taxation all material

shree j.h.bhalodia women's college-rajkot

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TAXATION

Income from House Property Introduction

The scope of income charged under this head income from house property is defined by section 22 of the

Income Tax Act and the computation of income falling under this head is governed by sections 23 to 27.

The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the

assessee is the owner, is chargeable to tax under the head Income from house property. However, if a

house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or

profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property

is not chargeable to tax under this head. Thus, three conditions are to be satisfied for property income to be

taxable under this head.

1. The property should consist of buildings or lands appurtenant thereto.

2. The assessee should be the owner of the property.

3. The property should not be used by the owner for the purpose of any business or profession carried

on by him, the profits of which are chargeable to income-tax.

Determination of Annual Value

The basis of calculating Income from House property is the annual value. This is the inherent

capacity of the property to earn income and it has been defined as the amount for which the property may

reasonably be expected to be let out from year to year. It is not necessary that the property should actually

be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent

realized when the property is, in fact, let out. Where the actual rent received is more than the reasonable

return, it has been specifically provided that the actual rent will be the annual value. Where, however, the

actual rent is less than the reasonable rent (e.g., in case where the tenancy is affected by fraud, emergency,

close relationship or such other consideration), the latter will be the annual value. The municipal value of

the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of

similar properties in the same locality, are all pointers to the determination of annual value.

The Gross Annual Value is the municipal value, the actual rent (whether received or receivable) or

the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the

gross annual value cannot exceed the standard rent under the Rent Control Act, or the actual rent, whichever

is higher. If the property is let out but remains vacant during any part or whole of the year and due to such

vacancy, the rent received is less than the reasonable expected rent, such lesser amount shall be the Annual

value.

Deduction under section 24

Two deductions will be allowed from the net annual value (which is gross annual value less municipal

taxes) to arrive at the taxable income under the head income from house property. It has to b e borne in

mind that the deductions mentioned here (section 24) are exhaustive and no other deductions are allowed.

The

deductions admissible are as under:

Statutory deduction:

30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for

the property, irrespective of the actual expenditure incurred.


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Interest on borrowed capital:

The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been

borrowed to buy or construct the house. Amount of interest payable for the relevant year should be

calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the

year or not. However, there should be a clear link between the borrowal and the construction/purchase etc.,

of the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as

deduction.

The following points are to be kept in mind while claiming deduction on account of interest on borrowed

capital:

1. In case the property is let out, the entire amount of interest accrued during the year is deductible.

The borrowals may be for construction/acquisition or repairs/renewals.

2. A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction

etc., of the property. In such a case also, the interest on the fresh loan will be allowable.

3. Interest payable on interest will not be allowed.

4. Brokerage or commission paid to arrange a loan for house construction will not be allowed.

5. When interest is payable outside India, no deduction will be allowed unless tax is deducted at source

or someone in India is treated as agent of the non-resident.

Interest attributable to period prior to construction/acquisition

Money may be borrowed prior to the acquisition or construction of the property. In such a case, the

period commencing from the date of borrowing and ending on the date of repayment of loan or on March 31

immediately preceeding the date of acquisition or completion of construction, whichever is earlier, is termed

as the pre-construction period. The interest paid/payable for the pre-construction period is to be aggregated

and claimed as deduction in five equal instalments during five successive financial years starting with the

year in which the acquisition or construction is completed. This deduction is not allowed if the loan is

utilized for repairs, renewal or reconstruction.

The annual value of one self-occupied house property, which has not been actually let out at any time during

the previous year, is taken as Nil [Section 23(2) (a)].

From the annual value, only the interest on borrowed capital is allowed as a deduction under section 24.

The amount of deduction will be:

(A) Either the actual amount accrued or Rs.30,000/- whichever is less

(B) When borrowal of money or acquisition of the property is after 31.3.1999 - deduction is Rs.

1,50,000/- applicable to A.Y 2002-03 and onwards.

However, if the borrowal is for repairs, renewals or reconstruction, the deduction is restricted to

Rs.30, 000. If the borrowal is for construction/acquisition, higher deduction as noted above is available. If a

person owns more than one house property, using all of them for selfoccupation, he is entitled to exercise an

option in terms of which, the annual value of one house property as specified by him will be taken at Nil.

The other self occupied house property/is will be deemed to be let out and their annual value will be

determined on notional basis as if they had been let out.


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Taxability of Unrealized Rent recovered later (Section 25A)

Where any rent cannot be realized, and subsequently if such amount is realized, such an amount will be

deemed to be the income from house property of that year in which it is received. We have seen earlier that

the basic requirement for assessment of this income is the ownership of the property. However, in the cases

where unrealized rent is subsequently realized, it is not necessary that the assessee continues to be the owner

of the property in the year of receipt also.

Assessment of arrears of rent received (Section 25B)

When the owner of a property receives arrears of rent from such a property, the same shall be deemed to be

the income from house property in the year of receipt. 30% of the receipt shall be allowed as deduction

towards repairs, collection charges etc. No other deduction will be allowed. As in the case of unrealized

rent, the assessee need not be the owner of the property in the year of receipt.

House property owned by co-owners (section 26)

If a house property is owned by two or more persons, then such persons are known as co-owners. Co-

owners are not taxable as an association of persons. When the share of each co-owner is definite and

ascertainable, it has been provided that each of the owners will be assessed individually in respect of share

of income from the property. In other words, income from the property will be determined and allocated to

each co-owner according to his share. When each of the co-owners of a property uses it for his residence,

each of them will also get the concessional treatment in respect of one self-occupied property.

Loss from house property

If the aggregate amount of permissible deductions exceeds the annual value of the house property, there will

be a loss from that property. So far as income from a self-occupied property is concerned, and in respect of a

property away from the workplace, the annual value is taken at nil and no other deductions are allowed

except for interest on borrowed capital upto a maximum of Rs.30,000 or Rs.1,50,000. In such cases, there

may be a loss upto a maximum of Rs.30, 000 or Rs.1, 50,000, as the case may be. However, in respect of a

let out house property, there are no restrictions on deductions and therefore, there can be loss of any

amount under this head. The loss from one house property can be set off against the income from another

house property. The remaining loss, if any, can be set off against incomes under any other head like salary.

In case the loss does not get wiped out completely, the balance will be carried forward to the next

assessment year to be set off against the income from house property of that year. However, such carry

forward is restricted to eight assessment years only.

PROPERTY INCOMES EXEMPT FROM TAX

Some incomes from house property are exempt from tax. They are neither taxable nor included in the total

income of the assessee for the rate purposes. These are:

1. Income from a farm house [section 2(1A) (c) and section 10(1)].

2. Annual value of one palace in the occupation of an ex-ruler [section 10(19A)].

3. Property income of a local authority [section 10(20)].

4. Property income of an approved scientific research association [section 10(21)].

5. Property income of an educational institution and hospital [section 10(23C)].

6. Property income of a registered trade union [section 10(24)].

7. Income from property held for charitable purposes [section 11].

8. Property income of a political party [section 13A].

9. Income from property used for own business or profession [section 22].

10. Annual value of one self occupied property [section 23(2)].


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(1) Shri Ram has let out his house property to Ravan on a monthly rent of Rs. 10,000. Ravan vacated the

House on 31.12.2012 and immediately it was let-out to a new tenant vibhishan on a monthly rent of

Rs. 12,000 During the P.Y. 2012-13, the assessee has paid municipal taxes as under :

Of P.Y. 2012-13 Rs. 18,000

Of P.Y. 2011-12 Rs. 18,000

Ascertain the Net Annual Value of the house property for the A.Y. 2013-14.

[N.A.V. : Rs. 1, 08,000]

(2) The annual municipal value Rs. 56,000, Fair rent Rs. 58,800, Standard rent Rs. 59,400 and the

Rent receivable per month Rs. 5,100 relate to a let out house. Municipal tax is 5%. The vacancy

Period is one month. The unrealized rent is Rs. 5,100. Find out the Net Annual Value of the house.

[N.A.V. : Rs. 50,900]

(3) From the following particulars, ascertain the Net Annual Value of each let-out for the Assessment

Year 2013-14 :

Particular House House House House

No. 1 No. 2 No. 3 No. 4

Rs. Rs. Rs. Rs.

(1) A.V. as per municipal records 7,200 12,000 2,400 6,000

(2) Annual Rent Receivable 6,000 10,000 2,700 7,200

(3) Actual Rent Received 4,800 7,200 2,700 4,800

(4) Accrued Rent 1,200 2,800 - -

(5) Local taxes paid by the owner 500 800 450 1,200

(6) Local taxes paid by the tenant - 400 - -

(7) Construction period 1999-2000 1996-97 1-1-2005 1-6-2010

to to

31-1-2007 31-7-2012

* House No.4 was let-out for residential use from 1-8-2012.

[Net Annual Value for House No.1 : Rs. 6,700 For House No. 2: Rs. 11,200

For House No. 3 : Rs. 2,250 for House No. 4 : Rs. 3,600 ]

(4) Shri Sahid has let out House No. 1 and other two houses. No. 2 and No. 3 have been used for

Personal residential purposes. You are asked to compute the taxable income from house property

For the A.Y. 2013-14. From the details given as under:

Particular House House House

No. 1 No. 2 No. 3

Rs. Rs. Rs.

(1) A.V. as per municipal records 6,000 9,000 7,200

(2) Annual Rent Receivable 7,200 - -

(3) Local Taxes Paid 1,200 900 720

(4) Interest on loan taken for construction - 6,000 3,400

(5) Date of completion of construction 30-6-2012 31-5-2007 31-12-2007

[Taxable Income from House No. 1 Rs. 2,940; Taxable Income from House No. 3 Rs. 1,136

{DLO}; Loss of House No. 2 Rs. 6,000 {S/O};Net Loss from House Property Rs. 1,924]

Problem with people is that they expect YOU to be perfect in all aspects

But in doing so

They forget to have a look at their own imperfection.

Practical Sum


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(5) Shri Abhishek has taken land on lease and has constructed building comprising of 100 residential

Houses the erection of which was completed on 31st March, 2011 and let out to tenants from

1-4-2011. He has furnished the following particulars for information. He has borrowed Rs. 1, 00,000

@ 10% interest for building construction

(1) House Nos. 1 to 25 : Annual letting value of each unit Rs. 4,400.

(2) House Nos. 26 to 100 : Annual letting value of each unit Rs. 3,600

(3) Municipal tax payable on annual letting value is :

(a) House Nos. 1 to 25 : @ Rs. 800 each.

(b) House Nos. 26 to 100 : @ Rs. 400 each.

(4) Interest paid on borrowings for construction Rs. 73,300

(5) Lease rent paid Rs. 8,000

(6) Land Revenue Rs. 800

(7) Fire Insurance Premium paid Rs. 1,000

(8) Salary to Rent Collector Rs. 3,000

Compute his House Property Taxable Income for the A.Y. 2013-14.

[Taxable Income from House Properties Rs. 1, 57,700]

(6) The following are the details of buildings owned by Mr. Tarak

Name of the Property A B C

S/O L/O Use for Own

Business

Rs. Rs. Rs.

(1) Annual Municipal Valuation 8,000 45,000 15,000

(2) Municipal Tax 30% 40% 40%

(3) Date of completion 1-5-2011 31-3-2011 1-5-2011

(4) Loan taken for construction @ 12% p.a. 3, 00,000 2, 00,000 -

(5) Repair expenses 12,400 12,500 22,600

(6) Insurance Premium paid 1,200 2,200 3,200

The Municipal tax was paid by the owner. House property No. B (which consists of two

identical units) was rented to two tenants at Rs. 2,100 p.m. per unit. One tenant had vacated the

House on 31-1-2013 without paying six months rent. This unit remained vacant up to 31-3-2013.

From this information, calculate the income from house property of Mr. Tarak for the

A.Y. 2013-14.

[Loss Rs. 44,040 Loss for House No A (S/O): Rs. 8,040

Loss for House No B (L/O) : Rs. 36,000]

(7) During the financial year 2012-13, Shri Amarnath owns four houses. The municipal valuation are

Rs. 12,600; Rs. 12,000; Rs. 11,000; Rs. 20,000 respectively. Municipal taxes are charged @ 10%.

The First House is occupied by Shri Amarnath for his residence. Shri Vijay Merchant is

residing in the second house on a monthly rent of Rs. 1,800. The third house is occupied by a fruit

Merchant Shri Mustak Ali at an annual rent of Rs. 13,200. In the fourth house Shri Amarnath is

carrying on his cutlery business.

He has claimed the following expenses :

(1) Rs. 4,800 as interest on loan taken by mortgaging the first house.

(2) Rs. 1,200 as gardeners salary paid in respect of the third house.

Compute his taxable income from house properties for A.Y. 2013-14.

[Taxable Income for First House : Nil (No deduction is allowable for interest on mortgage loan)

Second House : Rs. 14,280 (Let out for residential purpose)

Third House : Rs. 7,630 (Let out to a trader)

Fourth House : Rs. Nil (Used for own Business)]


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(8) Shri Kaif is the owner of the house property, 1/3rd

portion of which is always used for personal

Residential purposes. Remaining portion was let-out for residential purpose to a tenant on a monthly

Rent of Rs. 2,000. This portion was also used by him for personal residential purposes w.e.f.

1st January,2013.

The annual value of the house property, as per municipal records was Rs. 24,000. He has paid

Rs. 3,000 as municipal taxes (which includes outstanding Local Taxes of Rs. 1,500 of earlier year)

and Rs. 6,690 as expenses, (excluding repair charges, interest and collection charges) in respect

of the house property.

Ascertain the taxable income from house property for the A.Y. 2013-14, if the construction of the

House was completed on 31-12-2011.

[Taxable Income from House Property Rs. 11,200]

(9) Shri Kanakbhai is the owner of a house property, the annual municipal valuation of which is

Rs. 60,000 and the annual fair rental value is Rs. 66,000. 1/3rd

of this house is let out to a tenant

on a monthly rent of Rs. 2,000 and the remaining part is used for his own residence. Total municipal

taxes paid by the owner amounted to 5%. Interest on loan for construction is Rs. 15,000.

Compute the taxable income of the house property for the A.Y. 2013-14.

[Taxable Income from House Property Rs. 1,100]

(10) Vijay and Vinay were co-owners of two house property. Their shares of ownership and income

were 30% and 70% respectively. The details of properties for the year ending 31st March, 2013

are as under :

Particular House 1 House 2

Rs. Rs.

(1) Actual rent per month 9,000 10,000

(2) Standard rent annual 1, 10,000 -

(3) Fair rent- annual 1, 00,000 1, 20,000

(4) Municipal Tax @ 2.5% 2,000 2,500

(5) Collection charges 1,000 2,000

(6) Land revenue 3,000 1,000

(7) 10% house loan for construction (before 1.4.99) 1, 66,500 3, 50,000

(8) Interest on housing loan

(Paid during construction period) 30,000 40,000

(9) Construction completed on 31-3-2005 31-3-2005

(10) Vacancy period 1 month 15 days

Other Information : Details of their self-occupied house- property :

Particular Vijay Vinay

Rs. Rs.

(1) Municipal valuation annual 1, 50,000 80,000

(2) Fair rent annual 1, 30,000 72,000

(3) Municipal tax 2.5% 2.5%

(4) Interest on housing loan for construction 30,000 50,000

(On 1.4.2006)

(5) Interest on housing loan

(Paid during construction period 40,000 60,000

(6) Construction completed on 31-3-2010 31-3-2010

Compute the house-property income of Vijay and Vinay for A.Y. 2013-14.

[Total taxable income of jointly owned houses Rs. 1, 00,000 of which Vijays Share Rs. 30,000

And Vinays Share Rs. 70,000]


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(11) Shri Dinesh Shah and Shri Arvind Patel are the co-owners in housing properties. Their shares in

House properties and incomes are 45% and 55% respectively. They have two properties Ashiyana

And Shamiyana respectively. Particular of these properties are as under :

Particular Ashiyana Shamiyana

House House

Rs. Rs.

(1) Monthly Rent 4,000 8,000

(2) Municipal Taxes paid

(@20% of Municipal Valuation) 12,000 18,000

(3) Land Revenue 400 2,000

(4) Fire Insurance Premium 640 800

(5) Salary to Rent collector 2,400 3,000

(6) Interest on loan taken for improvement in House 20,000 10,000

(7) Vacancy Period 3 months -

Compute the total gross income of Shri Dinesh Shah and Shri Arvind Patel for the

A.Y. 2013-14, after taking into consideration the following further information :

Particular Shri Dinesh Shri Arvind

Shah Patel

Rs. Rs.

(i) Gross annual value of self-occupied house 8,400 9,000

(ii) Municipal taxes 800 1,000

(iii) Interest on loan taken for purchase of house 14,900 12,200

(iv) Taxable income from business 20,000 34,000

[Total Gross income : Shah Rs. 26,565; Patel Rs. 48,035

Taxable Income from jointly owned let out houses = Ashiyana Rs. 3,100; Shamiyana Rs. 44,600

(Of Shahs Share Rs. 21,465 and Patels Share Rs. 26,235)

Personal Taxable Income (loss) Shah: Rs. 14,900 (loss) Patel: Rs. 12,200 (loss)]

(12) Given below are the particulars of house property owned by Shri Rajabhai :


Labh Shubh Amrit

Rs. Rs. Rs.

(1) Municipal valuation 80,000 75,000 30,000

(2) Annual fair rent 90,000 1, 00,000 36,000

(3) Standard Rent - 1, 10,000 -

(4) Municipal taxes (unpaid) 20% 20% 20%

(5) Payment for tenants amenities - 3,000 -

(6) Repairs 4,000 5,000 3,000

(7) Insurance Premium (paid) 2,500 2,000 1,500

(8) Interest on loan taken for construction 30,000 30,000 10,000

(Of P.Y. 2012-13)

(9) 1/5th part of total interest of construction 10,000 15,000 5,150

Period

(10) Year of completion of construction 2011-12 2008-09 2009-10

(11) Use of the house S/O L/O S/O


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Other details:

(1) House Shubh (Consisting of two separate units and the area is in the ratio of 3:2) has been

Let-out to two tenants. Monthly rent of Unit 1 is Rs. 4,500 and that of Unit-2 is Rs. 3,000

(Rent of unit-2 is inclusive of charge for tenants amenities).

(2) The tenant, who was in possession of Unit-1, had vacated the house on 31-01-2013 without

Making payment of last two months rent. This unit remained vacant up to 31-03-2013

(3) The tenant, who was in possession of Unit-2, had also vacated the house on 1-3-2013. This

Unit remained vacant up to 31-03-2013.

Compute the taxable income under the head Income from House-Property for A.Y.2013-14.

[Total Loss Rs. 3,175 {Taxable Income from Shubh Unit -1 Rs. 8,700; Unit-2 Rs. 8,075}

House Labh is considered to be S/O and House Amrit is considered to be DLO]

(13) Shri Vikrambhai Zavery is the owner of three houses. The details for the year ending

31st march,2013 are as under :


Vasant Varsha Vaibhav

Rs. Rs. Rs.

(1) Use of House Property L/O S/O S/O

(2) Annual fair rent 1,15,000 90,000 60,000

(3) Standard Rent 1,00,000 - -

(4) Municipal taxes @10% 12,000 8,000 4,000

(5) Insurance Premium 6,000 5,000 5,000

(6) Loan for house repairing @10% 2,00,000 3,20,000 1,31,000

Loan taken on 1-4-2011

(7) Interest on loan taken for payment 1,500 1,000 1,000

Of municipal tax

(8) Expense for collection of rent 3,000 - -

(9) Year of completion of construction 2006-07 2006-07 2006-07

Other Informations :

(1) House Vasant (Which consists of two different units) was rented to two tenants. Monthly

Rent of Unit-1 and Unit-2: Rs. 4,000 and Rs. 4,500 respectively.

(2) The tenant of Unit-1 had vacated the Unit on 28-02-2013. This Unit remained vacant

Thereafter.

(3) The tenant of Unit-2 had vacated the Unit on 31-01-2013. This Unit remained vacant

thereafter.

Calculate the taxable income from house property for the A.Y. 2013-14.

[Taxable Income of all the three houses Rs. 30,000]

(14) From the following details of House Property of Manjusha Devi, compute her taxable income of

A.Y. 2013-14 under the head Income from house-property.

(a) Let-out House :

(i) Annual valuation as per Municipal Assessment Rs. 78,000

(ii) Local taxes (paid) Annual Rs. 7,200

(iii) Date of completion of construction : 31-03-2012

(iv) 15% loan taken for construction (on 1.1.2010) Rs. 2,40,000

(b) Self Residential House :

(i) Construction of the house was completed on 30-09-2009 and total interest on loan

taken for construction accumulated to Rs. 60,000

(ii) During 2012-13 a fresh loan was taken to construction the second floor and its


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outstanding interest amounted to Rs. 72,000.

(iii) During 2012-13 another loan was taken to make repairs and alteration (Required

as per Vastu Shashtra) on 1st Floor and its outstanding interest amounted to Rs.

35,000

[ Total Loss under the head Income from House-Property Rs. 1,16,640]

for L/O : loss Rs. 2,640 for S/O : loss Rs. 1,,14,000]

(15) Shri Parth owns four houses which are self-occupied. The particulars regarding these houses are

as under :

Particular House House House House

No. No. No. No.

1 2 3 4

Rs. Rs. Rs. Rs.

(i) Standard Rent 42,000 64,000 1,00,000 43,000

(ii) Fair Rent 45,000 60,000 95,000 44,000

(iii) Municipal Valuation 40,000 70,000 90,000 38,000

(iv) Municipal taxes (paid) 4,000 20,000 30,000 15,000

(v) Ground Rent 3,000 2,000 4,000 1,500

(vi) Land Revenue (unpaid) 1,500 - 2,000 1,200

(vii) Interest on loan taken for payment 1,000 800 - 500

of municipal taxes

(viii) Interest on loan taken for purchase

OR Construction of houses :

(1) Taken for construction before 1.4.99 10,000 - - -

(2) Taken for purchase of house - 80,000 70,000 1,00,000

(Loan taken on 1-4-2010)

After considering all options of Income-tax benefit, which house should be treated as self-occupied ?

Also computer Income from house property as per the best option selected by you for the

A.Y. 2013-14.

[Best option : House No. 3 is treated as S/O and other three house to be DLO : Loss : 1,83,000]

(16) Bhairav started business of letting properties on rent for commercial and residential purposes. For

the previous year 2012-13, rent is Rs. 3,40,000 on accrual basis. Fair rent is Rs. 2,92,500.

Bhairav pays one-third of the municipal taxes, while the balance two-thirds is paid by tenants. Total

Municipal tax @ 12% for the previous year amounts to Rs. 35,360.Other details are as under :

(1) Amount receivable from the tenants for providing different amenities (included in the rent of

Rs. 3,40,000) Rs. 36,000.

(2) Un-realised rent (defaulting tenant has not vacated, nor steps have been taken to vacate the

property) Rs. 3,500.

(3) Interest on capital borrowed for the purpose of construction Rs. 24,000.

(4) 3 flats of rental value of Rs. 1,500 p.m. and 6 flats of rental value of Rs.900 p.m. (inclusive

of cost of amenities) remained vacant for 6 months and 7 month respectively during the

P.Y. 2012-13

Determine his taxable income from house property for the A.Y. 2013-14

[Taxable income from House Property Rs. 1,39,992.]


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INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION

Introduction

The provisions regarding the Income from business or profession have been included in Section 28

to 44 of the Act. This head is perhaps the most important one as more than two-third of the total income

from direct taxes is derived from this head.

Meaning of Business and Profession

Business:

Under Section 2(13) of Income Tax Act Business includes any trade, commerce or

manufacture or any adventure of concern in the nature of trade, commerce or manufacture. Business

connotes some activity which is carried on by devoting time, attention and labour of a person either by

himself or through others with an intention to make profits

The definition is not exhaustive, yet it is clear that business covers any activity in the form

of an occupation carried on with a view to earn profits. Business connotes something which occupies

attention and labour of a person for the purpose of profit.

Profession:

Profession is any human activity which requires an intellectual skill, e.g. activities carried on

by a doctor, a lawyer, an architect, an accountant, a painter etc. are called profession. The Act does not

define either profession or vocation. It only says profession includes vocation.

However, from the viewpoint of Income-Tax Act, it is not necessary to distinguish between

income from business and that from profession. Incomes from all these sources are charged under one head

only, viz. profits and gains of business or profession. They are charged to tax under Section 28 of the Act.

In the commercial sense, the term Business implies continuity of economic activities. But

the Income Tax law does not require continuity. Even a single transaction would be construed as business.

Incomes from different businesses

If an assesses carried on more than one business during the previous year, profits and losses from all

of them have to be assessed under this head. It means that if a loss is incurred in any one business, it will be

set-off against profit of the other business, and only the net income will be charged to tax under this head.

However, speculative business is an exception. Income derived from speculative business is

chargeable to tax under this head. But such income is treated separate from income from other business.

Hence, any loss from such speculative activities is not allowed to be set off against income from other

business. It can, however, be carried forward up to a maximum of 8 years and be set-off against future

income from speculative business only.

Provision for Depreciation:

Depreciation can only be allowed, if:

The asset is of the ownership of the assesses. In case of asset is purchased on installment basis, depreciation can be allowed. In case of hire purchase, depreciation is allowed on the principal

amount included in amount of installment comprising principal and interest. No depreciation is

allowed on assets acquired on lease.

The asset should be used for the purpose of the business or profession. It should be used during relevant previous year. Depreciation is allowed on building. No depreciation is allowed on land. Depreciation is allowed only on prescribed rate of depreciation.


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Law assumes that the depreciation has been claimed every year by the assessee if there is enough profit.

Amount of depreciation for deduction should be computed as per the provisions of the law : In case of power industries, depreciation should be computed at prescribed rate on straight line

method and of in case of other industries. It should be on written down value of assets.

Written down value is the balance of the particular asset remained after deducting the depreciation.

Depreciation should be claimed on whole of the block of assets. Block of Assets means the group of Assets classified first on basis of Rates of depreciation and

thereafter on nature of the Assets.

The value of Block of Assets for purpose of Depreciation should be calculated as follows :

Balance at beginning of the year xxxxx

Add: Assets purchased during the year xxxxx

Less: Assets sold or discarded during the year (xxxxx)

Value of the Block of Assets xxxxx

Depreciation will be claimed at prescribed rate on the value of the block of assets. If, in the block of

assets, any asset purchased during the year and is used for less than 180 days, depreciation should be

claimed at half the rate of depreciation on the purchase price of that asset. If the asset, purchased during the

year is used for 180 or more days during the year of purchase, depreciation can be claimed at full prescribed

rate.

If there is not sufficient profit which can be absorb the full amount of depreciation, the remaining amount of depreciation can be carried forward as unabsorbed depreciation in future and can be

written off against future profit.

Rates of Depreciation for some assets :

Building : Mainly used for residential purposes 5% Mainly not used for residential purposes 10%

For Temporary Structure 100%

Furniture & Fittings : Including electric fittings 10% Plant & Machinery : Normal rate is 15% but for certain industries rate

of depreciation on machinery are 30%; 40% or

even 50%. On Plant & Machinery required for

pollution control @ 100% , on computers and its

software 60% on Flour Mill, Iron & Steel

Industry, Energy saving devices etc. @ 80% and

on Glass and Plastic equipment used as refill @ 50%

Intangible Assets : Patents, Know-how etc. 25%

If an asset is sold during the year, then the sale price (including proceeds from sale of scrap) is deducted from the opening balance of that block of assets before deducting depreciation. If the

amount to be so deducted (sale price, scrap realisation, claim for insurance co.) is more than the

opening value of such block of assets, the difference will be shown as short term capital gain under

the heading Capital Gains and no deduction will be allowed from such capital gain.

Provision of Section 50 Whenever one or more items of assets belonging to the same block of assets are sold during

the previous year, following procedure is to be considered :

W.D.V. of Block of Assets as on 1st April of the P.Y. xxxx

Add: Cost of new assets bought during the P.Y. xxxx


12

Add: Expenses incurred in respect of asset bought during the P.Y. xxxx

Less: Total Sale proceeds of assets sold during the P.Y. (xxxx)

Adjusted W.D.V. for P.Y. ( Base for depreciation) xxxx

Less: Depreciation at prescribed rate on the above adjusted W.D.V. (xxxx)

W.D.V. at the end of the P.Y. xxxx

Computation of Income from Business or Profession

(A) When Profit & Loss A/c. OR Income & Expenditure A/c. is given

Record the Net Profit shown on the debit side of P & L A/c. , Loss to be shown as Negative Figure

Observe the Credit Side of P & L A/c. and consider the items not assessable under this head but which are to be shown under other heads of income e.g. income from house property,

income from capital gains, salary income, or income from other sources as well as non

business income to be deducted from net profit

Observe the Debit Side of P & L A/c. and consider the non business expenses and inadmissible expenses which is to be added to net profit.

Adjustment entry should considered accordingly. The amount of depreciation should be added back to the Net Profit. Then the depreciation

admissible under the Act should only be deducted.

Now the items of business income not yet taken into account should be added to the Net Profit.

The final figure obtained will be the taxable profit of the business or profession.

(B) When Receipt & Payment Account is Given

Check the debit side (income side) of Receipt & Payment A/c. and consider the Business income received during the year of revenue nature.

check the credit side (Expenditure side) of Receipt & Payment A/c. and consider the Business expenses paid during the year of revenue nature.

Deduct the aggregate amount of expenses from aggregate amount of income additional information treated accordingly The resultant figure would be the income from business/profession.

A. PROFITS AND GAINS FROM BUSINESS OR PROFESSION (List of Section) 28 Profits and gains of business or profession

29 Income from profits and gains of business or profession, how computed

30 Rent, rates, taxes, repairs and insurance for buildings

31 Repairs and insurance of machinery, plant and furniture

32 Depreciation

32A Investment allowance

32AB Investment deposit account

33 Development rebate

33A Development allowance


13

33AB Tea development account, coffee development account and rubber development account

33ABA Site Restoration Fund

33AC Reserves for shipping business

33B Rehabilitation allowance

34 Conditions for depreciation allowance and development rebate

34A Restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain

domestic companies

35 Expenditure on scientific research

35A Expenditure on acquisition of patent rights or copyrights

35AB Expenditure on know-how

35ABB Expenditure for obtaining licence to operate telecommunication services

35AC Expenditure on eligible projects or schemes

35CCA Expenditure by way of payment to associations and institutions for carrying out rural development programmes

35CCB Expenditure by way of payment to associations and institutions for carrying out programmes of

conservation of natural resources

35D Amortisation of certain preliminary expenses

35DD Amortisation of expenditure in case of amalgamation or demerger

35DDA Amortisation of expenditure incurred under voluntary retirement scheme

35E Deduction for expenditure on prospecting, etc., for certain minerals

36 Other deductions

37 General

38 Building, etc., partly used for business, etc., or not exclusively so used

40 Amounts not deductible

40A Expenses or payments not deductible in certain circumstances

41 Profits chargeable to tax

42 Special provision for deductions in the case of business for prospecting, etc., for mineral oil

43 Definitions of certain terms relevant to income from profits and gains of business or profession

43A Special provisions consequential to changes in rate of exchange of currency

43B Certain deductions to be only on actual payment

43C Special provision for computation of cost of acquisition of certain assets

43D Special provision in case of income of public financial institutions, public companies, etc.


14

44 Insurance business

44A Special provision for deduction in the case of trade, professional or similar association

44AA Maintenance of accounts by certain persons carrying on profession or business

44AB Audit of accounts of certain persons carrying on business or profession

44AD Special provision for computing profits and gains of business of civil construction, etc.

44AE Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages

44AF Special provisions for computing profits and gains of retail business

44B Special provision for computing profits and gains of shipping business in the case of non-residents

44BB Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils

44BBA Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents

44BBB Special provision for computing profits and gains of foreign companies, engaged in the business

of civil construction, etc., in certain turnkey power projects

44C Deduction of head office expenditure in the case of non-residents

44D Special provisions for computing income by way of royalties, etc., in the case of foreign companies

44DA Special provision for computing income by way of royalties, etc., in case of non-residents

44DB Special provision for computing deductions in the case of business reorganization of co-operative banks

l , l l - , ! ! ? , l , , , , , , ; ? , l 10 , ?, l , , l , l


15

(1) Shree Omesh is the owner of a factory. He requests you to determine his total taxable business

income for the A.Y. 2013-14 on the basis of the following P & L A/c. for the year ended on 31-03-

2013.

Particular Rs. Particular Rs.

To By

Opening Stock 50,000 Sales 8,00,000

Purchases 5,00,000 Rent Received 30,000

Wages 2,00,000 Closing Stock 70,000

Audit fees 2,000 Bad debt recovery

Building Repairs (let out) 2,800 (of which Rs. 1,000 was

Rent collection charges 1,200 not allowed in earlier year) 2,500

General Expenses 3,000

Commission on loan 1,000

Bad debt Reserve 4,000

Bad Debt 5,000

Interest on capital 14,000 Contribution to staff welfare

fund 5,000

Income tax provision 15,000

Depreciation (approved) 6,500

Reserve for future contingency 3,000

Net Profit 90,000

Total 9,02,500 Total 9,02,500

[Taxable business Income Rs. 99,000]

(2) Following is the profit & Loss A/c. of Sachin for the year ended on 31-03-2013:


To By

Salaries 1,20,000 Gross Profit 5,10,000

Bad debt 5,000 Discount 2,000

+Prov. for B.D. 5,000 10,000 Bad debt recovered

General expenses 15,000 (50% of which was not

Insurance premium 6,000 allowed in the past) 5,000

Sales tax 5,000 Interest and Dividend 8,000

Interest on capital 12,000 Interest on post office

Advance Income tax 7,000 saving A/c. 2,000

Advertisement expenses 11,000

Donation 4,000

Motor car expenses 24,000

Telephone expenses 5,000

Depreciation 8,000

Net Profit 3,00,000

Total 5,27,000 Total 5,27,000

, l ; l

Practical Sum


16

Additional information :

(i) Salaries include Rs. 20,000 paid to the proprietor Mr. Sachin

(ii) Depreciation permissible as per Income Tax Act is Rs. 7,000

(iii) Insurance Premium include Rs. 3,000 paid towards life insurance premium

(iv) Motor car expenses include Rs. 12,000 spent toward personal purposes.

(v) Advertisement expenses include Rs. 3,000 spent on purchase of new permanent signboard.

(vi) Income tax refund of Rs. 5,000 received during the year in respect of earlier year is not

credited to above mentioned profit & Loss A/c.

Compute taxable income from business for A.Y. 2013-14of Sachin.

[Taxable Business Profit Rs. 3,51,500]

(3) Trading and profit & Loss A/c. for the year ended as on 31-03-2013 of shree Harish is as under :


To By

Opening Stock 99,000 Sales 4,51,500

Purchases 3,00,000 Closing Stock 1,98,000

Salary 56,000 Bad debt recovery 10,000

Bad debts 2,000 Rent of let-out building 15,500

Bad debts reserve 3,000 Dividend 25,500

Insurance premium 1,000 Interest on capital 6,000

Income-tax 9,000 Outstanding income tax 1,000

Provision for taxation 2,000

Sales tax 21,000 Net Profit 2,00,000

Total 7,00,000 Total 7,00,000

Additional information :

(i) He has not taken any steps to recover the bad debts written of in the books.

(ii) Interest on capital is outstanding Rs. 1,000, which is not included in the above interest on

capital.

(iii) Sales tax shown above in profit and loss account includes :

(i) Unpaid sales tax Rs. 5,000 for the current year.

(ii) Rs. 6,000 paid during the current year which was outstanding for the last year.

(iv) Opening stock is valued 10% more than the cost and closing stock is valued 10% less than the cost.

(v) Out of bad-debt recovery 70% was disallowed in the past.

(vi) Opening written down value of motor was Rs. 53,333, on which 15% depreciation is allowed

according to income tax act. There is Rs. 20,000 as motor expenses. The motor-car is being

used for personal purposes.

Find out the Taxable income from business-profession for the A.Y. 2013-14.

[ Taxable Business profit Rs. 1,90,500]

; l ; l

; l


17

(4) Following is the Trading and P& L A/c. for the year ending 31st March,2013 of shree Hasmukhbhai:


To By

Opening Stock 2,20,000 Sales 20,00,000

Purchases 8,00,000 Goods destroyed by fire 30,000

Purchase expenses 50,000 Closing stock 1,35,000

Factory expenses 1,30,000

Gross profit 9,65,000

Total 21,65,000 Total 21,65,000

Salaries 50,000 Gross profit 9,65,000

Office expenses 60,000 Sundry Income 35,000

Taxes 5,000 Bad-debt recovered 10,000

Fire insurance: Share dividend 6,000

Let out house 1,500 Commission 4,000

Stock and stores 3,500 5,000 Rent of let out house 30,000

LIC Premium 7,500

Loss on sale of investment 10,000

Depreciation on plant 40,000

Motor car expenses 15,000

Diwali-puja expenses 1,000

Loss by fire (goods) 8,000

Donation (approved) 11,000

Drawings 12,500

Net Profit 8,25,000

Total 10,50,000 Total 10,50,000

Other Information:

(i) Valuation of opening stock is 10% more than its cost price.

(ii) Valuation of closing stock is 10% less than its cost price.

(iii) Purchase include Rs. 40,000 of a purchase bill paid by using a credit card.

(iv) 25% amount of Bad-debts recovery was allowed as deduction in earlier year.

(v) Admissible depreciation on plants is Rs. 30,000

(vi) Admissible depreciation on Motor-car is Rs. 21,000, 1/3 use of motor-car is for personal purposes.

(vii) Interest on capital Rs. 5,000 and admissible advertisement expenses of Rs. 21,410 have not

been recorded in the books.

(viii) Discount received from the creditors Rs. 2,000 has not been credited in the above P & L A/c.

(ix) Taxes include Rs. 1,500 of local tax paid for Let-out house.

(x) Office expenses include Rs. 25,000 of Lap-Top purchased for business.

Calculate the taxable income of business for the A.Y. 2013-14.

[Taxable Business Profits Rs. 8,69,090]

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18

(5) Shree Dev Vyas is practicing as a C.A. and keeps the accounts on cash basis. He furnishes the

following information for the year ended on 31-03-2013.

Profit & Loss A/c.


To Salaries 1,10,000 By Professional incomes:

Stipend 12,000 2011-12 20,000

Rent 6,000 2012-13 3,30,000 3,50,000

Subscription 2,000 Salary from College 18,000

Drawings 20,000 Rent income from let-out

Motor-car expenses 15,000 house 12,000

Office expenses 10,000 Bank Interest & Dividend 12,000

Taxes (including taxes of 8,000 Short term capital gain from

house given on rent) sale of shares 20,000

Travelling expenses 15,000

Insurance expenses 12,000

Income-Tax 5,000

Net Profit 2,00,000

Total 4,15,000 Total 4,15,000

Additional Information:

(i) He owns a house which is let-out on a monthly rent of Rs. 1,000. He has paid Rs. 3,000 as its municipal taxes.

(ii) The 1/3rd

use of motor-car is personal. The W.D.V. of the car as on 1-4-2012 is Rs. 2,00,000. The rate

of depreciation is 15%. The depreciation has not been debited to P & L A/c.

(iii) He has purchased N.S.C. worth Rs. 20,000 on 1.3.2013 (iv) Insurance Premium includes Rs. 8,000 for Life Insurance.

Calculate the taxable income from business for the A.Y. 2013-14.

[Taxable business income Rs. 1,59,000]

(6) Following details provided to you of Prashant Trading Co. for the year ended on 31-03-2013.

Particular Rs. Particular Rs. To Salary & Allowances 70,000 By Gross Profit 6,00,000 Postage & Telephone 10,000 Interest & Dividend 80,000

Office Rent 15,000 Rent (includes Rs. 10,000 from 30,000

Local Taxes for Building 8,000 employees staff quarters) (Rs. 2,000 for staff quarters) Interest charged to debtors for

Bad Debt Reserve 7,000 late payment 5,000

Bad Debts (includes Rs. 2,000 Profit on sale of investments 25,000

for debt due for more than 2 yrs.) 8,000 Sundry Income 2,000 Donation 5,000

Interest (includes Rs. 7,000 on 15,000

capital) Motor-Car Expenses 20,000

Provision for Tax 50,000

Depreciation on machinery 20,000 Depreciation on motor car 15,000

Depreciation on furniture 12,000

Sales Tax 35,000

Insurance Premium 18,000 Misc. Exp. 30,000

Net Profit 4,04,000

Total 7,42,000 Total 7,42,000


19


(i) Salary includes Rs. 15,000 paid to the owner of the business.

(ii) Sales Tax includes Rs. 6,000 remaining unpaid at the end of the year, while Rs. 10,000 paid

during the year in respect of previous year has not been included.

(iii) 40% of the use of motor-car is meat for personal purposes.

(iv) Insurance premium includes Rs. 6,000 for life insurance policy of the son of the owner.

(v) W.D.V. of assets as on 1.4.2012 were as follows : Machinery Rs.80,000, furniture Rs.

40,000, Rates of Depreciation allowable are 15% and 10% respectively. a new machine was

purchased on 1-12-2012 for Rs. 40,000 on which depreciation allowable is 15%

(vi) Miscellaneous Expenses includes instruments purchased for Rs. 10,000.

Calculate taxable income under the head Income from Business and Profession for A.Y.

2013-14.

[Taxable Business Profit Rs. 4,08,000]

(7) Shree Prakash has prepared the following P & L A/c. for the year ended on 31-03-2013.


To By

Salaries and allowances 60,000 Gross profit 2,25,000

Local taxes (of rented house) 3,000 Agriculture income 20,000

Postage-telegram 3,000 Rent of house 25,000

Building repairs expenses. 6,000 Profit on sale of machine 21,000

Sales tax 25,000 Sundry Income 1,000

Bad debts 8,000 Bad debts recovered 8,000

Bad debts reserve 8,000 Net Loss 76,000

Depreciation on machines 17,500

Advertisement expenses 6,000

Depreciation on car 22,500

Shop expenses 22,000

Provision for taxation 25,000 Daughters marriage expenses 1,00,000 House hold expenses 70,000

Total 3,76,000 Total 3,76,000


(i) Salaries & allowances include Rs. 5,000 paid to son as salary, who is staying in hostel.

(ii) Of sales-tax debited Rs. 6,000 is still unpaid. Sales tax pertaining to earlier year Rs. 12,000 paid

during the year has not been debited to profit and loss account.

(iii) Out of bad debts recovery 30% of the amount is in respect of bad debts not allowed as deduction

in earlier year.

(iv) The opening written down value of the Block of Machines was Rs. 1,00,000. the permissible

rate of depreciation ( for the financial year 2012-13) as per income tax provision is 15%. The

machine which was sold during the year out of the said block was purchased in 2010-11. In

books of accounts the depreciation is calculated at the rate of 20% on reducing balance method

on the entire opening balance.

(v) 60% use of car is for personal purpose; Shop expenses include Rs. 10,000 of car expenses.

Admissible rate of depreciation on car is 15%, which has been fully charged to P & L A/c.

Compute the taxable income from business for the A.Y. 2013-14.

[Taxable Business Profit Rs. 99,430]


20

(8) The Profit & Loss A/c. of the firm Shri Jankant Parikh for the year ending on 31-03-2013 is as follows :


To By

Sales tax 40,000 Gross Profit 4,75,000

Salaries & Allowances 90,000 Rent of House property

Postage & Telegram 3,600 (of which Rs. 6,000 is for

Office Rent expenses 18,000 residential quarters allotted

Local taxes on house property 6,000 to employees) 30,000

(including Rs. 1,200 for Interest & Allowances:

for staff quarters) Int. debited to debtors 3,600

Repairs for house property +Allowance debited

(Rs. 1,000 for staff quarters) 12,000 to creditors 2,400 6,000

Bad debts written off Interest & dividend on

(of which Rs. 2,000 is in investments 52,000

regards to debt which was Profit on sale of machinery

2 years old.) 8,000 (Calculated on book value

Discount & Allowances 12,000 of Rs. 15,000 on 1.4.2009

Bad debt Reserve 6,400 after charging 6 months

Depreciation on Assets: depreciation of Rs. 4,500) 6,500

On machinery Sundry Income 500

(including Rs. 4,500 on

machinery sold) 69,000

On House Property

(including Rs. 2,000 for

staff quarters) 10,000

On Motor-Car 20,000

Sundry Expenses (motor) 10,000

Provision for Income tax 63,200

Net Profit 1,94,800

Total 5,70,000 Total 5,70,000

Additional information:

(i) Of sales-tax debited to profit & loss account, Rs. 8,000 is still unpaid, while sales-tax of Rs.

17,000 outstanding for last year has not been shown therein.

(ii) The book values of assets on 1.4.2012, calculated at reducing balance are as follows:

Rs.

Machine Block-I (Rate of Depreciation 15%) 3,70,000

Machine Block-II (Computers etc. : Rate of Depreciation 60%) 45,000 Furniture (Rate of Depreciation 10%) 70,000

House Property (Rate of Depreciation 5%) 2,00,000

Motor Car (Rate of Depreciation 15%) 1,33,333

On inquiry it was found that house properties, except staff quarters, are let out for residential

purposes.

A Machine of Rs. 80,000 was purchased on 1.1.2013 (Rate of Depreciation 60%) on which no

depreciation has been charged.

(iii) Motor Car is used equally for both the purposes.

(iv) Shri Jankant has earned a profit of Rs. 60,000 in speculation on Stock Exchange, which is not

shown in the above account.

(v) Unabsorbed depreciation of Rs. 21,000 of the financial year 2011-12 has been brought forward.

In addition, the speculation loss of Rs. 40,000 of the financial year 2010-11 has also been brought

forward to the current year.

From the above information, compute the taxable income from business or profession of Shri

Jankant Parikh for A.Y. 2013-14.


21

[Taxable Business Profit Rs. 1,83,400 (including Speculation profit of Rs. 20,000 after deducting

Speculation Loss]

(9) Dr. Chandaranas Receipt and Payment Account for the year ended on 31-03-2013 is as under :

Receipt Rs. Payment Rs.

To By

Balance b/f 50,000 Clinic rent 2,20,000

Visit fee 3,10,000 Electricity Expenses 1,00,000

Consultation fee 3,70,000 Purchase of Medical Books 10,000

Sales of Medicine 30,000 Purchase of Surgical Equipment

Operation theatre rent 90,000 through bank loan (1.2.2013) 1,30,000

Sales of Surgical Equipment Motor Expenses 12,000

(1-10-2012) 11,000 Purchase of Medicine 45,000

Income of house rent 16,000 Lion club membership fees 1,000

Salary from medical college 34,000 Medical association

Royalty (net) 9,000 membership fees 2,000

Profit in Card Game 20,000 Insurance 13,000

Interest 23,000 Municipal Taxes 4,000

Gift from patients 37,000 Staff Salaries 2,80,000

Payment of Bank Loan

Installments

(Rs. 12,000 + Interest) 13,000

Travelling Expenses 20,000

Balance c/d 1,50,000

Total 10,00,000 Total 10,00,000


(i) Opening balance of surgical equipments was Rs. 60,000. Depreciation allowed is 40%.

(ii) Loss in card games amounted to Rs. 2,323.

(iii) Municipal tax of Rs. 1,500 of let-out house is included in the municipal taxes shown above.

(iv) Travelling expenses includes Rs. 6,000 for family pilgrimage and Rs. 14,000 towards his

exclusive business promotion tour.

(v) Opening W.D.V. of motor was Rs. 2,00,000. Depreciation allowable is 15%. The 1/5 use of

motor car is for personal purpose.

(vi) Opening stock of medicine is Rs. 35,000 and closing stock is Rs. 10,000.

From the above details find out the total taxable income under the head of Business Profession

for the A.Y. 2013-14.

[Taxable income under the head Profit and Gains of Business or Profession Rs. 45,300]

(10) Jayson & Sons has purchased a factory machine (which was the only machine owned by the firm) for Rs.

1,20,000 in May 2009 and sold it for Rs. 14,600 in December 2012. Rate of Depreciation on this type of

machine is 15%. What would be its effect on the taxable business profit for the A.Y. 2013-14?

[W.D.V. as on 1.4.2012 of sold machine Rs. 73,695 and amount realised by sale of machine Rs. 14,600

deducted from opening W.D.V. hence balancing figure Rs. 59,095 is to be assessed as a short-term

capital loss for the A.Y. 2013-14.]

; ; ; .


22

(11) Sachin & Bros. has sold all his factory machines for Rs. 4,00,000 in May, 2012. From the following

additional information for the A.Y. 2013-14, you are required to state the effect of the sale of machinery

on his taxable income:

Rs.

(i) Cost of machinery purchased in July, 2007 3,00,000

(ii) Additions to Machinery in January, 2008 50,000

(iii) Total repair charges incurred in respect of the above machinery 50,000

up to the date of sale (sold in 2012-13)

(iv) Total depreciation allowed (from the date of acquisition to 31/3/2012) 1,00,000

Other Business Income (after allowing current years depreciation and repair

charges but without taking into account profit on sale of machinery) of Shri A

for the P.Y. 2012-13 amounts to Rs. 40,000.

[Taxable business profit Rs. 40,000; Short Term Capital Gain Rs. 1,50,000.]

(12) Shri Hemani is a manufacturer, who has furnished the following details for the purpose of calculation of

admissible depreciation on plant & machinery for the P.Y. 2012-13.

(i) Total purchase price of plant & Machinery : Rs. 40 Lacs. for which a special subsidy of Rs. 8

Lacs. was received from the government.

(ii) Accumulated interest upto 30-06-2012 on the loan taken from approved financial institution for

the purchase of plant & machinery Rs. 1,50,000

(iii) Transport charges incurred for the purchase of plant & machinery were Rs. 50,000 and

installation charges amounted to Rs. 60,000.

(iv) Date of Commencement of business use of New Plant & Machinery 1.7.2012.

(v) General Rate of Depreciation as per the Income Tax law is 15%; but a higher rate of 100% is

allowablein respect of some part of these plant and machines installed for the purpose of

Pollution Control ( having final actual cost of Rs. 1,10,000).

Calculate the total admissible depreciation for the A.Y. 2013-14.

[Total admissible depreciation Rs. 6,12,500 (which includes Rs. 1,10,000 calculated @ 100% of

final actual cost of plant installed for pollution control and Rs. 5,02,500 calculated @ 15% of

final actual cost of Rs. 33,50,000 of other items.]

(13) Following particular are furnished by Vikram Engineering relating to its year ending on 31/03/2012:

Assets W.D.V. as on Addition during Rate of

1.4.2012 the year Depreciation

Rs. Rs.

Furniture 16,250 - 10%

Machinery 2,71,250 60,000 15%

Buildings 5,13,825 - 10%

Motor Trucks 51,600 - 15%

New Machine (for office use) was installed on 1.10.2012.

A canteen building costing Rs. 50,000 was destroyed by fire on 30th June, 2012. It was

constructed in September, 2010. The Insurance company admitted a claim of Rs. 26,000. The W.D.V. of

Rs. 26,125 of canteen building was also included in the total W.D.V. (Rs. 5,13,825) of buildings.

Calculate the amount of depreciation allowable for the A.Y. 2013-14.

[Total admissible depreciation Rs. 1,07,911; Depreciation of Building Rs. 48.783; Depreciation on

Furniture Rs. 1,625; Depreciation on Machinery Rs. 49,763; Depreciation on Motor trucks Rs. 7,740.]


23

(14) There are two types of machinery in a factory owned by Mr. Sanjay. Type A machinery was bought on

1.1.2012 at a cost of Rs. 12,00,000. Installation, carriage and custom duty paid in this regard amounted to

Rs. 2,00,000, Rs. 75,000 and Rs. 1,20,000 respectively. A similar machine costing Rs. 5,00,000 was

bought on 1.11.2012 , while a part of old machinery was sold for Rs. 10,00,000 resulting in a profit of

Rs. 3,00,000. The applicable rate of depreciation is 15%. Type B machinery was bought on 1.5.2012 at a

cost of Rs. 50,00,000 but its use started only from 1.9.2012. Interest paid for this period on this

machinery was Rs. 2,50,000. carriage and installation expenses amounted to Rs. 75,000 and Rs.

1,25,000. A government subsidy of Rs. 12,00,000 was received in this regard. The machinery is subject

to 30% rate of depreciation. Calculate the admissible depreciation for both the type of machinery for the

A.Y.2013-14. What would be the treatment of unabsorbed depreciation in case of a loss-making firm?

[Admissible Depreciation for A.Y. 2013-14 : Type A Rs. 1,08,806; Type B Rs. 12,75,000; Total

Depreciation Rs. 13,83,806.]

(15) From the following particulars furnished by Shri Ramkishan determine his total taxable income for A.Y.

2013-14.

(A) Cloth Business :

(i) Loss of Rs. 25,000 for the P.Y. 2012-13 (business is discontinued from 31.10.2012)

(ii) Brought forward loss of Rs. 80,000 of P.Y. 2008-09.

(B) Chemical Business :

(i) No profit / loss for the P.Y. 2012-13 (as the business was closed on 1.3.2012)

(ii) Recovery of bad debts of Rs. 30,000 during P.Y. 2012-13, which was fully allowed in

earlier previous year.

(iii) Brought forward loss of Rs. 20,000 of P.Y. 2011-12.

(C) Stationery Business :

Taxable profit of P.Y. 2012-13 Rs. 70,000.

[Taxable Business Income Nil]

. . . . . . . . . ? . . ? , " ." , . , . : / !


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Income under the Head Capital Gain

Introduction : A profit earned on sale or transfer of a capital asset is treated as capital gain and is assessed to

income-tax in the year during which asset is sold or transferred, whether the consideration is actually

received during the year or not. Thus the date of receipt and the method of accounting are irrelevant for

transfer purpose. Profit arising from the conversion of a capital asset into stock-in-trade of a business carried

on by an assessee will be chargeable to tax in the year in which such stock is sold by him. Profit arising on

sale of assets including goodwill by an individual to a firm or by a firm to an individual is also made taxable

by an individual to a firm or by a firm to an individualis also made taxable.

Profits or gains arising from the receipt of any money or other assets from an insurance company on

account of destruction or damage to any capital asset, shall be deemed to be capital gains of the previous

year in which money is received and is taxed as capital gains.

Following points keep in mind for taxing capital gain

(i) There must exist capital asset owned by an assessee;

(ii) Such capital asset much have been transferred by the assessee;

(iii) Such transfer much have taken place during the previous year;

(iv) Such transfer must have resulted in to a capital profit/loss;

(v) Such capital profit must not be exempted in U/s 54 to 54 G/ 54 GA

Definition

Capital Gains :-

It refers to gain on transfer of capital assets. Thus, capital gain arises, when two conditions are

satisfied: (a) There is a capital asset (b) There is a transfer.

Capital Asset - 2(14) :-

capital asset is defined to include property of any kind held by an assessee, whether connected with

his business/profession or not. Capital Asset includes all kinds of property, movable or immovable,

tangible or intangible, fixed or circulating.

Types of Capital Assets

CA = Capital Assets ; STCA = Short Term Capital Assets ; LTCA = Long Term Capital Assets

Capital Assets Nature of Capital Assets

1. Financial Assets Shares, listed debentures /

government securities, units of UTI /

mutual funds, and zero coupon bonds.

1. If CA is held for < 1 Year = it is a STCA 2. If CA is held for > 1 Year = It is a LTCA

2. Depreciable assets Always treated as STCA

3. Other Assets 1. If CA is held for < 3 Years = it is a STCA 2. If CA is held for > 3 Years = it is a LTCA


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Types of Capital Gain [A] Short term Capital Gain :

Any profit or gain arising from the sale or transfer of short term capital asset is known as

Short term Capital Gain.

[B] Long term Capital Gain :

Any profit or gain arising from sale or transfer of long term capital asset is known as

long term Capital Gain

THE FOLLOWING ASSETS OR TRANSFER IS NOT INCLUDED IN CAPITAL GAIN

Gift, Will, revocable transfer other than ESOP. Distribution of capital assets of HUF. Sale of stock-in-trade. Transfer of asset from holding company to subsidiary company and vice versa. But the transferee

company must be Indian.

Membership right of any stock exchange. 6.5% and 7% Gold bond issued by Central Govt. Conversion of debentures into equity shares or new debentures . Agriculture land in India if such land :-

Not in the municipal area of 10000 or more population.

Not in the specified area.

Capital gain Exempted u/s 10

Transfer of units US-64. Sec.10(33) LTCG on transfer of BSE-500 equity shares. Sec.10(36) Compulsory acquisition of urban land. Sec. 10(37)

Allowed only to individual and HUF. Such land must be used for at least two years for agriculture purpose. Compensation received after 31 march 04.

LTCG on transfer of securities on which STT paid : Capital asset should be equity shares or units of equity oriented mutual fund. Such transfer made on or after 01 oct.2004.

Loan received under a scheme of reverse mortgage u/s 10(43) - Any amount received by an individual under a scheme of reverse mortgage, either in lump sum or in installment, in a

transaction of reverse mortgage referred to in section 47(xvi).

TRANSFER EXPENSES These expenses are deductible in calculation of Net SalesConsideration. e.g. Brokerage, commission, cost of

stamp, registration fees on sales etc.

Cost of Acquisition (COA).

It includes brokerage, fees, stamp duty paid at the time of purchase of capital asset.


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PROVISIONS OF SEC.49(1) Cost to the previous owner will be deemed to be the cost of acquisition in the following cases :- Distribution of HUF`s capital asset. Capital asset acquired under will or gift. Distribution of assets on liquidation of companies. If the cost to previous owner is not identified then the Market value as on the date of assets

acquired by previous owner will be deemed as cost of acquisition. For calculation of Short term/Long term capital gain the holding period of previous owner also

included.

Acquisition before 1st April, 1981

Market Value or the cost of acquisition (improvement cost incurred before Apr.1981 - ignored) whichever

is higher on 1st April, 1981 will be deemed as cost of acquisition. This rule is not applicable on depreciable

assets.

Amount forfeited paid as advance to vendor due to non-fulfillment of terms and condition, such forfeited

amount will be deducted from the cost of acquisition before indexation.

Cost of Acquisition for Bonus Shares Acquired on or after 1 Apr.1981 is NIL Acquired before 1 Apr.1981 is Fair Market Value.

Cost of Acquisition for Right shares Amount paid to the company for such shares. For transfer of right entitlement - NIL.

Cost of Acquisition for Conversion of debentures Conversion of debentures, debenture stock, deposit certificate into equity shares or debentures

of a company will not generate capital gain. On transfer of these converted equity shares or debentures , cost of acquisition will be equal to

the cost of old debentures converted into shares etc.

Cost of Improvement Cost of Improvement for (a) Goodwill of Business (b) Right to manufacture, produce or process any

article or thing. (c) Right to carry on any business shall be taken as NIL

Indexed Cost of Acquisition If any long term capital assets sold during the previous year benefit of Indexed Cost of Acquisition

is given except the following situation : Depreciable asset - always STCG. Bonds, debentures other than issued by you. Shares and debentures purchased by non-resident in foreign currency.

Computation of capital gain on transfer of self-generated assets 1. Cost of acquisition as NIL


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2. Transfer expenses is allowed. 3. Improvement cost is considered for tenancy right, route permit, loom hours but NIL in case of goodwill of business and right used for mfg. or processing or for running business.

4. Transfer of self- generated assets like goodwill of profession, patent of technique etc. are not taxable.

Exemption from Capital Gain Income

Section Allowed Assessee Condition to be satisfied Quantum of Exemption

54 Individual/HUF 1. Transfer should be of a residential house income of which is chargeable under thehead Income from house property. 2 It must be a long-term capital asset. 3. Purchase of another residential house should be within one year before or 2years after, or construction should be within three years after the date of transfer.

Actual amount invested in new asset or the capital gain whichever is less.

54 B Individual 1 Transfer should be of agricultural land. 2. It must have been used in the 2 years immediately preceding the date oftransfer for agricultural purposes eitherby the assessee or his parent. 3 Another agricultural land should be purchased within 2 years after the date of transfer.


54D Any assessee which is an industrial undertaking

1 There must be compulsory acquisition. 2. The property compulsorily acquired should be land and building forming part of an industrial undertaking. 3. The asset must have been used in the 2years immediately preceding the date of transfer of the assessee for the purpose of the business of the undertaking. 4. Within a period of 3 years after the date of compulsory acquisition any other land or building should be purchased or constructed for the use of existing or newly set up industrial undertaking.


54 EC Any Assessee 1. The asset transferred should be a long- term capital asset 2.Within a period of 6 months after

Actual amount invested in new asset or the capital gain whichever is less. However, maximum


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the date of transfer, the capital gain must he invested in the specified assets i.e. bonds redeemable after 3 years issued by NHAl or RECL.

amount which can be invested in any financial year cannot exceed Rs. 50,00,000

54F Individual/HUF 1. The asset transferred should be a long- term capital asset, not being a residential house. 2. Within a period of I year before or 2 years after the date of transfer, a residential house should be purchased or constructed within a period of 3 years after the date of transfer. 3. The assessee should not own more than one residential house on the date of transfer. 4. The assessee should not within a period of one year purchase or should not within a period of 3 years construct any residential house other than the new asset.

If the cost of the new residential house is not less than the net consideration then the whole of the capital gain . Otherwise, Ami. invested : ITCG x ------- Net consideration price

54G Any assessee which is an industrial undertaking

1 Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred. 2.Transfer should be due to shifting to any area other than an urban area. 3. Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.

If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.

54GA Any assessee which is an industrial undertaking

1. Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred. 2.Transfer should be due to shifting to any Special Economic Zone whether developed in any urban area or any other area. 3. Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.

If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.


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Notes : Capital Gain Scheme.If the new asset is not acquired under sections 54, 54B, 54D, 54F, 54G

and 54GA or the full amount could not be invested upto the due date of furnishing the return of income,

the assessee can deposit the desired amount under the Capital Gain Scheme on or before the due date of

return and thus can acquire the asset within the stipulated time out of money withdrawn from such scheme

at a later date. In the case of section 54EC the Capital Gain Scheme is not applicable. Consequences if the

new asset acquired is transferred within 3 years of its acquisition Under sections 54, 54B, 54D, 54G and

54GA.For computation of new Capital Gain (which will be short-term), the cost of acquisition of such

new asset shall be reduced by the amount of Capital Gain exempt under sections 54, 54B, 54D and 54G

earlier.

UNDER 54F.Besides the new Capital Gain (which will be short-term), the Capital Gain exempt earlier

under section 54F, shall be long-term capital gain of the previous year in which new asset is transferred.

Under section 54EC.If such security acquired is converted into money or any loan is taken against such

securities within 3 years, the Capital Gain exempt under section 54EC for such securities earlier shall be

long-term Capital Gain of the previous year in which such conversion takes place or the loan is taken.

Consequences if the amount deposited in Capital Gain Scheme is not utilised within the stipulated time of

3 years (2 years in case of section 54B).The unutilised amount shall be Capital Gain (short-term or long-

term depending upon original transfer) of the previous year in which such period has expired. However, in

case of section 54F, proportionate amount shall be taxable.

Tax on short term capital gain Sec. 111A

Any STCG arising from the transfer of an equity share in a company or a unit of an equity oriented fund

shall be liable to tax @15% if the following conditions are satisfied:

1. The transaction of sale should take place through a recognized stock exchange. 2. Such transaction is chargeable to STT. 3. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of STCG

u/s 111A.

4. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income

then STCG u/s 111A shall be reduced by the unexhausted basic exemption limit and only the balance

STCG shall be chargeable to tax @15%.

Tax on Long Term Capital Gain sec.112

1. Where the transferred long term asset is in the nature of listed securities or units of UTI or mutual fund or zero coupon bonds.

2. The gain arising from the transfer of such securities or units shall be liable to tax - @10% on such LTCG computed without the benefit of indexation, OR @ 20% on such LTCG computed availing the benefit of indexation

Whichever is more beneficial to the assessee.

3. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income then LTCG shall be reduced by the unexhausted basic exemption limit and only the balance

LTCG shall be chargeable to tax.

4. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of LTCG.

Please note that the possibility of applying 10% or 20% tax rate shall arise only in

a case where the listed shares are not traded through a recognized stock exchange and

not chargeable to STT. Otherwise, the transfer of listed shares is covered by the

exemption provided u/s 10(38).


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Special provisions for computation of capital gains in case of slump sale - Sec.50B

1. Slump sale Meaning

The transfer of one or more undertakings as a result of the sale for a lump sum consideration without values

being assigned to the individual assets and liabilities in such sales.

2. If assets transferred under the slump sale is owned and held for more than 36 months, the capital gain shall be treated as LTCG.

3. The net worth of the undertaking or division so transferred shall be deemed to be the cost of acquisition and the cost of improvement in computing the capital gain.

4. The benefit of indexation not allowed on slump sale. 5. Net worth shall be the aggregate of value of total assets of the undertaking or division as reduced by the value of such liabilities of such undertaking or division as appearing in its books of account

Any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of

Net worth.

Table for Cost Inflation Index

Financial Year C.I.I. Financial Year C.I.I.

1981-82 100 1997-98 331

1982-83 109 1998-99 351

1983-84 116 1999-2000 389

1984-85 125 2000-01 406

1985-86 133 2001-02 426

1986-87 140 2002-03 447

1987-88 150 2003-04 463

1988-89 161 2004-05 480

1989-90 172 2005-06 497

1990-91 182 2006-07 519

1991-92 199 2007-08 551

1992-93 223 2008-09 582

1993-94 244 2009-10 632

1994-95 259 2010-11 711

1995-96 281 2011-12 785

1996-97 305 2012-13 852

2013-14 939

A. CAPITAL GAINS (List of Important Sections)

45 Capital gains

46 Capital gains on distribution of assets by companies in liquidation

46A Capital gains on purchase by company of its own shares or other specified securities

47 Transactions not regarded as transfer

47A Withdrawal of exemption in certain cases

48 Mode of computation

49 Cost with reference to certain modes of acquisition


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50 Special provision for computation of capital gains in case of depreciable assets

50A Special provision for cost of acquisition in case of depreciable asset

50B Special provision for computation of capital gains in case of slump sale

50C Special provision for full value of consideration in certain cases

51 Advance money received

54 Profit on sale of property used for residence

54B Capital gain on transfer of land used for agricultural purposes not to be charged in certain

cases

54D Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases

54E Capital gain on transfer of capital assets not to be charged in certain cases

54EA Capital gain on transfer of long-term capital assets not to be charged in the

case of investment in specified securities

54EB Capital gain on transfer of long-term capital assets not to be charged in certain cases

54EC Capital gain not to be charged on investment in certain bonds

54ED Capital gain on transfer of certain listed securities or unit, not to be charged in certain cases

54F Capital gain on transfer of certain capital assets not to be charged in case of

investment in residential house

54G Exemption of capital gains on transfer of assets in cases of shifting of

industrial undertaking from urban area

54GA Exemption of capital gains on transfer of assets in ca

taxation all material

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