtax, wealth tax, gift tax, estate duty[Direct taxes], tax penalty, penal interest, fine.
12/12/2007 33

Continues

Add: Charity and donation

Gifts and presents to others

All reserves/provisions such as tax provision,
Reserve for dividend, provision for bad debts except provision for depreciation

All expenses related to other heads of income
12/12/2007 34

Continues

Add : Expenses not deductible u/s 40 and 40A

Expenses debited to P/L A/C not admissible u/s 30 to 40A

Add : Amount not credited to P/L A/c

Deemed income

Deduct :Income credited to P/L A/c but not chargeable under other heads
12/12/2007 35










Less :

Capital gain(u/s 45)
Dividend[ Income from other sources(56)]
Direct taxes refund such as Income tax, Wealth tax, estate duty, surtax refunds
Bad debts, excise duty recovered not allowed as expenditure preceding previous years
Deduct:
Expenses not debited to P/L A/c but allowed u/s 30 to 40A
Depreciation u/s 32

Income chargeable under income from business/profession.
12/12/2007 36

Specific deductions expressly allowed u/s 30 to 37

1.Rent (Sec.30)

Repairs(including painting of a house )

Land revenue, local taxes and municipal taxes

Insurance against risk of damage or destruction

Not allowed: a) arrears of rent b) share of profit instead of rent c.
12/12/2007 37

Repairs and insurance of machinery, plant and furniture(sec.31)

Revenue repair-allowed

Capital expenditure – not allowed

Quantum of expenditure is not important
12/12/2007 38

Depreciation Allowances(sec.32)







Conditions:
Asset must be owned by the assessee(Registration is not important),full control over asset,right to retain the possession and defend are characteristics of ownership.
Used or ready to use for business purpose
Used in the previous year
Both tangible and intangible assets
Right on occupancy on Lease property is entitled for depreciation
If hirer purchaser has right over asset and hire seller will loose all rights- Depreciation is allowed.
12/12/2007 39

Depreciation-Continues

Insurance premium, repairs and other expenditure incurred on leased business asset are deductible in the hands of lessor.

If any asset is fully controlled such as lease the capital expenditure incurred by lessee can provide depreciation[32(1)(ii).
12/12/2007 40

Lease property




Registered ownership is not necessary Sec. 53A of the transfer of property Act.
If the assessee can be the co-owner to claim depreciation
Any capital expenditure incurred by the person who takes building can provide depreciation on capital expenditure.
Rules of Accounting Standard (AS19) not applicable for depreciation as per IT Act.
12/12/2007 41

Hire purchase

Conditions:

Hire purchaser can provide depreciation if hire purchaser has uninterrupted right over the asset.

The seller looses his right

Who can provide depreciation?

Hire purchaser.
12/12/2007 42

12/12/2007
If used by the assessee’s employees – depreciation is allowed.
43

50% of rate of depreciation





If an asset acquired during the previous year.
Put into use or ready to use for less than 180 days.
Exceptions:1. Put into use for less than 180 days but ready to use for more than 180 days –full rate of depreciation
If asset purchased in the preceding year to current previous year but put into use for less than 180 days during the current previous year what is the rate of depreciation rate?
If an asset is not used at all-No depreciation not only for first year but also for subsequent period
12/12/2007 44


Full rate of depreciation.

Can depreciation be provided on intangible assets such as know- how, patent rights, copy right, trade mark, licences, franchises etc. depreciation?
12/12/2007 45

Meaning of Building and Plant




Building means: Super structure only. It does not include site.
Plant : Includes ships, vehicle, books, technical know-how report, scientific apparatus and surgical equipment.
It does not include tea bushes or livestock or building or furniture and fittings.
If assessee does not claim depreciation whether is depreciation available?
12/12/2007 46

Method of depreciation

Yes.

Block asset method.

What is block asset method?

Similar nature of asset having the same rate of depreciation are clubbed together.
12/12/2007 47

100% depreciation?






1. Building acquired on or after September 1,
2002 forming part of water supply project
2. Pollution control equipments
3. waste control equipment
4.wooden parts used in artificial silk manufacturing machine
5.cinimatograph films
6. Books
12/12/2007 48

Commercial vehicle

12/12/2007 49

calculation of depreciation

Block value in the beginning

Add:- Purchase of asset of the same block

Less:- Net sale value of the consideration received/receivable in cash /cheque/draft if any of the block of assets sold during the year
12/12/2007 50

Continuation

Calculate depreciation of the balance amount.

If it reaches to Zero value no more depreciation is allowed.

If net sale consideration exceeds the block it amounts to short term capital gain.
12/12/2007 51

continues

Once asset is depreciated the gain on sale of block never be a long term gain

Index can not be used for the calculation of capital gain.

If all assets of the assets sold out but block continues it amounts to short term capital loss.
12/12/2007 52

###Intangible assets

25%

12/12/2007 53

Imported Cars




Purchased between March 1, 1975 and
March 31, 2001 for hire for touristno depreciation is allowed if used in India for business purposes other than for hire for tourist
Used outside india for business-alowed
For hire for tourist-allowed
After 31 st March 2001- all purposes depreciation is allowed
12/12/2007 54

Change in the ownership in any part of the year due to amalgamation , absorption or demerger


12/12/2007 55

###Computation of additional depreciation



Manufacture or production of any article
Purchased entirely new machinery Not used any part of the world
Acquired and installed after March 31, 2005



If used less than 180 days-Half of the rate
Excludes ships and aircrafts, used in the guest house, or office road transport vehicles
12/12/2007 56

Actual Cost

Total cost-subsidy

Includes: interest on money borrowed before the asset is put into use

Bank charges

Loading

Unloading
12/12/2007 57

Actual cost-continues

Modification before first put into use

Training of staff to operate the machine

Other related expenses required such as cold storage.

Traveling expenses to acquire the
58

Un-absorbed depreciation

Deduct the depreciation of the previous year from income from business or profession

Deduct it from other heads of income except salary

If not able to absorb-carry over to subsequent assessment year (s) – No
59

Subsequent assessment years

Order of priority to set off:

1. current depreciation

2.Brought forward business losses

3. Un-absorbed depreciation

Note: Continuity of business is not relevant.

The same assessee only can carry forward
12/12/2007 60

Depreciation on Straight Line basis/WDV

Applicable to Power units(generating and distribution of power)

Assets acquired after 31 st march
1997.
12/12/2007 61

Terminal depreciation

If straight line depreciation method followed on power generating units
 sold after the use of such asset more than one previous year
Terminal depreciation=WDV> Net
Sale consideration
Capital gain=Net sale>WDV
12/12/2007 62

Tea, coffee and rubber development account[Sec.33AB]

Deposit with NABARD or Deposit account of tea, coffee or rubber Board

With in 6 months from the end of the previous year or before the last date of filing of returns whichever earlier

Exemption:

Amount deposited or 40% of profit whichever is less

Can amount be withdrawn?
12/12/2007 63

withdrawal






Only for the purpose stated
If unutilised within the previous year it is treated as income
If business closed or dissolved-treated as taxable profit
If death of the taxpayer/partition of HUF/liquidation of company will not be treated as income
Purpose: installed in plant and machinery in low priority sector or entitled to get 100% depreciation.
Maximum 8 years
12/12/2007 64

Site restoration fund[sec.33ABA]




Production of Petroleum /Natural gas in India
Deposit with SBI/account opened as per petrolem and Natural Gas Commission In a scheme specified
Before the end of the previous year
Amount withdrawn should be used for low priority sector/100% depreciated and utiled within 8 years at the end of previous year.
12/12/2007 65

###Scientific research[Sec.35]
In house research




All Revenue expenditure and Capital expenditure related to one’s business during the current previous year or even
3*** preceding previous years allowed
[Except Land]
Even asset is not put into use –it is allowed.
No depreciation is allowed on such capital asset
If such asset is sold what could be the consequences?
12/12/2007 66

If scientific asset sold?

If not used for any other purpose:

***Sale or deduction already allowed whichever is less taxed as business profit.

Capital gain=Sale-Cost (index if required)
12/12/2007 67

Contribution to National laboratory

Including
University, IIT

Weighted deduction=
1.25
times of contribution can be treated as Expenditure.

*** Even approval is withdrawn after the payment to such institution the assesssee who contributed can enjoy the benefit
12/12/2007 68

Expenditure on Patent rights and copy rights[35A]

Capital Expenditure incurred before
April 1998
1 st

14 instalments


After 1 st April 1998-
Depreciation can be claimed-25%
Revenue expenditure-
Fully allowed expenditure in the year such expenditure incurred.
12/12/2007 69

Technical know how
12/12/2007
Only depreciation
25% allowed
70

Amortisation of telecom license fees[35ABB]






Conditions
Capital Expenditure
Acquiring any right to operate telecommunication services
Incurred before or after commencement of Business
Mainly incurred to obtain license.
If conditions fulfilled claim can be done u/s 35ABB otherwise u/s 37(1) as business expenditure.
12/12/2007 71

Payment to associations and institution for rural development program

st

12/12/2007 72

Amortisation of preliminary expenses

Indian Company or resident non corporate assessee

Foreign company excluded


Legal charges on MOA, AOA,printing of MOA,
AOA,Registration fees,expenses connected to issue of shares or debentures
Is there any limit?
12/12/2007 73

Limit of preliminary expenses
Corporate assessee Non-Corporate assessee
5% of cost of project or
5% of capital employed
Whichever is
More(dil monge more)
5% of the cost of the project
Actual cost= costs incurred initially and additional costs after commencement
Of business
12/12/2007 74

Preliminary Exp. Continue

The value on the last day of the previous year in which the business of the assessee commences.

Deduction:
of the qualifying expenditure
12/12/2007 75






Expenses on issue of shares/Debentures
New company even Old industrial company issue shares - u/s 35 D
Old company-- u/s 37(1) except issue of shares)
Old industrial company issue shares-35D
Non industrial company – All expenses related to bonus issue, issue of debentures or raising of long term or short term loans
Note: old non industrial company-
Expenditure related to issue of shares
claimed
12/12/2007 76

Amortisation of expenditure incurred for amalgamation[35DD]


five
12/12/2007 77

Amortisation of expenditure under voluntary retirement scheme[35DDA]

Any assessee

Deduction
1/5 every year

Voluntary retirement scheme need not be accordance with guidelines prescribed under section 10(10C)
12/12/2007 78

Amartisation of expenditure on development of certain minerals[35E]


12/12/2007 79

Insurance premium to protect the asset or employees[36(1)(i)]


12/12/2007 80

Interest on borrowed capital[36 (1)(iii)




Interest on own capital is not allowed.
Interest paid by a firm to partner is deductibleper annum Simple interest
12%
Interest paid to wife and daughter- allowed
Interest before the asset is put into use to be
12/12/2007 81

Interest paid outside India without deducting TDS

12/12/2007 82

Discount on Zeeero coupon
Discount Bonds[36(1)(iiia)]

Issued after June 1, 2005

Minimum 10 years and Maximum 20 years

Deduction on pro rata basis.
12/12/2007 83

***Unpaid liabilities
Includes:
1.
2.
3.
Local taxes, duty cess or fee under any law
Sum payable to employees such PF, Gratuity, superannuation fund to employees, BONUS, OR
COMMISSION
Interest on loan borrowed from public financial institution such as ICICI,IFCI, IDBI,LIC AND
UTI ONLY
DEDUCTION ALLOWED ON PAYMENT BASIS
OR ACCRUAL BASIS?
12/12/2007 84

Payment/ Accrual?????

No paymentNot allowed

If deposited
EVEN before the
filing of returns
paymentfully allowed(page 336)
12/12/2007 85

****Employees’ contribution towards staff welfare scheme such as PF[36(1)(va)]

Amount received by employer-


12/12/2007 86

If paid !!!!!

Due date #### as per the PF rules or
Gratuity rules Usually with in a month of deduction from employees.

12/12/2007 87

Written off of allowance for animals
[36(1)(vi)]

If died /useless

Used as capital asset

Allowed loss = Original cost- Carcasses
or ( sale of animals)

12/12/2007 88

Bad debts
[36(1)(vii)]
!!!

If actual- allowed

Provision –Never allowed

If recovered[41(4)]-----If earlier allowed it is taxable

If earlier denied - not taxable
12/12/2007 89

Provision for Bad and doubtful debts to rural branches of scheduled and non scheduled commercial banks[36(1)(vii)] bank and Institution
Non scheduled bank

Scheduled Financial Foreign
5% 7.5% of income 5%
10% of advances --made by rural branchs
---
12/12/2007 90

Transfer to SPECIAL RESERVE
[36(1)(viii)]






Long term (5 years or more) financial corporation/public company/government company
Finance for industry/agriculture/infrastructure facilities in
India.
Deduction: Whichever is less
1. amount transferred to such account or
2. 40% of profit from business activities before such deductions
3. 200% of paid up capital and reserve on the last day of
PY(- )amount in special reserve account in the beginning of the PY
12/12/2007 91

Family planning expenditure
[36(1)(ix)]


For Company assessee
Revenue expenditure- Fully allowed


Capital Expenditure -
th
Non-corporate assessee can claim u/s
32(Depreciation on capital expenditure) and
37(1)(Revenue expenditure)
12/12/2007 92

Advertisement Expenditure[37(2B)]

Advertisement In publication of
-----Not allowed political
12/12/2007 93

Expenses incurred by commission agent from insurance UTI agents etc.If commission less than 60,000 commission Adhoc deduction Max. deduction
3 1
LIC –first year
2
50% of commission
15%
OF THE
COMMISSION
Renewal commission
First & renewal
Commission
Bonus
33 1/3%
No deduction
UTI/agents of
20,000
94

Contribution towards Exchange risk
Administration fund
[36(1)(x)]


12/12/2007 95

12/12/2007
Benefits to public financial institutions
96

General deductions[37(1)]

It should not be a capital expenditure or

Not personal

Not prohibited by law such as fine, penalty

Not be an illegal expenditure

Can we see some of the expenditures allowed as per various case laws?
12/12/2007 97

Expenses allowed




*Litigation expenses to protect the trade or business
/asset/or to retain title of asset
*Legal expenses to receive loan
*Litigation expenses in restoring trade mark
***Legal expenses to alter the AOA in conformity with the changes brought about in the companies ACT
****Damages paid to workers/fulfil the contract
***Damages for breach of contract
12/12/2007 98

Expenses allowed








**Contribution to the union formed to oppose the nationalisation of assessee’s business
**Expenses incurred during festival
***Premium paid for loss of profit
*Professional tax paid
All maintenance expenditure
**Expenses incurred to register trade marks
*****Entertainment expenses
**Periodical payment for the use of goodwill
12/12/2007 99

Expenses allowed-case laws





###Estimated probable liability for free maintenance
CIT vs Modi Olovetti ltd.(2004)
***Expenditure to car even it is huge[CIT vs
Mangalchand premchand& co.[2004]
**Repairs to maintain building taken on lease
[Sumitomo Corpn. India (p) ltd.
Expenditure on civil work on leased asset [Hero Honda motors vs CIT
***Interest on delayed payment of Provident fund[CIT vs Ishwari Khetan Sugar Mills (P0 ltd.(2004)
12/12/2007 100

Important notes & controversial issues

Expenditure to issue of shares fees paid to Registrar to increase the authorised capital disallowed[Brook
Bond India ltd Vs CIT(SC)

Retrenchment compensation payable at the time of partial closure of business Is deductible. But at the time of closure of industry is not deductible[CIT vs MGF India(2004)
12/12/2007 101

Expenses allowed


12/12/2007 102

Controversial Continues

12/12/2007 103

Controversial Continues

Medical expenses of wife employee of cine actor-Allowed [Ajay Singh
Deol Vs CIT]

Payment on account of membership fees for health club and also paid membership fees for an another club-Allowed [Sterlite
Industries (India) Vs CIT(2006)
12/12/2007 104

Controversial- Continues

###Provision made for contribution towards Provident
Fund maintained by Government of Tamilnadu sent on deputation to the assessee corporation-allowed[
CIT Vs Kattabomman Transport
Corporation Ltd.(2004)
12/12/2007 105

Controversial Continues

***Interest on arrears of tax , sales tax compensatory in nature and not penal
– allowed(Lachmandas Vs CIT(SC)
(2002)

***Interest paid for late payment of tax is disallowed. Even Income-tax itself disallowed.
12/12/2007 106

Disallowed Expenditure

*****Interest paid on borrowed funds to pay Income tax is disallowed

Interest paid on installment of the price of property

*****Expenditure to raise capital

***Expenditure on shifting of registered office
12/12/2007 107

Penalty/fine /interest on penalty

*#*#*#
12/12/2007 108

Important question to be asked!!!


12/12/2007 109

Expressly disallowed expenditures

Interest, Royalty, fees for technical services payable outside India

***TAX TO BE DEDUCTED
AND PAID WITHIN 7 DAYS
FROM THE LAST DAY OF THE
MONTH IN WHICH TAX WAS
DEDUCTED OR
12/12/2007 110

Expressly disallowed expenditures

AMOUNT PAID TO GOVERNMENT
IN THE FINANCIAL YEAR IF NOT
PAID WITHIN 7 DAYS FROM THE
LAST DAY OF THE MONTH.

Anything paid after the financial year and after the expiry of 7 days FROM THE
LAST DAY OF THE MONTH deductible only in the year of payment.
12/12/2007 111

Fringe benefit tax

Fringe benefit tax, Income tax, wealth tax, securities transaction tax- Not Taxable
12/12/2007 112

Salary payable outside India without
TDS

Outside India both resident and non-resident

In India to NON-REDIDENT
12/12/2007 113

Payment from provident fund
If TDS not done- Not allowed
12/12/2007 114

Tax on perquisites paid by the employer

Tax paid by employer- Not taxable to employees

Perquisites paid- Not deductible to employer

(Non monetary)

See illustration- para 82.1.8- page 328
12/12/2007 115

Payment to relatives[ Sec. 40A(2)]



Relative: husband, wife, brother or sister or lineal ascendant or descendant of that individual.
Substantial interest:- at least 20% of equity or 20% profits of a concern at any time during the year
12/12/2007 116

Expenditure exceeding Rs. 20,000

Should be paid account payee crossed cheque or account payee demand draft.

If not - 20% of such payment is disallowed.

Note: on the same day any number of cheques less than 20,000 each can be given

Partly cash, partly cheque without account payee crossed cheque without exceeding
117

Payment to unapproved gratuity by employer
12/12/2007
118

Recovery of earlier deductions

12/12/2007 119

Undisclosed income

Cash credit[sec.68]

Undisclosed investment[sec.69]

Unexplained money [sec. 69A]

Amount of investments not fully disclosed
[sec.69B]

Unexplained expenditure [sec.69C]

Amount borrowed or repaid on hundi[sec.69D]

They are deemed income of the current previous year.
12/12/2007 120

Maintenance of books compulsory[Sec.44AA]




Legal medical, engineering, architectural, accountancy,
Film artist technical consultancy, or interior decoration and other notified profession [Specified professional]
If gross receipts exceed 1,50,000 in any of the three years preceding the previous year.
Non-specified professional- Income exceed Rs.
1,20,000 and total gross receipts exceed 10,00,000
What are those books maintained?
12/12/2007 121

Specified Books to be maintained

Cash book

A Journal on mercantile basis

Ledger

Carbon copies of machine numbered bills exceeding Rs. 25 issued by the person

Original bills if exceed Rs. 50. If bills are not issued payment vouchers signed by the person
12/12/2007 122

Medical practitioner

Additional books required:

Daily cash register showing date, patient’s name, nature of professional services rendered, fees received and date of receipt

Stock register for medicines and other consumable accessories .
12/12/2007 123

Audit of Accounts[sec.44AB] if crossed limit


12/12/2007 124

Audit compulsory with out any limit of income/receipt




Person engaged in:
1. civil construction[44AD]- 8% of gross receipts
2.Business of plying, leasing or hiring trucks[44AE]-
Heavy vehicles Rs. 3500 pm (owned months), other vehicles- 3150 pm (not owned more than 10 vehicles any time during the previous year.No expenditure is deductible .
Retail traders[44AF]- 5% of turnover is considered as income
12/12/2007 125

Important points to solve problems







Bonus-before last date of filing
Depreciation- permitted as per income tax
Direct taxes-disallowed
Indirect taxes-allowed if paid before due date of filing
Capital expenditure-disallowed
Bad debts recovered-if allowed earlier taxable
Income from other heads such as salary, house property etc-if included in the P/L /A/c deduct.
12/12/2007 126

Points to solve problems

Outstanding statutory liabilitybefore due date to be paid
 statutory penalty-disallowed

Contractual penalty-allowed

Personal expenditure-disallowed
12/12/2007 127

Points to solve problems

Entertainment expenditure-fully allowed

Maintenance of guest house-fully allowed

Revenue advertisement including gift to customers-fully allowed.
12/12/2007 128

Points to solve problems

Capital expenditure on advertisementdepreciation is allowed.

Amount paid for expenses beyond 20,000 without crossed a/c payee cheque or draft -
20% disallowed

Any expenditure incurred (traveling) out side india –allowed to the extent of RBI’s permission
12/12/2007 129

Points to solve problems


12/12/2007 130

Points to solve problems




Interest on borrowing to pay direct tax such as
Income tax-disallowed
Copy right , technical know how, patent rightamount paid disallowed but depreciation 25% only allowed.
Employee’s contribution to PF- treated as income
If such employee’s contribution is paid before due date as per the PF act- allowed.
12/12/2007 131

Points to solve problems

Capital expenditure on travelling-disallowed

Traveling expenditure to buy stock-allowed

Insurance to asset or employees-fully allowed expenditure

Profit on sale of capital asset which is included in the P/L /a/c- disallowed
12/12/2007 132

Points to solve problems

Rent received from outsider other than employee- credited to P/L A/cdisallowed income-subtract from net profit-Income from House property.

Any payment to workers/Government-Before the last date of filing returns is allowed
12/12/2007 133

Points to solve problems

All reserves/provision except depreciation provision-disallowed

Interest on own capital-disallowed

Direct taxes refund like It refund shown in P/L
A/C –disallowed income= subtract from profit

Revenue repair to building , furniture even leasehold –allowed expenditure
12/12/2007 134

Points to solve problems

Capital expenditure on family planning- 1/5 is allowed

Loss of cash, goods-allowed.

Donation and charity-disallowed

Fringe benefit tax-disalowed

Expenditure on issue of shares-disallowed
;where as expenditure on issue of debentures, arrangement of loan (borrowed capital)- allowed
12/12/2007 135

Points to solve problems

Income from other heads-inadmissible income

Advance payment of tax, provision for tax, income tax refund-disalloed

Life insurance premium of owner paid from business-disallowed

Scientific Research (in house)-fully allowed including capital expenditure

Family planning revenue expenditure-allowed
12/12/2007 136

Points to solve problems

Unapproved statutory fundsdisallowed

Closing stock and opening stock to be valued in the same manner
12/12/2007 137

particulars
Profit and loss account
Amount
Rupees particulars Amount
Rupees
10,00,000 Salaries
Rent and rates
Office expenses
Stock destroyed
Depreciation
Discount
Advertisement
Interest on loan
Scientific research expenses
Bad debts
RBD
Insurance on building
Insurance stock
12/12/2007
Income tax
Gross profit
Interest on bonds
Dividend received
Rent
Rent paid in advance
Profit on sale of investment discount
138

12/12/2007
Closing stock is 10% less than the actual value
Opening stock was over valued by 8%

Advance payment of tax
 provision for tax
 income tax refund
Loss of cash, goods
Capital expenditure on family planning
Loss of cash, goods
Donation and charity
Fringe benefit tax
Expenditure on issue of shares expenditure on issue of debentures , arrangement of loan on borrowed capital
Bonus paid on 2 nd september

Copy right
 technical know how
 patent rights

Cash Amount paid for expenses 25000
139







Bad debts written off recovered (earlier disallowed) statutory penalty
Contractual penalty
Personal expenditure
Interest paid on borrowed funds to pay
Income tax
Interest paid on installment of the price of property

Expenditure to raise capital

Expenditure on shifting of registered office
12/12/2007 140

ALTERNATIVE WORK IS REST
Learn every day
Everyone is good
No bad day. It depends upon our mind set
Enjoy whatever you do
Two sides in a coin.
One is failure(50% )
Other is success(50%)
Happiness by giving but not receiving
12/12/2007
Accepting failure leads to success
141

12/12/2007
By
Augustin Amaladas.Lourduswamy
M.Com.,AICWA.,B.Ed.,PGDFM
142

Capital Assets





Any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession;
Personal effects, i.e., movable property (including wearing apparel and furniture, excluding jewellery), held for personal use by the assessee or any member of his family dependent on him.
Agricultural land in India, not being land situated in the following:-
In any area which is comprised within the jurisdiction of a municipality
(whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and, which has a population of not less than ten thousand according to the last preceding census.
In any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item
12/12/2007 143

Capital assets



6.5 per cent Gold Bonds 1977, or 7 per cent
Gold Bonds 1980, National, Defence Gold
Bonds, 1980, issued by the Central
Government;
Special Bearer Bonds, 1991, issued by the
Central Government;
Gold Deposit Bonds issued under the Gold
Deposit Scheme, 1999 notified by the Central
Government.
12/12/2007 144

transfer of house property







Under S 54, exempt from tax provided
The following conditions are satisfied
The house is a residential house is taxable under the head
"income form house property"
The house property, which may be self-occupied or let out, is a long term capital asset (i.e. held for a period of more than 36 months before sale or transfer.)
1+2 or 3
Invest upto capital gain in the same nature of asset
The house property, so purchased or constructed, has not been transferred within a period of 3 years from the date of purchase or construction.
12/12/2007 145

consequences if a new house is transferred within 3 years?
 the amount of capital gain that arise, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of the sale of the new house property.
12/12/2007 146

If new house transferred?

The gain along with exempted gain is taxed as short term
12/12/2007 147

Short term capital gain
Computation of Short-term capital gain
1. Find out the full value of consideration
2. Deduct the following: a. Expenditure incurred wholly and exclusively in connection with such transfer.
b. Cost of acquisition. c. Cost of improvement
3. From the resulting sum deduct the exemption provided by section 54B, 54D and 54G.
4. The balancing amount is the short-term capital gain.
12/12/2007 148

Computation of Long-term capital gain

1. Find out the full value of consideration
2. Deduct the following: a. Expenditure incurred wholly and exclusively in connection with such transfer b. Indexed Cost of acquisition c. Indexed Cost of improvement.
3. From the resulting sum deduct the exemption provided by section 54, 54B, 54D, 54EC,, 54F and 54G, and 54GA.
4. The balancing amount is the long-term capital gain.
12/12/2007 149

How IS long term capital gain taxed?


Flat rate-20%+Surcharge+Educational cess+ Secondary and higher education cess.
Surcharge-10% if net income exceed Rs.10,00,000 for individual,HUF,AOP,BOI
12/12/2007

Educational cess-2 % on tax
 Companies -10% if net income does not exceed 1 crore rupees. 2% educational cess

For Assesment year 2008-09 secondary and higer education cess-1% on( tax+surcharge)
150

Indexed cost of acquisition

Formula

Cost *Index of the year of sale/index of the year of acquisition of the present owner
 cost= cost of acquisition of the present owner or

Cost of acquisition of the previous owner in case of will or gift
12/12/2007 151

indexed cost of acquisition?

S 48 defines "indexed cost of acquisition" as the amount, which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year, in which the asset is transferred, bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later.
The Cost Inflation Index, in relation to a previous year, means such Index as the Central Government may, having regard to 75% of average rise in the
Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official
Gazette.
12/12/2007 152

tax shelter for avoiding capital gains tax?

The Income Tax Act grants total/partial exemption of capital gains under Sec.- 54, 54B,
54D, 54EC, 54F, 54G and 54H.
12/12/2007 153

Under S 54







Under S 54, exempt from tax provided
The following conditions are satisfied
The house is a residential house is taxable under the head
"income form house property"
The house property, which may be self-occupied or let out, is a long term capital asset (i.e. held for a period of more than 36 months before sale or transfer.)
1+2 or 3
Invest upto capital gain in the same nature of asset
The house property, so purchased or constructed, has not been transferred within a period of 3 years from the date of purchase or construction.
12/12/2007 154

Under S 54B

 a.
b.
Individuals agricultural land used for atleast for 2 years before transfer provided the assessee has purchased another land for agricultural purpose within a period of 2 years from the date of such transfer.
In the case of compulsory acquisition, It is exempted from tax as per section 10(37) with effect from assessment year 2005-06 onwards.
12/12/2007 155

***Capital gains exemted U/S 10 para 95.2





1. Capital gain on transfer of US 64[Section 10(36)]- both long term and short term
2. Long term capital gain on transfer of BSE-500 Equity
Shares[10(36)]-long term
3.Compulsory acquisition of urban agriculture land[10(37)]longterm and short term.-individual and HUF.
4. Securities not chargeable to tax if covered under transaction tax-such as mutual fund equity linked issued by domestic companies.
5. Capital gain arising in the reconstruction or revival of power generation business [10(41)]
12/12/2007 156

a.
Under S 54D, capital gains, arising on compulsory acquisition of any land or building forming part of an industrial undertaking, is exempt from tax, provided such land or building was used by the assessee for the purpose of the industrial undertaking for at least 2 years preceding the date of compulsory acquisition and, the assessee has, within a period of 3 years after that date, purchased any other land or building or right in any other land/ building or constructed any other building for the purpose of shifting or reestablishing the said undertaking or setting up another industrial undertaking.
12/12/2007 157

Under S 54EC
 where the capital gain arises from the transfer of a long-term capital asset before the 1st day of
April, 2000, and the assessee has, at any time within a period of six months after the date of such transfer invested the whole or any part of capital gains, in any of the assets,

Bonds in NHAI, Rural Electrification
12/12/2007 158

Under S 54 F




 where, in the case of an assessee being an individual or a Hindu undivided family , the capital gain arises from the transfer of any longterm capital asset ,
not being a residential house, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house.
12/12/2007 159

S 54 G Voluntary transfer of industry

The shifting of such industrial undertaking to any area other than an urban area, and
 the assessee has, within a period of 1 year
,before
 or 3 years after the date on which the transfer took place, purchased a new machinery or plant for the purposes of business of the industrial undertaking
12/12/2007 160

Sec.54GA Shifting from urban to
Special Economic Zone

Industry

1year before or 3 years after transfer

New asset can not be transferred with in 3 years.
12/12/2007 161

Special Cases

1.a capital asset is converted by the owner thereof into (or is treated by him as) stock-intrade of a business that is carried on by him, such conversion (or treatment) of the capital asset shall also be treated as "transfer of the asset" and hence chargeable to income tax
12/12/2007 162

How is it computed?

Sec.45(2) Conversion amount to transfer in the year of conversion.

But taxed in the year such stock is sold.

Capital gain=FMV on the date of conversion into stock in trade –cost(Index) of acquisition.

Business gain=sale-FMV
12/12/2007 163

Transfer of personal asset to partnership firm

Sec.45(3),(4):

It amounts to transfer in the year of transfer to partnership firm.

Capital Gain=Amount entered in the books of the firm-cost (Index).

If retransferred to partners:

Capital gain=FMV-Book value in the partnership firm
12/12/2007 164

Capital gain on self generated assets(Sec.115F)

Like goodwill, tenancy right, route permit

Cost of acquisition is NIL

Cost of improvement is considered

1 stApril 1981 is irrelevant
12/12/2007 165

Bonus Shares


If alloted before 1981 –cost of acquisition is
FMV on 1 st April 1981.
If aquired after 1 st April 1981 cost of acquisition is NIL
12/12/2007 166

Right shares

Cost of acquiring right shares =cost of acquisition like any other assets
12/12/2007 167

S 54H relaxation of time due to delay in compensation

, the period of acquiring the new asset under S
54, 54B, 54D, 54EC and 54F by the assessee or the period for depositing or investing the amount of capital gain shall be extended in relation to such amount of compensation as is not received on the date of transfer. The extended period shall be reckoned from the date of receipt of the amount of compensation.
12/12/2007 168

Inherited by the assessee or gifted to the assessee
 the cost of acquisition of the asset for which the previous owner acquired it, shall be deemed to be the cost of acquisition of the asset as increased by the cost of improvement of the assets if any, incurred or borne by the previous owner or the assessee as the case may be.
12/12/2007 169

Amalgamation
 cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the shares(s) in the amalgamating company.(old company )
12/12/2007 170

conversion of bonds or debentures, debenture-stock
 the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture- stock or deposit certificates in relation to which such asset is acquired by the assessee.
12/12/2007 171

Demerger

The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares, held by the assessee in the demerged company
12/12/2007 172

Compensation for loss of capital asset(Insurance claim)

It amounts to extinguishment of right

Sec.45(1A)

Taxable in the year of compensation
12/12/2007 173

Compensation for revenue assetstock in trade

It amounts to revenue receipt u/s-28 from business

Or income from other sources u/s 56
12/12/2007 174

Buy back of shares

Sec.46A

Transfer in the year of buy back

Capital gain=consideration received minus cost of acquisition(Index if long term)
12/12/2007 175

Slump sale[50B]

Assets are not sold individually but collectively

Capital gain=Sale- Net worth

Net worth= Assets—liabilities appearing in the books of accounts

No index
12/12/2007 176

Advanced money received and forfeited


Negotiation failed advance money forfeited by the current owner
Deduct from the original cost of acquisition before calculating index cost of acquisition

12/12/2007 177

Computation of capital gain on land and Building[50C]

Both for depreciable and non depreciable asset

Sale=The
valuation all purposes

If disputed – FMV if it is lower than Stamp duty value.
12/12/2007 178

please!!!



12/12/2007 179

Personal effect

used by the assessee or by the family members

12/12/2007 180