Final Course

Study Material
(Modules 1 to 4)

Paper 4
Direct Tax Laws &
International Taxation
[Direct Tax Laws as amended by the Finance (No.2) Act, 2024]
Assessment Year 2025-26

Module – 1
(Relevant for May, 2025 and
November, 2025 examinations)

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This Study Material has been prepared by the faculty of the Board of Studies. The objective of the
Study Material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarification or have any suggestion for further
improvement of the material contained herein, they may write to the Joint Director, Board of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Basic draft of this publication was prepared by CA. (Dr.) Rashmi Goel

Edition : November, 2024

Committee/Department : Board of Studies

E-mail : bosnoida@[Link]

Website : [Link]

Price : ` /- (For All Modules)

ISBN No. : 978-93-48313-26-3

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)

Printed by :

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BEFORE WE BEGIN …

Direct Tax Laws & International Taxation: Dynamic Subject Area

Direct Tax Laws & International Taxation is one of the dynamic subjects of the chartered
accountancy course. The direct tax laws of the country undergo significant changes every year with
the passing of the annual Finance Act. Apart from these significant amendments ushered in every
year through the Finance Act, notifications and circulars are also issued from time to time by the
Central Board of Direct Taxes (CBDT), the statutory authority in charge with the administration of
direct taxes, to implement the provisions of the Act and clarify issues regarding the meaning and
scope of certain provisions. Further, decisions are pronounced by various Courts interpreting the
provisions of tax laws.
With increased cross border transactions and the whole world virtually becoming one market, there
is a need for chartered accountants to enhance their knowledge base in international taxation.
Countries across the globe are entering into tax treaties to avoid double taxation of a single
transaction. In a highly advanced IT enabled business scenario where an entity operates from many
establishments spread throughout the globe, chartered accountants have to be well versed with the
nuances of international taxation to be able to give an informed and correct advice and ensure
compliance with tax laws. Accordingly, international taxation has been included as an integral part
of this paper.
The contents of the syllabi of this paper is divided into three parts –
1. Chapters based on substantive law of direct taxes including tax planning and tax avoidance;
2. Chapters based on the compliance and procedural law of direct taxes; and

3. Chapters based on international taxation.

The relevant Finance Act and Assessment Year

This Study Material is based on the provisions of direct tax laws, as amended by the
Finance (No. 2) Act, 2024 and the significant notifications, circulars issued and other legislative
amendments made upto 31st October, 2024. The computational problems have been solved on the
basis of the provisions of direct tax laws applicable for A.Y.2025-26. The Study Material is, therefore,
relevant for May 2025 and November, 2025 examinations. In this Study Material, the amendments
made by the Finance (No. 2) Act, 2024 and latest notifications and circulars issued have been
indicated in italics/bold italics.

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The significant circulars and notifications issued and other legislative amendments, if any, made
upto 31st October, 2024, relevant for May, 2025 Examination, but not covered in the study material
would be webhosted as Statutory Update for May, 2025 examination in the BoS Knowledge Portal.
Likewise, the significant circulars and notifications issued and other legislative amendments, if any,
made upto 30th April, 2025, relevant for November, 2025 Examination, but not covered in the study
material would be webhosted as Statutory Update for November, 2025 examination. The Judicial
Update containing latest significant court rulings relevant for May, 2025 and November, 2025
examination would also be webhosted at the BOS Knowledge Portal.
Read the Bare Act & Rules along with Study Material

At the Final level, along with the Study Material, students are also advised to read the Income-tax
Act, 1961 and Income-tax Rules, 1962, available at the website of the income-tax department
[Link]. This will help understand the language of law and sequence of sections
and rules. The circulars and notifications issued by CBDT, the income-tax return forms, important
provisions relating to firms, companies, trusts, FAQs etc. are also available at this website. Students
are advised to visit the income-tax department’s website and enhance their knowledge.
Framework of Chapters: Uniform Structure comprising of specific components

Efforts have been made to present the complex direct tax laws in a lucid manner. Care has been
taken to present the chapters in a logical sequence to facilitate easy understanding by the students.
The Study Material has been divided into four modules for ease of handling by students. The first
three modules are on direct tax laws and the fourth module is on international taxation.
Each chapter of the Study Material has been structured uniformly and comprises of the following
components:
Components of About the component
each Chapter
1 Learning Learning outcomes which you need to demonstrate after learning each
Outcomes topic have been detailed in the first page of each chapter. Demonstration
of these learning outcomes would help you achieve the desired level of
technical competence
2 Content The concepts and provisions of direct tax laws and international taxation
are explained in a student-friendly manner with the aid of
examples/illustrations/diagrams/flow charts. Diagrams and Flow charts
would help you understand and retain the concept/ provision learnt in a
better manner. Examples and illustrations would help you understand
the application of concepts/provisions. These value additions would,

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thus, help you develop conceptual clarity and get a good grasp of the
topic.
3 Significant The summary of recent significant select Supreme Court and High Court
Select Cases rulings have been tabulated at the end of each chapter capturing the gist
of the Court decisions interpreting the provisions of tax laws.
In addition, case laws (including recent case laws) also form part of the
discussion of topics in the content as well as in the questions and
answers in “Test Your Knowledge” component.
Questions on “Significant Select Cases” in direct tax laws have been
given at the end of Module 3 to enable you to apply the rationale of court
rulings in addressing issues.
4 Test Your The questions and answers at the end of each chapter would help you to
Knowledge analyse the provisions of direct tax laws and international taxation and
apply the same in problem solving, thus, sharpening your application
skills. In effect, these questions would test your ability to analyse and
apply the concepts/provisions learnt in solving problems and addressing
issues.

We hope that these student-friendly features in the Study Material improves your learning curve and
sharpens your analytical and interpretational skills.

Happy Reading and Best Wishes!

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PAPER – 4 : DIRECT TAX LAWS & INTERNATIONAL TAXATION

(One paper ─ Three hours –100 Marks)

Objective:

(a) To acquire the ability to analyse and interpret the provisions of direct tax laws and recommend
optimal solutions to practical problems in a tax efficient manner; and

(b) To apply the provisions of direct tax laws and the concepts, principles and provisions of
international taxation to recommend solutions to issues involved in cross border transactions.
Contents:

I. (i) Comprehensive computation of income-tax liabilities of companies and other entities

under the alternative tax regimes under the Income-tax Act, 1961 to optimise tax
liability

- General provisions under the Act for computation of total income and tax liability
for companies and other entities

- Special tax regimes under the Act for companies and other entities

- Optimisation of tax liability of companies and other entities through tax planning

(ii) Special Provisions relating to charitable and religious trust and institutions, political
parties and electoral trusts, business trusts, securitisation trusts, investment funds and
other funds/trusts

(iii) Anti-avoidance provisions under the Act

(iv) Provisions to address tax challenges on digitalization

II. Tax Administration and Appellate Mechanism

Deduction, Collection and Recovery of Tax

Income-tax Authorities

Assessment Procedures

Appeals and Revision; and Dispute Resolution

Provisions to counteract unethical tax practices

- Taxation of undisclosed income under the Income-tax Act, 1961

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- Taxation of undisclosed foreign income and assets

- Penalties and offences and prosecution

Miscellaneous Provisions

Tax Audit

III. International Taxation

(i) Taxation of cross border transactions and Non-resident taxation under the Income-tax
Act, 1961, including

- Transfer Pricing

- Non-resident Taxation

- Double Taxation Relief

- Advance Ruling

(ii) Other Aspects of International Taxation, namely,

- Significant articles of OECD and UN Model Tax Conventions

- Fundamentals of BEPS

- Application and Interpretation of Tax Treaties

- Latest developments in international taxation

Note: If any new legislation(s) are enacted in place of an existing legislation(s), the syllabus will
accordingly include the corresponding provisions of such new legislation(s) in the place of the
existing legislation(s) with effect from the date to be notified by the Institute. Similarly, if any existing
legislation(s) on direct tax laws ceases to be in force, the syllabus will accordingly exclude such
legislation(s) with effect from the date to be notified by the Institute.

Further, the specific inclusions/exclusions in any topic covered in the syllabus will be effected by
way of Study Guidelines every year, if required. Specific inclusions/exclusions in a topic may also
arise due to additions/deletions made every year by the Annual Finance Act.

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OVERVIEW OF SELECTED KEY AMENDMENTS

MADE BY THE FINANCE (NO. 2) ACT, 2024

This edition of the study material on Direct Tax Laws & International Taxation has been meticulously
updated in line with the Direct Tax Laws, as amended by the Finance (No. 2) Act, 2024 along with
significant Notifications and Circulars issued upto 31.10.2024. It is specifically designed for A.Y.
2025-26 and is applicable for May 2025 and November 2025 examinations.
The amendments made by the Finance (No.2) Act, 2024, significant Notifications and Circulars
issued upto 31.10.2024 have been incorporated in this material. Accordingly, the content including
tabular presentations, diagrams, flow charts etc have been added, deleted, modified on the basis of
provisions of direct tax laws applicable for A.Y. 2025-26. Additionally, examples, illustrations given
during the discussion, significant select cases of Supreme Court and High Court rulings forming part
of the discussion or contained in the questions and tabulated at the end of each chapter and "Test
Your Knowledge" questions have been updated, deleted or modified in accordance with these
amendments.
While the amended provisions are distinctly highlighted in italics/bold and italics throughout the
material for easy access and quick reference, the concise summary of some of the key amendments
introduced by the Finance (No. 2) Act, 2024 are given here below:
Default Tax Regime [Section 115BAC] - Significant changes have been made to the default
tax regime under section 115BAC, with the objective of making it more beneficial and
appealing for taxpayers. The tax slabs under the Default Tax Regime have been restructured
as follows:
Total income Rate of tax
Upto ` 3,00,000 Nil
From ` 3,00,001 to ` 7,00,000 5%
From ` 7,00,001 to ` 10,00,000 10%
From ` 10,00,001 to ` 12,00,000 15%
From ` 12,00,001 to ` 15,00,000 20%
Above ` 15,00,000 30%
Under the Default Tax Regime, the standard deduction available to salaried employees has
been enhanced from ₹ 50,000 to ₹ 75,000. Additionally, the maximum deduction for family

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pension has been increased from ₹ 15,000 to ₹ 25,000. For non-government employees, the
permissible deduction for employer’s contributions to the National Pension System (NPS) has
been raised from 10% to 14% of the employee’s salary, applicable exclusively under this
regime.
Reduction of tax rate applicable to foreign companies: The rate of income-tax chargeable
on total income of a foreign company (other than that chargeable at special rates) reduced
from 40% to 35%.
Increase in deduction limit in respect of remuneration to working partners of a firm:
The limit for computing the allowable deduction in respect of remuneration paid to working
partners has been increased. Accordingly, new limits are:

On the first ` 6,00,000 of the book-profit or in case Higher of ₹ 3,00,000, or 90% of the
of a loss book-profit

On the balance book profit 60%

Income from letting out of residential house property: Any income from letting out of a
residential house or part thereof by the owner would be chargeable to tax only under the head
‘Income from house property’ and not under the head ‘Profits and gains of business or
profession’.
Period of holding for classifying capital asset as long term or short term: W.e.f.
23.7.2024, there are only two period of holding for classifying a capital asset as long-term or
short-term, 12 months for all listed securities and 24 months for all other assets.
Consequently, the period of holding for units of listed business trust has been changed from
36 months to 12 months which is now at par with listed equity shares.
Increase in tax rate on STCG on specified financial assets - The tax rate on short term
capital gains on specified financial assets (STT paid equity shares, units of equity-oriented
fund and units of a business trust) under section 111A has been increased from 15% to 20%
with effect from 23.7.2024. However, there is no change in the tax rate for other short term
capital gains.
Uniform tax rate on LTCG - In respect of all long-term capital gains whether taxable under
section 112 or on specified financial assets under section 112A, a uniform tax rate of 12.5%
would be applicable (except unlisted debentures and bonds) w.e.f. 23.7.2024.

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Increased exemption limit under section 112A: The exemption limit for long term capital
gains on specified financial assets under section 112A has been increased from ₹ 1 lakh per
year to ₹ 1.25 lakh per year.
Capping of Indexation for Certain Long-Term Capital Gains: W.e.f. 23.7.2024, the
indexation benefit available on transfer of certain long term capital assets has been removed.
However, grand fathering being allowed in respect of long-term capital gain arising to resident
individual or HUF on transfer of land or building or both acquired before 23.7.2024.
Abolition of Angel Tax: Where capital is raised by closely held companies through the
issuance of shares and the consideration for issue of shares exceeds the face value of such
shares, the excess of consideration received over the fair market value of the shares, was
taxed under section 56(2)(viib). In order to boost the start-ups, the angle tax, as it is commonly
referred to, is abolished.
Tax on Buy-back of shares: The income from buy-back of shares by domestic companies
on or after 1.10.2024 is now taxable in the hands of recipient investor as dividend. Upto
30.9.2024, additional income-tax is attracted in the hands of the domestic company and
consequently, income on buyback of shares is exempt in the hands of shareholders under
section 10(34A). Accordingly, w.e.f. 1.10.2024, TDS@10% would be attracted in respect of
dividend arising on account of buy back of shares in the hands of shareholders.
No application for approval under First Regime: The Income-tax Act, 1961 puts in place
two main regimes for trusts or funds or institutions to claim exemption. The first regime is
contained in section 10(23C)(iv), (v), (vi) or (via). The second regime is contained in the
provisions of sections 11 to 13. In order to simplify the procedures for approvals or registration
of trusts or institutions and to reduce administrative burden, w.e.f. 1st October, 2024, no
application can be filed for approval under first regime.
Withdrawal of Equalisation Levy on e-commerce supply or services: Equalisation Levy
@ 2% of consideration received for e-commerce supply of goods or services from 1st August
2024 has been withdrawn. Consequently, this study material does not contain any discussion
regarding it.
Reduction in tax deducted at source (TDS) rates: The rate of TDS under section 194D,
194DA, 194G, 194H, 194-IB, 194M have been reduced from 5% to 2% from 1.10.2024 (in
case of section 194D, from 1.4.2025). Moreover, TDS rate on e-commerce operators under
section 194-O is also reduced from 1% to 0.1% on gross amount of sales or services or both.
This is in line with the objective of TDS serving as an audit trail rather than as a revenue
garnering measure.

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TCS on notified luxury goods: To enable TCS on luxury goods, the scope of section
206C(1F) has been expanded w.e.f. 1st January 2025 to levy TCS of 1% on notified goods of
value exceeding ` 10 lakhs.
Re-introduction of block assessment scheme for search and seizure cases: A scheme
of block assessment for search cases has been re-introduced w.e.f. 1st September 2024. The
block period would be six previous years preceding the previous year in which the search
was initiated, or any requisition was made and also include the period up to the date of
conclusion of search or such requisition. The applicable rate of tax would be 60%. Further,
penalty at 50% of the said tax would be leviable, unless the same is disclosed in the return
filed pursuant to search.
Revision in the time-limit for filing appeals to the ITAT: The time limit for filing appeal
before the ITAT has been amended w.e.f. 1st October 2024 from 'within sixty days of the date
on which the order sought to be appealed against is communicated to the assessee or to the
PCIT/CIT, as the case may be” to “within two months from the end of the month in which the
order sought to be appealed against is communicated to the assessee or to the PCIT/CIT, as
the case may be”.
Introduction of presumptive income scheme for cruise ship operations by non-
residents: New section 44BBC has been inserted to provide for presumptive income @20%
of the aggregate amount received/ receivable by, or paid/ payable to, the non-resident cruise-
ship operator, on account of the carriage of passengers, as profits and gains of such cruise-
ship operator from this business.
Parity in taxation between resident and non-resident assesses: To bring parity of taxation
between residents and non-residents, corresponding amendments to section 115AD, 115AB,
115AC, 115ACA and 115E have been made to align the rates of taxation in respect of long-
term capital gains taxable under section 112A and 112 and rates of short term capital gains
taxable under section 111A.

The above coverage provides only a concise overview of the significant select amendments made
by the Finance (No. 2) Act, 2024. To fully grasp the scope and application of the amendments
introduced by the Finance (No. 2) Act, 2024 along with Notification and Circulars, it is imperative to
refer to the detailed discussions including tabular presentations, flow charts, examples, illustrations,
significant select cases, test your knowledge questions provided in the respective chapters.
Therefore, students are advised to refer the chapters thoroughly for comprehensive study and
effective preparation for their examinations.

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CONTENTS

MODULE – 1
Chapter 1 : Basic Concepts
Chapter 2 : Incomes which do not form part of Total Income
Chapter 3 : Profits and Gains of Business or Profession
Chapter 4 : Capital Gains
Chapter 5 : Income from Other Sources
Chapter 6 : Income of Other Persons included in assessee’s Total Income
Chapter 7 : Aggregation of income, set-off or carry forward of Losses
Chapter 8 : Deductions from Gross Total Income

MODULE – 2
Chapter 9 : Assessment of Various Entities
Chapter 10: Assessment of Trusts and Institutions, Political Parties and Other Special Entities
Chapter 11 : Tax Planning, Tax Avoidance & Tax Evasion
Chapter 12 : Taxation of Digital Transactions
MODULE – 3
Chapter 13 : Deduction, Collection and Recovery of tax
Chapter 14 : Income-tax Authorities
Chapter 15 : Assessment Procedure
Chapter 16 : Appeals and Revision
Chapter 17 : Dispute Resolution
Chapter 18 : Miscellaneous Provisions
Chapter 19 : Provisions to Counteract Unethical Tax Practices
Chapter 20 : Tax Audit and Ethical Compliances

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MODULE – 4
Chapter 21 : Non-resident Taxation
Chapter 22 : Double Taxation Relief
Chapter 23 : Advance Rulings

Chapter 24 : Transfer Pricing

Chapter 25 : Fundamentals of BEPS
Chapter 26 : Application and Interpretation of Tax Treaties
Chapter 27 : Overview of Model Tax Conventions
Chapter 28 : Latest Developments in International Taxation

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DETAILED CONTENTS: MODULE - 1

CHAPTER 1 – BASIC CONCEPTS

Learning Outcomes ............................................................................................................................ 1.1

Contents:
1.1 Overview of Income-tax law in India ....................................................................................... 1.2
1.2 Important definitions ............................................................................................................. 1.10
1.3 Previous year and Assessment year .................................................................................... 1.33
1.4 Charge of Income-tax ........................................................................................................... 1.39
1.5 Rates of Tax, Surcharge & Cess ......................................................................................... 1.39
1.6 Rebate for resident individuals [Section 87A] ....................................................................... 1.65
Significant Select Cases ....................................................................................................... 1.68
Test Your Knowledge ............................................................................................................ 1.70

CHAPTER 2 - INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Learning Outcomes................................................................................................................. 2.1

Contents:

2.1 Introduction ................................................................................................................. 2.2

2.2 Incomes not included in total income [Section 10] ......................................................... 2.5
2.3 Restrictions on allowability of expenditure [Section 14A] ............................................. 2.40

Significant Select Cases ....................................................................................................... 2.42

Test Your Knowledge ............................................................................................................ 2.43

CHAPTER 3 – PROFITS AND GAINS OF BUSINESS OR PROFESSION

Learning Outcomes................................................................................................................. 3.1

Contents:
3.1 Meaning of ‘Business’ and ‘Profession’ ........................................................................ 3.3

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3.2 Income chargeable under this head [Section 28] ........................................................... 3.5
3.3 Speculation business ................................................................................................... 3.9
3.4 Method of Accounting ............................................................................................... 3.11

3.5 Computation of Profits and Gains from business

or profession [Section 29] .......................................................................................... 3.26
3.6 Admissible deductions ............................................................................................... 3.27
3.7 Inadmissible deductions [Section 40] ........................................................................ 3.132
3.8 Expenses or payments not deductible
in certain circumstances [Section 40A] ..................................................................... 3.144
3.9 Profits chargeable to tax [Section 41] ....................................................................... 3.152
3.10 Other provisions ...................................................................................................... 3.153
3.11 Compulsory maintenance of accounts [Section 44AA] ............................................... 3.166
3.12 Audit of accounts of certain persons
carrying on business or profession [Section 44AB].................................................... 3.170

3.13 Special provisions for computing profits and gains

of business on presumptive basis [Section 44AD/44ADA/44AE] ................................ 3.174
3.14 Method of computing deduction in the case of business
re-organization of Co-operative Banks [Section 44DB] .............................................. 3.181
3.15 Computation of business income in cases where income
is partly agricultural and partly business in nature ..................................................... 3.186

Significant Select Cases ..................................................................................................... 3.190

Test Your Knowledge .......................................................................................................... 3.199

CHAPTER 4- CAPITAL GAINS

Learning Outcomes................................................................................................................. 4.1

Contents:
4.1 Introduction ................................................................................................................. 4.2

4.2 Capital Asset ............................................................................................................... 4.2

4.3 Short-term and long-term capital assets ....................................................................... 4.7

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4.4 Transfer: What its means? [Section 2(47)] .................................................................. 4.13

4.5 Scope and year of chargeability [Section 45] .............................................................. 4.15
4.6 Capital gains on distribution of assets by companies in liquidation [Section 46] ........... 4.33
4.7 Capital gains on buyback of shares or other securities [Section 46A] .......................... 4.34
4.8 Important definitions .................................................................................................. 4.36
4.9 Transactions not regarded as transfer [Section 47] ..................................................... 4.39
4.10 Withdrawal of exemption in certain cases ................................................................... 4.58
4.11 Mode of computation of capital gains [Section 48] ...................................................... 4.59
4.12 Ascertainment of cost in specified circumstances [Section 49] .................................... 4.64
4.13 Cost of acquisition [Section 55(2)] .............................................................................. 4.76
4.14 Cost of improvement [Section 55(1)]........................................................................... 4.88
4.15 Computation of capital gains in case of depreciable assets [Section 50 & 50A]............ 4.91
4.16 Computation of capital gains in case of market linked debentures [Section 50AA] ....... 4.94
4.17 Capital gains in respect of slump sale [Section 50B] ................................................... 4.95
4.18 Deemed full value of consideration for computing capital
gains [Section 50C, 50CA & 50D] ............................................................................. 4.102
4.19 Advance money received [Section 51] ...................................................................... 4.106
4.20 Exemption of capital gains ....................................................................................... 4.109
4.21 Reference to Valuation Officer [Section 55A] ............................................................ 4.127

4.22 Tax on Short term capital gains in respect of equity

share/units of an equity oriented fund /unit of a business Trust [Section 111A] ......... 4.128
4.23 Tax on long term capital gains [Section 112] ............................................................. 4.129
4.24 Tax on long term capital gains on certain assets [Section 112A] ............................... 4.131
4.25 Surplus on sale of shares and securities - whether taxable as capital gains
or business income? [Circular No. 06/2016, dated 29-2-2016] ................................... 4.140
Significant Select Cases ..................................................................................................... 4.143
Test Your Knowledge .......................................................................................................... 4.150

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CHAPTER 5-INCOME FROM OTHER SOURCES

Learning Outcomes................................................................................................................. 5.1

Contents:

5.1 Introduction ................................................................................................................. 5.2

5.2 Method of accounting [Section 145] .............................................................................. 5.2

5.3 Incomes chargeable under this head [Section 56] ......................................................... 5.2

5.4 Applicable rate of tax in respect of casual income [Section 115BB] ............................. 5.51

5.5 Applicable rate of tax in respect of winning from online games [Section 115BBJ] ......... 5.51

5.6 Deductions allowable [Section 57] .............................................................................. 5.52

5.7 Deductions not allowable [Section 58] ........................................................................ 5.54

5.8 Deemed income chargeable to tax [Section 59] .......................................................... 5.56

Significant Select Cases ....................................................................................................... 5.57

Test Your Knowledge ............................................................................................................ 5.61

CHAPTER 6 - INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL INCOME

Learning Outcomes................................................................................................................. 6.1

Contents:
6.1 Clubbing of Income - An introduction ........................................................................... 6.3
6.2 Income of other persons includible in assessee’s total income ..................................... 6.3
6.3 Income of other persons includible in an individual’s total income ................................. 6.4
6.4 Cross transfers .......................................................................................................... 6.13

6.5 Conversion of self-acquired property into the property of a HUF[Section 64(2)] ........... 6.14
6.6 Income includes loss .................................................................................................. 6.15
6.7 Distinction between section 61 and section 64 ............................................................ 6.15

6.8 Liability of person in respect of income included in the income of another person ........ 6.15
Test Your Knowledge ............................................................................................................ 6.17

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CHAPTER 7 - AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF LOSSES

Learning Outcomes................................................................................................................. 7.1

Contents:
7.1 Aggregation of Income ................................................................................................. 7.3
7.2 Concept of set-off and carry forward of losses .............................................................. 7.4

7.3 Inter-source adjustments [Section 70]........................................................................... 7.4

7.4 Inter-head adjustments [Section 71] ............................................................................. 7.5
7.5 Carry forward and set off of loss from house property [Section 71B] .............................. 7.6
7.6 Carry forward and set-off of business losses [Section 72] ............................................. 7.9
7.7 Carry forward and set-off of accumulated business losses
and unabsorbed depreciation in certain cases of amalgamation/
demerger, etc. [Section 72A] ...................................................................................... 7.12
7.8 Carry forward and set off of accumulated business losses
and unabsorbed depreciation in a scheme of amalgamation
in certain cases [Section 72AA] .................................................................................. 7.16
7.9 Carry forward and set off of accumulated loss and unabsorbed
depreciation in business reorganisation of Co-operative Banks [Section 72AB] ........... 7.18
7.10 Losses in speculation business [Section 73] ............................................................... 7.20
7.11 Carry forward & set-off of losses by specified businesses [Section 73A] ...................... 7.22
7.12 Losses under head ‘Capital Gains’ [Section 74] .......................................................... 7.23
7.13 Losses from the activity of owning and maintaining race horses [Section 74A(3)] ........ 7.24
7.14 Carry forward and set-off of losses in case of change in
constitution of firm or succession [Section 78] ............................................................ 7.26
7.15 Carry forward and set-off of losses in case of closely
held companies [Section 79] ...................................................................................... 7.26

7.16 No set off of losses against undisclosed income brought to tax

Consequent to search, requisition and survey [Section 79A] ....................................... 7.29

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7.17 Order of set-off of losses ............................................................................................ 7.30

7.18 Submission of Return of Losses [Section 80] .............................................................. 7.32
Significant Select Cases ....................................................................................................... 7.34
Test Your Knowledge ............................................................................................................ 7.36

CHAPTER 8 – DEDUCTIONS FROM GROSS TOTAL INCOME

Learning Outcomes ............................................................................................................................ 8.1

Contents:
8.1 General provisions ....................................................................................................... 8.2
8.2 Deductions in respect of payments ............................................................................... 8.6
8.3 Deductions in respect of certain incomes ................................................................... 8.57
8.4 Deductions in respect of other income ........................................................................ 8.91
8.5 Other Deductions ....................................................................................................... 8.94
8.6 Deduction under section 10AA ................................................................................... 8.95
Significant Select Cases ..................................................................................................... 8.105
Test Your Knowledge .......................................................................................................... 8.111

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© The Institute of Chartered Accountants of India
CHAPTER 1
7
BASIC CONCEPTS

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 recap the basic concepts of income-tax law, its components and the
meaning of important terms used;
 interpret the provisions of income-tax law by applying the rules of
interpretation;
 examine whether a receipt is capital or revenue in nature, in the context
of the provisions of income-tax law;
 appreciate the difference between application of income and diversion
of income by overriding title;
 examine the circumstances when income of the previous year would be
assessed to tax in the previous year itself;
 appreciate the differences in the rates of tax and surcharge applicable
to different categories of persons;
 apply the rates of tax applicable to different components of the total
income of a person and the rates of surcharge, wherever applicable, and
health and education cess for the purpose of determining the tax liability
of such person.

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CHAPTER
 OVERVIEW

Components of Income-tax Law

Rules of Interpretation

Important Definitions

Charge of Income-tax

Rates of Tax & Surcharge

1.1 OVERVIEW OF INCOME TAX LAW IN INDIA

The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except
by authority of law.” Accordingly, both the levy of tax as well as its collection shall be made under
a law framed by the government.
Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the
Central and State Government. The Parliament and State Legislatures are empowered to make
laws on the matters enumerated in the Seventh Schedule by virtue of Article 246 of the
Constitution of India.
The Seventh Schedule to Article 246 contains three lists which enumerate the matters under
which the Parliament and the State Legislatures have the authority to make laws for the purpose of
levy of taxes.
The following are the lists:
(i) Union List or List I: Parliament has the exclusive power to make laws on the matters
contained in Union List.
(ii) State List or List II: The Legislatures of any State has the exclusive power to make laws
on the matters contained in the State List.
(iii) Concurrent List or List III: Both Parliament and State Legislatures have the power to
make laws on the matters contained in the Concurrent List.

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Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh
Schedule to Article 246 of the Constitution of India has given the power to the Parliament to make
laws on taxes on income other than agricultural income.

Income-tax is a tax levied on the total income of the previous year of every person. A person
includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of
Individuals (BOI), a firm, a company etc. The income-tax law in India consists of the following
components –

COMPONENTS OF INCOME TAX LAW

INCOME ANNUAL INCOME TAX CIRCULARS/ LEGAL DECISIONS

TAX ACT FINANCE ACT RULES NOTIFICATIONS OF COURTS

The various instruments of law containing the law relating to income-tax are explained below:
Income-tax Act, 1961
The levy of income-tax in India is governed by the Income-tax Act, 1961. In this material we shall
briefly refer to this as the Act.
• It extends to the whole of India.
• It came into force on 1st April, 1962.
• It contains sections 1 to 298 and schedules I to XIV.
• It undergoes a change every year by the Annual Finance Act passed by Parliament, and
other legislations like the Taxation Laws (Amendment) Act.
The Finance Act
Every year, the Finance Minister of the Government of India introduces the Finance Bill in the
Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the
Parliament and gets the assent of the President, it becomes the Finance Act. New provisions are
inserted; existing provisions are substituted or amended every year in the Income-tax Act, 1961
and other tax laws by the Finance Act.
The First Schedule to the Finance Act contains four parts which specify the rates of tax -
 Part I of the First Schedule to the Finance Act specifies the rates of tax applicable to the
current Assessment Year. Accordingly, Part I of the First Schedule to the Finance (No. 2)
Act, 2024 specifies the rates of tax for A.Y. 2024-25 i.e., F.Y. 2023-24.

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 Part II specifies the rates at which tax is deductible at source for the current Financial Year.
Accordingly, Part II of the First Schedule to the Finance (No. 2) Act, 2024 specifies the
rates at which tax is deductible at source for F.Y. 2024-25.
 Part III gives the rates for calculating income-tax for deducting tax from income chargeable
under the head “Salaries” and computation of advance tax for F.Y. 2024-25 where the
assessee exercises the option to shift out of the default tax regime provided under section
115BAC(1A).
 Part IV contains the rules for computing net agricultural income.
Income-tax Rules, 1962
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
• The CBDT is empowered to make rules for carrying out the purposes of the Act.

• For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time
to time. These rules are collectively called Income-tax Rules, 1962.
• Rules also have sub-rules, provisos and Explanations. The proviso to a Rule/ Sub-rule
spells out the exception to the limits, conditions, guidelines, basis of valuation, as the case
may be, spelt out in the Rule/ Sub-rule. The Explanation gives clarification for the purposes
of the Rule.

• It is important to keep in mind that along with the Income-tax Act, 1961, these rules should
also be studied.
Circulars and Notifications
Circulars
• Circulars are issued by the CBDT from time to time to deal with certain specific problems
and to clarify doubts regarding the scope and meaning of certain provisions of the Act.
• Circulars are issued for the guidance of the officers and/or assessees.
• The department is bound by the circulars. While such circulars are not binding on the
assessees, they can take advantage of beneficial circulars.
Notifications
• Notifications are issued by the Central Government to give effect to the provisions of the Act.

Example: Under section 10(15)(iv)(h), interest payable by any public sector company in
respect of such bonds or debentures and subject to such conditions as the Central

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Government may, by notification in the Official Gazette, specify in this behalf would be
exempt. Therefore, the bonds and debentures, interest on which would qualify for
exemption under this section are specified by the Central Government through Notifications.
• The CBDT is also empowered to make and amend rules for the purposes of the Act by
issuing notifications which are binding on both department and assessees.

Example: Under section 35CCD, the CBDT is empowered to prescribe guidelines for
notification of skill development project. Accordingly, the CBDT has, vide Notification No.
54/2013 dated 15.7.2013, prescribed Rule 6AAF laying down the guidelines and conditions
for approval of skill development project under section 35CCD.
Case Laws
The study of case laws is an important and unavoidable part of the study of Income-tax law. It is
not possible for Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the assessees and
the department and give decisions on various issues.

The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court
is the law of the land. The decisions given by various High Courts will apply in the respective
states in which such High Courts have jurisdiction.
Rules of Interpretation
Rules of Interpretation are principles that have evolved over the years, on account of interpretation
of provisions of law by various Courts. These rules help in interpretation of law. The object behind
use of these rules is to ascertain the intention of the lawmakers. These rules are not static and
keep on evolving. At times, there may be more than one rule of interpretation which appear to
applicable to a given situation. The Courts then decide the most appropriate one in the given
situation considering the facts of the case.
In the ensuing paragraphs, we have made an attempt to discuss the Rules of Interpretation, largely
in the context of income-tax law, citing appropriate instances.
I. Significant rules of interpretation used by Courts:
• Rule of literal interpretation - This rule is based on the age-old doctrine that “judges do
not legislate, they only interpret law”. It stipulates that the intention of the legislation must
be found in the words used by the legislature itself. Attention must be given to what has
been said and also what has not been said. Nothing should be added or subtracted. If the

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provision is unambiguous and if from that provision the legislative intent is clear, the other
rules of construction of statutes need not be called into aid.

• Mischief rule - The mischief rule originated in 16th century in the Heydon’s case in the
United Kingdom. It is commonly known as the Heydon’s Rule or Purposive construction.
Under this rule, the position before an amendment or enactment of an Act is examined to
find out the mischief sought to be remedied to determine the rationale for the remedy. In
order to do so, the following aspects are looked at:
- What was law before the provision was introduced or amended?

- What was the mischief or the defect for which the earlier provision of law did not
provide a remedy?
- What remedy has the Parliament effected in the provisions of law to cure the mischief or
defect?
- What is the intended effect of such remedy?
Courts then have to make a construction that suppresses the mischief and advances the
remedy.
• The Golden rule – It allows a judge to depart from a word's normal meaning in order to
avoid an absurd result. It is a compromise between the literal rule and the mischief rule.
Like the literal rule, it gives the words of a statute their plain, ordinary meaning. However, if
this leads to an irrational result which is unlikely to be the legislature's intention, the court
can depart from this meaning.
In such a case, the Court would also look at the context in which a provision appears. The
same words may mean one thing in one context and another in a different context. While
ascertaining the true intention of the Legislature, the court must not only look at the words
used by the Legislature but also have regard to the context and the setting in which they
occur. The meaning of words in an enactment is not to be ascertained by reading them in
isolation.

• Rule of Harmonious construction - The entire statute must be read as a whole. Further,
all parts of a section should be read harmoniously. Construction should be such that it
provides meaning to all parts of a statute. A construction which creates inconsistency or
repugnancy between the various sections or parts of the statute should be avoided.

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• Principle of beneficial construction - If the court finds that two views are possible
construction which is most beneficial to the taxpayer should be adopted. This principle is
also widely used in case of interpretation of fiscal laws.
Apart from these rules, there are several other rules such as ejusdem generis, nocitur a sociius
and stare decisis which are often used by Courts.

• Rule of ejusdem generis is used when particular words pertaining to a class, category or
genus are followed by general words. In that case general words are construed as limited to
things of the same kind.
• The principle of nocitur a sociius implies that meaning of a word may be ascertained by
reference to words associated with it. Words derive colour from the surrounding words.
• The principle of stare decisis stipulates that a view which is operating for long and is
accepted and acted upon should not be easily departed from.
II. Interpretation of different provisions of the Income-tax Act, 1961
In context of the Income-tax Act, 1961, the ensuing table summarizes how different types of
provisions are typically construed by Courts.
Type of provision Interpretation
Charging provisions Tax is levied by a charging section i.e., it imposes a charge or liability
to pay tax. If a person has been brought to tax within the ambit of the
charging section by clear words, he has to be taxed, subject to
specific exemption/ deduction, if any, available under the provisions of
the Act. Charging sections should be strictly construed.
Machinery Machinery provisions provide machinery for assessment and
provisions collection of charge created by the charging section. Machinery and
charging provisions constitute an integrated code. The machinery
provisions should be construed in a way that makes the machinery
workable.
Penal provisions Penal provisions are required to be construed in a strict manner. In
case of ambiguity, the taxpayer should be entitled to the benefit of
doubt.
Deeming provisions Deeming provision is intended to enlarge the scope of chargeability of
income under a particular head or scope of coverage of a certain
provision. It includes matters which otherwise may or may not fall
within the provision. Deeming provision should be strictly construed. It
should be given its full effect and carried to its logical conclusion.

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Appeal and refund The taxpayer has a right to appeal only if there is a statutory provision
provisions for the same. It cannot be implied. Appeal provision should be liberally
construed in a reasonable and practical manner. Similarly, provisions
granting refund must also be read liberally, in favor of the taxpayer.
Provisions giving Provisions giving deduction, exemption or relief should be interpreted
exemptions and liberally and in favor of taxpayers. They should be construed to
reliefs effectuate the object of legislature and not to defeat it.

III. Aids to interpretation

An aid is a device that helps or assists Courts in interpretation of statues. They can be broadly
classified as:
• Internal Aids
• External Aids
Internal aids to construction
Internal aids of construction refer to aids present within the statue itself, such as the long title, the
preamble, heading, marginal notes, punctuations, definition sections, provisos and explanations.
Let us now examine some of these:
• Explanations – Explanation is generally meant to explain or clarify the meaning of certain
words and expressions contained in the main provision. Explanation appended to a section
is an integral part of the section. It does not have independent existence apart from the
section. In exceptional cases an explanation may widen the scope of the main section by
introducing a legal fiction.
• Provisos – Generally the function of a proviso is to carve out an exception/ condition to
qualify a provision. A proviso cannot control the enactment. A proviso is not applicable
unless the main provision is applicable to the facts of the case. It must be construed
harmoniously with the main provision.
Example: Sections 80GGB and 80GGC provides for deduction from gross total income in
respect of contributions made by companies and other persons, respectively, to political
parties or an electoral trust.
The proviso to sections 80GGB and 80GGC provide that no deduction shall be allowed
under those sections in respect of any sum contributed by cash to political parties or an
electoral trust. Thus, the provisos to these sections spell out the circumstance when
deduction would not be available thereunder in respect of contributions made.

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The Explanation below section 80GGC provides that for the purposes of sections 80GGB
and 80GGC, “political party” means a political party registered under section 29A of the
Representation of the People Act, 1951. Thus, the Explanation clarifies that the political
party has to be a registered political party.

• Non-obstante clause – Non-obstante clause is a clause which begins with the phrase
“notwithstanding anything contained in any other provision of the Act” or “notwithstanding
anything contained in a particular provision(s) of the Act”. Use of this phrase shows that the
intent of lawmakers is to give it an overriding effect, in case of a conflict, over the other
provisions of the statute mentioned in the provision.
Example: Section 43B provides deduction of certain specified sums for computing of
income under the head “Profits and gains from business or profession” on actual payment
basis. It begins with the phrase “notwithstanding anything contrary in any other provision of
this Act”. Thus, it overrides the other provisions of the Act and provides deduction of
payments or expenditures specified therein only on the basis of actual payment.

• Marginal notes and headings - Headings may be prefixed to a section or a group of

sections. Marginal notes are the notes which are inserted at the side of the sections in a
statute and express the effect of the sections stated. Headings and marginal notes cannot
control the plain words of the provisions. Only in the case of ambiguity they may be referred
to throw light on intention of legislature.
• Definition clauses and undefined words –The object of a definition clause is to avoid the
necessity of frequent repetitions in describing the subject matter in the statute. When the
statute defines a particular word, the same should be used, unless the context otherwise
requires. A word occurring more than once in a statute should be generally given the same
meaning, unless the context requires otherwise. Words not specifically defined must be
taken in their legal sense, dictionary meaning, commercial or common meaning. Definition
from any other statute cannot be borrowed and used ignoring the definition contained in the
statute itself.

In the Income-tax Act, 1961, definitions contained in section 2 are for the purposes of the
Income-tax Act, 1961. However, definitions contained in a particular Chapter of the Income-
tax Act, 1961 are generally relevant only in the context of the provisions relating to that
Chapter, unless reference to such definition(s) has been made in any other provision(s)/
Chapter of the Act.

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External aids to construction

External aids refer to aids which are external to the statue such as legislative history, dictionaries,
foreign decisions, reference to other statues. Let us examine some of them:
• Legislative history - Historical setting cannot be used as an aid if the words are plain and
clear. If the wordings are ambiguous, one can look at the historical facts and circumstances
that prevailed at the time when the law was passed for determining the object and purpose.
Reports of Commissions including Law Commission or Committees including Parliamentary
Committees preceding the introduction of a bill can also be referred to as evidence of
historical facts, surrounding circumstances or mischief intended to be remedied.
• Circulars - CBDT Circulars issued under section 119 of the Income-tax Act, 1961 are
binding on the tax officers and persons employed in the execution of the Income-tax Act
1961. They express the views of CBDT on any issue. They are, however, not binding on the
Appellate Authorities, Tribunal, Courts or the taxpayer. Taxpayers can however take benefit
of the beneficial circulars.
• Speech - The speech made by the mover of the Bill can also be used to ascertain the
mischief sought to be remedied, the object and purpose of the legislation. However,
speeches made by the Members of the Parliament at the time of consideration of a Bill, are
not admissible as an aid.
• Explanatory Memorandum - Notes on clauses and memorandum explaining the provisions
of the Finance Bill can also aid in construction, in case of ambiguity.
• Dictionary meaning - The dictionary meaning of a word should not be looked at where the
word has been statutorily defined or judicially interpreted. However, when there is no such
interpretation or definition, the Court may take aid of dictionaries to ascertain a meaning of
the word.

1.2 IMPORTANT DEFINITIONS

In order to understand the provisions of the Act, one must have a thorough knowledge of the
meanings of certain key terms like ‘assessment year’, ‘person’, ‘assessee’, ‘income’, etc. To
understand the meanings of these terms we have to first check whether they are defined in the Act.
Terms defined in the Act: Section 2 gives definitions of the various terms and expressions used
therein. If a particular definition is given in the Act itself, we have to be guided by that definition. For
e.g. the term ‘perquisite’ has been defined under section 17(2) for the purpose of taxation of salaries.

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Terms not defined under the Act: If a particular definition is not given in the Act, reference can
be made to the General Clauses Act or dictionaries.

Students should note this point carefully because certain terms like “dividend”, “transfer”, etc. have
been given a wider meaning in the Income-tax Act, 1961 than they are commonly understood.
Some of the important terms defined under section 2 are given below:
Assessee [Section 2(7)]
“Assessee” means a person by whom any tax or any other sum of money is payable under this
Act. In addition, it includes –
• Every person in respect of whom any proceeding under this Act has been taken for the
assessment of -
 his income; or

 the income of any other person in respect of which he is assessable; or

 the loss sustained by him or by such other person; or
 the amount of refund due to him or to such other person.

• Every person who is deemed to be an assessee under any provision of this Act;
• Every person who is deemed to be an assessee-in-default under any provision of this Act.
• Every assessee is a ‘person’, but every ‘person’ need not be an assessee.
Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined by the Assessing Officer.
It may be by way of a normal assessment or by way of reassessment of an income previously
assessed.
Types of income-tax assessment:
1. Self-assessment under section 140A
2. Summary assessment under section 143(1)
3. Scrutiny assessment under section 143(3)
4. Best judgment assessment under section 144
5. Re-assessment or income escaping assessment under section 147

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Person [Section 2(31)]

The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is closely connected
with the latter. The term ‘person’ is important from another point of view also viz., the charge of
income-tax is on every ‘person’. The definition of the term ‘person’ is inclusive and not exhaustive.
The different types of persons recognized under the Act are provided in the diagram below:

Individual

Artificial
juridical HUF
person

Person
Local Company
Authority

AOPs/
Firm
BOIs

We may briefly consider some of the above seven categories of assessees each of which
constitute a separate unit of assessment or a separate tax entity.
(i) Individual
The term ‘individual’ means only a natural person, i.e., a human being.
• It includes both males and females.
• It also includes a minor or a person of unsound mind. But the assessment in such a case
may be made under section 161(1) on the guardian or manager of the minor or lunatic who
is entitled to receive his income. In the case of deceased person, assessment would be
made on the legal representative.
(ii) HUF
Under the Income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a separate entity for
the purpose of assessment. It is included in the definition of the term “person” under section 2(31).

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The levy of income-tax is on “every person”. Therefore, income-tax is payable by a HUF.

"Hindu undivided family" has not been defined under the Income-tax Act, 1961. The expression is,
however, defined under the Hindu Law as a family, which consists of all males lineally descended
from a common ancestor and includes their wives and daughters.
[Refer Chapter 9: Assessment of various entities in Module 2 for detail discussion of HUF]

(iii) Company [Section 2(17)]

For all purposes of the Act, the term ‘Company’, has a much wider connotation than that under the
Companies Act, 2013. Under the Act, the expression ‘Company’ means:
(a) any Indian company as defined in section 2(26); or
(b) any body corporate incorporated by or under the laws of a country outside India, i.e., any
foreign company; or
(c) any institution, association or body which is assessable or was assessed as a company for
any assessment year under the Indian Income-tax Act, 1922 or for any assessment year
commencing on or before 1.4.1970 under the present Act; or
(d) any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by a general or special order of the CBDT to be a company for
such assessment years as may be specified in the CBDT’s order.
Classes of Companies
(1) Domestic company and Foreign Company: Companies can be classified into two
categories, viz. (1) Domestic company and (2) Foreign company.
Domestic company [Section 2(22A)] - It means an "Indian company" or any other
company that has made the necessary arrangements to declare and pay dividends
(including those on preference shares) within India from its income that is subject to income
tax.
Indian company [Section 2(26)] - A company is considered an "Indian company" under
section 2(26) of the Income-tax Act, 1961 if it meets two key conditions:
1. Formation and Registration: The company should have been formed and
registered under the Companies Act, 1956 1.
2. Office Location: The company's registered or principal office should be in India.

1
Now Companies Act, 2013

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Additionally, the term "Indian company" also includes the following provided their registered
or principal office in India:
• Corporation established by or under a Central, State, or Provincial Act, such as
Financial Corporation or State Road Transport Corporation.
• Institution, association, or body declared by the Board to be a company under
section 2(17)(iv).
• Company formed and registered under any law in force in any part of India,
excluding Jammu and Kashmir and specific Union territories.
• Company formed and registered under any law in force in Jammu and Kashmir.

• Company formed and registered under any law in force in Union territories like Dadra
and Nagar Haveli, Daman and Diu, Pondicherry, or the State of Goa.
Foreign company [Section 2(23A)] - Foreign company means a company which is not a
domestic company

Classes of companies

Domestic company Foreign company

Indian A company which is

company Company which has made not a domestic
arrangement for declaring and paying company
dividend within India out of the income
chargeable to tax in India.

(2) A company is further classified into two primary categories based on public interest:
Widely Held Company (Company in which public are substantially interested): A
company is considered to have substantial public interest if it meets any of the following
criteria as outlined in section 2(18) of the Income-tax Act, 1961:
(a) Government or RBI Ownership or participation: A company owned by the Central
or State Government or the Reserve Bank of India (RBI), or where at least 40% of
the shares are held (whether singly or taken together) by the Government or the RBI
or a corporation owned by the RBI.

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(b) Company registered under section 25 of the Companies Act, 1956: A company
registered under section 25 of the Companies Act, 1956 2, which is formed to
promote commerce, art, science, education, research, social welfare, charity,
environmental protection, etc., and does not distribute dividends to their members.
(c) Companies with No Share Capital and declared by the CBDT: A company which
does not have share capital and is declared by the CBDT to be a company in which
the public are substantially interested for specified assessment years.
(d) Mutual Benefit Finance Company (Nidhi or Mutual Benefit Society): A company
that primarily accept deposits from its members and is declared by the Central
Government under Section 620A of the Companies Act, 1956 3, to be a Nidhi or
Mutual Benefit Society.
(e) Cooperative Society ownership: A company whose equity shares carrying at least
50% of the voting power are unconditionally allotted or acquired by one or more
cooperative societies and held throughout the relevant previous year.
(f) Public Limited Company: A company which is not a private company as defined in
the Companies Act, 1956 4 and which fulfills any of the following conditions:
- its equity shares were listed in a recognized stock exchange in India as on the
last day of the relevant previous year; or
- its equity shares carrying at least 50% (40% in case of an Indian company in
ship construction business or in the manufacture or processing of goods or in
mining or in generation or distribution of electricity or any other form of power)
voting power have been unconditionally allotted to or acquired by and should
have been beneficially held throughout the relevant previous year by
(a) Government or
(b) a Statutory Corporation or
(c) a company in which public are substantially interested or

(d) any wholly owned subsidiary of company mentioned in (c).

Closely Held Company (Company in which public are not substantially interested):
Any company that does not meet the criteria for being classified as widely held company is
2 Section 8 of the Companies Act, 2013
3 Section 406 of the Companies Act, 2013

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considered closely held company. Thus, all private limited companies will be treated as
companies in which public are not substantially interested.

[Refer Chapter 9: Assessment of various entities in Module 2 for detail discussion of

companies]
(iv) Firm [Section 2(23)]

The terms ‘firm’, ‘partner’ and ‘partnership’ have the same meanings as assigned to them in
the Indian Partnership Act, 1932. In addition, the definitions also include the terms limited
liability partnership, a partner of limited liability partnership as they have been defined in the
Limited Liability Partnership Act, 2008.
In an LLP, since liability of the partners is limited to their agreed contribution therein, it
contains elements of both a corporate structure as well as a partnership firm structure.
However, for income-tax purposes a minor admitted to the benefits of an existing
partnership would also be treated as partner.

Firm

As defined under the

As defined under the
Limited Liability
Partnership Act, 1932
Partnership Act, 2008

A partnership is the relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all. The persons who have entered into
partnership with one another are called individually ‘partners’ and collectively a ‘firm’.

(v) Association of Persons (AOP)

When persons combine together for promotion of joint enterprise they are assessable as an
AOP, when they do not in law constitute a partnership. In order to constitute an association,
persons must join for a common purpose or action and their object must be to produce
income; it is not enough that the persons receive the income jointly. Co-heirs, co-legatees or
co-donees joining together for a common purpose or action would be chargeable as an AOP.
For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. Join together to carry on construction
activity otherwise than as a partnership firm, such an association will be recognized as an
association of persons.

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(vi) Body of Individuals (BOI)

Body of individuals refers to a conglomeration of individuals who carry on some activity with
or without the object of producing income. It denotes the status of persons like executors or
trustees who merely receive the income jointly and who may be assessable in like manner
and to the same extent as the beneficiaries individually. Thus, co-executors or co-trustees
are assessable as a BOI as their title and interest are indivisible. Income-tax shall not be
payable by an assessee in respect of the receipt of share of income by him from BOI and
on which the tax has already been paid by such BOI. For e.g., mutual trade associations,
members club, etc.
Section 2(31) further explains that an association of persons/body of individuals or a local
authority or an artificial juridical person shall be treated as a person, whether or not it is
formed with the object of deriving income, profits or gains. Accordingly, even if such entities
have been formed not for earning any income/ profit still they are "person" for the purpose
of the Act and are covered by the provisions of the Act.
Difference between AOP and BOI: In case of a BOI, only individuals can be the members,
whereas in case of AOP, any person can be its member i.e., entities like company, firm etc.
can be the member of AOP but not of BOI.
In case of an AOP, members voluntarily come together with a common will for a common
intention or purpose, whereas in case of BOI, such common will may or may not be present.
(vii) Local Authority

The term means a municipal committee, district board, body of port commissioners or other
authority legally entitled to or entrusted by the Government with the control or management
of a municipal or local fund.
Note: A local authority is taxable in respect of that part of its income which arises from any
business carried on by it in so far as that income does not arise from the supply of a
commodity or service within its own jurisdictional area. However, income arising from the
supply of water and electricity even outside the local authority’s own jurisdictional areas is
exempt from tax.
(viii) Artificial Juridical Persons

Artificial Juridical Persons are the entities which are not natural persons but are separate
entities in the eyes of law. This is a residual category could cover all artificial persons with a

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juristic personality not falling under any other category of persons. Deities, Bar Council,
Universities are some important examples of Artificial Juridical Persons.
Income [Section 2(24)]
(i) Definition of Income
The definition of income as per the Income-tax Act, 1961 begins with the words “Income
includes”. Therefore, it is an inclusive definition and not an exhaustive one. Such a
definition does not confine the scope of income but leaves room for more inclusions within
the ambit of the term.
Section 2(24) of the Act gives a statutory definition of income. At present, the following
items of receipts are specifically included in income:—
(1) Profits and gains;
(2) Dividends;
(3) Voluntary contributions received by a trust/ institution created wholly or partly for
charitable or religious purposes or by an association or institution referred to in
section 10(21) or by a fund or institution referred to in section 10(23C) (iiiad)/ (iiiae)/
(iv)/(v)/(vi)/(via) or an electoral trust;
Research association approved under section 35(1)(ii)/(iii) 10(21)
Universities and other educational institutions 10(23C)(iiiad)/(vi)
Hospitals and other institutions 10(23C)(iiiae)/(via)
Notified funds or institutions established for charitable 10(23C)(iv)
purposes
Notified trusts or institutions established wholly for public 10(23C)(v)
religious purposes or wholly for public religious and charitable
purposes
Electoral trust 13B

(4) The value of any perquisite or profit in lieu of salary taxable under section 17(2)
and (3), respectively;
(5) Any special allowance or benefit, other than the perquisite included above,
specifically granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or employment of profit;
(6) Any allowance granted to the assessee to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily performed

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by him or at a place where he ordinarily resides or to compensate him for the

increased cost of living;

(7) The value of any benefit or perquisite, whether convertible into money or not,
obtained from a company either by a director or by a person who has a substantial
interest in the company, or by a relative of the director or such person, and any sum
paid by any such company in respect of any obligation which, but for such payment,
would have been payable by the director or other person aforesaid;
(8) The value of any benefit or perquisite, whether convertible into money or not,
which is obtained by any representative assessee mentioned under section
160(1)(iii) and (iv), or by any beneficiary or any amount paid by the representative
assessee for the benefit of the beneficiary which the beneficiary would have
ordinarily been required to pay;
(9) Deemed profits chargeable to tax under section 41 or section 59;
(10) Profits and gains of business or profession chargeable to tax under section
28(ii)/(iii)/(iiia)/(iiib)/(iiic)/(v)/(va); or The value of any benefit or perquisite taxable
under section 28(iv);
(11) Any capital gains chargeable under section 45;

(12) The profits and gains of any insurance business carried on by Mutual
Insurance Company or by a cooperative society, computed in accordance with
section 44 or any surplus taken to be such profits and gains by virtue of the
provisions contained in the first Schedule to the Act;
(13) The profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;
(14) Any winnings from lotteries, cross-word puzzles, races including horse races,
card games and other games of any sort or from gambling, or betting of any
form or nature whatsoever. For this purpose,

i. “Lottery” includes winnings from prizes awarded to any person by draw of lots
or by chance or in any other manner whatsoever, under any scheme or
arrangement by whatever name called;
ii. “Card game and other game of any sort” includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game.

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(15) Any sum received by the assessee from his employees as contributions to any
provident fund (PF) or superannuation fund or Employees State Insurance
Fund (ESI) or any other fund for the welfare of such employees;
(16) Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will constitute income;

“Keyman insurance policy” means a life insurance policy taken by a person on the
life of another person where the latter is or was an employee or is or was connected
in any manner whatsoever with the former’s business. It also includes such policy
which has been assigned to a person with or without any consideration, at any time
during the term of the policy.
(17) Any sum referred to in section 28(va). Any sum, whether received or receivable in
cash or kind, under an agreement for not carrying out any activity in relation to any
business or profession; or not sharing any know-how, patent, copy right, trade-mark,
licence, franchise, or any other business or commercial right of a similar nature, or
information or technique likely to assist in the manufacture or processing of goods or
provision of services, shall be chargeable to income tax under the head “profits and
gains of business or profession”;
(18) Fair market value of inventory as on the date on which it is converted into, or
treated as, a capital asset, determined in the prescribed manner [Section 28(via)];
(19) Any sum of money received as advance, if such sum is forfeited consequent to
failure of negotiation for transfer of a capital asset [Section 56(2)(ix)];
(20) Any sum of money or value of property received without consideration or for
inadequate consideration by any person [Section 56(2)(x)];
(21) Any compensation or other payment, due to or received by any person, by
whatever named called, in connection with termination of his employment or the
modification of the term and conditions relating thereto [Section 56(2)(xi)];
(22) Any specified sum received by a unit holder from a business trust during the
previous year, with respect to a unit held by him at any time during the previous year
[Section 56(2)(xii)];

(23) Sum received, including the amount allocated by way of bonus, under a LIP other
than under a ULIP and keyman insurance policy, which is not exempt u/s
10(10D), to the extent the same exceeds the aggregate of the premium paid during

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the term of the policy, and not claimed as deduction under any other provision of the
Act [Section 56(2)(xiii)];
[For details, refer to Chapter 5 “Income from Other Sources”].
(24) Assistance in the form of a subsidy or grant or cash incentive or duty drawback
or waiver or concession or reimbursement, by whatever name called, by the
Central Government or a State Government or any authority or body or agency in
cash or kind to the assessee is included in the definition of income.

Subsidy or Grant which are not included in the definition of income u/s 2(24)

Subsidy or grant or reimbursement taken into account for determination

of actual cost of depreciable asset in accordance with Explanation 10 to
section 43(1)

Subsidy or grant by the Central Government for the purpose of the corpus
of a trust or institution established by a Central Govt. or State Govt., as
the case may be.

(ii) Concept of Income under the Income-tax Act, 1961

 Regular receipt vis-à-vis casual receipt: Income, in general, means a periodic
monetary return which accrues or is expected to accrue regularly from definite
sources. However, under the Income-tax Act, 1961, even certain casual receipts
which do not arise regularly are treated as income for tax purposes e.g., Winnings
from lotteries, crossword puzzles.
 Revenue receipt vis-a-vis Capital receipt: Income normally refers to revenue
receipts. Capital receipts are generally not included within the scope of income in
general parlance. However, the Income-tax Act, 1961 has specifically included
certain capital receipts within the definition of income e.g., Capital gains i.e., gains
on sale of a capital assets like land, jewellery.
 Net receipt vis-a-vis Gross receipt: Income means net receipts and not gross
receipts. Net receipts are arrived at after deducting the expenditure incurred in
connection with earning such receipts. The expenditure which can be deducted while
computing income under each head is prescribed under the Income-tax Act, 1961.

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Income from certain eligible businesses/ professions is also determined on

presumptive basis i.e., as a certain percentage of gross receipts.
 Due basis vis-a-vis receipt basis: Income is taxable either on due basis or receipt
basis. For computing income under the heads “Profits and gains of business or
profession” and “Income from other sources”, the method of accounting regularly
employed by the assessee should be considered, which can be either cash system
or mercantile system. Some receipts are taxable only on receipt basis, like, income
by way of interest received on compensation or enhanced compensation.
 Application of Income vis-a-vis Diversion of Income: Application of income
means to discharge an obligation (which is gratuitous or self-imposed) after such
income reaches the assessee. Where by virtue of an obligation by overriding title,
income is diverted before it reaches the assessee, it is known as diversion of
income. In case of the former, the income would be taxable in the hands of the
person who applies it, whereas in the case of the latter, it is not taxable (i.e., even if
the assessee were to collect the income he does so on behalf of the person to whom
it is payable).
(iii) Concept of revenue and capital receipts
Students should carefully study the various items of receipts included in the definition of
income. Some of them like capital gains are not revenue receipts. However, since they have
been included in the definition, they are chargeable as income under the Act. The concept
of revenue and capital receipts is discussed hereunder –
The Act contemplates a levy of tax on income and not on capital and hence it is very
essential to distinguish between capital and revenue receipts. Capital receipts cannot be
taxed, unless they fall within the scope of the definition of “income” and so the distinction
between capital and revenue receipts is material for tax purposes.
Certain capital receipts which have been specifically included in the definition of income are
compensation for modification or termination of services, income by way of capital gains etc.
It is not possible to lay down any single test as infallible or any single criterion as decisive,
final and universal in application to determine whether a particular receipt is capital or
revenue in nature. Hence, the capital or revenue nature of the receipt must be determined
with reference to the facts and circumstances of each case.

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Criteria for determining whether a receipt is capital or revenue in nature

The following are some of the important criteria which may be applied to distinguish
between capital and revenue receipts.
Fixed capital or Circulating capital: A receipt referable to fixed capital would be a capital
receipt whereas a receipt referable to circulating capital would be a revenue receipt. The
former is not taxable while the latter is taxable. Tangible and intangible assets which the
owner keeps in his possession for making profits are in the nature of fixed capital. The
circulating capital is one which is turned over and yields income or loss in the process.

Income from transfer of capital asset or trading asset: Profits arising from the sale of a
capital asset are chargeable to tax as capital gains under section 45 whereas profits arising
from the sale of a trading asset being of revenue nature are taxable as income from
business under section 28 provided that the sale is in the regular course of assessee’s
business or the transaction constitutes an adventure in the nature of trade.
Capital Receipts vis-a-vis Revenue Receipts: Tests to be applied
(a) Transaction entered into the course of business: Profits arising from transactions
which are entered into in the course of the business regularly carried on by the
assessee, or are incidental to, or associated with the business of the assessee
would be revenue receipts chargeable to tax.
Example: A banker’s or financier’s dealings in foreign exchange or sale of shares
and securities, a shipbroker’s purchases of ship in his own name, a share broker’s
purchase of shares on his own account would constitute transactions entered and
yielding income in the ordinary course of their business. Whereas building and land
would constitute capital assets in the hands of a trader in shares, the same would
constitute stock-in-trade in the hands of a property dealer.
(b) Profit arising from sale of shares and securities: In the case of profit arising from
the sale of shares and securities the nature of the profit has to be ascertained from
the motive, intention or purpose with which they were bought. If the shares were
acquired as an investor or with a view to acquiring a controlling interest or for
obtaining a managing or selling agency or a directorship the profit or loss on their
sale would be of a capital nature; but if the shares were acquired in the ordinary
course of business as a dealer in shares, it would constitute his stock-in-trade. If the
shares were acquired with speculative motive the profit or loss (although of a
revenue nature) would have to be dealt with separately from other business.

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Note: However, securities held by Foreign Institutional Investor which has invested
in such securities in accordance with the regulations made under the SEBI Act, 1992
would be treated as a capital asset. Even if the nature of such security in the hands
of the Foreign Portfolio Investor is stock in trade, the same would be treated as a
capital asset and the profit on transfer would be taxable as capital gains.

(c) A single transaction - Can it constitute business? Even a single transaction may
constitute a business or an adventure in the nature of trade even if it is outside the
normal course of the assessee’s business. Repetition of such transactions is not
necessary. Thus, a bulk purchase followed by a bulk sale or a series of retail sales or
bulk sale followed by a series of retail purchases would constitute an adventure in the
nature of trade and consequently the income arising therefrom would be taxable.
Purchase of any article with no intention to resell it, but resold under changed
circumstances would be a transaction of a capital nature and capital gains arise.
However, where an asset is purchased with the intention to resell it, the question
whether the profit on sale is capital or revenue in nature depends upon (i) the conduct
of the assessee, (ii) the nature and quantity of the article purchased, (iii) the nature of
the operations involved, (iv) whether the venture is on capital or revenue account, and
(v) other related circumstances of the case.
(d) Liquidated damages: Receipt of liquidated damages directly and intimately linked
with the procurement of a capital asset, which lead to delay in coming into existence of
the profit-making apparatus, is a capital receipt. The amount received by the assessee
towards compensation for sterilization of the profit earning source is not in the ordinary
course of business. Hence, it is a capital receipt in the hands of the assessee.

(e) Compensation on termination of agency/ service contract: Where an assessee

receives compensation on termination of the agency business being the only source of
income, the receipt is a capital nature, but taxable under section 28(ii)(c). However,
where the assessee has a number of agencies and one of them is terminated and
compensation is received therefor, the receipt would be of a revenue nature since
taking agencies and exploiting the same for earning income is the ordinary course of
business. The loss of one agency would be made good profit from another agency.
Compensation received from the employer or from any person for premature
termination of the service contract is a capital receipt, but is taxable as profit in lieu of
salary under section 17(3) or as income from other sources under section 56(2)(xi),
respectively. Compensation received or receivable in connection with the termination

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or the modification of the terms and conditions of any contract relating to its business
shall be taxable as business income.

(f) Gifts: Normally, gifts constitute capital receipts in the hands of the recipient. However,
certain gifts are brought within the purview of income-tax, for example, receipt of
property without consideration is brought to tax under section 56(2)(x).

For example, any sum of money or value of property received without consideration or
for inadequate consideration by any person, other than a relative, is chargeable under
the head “Income from Other Sources” [For details, refer to Chapter 5 on “Income from
Other Sources”].
(iv) Diversion of income by overriding title and application of income
The concept of ‘diversion of income by overriding title’ signifies diversion of income at source
by an overriding title before it reaches an assessee. Such a diversion can take place either
under a legal compulsion or under a contractual obligation or otherwise. An obligation to apply
the income in a particular way before it has accrued or arisen to the assessee results in the
diversion of the income. On the other hand, an obligation to apply income which has accrued
or arisen or has been received amounts merely to the apportionment or application of the
income and not to its diversion. Sometimes the dividing line between diversion by overriding
title and the application of income after it has accrued is somewhat thin.
When income or a portion of income is diverted at the source by an overriding title before it
started flowing into the channel which was to reach the assessee concerned it could be
excluded from his assessable income. Wherever there is such diversion of income, such
diverted income, cannot be included in the total income of the assessee who claims that
there has been a diversion. On the other hand, where income has accrued or arisen in the
hands of the assessee, its subsequent application in any way will not affect the tax liability.
In order to decide whether a particular disbursement amounts to diversion or application of
income, the true test is to probe into and decide whether the amount sought to be deducted,
in truth, did not reach the assessee as his own income. It is the nature of the obligation that
is the decisive fact. There is a difference between an amount which a person is obliged to
apply out of his income and an amount which by the nature of the obligation cannot be said
to be a part of his income. It is the nature of the obligation that is the decisive fact. Where,
by obligation, income is diverted before it reaches the assessee, it is deductible; but where
the income is required to be applied to discharge an obligation after such income reaches
the assessee, the same consequence, in law, does not follow. In order that there is

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diversion at source of the income, the obligation is to attach to the source which yields
income and not to the income only. This was so held in CIT vs. Sitaldas Tirathdas [1961] 41
ITR 367 (SC), M.K. Brothers Pvt. Ltd. vs. CIT [1972] 86 ITR 38 (SC). In many cases, it
would really be a matter of proper drafting of the document creating the obligation, though,
in substance, the result in both the situations may appear similar.
For the purpose of tax planning, the concept of ‘diversion by overriding title’ would have
better scope for exploitation than the concept of ‘application of income’. This is because, as
pointed out above, where income is diverted by overriding title such diverted income is not
taxed in the hands of the person who claims such diversion. On the other hand, the concept
of application of income envisages first the accruing or arising of income and when once it
has come within the grasp of the Income-tax Act, 1961 it is liable to income-tax whatever
may be its destination or whomever it may be applied for. Therefore, if an overriding charge
is created by the assessee either voluntarily or in pursuance of an obligation, whether pre-
existing or not, the assessee may be able to invoke the principle of diversion of income by
overriding charge. This is, of course, subject to the clubbing provisions contained in
sections 60 to 64 (dealt with in Chapter 6: Income of other persons included in assessee’s
total income), which have the effect of getting over this principle in some situations.
Example on Application of Income
Mr. A is liable to pay ` 10,000 per month to Ms. B (his ex-wife) as alimony. Mr. A, being an
employee of ABC Pvt. Ltd., instructs the HR department to pay ` 10,000 per month out of
his salary to Ms. B directly and remit the remaining salary in his account.
In this case, the amount of ` 10,000 per month is an obligation of Mr. A to pay to Ms. B out
of his income and not an income in which Ms. B had over riding entitlement.
In other words, this is the income of Mr. A, which is applied by him to fulfill an obligation and
hence, includible in his total income and a mere arrangement to pay a sum directly to Ms. B
would not make it a case of diversion of income.
Example on Diversion of Income
M/s ABC is a partnership firm in which Mr. A and his two sons, Mr. B & Mr. C are partners.
The partnership deed provides that after the death of Mr. A, Mr. B & Mr. C shall continue
the business of the firm subject to a condition that 20% of profit of the firm shall be given to
Mrs. D (wife of Mr. A).
In the instant case, after the death of Mr. A, 20% of profits of the firm payable to Mrs. D
gets diverted at source by the charge created in her favour as per the terms of the
partnership deed. Such income does not reach the assessee-firm. Rather, such income

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stands diverted to the other person as such other person has a better title on such
income than the title of the assessee. The firm might have received the said amount,
but it so received for and on behalf of Mrs. D, who possesses the overriding title.
Therefore, the amount payable to Mrs. D after the death of Mr. A would be excluded
from the income of M/s ABC
(v) Classification of income under five heads of income
Under the Income-tax Act, 1961, for computation of total income, all income of a taxpayer
are classified into five different heads of income. These are shown below –

HEADS OF INCOME

Profits and
Income from Income
gains of Capital
Salaries house from other
business or gains
property sources
profession

The provisions relating to “Profits and gains of business or profession”, “Capital Gains” and
"Income from other sources” are discussed in Chapter 3: Profits and gains of business or
profession, Chapter 4: Capital Gains and Chapter 5: Income from Other Sources,
respectively, in this Module. The provisions relating to “Salaries” and “Income from house
property” had been dealt with in detail at Intermediate level itself. The ensuing paragraphs
contain an overview of Income under the head “Salaries” and “Income from house property”.
Income under the head “Salaries”
Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on
‘receipt’ basis, whichever is earlier. However, where any salary, paid in advance, is assessed in
the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.
If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed
again when it is paid.
The terms “Salary”, “Perquisite” and “Profit in lieu of salary” are defined under section 17(1).
Salary includes monetary as well as non-monetary items. The following deductions are allowable
to an individual from the gross salary:

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Deductions allowable from Gross Salary

(i) Standard deduction u/s 16(ia)
A standard deduction of ` 50,000 or the amount of salary, whichever is lower, is to be
provided to the employee if the assesse exercises the option of shifting out of the default
tax regime provided under section 115BAC(1A).
However, if the assessee is paying tax under default tax regime provided under section
115BAC(1A), standard deduction of ` 75,000 or the amount of salary, whichever is
lower, is provided to the employee.
(ii) Entertainment allowance u/s 16(ii) (only for Govt. employees)
Least of the following is allowable as deduction:
(a) ` 5,000
(b) 1/5th of basic salary
(c) Actual entertainment allowance received
[Deduction in respect of entertainment allowance would be available to an assessee only
if he exercises the option of shifting out of the default tax regime provided under section
115BAC(1A). The deduction would not be available under the default tax regime i.e.,
under section 115BAC(1A)].
(iii) Professional Tax/Tax on employment (paid by employer/ employee) u/s 16(iii): If
professional tax is reimbursed or directly paid by the employer on behalf of the
employee, the amount so paid is first included as salary income and then allowed as a
deduction u/s 16.
[Deduction in respect of professional tax would be available to an assessee only if he
exercises the option of shifting out of the default tax regime provided under section
115BAC(1A). The deduction would not be available under the default tax regime i.e.,
under section 115BAC(1A)].

Income from house property

(I) Annual Value - The process of computation of income under the head “Income from house
property” starts with the determination of annual value of the property. The concept of
annual value and the method of determination is laid down in section 23.
The annual value of any property comprising of buildings or lands appurtenant thereto of
which the assessee is the owner is chargeable to tax under the head “Income from house
property”.

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Exceptions: Annual value of the following properties are chargeable under the head
“Profits and gains of business or profession” -

(i) Portions of property occupied by the assessee for the purpose of any business or
profession carried on by him.
(ii) Commercial Properties of an assessee engaged in the business of letting out of
properties.
It is pertinent to note that that any income from letting out of a residential house or part
thereof by the assessee, being owner shall always be chargeable under the head “Income
from house property.

Determination of Annual Value

Municipal tax
paid by the
Gross Annual Net Annual
owner during
Value (GAV) Value (NAV)
the previous
year

GAV would be higher of expected rent and actual rent received or receivable during the
previous year. The Expected Rent (ER) is the higher of fair rent (FR) and municipal value
(MV) but restricted to standard rent (SR). In the absence of any information relating to
Municipal value, fair rent and standard rent, actual rent would be considered as GAV.
(II) Annual value of self-occupied property: Where the property is self-occupied for own
residence or unoccupied throughout the previous year, its Annual Value will be Nil,
provided no other benefit is derived by the owner from such property.

The expression “Unoccupied property” refers to a property which cannot be occupied

by the owner by reason of his employment, business or profession at a different place
and he resides at such other place in a building not belonging to him.

The benefit of “Nil” Annual Value is available only for upto two self-occupied or unoccupied
house properties i.e. for either one house property or two house properties owned by the
assessee. The benefit of “Nil” Annual Value in respect of upto two self-occupied house
properties is available only to an individual/ HUF.

No deduction for municipal taxes is allowed in respect of such property/properties as annual

value means value determined after deduction of municipal taxes.

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(III) Annual value of property held as stock-in-trade: In some cases, property consisting of
any building or land appurtenant thereto may be held as stock-in-trade, and the whole or
any part of the property may not be let out during the whole or any part of the previous year.
In such cases, the annual value of such property or part of the property shall be NIL.
This benefit would be available for the period upto two years from the end of the financial
year in which certificate of completion of construction of the property is obtained from the
competent authority.
(IV) Deductions from Net Annual Value under optional tax regime (normal provisions of the Act)

Deductions allowed from NAV

Let out/ deemed let Self occupied property/

out property properties

Interest on borrowed
Standard Interest on capital u/s 24(b)
deduction borrowed capital
u/s 24(a) u/s 24(b)
where loan is taken where loan is taken for
for repair, renewal or acquisition or construction of
30% of Fully reconstruction of house property
NAV Allowed house property

Acquisition or construction
Maximum completed within 5 years from
` 30,000 in toto the end of the FY in which the
for one or two capital was borrowed
self occupied +
properties Certificate from lender
specifying interest payable

No Yes

Maximum Maximum
` 30,000 in toto ` 2,00,000 in toto
for one or two for one or two self
self occupied occupied
properties properties

(V) Taxability of arrears of rent & unrealised rent: As per section 25A(1), the amount of rent
received in arrears from a tenant or the amount of unrealised rent realised subsequently from

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a tenant by an assessee shall be deemed to be income from house property in the financial
year in which such rent is received or realised, and shall be included in the total income of the
assessee under the head “Income from house property”, whether the assessee is the owner
of the property or not in that financial year. Section 25A(2) provides a deduction of 30% of
arrears of rent or unrealised rent realised subsequently by the assessee.
(VI) Annual value of co-owned property: Where the house property owned by co-owners is
self occupied by each of the co-owners, the annual value of the property of each co-owner
will be Nil and each co-owner shall be entitled to a deduction of ` 30,000 / ` 2,00,000, as
the case may be, under section 24(b) on account of interest on borrowed capital if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A).
However, the aggregate deduction of interest to each co-owner in respect of interest
payable on loan taken for co-owned house property and interest, if any, payable on loan
taken for another self-occupied property owned by him cannot exceed ` 30,000/
` 2,00,000, as the case may be.
Where the house property owned by co-owners is let out, the income from such property
shall be computed as if the property is owned by one owner and thereafter the income so
computed shall be apportioned amongst each co-owner as per their specific share.
(VII) Deemed ownership: As per section 27, the following persons, though not legal owners of a
property, are deemed to be the owners for the purposes of sections 22 to 26.
- In case of transfer of house property by an individual to his or her spouse otherwise
than for adequate consideration or in connection with an agreement to live apart, the
transferor is deemed to be the owner of the transferred property.

- In case of transfer of house property by an individual to his or her minor child (other
than a minor married daughter) otherwise than for adequate consideration, the
transferor would be deemed to be owner of the house property transferred.
Exception – In case of transfer to a minor married daughter, the transferor is not
deemed to be the owner.
Note – Where cash is transferred to spouse/minor child and the transferee acquires
property out of such cash, then the transferor shall not be treated as deemed owner
of the house property. However, clubbing provisions will be attracted.

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

- A member of a co-operative society, company or other association of persons to

whom a building or part thereof is allotted or leased under a House Building Scheme
of a society/ company/ association, shall be deemed to be owner of that building or
part thereof allotted to him although the co-operative society/company/ association is
the legal owner of that building.
- A person who is allowed to take or retain the possession of any building or part
thereof in part performance of a contract of the nature referred to in section 53A of
the Transfer of Property Act shall be the deemed owner of that house property.
- A person who acquires any rights in or with respect to any building or part thereof, by
virtue of any transaction as is referred to in section 269UA(f) i.e. transfer by way of
lease for not less than 12 years, shall be deemed to be the owner of that building or
part thereof.
Exception – In case the person acquiring any rights by way of lease from month to
month or for a period not exceeding one year, such person will not be deemed to be
the owner.
India [Section 2(25A)]
The term 'India' means –
(i) the territory of India as per article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone or
(v) any other specified maritime zone and the air space above its territory and territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976.
Maximum marginal rate and Average Rate of tax
As per section 2(10), "Average Rate of tax" means the rate arrived at by dividing the amount of
income-tax calculated on the total income, by such total income.

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Example: Total Income of Mr. A, who has exercised option of shifting out of default regime under
section 115BAC, is ` 6,00,000 and tax payable on it including cess is ` 33,800, the average rate
of tax works out to be 5.63%.
Section 2(29C) defines “Maximum marginal rate" to mean the rate of income-tax (including
surcharge on the income-tax, if any) applicable in relation to the highest slab of income in the case
of an individual, AOP or BOI, as the case may be, as specified in Finance Act of the relevant year.

1.3 PREVIOUS YEAR AND ASSESSMENT YEAR

The concepts have been dealt with at the Intermediate level. Let us have a quick recap of these
concepts -

Previous Year Assessment Year

2024-25 2025-26

Assessment year [Section 2(9)]

The term has been defined under section 2(9). This means a period of 12 months commencing on
1st April every year. The year in which income is earned is the previous year and such income is
taxable in the immediately following year which is the assessment year. Income earned in the
previous year 2024-25 is taxable in the assessment year 2025-26.
Assessment year always starts from 1st April and it is always a period of 12 months.
Previous year [Section 3]
It means the financial year immediately preceding the assessment year. As mentioned earlier, the
income earned during the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case, the previous
year shall be the period beginning on the date of setting up of the business or profession and
ending with 31st March of the said financial year.
If a source of income comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence and will end
with 31st March of the financial year.

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Examples: A is running a business from 1993 onwards. Determine the previous year for the
assessment year 2025-26.
Ans. The previous year will be 1.4.2024 to 31.3.2025.
A chartered accountant sets up his profession on 1st July, 2024. Determine the previous year for
the assessment year 2025-26.
Ans. The previous year will be from 1.7.2024 to 31.3.2025.

Certain cases when income of a previous year will be assessed in the previous year
itself

General Rule
Income of a previous year is assessed in the assessment year following the previous year

Exceptions to this rule

Cases where income of a previous year is assessed in the previous year itself

Shipping Persons likely to

Persons AOP/ BOI/ Artificial Discontinued
business of transfer
leaving Juridical Person business
non-resident property to
India formed for a particular avoid tax
event or purpose

The income of an assessee for a previous year is charged to income-tax in the assessment year
following the previous year. For instance, income of previous year 2024-25 is assessed during
2025-26. Therefore, 2025-26 is the assessment year for assessment of income of the previous
year 2024-25.
However, in a few cases, this rule does not apply and the income is taxed in the previous year in
which it is earned. These exceptions have been made to protect the interests of revenue. The
exceptions are as follows:
(a) Shipping business of non-resident [Section 172]

Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock,

mail or goods shipped at a port in India, the ship is allowed to leave the port only when the
tax has been paid or satisfactory arrangement has been made for payment thereof. 7.5% of

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the freight paid or payable to the owner or the charterer or to any person on his behalf,
whether in India or outside India on account of such carriage is deemed to be his income
which is charged to tax in the same year in which it is earned.
(b) Persons leaving India [Section 174]
Where it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry and he has no present intention of
returning to India, the total income of such individual for the period from the expiry of the
respective previous year up to the probable date of his departure from India is chargeable
to tax in that assessment year.

Example: Suppose Mr. X is leaving India for USA on 10.6.2024 and it appears to the
Assessing Officer that he has no intention to return. Before leaving India, Mr. X may be
asked to pay income-tax on the income earned during the P.Y. 2023-24 as well as the total
income earned during the period 1.4.2024 to 10.06.2024.

(c) AOP/ BOI/ Artificial Juridical Person formed for a particular event or purpose [Section 174A]
If an AOP/ BOI etc. is formed or established for a particular event or purpose and the
Assessing Officer apprehends that the AOP/ BOI is likely to be dissolved in the same year
or in the next year, he can make assessment of the income of such previous years up to the
date of dissolution as income of the relevant assessment year.

Example: Red Flakes is an AOP formed on 14.11.2024 by X and Y for a limited purpose of
organizing a musical concert of a British band “Music Zone” on 14.06.2025. The AOP is
likely to be dissolved after the concert. In such a case, the Assessing Officer can make the
assessment for the income earned from 14.11.2024 to 31.03.2025 and 01.04.2025 to
14.06.2025 during the A.Y. 2025-26 itself.

(d) Persons likely to transfer property to avoid tax [Section 175]

During the current assessment year, if it appears to the Assessing Officer that a person is
likely to charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid
payment of any liability under this Act, the total income of such person for the period from
the expiry of the previous year to the date, when the Assessing Officer commences
proceedings under this section is chargeable to tax in that assessment year.

Example: The Assessing Officer is informed that Mr. X, a defaulter of a leading bank, is
likely to sell all his luxury cars on 02.10.2024 with a view to avoid payment of Income-tax. In
such case, the Assessing Officer can commence proceedings to tax the income of the year
commencing from 01.04.2024 to 02.10.2024 during A.Y. 2024-25 itself.

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(e) Discontinued business [Section 176]

Where any business or profession is discontinued in any assessment year, the income of
the period from the expiry of the previous year up to the date of such discontinuance may,
at the discretion of the Assessing Officer, be charged to tax in that assessment year.

Example: The Assessing Officer is informed during the course of assessment by X Pvt. Ltd.
that they have discontinued their business from 31.05.2024. In such a case, the Assessing
Officer may exercise his discretion and tax the income of the company from 01.04.2024 to
31.05.2024 during the A.Y. 2024-25. It may be noted that the income of the P.Y. 2024-25
will also be taxed in A.Y. 2024-25. However, as the Assessing Officer has discretion under
section 176, he could alternatively wait till the completion of the assessment year and tax
the income of the period commencing from 01.04.2024 to 31.05.2024 in the
A.Y. 2025-26.

Undisclosed sources of income

Amount
borrowed or
repaid on hundi
[Section 69D]
Cash Credits Unexplained
[Section 68] expenditure
[Section 69C]
Undisclosed
sources of
Unexplained income
Investment etc.
Investments not fully
[Section 69] disclosed
Unexplained [Section 69B]
money
[Section 69A]

There are many occasions when the Assessing Officer detects cash credits, unexplained
investments, unexplained expenditure etc., the source for which is not satisfactorily explained by
the assessee to the Assessing Officer. The Act contains a series of provisions to provide for these
contingencies:

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(a) Cash Credits [Section 68]

Where any sum is found credited in the books of the assessee and the assessee offers no
explanation about the nature and source or the explanation offered is not satisfactory in the
opinion of the Assessing Officer, the sum so credited may be charged as income of the
assessee of that previous year.
Unexplained loan or borrowing - Where the sum so credited consists of loan or borrowing
or any such amount, by whatever name called, any explanation offered by the assessee in
whose books such sum is credited would not be deemed to be satisfactory, unless
- the person in whose name such credit is recorded in the books of such assessee
also offers an explanation about the nature and source of such sum so credited and
- in the opinion of the Assessing Officer, such explanation has been found to be
satisfactory.
Unexplained Share Capital/ Premium - Any explanation offered by a closely held
company in respect of any sum credited as share application money, share capital, share
premium or any such amount, by whatever name called, in the accounts of such company
would not be deemed to be satisfactory, unless
- the person, being a resident, in whose name such credit is recorded in the books of
such company also explains about the nature and the source of such sum so
credited and
- in the opinion of the Assessing Officer, such explanation has been found to be
satisfactory.
Non-applicability to Venture Capital Fund or Venture Capital Company 5 – The
abovementioned additional conditions would not apply if the person, in whose name the
sum is recorded, is a Venture Capital Fund or Venture Capital Company registered with
SEBI.
(b) Unexplained Investments [Section 69]
Where in the financial year immediately preceding the assessment year, the assessee has
made investments which are not recorded in the books of account and the assessee offers
no explanation about the nature and the source of investments or the explanation offered is
not satisfactory in the opinion of the Assessing Officer, the value of the investments are
taxed as deemed income of the assessee of such financial year.
5
defined under section 10(23FB)

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(c) Unexplained money etc. [Section 69A]

Where in any financial year the assessee is found to be the owner of any money, bullion,
jewellery or other valuable article and the same is not recorded in the books of account and
the assessee offers no explanation about the nature and source of acquisition of such
money, bullion etc. or the explanation offered is not satisfactory in the opinion of the
Assessing Officer, the money and the value of bullion etc. may be deemed to be the income
of the assessee for such financial year. Ownership is important and mere possession is not
enough.

(d) Amount of investments etc., not fully disclosed in the books of account [Section 69B]
Where in any financial year the assessee has made investments or is found to be the owner
of any bullion, jewellery or other valuable article and the Assessing Officer finds that the
amount spent on making such investments or in acquiring such articles exceeds the amount
recorded in the books of account maintained by the assessee and he offers no explanation
for the difference or the explanation offered is unsatisfactory in the opinion of the Assessing
Officer, such excess may be deemed to be the income of the assessee for such financial
year.

Example: If the assessee is found to be the owner of say 300 gms of gold (market value of
which is ` 25,000) during the financial year ending 31.3.2025 but he has recorded having
spent ` 15,000 in acquiring it, the Assessing Officer can add ` 10,000 (i.e., the difference of
the market value of such gold and ` 15,000) as the income of the assessee, if the assessee
offers no satisfactory explanation thereof.

(e) Unexplained expenditure [Section 69C]

Where in any financial year an assessee has incurred any expenditure and he offers no
explanation about the source of such expenditure or the explanation is unsatisfactory in the
opinion of the Assessing Officer, Assessing Officer can treat such unexplained expenditure
as the income of the assessee for such financial year. Such unexplained expenditure which
is deemed to be the income of the assessee shall not be allowed as deduction under any
head of income.
(f) Amount borrowed or repaid on hundi [Section 69D]
Where any amount is borrowed on a hundi or any amount due thereon is repaid other than
through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall

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be deemed to be the income of the person borrowing or repaying for the previous year in
which the amount was borrowed or repaid, as the case may be.

However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of
such amount. The amount repaid shall include interest paid on the amount borrowed.

Section 115BBE provides the rate at which such cash credits, undisclosed income, undisclosed
expenditure etc. deemed as income under section 68 or section 69 or section 69A or section 69B
or section 69C or section 69D would be subject to tax. See Special rates of tax in page 1.45 of this
Chapter.

1.4 CHARGE OF INCOME TAX

Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
(1) Tax shall be charged at the rates prescribed for the year by the annual Finance Act or the
Income-tax Act, 1961 or both.
(2) The charge is on every person specified under section 2(31);
(3) Tax is chargeable on the total income earned during the previous year and not the
assessment year. (There are certain exceptions provided by sections 172, 174, 174A, 175
and 176 discussed above);
(4) Tax shall be levied in accordance with and subject to the various provisions contained in
the Act.

This section is the backbone of the law of income-tax in so far as it serves as the most operative
provision of the Act. The tax liability of a person springs from this section.

1.5 RATES OF TAX, SURCHARGE & CESS

Income-tax

Income-tax is to be charged on every person at the rates prescribed for the year by the Annual
Finance Act or the Income-tax Act, 1961 or both.
Section 2 of the Finance (No. 2) Act, 2024 read with Part I of the First Schedule to the Finance
(No. 2) Act, 2024, seeks to specify the rates at which income-tax is to be levied on income
chargeable to tax for the assessment year 2024-25.

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Part II lays down the rate at which tax is to be deducted at source during the financial year
2024-25 from income subject to such deduction under the Income-tax Act, 1961;

Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-
tax from income chargeable under the head "Salaries" and the rates for computing advance tax for
the financial year 2024-25 where the assessee exercises the option to shift out of the default tax
regime.
Part III of the First Schedule to the Finance (No. 2) Act, 2024 will become Part I of the First
Schedule to the Finance Act, 2025 and so on.
Surcharge
Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a
percentage of income-tax. Surcharge is presently being levied beyond a particular threshold of
income for different persons. Also, higher rates of surcharge are prescribed for higher thresholds
of income. However, under the special tax regimes for domestic companies and co-operative
societies, a uniform surcharge is prescribed irrespective of the level of total income.
“Health and Education cess” on Income-tax
The amount of income-tax as increased by the union surcharge, if applicable, should be further
increased by an additional surcharge called the “Health and Education cess on income-tax”,
calculated at the rate of 4% of such income-tax and surcharge, if applicable. Health and education
cess is leviable in the case of all assessees i.e. individuals, HUF, AOPs/BOIs, Artificial Juridical
Persons, firms, local authorities, co-operative societies and companies.

It is leviable to fulfill the commitment of the Government to provide and finance quality health
services and universalised quality basic education and secondary and higher education.
Individual/ Hindu Undivided Family (HUF)/ Association of Persons (AOP)/ Body of
Individuals (BOI)/ Artificial Juridical Person
(i) Income-tax:

Individual/HUF/AoP/BoI and Artificial Juridical Persons can pay tax at concessional rates under the
default tax regime under section 115BAC. However, such person has to forego certain exemptions
and deductions under this regime. Alternatively, he/it can exercise the option to shift out of the
default tax regime and pay tax under the optional tax regime as per the regular provisions of the
Act at the tax rates prescribed by the Annual Finance Act of that year.

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Concessional tax rates under the default tax regime under section 115BAC(1A)
Individuals/ HUF/ AoPs/ BoIs or artificial judicial persons, other than those who exercise the option
to opt out this regime under section 115BAC(6), have to pay tax in respect of their total income
(other than income chargeable to tax at special rates under Chapter XII such as section 111A,
112, 112A, 115BB, 115BBJ etc.) at the following concessional rates, subject to certain conditions
specified under section 115BAC(2) like non-availability of deduction in respect of Leave Travel
Concession, interest on housing loan on self-occupied property, deductions under Chapter VI-A
[other than section 80CCD(2), 80CCH(2) or section 80JJAA] etc. –

(i) Upto ` 3,00,000 NIL

(ii) From ` 3,00,001 to ` 7,00,000 5%
(iii) From ` 7,00,001 to ` 10,00,000 10%
(iv) From ` 10,00,001 to ` 12,00,000 15%
(v) From ` 12,00,001 to ` 15,00,000 20%
(vii) Above ` 15,00,000 30%

For detailed discussion on section 115BAC, refer to Chapter 9 in Module 2 of the Study
Material.
Tax rates prescribed by the Annual Finance Act for optional tax regime

The slab rates for A.Y. 2025-26 applicable to an Individual/HUF/AOP/BOI/ Artificial Juridical
Person, which has exercised the option of shifting out of the default tax regime, are as follows:

(i) where the total income does not exceed NIL

` 2,50,000
(ii) where the total income exceeds ` 2,50,000 5% of the amount by which the total income
but does not exceed ` 5,00,000 exceeds ` 2,50,000
(iii) where the total income exceeds ` 5,00,000 ` 12,500 plus 20% of the amount by which
but does not exceed ` 10,00,000; the total income exceeds ` 5,00,000
(iv) where the total income exceeds ` 1,12,500 plus 30% of the amount by
` 10,00,000 which the total income exceeds ` 10,00,000

For a senior citizen (being a resident individual who is of the age of 60 years but not more than 80
years at any time during the previous year), the basic exemption limit is ` 3,00,000. Further,
resident individuals of the age of 80 years or more at any time during the previous year, being very
senior citizens, would be eligible for a higher basic exemption limit of ` 5,00,000. Therefore, the
tax slabs for these assessees would be as follows –

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For senior citizens (being resident individuals of the age of 60 years or more but less than
80 years)
(i) where the total income does not exceed NIL
` 3,00,000
(ii) where the total income exceeds 5% of the amount by which the total income
` 3,00,000 but does not exceed exceeds ` 3,00,000
` 5,00,000
(iii) where the total income exceeds ` 10,000 plus 20% of the amount by which
` 5,00,000 but does not exceed the total income exceeds ` 5,00,000
` 10,00,000;
(iv) where the total income exceeds ` 1,10,000 plus 30% of the amount by which
` 10,00,000 the total income exceeds ` 10,00,000

For resident individuals of the age of 80 years or more at any time during the previous year
(i) where the total income does not exceed NIL
` 5,00,000
(ii) where the total income exceeds ` 5,00,000 20% of the amount by which the total
but does not exceed ` 10,00,000; income exceeds ` 5,00,000
(iii) where the total income exceeds ` 10,00,000 ` 1,00,000 plus 30% of the amount by
which the total income exceeds
` 10,00,000

Clarification regarding attaining prescribed age of 60 years/ 80 years on 31st March itself, in
case of senior/very senior citizens whose date of birth falls on 1st April [Circular No.
28/2016, dated 27.07.2016]
An individual who is resident in India and of the age of 60 years or more (senior citizen) and 80
years or more (very senior citizen) is eligible for a higher basic exemption limit of ` 3,00,000 and
` 5,00,000, respectively.
The contentious issue is regarding the attainment of the aforesaid qualifying ages for availing
higher basic exemption limit in cases of the persons whose date of birth falls on 1st April of
calendar year. In other words, the broader question under consideration is whether a person born
on 1st April of a particular year can be said to have completed a particular age on 31st March, on
the preceding day of his/her birthday, or on 1st April itself of that year.
The Supreme Court had an occasion to consider a similar issue in the case of Prabhu Dayal
Sesma vs. State of Rajasthan &, another 1986, AIR, 1948 wherein it has dealt with on the general
rules to be followed for calculating the age of the person. The Apex Court observed that while
counting the age of the person, whole of the day should be reckoned and it starts from 12 o’clock
in the midnight and he attains the specified age on the day preceding, the anniversary of his

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birthday. In the absence of any express provision, it is well settled that any specified age in law is
to be computed as having been attained on the day preceding the anniversary of the birthday.
The CBDT has, vide this Circular, clarified that a person born on 1st April would be considered to
have attained a particular age on 31st March, the day preceding the anniversary of his birthday. In
particular, the question of attainment of age of eligibility for being considered a senior/very senior
citizen would be decided on the basis of above criteria.
Therefore, a resident individual whose 60th birthday falls on 1st April, 2025, would be treated as
having attained the age of 60 years in the P.Y.2024-25, and would be eligible for higher basic
exemption limit of ` 3 lakh in computing his tax liability for A.Y.2025-26 under the optional tax
regime as per normal provisions of the Act. Likewise, a resident individual whose 80th birthday falls
on 1st April, 2025, would be treated as having attained the age of 80 years in the P.Y.2024-25, and
would be eligible for higher basic exemption limit of ` 5 lakh in computing his tax liability for
A.Y.2025-26 under the optional tax regime as per normal provisions of the Act.

In respect of certain types of income, as mentioned below, the Income-tax Act, 1961 has
prescribed specific rates. The special rates of tax have to be applied on the respective component
of total income irrespective of the tax regime and the slab rates have to be applied on the balance
of total income after adjusting the basic exemption limit.
S. Section Income Rate of Tax
No.
(a) 112 (I) Long term capital gains (other than LTCG
taxable as per section 112A and mentioned in (II)
below) arising -
(a) from transfer of capital asset which takes 20% with indexation
place before 23.7.2024
(b) from transfer of capital asset which takes
place on or after 23.7.2024
- from transfer of any land or building or Lower of 20% with
both by an individual or a HUF, being a indexation or 12.5%
resident acquired before 23.7.2024 without indexation
- from transfer of other capital asset 12.5% without indexation
(II) Long-term capital gains arising from transfer
of unlisted securities or shares of company in
which public are not substantially interested by
non-resident assessee
- If transfer takes place before 23.7.2024 10% without indexation
and foreign currency
fluctuations

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- If transfer takes place on or after 23.7.2024 12.5% without indexation

and foreign currency
fluctuations
(b) 112A Long term capital gains on transfer of –
• Equity share in a company 10% on LTCG >` 1.25
• Unit of an equity oriented fund lakhs if transfer takes
place before 23.7.2024
• Unit of business trust
Condition for availing the benefit of this
concessional rate is that securities transaction 12.5% on LTCG > ` 1.25
tax should have been paid – lakhs if transfer takes
place on or after
In case of Time of payment of 23.7.2024
STT

Equity shares both at the time of Note: Total exemption in

acquisition and transfer P.Y. cannot exceed
` 1.25 lakhs.
Unit of equity at the time of transfer
oriented fund or unit
of business trust
(c) 111A Short-term capital gains on transfer of –
• Equity shares in a company 15% if transfer takes
• Unit of an equity oriented fund place before 23.7.2024
• Unit of business trust
The conditions for availing the benefit of this 20% if transfer takes
concessional rate are – place on or after
23.7.2024
(i) the transaction of sale of such equity share
or unit should be entered into on or after
1.10.2004; and
(ii) such transaction should be chargeable to
securities transaction tax.
(d) 115BB Winnings from 30%
• Lotteries;
• Crossword puzzles;
• Races including horse races;
• Card games and other games of any sort;
• Gambling or betting of any form or nature
(other than winning from any online game)

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 BASIC CONCEPTS 1.45

(e) 115BBJ Net winnings from online games 30%

(f) 115BBE Unexplained money, investment, expenditure, etc. 60%
deemed as income under section 68 or section 69
or section 69A or section 69B or section 69C or
section 69D [See discussion below]

Unexplained money, investments etc. to attract tax@60% [Section 115BBE]

(i) In order to control laundering of unaccounted money by availing the benefit of basic
exemption limit, the unexplained money, investment, expenditure, etc. deemed as income
under section 68 or section 69 or section 69A or section 69B or section 69C or section 69D
would be taxed at the rate of 60% plus surcharge @25% of tax. Thus, the effective rate of
tax (including surcharge@25% of tax and cess@4% of tax and surcharge) is 78%.
(ii) No basic exemption or allowance or expenditure shall be allowed to the assessee under
any provision of the Income-tax Act, 1961 in computing such deemed income.
(iii) Further, no set off of any loss shall be allowable against income brought to tax under
sections 68 or section 69 or section 69A or section 69B or section 69C or section 69D.
ILLUSTRATION 1
Mr. Arjun has a total income of ` 16,00,000 for P.Y.2024-25, comprising of income from house property
and interest on fixed deposits. Compute his tax liability for A.Y.2025-26 assuming his age is –
(a) 52 years

(b) 64 years
(c) 83 years
Assume that Mr. Arjun has exercised the option to shift out/ opt out of the default tax regime.

SOLUTION
(a) Computation of Tax liability of Mr. Arjun (aged 52 years)
Tax liability:
First ` 2,50,000 - Nil -
Next ` 2,50,001 – ` 5,00,000- @5% of ` 2,50,000 ` 12,500
Next ` 5,00,001 – ` 10,00,000- @20% of ` 5,00,000 ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000 - @30% of ` 6,00,000 ` 1,80,000
` 2,92,500

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 1.46 DIRECT TAX LAWS

Add: Health and Education cess@4% ` 11,700

` 3,04,200

(b) Computation of Tax liability of Mr. Arjun (aged 64 years)

Tax liability:
First ` 3,00,000 - Nil
Next ` 3,00,001 – ` 5,00,000 - @5% of ` 2,00,000 ` 10,000
Next ` 5,00,001 – ` 10,00,000- @20% of ` 5,00,000 ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000- @30% of ` 6,00,000 ` 1,80,000
` 2,90,000
Add: Health and Education cess@4% ` 11,600
` 3,01,600

(c) Computation of Tax liability of Mr. Arjun (aged 83 years)

Tax liability:
First ` 5,00,000 - Nil
Next ` 5,00,001 – ` 10,00,000 - @ 20% of ` 5,00,000 ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000 - @ 30% of ` 6,00,000 ` 1,80,000
` 2,80,000
Add: Health and Education cess@4% ` 11,200
` 2,91,200
Surcharge
In case the Individual/HUF/AoP 6/BoI and Artificial Juridical Person pays tax under default
tax regime under section 115BAC
Income-tax computed in accordance with the provisions of section 115BAC and/ or section 111A
or section 112 or section 112A or 115BBE or section 115BBJ would be increased by surcharge
given under the following table:
Particulars Rate of Examples
surcharge on Components of total Applicable rate of
income-tax income surcharge
(i) Where the total 10% Example
income (including • Dividend ` 15 lakhs; Surcharge would be
dividend income and
6 (other than an AOP consisting of only companies as members)

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 BASIC CONCEPTS 1.47

capital gains • STCG u/s 111A levied @10% on income-

chargeable to tax u/s ` 15 lakhs; tax computed on total
111A, 112 and 112A) • LTCG u/s 112 income of ` 1 crore.
> ` 50 lakhs but ≤ ` 25 lakhs;
` 1 crore
• LTCG u/s 112A
` 20 lakhs; and
• Other income
` 25 lakhs
(ii) Where total income 15% Example
(including dividend • Dividend income Surcharge would be
income and capital ` 10 lakhs; levied @15% on income-
gains chargeable to tax computed on total
tax u/s 111A, 112 • STCG u/s 111A
` 35 lakhs; income of ` 1.85 crores.
and 112A) > ` 1
crore but ≤ ` 2 crore • LTCG u/s 112
` 50 lakhs;
• LTCG u/s 112A
` 35 lakhs; and
• Other income
` 55 lakhs
(iii) Where total income 25% Example
(excluding dividend • Dividend income Surcharge@15% would
income and capital ` 51 lakhs; be levied on income-tax
gains chargeable to on:
tax u/s 111A, 112 • STCG u/s 111A
` 44 lakh; • Dividend income of
and 112A) > ` 2
crore • LTCG u/s 112 ` 51 lakhs;
` 42 lakhs; • STCG of ` 44 lakhs
The rate of Not chargeable to tax u/s
surcharge on the exceeding • LTCG u/s 112A
` 55 lakh; and 111A;
income-tax payable 15%
on the portion of • Other income • LTCG of ` 42 lakhs
dividend income and ` 6 crores chargeable to tax u/s
capital gains 112; and
chargeable to tax u/s • LTCG of ` 55 lakhs
111A, 112 and 112A chargeable to tax u/s
112A.
Surcharge@25% would
be leviable on income-
tax computed on other
income of
` 6 crores included in
total income

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 1.48 DIRECT TAX LAWS

(iv) Where total income 15% Example

(including dividend • Dividend income Surcharge would be
income and capital ` 40 lakhs; levied@15% on income-
gains chargeable to tax computed on total
tax u/s 111A, 112 • STCG u/s 111A
` 35 lakhs; income of
and 112A) > ` 2 ` 2.77 crore.
crore in cases not • LTCG u/s 112
covered under (iii) ` 42 lakhs;
above • LTCG u/s 112A
` 50 lakhs; and
Other income
` 1.10 crore

Marginal relief
The purpose of marginal relief is to ensure that the increase in amount of tax payable (including
surcharge) due to increase in total income of an assessee beyond the prescribed limit should not
exceed the amount of increase in total income.
Marginal relief is available in case of such persons paying tax under default tax regime u/s
115BAC referred to in above i.e., -

Particulars Marginal relief

(i) Where the total Step 1 - Compute income-tax on total income; and add
income > ` 50 lakhs surcharge@10% on such income-tax (A)
but ≤ ` 1 crore Step 2 - Compute income-tax on ` 50 lakhs
Step 3 - Total income (-) ` 50 lakhs
Step 4 - Add the amount computed in Step 2 and Step 3 (B)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in Step
1 (i.e., A) or Step 4 (i.e., B). Consequently, if A>B, the marginal
relief would be A – B.
(ii) Where the total Step 1 - Compute income-tax on total income; and add
income > ` 1 crore surcharge@15% on income-tax (C)
but ≤ ` 2 crores Step 2 - Compute income-tax on total income of ` 1 crore +
surcharge on such income-tax@10%
Step 3 - Total income (-) ` 1 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (D)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in Step
1 (i.e., C) or Step 4 (i.e., D). Consequently, if C>D, the marginal
relief would be C – D.

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 BASIC CONCEPTS 1.49

(iii) Where the total Step 1 - Compute income-tax on total income; and add
income > ` 2 crores surcharge@25% on income-tax (E)
Step 2 - Compute income-tax on total income of ` 2 crore +
surcharge on such income-tax@15%
Step 3 - Total income (-) ` 2 crore
Step 4 - Add the amount computed in Step 2 and Step 3 (F)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in Step
1 (i.e., E) or Step 4 (i.e., F). Consequently, if E>F, the marginal
relief would be E – F.
Note – It is presumed that the total income referred to above does not include dividend income,
long term capital gains taxable under section 112/ 112A and short-term capital gains taxable under
section 111A.
In case the total income includes dividend income, long term capital gains taxable under section
112/112A or short term capital gains taxable under section 111A, surcharge on income-tax
computed on such dividend income and capital gains cannot exceed 15%. This must be kept in
mind while computing marginal relief in cases referred to in (iii) above.
In case the Individual/HUF/AoP 7/BoI and Artificial Juridical Person exercises the option to
shift out of the default tax regime
Income-tax computed in accordance with normal provisions of the Act or section 111A or section
112 or section 112A or 115BBE or section 115BBJ would be increased by surcharge given under
the following table:
Rate of Example
Particulars surcharge on Components of total Applicable rate of
income-tax
income surcharge
(i) Where the total 10% Example
income (including Surcharge would be
• Dividend ` 10 lakhs;
dividend income levied@10% on
and capital gains • STCG u/s 111A
` 20 lakhs; income-tax computed
chargeable to tax on total income of
u/s 111A, 112 and • LTCG u/s 112 ` 15 ` 90 lakhs.
112A) > ` 50 lakhs lakhs;
but ≤ ` 1 crore • LTCG u/s 112A ` 20
lakhs; and
• Other income ` 25 lakhs

7 (other than an AOP consisting of only companies as members)

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 1.50 DIRECT TAX LAWS

(ii) Where total income 15% Example

(including dividend
• Dividend income Surcharge would be
income and capital levied@15% on
` 10 lakhs;
gains chargeable to
• STCG u/s 111A income-tax computed
tax u/s 111A, 112
` 40 lakhs; on total income of
and 112A) > ` 1 ` 1.90 crores.
crore but ≤ ` 2 • LTCG u/s 112
crore ` 55 lakhs;
• LTCG u/s 112A
` 35 lakhs; and
• Other income
` 50 lakhs
(iii) Where total income 25% Example
(excluding dividend
• Dividend income Surcharge@15%
income and capital
` 51 lakhs; would be levied on
gains chargeable to
tax u/s 111A, 112 and • STCG u/s 111A income-tax on:
112A) > ` 2 crore but ` 44 lakh; • Dividend income of
≤ ` 5 crore • LTCG u/s 112 ` 51 lakhs;
The rate of Not ` 42 lakhs; • STCG of ` 44
surcharge on the exceeding • LTCG u/s 112A lakhs chargeable to
income-tax payable 15% ` 55 lakh; and tax u/s 111A;
on the portion of • Other income • LTCG of ` 42 lakhs
dividend income ` 3 crores chargeable to tax
and capital gains u/s 112; and
chargeable to tax • LTCG of ` 55 lakhs
u/s 111A, 112 and chargeable to tax
112A u/s 112A.
Surcharge@25%
would be leviable on
income-tax computed
on other income of ` 3
crores included in total
income
(iv) Where total income 37% Example
(excluding dividend
• Dividend income Surcharge@15%
income and capital would be levied on
` 60 lakhs;
gains chargeable to
tax u/s 111A, 112 • STCG u/s 111A income-tax on:
and 112A) > ` 5 ` 50 lakhs; • Dividend income of
crore • LTCG u/s 112 ` 60 lakhs;
` 42 lakhs;

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 BASIC CONCEPTS 1.51

Rate of surcharge Not • LTCG u/s 112A • STCG of ` 50

on the income-tax exceeding ` 25 lakhs; and lakhs chargeable to
payable on the 15% tax u/s 111A;
• Other income
portion of dividend
` 6 crore • LTCG of ` 42 lakhs
income and capital
chargeable to tax
gains chargeable to
u/s 112; and
tax u/s 111A, 112
and 112A • LTCG of ` 25 lakhs
chargeable to tax
u/s 112A.
Surcharge@37% would
be leviable on the
income-tax computed
on other income of ` 6
crores included in total
income.
(v) Where total income 15% Example
(including dividend
• Dividend income Surcharge would be
income and capital levied@15% on
` 55 lakhs;
gains chargeable to income-tax computed
tax u/s 111A, 112 • STCG u/s 111A
` 60 lakhs; on total income of
and 112A) > ` 2 ` 3.02 crore.
crore in cases not • LTCG u/s 112
covered under (iii) ` 42 lakhs;
and (iv) above • LTCG u/s 112A
` 35 lakhs; and
• Other income
` 1.10 crore

Marginal relief
Marginal relief in case of such persons referred to in above under the optional tax regime (as per
the normal provisions of the Act).

Particulars Marginal relief

(i) Where the total income > Step 1 - Compute income-tax on total income; and add
` 50 lakhs but ≤ ` 1 crore surcharge@10% on such income-tax (A)
Step 2 - Compute income-tax on ` 50 lakhs
Step 3 - Total income (-) ` 50 lakhs
Step 4 - Add the amount computed in Step 2 and Step 3
(B)
Step 5 – Income-tax liability on total income (along with

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 1.52 DIRECT TAX LAWS

surcharge) would be the lower of the amount arrived at in

Step 1 (i.e., A) or Step 4 (i.e., B). Consequently, if A>B, the
marginal relief would be A – B.
(ii) Where the total income > Step 1 - Compute income-tax on total income; and add
` 1 crore but ≤ ` 2 crores surcharge@15% on income-tax (C)
Step 2 - Compute income-tax on total income of ` 1 crore +
surcharge on such income-tax@10%
Step 3 - Total income (-) ` 1 crore
Step 4 - Add the amount computed in Step 2 and Step 3
(D)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in
Step 1 (i.e., C) or Step 4 (i.e., D). Consequently, if C>D, the
marginal relief would be C – D.
(iii) Where the total income > Step 1 - Compute income-tax on total income; and add
` 2 crores but ≤ ` 5 crores surcharge@25% on income-tax (E)
Step 2 - Compute income-tax on total income of ` 2 crore +
surcharge on such income-tax@15%
Step 3 - Total income (-) ` 2 crore
Step 4 - Add the amount computed in Step 2 and Step 3
(F)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in
Step 1 (i.e., E) or Step 4 (i.e., F). Consequently, if E>F, the
marginal relief would be E – F.
(iv) Where the total income > Step 1 - Compute income-tax on total income; and add
` 5 crores surcharge@37% on income-tax (G)
Step 2 - Compute income-tax on total income of ` 5 crore +
surcharge on such income-tax@25%
Step 3 - Total income (-) ` 5 crore
Step 4 - Add the amount computed in Step 2 and Step 3
(H)
Step 5 – Income-tax liability on total income (along with
surcharge) would be the lower of the amount arrived at in
Step 1 (i.e., G) or Step 4 (i.e., H). Consequently, if G>H,
the marginal relief would be G – H.

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 BASIC CONCEPTS 1.53

Note – It is presumed that the total income referred to above does not include dividend income,
long term capital gains taxable under section 112/ 112A and short-term capital gains taxable under
section 111A.
In case the total income includes dividend income, long term capital gains taxable under section
112/ 112A or short term capital gains taxable under section 111A, surcharge on income-tax
computed on such dividend income and capital gains cannot exceed 15%. This must be kept in
mind while computing marginal relief in cases referred to in (iii) and (iv) above.
ILLUSTRATION 2
Compute the tax liability of Mr. Arpit (aged 42), having total income of ` 51 lakhs for the
Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from
house property and interest on fixed deposit. Assume that Mr. Arpit has exercised the option to
shift out of section 115BAC.
SOLUTION
Computation of tax liability of Mr. Arpit for the A.Y.2025-26
(A) Income-tax (including surcharge) computed on total income of ` 51,00,000
` 2,50,000 – ` 5,00,000 @5% ` 12,500
` 5,00,001 – ` 10,00,000 @20% ` 1,00,000
` 10,00,001 – ` 51,00,000 @30% ` 12,30,000
Total ` 13,42,500
Add: Surcharge @ 10% ` 1,34,250 ` 14,76,750
(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500
(C) Total Income Less ` 50 lakhs ` 1,00,000
(D) Income-tax computed on total income of ` 50 lakhs plus the
excess of total income over ` 50 lakhs (B +C) ` 14,12,500
(E) Tax liability: lower of (A) and (D) ` 14,12,500
Add: Health and education cess @4% ` 56,500
Tax liability ` 14,69,000
(F) Marginal Relief (A – D) ` 64,250

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 1.54 DIRECT TAX LAWS

Alternative method -
(A) Income-tax (including surcharge) computed on total income of ` 51,00,000
` 2,50,000 – ` 5,00,000@5% ` 12,500

` 5,00,001 – ` 10,00,000@20% ` 1,00,000

` 10,00,001 – ` 51,00,000@30% ` 12,30,000
Total ` 13,42,500
Add: Surcharge@10% ` 1,34,250 ` 14,76,750
(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500

(C) Excess tax payable (A)-(B) ` 1,64,250

(D) Marginal Relief (` 1,64,250 – ` 1,00,000, being the amount
of income in excess of ` 50,00,000) ` 64,250

(E) Tax liability (A)-(D) ` 14,12,500

Add: Health and education cess @4% ` 56,500
Tax liability ` 14,69,000

ILLUSTRATION 3
Compute the tax liability of Mr. Veer (aged 51) under the default tax regime, having total income of
` 1,01,00,000 for the Assessment Year 2025-26. Assume that his total income comprises of salary
income, Income from house property and interest on fixed deposit.
SOLUTION
Computation of tax liability of Mr. Veer for the A.Y. 2025-26

(A) Income-tax (including surcharge) computed on total income of ` 1,01,00,000

` 3,00,000 – ` 7,00,000@5% ` 20,000
` 7,00,001 – ` 10,00,000@10% ` 30,000

` 10,00,001 – ` 12,00,000@15% ` 30,000

` 12,00,001 – ` 15,00,000@20% ` 60,000

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 BASIC CONCEPTS 1.55

` 15,00,001 – ` 1,01,00,000@30% ` 25,80,000

Total ` 27,20,000
Add: Surcharge@15% ` 4,08,000
Tax liability without marginal relief ` 31,28,000
(B) Income-tax computed on total income of ` 1 crore
(` 1,40,000 plus ` 25,50,000) ` 26,90,000
Add: Surcharge@10% ` 2,69,000
` 29,59,000
(C) Total Income Less ` 1 crore ` 1,00,000
(D) Income-tax computed on total income of ` 1 crore plus the
excess of total income over ` 1 crore (B +C) ` 30,59,000
(E) Tax liability: lower of (A) & (D) ` 30,59,000
Add: Health and education cess @4% ` 1,22,360
Tax liability ` 31,81,360
(F) Marginal relief (A-D) ` 69,000
Alternative method:
(A) Income-tax (including surcharge) computed on total income of ` 1,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000
` 7,00,001 – ` 10,00,000@10% ` 30,000
` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000
` 15,00,001 – ` 1,01,00,000@30% ` 25,80,000
Total ` 27,20,000
Add: Surcharge @ 15% ` 4,08,000 ` 31,28,000
(B) Income-tax computed on total income of ` 1 crore
[(` 1,40,000 plus ` 25,50,000) plus surcharge@10%] ` 29,59,000
(C) Excess tax payable (A)-(B) ` 1,69,000

© The Institute of Chartered Accountants of India

 1.56 DIRECT TAX LAWS

(D) Marginal Relief (` 1,69,000 – ` 1,00,000, being the amount

of income in excess of ` 1,00,00,000) ` 69,000

(E) Tax liability (A) - (D) ` 30,59,000

Add: Health and education cess @4% ` 1,22,360

Tax liability ` 31,81,360

ILLUSTRATION 4

Compute the tax liability of Mr. Varun (aged 58), having total income of ` 2,01,00,000 for the
Assessment Year 2025-26. Assume that his total income comprises of salary income, Income from
house property and interest on fixed deposit. Assume that Mr. Varun has exercised the option to
shift out of section 115BAC.

SOLUTION

Computation of tax liability of Mr. Varun for the A.Y. 2025-26

(A) Income-tax (including surcharge) computed on total income of ` 2,01,00,000

` 2,50,000 – ` 5,00,000 @ 5% ` 12,500

` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000

` 10,00,001 – ` 2,01,00,000@30% ` 57,30,000

Total ` 58,42,500

Add: Surcharge @ 25% ` 14,60,625 ` 73,03,125

(B) Income-tax computed on total income of ` 2 crore

(` 12,500 plus ` 1,00,000 plus ` 57,00,000) ` 58,12,500

Add: Surcharge@15% ` 8,71,875

` 66,84,375

(C) Total Income Less ` 2 crore ` 1,00,000

(D) Income-tax computed on total income of ` 2 crore plus the

excess of total income over ` 2 crore (B +C) ` 67,84,375

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 BASIC CONCEPTS 1.57

(E) Tax liability (A) or (D), whichever is lower ` 67,84,375

Add: Health and education cess @4% ` 2,71,375
Tax liability ` 70,55,750
(F) Marginal relief (A-D) ` 5,18,750
Alternative method
(A) Income-tax (including surcharge) computed on total income of ` 2,01,00,000
` 2,50,000 – ` 5,00,000 @ 5% ` 12,500
` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000
` 10,00,001 – ` 2,01,00,000@30% ` 57,30,000
Total ` 58,42,500
Add: Surcharge@25% ` 14,60,625 ` 73,03,125
(B) Income-tax computed on total income of ` 2 crore
[(` 12,500 plus ` 1,00,000 plus ` 57,00,000) plus surcharge@15%] ` 66,84,375
(C) Excess tax payable (A)-(B) ` 6,18,750
(D) Marginal Relief (` 6,18,750 – ` 1,00,000, being the amount
of income in excess of ` 2,00,00,000) ` 5,18,750
(E) Tax liability (A) - (D) ` 67,84,375
Add: Health and education cess@4% ` 2,71,375
Tax liability ` 70,55,750
ILLUSTRATION 5
Compute the tax liability of Mr. Akhil (aged 65) in a most beneficial manner. He is having total
income of ` 5,01,00,000 for the Assessment Year 2025-26. Assume that his total income
comprises of salary income, Income from house property and interest on fixed deposit and is the
same under both tax regimes.
SOLUTION
Computation of tax liability of Mr. Akhil under default tax regime
for the A.Y. 2025-26
Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000

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 1.58 DIRECT TAX LAWS

` 7,00,001 – ` 10,00,000@10% ` 30,000

` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000
` 15,00,001 – ` 5,01,00,000@30% ` 1,45,80,000
Total ` 1,47,20,000
Add: Surcharge@25% ` 36,80,000
` 1,84,00,000
Add: Health and education cess @4% ` 7,36,000
Tax liability ` 1,91,36,000
Computation of tax liability of Mr. Akhil under optional tax regime
for the A.Y. 2025-26
(A) Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 5,00,000 @ 5% ` 10,000
` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000
` 10,00,001 – ` 5,01,00,000@30% ` 1,47,30,000
Total ` 1,48,40,000
Add: Surcharge @ 37% ` 54,90,800 ` 2,03,30,800
(B) Income-tax computed on total income of ` 5 crore
(` 10,000 plus ` 1,00,000 plus ` 1,47,00,000) ` 1,48,10,000
Add: Surcharge@25% ` 37,02,500
` 1,85,12,500
(C) Total Income Less ` 5 crore ` 1,00,000
(D) Income-tax computed on total income of ` 5 crore plus the
excess of total income over ` 5 crore (B +C) ` 1,86,12,500
(E) Tax liability (A) or (D), whichever is lower ` 1,86,12,500
Add: Health and education cess@4% ` 7,44,500
Tax liability ` 1,93,57,000
(F) Marginal Relief (A – D) ` 17,18,300

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 BASIC CONCEPTS 1.59

Alternative method
(A) Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 5,00,000@5% ` 10,000
` 5,00,001 – ` 10,00,000@20% ` 1,00,000
` 10,00,001 – ` 5,01,00,000@30% ` 1,47,30,000
Total ` 1,48,40,000
Add: Surcharge @ 37% ` 54,90,800 ` 2,03,30,800
(B) Income-tax computed on total income of ` 5 crore
[(` 10,000 plus ` 1,00,000 plus ` 1,47,00,000) plus surcharge@25%] ` 1,85,12,500
(C) Excess tax payable (A)-(B) ` 18,18,300
(D) Marginal Relief (` 18,18,300 – ` 1,00,000, being the
amount of income in excess of ` 5,00,00,000) ` 17,18,300
(E) Tax liability (A) - (D) ` 1,86,12,500
Add: Health and education cess @4% ` 7,44,500
Tax liability ` 1,93,57,000
It is beneficial for Mr. Akhil to pay tax under default tax regime under section 115BAC, since his
tax liability would be lower by ` 2,21,000 (` 1,93,57,000 - ` 1,91,36,000).
Firm/ LLP/ Local Authority
Income-tax
On the whole of the total income 30%

Special rates for capital gains under sections 112, 112A and 111A would be applicable to Firm/
LLP/ local authority also.
Surcharge
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 12% of income-tax
computed as above.
Marginal Relief
Marginal relief is available in case of such persons having a total income exceeding ` 1 crore i.e.,
the total amount of income-tax (together with surcharge) computed on such income should not

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exceed the amount of income-tax computed on total income of ` 1 crore by more than the amount
of income that exceeds ` 1 crore.
Co-operative Society
Income-tax rates as per the normal provisions of the Act
(i) Where the total income does not 10% of the total income
exceed ` 10,000
(ii) Where the total income exceeds ` 1,000 plus 20% of the amount by which the
` 10,000 but does not exceed ` total income exceeds ` 10,000
20,000
(iii) Where the total income exceeds ` 3,000 plus 30% of the amount by which the
20,000 total income exceeds ` 20,000

Note – A manufacturing co-operative society, resident in India, can opt for concessional rates of
tax under section 115BAE and other co-operative societies, resident in India, can opt for
concessional rates of tax under section 115BAD.
Tax rate in case of a manufacturing co-operative society, resident in India (set up and
registered on or after 1.4.2023 and commences manufacture of article or thing before
31.3.2024) opting for concessional tax regime u/s 115BAE
15% of income derived from or incidental to manufacturing or production of an article or thing

Tax rate in case of other resident co-operative society opting for concessional tax regime
u/s 115BAD: 22% of total income
Note - Co-operative society, resident in India, can opt for concessional rate of tax u/s 115BAD or
115BAE, as the case may be, subject to certain conditions. The total income of such co-operative
societies would be computed without giving effect to deduction under section 10AA, 33AB, 33ABA,
35(1)(ii)/(iia)/(iii), 35(2AA), 35AD, 35CCC, additional depreciation under section 32(1)(iia),
deductions under Chapter VI-A (other than section 80JJAA) etc. and set off of loss and
depreciation brought forward from earlier years relating to the above deductions. The provisions of
alternate minimum tax under section 115JC would not be applicable to a co-operative society
opting for section 115BAD or 115BAE.
For detailed discussion on sections 115BAD and 115BAE, please refer Chapter 9 in Module 2 of
the Study Material.
Special rates for capital gains under sections 112, 112A and 111A would be applicable to
Co-operative society also.

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Surcharge
(a) In case of a co-operative society (other than a co-operative society opting for section
115BAD or section 115BAE), whose total income > ` 1 crore but is ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is
payable at the rate of 7% of income-tax computed in accordance with the slab rates given
above and/ or section 111A or section 112 or section 112A.
Marginal Relief
Marginal relief is available in case of such co-operative societies i.e., the total amount of
income-tax (together with surcharge) computed on such income should not exceed the
amount of income-tax computed on total income of ` 1 crore by more than the amount of
income that exceeds ` 1 crore.
(b) In case of a co-operative society (other than a co-operative society opting for section
115BAD or section 115BAE), whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12% of
income-tax computed in accordance with the slab rates given above and/ or section 111A or
section 112 or section 112A.
Marginal Relief
Marginal relief is available in case of such co-operative societies i. e., the total amount of
income-tax (together with surcharge) computed on such income should not exceed the
amount of income-tax and surcharge computed on total income of ` 10 crore by more than
the amount of income that exceeds ` 10 crore.
(c) In case of a co-operative society opting for section 115BAD or section 115BAE
Surcharge @10% of income-tax computed under section 115BAD or section 115BAE would
be leviable. Since there is no threshold limit for applicability of surcharge, consequently, there
would be no marginal relief.

Domestic Company
Income-tax
If the total turnover or gross receipt in the P.Y.2022-23 25% of the total income
≤ ` 400 crore
In any other case 30% of the total income

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Notes –
• In case of a domestic manufacturing company (set up and registered on or after
1.10.2019 and commences manufacture of article or thing 8 before 31.3.2024)
exercising option u/s 115BAB: 15% of income derived from or incidental to
manufacturing or production of an article or thing
• In case of a domestic company exercising option u/s 115BAA: 22% of total income
Domestic company can opt for section 115BAA or section 115BAB, as the case may be,
subject to certain conditions. The total income of such companies would be computed without
giving effect to deductions under section 10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA),
35(2AB), 35AD, 35CCC, 35CCD, Chapter VI-A (except section 80JJAA or section 80M),
additional depreciation under section 32(1)(iia) etc. and without set-off of brought forward loss
and unabsorbed depreciation attributable to such deductions.
For detailed discussion on sections 115BAA and 115BAB, please refer Chapter 9 in Module 2
of the Study Material.

Special rates for capital gains under sections 112, 112A and 111A would be applicable to
domestic company also.
Surcharge
(a) In case of a domestic company (other than a domestic company opting for section
115BAA or section 115BAB), whose total income > ` 1 crore but is ≤ ` 10 crore

Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable
at the rate of 7% of income-tax computed in accordance with the rates given above.
Marginal Relief

Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of
income-tax computed on total income of ` 1 crore by more than the amount of income that
exceeds ` 1 crore.
ILLUSTRATION 6
Compute the marginal relief available to X Ltd., a domestic company, assuming that the
total income of X Ltd. is ` 1,01,00,000 for A.Y.2025-26 and the total income does not
include any income in the nature of capital gains. Assume that the company has not
exercised option under section 115BAA or 115BAB.
[Note - The gross receipts of X Ltd. for the P.Y.2022-23 is ` 402 crore]

8Including business of generation of electricity

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SOLUTION
The tax payable on total income of ` 1,01,00,000 of X Ltd. computed @32.1% (including
surcharge @7%) is ` 32,42,100. However, the tax cannot exceed ` 31,00,000 (i.e., the tax
of ` 30,00,000 payable on total income of ` 1 crore plus ` 1,00,000, being the amount of
total income exceeding ` 1 crore). The marginal relief is ` 1,42,100 (i.e., ` 32,42,100 -
` 31,00,000). Therefore, the tax payable on ` 1,01,00,000 would be ` 32,24,000
(` 31,00,000 plus health and education cess @4% of ` 1,24,000).
(b) In case of a domestic company (other than a domestic company opting for section
115BAA or section 115BAB), whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 12% of
income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of
income-tax and surcharge computed on total income of ` 10 crore by more than the amount
of income that exceeds ` 10 crore.
ILLUSTRATION 7
Compute the marginal relief available to Y Ltd., a domestic company, assuming that the
total income of Y Ltd. for A.Y.2025-26 is ` 10,01,00,000 and the total income does not
include any income in the nature of capital gains. Assume that the company has not
exercised option under section 115BAA or 115BAB.
[Note - The gross receipts of Y Ltd. for the P.Y.2022-23 is ` 410 crore]
SOLUTION

The tax payable on total income of ` 10,01,00,000 of Y Ltd. computed@ 33.6% (including
surcharge@12%) is ` 3,36,33,600. However, the tax cannot exceed ` 3,22,00,000 [i.e., the
tax of ` 3,21,00,000 (32.1% of ` 10 crore) payable on total income of ` 10 crore plus
` 1,00,000, being the amount of total income exceeding ` 10 crore]. The marginal relief is
` 14,33,600 (i.e., ` 3,36,33,600 - ` 3,22,00,000). Therefore, the tax payable on
` 10,01,00,000 would be ` 3,34,88,000 (i.e., ` 3,22,00,000 plus health and education cess
@4% of ` 12,88,000).

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(c) In case of a domestic company opting for section 115BAA or section 115BAB
Surcharge @10% of income-tax computed under section 115BAA or section 115BAB would
be leviable. Since there is no threshold limit for applicability of surcharge, consequently,
there would be no marginal relief.
Foreign Company
Income-tax

Royalties and fees for rendering technical services (FTS) received from 50%
Government or an Indian concern in pursuance of an agreement, approved by
the Central Government, made by the company with the Government or Indian
concern between 1.4.1961 and 31.3.1976 (in case of royalties) and between
1.3.1964 and 31.3.1976 (in case of FTS)

Other income 35%

Special rates for capital gains under sections 112, 112A and 111A would be applicable to
foreign company also.
Surcharge
(a) In case of a foreign company, whose total income > ` 1 crore but is ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable
at the rate of 2% of income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of
income-tax computed on total income of ` 1 crore by more than the amount of income that
exceeds ` 1 crore.
(b) In case of a foreign company, whose total income is > ` 10 crore

Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5% of
income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of income-tax
(together with surcharge) computed on such income should not exceed the amount of

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income-tax and surcharge computed on total income of ` 10 crore by more than the amount
of income that exceeds ` 10 crore.

1.6 REBATE FOR RESIDENT INDIVIDUALS [SECTION 87A]

In order to provide tax relief to the individual tax payers, section 87A provides a rebate from the
tax payable by an assessee, being an individual resident in India.
Rebate to resident individual paying tax under default tax regime u/s 115BAC

(1) If the total income of the resident individual is chargeable to tax under section 115BAC and
the total income of such individual does not exceed ` 7,00,000, the rebate shall be equal
to the amount of income-tax payable on his total income for any assessment year or an
amount of ` 25,000, whichever is less.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as
computed before allowing such rebate) on the total income of the assessee with which he is
chargeable for any assessment year.
ILLUSTRATION 8
Mr. Mahesh aged 32 years and a resident in India, has a total income of ` 6,50,000,
comprising his salary income and interest on bank fixed deposit. Compute his tax liability for
A.Y.2025-26 under default tax regime under section 115BAC.
SOLUTION
Computation of tax liability of Mr. Mahesh for A.Y. 2025-26

Particulars `
Tax on total income of ` 6,50,000
Tax @5% of ` 3,50,000 17,500
Less: Rebate u/s 87A (Lower of tax payable or ` 25,000) 17,500
Tax Liability Nil

(2) If the total income of the resident individual is chargeable to tax under section 115BAC and
the total income of such individual exceeds ` 7,00,000 and income-tax payable on such
total income exceeds the amount by which the total income is in excess of ` 7,00,000, the
rebate would be as follows.

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Step 1 – Total income (-) ` 7 lakhs (A)

Step 2 - Compute income-tax liability on total income (B)
Step 3 - If B>A, rebate under section 87A would be a B – A.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as
computed before allowing such rebate) on the total income of the assessee.
ILLUSTRATION 9
Mr. Nitin aged 42 years and a resident in India, has a total income of ` 7,15,000,
comprising his salary income and interest on bank fixed deposit. Compute his tax liability for
A.Y.2025-26 under default tax regime under section 115BAC.
SOLUTION
Computation of tax liability of Mr. Nitin for A.Y. 2025-26

Particulars `
Step 1: Total Income of ` 7,15,000 - ` 7,00,000 15,000 (A)
Step 2: Tax on total income of ` 7,15,000
Tax @10%of ` 15,000 + ` 20,000 21,500 (B)
Step 3: Since B > A, rebate u/s 87A would be B-A
[` 21,500 - ` 15,000] 6,500

15,000
Add: HEC@4% 600
Tax Liability 15,600

Rebate to a resident individual paying tax under optional tax regime (normal provisions of
the Act)
If total income of such individual does not exceed ` 5,00,000, the rebate shall be equal to the
amount of income-tax payable on his total income for any assessment year or an amount of
` 12,500, whichever is less.
The amount of rebate under section 87A shall not exceed the amount of income-tax (as computed
before allowing such rebate) on the total income of the assessee with which he is chargeable for
any assessment year.

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ILLUSTRATION 10
Mr. Manish, aged 47 years and a resident in India, has a total income of ` 4,15,000, comprising
his salary income and interest on bank fixed deposit. Compute his tax liability for A.Y.2025-26 if he
exercises the option to shift out of the default tax regime.
SOLUTION
Computation of tax liability of Mr. Manish for A.Y. 2025-26
Particulars `
Tax on total income of ` 4,15,000
Tax@5%of ` 1,65,000 8,250
Less: Rebate u/s 87A (Lower of tax payable or ` 12,500) 8,250
Tax Liability Nil

• Rebate under section 87A is allowed from income-tax computed before adding Health and
education cess on income-tax.
• Rebate under section 87A is, however, not available in respect of tax payable @10% on long-
term capital gains taxable u/s 112A.

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SIGNIFICANT SELECT CASES

Sl. No. Case Law

1. Mahle Anand Filter Systems Pvt. Ltd. v. ACIT [2023] 456 ITR 29 (SC)

Issue Analysis & Decision

Can foregoing a security deposit When the assessee sought to vacate certain leased
to settle a dispute be considered premises, disputes arose, and to end the dispute
a revenue expenditure? with the lessor, the assessee agreed not to claim the
security deposit of ` 5.8 crores. The Apex Court
affirmed the decision of the High Court which held
that the amount of ` 5.8 crores could not be treated
as revenue expenditure merely because it was paid
in the course of a dispute. It is evident that the
character of the amount was of a capital nature and
remained so although assessee decided to forgo
` 5.8 crores (the security deposit).

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

Issue Analysis & Decision

What is the nature of liquidated The damages are directly and intimately linked with the
damages received by a procurement of a capital asset i.e., the cement plant,
company from the supplier of which lead to delay in coming into existence of the
plant for failure to supply profit-making apparatus. It was not a receipt in the
machinery to the company course of profit earning process.
within the stipulated time – a
Therefore, the amount received by the assessee
capital receipt or a revenue
towards compensation for sterilization of the profit
receipt?
earning source, is not in the ordinary course of
business, hence it is a capital receipt in the hands
of the assessee.

3. Honda Siel Cars India Ltd. v. CIT(2017) 395 ITR 713(SC)

Issue Analysis & Decision

Whether technical fee paid If a limited right to use technical know-how is obtained
under a technical collaboration for a limited period for improvising existing business,

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 BASIC CONCEPTS 1.69

agreement for setting up a joint the expenditure is revenue in nature. However, if

venture company in India is to technical know-how is obtained for setting up a new
be treated as revenue or capital business, the position may be different.
expenditure, where, upon
The very purpose of the technical collaboration
termination of the agreement,
agreement, in this case, was to set up the Joint
the joint venture would come to
Venture. The collaboration included not only transfer of
an end?
technical information, but, complete assistance, actual,
factual and on the spot, for establishment of plant,
machinery, etc. so as to set up a manufacturing unit.
Upon termination of technical collaboration agreement,
the joint venture itself would come to an end. Therefore,
in this case, technical fee is capital in nature since
upon termination of technical collaboration
agreement, the joint venture itself would come to an
end.

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TEST YOUR KNOWLEDGE

Questions
1. Mr. Bhargava, a leading advocate on corporate law, decided to reduce his practice and to
accept briefs only for paying his taxes and making charities with the fees received on such
briefs. In a particular case, he agreed to appear to defend one company in the Supreme
Court on the condition that he would be provided with ` 5 lakhs for a public charitable trust
that he would create. He defended the company and was paid the sum by the company. He
created a trust of that sum by executing a trust deed. Decide whether the amount received
by Mr. Bhargava is assessable in his hands as income from profession.
2. XYZ Ltd. took over the running business of a sole-proprietor by a sale deed. As per the sale
deed, XYZ Ltd. undertook to pay overriding charges of ` 15,000 p.a. to the wife of the sole-
proprietor in addition to the sale consideration. The sale deed also specifically mentioned
that the amount was charged on the net profits of XYZ Ltd., who had accepted that
obligation as a condition of purchase of the going concern. Is the payment of overriding
charges by XYZ Ltd. to the wife of the sole-proprietor in the nature of diversion of income or
application of income? Discuss.
3. MKG Agency is a partnership firm consisting of Mr. Mohan and his three major sons. The
partnership deed provided that after the death of Mr. Mohan, the business shall be
continued by the sons, subject to the condition that the firm shall pay 20% of the profits to
their mother, Lakshmi. Mr. Mohan died in March, 2024. In the previous year 2024-25, the
reconstituted firm paid ` 1 lakh (equivalent to 20% of the profits) to Lakshmi and claimed
the amount as deduction from its income. Examine the correctness of the claim of the firm.
4. Anand was the Karta of HUF. He died leaving behind his major son Prem, his widow, his
grandmother and brother’s wife. Can the HUF retain its status as such or the surviving
persons would become co-owners?
5. Mr. C borrowed on Hundi, a sum of ` 25,000 by way of bearer cheque on 11-09-2024 and
repaid the same with interest amounting to ` 30,000 by account payee cheque on 12-10-
2024.

The Assessing Officer (AO) wants to treat the amount borrowed as income during the
previous year. Is the action of the Assessing Officer valid?

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6. The Assessing Officer found, during the course of assessment of a firm, that it had paid rent
in respect of its business premises amounting to ` 60,000, which was not debited in the
books of account for the year ending 31.3.2025. The firm did not explain the source for
payment of rent. The Assessing Officer proposes to make an addition of ` 60,000 in the
hands of the firm for the assessment year 2025-26. The firm claims that even if the addition
is made, the sum of ` 60,000 should be allowed as deduction while computing its business
income since it has been expended for purposes of its business. Examine the claim of the
firm.

Answers
1. In the instant case, the trust was created by Mr. Bhargava himself out of his professional
income. The client did not create the trust. The client did not impose any obligation in the
nature of a trust binding on Mr. Bhargava. Thus, there is no diversion of the money to the
trust before it became professional income in the hands of Mr. Bhargava. This case is one
of application of professional income and not of diversion of income by overriding title.
Therefore, the amount received by Mr. Bhargava is chargeable to tax under the head
“Profits and gains of business or profession”.
2. This issue came up for consideration before the Allahabad High Court in Jit & Pal X-Rays
(P.) Ltd. v. CIT (2004) 267 ITR 370 (All). The Allahabad High Court observed that the
overriding charge which had been created in favour of the wife of the sole-proprietor was an
integral part of the sale deed by which the going concern was transferred to the assessee.
The obligation, therefore, was attached to the very source of income i.e., the going concern
transferred to the assessee by the sale deed. The sale deed also specifically mentioned
that the amount in question was charged on the net profits of the assessee-company and
the assessee-company had accepted that obligation as a condition of purchase of the going
concern. Hence, it is clearly a case of diversion of income by an overriding charge and not
a mere application of income.
3. The issue raised in the problem is based on the concept of diversion of income by
overriding title, which is well recognised in the income-tax law. In the instant case, the
amount of ` 1 lakh, being 20% of profits of the firm, paid to Lakshmi gets diverted at source
by the charge created in her favour as per the terms of the partnership deed. Such income
does not reach the assessee-firm.

Rather, such income stands diverted to the other person as such other person has a better
title on such income than the title of the assessee. The firm might have received the said

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amount but it so received for and on behalf of Lakshmi, who possesses the overriding title.
Therefore, the amount paid to Lakshmi should be excluded from the income of the firm. This
view has been confirmed in CIT vs. Nariman B. Bharucha & Sons (1981) 130 ITR 863
(Bom).
4. In the case of Gowli Buddanna v. CIT (1966) 60 ITR 293, the Supreme Court has made it
clear that there need not be more than one male member to form a HUF as a taxable entity
under the Income-tax Act, 1961. The expression “Hindu Undivided Family” in the Act is
used in the sense in which it is understood under the personal law of the Hindus.

Under the Hindu system of law, a joint family may consist of a single male member and the
widows of the deceased male members and the Income-tax Act, 1961 does not mandate
that it should consist of at least two male members. Therefore, the property of a joint Hindu
family does not cease to belong to the family merely because the family is represented by a
single co-parcener who possesses the right which an owner of property may possess.
Therefore, the HUF would retain its status as such.

5. Section 69D provides that where any amount is borrowed on a hundi or any amount due
thereon is repaid otherwise than by way of an account-payee cheque drawn on a bank, the
amount so borrowed or repaid shall be deemed to be the income of the person borrowing or
repaying the amount for the previous year in which the amount was so borrowed or repaid,
as the case may be.
In this case, Mr. C has borrowed ` 25,000 on Hundi by way of bearer cheque. Therefore, it
shall be deemed to be income of Mr. C for the previous year 2024-25. Since the repayment
of the same along with interest was made by way of account payee cheque, the same
would not be hit by the provisions of section 69D. Therefore, the action of the Assessing
Officer treating the amount borrowed as income during the previous year is valid in law.
6. The claim of the firm for deduction of the sum of ` 60,000 in computing its business income
is not tenable. The action of the Assessing Officer in making the addition of ` 60,000, being
the payment of rent not debited in the books of account (for which the firm failed to explain
the source of payment) is correct in law since the same is an unexplained expenditure
under section 69C. The proviso to section 69C states that such unexplained expenditure,
which is deemed to be the income of the assessee, shall not be allowed as a deduction
under any head of income. Therefore, the claim of the firm is not tenable.

© The Institute of Chartered Accountants of India

CHAPTER 2
7
INCOMES WHICH DO NOT
FORM PART OF TOTAL
INCOME

LEARNING OUTCOMES

After studying this chapter, you would be able to -

 appreciate whether a particular income would constitute agricultural
income or non-agricultural income;
 compute the tax on non-agricultural income by applying the concept of
partial integration of agricultural income with non-agricultural income;
 examine the provisions of different clauses of section 10;
 analyse and apply such provisions to determine whether a particular
income would form/ would not form part of total income;
 analyse and apply the provisions of section 14A to determine the
expenditure incurred in relation to income not includible in total income.

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 2.2 DIRECT TAX LAWS

2.1 INTRODUCTION
(1) Exemption under section 10 vis-a-vis Deduction under Chapter VI-A
The various items of income referred to in the different clauses of section 10 are excluded from the
total income of an assessee. These incomes are known as exempted incomes. Consequently,
such income shall not enter into the computation of taxable income.
Moreover, there are certain other incomes which are included in gross total income but are wholly
or partly allowed as deductions under Chapter VI-A in computation of total income. Students
should note a very important difference between exemption under section 10 and the deduction
under Chapter VI-A.

EXEMPTION UNDER SECTION 10

The incomes which are exempt
under section 10 will not be DEDUCTION UNDER CHAPTER VI-A
included for computing total Incomes from which deductions are
income. allowable under chapter VI-A will first
be included in the gross total income
(GTI) and then the deductions will be
allowed from gross total income (GTI).

(2) Exemptions which are discussed under the relevant chapters:

In this chapter, we are going to study the provisions of section 10 which enumerate the
various categories of income that are exempt from tax.
Students may note that, in this chapter, only some of the exemptions are discussed. The
remaining exemptions are being discussed in the respective chapters as shown hereunder 1:

1 The exemptions under section 10 in relation to Salaries have been dealt with in detail at the Intermediate
level itself. The remaining exemptions are discussed in other chapters of this Study Material.

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.
INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.3

LIST OF EXEMPTIONS BEING DISCUSSED IN RESPECTIVE CHAPTERS

• Capital gain on transfer of a unit of Unit Scheme [Section 10(33)]
• Income received on buy-back of shares of domestic company [Section
10(34A)] [Exempted upto 1st October 2024]
Capital Gains • Capital gain on compulsory acquisition of agricultural land within
specified urban limits [Section 10(37)]
• Transfer of specified capital asset under Land Pooling Scheme [Section
10(37A)]
• Income received in transaction of reverse mortgage [Section 10(43)]

• Receipts from LIC [Section 10(10D)]

Income from • Interest income arising to certain persons [Section 10(15)]
Other Sources • Family pension received by widow/ children/ nominated heirs of armed
forces members [Section 10(19)]
Income of other
Persons • Exemption in respect of minor's income included in the hands of parent
Included in [Section 10(32)]
Assessee's
Total Income

• Payment from Sukanya Samriddhi Account [Section 10(11A)]

Gross Total • Payment from NPS Trust to an assessee on closure of his account or on
Income his opting out of the pension scheme [Section 10(12A)]
• Payment from NPS Trust to an employee on partial withdrawal [Section
10(12B)]
• Payment from Agnipath Corpus Fund to a person enrolled under the
Agnipath Scheme or to his nominee [Section 10(12C)]

Assessment of • Income of certain funds or institutions [Section 10(23C)]

Trusts and • Income of Securitisation trusts [Section 10(23DA)]
Institutions, • Income of Investment Fund [Section 10(23FBA)]
Political Parties • Income of Unit holders of Investment Fund [Section 10(23FBB)]
and other • Income of business trusts [Sections 10(23FC), 10(23FCA) and
special entities 10(23FD)]

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Taxation of • Any income arising from providing any specified service chargeable
Digital to equalisation levy [Section 10(50)]
transactions

• Interest on moneys standing to the credit of individual in his NRE account

[Section 10(4)(ii)]
• Interest income of a non-corporate non-resident or foreign company on
specified off-shore Rupee Denominated Bonds issued by an Indian company or
business trust [Section 10(4C)]
• Income of a specified fund on transfer of certain specified asset [Section 10(4D)]
• Income of a non-resident as a result of transfer of non-deliverable forward
contracts/ offshore derivative instruments/ over the counter derivatives entered
into with an offshore banking unit of an IFSC [Section 10(4E)]
• Income of a non-resident by way of royalty or interest, on account of lease of an
aircraft or a ship in a previous year, paid by a unit of an IFSC [Section 10(4F)]
• Income of a non-resident from portfolio of securities etc. in an account
maintained with an offshore banking unit in any IFSC [Section 10(4G)]
• Income received by a non-resident or a Unit of an IFSC [Section 10(4H)]
• Remuneration received by individuals, who are not citizens of India [Section
10(6)]
• Tax paid on behalf of foreign state or foreign enterprise on amount paid as
consideration of acquiring aircraft, etc. on lease [Section 10(6BB)]
• Income arising to foreign companies from projects connected with the security
of India [Section 10(6C)]
• Royalty income or fees for technical services arising to non-resident fom
National Technical Research Organisation (NTRO) [Section 10(6D)]
Non-
resident • Interest income arising to certain persons [Section 10(15)]
Taxation • Income arising to foreign state or foreign enterprise by way of consideration of
acquiring aircraft, etc. on lease [Section 10(15A)]
• Income of a foreign company from lease rentals of cruise ships [Section
10(15B)]
• Income of European Economic Community (EEC) [Section 10(23BBB)]
• Income derived by the SAARC Fund for Regional Projects [Section 10(23BBC)]
• Income accruing or arisiing to or received by a unit holder from a specified fund
or on transfer of units in a specified fund [Section 10(23FBC)]
• Certain incomes of wholly owned subsidiary of Abu Dhabi Investment Authority,
Sovereign Wealth Fund and specified pension fund [Section 10(23FE)]
• Capital Gains arising or received by a non-resident or a specified fund on
account of transfer of share of a company resident in india [Section10(23FF)]
• Any income of a unit of IFSC primarily engaged in the business of leasing of an
aircraft, by way of dividends from a company being a unit of any IFSC primarily
engaged in the business of leasing of an aircraft [Section 10(34B)]
• Income received by certain foreign companies in India in Indian currency from
sale of crude oil to any person in India [Section 10(48)]
• Income accruing or arising to a foreign company on account of storage of crude
oil in a facility in India and sale of crude oil therefrom to any person resident in
India [Section 10(48A)]
• Income accruing or arising to a foreign company on account of sale of leftover
stock of crude oil, if any, from the facility in India after the expiry of the
agreement or the arrangement [Section 10(48B)]

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.5

2.2 INCOMES NOT INCLUDED IN TOTAL INCOME

[SECTION 10]
Let us now have a look at the various incomes which are exempt from tax and the conditions to be
satisfied in order to be eligible for exemption.

(1) Agricultural income [Section 10(1)]

Section 10(1) provides that agricultural income is not to be included in the total income of the
assessee. The reason for total exemption of agricultural income from the scope of central income-
tax is that under the Constitution, the Central Government has no power to levy a tax on
agricultural income.

Definition of agricultural income [Section 2(1A)]

This definition is very wide and covers the income of not only the cultivators but also the land holders
who might have rented out the lands. Agricultural income may be received in cash or in kind.
Agricultural income may arise in any one of the following three ways:-
(i) It may be rent or revenue derived from land situated in India and used for agricultural
purposes.

(ii) It may be income derived from such land by

(a) agriculture or
(b) the performance of a process ordinarily employed by a cultivator or receiver of
rent in kind to render the produce fit to be taken to the market or
(c) the sale, by a cultivator or receiver of rent in kind, of such agricultural produce
raised or received by him, in respect of which no process has been performed
other than a process of the nature mentioned in point (b) above.
(iii) Lastly, agricultural income may be derived from any farm building required for agricultural
operations.
Now let us take a critical look at the following aspects:
(i) Rent or revenue derived from land situated in India and used for agricultural
purposes: The following three conditions have to be satisfied for income to be treated as
agricultural income:
(a) Rent or revenue should be derived from land;

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(b) Land has to be situated in India (If agricultural land is situated in a foreign country,
the entire income would be taxable); and

(c) land should be used for agricultural purposes.

The amount received in money or in kind, by one person from another for right to use land
is termed as Rent. The rent can either be received by the owner of the land or by the
original tenant from the sub-tenant. It implies that ownership of land is not necessary. Thus,
the rent received by the original tenant from sub-tenant would also be agricultural income
subject to the other conditions mentioned above.
The scope of the term “Revenue” is much broader than rent. It includes income other than
rent. For example, fees received for renewal for grant of land on lease would be revenue
derived from land.
(ii) Income derived from such land by
(a) Agriculture: The term “Agriculture” has not been defined in the Act. However,
cultivation of a field involving human skill and labour on the land can be broadly
termed as agriculture.
“Agriculture” means tilling of the land, sowing of the seeds and similar operations. It
involves basic operations and subsequent operations.

Basic Subsequent Operations to be

Operations Operations performed after the
Those operations produce of sprouts
by agriculturists from the land (e.g.,
which are weeding, digging etc.)
absolutely are subsequent
necessary for the operations. These
purpose of subsequent operations
effectively raising would be agricultural
produce from the operations only when
land are the basic taken in conjunction
operations. with and as a
continuation of the
basic operations.

“Agriculture” comprises within its scope the basic as well as the subsidiary
operations regardless of the nature of the produce raised on the land. These produce
may be grain, fruits or vegetables necessary for sustenance of human beings
including plantation and groves or grass or pasture for consumption of beasts or

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.7

articles of luxury such as betel, coffee, tea, spices, tobacco or commercial crops like
cotton flax, jute hemp and indigo. The term comprises of products of land having
some utility either for consumption or for trade and commerce and would include
forest products such as sal, tendu leaves etc.

Note: The term ‘agriculture’ cannot be extended to all activities which have some
distant relation to land like dairy farming, breeding and rearing of live stock, butter
and cheese making and poultry farming. This aspect is discussed in detail later on in
this chapter.

Whether income from nursery constitutes agricultural income?

In the past, there have been court rulings that only if a nursery is maintained by
carrying out the basic operations on land and subsequent operations in continuation
thereof, income from such nursery would be treated as agricultural income and
would qualify for exemption under section 10(1).
The Supreme Court has, in CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466,
held that the basic operations must be performed before any income can be called
as agricultural income. The basic operations involve cultivation of the ground, in the
sense of tilling of the land, sowing of the seeds, planting and other similar operations
on the land. Such basic operations demand the expenditure of human labour and
skill upon the land itself and further, they are directed to make the crop sprout from
the land. Therefore, income derived from sale of plants grown directly in pots would
not be treated as agricultural income.
However, the Madras High Court, in CIT v. Soundarya Nursery (2000) 241 ITR 530,
observed that nursing activity involves carrying out of several operations on land
before the saplings were transplanted in suitable containers including pots and
thereafter kept in shade or green house for further operation and growth. Therefore,
income arising from nursery should be considered as agricultural income.
Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery would be deemed to be agricultural income, whether or
not the basic operations were carried out on land. This Explanation ratifies the view
taken by the Madras High Court in favour of the taxpayer.

(b) Process ordinarily employed to render the produce fit to be taken to the
market: Sometimes, to make the agricultural produce a saleable commodity, it
becomes necessary to perform some kind of process on the produce. The income

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from the process employed to render the produce fit to be taken to the market would
be agricultural income. However, it must be a process ordinarily employed by the
cultivator or receiver of rent in kind and the process must be applied to make the
produce fit to be taken to the market.
The ordinary process employed to render the produce fit to be taken to the market
includes thrashing, winnowing, cleaning, drying, crushing etc. For example, the
process ordinarily employed by the cultivator to obtain the rice from paddy is to first
remove the hay from the basic grain, and thereafter to remove the chaff from the
grain. The grain has to be properly filtered to remove stones etc. and finally the rice
has to be packed in gunny bags for sale in the market.
After such process, the rice can be taken to the market for sale. This process of
making the rice ready for the market may involve manual operations or mechanical
operations. All these operations constitute the process ordinarily employed to make
the product fit for the market. The produce must retain its original character in spite
of the processing unless there is no market for selling it in that condition.
However, if marketing process is performed on a produce which can be sold in its raw
form, income derived therefrom is partly agricultural income and partly business income.
(c) Sale of such agricultural produce in the market: Any income from the sale of any
produce to the cultivator or receiver of rent-in kind is agricultural income provided it
is from the land situated in India and used for agricultural purposes. However, if the
produce is subjected to any process other than process ordinarily employed to make
the produce fit for market, the income arising on sale of such produce would be
partly agricultural income and partly non-agricultural income.
Similarly, if other agricultural produce like tea, cotton, tobacco, sugarcane etc. are
subjected to manufacturing process and the manufactured product is sold, the profit
on such sale will consist of agricultural income as well as business income. That
portion of the profit representing agricultural income will be exempted.
Apportionment of Income between business income and agriculture income: Rules 7,
7A, 7B & 8 of Income-tax Rules, 1962 provides the basis of apportionment of income
between agricultural income and business income.
I. Rule 7 - Income from growing and manufacturing of any product
Where income is partially agricultural income and partially income chargeable to income-tax
as business income, the market value of any agricultural produce which has been raised by

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.9

the assessee or received by him as rent in kind and which has been utilised as raw material
in such business or the sale receipts of which are included in the accounts of the business
shall be deducted. No further deduction shall be made in respect of any expenditure
incurred by the assessee as a cultivator or receiver of rent in kind.
Determination of market value - There are two possibilities here:

(i) The agricultural produce is capable of being sold in the market either in its raw stage
or after application of any ordinary process to make it fit to be taken to the market. In
such a case, the value calculated at the average price at which it has been so sold
during the relevant previous year will be the market value.
(ii) It is possible that the agricultural produce is not capable of being ordinarily sold in
the market in its raw form or after application of any ordinary process. In such case
the market value will be the total of the following:—
• The expenses of cultivation;
• The land revenue or rent paid for the area in which it was grown; and
• Such amount as the Assessing Officer finds having regard to the
circumstances in each case to represent at reasonable profit.
ILLUSTRATION 1
Mr. Amar grows sugarcane and uses the same for the purpose of manufacturing sugar in
his factory. 40% of sugarcane produce is sold for ` 12 lakhs, and the cost of cultivation of
such sugarcane is ` 6 lakhs. The cost of cultivation of the balance sugarcane (60%) is ` 15
lakhs and the market value of the same is ` 25 lakhs. After incurring ` 1.5 lakhs in the
manufacturing process on the balance sugarcane, the sugar was sold for ` 30 lakhs.
Compute Amar’s business income and agricultural income.
SOLUTION
Computation of Business Income and Agriculture Income of Mr. Amar
Particulars Business Agricultural Income
Income
(`) (`) (`)
Sale of Sugar
Business income
Sale Proceeds of sugar 30,00,000
Less: Market value of sugar (60%) 25,00,000

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 2.10 DIRECT TAX LAWS

Less: Manufacturing exp. 1,50,000

3,50,000
Agricultural income
Market value of sugar (60%) 25,00,000
Less: Cost of cultivation 15,00,000
10,00,000
Sale of sugarcane
Agricultural Income
Sale proceeds of sugarcane (40%) 12,00,000
Less: Cost of cultivation 6,00,000
6,00,000
16,00,000

II. Rule 7A – Income from growing and manufacturing of rubber

This rule is applicable when income derived from the sale of centrifuged latex or cenex or
latex based crepes or brown crepes or technically specified block rubbers manufactured or
processed from field latex or coagulum obtained from rubber plants grown by the seller in
India. In such cases 35% profits on sale is taxable as business income under the head
“Profits and gains from business or profession”, and the balance 65% is agricultural income
and is exempt.
ILLUSTRATION 2
Mr. Nilesh manufactures latex from the rubber plants grown by him in India. These are then
sold in the market for ` 36 lakhs. The cost of growing rubber plants is ` 16 lakhs and that of
manufacturing latex is ` 12 lakhs. Compute his total income.
SOLUTION
The total income of Mr. Nilesh comprises of agricultural income and business income.
Total profits from the sale of latex = ` 36 lakhs – ` 16 lakhs – ` 12 lakhs = ` 8 lakhs.
Agricultural income = 65% of ` 8 lakhs = ` 5.2 lakhs
Business income = 35% of ` 8 lakhs = ` 2.8 lakhs
III. Rule 7B – Income from growing and manufacturing of coffee

(i) In case of income derived from the sale of coffee grown and cured by the seller in
India, 25% profits on sale is taxable as business income under the head “Profits and

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.11

gains from business or profession”, and the balance 75% is agricultural income and
is exempt.

(ii) In case of income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India, with or without mixing chicory or other flavoring
ingredients, 40% profits on sale is taxable as business income under the head
“Profits and gains from business or profession”, and the balance 60% is agricultural
income and is exempt.
IV. Rule 8 - Income from growing and manufacturing of tea

This rule applies only in cases where the assessee himself grows tea leaves and
manufactures tea in India. In such cases 40% profits on sale is taxable as business income
under the head “Profits and gains from business or profession”, and the balance 60% is
agricultural income and is exempt.
Rule Apportionment of income in certain cases Agricultural Business
Income Income
7A Income from sale of rubber products derived 65% 35%
from rubber plant grown by the seller in India
7B Income from sale of coffee
- grown and cured by the seller in India 75% 25%
- grown, cured, roasted and grounded by the 60% 40%
seller in India
8 Income from sale of tea grown and manufactured 60% 40%
by the seller in India

(iii) Income from farm building – Income from the farm building which is owned and occupied
by the receiver of the rent or revenue of any such land or occupied by the cultivator or the
receiver of the rent in kind, of any land with respect to which, or the produce of which, any
process discussed above is carried on, would be treated as agricultural income.
However, the income arising from the use of such farm building for any purpose (including
letting for residential purpose or for the purpose of business or profession) other than
agriculture referred in (b) & (c) of (ii) of para (1) in page 2.5 would not be agricultural income.
Further, the income from such farm building would be agricultural income only if the
following conditions are satisfied:

(a) The building should be on or in the immediate vicinity of the land; and
(b) The receiver of the rent or revenue or the cultivator or the receiver of rent in kind

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should, by reason of his connection with such land require it as a dwelling house or
as a store house.

In addition to the above conditions any one of the following two conditions should also be
satisfied:
(i) The land should either be assessed to land revenue in India or be subject to a local
rate assessed and collected by the officers of the Government as such or;
(ii) Where the land is not so assessed to land revenue in India or is not subject to local rate:-
a. It should not be situated in any area as comprised within the jurisdiction of a
municipality or a cantonment board and which has a population not less than
10,000.
b. It should not be situated in any area within such distance, measured aerially,
in relation to the range of population as shown hereunder –
Shortest aerial distance Population according to the last
from the local limits of a preceding census of which the
municipality or relevant figures have been
cantonment board referred published before the first day of
to in item a. the previous year.
(i) ≤ 2 kms > 10,000
(ii) > 2 kms but ≤ 6 kms > 1,00,000
(iii) > 6 kms but ≤ 8 kms > 10,00,000

Example:
Area Shortest aerial Population according Would income
distance from the to the last preceding derived from farm
local limits of a census of which the building situated
municipality or relevant figures have in this area be
cantonment been published treated as
board referred to before the first day of agricultural
in item a. the previous year income?
(i) A 1 km 9,000 Yes
(ii) B 1.5 kms 12,000 No
(iii) C 2 kms 11,00,000 No
(iv) D 3 kms 80,000 Yes
(v) E 4 kms 3,00,000 No
(v) F 5 kms 12,00,000 No

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.13

(vi) G 6 kms 8,000 Yes

(vii) H 7 kms 4,00,000 Yes
(viii) I 8 kms 10,50,000 No
(ix) J 9 kms 15,00,000 Yes

Would income arising from transfer of agricultural land situated in urban area be
agricultural income?

No, as per Explanation 1 to section 2(1A), the capital gains arising from the transfer of such
urban agricultural land would not be treated as agricultural income under section 10 but will
be taxable under section 45.

Example: Suppose Bittoo sells agricultural land situated in New Delhi for ` 10 lakhs and
makes a surplus of ` 8 lakhs over its cost of acquisition. This surplus will not constitute
agricultural income exempt under section 10(1) and will be taxable under section 45.

Indirect connection with land

We have seen above that agricultural income is exempt, whether it is received by the tiller or the
landlord. However, non-agricultural income does not become agricultural merely on account of its
indirect connection with the land. The following examples will illustrate the above point.
Example: A rural society has as its principal business the selling on behalf of its member
societies, butter made by these societies from cream sold to them by farmers. The making of
butter was a factory process separated from the farm.
The butter resulting from the factory operations separated from the farm was not an agricultural
product and the society was, therefore, not entitled to exemption under section 10(1) in respect of
such income.
Example: X was the managing agent of a company. He was entitled for a commission at the rate
of 10% p.a. on the annual net profits of the company. A part of the company’s income was agricul-
tural income. X claimed that since his remuneration was calculated with reference to the income of
the company, part of which was agricultural income, such part of the commission as was
proportionate to the agricultural income was exempt from income tax.

Since, X received remuneration under a contract for personal service calculated on the amount of
profits earned by the company, such remuneration does not constitute agricultural income.
Example: Y owned 100 acres of agricultural land, a part of which was used as pasture for cows.
The lands were purely maintained for manuring and other purposes connected with agriculture and

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only the surplus milk after satisfying the assessee’s needs was sold. The question arose whether
income from such sale of milk was agricultural income.

The regularity with which the sales of milk were effected and quantity of milk sold showed that the
assessee carried on regular business of producing milk and selling it as a commercial proposition.
Hence, it was not agricultural income.

Example: In regard to forest trees of spontaneous growth which grow on the soil unaided by
any human skill and labour there is no cultivation of the soil at all. Even though operations in the
nature of forestry operations performed by the assessee may have the effect of nursing and
fostering the growth of such forest trees, it cannot constitute agricultural operations.
Income from the sale of such forest trees of spontaneous growth does not, therefore, constitute
agricultural income.
Examples of Agricultural income and non-agricultural income:
For better understanding of the concept, certain examples of agricultural income and non-
agricultural income are given below:
Example: Agricultural income
• Income derived from sampling or seedlings grown in a nursery.
• Income from growing of flowers and creepers.
• Rent received from land used for grazing of cattle required for agricultural activities.
• Income from growing of bamboo.
Example: Non-agricultural income
• Income from breeding of livestock.
• Income from poultry farming.
• Income from fisheries.
• Income from dairy farming.
ILLUSTRATION 3
Ankur, the owner of a land situated in Kerala used for growing thereon different types of fruits,
paddy, vegetables and flowers, received from Yahoo Movies Ltd., Chennai, ` 5 lakhs as rent
towards the use of this land for shooting of a film. The amount so received was accounted by him
in the books as revenue derived from land and claimed to be exempt under section 10(1). He now

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.15

wants to confirm from you whether the amount has been correctly treated by him as agricultural
income.
SOLUTION
The income received by Mr. Ankur from a filmmaker for allowing them to shoot a film in the
agricultural land owned by him is not in the nature of agricultural income because it was neither
received by him against the sale of agricultural produce obtained nor for carrying out the normal
agricultural operations on the land. The amount paid was only for the purpose of shooting of a film
on such land.

To claim exemption in respect of agricultural income under section 10(1), the conditions contained in
section 2(1A)(a) to (c) have to be first complied with/ fulfilled by the assessee. The Madras High Court
in the case of B. Nagi Reddi v. CIT (2002) 258 ITR 719, following the judgment of Apex Court in the
case of CIT v Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466, has held, on identical facts, that the
income derived for allowing a shooting of film in the agricultural land cannot be treated as agricultural
income, as it has no nexus with the land, except that it was carried out on agricultural land.
Partial integration of agricultural income with non-agricultural income
As in the above discussion, we have seen that agricultural income is exempt subject to conditions
mentioned in the definition clause of section 2(1A). However, a method has been laid down to levy
tax on agricultural income in an indirect way. This concept is known as partial integration of
agricultural income with non-agricultural income. It is applicable to individuals, HUF, AOPs,
BOIs and artificial juridical persons. Two conditions which need to be satisfied for partial
integration are:
1. The net agricultural income should exceed ` 5,000 p.a., and

2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., If
such person is paying tax under default tax regime u/s 115BAC, then ` 3,00,000 is the
basic exemption limit irrespective of the age of the person. If such person has exercised the
option to shift out of the default tax regime, then, the basic exemption limit would be
` 5,00,000 for resident individuals of the age of 80 years or more at any time during the
previous year, ` 3,00,000 for resident individuals of the age of 60 years or more (but less
than 80 years) at any time during the previous year and ` 2,50,000 for all others). Only if
non-agricultural income exceeds this limit, partial integration would be required.
It may be noted that aggregation provisions do not apply to company, LLP, firm, co-operative
society and local authority. The object of aggregating the net agricultural income with non-
agricultural income is to tax the non-agricultural income at higher rates.

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Tax calculation in such cases is as follows:

Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate
amount.
Step 2: Add net agricultural income and the basic exemption limit available to the assessee.
Compute tax on the aggregate amount.

Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in
step 1 i.e., Step 1 – Step 2.
Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be
reduced by the rebate, if any, available u/s 87A.
Step 5: Thereafter, it would be increase by health and education cess @4%.
The above concept can be clearly understood with the help of the following illustration:
ILLUSTRATION 4
Mr. X, a resident, has provided the following particulars of his income for the P.Y.2024-25.
i. Income from salary (computed) - ` 4,00,000

ii. Income from house property (computed) - ` 3,80,000

iii. Agricultural income from a land in Assam - ` 4,50,000
iv. Expenses incurred for earning agricultural income - ` 1,60,000

Compute his tax liability for A.Y. 2025-26 assuming his age is -
(a) 40 years
(b) 75 years

SOLUTION
(a) Computation of tax liability (age 40 years)
Computation of total income of Mr. X for the A.Y. 2025-26
under default tax regime under section 115BAC
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ` 3,00,000.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.17

His tax liability is computed in the following manner:

Particulars ` `
Income from salary 4,00,000
Income from house property 3,80,000
Net agricultural income [` 4,50,000 (-) ` 1,60,000] 2,90,000
Less: Exempt under section 10(1) (2,90,000) -
Gross Total Income 7,80,000
Less: Deductions under Chapter VI-A -
Total Income 7,80,000

Step 1 : ` 7,80,000 + ` 2,90,000 = ` 10,70,000

Tax on ` 10,70,000 = ` 60,500

(i.e., 5% of ` 4,00,000 plus 10% of ` 3,00,000 plus 15% of ` 70,000)

Step 2 : ` 2,90,000 + ` 3,00,000 = ` 5,90,000
Tax on ` 5,90,000 = ` 14,500
(i.e. 5% of ` 2,90,000)
Step 3 : ` 60,500 – ` 14,500 = ` 46,000
Step 4 & 5 : Total tax payable = ` 46,000 + 4% of ` 46,000 = ` 47,840
Computation of total income of Mr. X for the A.Y. 2025-26
under normal provisions of the Act
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and

2. Non-agricultural income exceeds the basic exemption limit of ` 2,50,000.

His tax liability is computed in the following manner:

Particulars ` `
Income from salary 4,00,000
Income from house property 3,80,000
Net agricultural income [` 4,50,000 (-) ` 1,60,000] 2,90,000
Less: Exempt under section 10(1) (2,90,000) -

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Gross Total Income 7,80,000

Less: Deductions under Chapter VI-A -
Total Income 7,80,000

Step 1 : ` 7,80,000 + ` 2,90,000 = ` 10,70,000

Tax on ` 10,70,000 = ` 1,33,500
(i.e., 5% of ` 2,50,000 plus 20% of ` 5,00,000 plus 30% of ` 70,000)

Step 2 : ` 2,90,000 + ` 2,50,000 = ` 5,40,000

Tax on ` 5,40,000 = ` 20,500
(i.e. 5% of ` 2,50,000 plus 20% of ` 40,000)
Step 3 : ` 1,33,500 – ` 20,500 = ` 1,13,000
Step 4 & 5 : Total tax payable = ` 1,13,000 + 4% of ` 1,13,000 = ` 1,17,520
(b) Computation of tax liability (age 75 years)
Computation of total income of Mr. X for the A.Y. 2025-26
under default tax regime under section 115BAC
Tax liability of Mr. X would be same under default tax regime whether he is of age of 40 years of
75 years i.e., ` 47,840.
Computation of total income of Mr. X for the A.Y. 2025-26
under normal provisions of the Act
His tax liability is computed in the following manner:
Step 1 : ` 7,80,000 + ` 2,90,000 = ` 10,70,000.
Tax on ` 10,70,000 = ` 1,31,000
(i.e. 5% of ` 2,00,000 plus 20% of 5,00,000 plus 30% of 70,000)

Step 2 : ` 2,90,000 + ` 3,00,000 = ` 5,90,000.

Tax on ` 5,90,000 = ` 28,000
(i.e. 5% of ` 2,00,000 plus 20% of ` 90,000)

Step 3 : ` 1,31,000 – ` 28,000 = ` 1,03,000

Step 4 & 5: Total tax payable = ` 1,03,000 + 4% of ` 1,03,000 = ` 1,07,120.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.19

(2) Amounts received by a member from the income of the HUF [Section 10(2)]

(i) As explained in Chapter 1, a HUF is a ‘person’ and hence, a unit of assessment under the
Act. Income earned by the HUF is assessable in its own hands.
(ii) In order to prevent double taxation of one and the same income, once in the hands of the
HUF which earns it and again in the hands of a member when it is paid out to him, section
10(2) provides that members of a HUF do not have to pay tax in respect of any amounts
received by them from the family.
(iii) The exemption applies only in respect of a payment made by the HUF to its member
(a) out of the income of the family or
(b) out of the income of the impartible estate belonging to the family.

(3) Share income of a partner [Section 10(2A)]

This clause exempts from tax a partner’s share in the total income of the firm. In other words, the
partner’s share in the total income of the firm determined in accordance with the profit-sharing
ratio will be exempt from tax.

Taxability of partner’s share, where the income of the firm is exempt under Chapter III/
deductible under Chapter VI-A [Circular No. 8/2014 dated 31.03.2014]
Section 10(2A) provides that a partner’s share in the total income of a firm which is separately
assessed as such shall not be included in computing the total income of the partner. In effect, a
partner’s share of profits in such firm is exempt from tax in his hands.
Sub-section (2A) was inserted in section 10 by the Finance Act, 1992 with effect from 1.4.1993
consequent to change in the scheme of taxation of partnership firms. Since A.Y.1993-94, a firm is
assessed as such and is liable to pay tax on its total income. A partner is, therefore, not liable to
tax once again on his share in the said total income.
An issue has arisen as to the amount which would be exempt in the hands of the partners of a
partnership firm, in cases where the firm has claimed exemption/deduction under Chapter III or
Chapter VI-A.
The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and
the same can under no circumstances be taxed in the hands of its partners. Therefore, the entire
profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such
partners, even if the income chargeable to tax becomes Nil in the hands of the firm on account of
any exemption or deduction available under the provisions of the Act.

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(4) Payments to Bhopal Gas Victims [Section 10(10BB)]

Any payment made to a person under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985
and any scheme framed thereunder will be fully exempt.
However, payments made to any assessee in connection with Bhopal Gas Leak Disaster to the
extent he has been allowed a deduction under the Act on account of any loss or damage caused to
him by such disaster will not be exempted.

(5) Compensation received on account of disaster [Section 10(10BC)]

(i) This clause exempts any amount received or receivable as compensation by an individual
or his legal heir on account of any disaster.
(ii) Such compensation should be granted by the Central Government or a State Government
or a local authority.

(iii) However, exemption would not be available in respect of compensation for alleviating any
damage or loss, which has already been allowed as deduction under the Act.

(iv) "Disaster" means a catastrophe, mishap, calamity or grave occurrence in any area, arising
from natural or manmade causes, or by accident or negligence. It should have the effect of
causing -

(a) substantial loss of life or human suffering; or

(b) damage to, and destruction of, property; or

(c) damage to, or degradation of, environment.

It should be of such a nature or magnitude as to be beyond the coping capacity of the

community of the affected area.
ILLUSTRATION 5

An amount of ` 5 lakhs was paid on 17.3.2025 to the parents of Amit by the Government of
Chattisgarh as compensation to the aggrieved family, whose only son Amit lost his life in Maoist
local bus bomb blast in Dantewada.

Examine with reasons, whether the amount of compensation received is chargeable to tax in
A.Y. 2025-26.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.21

SOLUTION
As per section 10(10BC), the meaning of “disaster” shall be derived from Disaster Management
Act, 2005 which defines disaster to mean a catastrophe, mishap, calamity or grave occurrence in
any area, arising from natural or manmade causes, or by accident or negligence. It should have
the effect of causing substantial loss of life or human suffering or damage to, and destruction of
property, or damage to, or degradation of environment. It should be of such a nature or magnitude
to be beyond the coping capacity of the community of the affected area.
If, for this reason, any compensation is paid by the Central Government or by a State Government
or by a local authority, then, the same will be exempt from tax. Accordingly, the amount of ` 5
lakhs received by the parents of deceased Amit from the Government of Chattisgarh for the
disaster because of Dantewada bus bomb blast is exempt under section 10(10BC).

(6) Educational scholarships [Section 10(16)]

The value of scholarship granted to meet the cost of education would be exempt from tax in the
hands of the recipient irrespective of the amount or source of scholarship.

(7) Payments to MPs & MLAs [Section 10(17)]

The following incomes of Members of Parliament or State Legislatures will be exempt:

(i) Daily Allowance - Daily allowance received by any Member of Parliament or of State
Legislatures or any Committee thereof.
(ii) Constituency Allowance of MPs - In the case of a Member of Parliament, any allowance
received under Members of Parliament (Constituency Allowance) Rules, 1986; and
(iii) Constituency allowance of MLAs - Any constituency allowance received by any person by
reason of his membership of any State Legislature under any Act or rules made by that
State Legislature.
(8) Awards for literary, scientific and artistic works and other awards by the Government
[Section 10(17A)]

Any payment, whether in cash or in kind -

- in pursuance of any award instituted in the public interest by the Central/ State Government
or any body approved by the Central Government or
- as a reward by Central/ State Government for such purposes as may be approved by the
Central Government in public interest,
will enjoy exemption under this clause.

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(9) Pension received by recipient of gallantry awards [Section 10(18)]

(i) Exemption of Pension - Any income by way of pension received by an individual is exempt
from income-tax if -
(a) such individual was an employee of Central or State Government and
(b) has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such
other gallantry award notified by the Central Government in this behalf.
(ii) Exemption of Family Pension - In case of the death of such individual, any income by way
of family pension received by any member of the family of the individual shall also be exempt
under this clause.
(iii) Meaning of Family - Family, in relation to an individual, means –
- the spouse and children of the individual; and

- the parents, brothers and sisters of the individuals or any of them wholly or mainly
dependent on the individual.

Exemption of disability pension granted to disabled personnel of armed forces who have been
invalided on account of disability attributable to or aggravated by such service [Circular No.
13/2019, dated 24.6.2019]
The entire disability pension, i.e. “disability element” and “service element” of pension granted to
members of naval, military or air forces who have been invalided out of naval, military or air force
service on account of bodily disability attributable to or aggravated by such service would be exempt
from tax.
The CBDT has, vide this circular, clarified that exemption in respect of disability pension would be
available to all armed forces personnel (irrespective of rank) who have been invalided out of such
service on account of bodily disability attributable to or aggravated by such service. However, such
tax exemption will be available only to armed forces personnel who have been invalided out of
service on account of bodily disability attributable to or aggravated by such service and not to
personnel who have been retired on superannuation or otherwise.

(10) Annual value of palaces of former rulers [Section 10(19A)]

The annual value of any one palace in the occupation of former Ruler during the relevant previous
year would be excluded from the total income, provided the annual value was exempt before

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.23

28.12.1971 by virtue of the provisions of the prevailing orders, i.e., the Merged States (Tax
Concessions) Order, 1949 or the Part B States (Tax Concessions) Order, 1950.

The Supreme Court has, in Maharao Bhim Singh of Kota v. CIT (2017) 390 ITR 532, observed
that, in order to claim exemption from payment of income-tax on the residential palace of the Ruler
under section 10(19A), it is necessary for the Ruler to satisfy the following conditions:

(i) He should own the palace as his ancestral property;

(ii) Such palace should be in his occupation as his residence; and
(iii) The palace should be declared by the Central Government to be exempt from payment of
Income-tax under paragraph 15(iii) of the 1950 Order.
The Supreme Court, accordingly, held that where part of the residential palace is found to be in
occupation of the tenant and the remaining is in occupation of the Ruler for his residence, the
Ruler is entitled to claim exemption for the whole of his residential palace under section 10(19A).
Such exemption cannot be confined to that portion of the palace which is in his actual occupation
thereby subjecting the income derived from the portion let out to payment of income-tax in the
hands of the Ruler.

(11) Income of local authorities [Section 10(20)]

(i) Exempt income - Following income arising to a local authority would be exempt
• Income under the head house property; or
• Income from Capital gains; or
• Income from Other Sources; or
• Income from trade or business carried on by it which accrues or arises
 from the supply of commodity or service under its jurisdictional area
 from the supply of water or electricity within or outside its own jurisdictional area.
(ii) Meaning of Local Authority - For the purposes of this clause, “local authority” means the
following:
(a) Panchayat
(b) Municipality
(c) Municipal Committee and District Board legally entitled to, or entrusted by the
Government with the control or management of a Municipal or local Fund
(d) Cantonment Board

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(12) Income of research associations approved under section 35(1)(ii)/(iii) [Section 10(21)]

This clause provides for exemption in respect of any income of research associations which are
approved under section 35(1)(ii)/(iii) 2. This exemption has, however, been made subject to the
following conditions:
(i) Application and accumulation for the objects - It should apply its income or accumulate
for application wholly and exclusively to its objects and provisions of section 11(2) and (3) 3
would also apply in relation to such accumulation.
(ii) Approved modes of investment/ deposit - The association should invest or deposit its funds
in the forms or modes specified in section 11(5) 4. This condition would however not apply to -
(a) any assets held by the research association where such assets form part of the
corpus of the fund of the association as on 1-6-1973;
(b) any bonus shares allotted to the research institution, in respect of the shares
mentioned above forming part of the corpus of such fund, etc.;
(c) any voluntary contributions received and maintained in the form of jewellery, furniture
or other article as the Board may specify for any period during the previous year.
(iii) Exemption in relation voluntary contribution – Exemption would not be denied in relation
to voluntary contribution, other than voluntary contribution in cash or voluntary contribution
of the nature referred in (a) to (c) above, subject to the condition that such voluntary
contribution is not held by the association otherwise than in any one or more of the forms or
modes specified in section 11(5), after the expiry of one year from the end of the previous
year in which such asset is acquired.
(iv) Non-applicability of exemption in respect of business income - The exemption will not
apply to income of such association which are in the nature of profits and gains of business
unless the business is incidental to the attainment of its objectives and separate books of
account are maintained in respect of such business.
(v) Withdrawal of Approval - The approval once granted may be withdrawn if at any time the
Government is satisfied that –
(a) the research association has not applied its income in accordance with sections
11(2) and (3);

2Section 35(1)(ii)/(iii) will be discussed in Chapter 3

3Section 11(2) and (3) will be discussed in Chapter 10
4Section 11(5) will be discussed in Chapter 10

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.25

(b) the research association has not invested or deposited its funds in accordance with
point (ii) above.

(c) the activities of the research association are not genuine;

(d) the activities of the research association are not being carried out in accordance with
the conditions imposed on the basis of which the approval was granted.

Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.

(13) Income of professional associations [Section 10(23A)]

(i) Exempt and Non-exempt income - All income arising to an association is exempt from
inclusion in income, except the following categories of income, provided it satisfies the
specified conditions:
(a) income under the head ‘income from house property’;
(b) income received for rendering any specific service; and
(c) income by way of interest or dividends derived from its investments.
(ii) Conditions to be satisfied - Associations or institutions must.

• established in India

• have as its object the control, supervision, regulation or encouragement

of the profession of law, medicine, accountancy, engineering or
architecture, or any other profession specified by the Central Government

• apply their income or accumulate it solely to their objects of establishment

• be approved by the Central Government by general or special order

(iii) Withdrawal of Approval - However, approval once granted may be withdrawn if, at any
time, the Government is satisfied that –
(a) the association or institution has not applied or accumulated its income in
accordance with the provisions of the section;

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(b) the activities of the association or institution are not being carried out in accordance
with the conditions imposed on the basis of which the approval was granted.

Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.

(14) Income of institutions established by armed forces [Section 10(23AA)]

Any income received by any person on behalf of any regimental fund or non-public fund
established by the armed forces of the Union for the welfare of the past and present members of
such forces or their dependents is exempt from tax.
Students may note that donations to such institutions will qualify for deduction under section 80G.
(15) Income of Funds established for welfare of employees of which such employees are
members [Section 10(23AAA)]

A number of funds have been established for the welfare of employees or their dependents in
which such employees themselves are members. These funds are utilised to provide benefits to a
member on his superannuation, or in the event of his illness or illness of any member of his family,
or to the dependents of a member on his death.
The exemption will be available to the funds only if the following conditions are fulfilled:

the fund should have been established for the welfare of employees or
their dependents and for such purposes as may be notified by the Board

such employees should be the members of the fund

the fund should apply its income, or accumulate it for application, wholly
and exclusively to the objects for which it is established

the fund shall invest its fund and contributions made by the employees
and other sums received by it in any one mode specified u/s11(5)

the fund should be approved by the Principal Commissioner or

Commissioner in accordance with the prescribed rules

The approval shall have effect for such assessment year or years not exceeding three assessment
years as may be specified in the order of approval.

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(16) Income of Fund set up by Life Insurance Corporation or other insurer under pension
scheme [Section 10(23AAB)]

Any income of a fund set up by the LIC of India or any other insurer under a pension scheme to
which contribution is made by any person for receiving pensions from such fund. Such scheme
should be approved by the Controller of Insurance or the IRDA.
(17) Income of institution established for development of Khadi and Village industries
[Section 10(23B)]

(i) Institutions eligible for exemption - The exemption will be available to institutions
constituted as public charitable trusts or registered under the Societies Registration Act,
1860 or under any law corresponding to that Act in force in any part of India existing solely
for development of khadi and village industries or both and not for purpose of profit.
(ii) Income eligible for exemption - Income derived by such institutions from the production,
sale or marketing of Khadi products or village industries would be exempt from income-tax.
(iii) Conditions for availing exemption -
(a) The institution has to apply its income or accumulate it for application, solely for the
development of khadi or village industries or both.

(b) They should be approved by the Khadi and Village Industries Commission.
The approval shall have effect for such assessment year or years not exceeding three
assessment years as may be specified in the order of approval.
(iv) Withdrawal of Approval - The approval once granted may be withdrawn if at any time the
Government is satisfied that –
(a) the institution has not applied or accumulated its income in accordance with the
provisions of the section;
(b) the activities of the institution are not being carried out in accordance with the
conditions imposed on the basis of which the approval was granted.

Such withdrawal shall be made after giving reasonable opportunity to the assessee. A copy
of the order shall be sent to the Assessing Officer as well as the assessee.
(18) Income of authorities set up under State or Provincial Act for promotion of Khadi and
Village Industries [Section 10(23BB)]

Income derived by authorities similar to Khadi and Village Industries Board, set up under any State
or Provincial Act, for the development of Khadi or Village industries in the state is exempt from tax.

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(19) Income of authorities set up to administer religious or charitable trusts [Section

10(23BBA)

Income of bodies or authorities established, constituted or appointed under any enactment for the
administration of public religious or charitable trusts or endowments (including maths, temples,
gurudwaras, wakfs, churches, synagogues, agiaries or other places of public religious worship) or
societies for religious or charitable purpose is exempt from tax.
However, it is clarified that this section does not provide exemption in respect of income of any
trust, endowment or society.

(20) Income of the IRDA [Section 10(23BBE)]

Any income of the IRDA established under section 3(1) of the IRDA Act, 1999 will be exempt.

(21) Income of Central Electricity Regulatory Commission [Section 10(23BBG)]

This clause provides exemption to any income of Central Electricity Regulatory Commission
constituted under section 76(1) of the Electricity Act, 2003.

(22) Income of Prasar Bharati (Broadcasting Corporation of India) [Section 10(23BBH)]

Any income of the Prasar Bharati (Broadcasting Corporation of India) established under section
3(1) of the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 is exempt.

(23) Income of certain funds or institutions [Section 10(23C)]

An exemption is available in respect of any income received by any person on behalf of the
following entities:
(i) the Prime Minister’s National Relief Fund or the Prime Minister's Citizen Assistance and
Relief in Emergency Situations Fund (PM CARES FUND) [Sub-clause (i)];
(ii) the Prime Minister’s Fund (Promotion of Folk Art) [Sub-clause (ii)];
(iii) the Prime Minister’s Aid to Students Fund [Sub-clause (iii)];
(iv) the National Foundation for Communal Harmony [Sub-clause (iiia)];
(v) the Swachh Bharat Kosh, set up by the Central Government [Sub-clause (iiiaa)];
(vi) the Clean Ganga Fund, set up by the Central Government [Sub-clause (iiiaaa)];
(vii) the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any
State or Union Territory [Sub-clause (iiiaaaa)];

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(viii) any university or other educational institution exists solely for educational purposes and not
for profit which is wholly or substantially financed by the Government [Sub-clause (iiiab)];
(ix) any hospital or other institution wholly or substantially financed by the Government,
which exists solely for philanthropic purposes and not for profit and which exists for the
reception and treatment of persons suffering from illness or mental defectiveness or
reception and treatment of convalescing persons or persons requiring medical attention or
rehabilitation [Sub-clause (iiiac)];

If the government grant to a university or other educational institution, hospital or other

institution during the relevant previous year exceeds 50% of the total receipts (including any
voluntary contributions), of such university or other educational institution, hospital or other
institution, as the case may be, then, such university or other educational institution,
hospital or other institution shall be considered as being substantially financed by the
Government for that previous year.

(x) any university or other educational institution existing solely for educational purposes and
not for profit and aggregate annual receipts of the person from such university(ies) or
educational institution(s) do not exceed ` 5 crore [Sub-clause (iiiad)];
(xi) any hospital or other institution which exists solely for philanthropic purposes and not for
profit and which exists for the reception and treatment of persons suffering from illness or
mental defectiveness or reception and treatment of convalescing persons or persons
requiring medical attention or rehabilitation if aggregate annual receipts of the person from
such hospital(s) or institution(s) do not exceed ` 5 crore [Sub-clause (iiiae)];

If the person has receipts from university or universities or educational institution or institutions as
referred to in (x) as well as from hospital or hospitals or institution or institutions as referred to in
(xi), the exemptions would not apply, if the aggregate of annual receipts of the person from such
university or universities or educational institution or institutions or hospital or hospitals or
institution or institutions, exceed ` 5 crore;

(xii) any other fund or institution for charitable purposes approved by the Principal
Commissioner or Commissioner of Income-tax, having regard to the objects of the fund or
institution and its importance throughout India or throughout any State or States [Sub-
clause (iv)];
(xiii) any trust (including any other legal obligation) or institution wholly for public religious or wholly
for public religious and charitable purposes approved by the Principal Commissioner or

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Commissioner of Income-tax [Sub-clause (v)];

(xiv) any university or other educational institutions which exists solely for educational purposes
and not for profit approved by Principal Commissioner or Commissioner of Income-tax
[Sub-clause (vi)];
(xv) any hospital or other institution which exists solely for philanthropic purposes and not for
profit and which exists for the reception and treatment of persons suffering from illness or
mental defectiveness or reception and treatment of convalescing persons or persons
requiring medical attention or rehabilitation approved by the Principal Commissioner or
Commissioner of Income-tax [Sub-clause (via)].
However, on or after 1st October 2024, no application for approval under sub-clause (iv), (v),
(vi) or (via) of section 10(23C) can be made before the Principal Commissioner or
Commissioner.
Refer to “Chapter 10: Assessment of Trusts or institutions, Political Parties and Other special
entities, wherein the provisions of section 10(23C) are discussed in detail.

(24) Income of Mutual Fund [Section 10(23D)]

(i) The income of a Mutual Fund registered under the SEBI Act and regulations made
thereunder or other Mutual Fund set up by a public sector bank/public financial
institution/RBI subject to certain conditions is exempt.

(ii) “Public sector bank” means SBI or any nationalised bank or a bank included in the category
“other public sector banks” by the RBI, for example, IDBI Bank.

Note: The income of a mutual fund registered under the SEBI will be exempt without any
conditions laid down by the Central Government. In the case of other mutual funds, the conditions
will be applicable.
(25) Income of Investor Protection Funds set up by recognised stock exchanges in India
[Section 10(23EA)]

(i) Clause (23EA) excludes any income by way of contributions received from recognized stock
exchanges and the members thereof, of an Investor Protection Fund set up by recognised
stock exchanges in India, either jointly or separately, and notified by the Central
Government in this behalf.

(ii) Where any amount standing to the credit of the Fund and not charged to income-tax during
any previous year is shared, either wholly or in part, with a recognised stock exchange, the

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.31

whole of the amount so shared shall be deemed to be the income of the previous year in
which such amount is so shared and shall accordingly be chargeable to income-tax.

(26) Specified income of Investor Protection Fund set up by commodity exchanges

[Section 10(23EC)]

(i) This clause exempts any income, by way of contributions received from commodity
exchanges and the members thereof, of such Investor Protection Fund set up by commodity
exchanges in India, either jointly or separately, as the Central Government may, by
notification in the Official Gazette, specify in this behalf.
(ii) Where any amount standing to the credit of the said Fund and not charged to income-tax
during any previous year is shared, either wholly or in part, with a commodity exchange, the
entire amount so shared shall be deemed to be the income of the previous year in which the
amount is so shared and shall accordingly be chargeable to income-tax.

(iii) A “commodity exchange” means a “registered association” as defined in section 2(jj) of the
Forward Contracts (Regulation) Act, 1952 i.e., an association to which for the time being a
certificate of registration has been granted by the Forward Markets Commission u/s 14B.

(27) Income of Investor Protection Fund set up by depositories [Section 10(23ED)]

(i) Under section 10(23EA), any income by way of contributions from a recognised stock
exchange received by an Investor Protection Fund set up by the recognised stock exchange
is exempt from taxation.
(ii) In line with section 10(23EA), section 10(23ED) provides that any income, by way of
contribution from a depository, of such Investor Protection Fund set up by a depository in
accordance with the regulations made under the SEBI Act, 1992 and the Depositories Act,
1996, will not be included while computing the total income of such investor protection fund.
(iii) The Central Government, would, by way of notification in the Official Gazette, specify such
investor protection funds set up by depositories in accordance with the SEBI and
depositories regulations.
(iv) Where any amount standing to the credit of the fund and not charged to income-tax during
any previous year is shared wholly or partly with a depository, the amount so shared shall
be deemed to be the income of the previous year in which such amount is shared.
Accordingly, such amount would be chargeable to income-tax.

(v) “Depository” means a company formed and registered under the Companies Act, 1956 and

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which has been granted a certificate of registration under section 12(1A) of the
SEBI Act, 1992.
(28) Specified income of Core Settlement Guarantee Fund (SGF) set up by a recognized
Clearing Corporation [Section 10(23EE)]

(i) The Clearing Corporations are required, under the provisions of Securities Contracts
(Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 notified by
SEBI, to establish a fund, called Core Settlement Guarantee Fund (Core SGF) for each
segment of each recognized stock exchange to guarantee the settlement of trades
executed in respective segments of the exchange.
(ii) Under sections 10(23EA), 10(23EC) and 10(23ED), any income by way of contributions
received from recognized stock exchanges or commodity exchanges and the members
thereof or depositories of Investor Protection Fund set up by such recognised stock
exchanges in India, or by commodity exchanges in India or by such depository,
respectively, as the Central Government may notify in this behalf, are exempt from taxation.
(iii) On parallel lines, section 10(23EE) exempts any specified income of such Core SGF set up
by a recognized clearing corporation in accordance with the regulations, notified by the
Central Government.
(iv) Where any amount standing to the credit of the Fund and not charged to income-tax during
any previous year is shared, either wholly or in part with the specified person, the whole of
the amount so shared shall be deemed to be the income of the previous year in which such
amount is shared, and shall accordingly be chargeable to income-tax.
(v) Meaning of certain terms:
Terms Meaning
Regulations Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2012 made under the SEBI Act, 1992 and
Securities Contracts (Regulation) Act, 1956 or International
Financial Services Centres Authority (Market Infrastructure
Institutions) Regulations, 2021 made under the IFSC Act, 2019.
Recognised Meaning assigned as per Regulation 2(1)(o) of the Securities
clearing Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
corporation Regulations, 2012 made under the SEBI Act, 1992 and Securities
Contracts (Regulation) Act, 1956 i.e., "Recognised clearing
corporation" means a clearing corporation which is recognised by the
SEBI under section 4 read with section 8A of the SEBI Act, 1992 or
under regulation 2(1)(n) of the International Financial Services

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.33

Centres Authority (Market Infrastructure Institutions)

Regulations, 2021 made under the IFSC Act, 2019 i.e., a clearing
corporation in an IFSC recognised by the Authority;
Specified (a) the income by way of contribution received from specified
Income persons;
(b) the income by way of penalties imposed by the recognised clearing
corporation and credited to the Core Settlement Guarantee Fund; or
(c) the income from investment made by the Fund.
Specified (a) any recognised clearing corporation which establishes and
person maintains the Core Settlement Guarantee Fund;
(b) any recognised stock exchange being shareholder in such
recognised clearing corporation or a contributor to Core
Settlement Guarantee Fund; and
(c) any clearing member contributing to the Core Settlement
Guarantee Fund.

(29) Income of trade unions [Section 10(24)]

Any income under the heads “Income from house property” and “Income from other sources” of a
registered trade union, within the meaning of the Trade Unions Act, 1926, formed primarily for the
purpose of regulating the relations between workmen and the employers or between workmen and
workmen will be exempt.
Further, this exemption is also available in respect of an association of such registered unions.

(30) Income of provident funds, superannuation funds, gratuity funds [Section 10(25)]

Any income of a recognized provident fund (RPF) and of an approved superannuation fund or
gratuity fund is exempt from tax and the trustees of these funds would not be liable to pay tax
thereon.
The exemption also applies to -
(i) the interest on securities which are held by or are the property of statutory provident fund
(SPF) governed by the Provident Funds Act, 1925;
(ii) the capital gains of the fund, if any, arising to it from the sale, exchange or transfer of such
securities;

(iii) any income received by the Board of Trustees constituted

- under Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 and
- under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952,

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on behalf of the Deposit Linked Insurance Funds established under these respective Acts.

(31) Income of Employees’ State Insurance (ESI) Fund [Section 10(25A)]

The contributions paid under ESI Act, 1948 and all other moneys received on behalf of the ESI
Corporation are paid into a Fund called the ESI Fund. This Fund is held and administered by the
ESI Corporation. The amounts lying in the Fund are to be expended for payment of cash benefits
and provision of medical treatment and attendance to insured persons and their families,
establishment and maintenance of hospitals and dispensaries, etc. Any income of the ESI Fund is
exempted from income-tax.

(32) Income of member of a scheduled tribe [Section 10(26)]

A member of a Scheduled Tribe residing in -

(i) any area specified in the Constitution i.e., The North Cachar Hills District, The Karbi
Anglong District, The Bodoland Territorial Areas District, Khasi Hills District, Jaintia Hills
District or The Garo Hills District or
(ii) in the States of Manipur, Tripura, Arunachal Pradesh, Mizoram and Nagaland, or

(iii) in Ladakh
is exempt from tax on his income arising or accruing -
(a) from any source in the areas or States aforesaid.
(b) by way of dividend or interest on securities.

(33) Specified income of a Sikkimese Individual [Section 10(26AAA)]

The following income, which accrues or arises to a Sikkimese individual, would be exempt from
income-tax –
(a) income from any source in the State of Sikkim; or
(b) income by way of dividend or interest on securities.

(34) Income of an Agricultural Produce Market Committee or Board [Section 10(26AAB)]

Any income of an Agricultural Produce Market Committee or Board constituted under any law for
the time being in force for the purpose of regulating the marketing of agricultural produce would be
exempt.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.35

(35) Income of a corporation etc. for the promotion of interests of members of Scheduled
Casts or Tribes or backward classes or any two or all of them [Section 10(26B)]

Any income of a corporation (established by a Central, State or Provincial Act) or other body,
institution or association (wholly financed by Government) formed for promotion of the interests of
the members of Scheduled Castes or Tribes or backward classes or of any two or all of them is
exempt from tax.
(36) Income of corporations established to protect interests of minority community
[Section 10(26BB)]

Any income of a corporation established by the Central Government or any State Government for
promoting the interests of the members of a minority community will be exempt from income tax.
Section 80G also provides tax relief in respect of donations made to these corporations.
(37) Income of corporation established for welfare and economic upliftment of ex-
servicemen [Section 10(26BBB)]

Any income of a corporation established by a Central, State or Provincial Act for the welfare and
economic upliftment of ex-servicemen, being citizens of India, would be exempt from income-tax.
(38) Income of a co-operative society for promoting interest of members of Scheduled
castes or Tribes or both [Section 10(27)]

Any income of a co-operative society formed for promoting the interests of the members of either
the scheduled castes or scheduled tribes or both will be exempted from being included in the total
income of the society.
Conditions:
(i) The membership of the co-operative society should consist of only other co-operative
societies formed for similar purposes, and
(ii) The finances of the society shall be provided by the Government and such other societies.

(39) Incomes of certain bodies like Coffee/Tea/Rubber Board, etc. [Section 10(29A)]
Under this clause, any income accruing or arising to the following bodies is exempt from tax:
(i) the Coffee Board constituted under section 4 of the Coffee Act, 1942,

(ii) the Rubber Board constituted under section 4(1) of the Rubber Board Act, 1947,
(iii) the Tea Board established under section 4 of the Tea Act, 1953,
(iv) the Tobacco Board constituted under the Tobacco Board Act, 1975,

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(v) the Marine Products Export Development Authority established under section 4 of the
Marine Products Export Development Authority Act, 1972,

(vi) the Agricultural and Processed Food Products Export Development Authority established
under section 4 of the Agricultural and Processed Food Products Export Development
Act, 1985,

(vii) the Spices Board constituted under section 3(1) of the Spices Board Act, 1986,
(viii) the Coir Board established under the Coir Industry Act, 1953.

(40) Tea board subsidy [Section 10(30)]

The amount of any subsidy received by any assessee engaged in the business of growing and
manufacturing tea in India through or from the Tea Board will be wholly exempt from tax.
Conditions:
(i) The subsidy should have been received under any scheme for replantation or replacement
of the bushes or for rejuvenation or consolidation of areas used for cultivation of tea, as
notified by the Central Government.
(ii) The assessee should furnish a certificate from the Tea Board, as to the amount of subsidy
received by him during the previous year, to the Assessing Officer.

(41) Other subsidies [Section 10(31)]

Amount of any subsidy received by an assessee engaged in the business of growing and
manufacturing rubber, coffee, cardamom or other specified commodity in India, as notified by the
Central Government, will be wholly exempt from tax.
Conditions:
(i) The subsidies should have been received from or through the Rubber Board, Coffee Board,
Spices Board or any other Board in respect of any other commodity under any scheme for
replantation or replacement of rubber, coffee, cardamom or other plants or for rejuvenation
or consolidation of areas used for cultivation of all such commodities.
(ii) The assessee should furnish a certificate from the Board, as to the amount of subsidy
received by him during the previous year, to the Assessing Officer.
(42) Specified income arising from any international sporting event in India [Section
10(39)]

(i) This clause exempts income of the nature and to the extent, arising from any international

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.37

sporting event in India, to the person or persons notified by the Central Government in the
Official Gazette.

(ii) Such international sporting event should -

(a) be approved by the international body regulating the international sport relating to
such event;

(b) have participation by more than two countries;

(c) be notified by the Central Government in the Official Gazette for the purposes of this
clause.
(43) Certain grants etc. received by a subsidiary from its Indian holding company engaged in
the business of generation or transmission or distribution of power [Section 10(40)]

(i) This clause exempts income of any subsidiary company by way of grant or otherwise
received from an Indian company, being its holding company engaged in the business of
generation or transmission or distribution of power.
(ii) The receipt of such income should be for settlement of dues in connection with
reconstruction or revival of an existing business of power generation.
(iii) The exemption under this clause is available if the reconstruction or revival of any existing
business of power generation is by way of transfer of such business to the Indian company
notified under section 80-IA(4)(v)(a).

(44) Specified income of certain bodies or authorities [Section 10(42)]

(i) This clause exempts income, of the nature and to the extent, arising to a body or authority,
notified by the Central Government.
(ii) Such body or authority should have been established or constituted or appointed -
(a) under a treaty or an agreement entered into by the Central Government with two or
more countries or a convention signed by the Central Government;
(b) not for the purposes of profit.

(45) Income received by any person on behalf of NPS Trust [Section 10(44)]

The NPS Trust would exempt from the applicability of –

(i) income-tax on any income received by any person for, or on behalf of, the NPS Trust
[Section 10(44)]; and

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(ii) securities transaction tax on all purchases and sales of equity and derivatives by the NPS Trust.
Further, the NPS Trust shall receive all income without any deduction of tax at source. [Section
197A(1E)].
Thus, the NPS Trust, which was set up to manage the assets and funds under the New Pension
System in the interest of the beneficiaries, would enjoy a “pass-through status”.
(46) Specified income of notified entities not engaged in commercial activity [Section 10(46)]

(i) Section 10(46) provides for exemption of income arising to a body or authority or Board or
Trust or Commission, other than those covered under section 10(46A), or a class thereof,
the nature and extent of which is to be specified by the Central Government.
(ii) For availing the benefit of exemption under this clause, the body or authority or Board or
Trust or Commission or a class thereof should be established or constituted by or under a
Central, State or Provincial Act or constituted by the Central or State Government with the
object of regulating or administering an activity for the benefit of the general public.
(iii) Further, the body or authority or Board or Trust or Commission should –

(a) not be engaged in any commercial activity; and

(b) be notified by the Central Government in this behalf.

(47) Any income of notified entities established or constituted under a Central Act or State
Act [Section 10(46A)]

(i) Section 10(46A) provides for exemption of any income arising to a body or authority or
Board or Trust or Commission, not being a company.
(ii) For availing the benefit of exemption under this clause, the body or authority or Board or
Trust or Commission, not being a company, should be established or constituted by or
under a Central Act or State Act with one or more of the following purposes -
- dealing with and satisfying the need for housing accommodation;
- planning, development or improvement of cities, towns and villages;

- regulating, or regulating and developing, any activity for the benefit of the general
public; or
- regulating any matter, for the benefit of the general public, arising out of the objects
for which it has been created.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.39

(iii) Further, the body or authority or Board or Trust or Commission, not being a company
should be notified by the Central Government in this behalf.
(48) Any income of National Credit Guarantee Trustee Company Ltd, credit guarantee fund or
credit guarantee Fund Trust [Section 10(46B)]
Section 10(46B) provides exemption of any income accruing or arising to
- National Credit Guarantee Trustee Company Ltd., being a company established and wholly
financed by the Central Government for the purpose of operating credit guarantee funds
established and wholly financed by the Central Government;
- Credit guarantee funds established and wholly financed by the Central Government and
managed by the National Credit Guarantee Trustee Company Ltd.;
- Credit Guarantee Fund Trust for Micro and Small Enterprises, being a trust created by the
Government of India and the Small Industries Development Bank of India established under
Small Industries Development Bank of India Act, 1989.
(49) Income of notified infrastructure debt funds [Section 10(47)]

In order to give a fillip to infrastructure and encourage inflow of long-term foreign funds to this
sector, the Central Government to notify infrastructure debt funds to be set up in accordance with
the prescribed guidelines, the income of which would be exempt from tax.

(50) Certain income of Indian Strategic Petroleum Reserves Limited [Section 10(48C)]

Any income accruing or arising to the Indian Strategic Petroleum Reserves Limited, being a wholly
owned subsidiary of the Oil Industry Development Board under the Ministry of Petroleum and
Natural Gas, as a result of arrangement for replenishment of crude oil stored in its storage facility
in pursuance of directions of the Central Government would be exempt.
However, exemption would not available in respect of an arrangement, if the crude oil is not
replenished in the storage facility within three years from the end of the financial year in which the
crude oil was removed from the storage facility for the first time.
(51) Income of an institution established for financing infrastructure and development
[Section 10(48D)]

Any income accruing or arising to an institution established for financing the infrastructure and
development, set up under an Act of Parliament and notified by the Central Government, for 10
consecutive assessment years beginning from the assessment year relevant to the previous year
in which such institution is set up would be exempt.

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(52) Income of a developmental financing institution licensed by RBI [Section 10(48E)]

Any income accruing or arising to a developmental financing institution, licensed by the RBI under
an Act of Parliament referred to in section 10(48D) and notified by the Central Government, for 5
consecutive assessment years beginning from the assessment year relevant to the previous year
in which the developmental financing institution is set up would be exempt.
Further, the Central Government may, by issuing notification, extend the exemption for a further
period, not exceeding 5 more consecutive assessment year, subject to fulfillment of such
conditions as may be specified in the said notification.

Students should carefully note that all the items under section 10 listed above are either
wholly or partially exempt from taxation and the exempt portion is not even includible in the
total income of the person concerned.

2.3 RESTRICTIONS ON ALLOWABILITY OF

EXPENDITURE [SECTION 14A]
As per section 14A, notwithstanding anything to the contrary, expenditure incurred in relation to
any exempt income is not allowed as a deduction while computing income under any of the five
heads of income [Sub-section (1)].
The Assessing Officer is empowered to determine the amount of expenditure incurred in relation to
such income which does not form part of total income in accordance with such method as may be
prescribed [Sub-section (2)].

The method for determining expenditure in relation to exempt income is to be prescribed by the
CBDT for the purpose of disallowance of such expenditure under section 14A. Such method
should be adopted by the Assessing Officer in the following cases –

(i) if he is not satisfied with the correctness of the claim of the assessee, having regard to the
accounts of the assessee. [Sub-section (2)]; or
(ii) where an assessee claims that no expenditure has been incurred by him in relation to
income which does not form part of total income [Sub-section (3)].
Rule 8D lays down the method for determining the amount of expenditure in relation to income not
includible in total income.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.41

If the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not
satisfied with –

(a) the correctness of the claim of expenditure by the assessee; or

(b) the claim made by the assessee that no expenditure has been incurred
in relation to exempt income for such previous year, he shall determine the amount of expenditure
in relation to such income in the manner provided hereunder –
The expenditure in relation to income not forming part of total income shall be the aggregate of the
following:
(i) the amount of expenditure directly relating to income which does not form part of total
income;
(ii) an amount equal to 1% of the annual average of the monthly averages of the opening and
closing balances of the value of investment, income from which does not form part of total
income.
However, the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure
claimed by the assessee.
Expenditure incurred during a previous year (say, P.Y. 2024-25) in relation to exempt income
would be disallowed while computing total income of that previous year by applying the provisions
of section 14A even though such exempt income has not accrued or arisen or has not been
received during the said previous year.

Clarification regarding disallowance of expenses under section 14A in cases where

corresponding exempt income has not been earned during the financial year [Circular No.
5/2014, dated 11.2.2014]
Section 14A provides that no deduction shall be allowed in respect of expenditure incurred relating
to income which does not form part of total income. A controversy has arisen as to whether
disallowance can be made by invoking section 14A even in those cases where no income has
been earned by an assessee, which has been claimed as exempt during the financial year.
The CBDT has, through this Circular, clarified that the legislative intent is to allow only that
expenditure which is relatable to earning of income. Therefore, it follows that the expenses which
are relatable to earning of exempt income have to be considered for disallowance, irrespective of
the fact whether such income has been earned during the financial year or not.

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The above position is clarified by the usage of the term “includible” in the heading to section 14A
[Expenditure incurred in relation to income not includible in total income] and Rule 8D [Method for
determining amount of expenditure in relation to income not includible in total income], which
indicates that it is not necessary that exempt income should necessarily be included in a particular
year’s income, for triggering disallowance. Also, the terminology used in section 14A is “income
under the Act” and not “income of the year”, which again indicates that it is not material that the
assessee should have earned such income during the financial year under consideration.
In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even
where the taxpayer has not earned any exempt income in a particular year.

SIGNIFICANT SELECT CASES

Case Law

CIT v. Kribhco (2012) 349 ITR 0618 (Delhi)

Issue Analysis & Decision

Is section 14A applicable in respect of Deductions under Chapter VIA are different from the
deductions, which are permissible and exclusions/exemptions provided under Chapter III.
allowed under Chapter VI-A? Section 14A is applicable only if an income is not
included in the total income as per the provisions of
Chapter III of the Income-tax Act, 1961. Therefore, no
disallowance can be made u/s 14A in respect of
income included in total income in respect of which
deduction is allowable u/s 80C to 80U.

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INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME 2.43

TEST YOUR KNOWLEDGE

Questions
1. Examine with reasons, based on the provisions of the Act, as to chargeability of the following
receipts to tax in the assessment year 2025-26:

(i) Rent of ` 60,000 charged from tenants occupying houses constructed on the land
situated in India and used for agricultural purposes. The tenants, working in the
nearby industrial area, occupy these houses for their own residential purposes.
(ii) Income of ` 75,000 derived by Anand Nursery from the sale of seedlings grown
without carrying out all the basic operations on land.
(iii) Mr. Gaitonde, born and brought up in the State of Sikkim, had a net profit of
` 2,25,000 from the business located in Sikkim and interest of ` 55,000 on the
securities/ bonds issued by the Government of Rajasthan.
2. Mr. Akash, a resident Indian, earns income of ` 22 lakhs from sale of rubber manufactured
from latex obtained from rubber plants grown by him in India and ` 30 lakhs from sale of
rubber manufactured from latex obtained from rubber plants grown by him in Malaysia
during the A.Y.2025-26. What would be his business income, assuming he has no other
business?
3. Mr. Ram, a resident Indian, earns income of ` 15 lakhs from sale of coffee grown and cured
in India during the A.Y.2025-26. His friend, Mr. Shyam, a resident Indian, earns income of
` 25 lakhs from sale of coffee grown, cured, roasted and grounded by him in India during
the A.Y.2025-26. What would be the business income chargeable to tax in India of Mr. Ram
and Mr. Shyam?

Answers
1. (i) As per section 10(1), agricultural income is exempt from tax. The meaning and scope
of agricultural income is defined in section 2(1A). According to Explanation 2 to
section 2(1A), any income derived from any building from the use of such building for
any purpose (including letting for residential purposes or for the purpose of any
business or profession) other than agriculture shall not be agricultural income.
Therefore, the rent of ` 60,000 from letting out of houses constructed on agricultural
land for residential purposes of industrial workers shall not be treated as agricultural

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income by virtue of Explanation 2 to section 2(1A). Hence, such income would be

chargeable to tax.

(ii) Explanation 3 to section 2(1A) provides that the income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income, whether or
not the basic operations were carried out on land. Accordingly, the income of
` 75,000 derived by Anand Nursery from the sale of seedlings grown without
carrying out all the basic operations on land shall be treated as agricultural income
and exempt from tax under section 10(1).

(iii) Section 10(26AAA) exempts the income which accrues or arises to a Sikkimese
individual from any source in the State of Sikkim and the income by way of dividend
or interest on securities. Therefore, the income of Mr. Gaitonde from a business
located in Sikkim and interest income on the securities/bonds of Government of
Rajasthan shall not be subject to tax.
2. Since Mr. Akash is a resident, his global income would be taxable in India. Income of ` 30
lakhs from sale of rubber manufactured from latex obtained from rubber plants grown by
him in Malaysia would be his business income since it is from rubber plants grown outside
India. 35% income from sale of rubber manufactured from latex obtained from rubber plants
grown by him in India would be taxable as business income and balance 65% would be
exempt as agricultural income.
Business income = 35% of ` 22 lakhs + ` 30 lakhs = ` 37.70 lakhs
3. In case of income derived from the sale of coffee grown and cured by the seller in India,
25% income on such sale is taxable as business income. In case of income derived from
the sale of coffee grown, cured, roasted and grounded by the seller in India, 40% income on
such sale is taxable as business income.
Business income of Mr. Ram = 25% of ` 15 lakhs = ` 3.75 lakhs
Business income of Mr. Shyam = 40% of ` 25 lakhs = ` 10 lakhs

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CHAPTER 3

PROFITS AND GAINS OF

BUSINESS OR PROFESSION

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 examine whether a particular income would be chargeable to tax under the head
“Profits and gains of business or profession” by analysing the provisions of section
28;
 comprehend the “Income Computation and Disclosure Standards” (ICDSs) and
analyse and apply these standards to determine the income chargeable to tax under
this head;
 analyse and apply the provisions of sections 30 to 37 to determine whether any
particular expenditure /payment would be admissible as deduction while computing
income under this head;
 analyse and apply the conditions contained under sections 40 & 40A to determine
whether a particular expenditure/ payment would be admissible/ inadmissible as
deduction while computing income under this head;
 analyse and apply the provisions of section 43B to allow/ disallow expenditures
specified therein, in respect of which deduction is admissible only on actual
payment;
 examine when certain receipts are deemed as income chargeable to tax under this
head;

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 3.2 DIRECT TAX LAWS

 appreciate the provisions of section 44AA relating to maintenance of books of

account and identify the assessees, who are compulsorily required to maintain
books of account;
 appreciate the provisions of section 44AB, listing the circumstances when an
assessee is compulsorily required to get the books of account audited under
Income-tax Act, 1961;
 examine the presumptive tax provisions contained in sections 44AD, 44ADA &
44AE to determine whether an assessee engaged in a business, profession or
plying, hiring or leasing goods carriages can opt for such presumptive taxation
schemes;
 compute income under this head applying the charging and deeming provisions,
allowing the permissible deductions and disallowing the impermissible deductions.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.3

CHAPTER OVERVIEW

Computation of income under the head “Profits and gains of business

or profession”

Income chargeable under the head “Profits and gains of business or

profession” [Section 28] & Profits chargeable to tax [Section 41]

Less: Deductions

Inadmissible Expenses or
Admissible payments not
deductions
deductions deductible in certain
(Sections 30 (Section 40) circumstances
to 37) (Section 40A)

Other provisions [Sections 42, 43A, 43AA, 43B, 43C, 43CA, 43CB,
43D44AA, 44AB, 44AD, 44ADA, 44AE, 44DB]

3.1 MEANING OF ‘BUSINESS’ AND ‘PROFESSION’

The income chargeable to tax under this head is in respect of the profits and gains of any
business or profession, carried on by an assessee at any time during the previous year.

Business Profession
The term “business” has been defined in The term “profession” has not been defined
section 2(13) to “include any trade, in the Act. It means an occupation requiring
commerce or manufacture or any adventure some degree of learning. The term
or concern in the nature of trade, commerce ‘profession’ includes vocation as well [Section
or manufacture”. 2(36)]
• Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and
even an astrologer are persons who can be said to be carrying on a profession but not
business.

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 3.4 DIRECT TAX LAWS

• It is, however, not material whether a person is carrying on a ‘business’ or ‘profession’ or

‘vocation’ since for purposes of assessment, profits from all these sources are treated
and taxed alike (except in case of tax audit and presumptive income provisions, where
the rates and threshold limits are different for business and profession).
• Business necessarily means a continuous exercise of an activity with a profit motive;
nevertheless, profit from a single venture in the nature of trade may also be treated as
business.

Meaning of ‘Profits’
(1) Profits in cash or in kind: Profits may be realised in money or in money’s worth, i.e., in
cash or in kind. Where profit is realised in any form other than cash, the cash equivalent of
the receipt on the date of receipt must be taken as the value of the income received in kind.
(2) Capital receipts: Capital receipts are not generally to be taken into account while
computing profits under this head.
(3) Voluntary Receipts: Payment voluntarily made by persons who were under no obligation
to pay anything at all would be income in the hands of the recipient, if they were received in
the course of a business or by the exercise of a profession or vocation. Thus, any amount
paid to a lawyer by a person who was not a client, but who has been benefited by the
lawyer’s professional service to another would be assessable as the lawyer’s income.
(4) Application of the gains of trade is immaterial: Gains made even for the benefit of the
community by a public body would be liable to tax. To attract the provisions of section 28, it
is necessary that the business, profession or vocation should be carried on at least for
some time during the accounting year but not necessarily throughout that year and not
necessarily by the assessee-owner personally, but it should be under his direction and
control.
(5) Income from distinct businesses: The profits of each distinct business must be computed
separately but the tax chargeable under this section is not on the separate income of every
distinct business but on the aggregate profits of all the business carried on by the
assessee.
(6) Computation of profits: Profits should be computed after deducting the losses and
expenses incurred for earning the income in the regular course of the business, profession,
or vocation unless the loss or expenses is expressly or by necessary implication, disallowed
by the Act. The charge is not on the gross receipts but on the profits and gains.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.5

(7) Legality of income: The illegality of a business, profession or vocation does not exempt its
profits from tax. The revenue is not concerned with the taint of illegality in the income or its
source. Thus, income tax is not restricted in its application to lawful business only.
However, expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law would not be allowable as deduction while computing profits of
such business.

3.2 INCOME CHARGEABLE UNDER THIS HEAD

[SECTION 28]
The various items of income chargeable to tax as income under the head ‘profits and gains of
business or profession’ are as under:
(1) Income from business, profession or vocation: Income arising to any person by way of
profits and gains from the business or profession carried on by him at any time during the
previous year.
However, income from letting out of a residential house or a part of the house by the
owner is chargeable to tax under the head “Income from house property” and not
under the head “Profits and gains of business or profession”.
(2) Any compensation or other payment due to or received by:
(i) Any person, by whatever name called, managing the whole or substantially the whole
of -
(a) the affairs of an Indian company or
(b) the affairs in India of any other company
at or in connection with the termination of his management or office or the
modification of any of the terms and conditions relating thereto;

(ii) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person, at or in connection with the
termination of the agency or the modification of any of the terms and conditions
relating thereto;
(iii) any person, for or in connection with the vesting in the Government or in any
corporation owned or controlled by the Government under any law for the time being
in force, of the management of any property or business;

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(iv) any person, by whatever name called, at or in connection with the termination or
modification of the terms and conditions, of any contract relating to his business.

(3) Income from specific services performed for its members by a trade, professional or
business: Income derived by any trade, professional or similar associations from specific
services rendered by them to their members. It may be noted that this forms an exception to
the general principle of mutuality governing the assessment of income of mutual
associations such as chambers of commerce, stock brokers’ associations etc.
As a result, a trade, professional or similar association performing specific services for its
members is to be deemed as carrying on business in respect of these services and on that
assumption the income arising therefrom is to be subjected to tax. For this purpose, it is not
necessary that the income received by the association should definitely or directly be
related to these services.
(4) Incentives received or receivable by assessee carrying on export business:
(i) Profit on sale of import entitlements: Profits on sale of a licence granted under the
Imports (Control) Order, 1955 1 made under the Imports and Exports (Control) Act,
1947 2.
(ii) Cash assistance against exports under any scheme of GoI: Cash assistance (by
whatever name called) received or receivable by any person against exports under
any scheme of the Government of India.
(iii) Customs duty or excise duty re-paid or repayable as drawback: Any Customs
duty or Excise duty drawback repaid or repayable to any person against export under
the Customs and Central Excise Duties Drawback Rules, 1971 3.
(iv) Profit on transfer of Duty Entitlement Pass Book Scheme or Duty Free
Replenishment Certificate: Any profit on the transfer of the Duty Entitlement Pass
Book Scheme 4 or Duty Free Replenishment Certificate, being Duty Remission
Scheme, under the export and import policy formulated and announced under
section 5 of the Foreign Trade (Development and Regulation) Act, 1992.

1 Now Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993
2 Now Foreign Trade (Development and Regulation) Act, 1992
3 Now Customs and Central Excise Duties Drawback Rules, 2017
4 The pre‐export DEPB scheme was abolished with effect from 1 April 2000. After several extensions through the

years, the post‐export scheme was phased out on 30 September 2011 and thereafter DEPB items were incorporated
into the Duty Drawback Schedule with effect from 1 October 2011

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.7

(5) Value of any benefit or perquisite: The value of any benefit or perquisite arising from
business or the exercise of any profession, whether –

- convertible into money or not or

- in cash or in kind or partly in cash and partly in kind

Example:
If a company provides rent free residential accommodation to a lawyer in consideration of
professional services rendered by him to the company, the value of such accommodation
would be assessable in the hands of the said lawyer as his income under the head “Profits
and gains or business or profession”.

(6) Sum due to, or received by, a partner of a firm: Any interest, salary, bonus, commission
or remuneration, by whatever name called, due to or received by a partner of a firm from
such firm will be deemed to be income from business. However, where any interest, salary,
bonus, commission or remuneration by whatever name called, or any part thereof has not
been allowed to be deducted under section 40(b), in the computation of the income of the
firm the income to be taxed shall be adjusted to the extent of the amount disallowed.

Example:
Suppose a firm pays interest at 20% p.a. simple interest to a partner. The allowable rate of
interest is 12% p.a. Hence the excess 8% paid will be disallowed in the hands of the firm.
Since the excess interest has suffered tax in the hands of the firm due to disallowance, the
same will not be taxed in the hands of the partner. However the interest allowed to the
extent of 12% p.a. in the hands of firm will be taxed in the hands of partner.

Exemption of share income of a partner [Section 10(2A)]

Section 10(2A) exempts from tax a partner’s share in the total income of the firm. In other
words, the partner’s share in the total income of the firm determined in accordance with the
profit-sharing ratio will be exempt from tax.
(7) Any sum whether received or receivable, in cash or kind, under an agreement
(i) for not carrying out any activity in relation to any business or profession; or
However, the following sums received or receivable would not be chargeable to
tax under the head “profits and gains from business or profession”:
(a) any sum, whether received or receivable, in cash or kind, on account of
transfer of the right to manufacture, produce or process any article or thing or

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right to carry on any business or profession, which is chargeable under the

head “Capital gains”.
(b) any sum received as compensation, from the multilateral fund of the Montreal
Protocol on Substances that Deplete the Ozone layer under the United
Nations Environment Programme, in accordance with the terms of agreement
entered into with the Government of India.

(ii) for not sharing any know-how, patent, copyright, trade-mark, licence, franchise or
any other business or commercial right of similar nature or information or technique
likely to assist in the manufacture or processing of goods or provision for services.
Meaning of certain terms
Term Meaning
Agreement Includes any arrangement or understanding or action in concert, -
(A) whether or not such arrangement, understanding or action is
formal or in writing; or
(B) whether or not such arrangement, understanding or action is
intended to be enforceable by legal proceedings;
Service Service of any description which is made available to potential users and
includes the provision of services in connection with business of any
industrial or commercial nature such as accounting, banking,
communication, conveying of news or information, advertising,
entertainment, amusement, education, financing, insurance, chit funds,
real estate, construction, transport, storage, processing, supply of
electrical or other energy, boarding and lodging.

(8) Any sum received under a Keyman insurance policy: Any sum received by the
assessee, as an employer, under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will be taxable as income from business.
(9) Fair market value of inventory on its conversion as capital asset: Fair market value of
inventory on the date of its conversion or treatment as capital asset, determined in the
prescribed manner, would be chargeable to tax as business income 5.
(10) Sum received on account of capital asset referred under section 35AD: Any sum
received or receivable, in cash or kind, on account of any capital asset (in respect of which

5 Rule 11UAB inserted to prescribe the manner of determination of fair market value (FMV) of the inventory
on the date of conversion. For detailed reading of 11UAB of the Income-tax Rules, 1962, refer to Annexure
2 at the end of this module.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.9

whole of the expenditure on such capital asset has been allowed as a deduction under
section 35AD) being demolished, destroyed, discarded or transferred.

Note - Where a specified person, being a partner of a firm or member of other AOP/BoI, receives
during the P.Y. any stock in trade from a specified entity, being a firm or other AOP/BoI in
connection with the dissolution or reconstitution of such specified entity, then, the specified entity
would be deemed to have transferred such stock in trade to the specified person in the year in
which it is received by the specified person. Profit and gains arising from such deemed transfer
would be deemed to be the income of such specified entity in the same year of receipt by specified
person and chargeable to income-tax under the “Profit and gains of business or profession”
[Section 9B]. For detailed discussion on section 9B, refer Chapter 4 – “Capital Gains”.

3.3 SPECULATION BUSINESS

Explanation 2 to section 28 specifically provides that where an assessee carries on speculative
business, that business of the assessee must be deemed as distinct and separate from any other
business. This becomes necessary because section 73 provides that losses in speculation business
unlike other business, cannot be set-off against the profits of any business other than a speculation
business.
Likewise, a loss in speculation business carried forward to a subsequent year can be set-off only
against the profit and gains of any speculative business in the subsequent year. Profits and losses
resulting from speculative transaction must, therefore, be treated as separate and distinct from
profits and gains of business and profession from any other business.
(1) Meaning of Speculative Transaction
“Speculative transaction” means a transaction in which a contract for the purchase or sales of
any commodity including stocks and shares, is periodically or ultimately settled otherwise than by
the actual delivery or transfer of the commodity or scrips [Section 43(5)].
Where any part of the business of a company consists in the purchase and sale of the shares of
other companies, such a company shall be deemed to be carrying on speculation business to the
extent to which the business consists of the purchase and sale of such shares.

However, this deeming provision does not apply to the following companies –
(i) A company whose gross total income consists of mainly income chargeable under the
heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income
from other sources”;

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(ii) A company, the principal business of which is –

(a) the business of trading in shares; or
(b) the business of banking; or
(c) the granting of loans and advances.
Accordingly, if these companies as mentioned above carry on the business of purchase and sale
of shares of other companies, they would not be deemed to be carrying on speculation business
[Explanation to section 73].
(2) Transaction not deemed to be speculative transaction

The following forms of transactions shall not be deemed to be speculative transaction:

(i) Hedging contract in respect of raw materials or merchandise: A contract in respect of
raw materials or merchandise entered into by a person in the course of his manufacturing or
merchandising business to guard against loss through future price fluctuations in respect of
his contracts for the actual delivery of goods manufactured by him or merchandise sold by
him; or
(ii) Hedging contract in respect of stocks and shares: A contract in respect of stocks and
shares entered into by a dealer or investor therein to guard against loss in his holdings of
stocks and shares through price fluctuation; or
(iii) Forward contract: A contract entered into by a member of a forward market or stock
exchange in the course of any transaction in the nature of jobbing or arbitrage to guard
against any loss which may arise in the ordinary course of his business as a member; or
(iv) Trading in derivatives: An eligible transaction carried out in respect of trading in
derivatives in a recognized stock exchange.
Meaning of certain terms

Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems through a
stock broker or sub-broker or such other intermediary registered
under section 12 of the Securities and Exchange Board of India
Act, 1992 in accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956 or the Securities and Exchange
Board of India Act, 1992 or the Depositories Act, 1996 and the
rules, regulations or bye-laws made or directions issued under

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.11

those Acts or by banks or mutual funds on a recognised stock

exchange; and
(B) which is supported by a time stamped contract note issued by
such stock broker or sub-broker or such other intermediary to
every client indicating in the contract note, the unique client
identity number allotted under any Act referred to in (A) above
and permanent account number;

(v) Trading in commodity derivatives: An eligible transaction in respect of trading in

commodity derivatives carried out in a recognised stock exchange, which is chargeable to
commodities transaction tax under Chapter VII of the Finance Act, 2013.
However, the requirement of chargeability of commodities transaction tax is not applicable
in respect of trading in agricultural commodity derivatives.
Meaning of certain terms
Term Meaning
Eligible Any transaction,–
transaction (A) carried out electronically on screen-based systems through a
member or an intermediary registered under the bye-laws,
rules and regulations of the recognised stock exchange for
trading in commodity derivative in accordance with the
provisions of the Forward Contracts (Regulation) Act, 1952
and the rules, regulations or bye-laws made or directions
issued under that Act on a recognised stock exchange; and
(B) which is supported by a time stamped contract note issued by
such member or an intermediary to every client indicating in
the contract note, the unique client identity number allotted
under the Act, rules, regulations or bye-laws referred to in (A)
above, unique trade number and permanent account number

3.4 METHOD OF ACCOUNTING

(1) Method of Accounting (Section 145)

Section 145 of the Income-tax Act, 1961 provides for the method of accounting. Section 145(1)
requires income chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” to be computed in accordance with either the cash or mercantile
system of accounting regularly employed by the assessee, subject to the provisions of section
145(2).

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However, as per section 145B, certain income would be taxable in the following manner:
(i) interest received by an assessee on compensation or on enhanced compensation, shall be
deemed to be the income of the year in which it is received. [Such income is taxable under
the head “Income from other sources”]
(ii) the claim for escalation of price in a contract or export incentives shall be deemed to be the
income of the previous year in which reasonable certainty of its realisation is achieved.
(iii) income referred to in section 2(24)(xviii) i.e., assistance in the form of a subsidy or grant or
cash incentive or duty drawback or waiver or concession or reimbursement, by whatever
name called, by the Central Government or a State Government or any authority or body or
agency in cash or kind to the assessee shall be deemed to be the income of the previous
year in which it is received, if not charged to income tax for any earlier previous year.
Under section 145(2), the Central Government is empowered to notify in the Official Gazette from
time to time, income computation and disclosure standards (ICDSs) to be followed by any
class of assessees or in respect of any class of income.
Accordingly, the Central Government has, vide Notification No. S.O.3079(E) dated 29.9.2016,
notified ten ICDSs to be applicable from A.Y.2017-18.
The notified ICDSs have to be followed by all assessees (other than an individual or a Hindu
undivided family who is not required to get his accounts of the previous year audited in accordance
with the provisions of section 44AB) following the mercantile system of accounting, for the
purposes of computation of income chargeable to income-tax under the head “Profits and gains of
business or profession” or “Income from other sources”, from A.Y.2017-18.
The ten notified ICDSs are:
ICDS I : Accounting Policies
ICDS II : Valuation of Inventories
ICDS III : Construction Contracts
ICDS IV : Revenue Recognition
ICDS V : Tangible Fixed Assets
ICDS VI : The Effects of Changes in Foreign Exchange Rates
ICDS VII : Government Grants
ICDS VIII : Securities
ICDS IX : Borrowing Costs
ICDS X : Provisions, Contingent Liabilities and Contingent Assets

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Cardinal features of Notified ICDSs

(1) Applicability: All the notified ICDSs are applicable for computation of income chargeable
under the head “Profits and gains of business or profession” or “Income from other sources”
and not for the purpose of maintenance of books of accounts. This is stated in the
Preamble at the beginning of each ICDS.
(2) Position in case of conflict with the Income-tax Act, 1961: In the case of conflict
between the provisions of the Income‐tax Act, 1961 and the notified ICDSs, the provisions
of the Act shall prevail to that extent. This is also stated in the Preamble at the beginning of
each ICDS.
(3) Scope Paragraph: Each of the ten notified ICDSs has a scope paragraph explaining what
exactly the ICDS deals with. In some standards, the scope paragraph also specifies what
the ICDS does not deal with.
(4) Transitional Provisions: All ICDSs (except ICDS VIII on Securities) contain transitional
provisions to facilitate first time adoption and prevent any tax leakage or any double
taxation.
(5) Disclosure Requirements: All ICDSs (except ICDS VI on Effects of changes in foreign
exchange rates and ICDS VIII on Securities) contain specific disclosure requirements. The
last paragraph(s) of these ICDSs is on disclosure.
Salient Features of the notified ICDSs

ICDS I: Accounting Policies

► This ICDS deals with significant accounting policies.
► While it recognizes the fundamental accounting assumptions of going concern,
consistency and accrual, it does not recognize the concepts of “materiality” and
“prudence” in selection of accounting policies.
► Treatment and presentation of transactions have to be governed by their substance and
not merely by the legal form.
► Marked to market loss or an expected loss is not to be recognized unless recognition of
such loss is in accordance with the provisions of any other ICDS.

ICDS II: Valuation of Inventories

► “Inventories” has been defined to mean assets held for –

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o sale in the ordinary course of business;

o in the process of production for such sale;
o in the form of materials or supplies to be consumed in the production process or in
the rendering of services.
► This ICDS requires inventory to be valued at cost or net realizable value, whichever is
lower.
► This ICDS requires disclosure of the accounting policies adopted in measuring
inventories including the cost formulae used and the total carrying amount of inventories
and its classification appropriate to a person.

ICDS III: Construction Contracts

► This ICDS is required to be applied in determination of income for a construction contract
of a contractor.
► It recognizes percentage of completion method (POCM) for recognizing contract revenue
and contract costs associated with a construction contract.
► However, contract revenue and contract costs associated with the construction contract,
which commenced on or before 31.3.2016 but not completed by the said date, can be
recognised based on the method regularly followed by the person prior to the previous
year 2016-17.
► This ICDS also contains certain disclosure requirements, like the amount of contract
revenue recognized as revenue in the period, the methods used to determine the stage
of completion of contracts in progress etc.

ICDS IV: Revenue Recognition

► This ICDS deals with the bases for recognition of revenue arising in the course of the
ordinary activities of a person from –
o the sale of goods;
o the rendering of services;
o the use by others of the person’s resources yielding interest, royalties or
dividends.

► It does not, however, deal with the aspects of revenue recognition which are dealt with by
other ICDSs.
► “Revenue” is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of a person from the sale of goods, from the rendering of

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services, or from the use by others of the person’s resources yielding interest, royalties
or dividends. In an agency relationship, the revenue is the amount of commission and
not the gross inflow of cash, receivables or other consideration.
► This ICDS also contains a provision wherein the revenue from sale of goods could be
recognized when there is reasonable certainty of its ultimate collection.
► Revenue from service transactions is required to be recognized on the basis of
percentage completion method. However, revenue can be recognised on a straight line
basis over a specific period of time, when services are provided by an indeterminate
number of acts over such period.
► Revenue from service contracts with duration of not more than 90 days to be recognised
when the rendering of services under that contract is completed or substantially
completed.
► This ICDS contains certain disclosure requirements, like the amount of revenue from
service transactions recognized as revenue during the previous year, the method used to
determine the stage of completion of service transactions in progress, information
relating to service transactions in progress at the end of the previous year etc.

ICDS V: Tangible Fixed Assets

► This ICDS deals with the treatment of tangible fixed assets.
► “Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held
with the intention of being used for the purpose of producing or providing goods or
services and is not held for sale in the normal course of business.
► This ICDS provides the components of actual cost of such assets and valuation of such
assets in special cases.
► The fair value of a tangible fixed asset acquired in exchange for shares or other
securities or another asset shall be its actual cost.
► The ICDS also provides that depreciation on such assets and income arising on transfer
of such assets shall be computed in accordance with the provisions of the Income-tax
Act, 1961.
► The ICDS also contains disclosure requirements in respect of such assets, like the
description of asset or block of assets, rate of depreciation, actual cost or written down
value, as the case may be, additions or deductions during the year with dates,
depreciation allowable and written down value at the end of the year.

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ICDS VI: The Effects of changes in foreign exchange rates

► This ICDS deals with treatment of transactions in foreign currencies, translating the
financial statements of foreign operations and treatment of foreign currency transactions
in the nature of forward exchange contracts.
► This ICDS requires exchange differences arising on settlement of monetary items or
conversion thereof at last day of the previous year to be recognized as income or as
expense in that previous year.
► In respect of non-monetary items, exchange differences arising on conversion thereof as
at the last day of the previous year shall not be recognized as income or as expense in
that previous year.
► At the last day of each previous year, foreign currency monetary items shall be converted
into reporting currency by applying the closing rate.
► Non-monetary items in a foreign currency shall be converted into reporting currency by
using the exchange rate at the date of the transaction.
► Non-monetary item being inventory which is carried at net realisable value denominated
in a foreign currency shall be reported using the exchange rate that existed when such
value was determined.
► The ICDS contains provisions for initial recognition, conversion at the last date of the
previous year and recognition of exchange differences. These provisions shall be subject
to the provisions of section 43A of the Income-tax Act, 1961 and Rule 115 of the Income-
tax Rules, 1962.

ICDS VII: Government Grants

► This ICDS deals with the treatment of government grants. It recognizes that government
grants are sometimes called by other names such as subsidies, cash incentives, duty
drawbacks etc.
► This ICDS does not deal with Government assistance other than in the form of
Government grants and Government participation in the ownership of the enterprise.
► It requires recognition of Government Grants when there is a reasonable assurance that
the person shall comply with the conditions attached to them and the grants shall be
received. However, it also states that recognition of Government grant shall not be
postponed beyond the date of actual receipt.
► This ICDS requires Government grants relatable to depreciable fixed assets to be
reduced from actual cost/WDV. It further provides that where the Government grant is not
directly relatable to the asset acquired, then a pro-rata reduction of the amount of grant

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should be made in the same proportion as such asset bears to all assets with reference
to which the Government grant is so received.
► The standard requires grants relating to non-depreciable fixed assets to be recognized as
income over the same period over which the cost of meeting such obligations is charged
to income.
► The standard also requires Government grants receivable as compensation for expenses
or losses incurred in a previous financial year or for the purpose of giving immediate
financial support to the person with no further related costs to be recognized as income
of the period in which it is receivable.
► All other Government Grants have to be recognized as income over the periods
necessary to match them with the related costs which they are intended to compensate.
► The standard contains certain disclosure requirements, like nature and extent of
Government grants recognized during the previous year as income, nature and extent of
Government grants not recognized during the previous year as income and reasons
thereof etc.

ICDS VIII: Securities

► This ICDS deals with securities.
► There are two parts. Part A deals with securities held as stock-in-trade. Part B deals with
securities held by a scheduled bank or public financial institutions formed under a Central or a
State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013.
► It requires securities (referred to in Part A) to be recognized at actual cost on acquisition,
which shall comprise of its purchase price and include acquisition charges like
brokerage, fees, tax, duty or cess.
► The actual cost of a security (referred to in Part A) acquired in exchange for other
securities or another asset shall be the fair value of the security so acquired.
► Subsequently, at the end of any previous year, securities held as stock-in-trade have to
be valued at actual cost initially recognized or net realizable value at the end of that
previous year, whichever is lower.
► It goes on to provide that such comparison of actual cost initially recognized and net
realizable value has to be done category-wise and not for each individual security.
► Where actual cost initially recognized cannot be ascertained by reference to specific
identification, use of “First in First Out” method or “Weighted Average Cost” formula is
permitted for subsequent measurement of securities held as stock-in-trade (other than
unlisted or unquoted securities) referred to in Part A.

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► Securities referred to in Part B to be classified, recognised and measured in accordance

with the extant guidelines issued by the RBI in this regard. Any claim for deduction in
excess of the said guidelines will not be taken into account. To this extent, the provisions
of ICDS VI on the effect of changes in foreign exchange rates relating to forward
exchange contracts would not apply.

ICDS IX: Borrowing Costs

► This ICDS deals with the treatment of borrowing costs. It does not deal with the actual or
imputed cost of owners’ equity and preference share capital.
► It requires borrowing costs which are directly attributable to the acquisition, construction or
production of a qualifying asset to be capitalized as part of the cost of that asset. Other
borrowing costs have to be recognized in accordance with the provisions of the Act.
► Qualifying asset has been defined to mean –
o land, building, machinery, plant or furniture, being tangible assets;
o know‐how, patents, copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets;
o inventories that require a period of twelve months or more to bring them to a
saleable condition.
► This ICDS requires capitalization of specific borrowing costs and general borrowing
costs.
► This ICDS provides the formula for capitalization of borrowing costs when funds are
borrowed generally and used for the purpose of acquisition, construction or production of
a qualifying asset.
► For the purpose of computing the amount of borrowing costs to be capitalized, in a case
where the funds are not borrowed specifically for the purposes of acquisition,
construction or production of a qualifying asset, a qualifying asset would be such asset
that necessarily require a period of 12 months or more for its acquisition, construction or
production.
► It also provides as to when capitalization of borrowing costs would commence and cease.
► It requires disclosure of the accounting policy adopted for borrowing costs and the
amount of borrowing costs capitalized during the year.

ICDS X: Provisions, Contingent Liabilities and Contingent Assets

► This ICDS deals with Provisions, Contingent Liabilities and Contingent Assets. However,
it does not deal with provisions, contingent liabilities and contingent assets –

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o resulting from financial instruments,

o resulting from executory contracts,
o arising in insurance business from contracts with policyholders and
o covered by another ICDS.
It also does not deal with recognition of revenue dealt with by ICDS on Revenue
Recognition.
► The ICDS specifies the conditions for recognition of a provision, namely, existence of a
present obligation as a result of a past event, reasonable certainty that outflow of
resources embodying economic benefits will be required to settle the obligation and
making a reliable estimate of the amount of the obligation.
► It provides that a person shall not recognize a contingent liability or a contingent asset.
However, it requires contingent assets to be assessed continually. When it becomes
reasonably certain that inflow of economic benefit will arise, the asset and related income
have to be recognized in the previous year in which the change occurs.
► It contains provisions for measurement and review of a provision and asset and related
income.
► It also provides that a provision shall be used only for expenditures for which the
provision was originally recognized.
► The ICDS also contains specific disclosure requirements in respect of each class of
provision, asset and related income recognized.

Clarification on Income Computation and Disclosure Standards (ICDS) notified under

section 145(2) of the Income-tax Act, 1961 – [Circular No. 10/2017, dated 23-03-2017]

After notification of ICDS, it was brought to the notice of the CBDT by the stakeholders that certain
provisions of ICDS may require amendment/ clarification for proper implementation. The matter
was referred to an expert committee. The Committee after duly consulting the stakeholders in this
regard has recommended a two-fold approach for the smooth implementation of ICDS i.e.,
amendment to the provisions of ICDS in respect of certain issues and issuance of clarifications by
way of FAQs for the rest of issues.
The CBDT has, vide this circular, issued the following clarification on other issues:
Question 1: Preamble of ICDS I states that this ICDS is applicable for computation of income
chargeable under the head “Profits and gains of business or profession" or "Income from other
sources" and not for the purposes of maintenance of books of account. However, Para 1 of ICDS I

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states that it deals with significant accounting policies. Accounting policies are applied for
maintenance of books of accounts and preparing financial statements. What is the interplay
between ICDS I and maintenance of books of accounts?
Answer: As stated in the Preamble, ICDS is not meant for maintenance of books of accounts or
preparing financial statements. Persons are required to maintain books of accounts and prepare
financial statements as per accounting policies applicable to them. For example, companies are
required to maintain books of account and prepare financial statements as per requirements of
Companies Act, 2013. The accounting policies mentioned in ICDS-I being fundamental in nature
shall be applicable for computing income under the heads "Profits and gains of business or
profession" or "Income from other sources".
Question 2: Certain ICDS provisions are inconsistent with judicial precedents. Whether these
judicial precedents would prevail over ICDS?
Answer: The ICDS have been notified after due deliberation and after examining judicial views for
bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in
the absence of authoritative guidance on these issues under the Act for computing Income under
the head "Profits and gains of business or profession'' or Income from other sources. Since
certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be
applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and
subsequent assessment years.
Question 3: Does ICDS apply to non-corporate taxpayers who are not required to maintain books
of account and/or those who are covered by presumptive scheme of taxation like sections 44AD,
44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act?
Answer: ICDS is applicable to specified persons having income chargeable under the head
'Profits and gains of business or profession' or 'Income from other sources'. Therefore, the relevant
provisions of ICDS shall also apply to the persons computing income under the relevant
presumptive taxation scheme. For example, for computing presumptive income of a partnership
firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue
recognition shall apply for determining the receipts or turnover, as the case may be.
Question 4: If there is conflict between ICDS and other specific provisions of the Income-tax
Rules, 1962 governing taxation of income like rules 9A, 9B etc. of the Rules, which provisions shall
prevail?

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.21

Answer: ICDS provides general principles for computation of income. In case of conflict, if any,
between the provisions of Rules and ICDS, the provisions of Rules, which deal with specific
circumstances, shall prevail.
Question 5: ICDS is framed on the basis of accounting standards notified by Ministry of Corporate
Affairs (MCA) vide Notification No. GSR 739(E) dated 7th December, 2006 under section 211(3C)
of erstwhile Companies Act 1956. However, MCA has notified in February, 2015 a new set of
standards called 'Indian Accounting Standards' (Ind-AS). How will ICDS apply to companies which
adopted Ind-AS?
Answer: ICDS shall apply for computation of taxable income under the head "Profit and gains of
business or profession" or "Income from other sources" under the Income-tax Act. This is
irrespective of the accounting standards adopted by companies i.e. either Accounting Standards or
Ind-AS.
Question 6: Whether ICDS shall apply to computation of Minimum Alternate Tax (MAT) under
section 115JB of the Act or Alternate Minimum Tax (AMT) under section 115JC of the Act?
Answer: MAT under section 115JB of the Act is computed on 'book profit' that is net profit as
shown in the Profit and Loss Account prepared under the Companies Act subject to certain
specified adjustments. Since, the provisions of ICDS are applicable for computation of income
under the regular provisions of the Act, the provisions of ICDS shall not apply for computation of
MAT.
AMT under section 115JC of the Act is computed on adjusted total income which is derived by
making specified adjustments to total income computed as per the regular provisions of the Act.
Hence, the provisions of ICDS shall apply for computation of AMT.
Question 7: Whether the provisions of ICDS shall apply to Banks, Non-banking financial
institutions, Insurance companies, Power sector etc.?
Answer: The general provisions of ICDS shall apply to all persons unless there are sector specific
provisions contained in the ICDS or the Act. For example, ICDS VIII contains specific provisions
for banks and certain financial institutions and Schedule I of the Act contains specific provisions for
Insurance business.
Question 8: Para 4(ii) of ICDS-1 provides that Mark to Market (MTM) loss or an expected loss
shall not be recognized unless the recognition is in accordance with the provisions of any other
ICDS. Whether similar consideration applies to recognition of MTM gain or expected incomes?

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 3.22 DIRECT TAX LAWS

Answer: Same principle as contained in ICDS-I relating to MTM losses or an expected loss shall
apply mutatis mutandis to MTM gains or an expected profit.

Question 9: ICDS-1 provides that an accounting policy shall not be changed without 'reasonable
cause'. The term 'reasonable cause' is not defined. What shall constitute 'reasonable cause'?
Answer: Under the Act, 'reasonable cause' is an existing concept and has evolved well over a
period of time conferring desired flexibility to the tax payer in deserving cases.
Question 10: Which ICDS would govern derivative instruments?
Answer: ICDS -VI (subject to para 3 of ICDS-III) provides guidance on accounting for derivative
contracts such as forward contracts and other similar contracts. For derivatives, not within the
scope of ICDS-VI, provisions of ICDS-1 would apply.
Question 12: Since there is no specific scope exclusion for real estate developers and Build -
Operate-Transfer (BOT) projects from ICDS IV on Revenue Recognition, please clarify whether
ICDS-III and ICDS-IV should be applied by real estate developers and BOT operators. Also,
whether ICDS is applicable for leases.
Answer: At present, there is no specific ICDS notified for real estate developers, BOT projects and
leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as
may be applicable.
Question 13: The condition of reasonable certainty of ultimate collection is not laid down for
taxation of interest, royalty and dividend. Whether the taxpayer is obliged to account for such
income even when the collection thereof is uncertain?
Answer: As a principle, interest accrues on time basis and royalty accrues on the basis of
contractual terms. Subsequent non-recovery in either cases can be claimed as deduction in view
of amendment to section 36(1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail
over the provisions of ICDS.
Question 14: Whether ICDS is applicable to revenues which are liable to tax on gross basis like
interest, royalty and fees for technical services for non-residents u/s. 115A of the Act.
Answer: Yes, the provisions of ICDS, also apply for computation of these incomes on gross basis
for arriving at the amount chargeable to tax.
Question 15: Para 8 of ICDS-V states expenditure incurred on commissioning of project, including
expenditure incurred on test runs and experimental production shall be capitalized. It also states
that expenditure incurred after the plant has begun commercial production i.e., production intended

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.23

for sale or captive consumption shall be treated as revenue expenditure. What shall be the
treatment of expense incurred after the conduct of test runs and experimental production but
before commencement of commercial production?
Answer: As clarified in Para 8 of lCDS-V, the expenditure incurred till the plant has begun
commercial production, that is, production intended for sale or captive consumption, shall be
treated as capital expenditure.
Question 18: If the taxpayer sells a security on 30th April 2024. The interest payment dates are
December and June. The actual date of receipt of interest is on 30th June 2024 but the interest on
accrual basis has been accounted as income on 31st March 2024. Whether the taxpayer shall be
permitted to claim deduction of such interest i.e. offered to tax but not received while computing
the capital gain?

Answer: Yes, the amount already taxed as interest income on accrual basis shall be taken into
account for computation of income arising from such sale.
Question 19: Para 9 of ICDS-VIII on securities requires securities held as stock-in-trade shall be
valued at actual cost initially recognised or net realisable value (NRV) at the end of that previous
year, whichever is lower. Para 10 of Part-A of ICDS-VIII requires the said exercise to be carried
out category wise. How the same shall be computed?
Answer: For subsequent measurement of securities held as stock-in-trade, the securities are first
aggregated category wise. The aggregate cost and NRV of each category of security are
compared and the lower of the two is to be taken as carrying value as per ICDS-VIII. This is
illustrated below –
Security Category Cost NRV Lower of ICDS Value
cost or NRV
A Share 100 75 75
B Share 120 150 120
C Share 140 120 120
D Share 200 190 190
Total 560 535 505 535
E Debt Security 150 160 150
F Debt Security 105 90 90
G Debt Security 125 135 125
H Debt Security 220 230 220
Total 600 615 585 600
Securities Total 1160 1150 1090 1135

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Question 20: There are specific provisions in the Act read with Rules under which a portion of
borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(i), 40(a)(ia), 40A(2)(b), etc.
of the Act. Whether borrowing costs to be capitalized under ICDS-IX should exclude portion of
borrowing costs which gets disallowed under such specific provisions?
Answer: Since specific provisions of the Act override the provisions of ICDS, it is clarified that
borrowing costs to be considered for capitalization under ICDS IX shall exclude those borrowing
costs which are disallowed under specific provisions of the Act. Capitalization of borrowing cost
shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under
the Act.
Question 21: Whether bill discounting charges and other similar charges would fall under the
definition of borrowing cost?
Answer: The definition of borrowing cost is an inclusive definition. Bill discounting charges and
other similar charges are covered as borrowing cost.
Question 22: How to allocate borrowing costs relating to general borrowing as computed in
accordance with formula provided under Para 6 of ICDS-IX to different qualifying assets?
Answer: The capitalization of general borrowing cost under ICDS-IX shall be done on asset by-
asset basis.

Question 24: Expenditure on most post-retirement benefits like provident fund, gratuity, etc. are
covered by specific provisions. There are other post-retirement benefits offered by companies like
medical benefits. Such benefits are covered by AS-15 for which no parallel ICDS has been
notified. Whether provision for these liabilities are excluded from scope of ICDS X?
Answer: It is clarified that provisioning for employee benefit which are otherwise covered by AS 15
shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS-X.
Question 25: ICDS-1 requires disclosure of significant accounting policies and other ICDS
requires specific disclosures. Where is the taxpayer required to make such disclosures specified in
ICDS?

Answer: Net effect on the income due to application of ICDS is to be disclosed in the Return of
income. The disclosures required under ICDS shall be made in the tax audit report in Form 3CD.
However, there shall not be any separate disclosure requirements for persons who are not liable to
tax audit.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.25

Notified ICDS and Corresponding AS and IND AS

ICDS Corresponding AS Corresponding IND AS

ICDS I - Accounting AS – 1 Disclosure of Ind AS 1 - Presentation of Financial
Policies Accounting Policies Statements
ICDS II - Valuation of AS - 2 Valuation of Ind AS – 2 Inventories
Inventories Inventories (Revised)
ICDS III - Construction AS 7 – Construction Ind AS 115 – Revenue from
Contracts Contracts contracts with customers
ICDS IV - Revenue AS 9 – Revenue Ind AS 115 - Revenue from contracts
Recognition Recognition with customers
ICDS V - Tangible Fixed AS 10 – Property, Plant and Ind AS 16 Property, Plant and
Assets Equipment (Revised) Equipment
ICDS VI - The Effects of AS 11 – The Effects of Ind AS 21 – The Effects of changes
changes in foreign changes in foreign in foreign exchange rates
exchange rates exchange rates (Revised)
ICDS VII - Government AS 12 - Accounting for Ind AS 20 – Accounting for
Grants Government Grants Government Grants and Disclosure
of Government Assistance
ICDS VIII - Securities AS 13 - Accounting for Ind AS 40 – Investment Property, Ind
Investments (Revised) AS109 – Financial Instruments, Ind
AS 105 – Non-current Assets held
for Sale and Discontinued
Operations
ICDS IX - Borrowing Costs AS 16 - Borrowing Costs Ind AS 23 - Borrowing Costs
ICDS X - Provisions, AS 29 - Provisions, Ind AS 37 - Provisions, Contingent
Contingent Liabilities and Contingent Liabilities and Liabilities and Contingent Assets
Contingent Assets Contingent Assets
(Revised)

Student may note that the text of the notified ICDSs has been given as Annexure 1 at the
end of this Module.

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 3.26 DIRECT TAX LAWS

(2) Method of Accounting in certain cases [Section 145A]

The Delhi High Court had, in the case of Chamber of Tax Consultants & Anr vs. Union of India &
Ors, held that certain provisions of ICDSs are ultra vires the Act, since they seek to overcome
binding judicial precedents and are, thus, contrary to the law settled by the Supreme Court and
various High Courts.
In order to bring certainty in the wake of such judicial pronouncements section 36(1)(xviii), section
40A(13), section 43AA, section 43CB, section 145A and section 145B have been inserted in the
Income-tax Act, 1961 with effect from A.Y.2017-18.

Section 145A provides that for the purpose of determining the income chargeable under the head
“Profits and gains of business or profession”:
(a) the valuation of inventory shall be made at lower of actual cost or net realizable value
computed in accordance with notified ICDS i.e., ICDS II “Valuation of inventories”.
(b) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to
include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to
bring the goods or services to the place of its location and condition as on the date of valuation.
(c) inventory being securities not listed or listed but not quoted on a recognised stock
exchange with regularity from time to time shall be valued at actual cost initially recognised
in accordance with the notified ICDS i.e., ICDS VIII: Securities.
(d) inventory being listed and quoted securities, shall be valued at lower of actual cost or net
realisable value in accordance with notified ICDS i.e., ICDS VIII: Securities. Such
comparison of actual cost and net realisable value shall be done category-wise.
However, inventories being securities held by a scheduled bank or public financial institution shall
be valued in accordance with notified ICDS after taking into account the extant guidelines issued
by the RBI.
Note: Student may note that section 36(1)(xviii), section 40A(13), section 43AA, section 43CB,
and section 145B are discussed at respective places in this chapter.

3.5 COMPUTATION OF PROFITS AND GAINS FROM

BUSINESS OR PROFESSION [SECTION 29]
According to section 29, the profits and gains of any business or profession are to be computed in
accordance with the provisions contained in sections 30 to 43D. It must, however, be remembered

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.27

that in addition to the specific allowances and deductions stated in sections 30 to 36, the Act
further permits allowance of items of expenses under the residuary section 37(1), which extends
the allowance to items of business expenditure not covered by sections 30 to 36, where these are
allowable according to accepted commercial practices.

Computation of income from business or profession [Section 29]

Inadmissible Other
Expenses or
Admissible Profits provisions
deductions payments not
deductions chargeable to
(Section 40) deductible in certain
(Sections 30 tax (Section 41)
circumstances
to 37)
(Section 40A)

3.6 ADMISSIBLE DEDUCTIONS

(1) Rent, rates, taxes, repairs and insurance for buildings [Section 30]
Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of buildings
used by the assessee for the purpose of his business or profession.
• Where the premises are occupied by the assessee as a tenant, the rent paid for such
premises and the amount paid on account of cost of repairs, if the assessee has undertaken
to bear such repairs to the premises.
• Occupation of premises by the assessee being the owner: Where the assessee himself
is owner of the premises and occupies them for his business purposes, no notional rent
would be allowed under this section. However, where a firm runs its business in the
premises owned by one of its partners, the rent payable to the partner will be an allowable
deduction to the extent it is reasonable and is not excessive.
• Repairs of the premises: Apart from rent, this section allows deductions in respect of
expenses incurred on account of repairs to building in case where

♦ the assessee is the owner of the building or

♦ the assessee is a tenant who has undertaken to bear the cost of repairs to the premises.

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 3.28 DIRECT TAX LAWS

♦ Even if the assessee occupies the premises otherwise than as a tenant or owner,
i.e., as a lessee, licensee or mortgagee with possession, he is entitled to a deduction
under the section in respect of current repairs to the premises.
• Cost of repairs and current repairs of capital nature not to be allowed as deduction
[Explanation to section 30]: Amount paid on account of the cost of repairs to the premises
occupied by the assessee as a tenant and the amount paid on account of current repairs to
the premises occupied by the assessee, otherwise than as a tenant, shall not include any
capital nature expenditure. In other words, cost of repairs and current repairs other than of
capital nature is allowed as deduction while computing business income.
• Other expenses: In addition, deductions are allowed in respect of expenses by way of land
revenue, local rates, municipal taxes and insurance in respect of the premises used for the
purposes of the business or profession. Cesses, rates and taxes levied by a foreign
Government are also allowed.
• Premises used partly for business and partly for other purposes: Where the premises
are used partly for business and partly for other purposes, only a proportionate part of the
expenses attributable to that part of the premises used for purposes of business will be
allowed as a deduction [Section 38(1)].
(2) Repairs and insurance of machinery, plant and furniture [Section 31]
Section 31 allows deduction in respect of the expenses on current repairs and insurance of
machinery, plant and furniture in computing the income from business or profession.

• Usage of the asset: In order to claim this deduction, the assets must have been used for
purposes of the assessee’s own business the profits of which are being taxed i.e., the
assessee should be the beneficial owner of the asset.
The word ‘used’ has to be read in a wide sense so as to include active as well as passive
use. However, insurance and repair charges of assets which are owned by the assessee
but have not been used for the business during the previous year would not be allowed as a
deduction.
Even if an asset is used for a part of the previous year, the assessee is entitled to the
deduction of the full amount of expenses on repair and insurance charges and not merely
an amount proportionate to the period of use.

• Repairs exclude replacement or reconstruction: The term ‘repairs’ will include renewal
or renovation of an asset but not its replacement or reconstruction.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.29

The deduction allowable under this section is only of current repairs but not arrears of
repairs for earlier years even though they may still rank for a deduction under section 37(1).

• Insurance premium: The deduction allowable in respect of premia paid for insuring the
machinery, plant or furniture is subject to the following conditions:

♦ The insurance must be against the risk of damage or destruction of the machinery,
plant or furniture.
♦ The assets must be used by the assessee for the purposes of his business or
profession during the accounting year.
♦ The premium should have been actually paid (or payable under the mercantile
system of accounting).
The premium may even take the form of contribution to a trade association which
undertakes to indemnify and insure its members against loss; such premium or contribution
would be deductible as an allowance under this section even if a part of it is returnable to
the insured in certain circumstances.
It does not matter if the payment of the claim will enure to the benefit of someone other than
the owner.
• Current repairs of capital nature not to be allowed [Explanation to section 31]: Amount
paid on account of current repairs of machinery, plant or furniture shall not include any
capital nature expenditure. In other words, current repairs other than of capital nature
expenditure is allowed as deduction in the computation of income under the head “profits
and gains of business or profession”.
• Machinery, plant and furniture used partly for business and partly for other purposes:
Where the machinery, plant and furniture are used partly for business and partly for other
purposes, only a proportionate part of the expenses attributable to that part of the
machinery, plant and furniture used for purposes of business will be allowed as a deduction
[Section 38(2)].
(3) Depreciation [Section 32]
(1) Charge of depreciation mandatory: Section 32 allows a deduction in respect of
depreciation resulting from the diminution or exhaustion in the value of certain capital
assets.

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The Explanation 5 to this section provides that deduction on account of depreciation shall
be made compulsorily, whether or not the assessee has claimed the deduction in computing
his total income.
(2) Conditions to be satisfied for allowance of depreciation: The allowance of depreciation
which is regulated by Rule 5 of the Income-tax Rules, 1962, is subject to the following
conditions which are cumulative in their application.
(a) The assets in respect of which depreciation is claimed must belong to either of
the following categories, namely:
(1) buildings, machinery, plant or furniture, being tangible assets;
(2) know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, being intangible assets
acquired on or after 1st April, 1998, not being goodwill of a business or
profession.
 The depreciation in the value of any other capital assets cannot be
claimed as a deduction from the business income.
 No depreciation is allowable on the cost of the land on which the
building is erected because the term ‘building’ refers only to
superstructure but not the land on which it has been erected.
 The term ‘plant’ as defined in section 43(3) includes ships, vehicle,
books, scientific apparatus and surgical equipments used for the
purpose of the business or profession but does not include tea bushes
or livestock or buildings or furniture and fittings.
 However, the word ‘plant’ does not include an animal, human body or
stock-in-trade. Thus, plant includes all goods and chattels, fixed or
movable, which a businessman keeps for employment in his business
with some degree of durability.
 The expression ‘plant’ includes part of a plant (e.g., the engine of a
vehicle); machinery includes part of machinery and building includes a
part of the building.
 Similarly, the term ‘buildings’ includes within its scope roads, bridges,
culverts, wells and tubewells.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.31

(b) The assets should be actually used by the assessee for purposes of his
business or profession during the previous year - The asset must be put to use
at any time during the previous year. The amount of depreciation allowance is not
proportionate to the period of use during the previous year. If the asset is acquired
during the previous year and is not put to use in the same year, then the depreciation
shall not be allowed for such asset but the cost of such asset would be added to the
block of asset.
Asset used for less than 180 days - Where any asset is acquired by the assessee
during the previous year and is put to use for the purposes of business or profession
for a period of less than 180 days, depreciation shall be allowed at 50 per cent of
the allowable depreciation according to the percentage prescribed in respect of the
block of assets comprising such asset. It is significant to note that this restriction
applies only to the year of acquisition and not for subsequent years.

If the assets are not used exclusively for the business of the assessee but
for other purposes as well, the depreciation allowable would be a proportionate
part of the depreciation allowance to which the assessee would be otherwise
entitled. This is provided in section 38.

Depreciation would be allowable to the owner even in respect of assets which are
actually worked or utilized by another person e.g., a lessee or licensee. The
deduction on account of depreciation would be allowed under this section to the
owner who has let on hire his building, machinery, plant or furniture provided that
letting out of such assets is the business of the assessee. In other cases where the
letting out of such assets does not constitute the business of the assessee, the
deduction on account of depreciation would still be allowable under section 57(ii).
Use includes passive use in certain circumstances: One of the conditions for
claim of depreciation is that the asset must be “used for the purpose of business or
profession”. Depreciation is allowed when asset is actually put to use and not ready
to use. However, in certain circumstances, Courts have held that, an asset can be
said to be in use even when it is “kept ready for use”.
For example, stand by equipment and fire extinguishers can be capitalized if they
are ‘ready for use’’.
Likewise, machinery spares which can be used only in connection with an item of
tangible fixed asset and their use is expected to be irregular, has to be capitalised.

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Hence, in such cases, the term “use” embraces both active use and passive use.
However, such passive use should also be for business purposes.

(c) The assessee must own the assets, wholly or partly – Depreciation is allowed
only to the owner of the asset. If the assessee has taken an asset on lease, he,
being the lessee, cannot avail depreciation in respect of such asset. On the other
hands, the lessor will be entitled to depreciation on such asset as he is the owner.

However, in this connection, students may note that the Explanation 1 to

section 32 provides that where the business or profession of the assessee is carried
on in a building not owned by him but in respect of which the assessee holds a lease
or other right of occupancy, and any capital expenditure is incurred by the assessee
for the purposes of the business or profession or the construction of any structure or
doing of any work by way of renovation, extension or improvement to the building,
then depreciation will be allowed as if the said structure or work is a building owned
by the assessee.

Depreciation is allowable not only in respect of assets “wholly” owned by the

assessee but also in respect of assets “partly” owned by him and used for the
purposes of his business or profession.
(3) Computation of Depreciation Allowance: Depreciation allowance will be calculated on the
following basis:
(i) Power generation undertakings: In the case of assets of an undertaking engaged
in generation or generation and distribution of power, such percentage on the actual
cost to the assessee as prescribed by Rule 5(1A).
Rule 5(1A) - As per this rule, the depreciation on the abovementioned assets shall
be calculated at the percentage of the actual cost at rates specified in Appendix IA of
these rules. However, the aggregate depreciation allowed in respect of any asset for
different assessment years shall not exceed the actual cost of the asset. It is further
provided that such an undertaking as mentioned above has the option of being
allowed depreciation on the written down value of such block of assets as are used
for its business at rates specified in Appendix I to these rules.
However, such option must be exercised before the due date for furnishing return
under section 139(1) for the assessment year relevant to the previous year in which
it begins to generate power.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.33

It is further provided that any such option once exercised shall be final and shall
apply to all subsequent assessment years.

(ii) Block of assets: In the case of any block of assets, at such percentage of the
written down value of the block, as may be prescribed by Rule 5(1).

Block of Assets: A “block of assets” is defined in section 2(11), as a group of assets

falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses,
franchises or any other business or commercial rights of similar nature, not
being goodwill of a business or profession,
in respect of which the same percentage of depreciation is prescribed.

Block of asset simply means “same class of assets with same rate of depreciation”.

Know-how - In this context, ‘know-how’ means any industrial information or

technique likely to assist in the manufacture or processing of goods or in the working
of a mine, oil-well or other sources of mineral deposits (including searching for
discovery or testing of deposits for the winning of access thereto).
(iii) Additional depreciation on Plant & Machinery [Section 32(1)(iia)]: Additional
depreciation is allowed on any new machinery or plant (other than ships and aircraft)
acquired and installed after 31.3.2005 by an assessee engaged in the business of
manufacture or production of any article or thing or in the business of generation or
transmission or distribution of power at the rate of 20% of the actual cost of such
machinery or plant.
Asset put to use for less than 180 days: As per second proviso to section
32(1)(ii), 50% of additional depreciation to be allowed, where the plant and
machinery is put to use for less than 180 days during the previous year in which
such asset is acquired.
Further, third proviso to section 32(1)(ii) also provides that the balance 50% of the
additional depreciation on new plant or machinery acquired and used for less than
180 days which has not been allowed in the year of acquisition and installation of
such plant or machinery, shall be allowed in the immediately succeeding previous
year.

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Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI
or an artificial juridical person, additional depreciation is not allowable under the
default tax regime under section 115BAC. Additional depreciation would be allowable
only if such person has exercised the option of shifting out of the default tax regime
provided under section 115BAC(1A) and pays tax as per the optional tax regime
under the regular provisions of the Act.
In case of companies and co-operative societies, additional depreciation would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, additional depreciation would be
allowable only if companies and co-operative societies pay tax under the normal
provisions of the Act.

Plant and Machinery not qualifying for additional depreciation

Such additional depreciation will not be available in respect of:
(i) any machinery or plant which, before its installation by the assessee, was
used within or outside India by any other person (second hand machinery); or
(ii) any machinery or plant installed in office premises, residential
accommodation, or in any guest house; or
(iii) office appliances or road transport vehicles; or
(iv) any machinery or plant, the whole or part of the actual cost of which is
allowed as a deduction (whether by way of depreciation or otherwise) in
computing the income chargeable under the head “Profits and Gains of
Business or Profession” of any one previous year.
Note: Additional depreciation is not allowed to power generation undertakings opting
Appendix 1A of Rule 5 i.e., depreciation calculated as a percentage on the actual cost
to the assessee.
Eligibility for grant of additional depreciation under section 32(1)(iia) in the
case of an assessee engaged in printing or printing and publishing [Circular
No. 15/2016, dated 19-5-2016]
An assessee, engaged in the business of manufacture or production of an article or
thing, is eligible to claim additional depreciation under section 32(1)(iia) in addition to
the normal depreciation under section 32(1).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.35

The CBDT has, vide this Circular, clarified that the business of printing or printing
and publishing amounts to manufacture or production of an article or thing and
is, therefore, eligible for additional depreciation under section 32(1)(iia).

(iv) Terminal depreciation: In case of a power concern as covered under clause (i)
above, if any asset is sold, discarded, demolished or otherwise destroyed in the
previous year (other than the previous year in which it is first brought into use) the
depreciation amount will be the amount by which the moneys payable in respect of
such building, machinery, plant or furniture, together with the amount of scrap value,
if any, falls short of the written down value thereof. The depreciation will be available
only if the deficiency is actually written off in the books of the assessee.
Example: Mahapower Ltd. purchased an asset on 20.7.2020. The actual cost of the
asset was ` 100 lakhs. Mahapower Ltd. claimed depreciation @5% on the actual
cost of the asset. WDV of the asset as on 1.4.2024 is ` 80 lakhs. On 15.5.2024,
Mahapower Ltd. sold the asset for ` 55 lakhs. Deduction allowed as terminal
depreciation u/s 32(1)(ii) for P.Y. 2024-25 is ` 25 lakhs (` 80 lakhs - ` 55 lakhs)
provided the deficiency of ` 25 lakhs is actually written off in the books of
Mahapower Ltd.
Meaning of certain terms
Term Meaning
Moneys In respect of any building, machinery, plant or furniture includes —
payable (a) any insurance, salvage or compensation moneys payable in
respect thereof;
(b) where the building, machinery, plant or furniture is sold, the
price for which it is sold.,
Sold Includes a transfer by way of exchange or a compulsory acquisition
under any law for the time being in force. However, it does not
include a transfer, in a scheme of amalgamation, of any asset by the
amalgamating company to the amalgamated company where the
amalgamated company is an Indian company or a transfer of any
asset by a banking company to a banking institution in a scheme of
amalgamation of such banking company with the banking institution,
sanctioned and brought into force by the Central Government.

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 3.36 DIRECT TAX LAWS

Clarification regarding treatment of expenditure incurred on purchase of participating

interest by the Oil Exploration and Production (E&P) Companies [Circular No.
20/2019, dated 19.08.2019]
Over the life cycle of an Oil & Gas block, Oil Exploration and Production (E&P) companies
generally buy ('Farm in') and sell ('Farm out') their participating interests (PI) in the
'Production Sharing Agreement' (PSC). 'Farm-in' expenditure is incurred when an entity in
this line of business acquires a PI from another entity(s) in oil/gas block(s) and becomes
part of the PSC entered into with the Central Government.
The Government of India (Gol) offers exploration and development rights through global bidding for
specified blocks in various rounds under the New Exploration and Licensing Policy (NELP),
Hydrocarbon Exploration & Licensing Policy (HELP), Open Acreage Licensing Policy (OALP) etc.
by signing the Production Sharing Contracts (PSC’s) with the Oil & Gas companies. The
successful Oil & Gas Companies are granted license to explore, develop and carry out production
operations in Oil & Gas blocks and in India under a PSC with the Gol. Typically, owing to the large
investments required and the risks involved, multiple E&P companies execute the PSC with the
Gol in which each member has its agreed and defined PI.
It is common international practice for the upstream companies to buy (farm-in) and sale
(farm-out) their PI in the PSC or similar contracts with the Government and thereby to share
risk, bring new and niche expertise and technologies. In such transactions, PI are treated as
interests in rights, licences and obligation under the PSC. Such farm-in purchase price is
accounted as an asset as per guidance note issued by the Institute of Chartered
Accountants of India. International accounting rules for Oil & Gas followed in Australia,
Indonesia, UK etc. also require that such acquisition cost to be capitalized and depreciated.
A perusal of the Model PSC’s {as per the website of the Director General of Hydrocarbon
(DGH)} indicates that participating interests are share in rights and obligation to explore,
exploit and sell petroleum under the PSC along with related licences, permits etc. A few of
the case-laws on this issue also support treatment of acquisition rights in a PSC as
Intangible asset.
In this regard, it is relevant to mention that earlier vide Notification No. G.S.R. 117(E) dated
08.03.1996, in exercise of its powers under section 293A of the Act, Central Government
had laid down that the persons with whom it enters into agreement for the association or
participation in any business consisting of the prospecting for or extraction or production of
mineral oils on or after the 1st day of April,1992 -
a) shall not be assessed on the income as association of persons or body of individuals
consisting of such persons; but
b) each of the persons referred to above be assessed in respect of his or its share of
income, as the case may be, in the same status in which the person enters into the
agreement with the Central Government.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.37

Thus, as persons participating in an E&P contract are assessed individually in respect of their
share of income, the sum expended on acquisition of whole or part of such 'Participating
Interest' in an E&P contract where such acquisition is approved by the Government of India,
represents the amount paid to acquire the underlying share (expressed as a percentage) being
interests in rights, licences and obligations under the E&P contract.
In view of the above legal position, it is hereby clarified as under:-
i. amount paid for acquiring the 'Participating Interest' shall not be treated either as
cost for acquiring the share in partnership or investment for' acquisition of a
member's interest in an association of persons or body of individuals, rather it would
be treated as an amount paid to acquire the underlying assets; and
ii. the amount paid for acquiring the 'Participating Interest', after reducing component of
cost attributable to tangible assets for purposes of section 32(1)(i), would be treated
as an 'intangible asset' (being a business or commercial right akin to a licence),
eligible for claim of depreciation for purposes of section 32(1)(ii).

(4) Rates of depreciation: All assets have been divided into four main categories and rates of
depreciation as prescribed by Rule 5(1) are given below:

PART A TANGIBLE ASSETS

I Buildings
Block 1. Buildings which are used mainly for residential purposes except 5%
hotels and boarding houses
Block 2. Buildings which are not used mainly for residential purposes and 10%
not covered by Block (1) above and (3) below
Block 3. Buildings acquired on or after 1st September, 2002 for installing 40%
machinery and plant forming part of water supply project or water
treatment system and which is put to use for the purpose of
business of providing infrastructure facilities
Block 4. Purely temporary erections such as wooden structures 40%
II Furniture and Fittings
Block 1. Furniture and fittings including electrical fittings ["Electrical fittings" 10%
include electrical wiring, switches, sockets, other fittings and fans,
etc.]
III Plant & Machinery
Block 1. Motor cars other than those used in a business of running them on 30%
hire, acquired during the period from 23.8.2019 to 31.3.2020 and
put to use on or before 31.3.2020

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 3.38 DIRECT TAX LAWS

Block 2. Motor cars other than those used in a business of running them on 15%
hire, acquired or put to use on or after 1-4-1990 [Other than motor
cars mentioned in Block 1 above]
Block 3. Motor buses, motor lorries and motor taxis used in a business of 45%
running them on hire, acquired during the period from 23.8.2019 to
31.3.2020 and put to use on or before 31.3.2020
Block 4. Motors buses, motor lorries, motor taxis used in the business of 30%
running them on hire [Other than motor cars mentioned in Block 4
above]
Block 5. Moulds used in rubber and plastic goods factories 30%
Block 6. Aeroplanes, Aeroengines 40%
Block 7. Specified air pollution control equipments, water pollution control 40%
equipments, solid waste control equipment and solid waste
recycling and resource recovery systems
Block 8. Plant & Machinery used in semi-conductor industry covering all 30%
Integrated Circuits (ICs) (other than mentioned in Block 7 Above)
Block 9. Life saving medical equipments 40%
Block 10. Machinery and plant, acquired and installed on or after the 1st day 40%
of September, 2002 in a water supply project or a water treatment
system and which is put to use for the purpose of business of
providing infrastructure facility
Block 11. Containers made of glass or plastic used as re-fills 40%
Block 12 Energy Saving Devices (as specified) 40%
Block 13. Renewable Energy Saving Devices (as specified) including the 40%
devices specified in (i) to (iii) below
(i) Electrically operated vehicles including battery powered or 40%
fuel-cell powered vehicles
(ii) Windmills and any specially designed devices which run on 40%
windmills installed on or after 1.4.2014
(iii) Any special devices including electric generators and 40%
pumps running on wind energy installed on or after 1.4.2014
Block 14. Windmills and any specially designed devices running on windmills 15%
installed on or before 31.3.2014 and any special devices including
electric generators and pumps running on wind energy installed on
or before 31.3.2014
Block 15. Computers including computer software (See Note below) 40%

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.39

Block 16. Books (annual publications or other than annual publications) 40%
owned by assessees carrying on a profession
Block 17. Books owned by assessees carrying on business in running 40%
lending libraries
Block 18. Plant & machinery (General rate) 15%
IV Ships
Block 1. Ocean-going ships 20%
Block 2. Vessels ordinarily operating on inland waters not covered by Block 20%
3 below
Block 3. Speed boats operating on inland water 20%

PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or any other 25%
business or commercial rights of similar nature

Note - Mobile phones and EPABX are not considered as computers and hence, not eligible
for 40% rate of depreciation while computer accessories such as UPS, printers scanners,
etc. are eligible for 40% rate of depreciation.
Note: Students should refer to Income-tax Rules, 1962 for the detailed classification
of assets under Rule 5(1) and the rate of depreciation applicable thereto.
(5) Increased rate of depreciation for certain assets [Rule 5(2)]
Any new machinery or plant installed to manufacture or produce any article or thing by
using any technology or other know-how developed in or is an article or thing invented in a
laboratory owned or financed by the Government or a laboratory owned by a public sector
company or a University or an institution recognized by the Secretary, Department of
Scientific and Industrial Research, Government of India shall be treated as a part of the
block of assets qualifying for depreciation @40% of written down value.
Conditions to be fulfilled:
1. The right to use such technology or other know-how or to manufacture or produce
such article or thing has been acquired from the owner of such laboratory or any
person deriving title from such owner.
2. The return filed by the assessee for any previous year in which the said machinery is
acquired, should be accompanied by a certificate from the Secretary, Department of
Scientific and Industrial Research, Government of India to the effect that such article or

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 3.40 DIRECT TAX LAWS

thing is manufactured or produced by using such technology or other know-how

developed in such laboratory or such article or thing has been invented in that laboratory.

3. The machinery or plant is not used for the purpose of business of manufacture or
production of any article or thing specified in the Eleventh Schedule [The exclusion list
comprises of beer, wine and other alcoholic spirits, tobacco and tobacco preparations,
cosmetic and toilet preparations, tooth paste, dental cream, tooth powder and soap,
confectionery and chocolates, office machines and apparatus, steel furniture etc.].
The depreciation ordinarily allowable to an assessee in respect of any block of assets shall be
calculated at the above specified rates on the WDV of such block of assets as are used for the
purposes of the business or profession of the assessee at any time during the previous year.
ILLUSTRATION 1
XYZ (P) Ltd., engaged in manufacturing business, furnishes the following particulars:
Particulars `
(1) Opening WDV of plant and machinery as on 1.4.2024 (i.e., WDV as 30,00,000
on 31.3.2024 after reducing depreciation for P.Y. 2023-24)
(2) New plant and machinery purchased and put to use on 08.06.2024 20,00,000
(3) New plant and machinery acquired and put to use on 15.12.2024 8,00,000
(4) Computer acquired and installed in the office premises on 2.1.2025 3,00,000

Compute the amount of depreciation and additional depreciation as per the Income-tax Act,
1961 for the A.Y. 2025-26. Assume that all the assets were purchased by way of account
payee cheque and that the company does not opt for section 115BAA/115BAB.
SOLUTION
Computation of depreciation and additional depreciation for A.Y. 2025-26
Plant & Computer
Particulars Machinery (40%)
(15%)
(`) (`)
Normal depreciation
• @ 15% on ` 50,00,000 [See Working Notes 1 & 2] 7,50,000 -
• @ 7.5% (50% of 15%, since put to use for less than 60,000 -
180 days) on ` 8,00,000
• @ 20% (50% of 40%, since put to use for less than - 60,000
180 days) on ` 3,00,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.41

Additional Depreciation
• @ 20% on ` 20,00,000 (new plant and machinery put 4,00,000 -
to use for more than 180 days)
• @10% (50% of 20%, since put to use for less than -
180 days) on ` 8,00,000 80,000
Total depreciation 12,90,000 60,000

Working Note:
Computation of written down value of Plant & Machinery

Particulars Plant & Computer

Machinery
(`) (`)
Written down value as on 1.4.2024 30,00,000 -
Add: Plant & Machinery purchased on 08.6.2024 (put to 20,00,000 -
use for more than 180 days)
Add: Plant & Machinery acquired on 15.12.2024 (put to use 8,00,000 -
for less than 180 days)
Computer acquired and installed in the office premises (put - 3,00,000
to use for less than 180 days)
Written down value as on 31.03.2025 58,00,000 3,00,000

Composition of plant and machinery included in the WDV

Plant & Computer

Particulars Machinery (`)
(`)
Plant and machinery put to use for 180 days or more 50,00,000
[` 30,00,000 (WDV) + ` 20,00,000 (purchased on 8.6.2024)]
Plant and machinery put to use for less than 180 days 8,00,000 -
Computers put to use for less than 180 days - 3,00,000
58,00,000 3,00,000

Notes:
1. As per the second proviso to section 32(1)(ii), where an asset acquired during the
previous year is put to use for less than 180 days in that previous year, the amount
of deduction allowable as normal depreciation and additional depreciation would be
restricted to 50% of amount computed in accordance with the prescribed percentage.

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 3.42 DIRECT TAX LAWS

Therefore, normal depreciation on plant and machinery acquired and put to use on
15.12.2024 and computer acquired and installed on 02.01.2025, is restricted to 50%
of 15% and 40%, respectively. The additional depreciation on the said plant and
machinery is restricted to ` 80,000, being 10% (i.e., 50% of 20%) of ` 8 lakh.
2. As per third proviso to section 32(1)(ii), the balance additional depreciation of
` 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2026-27 if XYZ (P) Ltd. does not opt for the provisions of
section 115BAA.

3. As per section 32(1)(iia), additional depreciation is allowable in the case of any new
machinery or plant acquired and installed after 31.3.2005 by an assessee engaged,
inter alia, in the business of manufacture or production of any article or thing, @20%
of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any
machinery or plant installed in office premises, residential accommodation or in any
guest house.
Accordingly, additional depreciation is not allowable on computer installed in the
office premises.
ILLUSTRATION 2
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired
the following assets in his office during F.Y. 2024-25 at the cost shown against each item.
Calculate the amount of depreciation that can be claimed from his professional income for
A.Y.2025-26. Assume that all the assets were purchased by way of account payee cheque.

Sl. Description Date of Date when Amount

No. acquisition put to use `
1. Computer including computer 27 Sept., 24 1 Oct., 24 35,000
software
2. Computer UPS 2 Oct., 24 8 Oct., 24 8,500
3. Computer printer 1 Oct., 24 1 Oct., 24 12,500
4. Books (of which books being annual 1 Apr., 24 1 Apr., 24 13,000
publications are of ` 12,000)
5. Office furniture 1 Apr., 24 1 Apr., 24 3,00,000
(Acquired from a practising C.A.)
6. Laptop 26 Sep., 24 8 Oct., 24 43,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.43

SOLUTION
Computation of depreciation allowable for A.Y.2025-26

Asset Rate Depreciation

Block 1 Furniture [See working note below] 10% 30,000
Block 2 Plant (Computer including computer software, 40%
computer UPS, laptop, computer printer & books) 34,500
Total depreciation allowable 64,500

Working Notes:
Computation of depreciation
Block of Assets `
Block 1: Furniture – [Rate of depreciation - 10%]
Put to use for more than 180 days [` 3,00,000@10%] 30,000
Block 2: Plant [Rate of depreciation - 40%]
(a) Computer including computer software (put to use for more than 180 14,000
days) [` 35,000 @ 40%]
(b) Computer UPS (put to use for less than 180 days) [` 8,500@ 20%] 1,700
[See Note below]
(c) Computer Printer (put to use for more than 180 days) [` 12,500 @ 5,000
40%]
(d) Laptop (put to use for less than 180 days) [` 43,000 @ 20%] [See 8,600
Note below]
(e) Books (being annual publications or other than annual publications) 5,200
(Put to use for more than 180 days) [` 13,000 @ 40%]
34,500

Note - Where an asset is acquired by the assessee during the previous year and is put to
use for the purposes of business or profession for a period of less than 180 days, the
deduction on account of depreciation would be restricted to 50% of the prescribed rate. In
this case, since Mr. Dhaval commenced his practice in the P.Y.2024-25 and acquired the
assets during the same year, the restriction of depreciation to 50% of the prescribed rate
would apply to those assets which have been put to use for less than 180 days in that year,
namely, laptop and computer UPS.

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 3.44 DIRECT TAX LAWS

(6) Depreciation in case of succession of firm/sole proprietary concern by a company or

business reorganization, amalgamation or demerger of companies or succession of
business otherwise than on death

As per the sixth proviso to section 32(1)(ii), depreciation allowable in the hands of

- predecessor and the successor in case of succession of firm/ sole proprietary

concern by a company fulfilling the conditions mentioned in section 47(xiii)/(xiv) or

- predecessor company and successor LLP in case of conversion of a private

company or an unlisted public company into an LLP fulfilling the conditions
mentioned in section 47(xiiib) or

- predecessor and the successor in case of succession of business otherwise than on

death

- amalgamating/ amalgamated company or demerged or resulting company in case of

amalgamation or demerger of companies

shall not exceed the amount of depreciation calculated at the prescribed rates as if the
succession, business reorganization, amalgamation or demerger had not taken place.

It is also provided that such amount of depreciation shall be apportioned between the two
entities in the ratio of the number of days for which the assets were used by them.

ILLUSTRATION 3
Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose WDV as on
31.3.2024 after reducing depreciation for P.Y. 2023-24 was ` 40 lakhs. It purchased
another asset (second-hand plant and machinery) of the same block on 01.11.2024 for
` 14.40 lakhs and put to use on the same day. Sai Ltd. was amalgamated with Shirdi Ltd.
with effect from 01.01.2025.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the
previous year ended on 31.03.2025 assuming that the assets were transferred to Shirdi Ltd. at
` 60 lakhs. Also assume that the plant and machinery were purchased by way of account
payee cheque.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.45

SOLUTION
Statement showing computation of depreciation allowable
to Sai Ltd. & Shirdi Ltd. for A.Y. 2025-26
Particulars `
Opening WDV as on 1.4.2024 [i.e., WDV as on 31.3.2024 after reducing 40,00,000
depreciation for P.Y. 2023-24
Addition during the P.Y. 2024-25 (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on ` 40,00,000 @15% 6,00,000
Depreciation on ` 14,40,000 @7.5% 1,08,000
Total depreciation for the P.Y. 2024-25 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
` 6,00,000 × 275/365 4,52,055
` 1,08,000 × 61/151 43,629
4,95,684
(b) Amalgamated company, Shirdi Ltd.
` 6,00,000 × 90/365 1,47,945
` 1,08,000 × 90/151 64,371
2,12,316

Notes:
(i) The aggregate deduction, in respect of depreciation allowable to the amalgamating
company and amalgamated company in the case of amalgamation shall not exceed
in any case, the deduction calculated at the prescribed rates as if the amalgamation
had not taken place. Such deduction shall be apportioned between the
amalgamating company and the amalgamated company in the ratio of the number of
days for which the assets were used by them.

(ii) The price at which the assets were transferred, i.e., ` 60 lakhs, has no implication in
computing eligible depreciation.
(7) Hire purchase: In the case of assets under the hire purchase system the allowance for
depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-1943,
be granted as follows:

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 3.46 DIRECT TAX LAWS

• In every case of payment purporting to be for hire purchase, production of the agreement
under which the payment is made would be insisted upon by the department.

• Where the effect of an agreement is that the ownership of the asset is at once
transferred on the lessee, the transaction should be regarded as one of purchase by
instalments and consequently no deduction in respect of the hire amount should be
made. This principle will be applicable in a case where the lessor obtains a right to
sue for arrears of installments but has no right to recover the asset back from the
lessee. Depreciation in such cases should be allowed to the lessee on the hire
purchase price determined in accordance with the terms of hire purchase agreement.
• Where the terms of an agreement provide that the asset shall eventually become the
property of the hirer or confer on the hirer an option to purchase an asset, the
transaction should be regarded as one of hire purchase. In such case, periodical
payments made by the hirer should for all tax purposes be regarded as made up of
(i) the consideration for hirer which will be allowed as a deduction in
assessment, and
(ii) payment on account of the purchase price, to be treated as capital outlay and
depreciation being allowed to the lessee on the initial value namely, the
amount for which the hired assets would have been sold for cash at the date
of the agreement.
The allowance to be made in respect of the hire should be the amount of the
difference between the aggregate amount of the periodical payments under the
agreement and the initial value as stated above. The amount of this allowance
should be spread over the duration of the agreement evenly. If, however, agreement
is terminated either by outright purchase of the asset or by its return to the seller, the
deduction should cease as from the date of termination of agreement.
For the purpose of allowing depreciation, an assessee claiming deduction in respect
of the assets acquired on hire purchase would be required to furnish a certificate
from the seller or any other suitable documentary evidence in respect of the initial
value or the cash price of the asset.
In cases where no such certificate or other evidence is furnished the initial value of
the assets should be arrived at by computing the present value of the amount
payable under the agreement at an appropriate per centum.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.47

For the purpose of allowing depreciation the question whether in a particular case
the assessee is the owner of the hired asset or not is to be decided on a
consideration of all the facts and circumstances of each case and the terms of the
hire purchase agreement. Where the hired asset is originally purchased by the
assessee and is registered in his name, the mere fact that the payment of the price
is spread over the specified period and is made in installments to suit the needs of
the purchaser does not disentitle the assessee from claiming depreciation in respect
of the asset, since the assessee would be the real owner although the payment of
purchase price is made subsequent to the date of acquisition of the asset itself.
(8) Actual Cost [Section 43(1)]
The expression “actual cost” means the actual cost of the asset to the assessee as reduced
by that portion of the cost thereof, if any, as has been met directly or indirectly by any other
person or authority.
However, where an assessee incurs any expenditure for acquisition of any asset or part
thereof in respect of which a payment or aggregate of payments made to a person in a day,
otherwise than by an account payee cheque drawn on a bank or account payee bank draft
or use of electronic clearing system through a bank account or through such other
prescribed electronic mode, exceeds ` 10,000, such expenditure shall not form part of
actual cost of such asset [Second proviso to section 43(1)].
The prescribed electronic modes include credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].
Actual cost in certain special situations [Explanations to section 43(1)]
Explanation Situation Actual cost of the asset to the assessee
1 Where an asset is used for Actual cost to the assessee as reduced by
the purposes of business any deduction allowed u/s 35(1)(iv).
after it ceases to be used Note - Actual cost of such asset would be
for scientific research Nil as already 100% deduction would have
related to that business been claimed u/s 35(1)(iv)
1A Where inventory is Fair market value of such inventory as on
converted or treated as a the date of its conversion into capital asset
capital asset and is used determined in the prescribed manner
for the purpose of business
or profession

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2 Where an asset is acquired Actual cost to the previous owner minus

by way of gift or inheritance depreciation allowable to the assessee as
if asset was the only asset in the relevant
block of assets.
Further, any expenditure incurred by the
assessee such as expenditure on freight,
installation etc. of such asset would also
be includible in the actual cost.
3 Where, before the date of An amount which the Assessing Officer
its acquisition by the may, with the previous approval of the
assessee, the asset was at Joint Commissioner, determine, having
any time used by any other regard to all the circumstances of the case
person for the purposes of
his business or profession,
and the Assessing Officer
is satisfied that the main
purpose of the transfer of
the asset directly or
indirectly to the assessee
was the reduction of liability
of income-tax directly or
indirectly to the assessee
(by claiming depreciation
with reference to an
enhanced cost)
4 Where any asset which had (a) the actual cost when he first acquired
once belonged to the the asset minus depreciation allowable
assessee and had been to the assessee as if asset was the
used by him for the only asset in the relevant block of
purposes of his business or assets; or
profession and thereafter (b) the actual price for which the asset is
ceased to be his property re-acquired by him
by reason of transfer or whichever is less
otherwise, is re-acquired by
him
4A Where before the date of Actual cost of the transferred assets, in the
acquisition by the case of Mr. A, shall be the same as the
assessee, say, Mr. A, the written down value of the said assets at the
assets were at any time time of transfer thereof by Mr. B.
used by any other person,
say Mr. B, for the purposes
of his business or
profession and depreciation
allowance has been

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.49

claimed in respect of such

assets in the case of Mr. B
and such person acquires
on lease, hire or otherwise,
assets from Mr. A
5 Where a building which was Actual cost of the building to the assessee,
previously the property of as reduced by an amount equal to the
the assessee is brought depreciation calculated at the rates in force
into use for the purposes of on that date that would have been
the business or profession allowable had the building been used for
the purposes of the business or profession
since the date of its acquisition by the
assessee
6 When any capital asset is The actual cost of the transferred capital
transferred by a holding asset to the transferee company shall be
company to its wholly taken to be the same as it would have
owned Indian subsidiary been if the transferor company had
company or by a subsidiary continued to hold the capital asset for the
company to its 100% purposes of its own business
holding company, being an
Indian company then, the
transaction not being
regarded as a transfer of a
capital asset
7 In a scheme of The actual cost of the transferred capital
amalgamation, if any assets to the amalgamated company will
capital asset is transferred be taken at the same amount as it would
by the amalgamating have been taken in the case of the
company to the amalgamating company had it continued to
amalgamated Indian hold it for the purposes of its own business
company
7A In the case of a demerger, The actual cost of the transferred asset to
where any capital asset is the resulting company shall be taken to be
transferred by the the same as it would have been if the
demerged company to the demerged company had continued to hold
resulting Indian company the capital asset for the purpose of its own
business.
However, the actual cost shall not exceed
the WDV of the asset in the hands of the
demerged company

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 3.50 DIRECT TAX LAWS

Explanation 4A overrides Explanation 3

Explanation 3 to section 43(1) deals with a situation where a transfer of any asset is made
with the main purpose of reduction of tax liability (by claiming depreciation on enhanced
cost), and the Assessing Officer, having satisfied himself about such purpose of transfer
with the prior approval of the joint commissioner, may determine the actual cost having
regard to all the circumstances of the case.
In the Explanation 4A, a non-obstante clause has been included to the effect that
Explanation 4A will have an overriding effect over Explanation 3. The result of this is that
there is no necessity of finding out whether the main purpose of the transaction is reduction
of tax liability. Explanation 4A is activated in every situation described above without
inquiring about the main purpose.

Example:
A person (say “B”) owns an asset and uses it for the purposes of his business or profession. B
has claimed depreciation in respect of such asset. The said asset is transferred by B to another
person (say “A”). B then acquires the same asset back from A on lease, hire or otherwise. A
being the new owner will be entitled to depreciation. In the above situation, the cost of
acquisition of the transferred assets in the hands of A shall be the same as the written down
value of the said assets at the time of transfer in the hands of B.

Actual cost in other special situations

(i) Capitalization of interest paid or payable in connection with acquisition of an
asset: Certain taxpayers have, with a view to obtain more tax benefits and reduce
the tax outflow, resorted to the method of capitalising interest paid or payable in
connection with acquisition of an asset relatable to the period after such asset is first
put to use.
This capitalisation implies inclusion of such interest in the ‘Actual Cost’ of the asset
for the purposes of claiming depreciation under the Income-tax Act, 1961. This was
never the legislative intent nor was it in accordance with recognised accounting
practices. Therefore, with a view to counter-acting tax avoidance through this
method and placing the matter beyond doubt, Explanation 8 to section 43(1)
provides that any amount paid or payable as interest in connection with the
acquisition of an asset and relatable to period after asset is first put to use shall not
be included and shall be deemed to have never been included in the actual cost of
the asset.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.51

(ii) Amount of duty of excise or additional duty leviable shall be reduced if credit
is claimed: Where an asset is or has been acquired by an assessee, the actual cost
of asset shall be reduced by the amount of duty of excise or the additional duty
leviable under section 3 of the Customs Tariff Act, 1975 in respect of which a claim
of credit has been made and allowed under the Central Excise Rules, 1944 6
[Explanation 9].
(iii) Subsidy or grant or reimbursement: Where a portion of the cost of an asset
acquired by the assessee has been met directly or indirectly by the Central
Government or a State Government or any authority established under any law or by
any other person, in the form of a subsidy or grant or reimbursement (by whatever
name called), then, so much of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of the asset to the assessee.
However, where such subsidy or grant or reimbursement is of such nature that it
cannot be directly relatable to the asset acquired, so much of the amount which
bears to the total subsidy or reimbursement or grant the same proportion as such
asset bears to all the assets in respect of or with reference to which the subsidy or
grant or reimbursement is so received, shall not be included in the actual cost of the
asset to the assessee [Explanation 10].
Note: ICDS VII requires Government grants relatable to depreciable assets to be
reduced from actual cost of the asset/WDV of the block of asset. It further provides
that where the Government grant is not directly relatable to the asset acquired, then
a pro-rata reduction of the amount of grant should be made in the same proportion
as such asset bears to all assets with reference to which the Government grant is so
received.
(iv) Asset is acquired outside India by an assessee, being a non-resident and such
asset is brought by him to India: Where an asset is acquired outside India by an
assessee, being a non-resident and such asset is brought by him to India and used
for the purposes of his business or profession, the actual cost of asset to the
assessee shall be the actual cost of the asset to the assessee, as reduced by an
amount equal to the amount of depreciation calculated at the rate in force that would
have been allowable had the asset been used in India for the said purposes since
the date of its acquisition by the assessee [Explanation 11].

6 Now Central Excise Rules, 2002

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 3.52 DIRECT TAX LAWS

(v) Capital asset is acquired under a scheme for corporatization: Where any capital
asset is acquired under a scheme for corporatization of a recognised stock exchange
in India approved by the SEBI, the actual cost shall be deemed to be the amount which
would have been regarded as actual cost had there been no such corporatization
[Explanation 12].
Note: Under the scheme of corporatization, recognised stock exchange gets
converted into ‘Company’ from the status of being ‘Association of persons’ or ‘Body
of Individuals’.

(vi) Capital asset on which deduction is allowable under section 35AD: Explanation
13 to section 43(1) provides that the actual cost of any capital asset, on which
deduction has been allowed or is allowable to the assessee under section 35AD,
shall be nil.
This would be applicable in the case of transfer of asset by the assessee where –
(1) the assessee himself has claimed deduction under section 35AD; or
(2) the previous owner has claimed deduction under section 35AD. This would be
applicable where the capital asset is acquired by the assessee by way of –
(a) gift, will or an irrevocable trust;
(b) any distribution on liquidation of the company;
(c) any distribution of capital assets on total or partial partition of a HUF;
(d) any transfer of a capital asset by a holding company to its 100%
subsidiary company, being an Indian company;
(e) any transfer of a capital asset by a subsidiary company to its 100%
holding company, being an Indian company;
(f) any transfer of a capital asset by the amalgamating company to an
amalgamated company in a scheme of amalgamation, if the
amalgamated company is an Indian company;

(g) any transfer of a capital asset by the demerged company to the

resulting company in a scheme of demerger, if the resulting company
is an Indian company;
(h) any transfer of a capital asset or intangible asset by a firm to a
company as a result of succession of the firm by a company in the

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.53

business carried on by the firm, or any transfer of a capital asset to a

company in the course of demutualization or corporatisation of a
recognized stock exchange in India as a result of which an association
of persons or body of individuals is succeeded by such company
(fulfilling the conditions specified);
(i) any transfer of a capital asset or intangible asset by a sole proprietary
concern to a company, where the sole proprietary concern is
succeeded by a company (fulfilling the conditions specified).

(j) any transfer of a capital asset or intangible asset by a private company

or unlisted public company to an LLP as a result of conversion of the
company into LLP (fulfilling the conditions prescribed).
However, where an asset, in respect of which deduction is claimed and allowed
under section 35AD is deemed to be the income of the assessee in accordance with
the provisions of section 35AD(7B) (on account of being used for a purpose other
than specified business under section 35AD), the actual cost of the asset to the
assessee shall be actual cost to assessee as reduced by the amount of
depreciation allowable had the asset been used for the purpose of business,
calculated at the rate in force, since the date of its acquisition [Proviso to
Explanation 13 to section 43(1)]
(9) Written down value [Section 43(6)]

(i) Assets acquired by the assessee during the previous year: In the case of assets
acquired by the assessee during the previous year, the written down value means
the actual cost to the assessee.
(ii) Assets acquired before the previous year: In the case of assets acquired before
the previous year, the written down value would be the actual cost to the assessee
less the aggregate of all deductions actually allowed in respect of depreciation.

For this purpose, any depreciation carried forward is deemed to be depreciation

actually allowed [Section 43(6)(c)(i) read with Explanation 3].
(iii) In case of any block of assets: The written down value of any block of assets shall
be worked out as under in accordance with section 43(6)(c):
(1) W.D.V. of the block of assets in immediately preceding previous year xxx
(P.Y. 2023-24)

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 3.54 DIRECT TAX LAWS

(2) Less: Depreciation actually allowed in respect of that block of assets xxx
in said preceding previous year (i.e., in P.Y. 2023-24)
Opening balance as on 1st April of the current P.Y. (i.e., on 1.4.2024) xxx
Increased by
(3) Actual cost of assets acquired during the previous year 2024-25, not xxx
being on account of acquisition of goodwill of a business or
profession
(4) Total (1) - (2) + (3) xxx
Reduced by
(5) Money receivable in respect of any asset falling within the block xxx
which is sold, discarded, demolished or destroyed during that
previous year. However, such amount cannot exceed the amount in
(4).
(6) In case of slump sale, actual cost of the asset (-) amount of xxx
depreciation that would have been allowable to the assessee for any
assessment year as if the asset was the only asset in the block.
However, such amount of reduction cannot exceed the WDV.
(7) W.D.V at the end of the year (as on 31.3.2025, on which depreciation xxx
is allowable) [(4) – (5) – (6)]
(8) Depreciation at the prescribed rate
(Rate of Depreciation × WDV arrived at in (7) above) xxx

(iv) Succession to business or profession otherwise than on death: When in the

case of a succession to business or profession otherwise than on death, an
assessment is made on the successor under section 170(2), the written down value
of an asset or block of assets shall be the amount which would have been taken as
the written down value if the assessment had been made directly on the person
succeeded to [Explanation 1 to section 43(6)].
Example: Tapan succeeded his father’s business due to retirement of his father. The
WDV of the assets in the hands of Tapan would be the WDV of the assets in the
hands of his father.
(v) Transfer of block of assets by a holding company to a subsidiary company or
vice versa or by amalgamating company to amalgamated company: Where in
any previous year any block of assets is transferred by a holding company to its
wholly owned Indian subsidiary company or by a subsidiary company to its 100%
holding company, being an Indian company or by an amalgamating company to an

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.55

amalgamated company, the latter being an Indian company, then the actual cost of
the block of assets in the case of transferee-company or amalgamated company as
the case may be, shall be the written down value of the block of assets as in the
case of the transferor company or amalgamating company, as the case may be, for
the immediately preceding year as reduced by depreciation actually allowed in
relation to the said previous year [Explanation 2 to section 43(6)].
(vi) Block of assets is transferred by demerged company to the resulting company:
Where in any previous year any asset forming part of a block of assets is transferred
by demerged company to the resulting company, the written down value of the block
of assets of the demerged company for the immediately preceding year shall be
reduced by the written down value of the assets transferred to the resulting company
[Explanation 2A to section 43(6)].
(vii) Block of assets is transferred by a demerged company to the resulting
company: Where any asset forming part of a block of assets is transferred by a
demerged company to the resulting company, the written down value of the block of
assets in the case of resulting company shall be the written down value of the
transferred assets of the demerged company immediately before the demerger
[Explanation 2B to section 43(6)].
(viii) Block of assets in the case of the successor LLP: The actual cost of the block of
assets in the case of the successor LLP on conversion of private or unlisted
company to a LLP and the conditions of clause 47(xiiib) are satisfied, shall be the
written down value of the block of assets as in the case of the predecessor company
on the date of conversion [Explanation 2C to section 43(6)].
(ix) Block of assets transferred by a recognised stock exchange in India to a
company under a scheme for corporatization: Where any asset forming part of a
block of assets is transferred in any previous year by a recognised stock exchange in
India to a company under a scheme for corporatisation approved by SEBI, the
written down value of the block shall be the written down value of the transferred
assets immediately before the transfer [Explanation 5 to section 43(6)].
(x) Depreciation provided in the books of account deemed to be depreciation
actually allowed: Section 32(1)(ii) provides that depreciation shall be allowed at the
prescribed percentage on the written down value (WDV) of any block of assets.
Section 43(6)(b) provides that written down value in the case of assets acquired

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 3.56 DIRECT TAX LAWS

before the previous year means the actual cost to the assessee less all depreciation
actually allowed to him under the Income-tax Act, 1961.

Persons who were exempt from tax were not required to compute their income under
the head “Profits and gains of business or profession”. However, when the
exemption is withdrawn subsequently, such persons became liable to income-tax
and hence, were required to compute their income for income-tax purposes. In this
regard, a question arises as to the basis on which depreciation is to be allowed
under the Income-tax Act, 1961 in respect of assets acquired during the years when
the person was exempt from tax.
Explanation 6 to section 43(6) provides that -
(a) the actual cost of an asset has to be adjusted by the amount attributable to
the revaluation of such asset, if any, in the books of account;
(b) the total amount of depreciation on such asset provided in the books of
account of the assessee in respect of such previous year or years preceding
the previous year relevant to the assessment year under consideration shall
be deemed to be the depreciation actually allowed under the Income-tax Act,
1961 for the purposes of section 43(6);
(c) the depreciation actually allowed as above has to be adjusted by the amount
of depreciation attributable to such revaluation.
(xi) Composite Income: Explanation 7 provides that in cases of ‘composite income’, for
the purpose of computing written down value of assets acquired before the previous
year, the total amount of depreciation shall be computed as if the entire composite
income of the assessee is chargeable under the head “Profits and Gains of business
or profession”. The depreciation so computed shall be deemed to have been
“actually allowed” to the assessee.

Rule 8 prescribes the taxability of income from the manufacture of tea. Under the
said rule, income derived from the sale of tea grown and manufactured by seller
shall be computed as if it were income derived from business, and 40% of such
income shall be deemed to be income liable to tax.
Example: If the turnover is, say, ` 20 lakh, the depreciation ` 1 lakh and other
expenses ` 4 lakh, then, the income would be ` 15 lakh. Business income would be
` 6 lakh (being 40% of ` 15 lakh). In this case, ` 1 lakh, being the amount of
depreciation would be deemed to have been actually allowed.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.57

The WDV is required to be computed by deducting the full depreciation attributable

to composite income i.e. ` 1 lakh. Explanation 7 clarifies this legislative intent.

(xii) Cases where the Written Down Value reduced to Nil: The written down value of
any block of assets, may be reduced to nil for any of the following reasons:

(a) The moneys receivable by the assessee in regard to the assets sold or
otherwise transferred during the previous year together with the amount of
scrap value may exceed the written down value at the beginning of the year
as increased by the actual cost of any new asset acquired, or
(b) All the assets in the relevant block may be transferred during the year.
(10) Carry forward and set off of depreciation [Section 32(2)]
Section 32(2) provides for carry forward of unabsorbed depreciation. Where, in any
previous year the profits or gains chargeable are not sufficient to give full effect to the
depreciation allowance, the unabsorbed depreciation shall be added to the depreciation
allowance for the following previous year and shall be deemed to be part of that allowance.
If no depreciation allowance is available for that previous year, the unabsorbed depreciation
of the earlier previous year shall become the depreciation allowance of that year. The effect
of this provision is that the unabsorbed depreciation shall be carried forward indefinitely till
it is fully set off.
Example: Profits and gains from business or profession of Mr. X for P.Y. 2023-24, before
charging depreciation of ` 20 lakhs u/s 32, was ` 16 lakhs. In such a case, after setting off
the depreciation, the unabsorbed depreciation of P.Y. 2023-24 would be ` 4 lakhs. If profits
and gains from business or profession for P.Y. 2024-25 before depreciation is ` 11 lakhs
and depreciation allowance u/s 32 for the said previous year is ` 5 lakhs, then, the
unabsorbed depreciation of ` 4 lakhs for the P.Y. 2023-24 would be added to the
depreciation allowance of ` 5 lakhs. Consequently, ` 9 lakhs would be allowed to be set-off
against the profits of ` 11 lakhs and the taxable profits for P.Y. 2024-25 would be ` 2 lakhs.
Order of set-off
However, in the order of set-off of losses under different heads of income, effect shall first
be given to current year depreciation then brought forward business losses and only then to
unabsorbed depreciation.
The provisions in effect are as follows:

• Since the unabsorbed depreciation forms part of the current year’s depreciation, it

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 3.58 DIRECT TAX LAWS

can be set off against any other head of income except “Salaries”.
• The unabsorbed depreciation can be carried forward for indefinite number of
previous years.
• Set off will be allowed even if the same business to which it relates is no longer in
existence in the year in which the set off takes place.

Current depreciation to be deducted first - The Supreme Court, in CIT v. Mother India
Refrigeration (P.) Ltd. [1985] 23 Taxman 8, has categorically held that current depreciation
must be deducted first before deducting the unabsorbed carried forward business losses of
the earlier years in giving set off while computing the total income of any particular year.

ORDER OF SET-OFF

Current Year Brought forward Unabsorbed

Depreciation Business Loss depreciation

ILLUSTRATION 4
Lights and Power Ltd. engaged in the business of generation of power, furnishes the
following particulars pertaining to P.Y. 2024-25. Compute the depreciation allowable under
section 32 for A.Y.2025-26 and the opening balance of written down value of the block of
assets as on 01.04.2025, while computing his income under the head “Profits and gains of
business or profession”. The company has opted for the depreciation allowance on the
basis of written down value. Assume that all the assets were purchased by way of account
payee cheque and that the company has not opted for the special tax regimes under
section 115BAA or under section 115BAB.
Particulars (` )
1. Opening Written down value of Plant and Machinery (15% block) as 5,78,000
on 01.04.2024 (Purchase value ` 8,00,000) [WDV for P.Y. 2023-24
less depreciation for that year]
2. Purchase of second hand machinery (15% block) on 29.12.2024 for 2,00,000
business purpose
3. Machinery Y (15% block) purchased and installed on 12.07.2024 for 8,00,000
the purpose of power generation

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.59

4. Acquired and installed for use a new air pollution control equipment 2,50,000
on 31.7.2024
5. New air conditioner purchased and installed in office premises on 3,00,000
8.9.2024
6. New machinery Z (15% block) acquired and installed on 23.11.2024 3,25,000
for the purpose of generation of power
7. Sale value of an old machinery X, sold during the year (Purchase 3,10,000
value ` 4,80,000, WDV as on 01.04.2024 ` 3,46,800)

SOLUTION
Computation of depreciation allowance under section 32 for the A.Y. 2025-26
Plant and Plant and
Particulars Machinery Machinery
(15%) (40%)
(`) (`) (`)
Opening WDV as on 01.04.2024 5,78,000 -
Add: Plant and Machinery acquired during the
year
- Second hand machinery 2,00,000
- Machinery Y 8,00,000
- Air conditioner for office 3,00,000
- Machinery Z 3,25,000 16,25,000 -
- Air pollution control equipment - 2,50,000
22,03,000 2,50,000
Less: Asset sold during the year 3,10,000 Nil
Written down value as on 31.3.2025 before 18,93,000 2,50,000
charging depreciation
Normal depreciation
40% on air pollution control equipment (` 2,50,000 - 1,00,000
x 40%)
Depreciation on plant and machinery put to
use for less than 180 days@ 7.5% (i.e., 50% of
15%)
- Second hand machinery (` 2,00,000 × 7.5%) 15,000
- Machinery Z (` 3,25,000 × 7.5%) 24,375 39,375
15% on the balance WDV being put to use for 2,05,200
more than 180 days (` 13,68,000 × 15%)

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 3.60 DIRECT TAX LAWS

Additional depreciation
- Machinery Y (` 8,00,000 × 20%) 1,60,000
- Machinery Z (` 3,25,000 × 10%, being 50% of 32,500 1,92,500 -
20%)
- Air pollution control equipment (` 2,50,000× - 50,000
20%)
Total depreciation 4,37,075 1,50,000
WDV as on 1.4.2025 [WDV of P.Y. 2024-25 less 14,55,925 1,00,000
depreciation for that year]

Notes:
(i) Power generation equipments qualify for claiming additional depreciation in respect
of new plant and machinery.
(ii) Additional depreciation is not allowed in respect of second hand machinery and air
conditioner installed in office premises.

(iii) The balance 50% additional depreciation in respect of Machinery Z of ` 32,500

(10% x ` 3,25,000) can be claimed as deduction in the subsequent financial year
i.e., F.Y. 2025-26.
(11) Building, machinery, plant and furniture not exclusively used for business purpose
[Section 38(2)]
Where any building, plant and machinery, furniture is not exclusively used for the purposes
of business or profession, the deduction on account of expenses on account of current
repairs to the premises, insurance premium of the premises, current repairs and insurance
premium of machinery, plant and furniture and depreciation in respect of these assets shall
be restricted to a fair proportionate part thereof, which the Assessing Officer may determine
having regard to the user of such asset for the purposes of the business or profession.
(12) Balancing Charge

Section 41(2) provides for the manner of calculation of the amount which shall be chargeable
to income-tax as income of the business of the previous year in which the moneys payable for
the building, machinery, plant or furniture on which depreciation has been claimed under
section 32(1)(i), i.e., in the case of power undertakings, is sold, discarded, demolished or
destroyed. The balancing charge will be the amount by which the moneys payable in respect
of such building, machinery, plant or furniture, together with the amount of scrap value, if any,
exceeds the written down value. However, the amount of balancing charge should not exceed

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.61

the difference between the actual cost and the WDV. The tax shall be levied in the year in
which the moneys payable become due.

The Explanation below section 41(2) makes it clear that where the moneys payable in
respect of the building, machinery, plant or furniture referred to in section 41(2) become due
in a previous year in which the business, for the purpose of which the building, machinery,
plant or furniture was being used, is no longer in existence, these provisions will apply as if
the business is in existence in that previous year.
Example: Mahapower Ltd. purchased an asset on 20.7.2020. The actual cost of the asset
was ` 100 lakhs. Mahapower Ltd. claimed depreciation @5% on the actual cost of the
asset. WDV of the asset as on 1.4.2024 is ` 80 lakhs. On 15.5.2024, Mahapower Ltd. sold
the asset for ` 90 lakhs. The balancing charge of ` 10 lakhs (` 90 lakhs - ` 80 lakhs) would
be taxable as income u/s 41(2).
(4) Tea Development Account/ Coffee Development Account/ Rubber Development
Account [Section 33AB]
(i) Eligibility for deduction: This section provides for a deduction in the computation of the
taxable profits in the case of an assessee carrying on business of growing and
manufacturing tea or coffee or rubber in India.
(ii) Quantum of deduction: It provides that where the assessee has before the expiry of six
months from the end of the previous year or before the due date of furnishing the return of
income, whichever is earlier,
(a) deposited with a National Bank any amount in a special account maintained by the
assessee with that Bank in accordance with a scheme approved by Tea Board or
Coffee Board or Rubber Board, or
(b) deposited any amount in an account to be known as Deposit Account opened by the
assessee in accordance with the scheme framed by the Tea Board or Coffee Board
or Rubber Board, as the case may be, (hereinafter referred to as the deposit
scheme) with the previous approval of the Central Government,

the assessee shall be allowed a deduction of:

(a) A sum equal to the aggregate of the deposits made or
(b) 40% of the profits of such business (as computed under the head ‘Profits and gains
of business or profession before making any deduction under this section),
whichever is less.

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The above deduction will be allowed before the setting off of brought-forward loss under
section 72.

(iii) No deduction to partner of assessee-firm or member of assessee-AOP/ BOI: Where

the assessee is a firm or any association of persons or any body of individuals, the
deduction under this section shall not be allowed in the computation of the income of any
partner or member of such firm, AOP or BOI.
(iv) Non-eligibility of deduction in any other previous year: Where any deduction in respect
of any amount deposited in the special account or Deposit Account has been allowed in any
previous year, no deduction shall be allowed in respect of such amount in any other
previous year.
(v) Audit of books of accounts: This deduction shall not be allowed unless the accounts of
such business of the assessee for the previous year have been audited by a chartered
accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1), and the assessee furnishes by that date the
report of such audit in the prescribed form duly signed and verified by such accountant.
Particulars Due date of filing of return Specified Date
Assessees (other 31st October of the relevant 30th September of the relevant
than a company) A.Y. A.Y.
subject to tax audit For A.Y.2025-26, on or before For A.Y.2025-26, on or before
31st October, 2025 30th September, 2025

However, where the assessee is required by any other law to get his accounts audited it
shall be sufficient compliance with the provision of this section if such assessee gets the
accounts of such business audited under any such law and furnishes the report of the audit
and a further report in the prescribed form under this section.
(vi) Condition to withdraw the amount from special account or deposit account: Any
amount standing to the credit of the assessee in the special account or deposit account
cannot be withdrawn except for the purposes specified in the scheme, or, as the case may
be, in the deposit scheme.
The above amount can also be withdrawn in the following circumstances:

(a) Closure of business

(b) Death of an assessee
(c) Partition of HUF

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(d) Dissolution of a firm

(e) Liquidation of a company.
(vii) Amount withdrawn and utilised for purchase of specified assets would be chargeable
to tax as business income: Where the sum standing to the credit of the assessee in the
Special account or in the Deposit account is released by the National Bank or is withdrawn
by the assessee from the Deposit account and is utilised for the purchase of:
(a) Any machinery or plant installed in any office premises or residential accommodation
including a guest house.
(b) Any office appliances (other than computers)
(c) Any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head ‘Profits and gains of business or profession’ of any one
previous year;
(d) Any new machinery or plant to be installed in an industrial undertaking for the
purpose of the business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
the whole of such amount so utilised will be treated as taxable profits of that year and taxed
accordingly.
(viii) Amount withdrawn on the closure of business or dissolution of a firm: Where any
amount is withdrawn by the assessee from the special account or deposit account during
any previous year on the closure of his business or dissolution of a firm, the whole of such
withdrawal shall be deemed to be the profits and gains of business of that previous year
and shall be chargeable to tax as the income of that previous year, as if the business had
not closed or the firm had not been dissolved.
(ix) Utilisation from scheme for business purpose not available as a deduction: Where
any amount standing to the credit of the assessee in the special account or in the deposit
account is utilised by the assessee for the purpose of any expenditure in connection with
such business in accordance with the scheme or deposit scheme, such expenditure shall
not be allowed in computing the business income.
(x) Consequences of non-utilisation of withdrawn amount: Where any amount in the
special account which is released during any previous year by the National Bank or is
withdrawn by the assessee from the Deposit Account, for being utilised by the assessee for

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the purposes of such business and is not utilized in accordance with the scheme or deposit
scheme in that year, the unutilised amount shall be deemed to be profits and gains and
chargeable to income-tax as the income of that previous year.
However, where such amount is released during the previous year at the closing of the
account on the death of the assessee, partition of a HUF or liquidation of a company, the
above restriction will not apply.
(xi) Consequences of sale or transfer: Where an asset acquired in accordance with the
scheme or deposit scheme is sold or otherwise transferred in any previous year by the
assessee to any person at any time before the expiry of 8 years from the end of the
previous year in which it was acquired, such portion of the cost relatable to the deduction
allowed under section 33AB(1) shall be deemed to be profits and gains of business or
profession of the previous year in which the asset is sold or transferred and shall be
chargeable to income-tax as the income of that previous year.
Exceptions: Such restriction will not apply in the following cases:

(a) Where the asset is sold or otherwise transferred to Government, local authority,
statutory corporation or a Government company.
(b) Where the sale or transfer is made in connection with the succession of a firm by a
company in the business or profession carried on by the firm as a result of which the
firm sells or otherwise transfers any asset to the company and the scheme or deposit
scheme continues to apply to the company in the same manner as applicable to the
firm.
Further, all the properties and liabilities of the firm relating to the business or
profession immediately before the succession should become the properties and
liabilities of the company and all the shareholders of the company should have been
partners of the firm immediately before the succession.
(xii) Power to Central Government for specified period: The Central Government has the
power to direct that the deduction allowable under this section shall not be allowed after a
specified date.
(xiii) Meaning of National Bank: “National Bank” means the National Bank for Agricultural and
Rural Development (NABARD).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.65

(5) Site Restoration Fund [Section 33ABA]

(i) Eligibility for deduction: This section provides for a deduction in the computation of the
taxable profits in the case of an assessee carrying on business of prospecting for, or
extraction or production, of petroleum or natural gas or both in India and in relation to which
the Central Government has entered into an agreement with such assessee for such
business.
(ii) Quantum of deduction: It provides that where the assessee has before the end of the
previous year -
(a) deposited any sum with the State Bank of India in a special account maintained by
the assessee with that bank in accordance with the scheme approved in this behalf
by the Government of India in the Ministry of Petroleum and Natural Gas, or
(b) deposited any amount in a Site Restoration Account opened by the assessee for the
purposes specified in a scheme framed by the said Ministry (hereinafter referred to
as the deposit scheme),
the assessee shall be entitled to a deduction of —
- a sum equal to the sum deposited; or
- a sum equal to 20% of its profits (as computed under the head “Profits and gains of
business or profession” before making any deduction under this section),
whichever is less.
For this purpose, it is provided that any amount credited in the special account or Site
Restoration Account by way of interest shall also be deemed to be a deposit.
The above deduction will be allowed before the setting off of brought-forward loss under
section 72.
(iii) No deduction to partner of assessee-firm or member of assessee-AOP/ BOI: Where
the assessee is a firm or any association of persons or anybody of individuals the deduction
under this section shall not be allowed in the computation of the income of any partner or
member of such firm, AOP or BOI.
(iv) Non-eligibility of deduction in any other previous year: Where any deduction in respect
of any amount deposited in the special account or Site Restoration Account has been
allowed in any previous year, no deduction shall be allowed in respect of such amount in
any other previous year.

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(v) Audit of books of accounts: This deduction shall not be allowed unless the accounts of
such business of the assessee for the previous year have been audited by a chartered
accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1) and the assessee furnishes by that date the report
of such audit in the prescribed form duly signed and verified by such accountant.
However, where the assessee is required by any other law to get his accounts audited it
shall be sufficient compliance with the provision of this section if such assessee gets the
accounts of such business audited under any such law and furnishes the report of the audit
and a further report in the prescribed form under this section.
(vi) Condition to withdraw the amount - Any amount standing to the credit in the special
account or the Site Restoration Account will not be allowed to be withdrawn except for the
purposes specified in the scheme or in the deposit scheme.
(vii) No deduction: No deduction shall be allowed in respect of any amount utilised for the
purchase of the following items:

(a) any machinery or plant to be installed in any office premises or residential

accommodation, including any accommodation in the nature of a guest house;
(b) any office appliances (not being computers);
(c) any machinery or plant, the whole of the actual cost of which is allowed as a
deduction (whether by way of depreciation or otherwise) in computing the income
chargeable under the head ‘Profits and gains of business or profession’ of any one
previous year;
(d) any new machinery or plant to be installed in an industrial undertaking for the
purpose of the business of construction, manufacture or production of any article or
thing specified in the list in the Eleventh Schedule.
(viii) Withdrawal on closure of account: Where any amount standing to the credit of the
assessee in the special account or in the Site Restoration Account is withdrawn on closure
of the account during any previous year by the assessee, the amount so withdrawn from the
account as reduced by the amount, if any, payable to the Central Government by way of
profit or production share as provided in the agreement referred to in section 42, shall be
deemed to be the profits and gains of business or profession of that previous year and shall
accordingly be chargeable to income-tax as the income of that previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.67

Where any amount is withdrawn on closure of the account in a previous year in which the
business carried on by the assessee in no longer in existence, these provisions will apply
as if the business is in existence in that previous year.

(ix) Utilisation from scheme for business purpose not available as a deduction: Where
any amount standing to the credit of the assessee in the special account or in the Site
Restoration Account is utilised by the assessee for the purpose of any expenditure in
connection with such business in accordance with the scheme or deposit scheme, such
expenditure shall not be allowed in computing the business income.

(x) Consequences of non-utilisation of withdrawn amount: Where any amount in the

special account or Site Restoration Account is released in the previous year by the State
Bank of India or is withdrawn from the Site Restoration Account for being utilised by the
assessee for the purposes of such business and is not utilised in accordance with the
scheme or the deposit scheme in that year, the unutilised amount shall be deemed to be
profits and gains and chargeable to income-tax as the income of that previous year.

(xi) Consequences of sale or transfer - Where any asset acquired in accordance with the
scheme or the deposit scheme is sold or otherwise transferred in any previous year by the
assessee to any person at any time before the expiry of 8 years from the end of the
previous year in which such assets were acquired, such part of the cost of such asset as is
relatable to the deduction allowed under section 33ABA(1) shall be deemed to be the profits
and gains of business or profession of the previous year in which the asset is sold or
otherwise transferred and shall accordingly be chargeable to income-tax as the income of
that previous year.

Exceptions: This restriction will not apply in the following cases:

(a) Where the asset is sold or otherwise transferred to Government, local authority,
statutory corporation or a Government company.

(b) Where the sale or transfer of the asset is made in connection with the succession of
a firm by a company in the business or profession carried on by the firm as a result
of which the firm sells or otherwise transfers to the company any asset and the
scheme or the deposit scheme continues to apply to the company in the manner
applicable to the firm.

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Further, all the properties and liabilities of the firm relating to the business or
profession immediately before the succession should become the properties and
liabilities of the company and all the shareholders of the company should have been
partners of the firm immediately before the succession.

(xii) Power to Central Government for specified period: The Central Government has the
power to direct that the deduction allowable under this section shall not be allowed after a
specified date.

(6) Expenditure on Scientific Research [Section 35]

This section allows a deduction in respect of any expenditure on scientific research related to the
business of assessee.
Meaning of certain terms:

Term Meaning

Scientific research Activities for the extension of knowledge in the fields of natural or
applied science including agriculture, animal husbandry or fisheries
[Section 43(4)(i)].

Scientific research Expenditure incurred on scientific research would include all

expenditure expenditure incurred for the prosecution or the provision of facilities for
the prosecution of scientific research but does not include any
expenditure incurred in the acquisition of rights in or arising out of
scientific research.

Scientific research Scientific research related to a business or a class of business would

related to a business include
or a class of
(i) any scientific research which may lead to or facilitate an extension
business
of that business or all the business of that class, as the case may
be;
(ii) any scientific research of a medical nature which has a special
relation to the welfare of the workers employed in that business or
all the business of that class, as the case may be.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.69

The deduction allowable under this section consists of –

by a company engaged in business of

Bio-technology or in any business of
manufacture or production of any article, 100% of expenditure incurred
not being article or thing specified in the (other than expenditure on
Expenditure on Scientific research

list of the Eleventh Schedule on an land & building)

approved in-house research and
development facility
100% of the
Revenue Expenditure expenditure
Incurred by assessee on
scientific research related to incurred
business (other than
Capital Expenditure expenditure
on land)
Approved Indian company for
scientific research
100% of
Notified approved University/ college/ sum
Research association/ other institution
for social science or statistical
paid
research
Paid to
Notified approved University/ college/
Research association/ other institution 100% of
for scientific research sum
paid
Approved National
Laboratory/university/IIT/ specified person
for scientific research undertaken under an
approved programme

(I) Incurred by assessee:

(i) Revenue Expenditure: Any revenue expenditure incurred by the assessee on
scientific research related to his business would be allowed as deduction in the
year in which it was incurred. Expenditure incurred within 3 years immediately
preceding the commencement of the business on payment of salary to research
personnel engaged in scientific research related to his business carried on by the
taxpayer or on purchase of material inputs for such scientific research will be allowed
as deduction in the year in which the business is commenced. The deduction will be
limited to the amount certified by the prescribed authority [Section 35(1)(i)]

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(ii) Capital Expenditure: Any expenditure of a capital nature on scientific research

related to the business carried on by the assessee would be deductible in full in the
previous year in which it is incurred [Section 35(1)(iv)].
(a) Capital expenditure prior to commencement of business
The Explanation 1 to section 35(2)(ia) specifically provides that where any
capital expenditure has been incurred prior to the commencement of the
business, the aggregate of the expenditure so incurred within the three years
immediately preceding the commencement of the business shall be deemed
to have been incurred in the previous year in which the business is
commenced and will rank for deduction as expenditure for scientific research
incurred during the previous year.
Expenditure on land disallowed
No deduction will be allowed in respect of capital expenditure incurred on the
acquisition of any land whether the land is acquired as such or as part of any
property.
(b) Carry forward of deficiency
Capital expenditure incurred on scientific research which cannot be absorbed
by the business profits of the relevant previous year can be carried forward to
the immediately succeeding previous year and shall be treated as the
allowance for that year. In effect, this means that there is no time bar on the
period of carry forward. It shall be accordingly allowable for that previous year
against any head of income other than salaries [Section 35(4)].
(c) No depreciation
Section 35(2)(iv) clarifies that no depreciation will be admissible on any
capital asset represented by expenditure which has been allowed as a
deduction under section 35 whether in the year in which deduction under
section 35 was allowed or in any other previous year.
(d) Sale of asset representing expenditure of capital nature on scientific
research

Section 41, inter alia, seeks to tax the profits arising on the sale of an asset
representing expenditure of a capital nature on scientific research.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.71

Where the asset representing expenditure of a capital nature on scientific

research is sold without having been used for other purposes, the provisions
of section 41(3) would be attracted. If the proceeds of sale together with the
total amount of the deductions made under section 35(1)(iv) exceed the
amount of capital expenditure, the excess or the amount of deduction so
made, whichever is less, will be charged to tax as income of the business of
the previous year in which the sale took place.
In simple words, since amount of deduction under section 35(1)(iv) is equal to
the amount of expenditure, lower of amount of sale proceeds or deduction
allowed under section 35(1)(iv) will be the charged to tax as income of the
business in the previous year in which the asset is sold.

Example - If capital expenditure incurred for scientific research in P.Y. 2023-

24 is ` 3 lakhs, then deduction u/s 35(1)(iv) would have been ` 3 lakhs in that
P.Y. If the asset is sold for ` 4 lakhs in P.Y.2024-25, ` 3 lakhs, being lower of
sale proceeds of ` 4 lakhs and deduction u/s 35(1)(iv) of ` 3 lakhs, would be
charged to tax u/s 41(3) in the P.Y. 2024-25, being the year of sale.

Note - Deduction under section 35(1)(i) and 35(1)(iv) read with section 35(2) would be
available to an assessee under the special concessional tax regimes under section
115BAA/115BAB/115BAC/115BAD/115BAE as well as the regular provisions of the Act.

(II) Amount contributed or paid to:

(i) Notified approved research association, university, college or other institution:
An amount equal to any sum paid to -
- a research association which has as its object, the undertaking of scientific
research or
- to a university, college or other institution to be used for scientific research.
provided that such university, college, institution or association is approved for this
purpose and notified by the Central Government. [Section 35(1)(ii)]
The payments so made to such institutions would be allowable irrespective of whether:
(a) the field of scientific research is related to the assessee’s business or not,
and
(b) the payment is of a revenue nature or of a capital nature.

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Note - Deduction u/s 35(1)(ii) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(ii) would not be
allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(ii) would be
allowable only if they pay tax under the normal provisions of the Act.

(ii) Approved Indian company for scientific research: A sum equal to any amount
paid to a company to be used by it for scientific research [Section 35(1)(iia)]
However, such deduction would be available only if;
- the company is registered in India and
- has as its main object the scientific research and development.
Further, it should be approved by the prescribed authority and should fulfill the other
prescribed conditions.

Note - Deduction u/s 35(1)(iia) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.

In case of companies and co-operative societies, deduction u/s 35(1)(iia) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(iia) would be
allowable only if they pay tax under the normal provisions of the Act.

(iii) Approved notified research association, university, college or other institution:

A sum equal to any amount paid to
- a research association which has as its object the undertaking of research in
social science or statistical research or
- a university, college or other institution to be used for research in any social
science or statistical research

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.73

provided that they are approved for this purpose and notified by the Central
Government. [Section 35(1)(iii)]

Further, it has been clarified that the deduction to which an assessee (i.e. donor) is
entitled on account of payment of any sum to a research association or university or
college or other institution for scientific research or research in a social science or
statistical research or to a company for scientific research, shall not be denied
merely on the ground that subsequent to payment of such sum by the assessee, the
approval granted to any of the aforesaid entities is withdrawn.

Note - Deduction u/s 35(1)(iii) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(1)(iii) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(1)(iii) would be
allowable only if they pay tax under the normal provisions of the Act.

Approval -
The research association, university, college or other institution for scientific
research or research in a social science or statistical research has to make an
application in the prescribed form and manner to the Central Government for the
purpose of grant of approval, or continuance thereof.
The Central Government before granting approval, call for such documents or
information as it thinks necessary in order to satisfy itself about the genuineness of
the activities of the research association, university, college or other institution and
that Government may also make such inquiries as it may deem necessary.
Every notification in respect of research association, university, college or other
institution or Indian company for scientific research issued on or before 1.4.2021
shall be deemed to have been withdrawn unless such
association/institution/university/college/company makes an intimation to the
prescribed income-tax authority in the prescribed form. Such intimation has to be
made within 3 months from 1.4.2021. Such notification shall be valid for a period of 5

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consecutive assessment years beginning with the A.Y. 2022-23 or thereafter subject
to the intimation made by the association/institution/university/college/company.

However, where any notification is issued by the Central Government after

29.9.2020, it shall, at any time, have effect for such assessment year(s), but not
exceeding 5 assessment years as may be specified in the notification.
Requirements –
Research association, university, college or other institution or Indian company for
scientific research has to
(i) prepare prescribed statement for prescribed period and deliver or cause to be
delivered such statement to the prescribed income-tax authority or the person
authorized by such authority in such form, verified in such manner, setting
forth such particulars and within such prescribed time.
Such association/institution/university/college/company may also deliver to
the prescribed authority a correction statement for rectification of any mistake
or to add, delete or update the information furnished in the statement
delivered in the prescribed form and verified in prescribed manner.
(ii) furnish to the donor, a certificate specifying the amount of donation in the
such manner, containing such particulars and within such time from the date
of receipt of sum, as may be prescribed.
The deduction with respect to the donation given by the assessee to any research
association, university, college or other institution referred to in section 35(1)(ii)/(iii)
or the company referred to in section 35(1)(iia) would not be allowed unless such
research association, university, college or other institution or company complies
with the above requirements stipulated under section 35(1A) .
(iv) Sum paid to National Laboratory, etc. [Section 35(2AA)]: Section 35(2AA)
provides that any sum paid by an assessee to a National Laboratory or University or
Indian Institute of Technology or a specified person for carrying out programmes of
scientific research approved by the prescribed authority will be eligible for deduction
of the amount so paid.
No other deduction under the Act: No contribution which qualifies for deduction
under this clause will be entitled to deduction under any other provision of the Act.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.75

Further, it has been clarified that the deduction to which an assessee is entitled on
account of payment of any sum by him to an approved National Laboratory,
University, Indian Institute of Technology or a specified person for the approved
programme shall not be denied to the donor-assessee merely on the ground that
after payment of such sum by him, the approval granted to any of the aforesaid
donee-entities or the programme has been withdrawn.
Term Meaning
Specified person A person who is approved by the prescribed authority

Note - Deduction u/s 35(2AA) would be available to an individual, HUF, AoP (other
than a co-operative society) or BoI or an artificial juridical person only if they
exercise the option of shifting out of the default tax regime provided under section
115BAC(1A) and pay tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction u/s 35(2AA) would not
be allowable if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction u/s 35(2AA) would be
allowable only if they pay tax under the normal provisions of the Act.

(III) Company engaged in Business of bio-technology or manufacturing of article or thing

etc. [Section 35(2AB)]
Where a company engaged in the business of bio-technology or in any business of
manufacture or production of any article or thing, not being an article or thing specified
in the list of the Eleventh Schedule [The exclusion list comprises of beer, wine and other
alcoholic spirits, tobacco and tobacco preparations, cosmetic and toilet preparations, tooth
paste, dental cream, tooth powder and soap, confectionery and chocolates, office machines
and apparatus, steel furniture etc] incurs any expenditure on scientific research on in-house
research and development facility as approved by the prescribed authority, a deduction of a
sum equal to the expenditure will be allowed. Such expenditure should not be in the
nature of cost of any land or building.

“Expenditure on scientific research” in relation to drugs and pharmaceuticals shall

include expenditure incurred on clinical drug trial, obtaining approval from any state
regulatory authority, and filing an application for a patent under the Patents Act, 1970.

No other deduction under the Act: No deduction will be allowed in respect of the above
expenditure under any other provision of the Income-tax Act, 1961.

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Agreement with the prescribed authority: No company will be entitled to this deduction
unless it enters into an agreement with the prescribed authority for co-operation in such
research and development facility and fulfills the prescribed conditions with regard to
maintenance and audit of accounts and also furnishes prescribed reports in the prescribed
manner.
Approval of the Authority: The prescribed authority shall submit its report in relation to
the approval of the said facility to the Principal Chief Commissioner or the Chief
Commissioner or Principal Director General Director General in such form and within such
time as may be prescribed.

Note - In case of companies, deduction u/s 35(2AB) would not be allowable if they opt for
the special provisions u/s 115BAA/115BAB. In other words, deduction u/s 35(2AB) would be
allowable only if they pay tax under the normal provisions of the Act.

ILLUSTRATION 5
A Ltd., engaged in the business of manufacturing, furnishes the following particulars for the
P.Y.2024-25. Compute the deduction allowable under section 35 for A.Y.2025-26, while computing
its income under the head “Profits and gains of business or profession”, assuming that it does not
opt for special tax regime under section 115BAA or under section 115BAB.

Particulars `
1. Amount paid to notified approved Indian Institute of Science, Bangalore, for 1,00,000
scientific research
2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000
3. Amount paid to X Ltd., a company registered in India which has as its main 4,00,000
object scientific research and development, as is approved by the prescribed
authority
4. Expenditure incurred on in-house research and development facility as
approved by the prescribed authority
(a) Revenue expenditure on scientific research 3,00,000
(b) Capital expenditure (including cost of acquisition of land ` 5,00,000) 7,50,000
on scientific research

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.77

SOLUTION
Computation of deduction under section 35 for the A.Y.2025-26
Particulars ` Section % of Amount of
deduction deduction
(`)
Payment for scientific research
Indian Institute of Science 1,00,000 35(1)(ii) 100% 1,00,000
IIT, Delhi 2,50,000 35(2AA) 100% 2,50,000
X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000
Expenditure incurred on in-house
research and development facility
Revenue expenditure 3,00,000 35(2AB)) 100% 3,00,000
Capital expenditure (excluding cost
of acquisition of land ` 5,00,000) 2,50,000 35(2AB) 100% 2,50,000
Deduction allowable under section 35 13,00,000

(7) Expenditure for obtaining right to use spectrum for telecommunication services
[Section 35ABA]
(i) Section 32 allows depreciation in respect of assets including certain intangible assets.
Section 35ABB provides for amortisation of licence fee in case of telecommunication
service.
(ii) The Government has introduced spectrum fee for auction of airwaves.
(iii) In order to resolve the uncertainty in tax treatment of payments in respect of spectrum i.e.,
whether spectrum is an intangible asset and the spectrum fees paid is eligible for
depreciation under section 32 or whether it is in the nature of a 'licence to operate
telecommunication business' and eligible for deduction under section 35ABB, section
35ABA provides for tax treatment of spectrum fee.
(iv) Tax treatment of spectrum fee:
Transaction Manner of deduction
(1) Acquisition of right to use spectrum
Any capital Appropriate fraction of the amount of such expenditure [1/
expenditure total number of relevant previous years]
incurred for

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acquisition of any Meaning of relevant previous years:

right to use
spectrum for Case Meaning
telecommunication Where the spectrum The previous years beginning with
services either fee is actually paid the P.Y. in which such business
before the before the commenced and the subsequent
commencement of commencement of P.Y. or P.Y.s during which the
the business or business to operate spectrum, for which the fee is paid,
thereafter at any telecommunication shall be in force.
time during any services
previous year and
for which payment In any other case The previous years beginning with
has actually been the P.Y. in which the spectrum fee is
made to obtain a actually paid and the subsequent
right to use P.Y. or years during which the
spectrum. spectrum, for which the fee is paid,
shall be in force.
Meaning of ‘payment has actually been made’.
Payment has actually been made means actual payment of expenditure irrespective
of the previous year in which the liability for expenditure was incurred according to
the method of accounting regularly employed by the assessee or payable in the
prescribed manner.
Rule 6A substantiates the meaning of the phrase ‘payment has actually been
made’
(a) In a case where full upfront payment of spectrum fee has been made:
Where an assessee has opted and been allowed by the Department of
Telecommunications, Government of India to make full upfront payment of
spectrum fee, the actual payment of expenditure irrespective of the previous
year in which the liability for the expenditure was incurred according to the
method of accounting regularly employed by the assessee;
(b) In a case where deferred payment is made:
Where an assessee has opted and been allowed by the Department of
Telecommunications, Government of India to make deferred payment, the
amount which would have been payable by the assessee had he opted for full
upfront payment of spectrum fee irrespective of the previous year in which the
liability for the expenditure was incurred according to the method of accounting
regularly employed by the assessee.
However, in case of deferred payment referred to in clause (b) above, where there is
failure by the assessee to comply with any of the conditions specified by the scheme
of the Department of Telecommunications, Government of India and Department of
Telecommunications terminates the allotment or assignment of spectrum, the
Assessing Officer shall, in exercise of power vested in him under section 35ABA(3),

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.79

re-compute the total income of the assessee for the previous year in which the
deduction has been claimed and granted to him by deeming that,-
(i) the total amount of spectrum fee paid up to the date of termination is the
amount of “payment actually been made”;
(ii) the spectrum was in force up to the date of its termination for the purpose of
computing “relevant previous year”.
(2) Transfer of the spectrum
Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the proceeds of transfer shall be allowed in the previous year in
transfer of which the spectrum has been transferred.
spectrum are less Amount of deduction = Expenditure remain unallowed –
than the Sale proceeds
expenditure
incurred remaining
unallowed
Case 2: Where the The excess amount or expenditure allowed till date (i.e.,
proceeds of the difference between expenditure incurred to obtain spectrum
transfer of whole and the expenditure remain unallowed), whichever is less,
or any part of the shall be chargeable to tax as profits and gains of business in
spectrum exceed the previous year in which the spectrum has been transferred.
the amount of Taxable as profits and gains from business and
expenditure profession =
remaining
unallowed Sale proceeds – Expenditure remain unallowed
OR Whichever
is less
Expenditure allowed till date
If the spectrum is transferred in a previous year in which the
business is no longer in existence, the taxability would arise in
the above manner as though the business is in existence in
that previous year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the previous year in which spectrum is transferred or in respect of
transfer of whole any subsequent previous year or years.
or any part of the Amount of deduction = NIL
spectrum are not
less than the
amount of
expenditure
incurred remaining
unallowed.

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 3.80 DIRECT TAX LAWS

Case 4: Where a Unallowed expenditure would be amortised in the following

part of the manner –
spectrum is (i) subtracting the proceeds of transfer from the expenditure
transferred and remaining unallowed; and
the case is not
(ii) dividing the remainder by the number of relevant
covered under
previous years which have not expired at the beginning
Case 2 above i.e.,
of the previous year during which the spectrum is
the proceeds of
transferred.
transfer of a part
of the spectrum Unallowed expenditure − Sale proceeds
Amount of deduction =
does not exceed Unexpired number of relevant P.Y.s
the amount of
expenditure
remaining
unallowed
(3) Transfer of spectrum in a scheme of amalgamation
If the The provisions of section 35ABA will apply to amalgamated
amalgamating company as they would have applied to amalgamating
company sells or company as if the latter has not transferred the spectrum.
transfers the The tax treatment in cases 1, 2 & 3 given in (2) above will not
spectrum to the apply to the amalgamating company.
amalgamated
company, being an
Indian company
under the scheme
of amalgamation
(4) Transfer of spectrum in a scheme of demerger
If the demerged The provisions of section 35ABA will apply to resulting
company sells or company as they would have applied to demerged company
transfers the as if the latter has not transferred the spectrum.
spectrum to the The tax treatment in cases 1, 2 & 3 given in (2) above will not
resulting company, apply to the demerged company.
being an Indian
company under
the scheme of
demerger

(v) No depreciation
Where a deduction is claimed and allowed for any previous year under this section, then no
depreciation on capital expenditure so incurred shall be allowed by way of depreciation
under section 32(1) for the same previous year or in any other previous year.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.81

(vi) Consequences of failure to comply with the conditions after grant of deduction:
Where, in a previous year, any deduction has been claimed and granted to an assessee
and subsequently, there is failure to comply with any of the provisions of this section, then –
(1) the deduction shall be deemed to have been wrongly allowed;
(2) the Assessing Officer may recompute the total income of the assessee for the said
previous year and make the necessary rectification. This is notwithstanding anything
contained in the Income-tax Act, 1961;
(3) the provisions under section 154 for rectification of mistake apparent from the record
would apply. The period of four years would be reckoned from the end of the
previous year in which the failure to comply with the provisions of section 35ABA
takes place.
(8) Expenditure for obtaining licence to operate telecommunication services
[Section 35ABB]
(i) Tax treatment of licence fee:
Transaction Manner of deduction
(1) Acquisition of right to operate telecommunication services
Any capital Appropriate fraction of the amount of such expenditure [1/
expenditure incurred total number of relevant previous years]
for acquisition of any Meaning of relevant previous years:
right to operate
telecommunication Case Meaning
services either before Where the licence The previous years beginning with
the commencement fee is actually paid the P.Y. in which such business
of the business or before the commenced and the subsequent
thereafter at any time commencement of P.Y. or P.Y.s during which the
during any previous business to operate licence, for which the fee is paid,
year and for which telecommunication shall be in force.
payment has services
actually been made In any other case The previous years beginning with
(actual payment of the P.Y. in which the licence fee is
expenditure) to actually paid and the subsequent
obtain a licence. P.Y. or years during which the
licence, for which the fee is paid,
shall be in force.
Payment has actually been made means the actual payment of expenditure
irrespective of the previous year in which the liability for the expenditure was
incurred according to the method of accounting regularly employed by the assessee.

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(2) Transfer of the licence

Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the proceeds of transfer shall be allowed in the previous year in
transfer of licence which the licence has been transferred.
are less than the
expenditure incurred Amount of deduction = Expenditure remain unallowed –
remaining unallowed Sale proceeds
Case 2: Where the The excess amount shall be chargeable to tax as profits
proceeds of the and gains of business in the previous year in which the
transfer of whole or licence has been transferred. However, the excess should
any part of the not exceed the difference between the expenditure incurred
licence exceed the to obtain the licence and the amount of expenditure
amount of remaining unallowed.
expenditure Taxable as profits and gains from business and
remaining unallowed profession =
Sale proceeds – Expenditure remain unallowed
Whichever is
OR
less
Expenditure allowed till date
If the licence is transferred in a previous year in which the
business is no longer in existence, the taxability would arise
in the above manner as if the business is in existence in
that previous year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the previous year in which licence is transferred or in respect of
transfer of whole or any subsequent previous year or years.
any part of the Amount of deduction = NIL
licence are not less
than the amount of
expenditure incurred
remaining unallowed.
Case 4: Where a part Unallowed expenditure would be amortised in the following
of the licence is manner –
transferred and the (i) subtracting the proceeds of transfer from the
case is not covered expenditure remaining unallowed; and
under Case 2 above (ii) dividing the remainder by the number of relevant
i.e., the proceeds of previous years which have not expired at the beginning
transfer of a part of of the previous year during which the licence is
the licence does not transferred.
exceed the amount of
expenditure Unallowed expenditure − Sale proceeds
Amount of deduction=
remaining unallowed Unexpired number of relevant P.Y.s

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.83

(3) Transfer of licence in a scheme of amalgamation

If the amalgamating The provisions of section 35ABB will apply to amalgamated
company sells or company as they would have applied to amalgamating
transfers the licence company as if the latter has not transferred the licence.
to the amalgamated
The tax treatment in cases 1, 2 & 3 given in (2) above will
company, being an
not apply to the amalgamating company.
Indian company,
under the scheme of
amalgamation
(4) Transfer of licence in a scheme of demerger
If the demerged The provisions of section 35ABB will apply to resulting
company sells or company as they would have applied to demerged company
transfers the licence as if the latter has not transferred the licence.
to the resulting
The tax treatment in cases 1, 2 & 3 given in (2) above will
company, being an
not apply to the demerged company.
Indian company,
under the scheme of
demerger

(ii) No depreciation
Where a deduction is claimed and allowed for any previous year under this section, then no
depreciation on capital expenditure so incurred shall be allowed by way of depreciation
under section 32(1) for the same previous year or in any other previous year.
ILLUSTRATION 6

X Ltd., providing telecommunication services, acquired a telecom licence at cost of ` 50 lakhs on

01.04.2022 for a period of 10 years. Assuming the telecom licence is transferred by X Ltd. in P.Y.
2024-25, say for: (a) ` 32 lakhs; (b) ` 43 lakhs or (c) ` 52 lakhs, and if:

(i) Whole of the license is transferred

(ii) Part of the license is transferred.

Explain, how the transfer shall be dealt with under the Income-tax Act, 1961 and the amount, if
any, deductible for A.Y. 2025-26.

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 3.84 DIRECT TAX LAWS

SOLUTION
(i) Whole of the license is transferred:

Particulars ` (in lakhs)

Cost of the licence 50
Less: Deduction u/s 35ABB for P.Y. 2022-23 5
45
Less: Deduction u/s 35ABB for P.Y. 2023-24 5
Expenditure remaining unallowed 40
(a) If transferred for ` 32 lakhs
Proceeds from transfer 32
Deduction allowed u/s 35ABB in P.Y. 2024-25 (Expenditure remaining unallowed 8
as reduced by the proceeds of transfer)
(b) If transferred for ` 43 lakhs
Proceeds from transfer 43
Taxable as profits and gains from business and profession (Lesser of: ` 3 lakhs 3
i.e., Proceed from transfer - Expense remain unallowed i.e. ` 43 lakhs - ` 40
lakhs or ` 10 lakhs i.e., expense allowed till date)
(c) If transferred for ` 52 lakhs
Proceeds from transfer 52
Taxable as profits and gains from business and profession (Lesser of: ` 12 10
lakhs i.e., Proceed from transfer - Expense remain unallowed i.e. ` 52 lakhs -
` 40 lakhs or ` 10 lakhs i.e., expense allowed till date)
Short Term Capital Gains (` 52 lakhs - ` 40 lakhs - ` 10 lakhs) 2

(ii) Part of the license is transferred:

Particulars ` (in lakhs)

Cost of the licence 50
Less: Deduction u/s 35ABB for P.Y. 2022-23 5
45
Less: Deduction u/s 35ABB for P.Y. 2023-24 5
Expenditure remaining unallowed 40
(a) If transferred for ` 32 lakhs
Proceeds from transfer 32

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.85

Deduction allowed u/s 35ABB in P.Y. 2024-25 [` 40 lakhs - ` 32 lakhs)/ 8 years 1

(b) If transferred for ` 43 lakhs
Proceeds from transfer 43
Taxable as profits and gains from business and profession (Lesser of: ` 3 lakhs 3
i.e., Proceeds from transfer - Expense remaining unallowed i.e. ` 43 lakhs -
` 40 lakhs or ` 10 lakhs i.e., expense allowed till date)
(c) If transferred for ` 52 lakhs
Proceeds from transfer 52
Amount taxable as profits and gains from business and profession (Lesser of: 10
` 12 lakhs i.e., Proceeds from transfer - Expense remaining unallowed i.e. ` 52
lakhs - ` 40 lakhs or ` 10 lakhs i.e., expense allowed till date)
Short Term Capital Gains (` 52 lakhs - ` 40 lakhs - ` 10 lakhs) 2

(9) “Investment-linked tax incentives” for specified businesses [Section 35AD]

(i) List of specified businesses: With the specific objective of creating rural infrastructure
and environment friendly alternate means for transportation of bulk goods, investment-
linked tax incentives have been introduced for specified businesses, namely –
• setting-up and operating ‘cold chain’ facilities for specified products;
• setting-up and operating warehousing facilities for storing agricultural produce;
• laying and operating a cross-country natural gas or crude or petroleum oil pipeline
network for distribution, including storage facilities being an integral part of such
network;
• building and operating a hotel of two-star or above category, anywhere in India;
• building and operating a hospital, anywhere in India, with at least 100 beds for
patients;
• developing and building a housing project under a notified scheme for slum
redevelopment or rehabilitation framed by the Central Government or a State
Government.
• developing and building a housing project under a notified scheme for affordable
housing framed by the Central Government or State Government;

• production of fertilizer in India;

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 3.86 DIRECT TAX LAWS

• setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar;
• laying and operating a slurry pipeline for the transportation of iron ore;

• setting up and operating a semiconductor wafer fabrication manufacturing unit, if

such unit is notified by the Board in accordance with the prescribed guidelines;
• developing or maintaining and operating or developing, maintaining and operating a
new infrastructure facility.
(ii) Deduction for Capital Expenditure: 100% of the capital expenditure incurred during the
previous year, wholly and exclusively for the above businesses would be allowed as
deduction from the business income to the assessee opting for deduction under section
35AD.

However, expenditure incurred on acquisition of any land, goodwill or financial

instrument would not be eligible for deduction.

Further, any expenditure in respect of which payment or aggregate of payment

made to a person of an amount exceeding ` 10,000 in a day otherwise than by an account
payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing
system through a bank account or through such other prescribed electronic mode would not
be eligible for deduction. The prescribed electronic modes include credit card, debit card,
net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS
(Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay [Notification No. 8/2020 dated 29.01.2020].

Note - In case of an individual/HUF/AoP/BoI carrying on specified business, deduction u/s

35AD would be available only if such person exercises the option of shifting out of the
default tax regime provided under section 115BAC(1A). If such person is paying
concessional rates of tax under the default tax regime u/s 115BAC, deduction u/s 35AD
would not be available.
A company/ cooperative society would not be eligible for deduction under section 35AD, if it
opts for the special provisions of section 115BAA/115BAB or section 115BAD/115BAE,
respectively.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.87

(iii) Expenditure prior to commencement of operation: Further, the expenditure incurred,

wholly and exclusively, for the purpose of specified business prior to commencement of
operation would be allowed as deduction during the previous year in which the assessee
commences operation of his specified business.
The amount incurred prior to commencement should be capitalized in the books of account
of the assessee on the date of commencement of its operations.
(iv) Conditions to be fulfilled: For claiming deduction under section 35AD, the specified
business should fulfill the following conditions –
General Conditions:
To be fulfilled by every specified business
(i) it should not be set up by splitting up, or the reconstruction, of a business already
in existence;
(ii) it should not be set up by the transfer to the specified business of machinery or
plant previously used for any purpose;
In order to satisfy this condition, the total value of the plant or machinery so
transferred should not exceed 20% of the value of the total plant or machinery
used in such specified business.
For the purpose of this condition, machinery or plant would not be regarded as
previously used if it had been used outside India by any person other than the
assessee provided the following conditions are satisfied:
(a) such plant or machinery was not used in India at any time prior to the date
of its installation by the assessee;
(b) the plant or machinery was imported into India from a foreign country;
(c) no deduction in respect of depreciation of such plant or machinery has
been allowed to any person at any time prior to the date of installation by
the assessee.
Conditions required to be fulfilled by certain specified businesses:
I. Business of laying and operating a cross-country natural gas or crude or
petroleum oil pipeline network for distribution, including storage facilities being an
integral part of such network
(i) Such business should be owned by a company formed and registered in India
under the Companies Act, 1956 7 or by a consortium of such companies or by an
authority or a board or a corporation established or constituted under any Central
or State Act;

7
Now Companies Act, 2013

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 3.88 DIRECT TAX LAWS

(ii) It should have been approved by the Petroleum and Natural Gas Regulatory
Board and notified by the Central Government in the Official Gazette
(iii) It should have made not less than such proportion of its total pipeline capacity
available for use on common carrier basis by any person other than the assessee
or an associated person.
(iv) It should fulfill any other prescribed condition.
II. Business of developing or operating and maintaining or developing, operating
and maintaining a new infrastructure facility
(i) The business should be owned by a company registered in India or by a
consortium of such companies or by an authority or a board or corporation or any
other body established or constituted under any Central or State Act.
(ii) The entity should have entered into an agreement with the Central Government or
a State Government or a local authority or any other statutory body for developing
or operating and maintaining or developing, operating and maintaining, a new
infrastructure facility.

(v) No deduction under section 10AA or Chapter VI-A under the heading “C.-Deductions
in respect of certain incomes”: Where a deduction under this section is claimed and
allowed in respect of the specified business for any assessment year, no deduction under
the provisions of Chapter VI-A under the heading “C - Deductions in respect of certain
incomes” or section 10AA is permissible in relation to such specified business for the same
or any other assessment year.
Correspondingly, section 80A has been amended to provide that where a deduction under
any provision of this Chapter under the heading “C – Deductions in respect of certain
incomes” is claimed and allowed in respect of the profits of such specified business for any
assessment year, no deduction under section 35AD is permissible in relation to such
specified business for the same or any other assessment year.

In short, once the assessee has claimed the benefit of deduction under section
35AD for a particular year in respect of a specified business, he cannot claim benefit under
Chapter VI-A under the heading “C.-Deductions in respect of certain incomes” or section
10AA, for the same or any other year and vice versa.

(vi) No deduction allowable under the Act in respect of expenditure for which deduction
allowed under this section: The assessee cannot claim deduction in respect of such
expenditure incurred for specified business under any other provision of the Income-tax Act,
1961 in the current year or under this section for any other year, if the deduction has been
claimed or opted by him and allowed to him under section 35AD.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.89

(vii) Date of Commencement of specified businesses:

S. Specified business Date of commencement
No. of operations
1. Laying and operating a cross country natural gas on or after 1st April, 2007
pipeline network for distribution, including storage
facilities being an integral part of such network
2. (a) building and operating anywhere in India, a on or after 1st April, 2010
hotel of two-star or above category as
specified by the Central Government
(b) building and operating a hospital with at least
100 beds for patients
(c) notified scheme for slum redevelopment or
rehabilitation housing projects
3. (a) notified scheme for affordable housing on or after 1st April, 2011
projects and
(b) production of fertilizer in a new plant or in a
newly installed capacity in an existing plant
4. (a) setting up and operating an inland container on or after 1st April, 2012
depot or a container freight station notified or
approved under the Customs Act, 1962,
(b) bee-keeping and production of honey and
beeswax and
(c) setting up and operating a warehousing
facility for storage of sugar
5. (a) laying and operating a slurry pipeline for the on or after 1st April, 2014
transportation of iron ore or
(b) setting up and operating a semi-conductor
wafer fabrication manufacturing unit
6. developing or operating and maintaining or on or after 1st April, 2017
developing, operating and maintaining, any
infrastructure facility
7. In any other case, namely, setting and operating - on or after 1st April, 2009
(a) “cold-chain” facilities for specified products or
(b) warehousing facilities for storing agricultural
produce

(viii) Meaning of certain terms

Term Meaning
Cold chain A chain of facilities for storage or transportation of agricultural and
facility forest produce, meat and meat products, poultry, marine and dairy
products, products of horticulture, floriculture and apiculture and

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processed food items under scientifically controlled conditions including

refrigeration and other facilities necessary for the preservation of such
produce.
Associated In relation to the assessee means a person—
person (i) who participates directly or indirectly or through one or more
intermediaries in the management or control or capital of the
assessee;
(ii) who holds, directly or indirectly, shares carrying not less than
26% of the voting power in the capital of the assessee;
(iii) who appoints more than half of the Board of directors or
members of the governing board, or one or more executive
directors or executive members of the governing board of the
assessee; or
(iv) who guarantees not less than 10% of the total borrowings of the
assessee.
Infrastructure (i) A road including toll road, a bridge or a rail system.
facility (ii) A highway project including housing or other activities being an
integral part of the highway project.
(iii) A water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management
system.
(iv) A port, airport, inland waterway, inland port or navigational
channel in the sea.
(ix) Set-off or carry forward and set-off of loss from specified business:
The loss of an assessee claiming deduction under section 35AD in respect of a specified
business can be set-off against the profit of another specified business under section 73A,
irrespective of whether the latter is eligible for deduction under section 35AD.
Such loss can, however, be carried forward indefinitely for set-off against profits of the
same or any other specified business but the assessee has to file return of income on or
before the due date of filling return of income under section 139 for carry forward of losses
from specified business.
Example:
A assessee can therefore, set-off the losses of a hospital or hotel which begins to operate
after 1st April, 2010 and which is eligible for deduction section 35AD, against the profits of
the existing business of operating a hospital (with atleast 100 beds for patients) or a hotel
(of two-star or above category) started before 1st April, 2010, even if the latter is not eligible
for deduction under section 35AD.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.91

ILLUSTRATION 7
Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of
food grains, sugar and edible oil on 1.4.2024. He incurred capital expenditure of ` 80 lakh, ` 60
lakh and ` 50 lakh, respectively, on purchase of land and building during the period January, 2024
to March, 2024 exclusively for the above businesses, and capitalized the same in its books of
account as on 1st April, 2024. The cost of land included in the above figures is ` 50 lakh, ` 40 lakh
and ` 30 lakh, respectively. During the P.Y. 2024-25, he incurred capital expenditure of ` 20 lakh,
` 15 lakh & ` 10 lakh, respectively, for extension/ reconstruction of the building purchased and
used exclusively for the above businesses.
The profits from the business of setting up a warehousing facility for storage of food grains, sugar
and edible oil (before claiming deduction under section 35AD and section 32) for the A.Y. 2025-26
is ` 16 lakhs, ` 14 lakhs and ` 31 lakhs, respectively. Assume in respect of expenditure incurred,
the payments are made by account payee cheque or use of ECS through bank account.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2025-26 and the loss to be carried forward, assuming that Mr. A is exercising the option of
shifting out of the default tax regime provided under section 115BAC(1A) and has fulfilled all the
conditions specified for claim of deduction under section 35AD and wants to claim deduction under
section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C. –
Deductions in respect of certain incomes”.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2025-26
Particulars ` (in lakhs)
Profit from business of setting up of warehouse for storage of edible oil (before 31
providing for depreciation under section 32)
Less: Depreciation under section 32
10% of ` 30 lakh, being (` 50 lakh – ` 30 lakh + ` 10 lakh) 3
Income chargeable under “Profits and gains from business or profession” 28

Computation of income/loss from specified business under section 35AD

Particulars Food Sugar Total
Grains
` (in lakhs)
(A) Profits from the specified business of setting up a 16 14 30
warehousing facility (before providing deduction under
section 35AD)

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Less: Deduction under section 35AD

(B) Capital expenditure incurred prior to 1.4.2024 (i.e., prior to
commencement of business) and capitalized in the books
of account as on 1.4.2024 (excluding the expenditure
incurred on acquisition of land) = ` 30 lakh (` 80 lakh –
30 20 50
` 50 lakh) and ` 20 lakh (` 60 lakh – ` 40 lakh)
(C) Capital expenditure incurred during the P.Y.2024-25 20 15 35
(D) Total capital expenditure (B + C) 50 35 85
(E) Deduction under section 35AD
100% of capital expenditure (food grains/sugar) 50 35 85
Total deduction u/s 35AD for A.Y.2025-26 50 35 85
(F) Loss from the specified business of setting up and
operating a warehousing facility (after providing for
deduction under section 35AD) to be carried forward as (34) (21) (55)
per section 73A (A-E)
Notes:
(i) Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2025-26
in respect of specified business of setting up and operating a warehousing facility for storage
of sugar and setting up and operating a warehousing facility for storage of agricultural
produce where operations are commenced on or after 01.04.2012 or on or after 01.04.2009,
respectively.
(ii) However, since setting up and operating a warehousing facility for storage of edible oils is not
a specified business, Mr. A is not eligible for deduction under section 35AD in respect of
capital expenditure incurred in respect of such business.
(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital
expenditure incurred on buildings. It is presumed that the buildings were put to use for more
than 180 days during the P.Y. 2024-25.
(iv) Loss from a specified business can be set-off only against profits from another specified
business. Therefore, the loss of ` 55 lakh from the specified businesses of setting up and
operating a warehousing facility for storage of food grains and sugar cannot be set-off against
the profits of ` 28 lakh from the business of setting and operating a warehousing facility for
storage of edible oils, since the same is not a specified business. Such loss can, however, be
carried forward indefinitely for set-off against profits of the same or any other specified
business provided Mr. A file his return of income on or before the due date as specified
u/s 139.

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ILLUSTRATION 8
XYZ Ltd. commenced operations of the business of a new three-star hotel in Madurai, Tamil Nadu
on 1.4.2024. The company incurred capital expenditure of ` 50 lakh during the period January,
2024 to March, 2024 exclusively for the above business, and capitalized the same in his books of
account as on 1st April, 2024. Further, during the P.Y. 2024-25, it incurred capital expenditure of
` 2 crore (out of which ` 1.50 crore was for acquisition of land) exclusively for the above business.
Compute the income under the head “Profits and gains of business or profession” for the
A.Y.2025-26, assuming that XYZ Ltd. has fulfilled all the conditions specified for claim of deduction
under section 35AD and opted for claiming deduction under section 35AD; and has not claimed
any deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain
incomes”. The company is not opting for the concessional tax regime under section 115BAA.

The profits from the business of running this hotel (before claiming deduction under section 35AD) for
the A.Y.2025-26 is ` 25 lakhs. Assume that the company also has another existing business of
running a four-star hotel in Coimbatore, which commenced operations fifteen years back, the profits
from which are ` 120 lakhs for the A.Y.2025-26. Also, assume that expenditure incurred during the
previous year 2024-25 were paid by account payee cheque or use of ECS through bank account.
SOLUTION
Computation of profits and gains of business or profession for A.Y. 2025-26

Particulars ` (in lakhs)

Profits from the specified business of new hotel in Madurai (before providing 25
deduction under section 35AD)
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y.2024-25 (excluding the
expenditure incurred on acquisition of land) = ` 200 lakhs – ` 150 lakhs 50 lakh
Capital expenditure incurred prior to 1.4.2024 (i.e., prior to
commencement of business) and capitalized in the books of account 50 lakh
as on 1.4.2024
Total deduction under section 35AD for A.Y.2025-26 100
Loss from the specified business of new hotel in Madurai (75)
Profit from the existing business of running a hotel in Coimbatore 120
Net profit from business after set-off of loss of specified business against profits 45
of another specified business under section 73A

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(x) Transfer of hotel built by the assessee: Where the assessee builds a hotel of two-star or
above category as classified by the Central Government and subsequently, while continuing
to own the hotel, transfers the operation of the said hotel to another person, the assessee
shall be deemed to be carrying on the specified business of building and operating a hotel.
Therefore, he would be eligible to claim investment-linked tax deduction under section
35AD.

Therefore, in effect, the assessee shall be deemed to be carrying on the

specified business of building and operating hotel if –
(i) The assessee builds a hotel of two-star or above category;
(ii) Thereafter, he transfers the operation of the hotel to another person;
(iii) He, however, should continue to own the hotel.

(xi) Other conditions contained under section 35AD

S. Particulars Condition
No.
1. Transfer of goods Where any goods or services held for the purposes of the
and services specified business are transferred to any other business
carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the
market value of the goods or services then the profits and
gains of the specified business shall be computed as if the
transfer was made at market value.
Market value means the price such goods or services would
ordinarily fetch in the open market, subject to statutory or
regulatory restrictions, if any.
2. Close connection Where due to the close connection between the assessee
between assessee and the other person or for any other reason, it appears to
and any other the Assessing Officer that the profits of specified business is
person increased to more than the ordinary profits, the Assessing
Officer shall compute the amount of profits of such eligible
business on a reasonable basis for allowing the deduction.
2. Audit of accounts The deduction shall be allowed to the assessee only if the
accounts of the assessee for the relevant previous year
have been audited by a chartered accountant and the
assessee furnishes the audit report in the prescribed form,
duly signed and verified by such accountant along with his
return of income.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.95

3. Asset to be used Section 35AD(7A) provides that any asset in respect of

for specified which a deduction is claimed and allowed under section
business for eight 35AD shall be used only for the specified business for a
years period of eight years beginning with the previous year in
which such asset is acquired or constructed.
4. Asset demolished, destroyed, discarded or transferred for which a deduction
has been allowed
If any asset on which a deduction under section 35AD has been claimed and
allowed, is demolished, destroyed, discarded or transferred, the sum received or
receivable for the same is chargeable to tax under clause (vii) of section 28.
This does not take into account a case where asset on which deduction under
section 35AD has been claimed is used for any purpose other than the specified
business by way of a mode other than that specified above.
5. Asset used for any other business other than specified business during 8
years [Section 35AD(7B)]
If asset is used for any purpose other than the specified business during 8
years beginning with the previous year in which such asset is acquired, the total
amount of deduction so claimed and allowed in any previous year(s) in respect of
such asset, as reduced by the amount of depreciation allowable in accordance with
the provisions of section 32 as if no deduction had been allowed under section
35AD, shall be deemed to be income of the assessee chargeable under the head
“Profits and gains of business or profession” of the previous year in which the asset
is so used.
In such a case, as per the proviso to Explanation 13 to Section 43(1), the actual
cost of such asset for the assesse shall be the actual cost as reduced by amount of
depreciation would have been allowable had the asset been used for the purpose
of business since the date of its acquisition.
However, the deeming provision under sub-section (7B) shall not be applicable to a
company which has become a sick industrial company under section 17(1) of the
Sick Industrial Companies (Special Provisions) Act, 1985, during the intervening
period of eight years specified in sub-section (7A).

ILLUSTRATION 9
ABC Ltd. is a company having two units – Unit A carries on specified business of setting up and
operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of
operating a warehousing facility for storage of edible oil.
Unit A commenced operations on 1.4.2023 and it claimed deduction of ` 100 lakhs incurred on
purchase of two buildings for ` 50 lakhs each (for operating a warehousing facility for storage of
sugar) under section 35AD for A.Y. 2024-25. However, in February, 2025, Unit A transferred one
of its buildings to Unit B.
Examine the tax implications of such transfer in the hands of ABC Ltd.

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SOLUTION
Since the capital asset, in respect of which deduction of ` 50 lakhs was claimed under section
35AD, has been transferred by Unit A carrying on specified business to Unit B carrying on non-
specified business in the P.Y.2024-25, the deeming provision under section 35AD(7B) is attracted
during the A.Y. 2025-26.
Particulars `
Deduction allowed under section 35AD for A.Y.2024-25 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2024-25 [10% of ` 50 lakhs] 5,00,000
Deemed income under section 35AD(7B) 45,00,000

ABC Ltd., however, by virtue of proviso to Explanation 13 to section 43(1), can claim depreciation
under section 32 on the building in Unit B for A.Y. 2025-26. For the purpose of claiming
depreciation on building in Unit B, the actual cost of the building would be:
Particulars `
Actual cost to the assesse 50,00,000
Less: Depreciation allowable u/s 32 for A.Y.2024-25 [10% of ` 50 lakhs] 5,00,000
Actual cost in the hands of ABC Ltd. in respect of building in Unit B 45,00,000

(10) Contributions for Rural Development [Section 35CCA]

This section allows a deduction of the following payment or contribution made by the assessee
during the previous year to:
(1) Notified rural development fund - Payment to a rural development fund set up and
notified by the Central Government.
(2) Notified National Urban Poverty Eradication Fund - Payments made to “National Urban
Poverty Eradication Fund” (NUPEF) set up and notified by the Central Government.
No other deduction - It has been specifically provided that in every case where any deduction
under this section is claimed by the assessee and allowed to him for any assessment year in
respect of any expenditure incurred by way of payment of contribution to such notified fund, no
deduction in respect of the same expenditure can again be claimed by the assessee under any
other relevant provision for the same or any other assessment year.
(11) Deduction in respect of expenditure incurred on notified agricultural extension
project [Section 35CCC]
(i) Eligible project and Quantum of Deduction: In order to incentivize the business entities
to provide better and effective agriculture extensive services, section 35CCC provides a

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.97

deduction of a sum equal to expenditure incurred by an assessee on agricultural extension

project in accordance with the prescribed guidelines.

(ii) No other deduction: In case deduction in respect of such expenditure is allowed under this
section then, no deduction in respect of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.

(iii) Project must be notified: The agricultural extension project eligible for this deduction shall
be notified by the CBDT.
The agricultural extension project shall be considered for notification if it fulfils all of the
following conditions, namely:—
(a) the project shall be undertaken by an assessee for training, education and guidance
of farmers;
(b) the project shall have prior approval of the Ministry of Agriculture, Government of India;
and
(c) an expenditure (not being expenditure in the nature of cost of any land or building)
exceeding the amount of ` 25 lakhs is expected to be incurred for the project.

Components of expenditure: All expenses (not being expenditure in the nature of cost
of any land or building), as reduced by the amount received from beneficiary, if any,
incurred wholly and exclusively for undertaking an eligible agricultural extension project
shall be eligible for deduction under section 35CCC.
However, expenditure incurred on the agricultural extension project which is
reimbursed or reimbursable to the assessee by any person, whether directly or
indirectly, shall not be eligible for deduction under section 35CCC.

(iv) Conditions for claiming deduction: Deduction in respect of expenditure incurred for
notified agricultural extension project would be available, if

♦ assessee maintain separate books of account of such agricultural extension project

and get such books of account audited by an Accountant and
♦ furnish the following on or before the due date of furnishing the return of income to
the Commissioner of Income-tax or Director of Income-tax, as the case may be :-
 the audited statement of accounts of the agricultural extension project along
with the audited report and amount of deduction claimed under this section,

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 a note on agricultural project undertaken and programme of agricultural

extension project to be undertaken during the current year and financial
allocation for such programme and
 a certificate from Ministry of Agriculture, Government of India, regarding the
genuineness of such project.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction u/s 35CCC would be available only if such person exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A). If such person is
paying concessional rates of tax under the default tax regime u/s 115BAC, deduction u/s 35CCC
would not be available.
A company/ cooperative society would not be eligible for deduction under section 35CCC, if it opts
for the special provisions of section 115BAA/115BAB or section 115BAD/115BAE, respectively.
(12) Deduction in respect of expenditure incurred by companies on notified skill
development project [Section 35CCD]
(i) Quantum of Deduction: In order to encourage companies to invest on skill development
projects in the manufacturing sector, section 35CCD provides for a deduction of a sum
equal to the expenditure (not being expenditure in the nature of cost of any land or building)
on skill development project incurred by the company in accordance with the prescribed
guidelines. However, expenditure incurred on the notified skill development project which is
reimbursed or reimbursable to the company by any person, whether directly or indirectly,
shall not be eligible for deduction under section 35CCD.
(ii) No other deduction allowed: In case deduction in respect of such expenditure is allowed
under this section then, no deduction of such expenditure shall be allowed under any other
provisions of the Act in the same or any other assessment year.
(iii) Only notified projects are eligible: The skill development project eligible for this
deduction shall be notified by the CBDT.
A skill development project would be considered for notification if it is undertaken by an
eligible company (a company engaged in the business of manufacture or production of any
article or thing, not being beer, wine and other alcoholic spirits and tobacco and tobacco
preparations or engaged in providing specified services) and the project is undertaken in
separate facilities in a training institute.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.99

Skill development project in respect of existing employees of the company, however, would
not be eligible for notification, where the training of such employees commences after six
months of their recruitment.
Further, the deduction would be available, if the company undertaking such project
- maintain separate books of account of the skill development project and get such
books of account audited by an accountant.
- furnish the audited statement of accounts of the skill development project along with
the audited report and amount of deduction claimed under this section, to the
Commissioner of Income-tax or Director of Income-tax, as the case may be.

Note - A company would not be eligible for deduction under section 35CCD, if it opts for the
special provisions of section 115BAA/115BAB.

(13) Amortisation of Preliminary Expenses [Section 35D]

(i) Nature of expenditure: Section 35D provides for the amortisation of preliminary expenses
incurred by Indian companies and other resident non-corporate taxpayers for the
establishment of business concerns or the expansion of the business of existing concerns.
(ii) Applicable: This section applies
(a) only to Indian companies and resident non-corporate assessees;

(b) in the case of new companies to expenses incurred before the commencement of the
business;
(c) in the case of extension of an existing undertaking to expenses incurred till the
extension is completed, i.e., in the case of the setting up of a new unit - expenses
incurred till the new unit commences production or operation.
(iii) Amount eligible for deduction: Such preliminary expenditure incurred shall be amortised
over a period of 5 years. In other words, 1/5th of such expenditure is allowable as a
deduction for each of the five successive previous years beginning with the previous year in
which the business commences or, the previous year in which the extension of the
undertaking is completed or the new unit commences production or operation, as the case
may be.
(iv) Eligible expenses - The following expenditure are eligible for amortisation:
(I) Expenditure in connection with –

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(a) the preparation of feasibility report

(b) the preparation of project report;
(c) conducting market survey or any other survey necessary for the business of
the assessee;
(d) engineering services relating to the assessee’s business;
The assessee has to furnish a statement containing the particulars of above
expenditure within one month prior to the due date for furnishing the return of income
as specified under section 139(1) to the Principal Director General of Income-tax
(Systems) or the Director General of Income-tax (Systems), as the case may be, or
any person authorised by the Principal Director General of Income-tax (Systems) or
Director General of Income-tax (Systems) in the Form No. 3AF in prescribed manner
for each previous year [Rule 6ABBB].
(II) legal charges for drafting any agreement between the assessee and any other
person for any purpose relating to the setting up to conduct the business of
assessee.
(III) Where the assessee is a company, in addition to the above, expenditure incurred –
(f) by way of legal charges for drafting the Memorandum and Articles of
Association of the company;
(g) on printing the Memorandum and Articles of Association;
(h) by way of fees for registering the company under the Companies Act; 1956 8,
(i) in connection with the issue, for public subscription, of the shares in or
debentures of the company, being underwriting commission, brokerage and
charges for drafting, printing and advertisement of the prospectus; and
(IV) Such other items of expenditure (not being expenditure qualifying for any allowance
or deduction under any other provision of the Act) as may be prescribed by the
Board for the purpose of amortisation. However, the Board, so far, has not
prescribed any specific item of expense as qualifying for amortisation under this
clause.
(v) Overall Limits - The maximum aggregate amount of the qualifying expenses that can be
amortised is

8
Now Companies Act, 2013

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.101

In case of resident non-corporate assessee - 5% of the cost of the project

In the case of an Indian company – 5% of the cost of the project or, at the option of the
company, 5% of the capital employed in the business of the company, whichever is higher.
The excess, if any, of the qualifying expenses shall be ignored.

Amount of • 5% of cost of
deduction

Whichever is
• 5% of the cost project

higher
of the project • 1/5th of qualifying OR
limit
• for each five • 5% of capital
successive years employed
In case of resident non-
corporate assessees
In case of Indian
companies

(vi) Meaning of certain terms:

Terms Meaning
Cost of the (i) Expenses incurred before the commencement of business: The
project actual cost of the fixed assets, being land, buildings, leaseholds,
plant, machinery, furniture, fittings, railway sidings (including
expenditure on the development of land, buildings) which are
shown in the books of the assessee as on the last day of the
previous year in which the business of the assessee commences;
(ii) Expenses incurred for extension of the business or setting up of
a new unit: The cost of the fixed assets being land, buildings,
leaseholds, plant, machinery, furniture, fittings, and railway sidings
(including expenditure on the development of land and buildings)
which are shown in the books of the assessee as on the last day of
the previous year in which the extension of the undertaking is
completed or, as the case may be, the new unit commences
production or operation, in so far as such assets have been
acquired or developed in connection with the extension of the
undertaking or the setting up of the new unit.

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Capital (i) In the case of new company: The aggregate of the issued share
employed capital, debentures and long-term borrowings as on the last day of
in the the previous year in which the business of the company
business commences;
of the (ii) In the case of extension of the business or the setting up of a
company new unit: The aggregate of the issued share capital, debentures,
and long-term borrowings as on the last day of the previous year in
which the extension of the undertaking is completed or, as the case
may be, the unit commences production or operation in so far as
such capital, debentures and long-term borrowings have been
issued or obtained in connection with the extension of the
undertaking or the setting up of the new undertaking or the setting
up of the new unit of the company.
Long-term (i) Any moneys borrowed in India by the company from the
borrowing Government or the Industrial Finance Corporation of India or the
Industrial Credit and Investment Corporation of India or any other
financial institution eligible for deduction under section 36(1)(viii) or
any banking institution, or
(ii) any moneys borrowed or debt incurred by it in a foreign country in
respect of the purchase outside India of plant and machinery where
the terms under which such moneys are borrowed or the debt is
incurred provide for the repayment thereof during a period of not
less than 7 years.

(vii) Audit of accounts: In cases where the assessee is a person other than a company or a co-
operative society, the deduction would be allowable only if the accounts of the assessee for
the year or years in which the expenditure is incurred have been audited by a Chartered
Accountant before the date specified in section 44AB i.e., one month prior to the due date
for furnishing return of income u/s 139(1); and the assessee has, by that date, furnished for
the first year in which the deduction is claimed, the report of such audit in the prescribed
form duly signed and verified by the auditor and setting forth such other particulars as may
be prescribed.
Particulars Due date of filing of return Specified Date

Assessees 31st October of the relevant 30th September of the relevant

(other than a A.Y. A.Y.
company)
subject to tax For A.Y.2025-26, on or before For A.Y.2025-26, on or before
audit 31st October, 2025 30th September, 2025

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.103

(viii) Special provisions for amalgamation and demerger- Where the undertaking of an Indian
company is transferred, before the expiry of the period of five years, to another Indian
company under a scheme of amalgamation, the aforesaid provisions will apply to the
amalgamated company as if the amalgamation had not taken place. But no deduction will
be admissible in the case of the amalgamating company for the previous year in which the
amalgamation takes place.
Likewise, in the scheme of demerger where the resulting company will be able to claim
amortisation of preliminary expenses as if demerger had not taken place, and no deduction
shall be allowed to the demerged company in the year of demerger.
(ix) No other deduction under any provision of the Act: It has been clarified that in case
where a deduction under this section is claimed and allowed for any assessment year in
respect of any item of expenditure, the expenditure in respect of which deduction is so
allowed shall not qualify for deduction under any other provision of the Act for the same or any
other assessment year.
(14) Amortisation of expense for Amalgamation/demerger [Section 35DD]
(i) Nature of expenditure: This section applies where an assessee, being an Indian company,
incurs expenditure, wholly and exclusively for the purpose of amalgamation or demerger.
(ii) Amount of deduction: The assessee shall be allowed a deduction equal to one-fifth of
such expenditure for five successive previous years beginning with the previous year in
which amalgamation or demerger takes place.
(iii) No other deduction under any provision of the Act: No deduction shall be allowed in
respect of the above expenditure under any other provisions of the Act.
(15) Amortisation of expenditure incurred under voluntary retirement scheme
[Section 35DDA]
(i) Nature of expenditure: This section applies to an assessee who has incurred expenditure
in any previous year in the form of payment to any employee in connection with his
voluntary retirement, in accordance with any scheme or schemes of voluntary retirement.
(ii) Amount of deduction: The amount of deduction allowable is one-fifth of the amount
paid for that previous year, and the balance in four equal installments in the four
immediately succeeding previous years.
(iii) Transfer of business: In case of amalgamation, demerger, reorganisation or succession of
business during the intervening period of the said 5 years, the benefit of deduction will be

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available to the “new company” for the balance period including the year in which such
amalgamation/ demerger/ reorganisation or succession takes place.

Conditions to be satisfied - This will be applicable in the following situations:

(i) where an Indian company is transferred to another Indian company in a scheme of
amalgamation;

(ii) where the undertaking of an Indian company is transferred to another company in a

scheme of demerger;
(iii) where due to a re-organisation of business, a firm is succeeded by a company
fulfilling the conditions in section 47(xiii) or a proprietary concern is succeeded by a
company fulfilling the conditions in section 47(xiv);
(iv) where a private company or unlisted company is succeeded by LLP fulfilling the
conditions laid down in section 47(xiiib).
In the above cases, the deduction shall be available to the successor company as such
deduction would have applied to the original entity if such transfer had not taken place at
all.
It is further provided that no deduction shall be available to the original entity being the
amalgamating company, demerged company, or the firm or proprietary concern or private
company (as the case may be) for the previous year in which the amalgamation,
demerger or succession takes place.
(iv) No other deduction under any provision of the Act: No deduction shall be allowed in
respect of the above expenditure under any other provision of the Act.
(16) Amortisation of expenses for prospecting and development of certain minerals
[Section 35E]
(i) Eligible assessee: This provision applies only to expenditure incurred by an Indian
company or other resident non-corporate taxpayer. In order to qualify for amortisation, the
assessee should be engaged in any operations relating to prospecting for or the extraction
or production of any mineral.

(ii) Eligible expenses - The nature and kind of expenditure qualifying for amortisation are –
(i) It must have been incurred during the year of commercial production and any one or
more of the four years immediately preceding that year,

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.105

(ii) It must be incurred wholly and exclusively on any operations relating to the pros-
pecting for any mineral or group of certain minerals listed in the Seventh Schedule of
the Income-tax Act, 1961 or on the development of a mine or other natural deposit of
any mineral or group of associated minerals.

(iii) Expenditure not allowed for deduction - Any portion of the expenditure which is met
directly or indirectly by any other persons or authority and the sale, salvage, compensation
or insurance moneys realised by the assessee in respect of any property or rights brought
into existence as a result of the expenditure should be excluded from the amount of
expenditure qualifying for amortisation.

Further, specific provision has been made to the effect that the following items of expenses
do not qualify for amortisation at all viz.:

(a) Expenditure incurred on the acquisition of the site of the source of any minerals or
group of associated minerals stated above or of any right in or over such site;

(b) Expenditure on the acquisition of the deposits of minerals or group of associated

minerals referred to above or to any rights in or over such deposits; or

(c) Expenditure of a capital nature in respect of any building, machinery, plant or

furniture for which depreciation allowance is permissible under section 32.
(iv) Amount of deduction - The assessee will be allowed for each of ten relevant previous
years, a deduction of an amount equal to one-tenth of the aggregate amount of the
qualifying expenditure.
Thus, the deduction to be allowed for any relevant previous year is
(i) one-tenth of the expenditure or

(ii) such amount as will reduce to nil the income of the previous year arising from the
commercial exploration of any minerals or other natural deposit of the mineral or minerals
in a group of associated minerals in respect of which the expenditure was incurred,

whichever figure is less.

The amount of the deduction admissible in respect of any relevant previous year to the
extent to which it remains unallowed, shall be carried forward and added to the installment
relating to the previous year next following and shall be deemed to be a part of the
installment and so on, for ten previous years beginning from the year of commercial
production.

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(v) Meaning of certain terms:

Term Meaning
Operation relating Any operation undertaken for the purpose of exploiting, locating
to prospecting or proving deposits of any minerals and includes any such
operation which proves to be infructuous or abortive.
Year of commercial The previous year in which as a result of any operation relating
production to prospecting or commercial production of any material or one
or more of the minerals in a group of associated minerals
specified in Part A or Part B, respectively, of the Seventh
Schedule to Act actually commences.
Relevant previous Ten previous years beginning with the year of commercial pro-
year duction

(vi) Audit of accounts: The provisions with regard to audit of accounts relating to the qualifying
expenditure are similar to those applicable for amortisation of preliminary expenses
discussed earlier.
(vii) Special provisions for amalgamation or demerger: In the case of amalgamation, such
deduction would continue to be admissible to the amalgamated company as if the
amalgamation had not taken place.

Likewise, in case of demerger where such deduction can be availed of by the resulting company
as if the demerger had not taken place.
Further, no deduction will be admissible to the amalgamating/ demerged company in the
year of amalgamation/ demergers.
(viii) No other deduction allowed in respect of the expenditure for which deduction is
claimed under this section: Where a deduction is claimed and allowed on account of
amortisation of the expenses under section 35E in any year in respect of any expenditure,
the expenditure in respect of which deduction is so allowed shall not again qualify for
deduction from the profits and gains under any other provisions of the Act for the same or
any other assessment year.
(17) Other Deductions [Section 36]
This section authorises deduction of certain specific expenses. The items of expenditure and the
conditions under which such expenditures are deductible are:
(1) Insurance premia paid [Section 36(1)(i)] - If insurance policy has been taken out against
risk, damage or destruction of the stock or stores of the business or profession, the premia

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.107

paid is deductible. But the premium in respect of any insurance undertaken for any other
purpose is not allowable under the clause.
(2) Insurance premia paid by a Federal Milk Co-operative Society [Section 36(1)(ia)] -
Deduction is allowed in respect of the amount of premium paid by a Federal Milk Co-
operative Society to effect or to keep in force an insurance on the life of the cattle owned by
a member of a co-operative society, being a primary society engaged in supply of milk
raised by its members to such Federal Milk Co-operative Society. The deduction is
admissible without any monetary or other limits.
(3) Premia paid by employer for health insurance of employees [Section 36(1)(ib)] - This
clause seeks to allow a deduction to an employer in respect of premia paid by him by any
mode of payment other than cash to effect or to keep in force an insurance on the health of
his employees in accordance with a scheme framed by
(i) the General Insurance Corporation of India and approved by the Central
Government; or
(ii) any other insurer and approved by the IRDA.
(4) Bonus and Commission [Section 36(1)(ii)] - These are deductible in full provided the sum
paid to the employees as bonus or commission shall not be payable to them as profits or
dividends if it had not been paid as bonus or commission.
It is a provision intended to safeguard against a private company or an association
escaping tax by distributing a part of its profits by way of bonus amongst the members, or
employees of their own concern instead of distributing the money as dividends or profits.
(5) Interest on borrowed capital [Section 36(1)(iii)] - Deduction of interest is allowed in
respect of capital borrowed for the purposes of business or profession in the computation of
income under the head "Profits and gains of business or profession".
Capital may be borrowed for several purposes like for acquiring a capital asset, or to pay off
a trading debt or loss etc. The scope of the expression ‘for the purposes of business’ is very
wide. Capital may be borrowed in the course of the existing business as well as for
acquiring assets for extension of existing business.
As per proviso to section 36(1)(iii), deduction in respect of any amount of interest paid, in
respect of capital borrowed for acquisition of new asset (whether capitalised in the books of
account or not) for any period beginning from the date on which the capital was borrowed
for acquisition of the asset till the date on which such asset was first put to use shall not be
allowed.

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Explanation 8 to section 43(1) clarifies that interest relatable to a period after the asset is
first put to use cannot be capitalised. Interest in respect of capital borrowed for any period
from the date of borrowing to the date on which the asset was first put to use should,
therefore, be capitalised.

Note: In the case of genuine business borrowings, the department cannot disallow any part
of the interest on the ground that the rate of interest is unreasonably high except in cases
falling under section 40A.

(6) Discount on Zero Coupon Bonds (ZCBs) [Section 36(1)(iiia)] - Section 36(1)(iiia)
provides deduction for the discount on ZCB on pro rata basis having regard to the period of
life of the bond to be calculated in the manner prescribed.

Term Meaning
Discount Difference of the amount received or receivable by an infrastructure
capital company/ infrastructure capital fund/ public sector company/
scheduled bank on issue of the bond and the amount payable by such
company or fund or bank on maturity or redemption of the bond.
Period of life The period commencing from the date of issue of the bond and ending on
of the bond the date of the maturity or redemption.

Meaning of Infrastructure Capital Company [Section 2(26A)]

“Infrastructure capital company" means such company which makes investments by way of
acquiring shares or providing long-term finance to -
(1) any enterprise or undertaking wholly engaged –
(a) in the business referred to in section 80-IA(4) i.e. business of
(i) developing/ operating and maintaining/ developing, operating and
maintaining any infrastructure facility fulfilling the specified conditions
(ii) providing telecom services, whether basic or cellular
(iii) developing, developing and operating or maintaining and operating an
industrial park or special economic zone notified by the Central
Government

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.109

(iv) generating, transmitting or distributing power or undertaking substantial

renovation and modernization of the existing network of transmission
or distribution lines.
(b) in the business referred to in section 80-IAB(1) i.e. any business of
developing a SEZ.

(2) an undertaking developing and building a housing project referred to in section 80-
IB(10) i.e. approved before 31.3.2008 by a local authority and commences or
commenced development and construction on or after 1.10.98 and completes or
completed development and construction within the time specified.
(3) a project for constructing a hotel of not less than three-star category as classified by
the Central Government or
(4) a project for constructing a hospital with at least 100 beds for patients.
Meaning of Infrastructure Capital Fund [Section 2(26B)]
Infrastructure capital fund means such fund operating under a trust deed registered under
the provisions of the Registration Act, 1908 established to raise monies by the trustees for
investment by way of acquiring shares or providing long-term finance to -
(1) any enterprise or undertaking wholly engaged in the business referred to in section
80-IA(4) or section 80-IAB(1); or
(2) an undertaking developing and building a housing project referred to in section
80-IB(10); or
(3) a project for constructing a hotel of not less than three star category as classified by
the Central Government; or
(4) a project for constructing a hospital with at least 100 beds for patients.

(7) Contributions to provident and other funds [Section 36(1)(iv) and (v)] - Contribution to
the employees’ recognised provident fund/approved superannuation fund is allowable
subject to the limits laid down for the purpose of recognizing the provident fund or
approving superannuation fund.
Contribution to an approved gratuity fund is allowable subject to the condition that the
gratuity fund should be for exclusive benefit of the employees under an irrevocable trust

The nature of the benefit available to the employees from the fund is not material; it may be
pension, gratuity or provident fund.

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(8) Employer’s contribution to the account of the employee under a Pension Scheme
referred to in section 80CCD [Section 36(1)(iva)]

(i) Section 36(1)(iva) to provide that the employer’s contribution to the account of an
employee under a Pension Scheme as referred to in section 80CCD would be
allowed as deduction while computing business income.

(ii) However, deduction would be restricted to 14% of salary of the employee in the
previous year.
(iii) Salary, for this purpose, includes dearness allowance, if the terms of employment so
provide, but excludes all other allowances and perquisites.
(iv) Correspondingly, section 40A(9), which provides for disallowance of any sum paid by an
employer towards contribution to any fund or trust has been amended to exclude from
the scope of its disallowance, contribution by an employer to the pension scheme
referred to in section 80CCD, to the extent to which deduction is allowable under section
36(1)(iva).
ILLUSTRATION 10
X Ltd. contributes 20% of basic salary to the account of each employee under a pension
scheme referred to in section 80CCD. Dearness Allowance is 40% of basic salary and it
forms part of pay of the employees.
Compute the amount of deduction allowable under section 36(1)(iva), if the basic salary of the
employees aggregate to ` 10 lakh. Would disallowance under section 40A(9) be attracted,
and if so, to what extent?
SOLUTION
Computation of deduction u/s 36(1)(iva) and disallowance u/s 40A(9)

Particulars `
Basic Salary 10,00,000
Dearness Allowance@40% of basic salary [DA forms part of pay] 4,00,000
Salary for the purpose of section 36(1)(iva) (Basic Salary + DA) 14,00,000
Actual contribution (20% of basic salary i.e., 20% of `10 lakh) 2,00,000
Less: Permissible deduction under section 36(1)(iva) [14% of (basic
salary plus dearness pay) = 14% of ` 14,00,000 = ` 1,40,000] 1,96,000
Excess contribution disallowed under section 40A(9) 4,000

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(9) Amount received by assessee-employer as contribution from his employees towards

their welfare fund to be allowed only if such amount is credited on or before due date
– Section 36(1)(va) and section 57(ia) provide that deduction in respect of any sum
received by the taxpayer as contribution from his employees towards any welfare fund of
such employees will be allowed only if such sum is credited by the taxpayer to the
employee’s account in the relevant fund on or before the due date.

Due date The date by which the assessee is required as an employer to credit such
contribution to the employee’s account in the relevant fund under the
provisions of any law on term of contract of service or otherwise.

As per the Employees Provident Funds Scheme, 1952, the amounts under consideration in
respect of wages of the employees for any particular month shall be paid within 15 days of
the close of every month.
Note - It is clarified that the provisions of section 43B regarding allowability of certain
expenditure in a previous year only on actual payment basis on or before due date of filing
of return of income for relevant assessment year, does not apply and would deemed never
to be applied on employee’s contribution received by employer towards any welfare fund of
such employee. In effect, the extended time upto due date of filing of return for is not
available for credit of employees contribution towards any welfare fund received by the
employer.
(10) Allowance for animals [Section 36(1)(vi)] – This clause grants an allowance in respect of
animals which have died or become permanently useless.

The amount of the allowance is the difference between the actual cost of the animals and
the price realized on the sale of the animals themselves or their carcasses.
The allowance under the clause would thus recoup to the assessee the entire capital
expenditure in respect of animal.
(11) Bad debts [Section 36(1)(vii) and section 36(2)] – These can be deducted subject to the
following conditions:

(a) The debts or loans should be in respect of a business which was carried on by the
assessee during the relevant previous year.
(b) The debt should have been taken into account in computing the income of the
assessee of the previous year in which such debt is written off or of an earlier

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previous year or should represent money lent by the assessee in the ordinary course
of his business of banking or money lending.

I. Deduction under section 36(1)(vii) for bad debts limited to the amount by which
bad debts exceed credit balance in the provision for doubtful debts account
under section 36(1)(viia)

Under section 36(1)(vii), bad debt actually written off as irrecoverable in the books of
account of the assessee is deductible. However, in the case of entities for which
provision for bad and doubtful debts is allowable under section 36(1)(viia), deduction
for bad debts written off under said clause (vii) shall be limited to the amount by
which the bad debt written off exceeds the credit balance in the provision for bad and
doubtful debts account made under section 36(1)(viia). This is provided in the
proviso to section 36(1)(vii).

The CBDT has, clarified vide Circular no. 12/2016, dated 30-05-2016, that claim for
any debt or part thereof in any previous year, shall be admissible under section
36(1)(vii), if it is written off as irrecoverable in the books of accounts of the assessee
for that previous year and it fulfills the conditions stipulated in section 36(2).

However, no such requirement is there in law that the assessee has to establish that
the debt has, in fact, become irrecoverable.

Further, the provisions of section 36(1)(vii) are subject to the provisions of section
36(2). Section 36(2)(v) provides that where the debt or part thereof relates to
advances made by an assessee, to which section 36(1)(viia) applies, no deduction
shall be allowed unless the assessee has debited the amount of such debt or part of
such debt in that previous year to the provision for bad and doubtful debts account
made under section 36(1)(viia).

Explanation 2 to section 36(1)(vii) states that for the purposes of the proviso to
section 36(1)(vii) and section 36(2)(v), only one account as referred to therein shall
be made in respect of provision for bad and doubtful debts under section 36(1)(viia)
and such account shall relate to all types of advances, including advances made by
rural branches.

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Therefore, in the case of an assessee to which section 36(1)(viia) applies, the

amount of deduction in respect of the bad debts actually written off under section
36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit
balance in the provision for bad and doubtful debts account made under section
36(1)(viia) without any distinction between rural advances and other advances.

II. Amount of debt taken into account in computing the income of the assessee
on the basis of notified ICDSs to be allowed as deduction in the previous year
in which such debt or part thereof becomes irrecoverable [Second proviso to
section 36(1)(vii)]

(i) Under section 36(1)(vii), deduction is allowed in respect of the amount of any
bad debt or part thereof which is written off as irrecoverable in the accounts of
the assessee for the previous year.

(ii) Therefore, write off in the books of account is an essential condition for claim
of bad debts under section 36(1)(vii).

(iii) Amount of debt taken into account in computing the income of the assessee
on the basis of notified ICDSs to be allowed as deduction in the previous year
in which such debt or part thereof becomes irrecoverable.

If a debt, which has not been recognized in the books of account as per the
requirement of the accounting standards but has been taken into account in the
computation of income as per the notified ICDSs, has become irrecoverable, it can
still be claimed as bad debts under section 36(1)(vii) since it shall be deemed that
the debt has been written off as irrecoverable in the books of account by virtue
of the second proviso to section 36(1)(vii). This is because some ICDSs require
recognition of income at an earlier point of time (prior to the point of time such
income is recognised in the books of account). Consequently, if the whole or part of
such income recognised at an earlier point of time for tax purposes becomes
irrecoverable, it can be claimed as bad debts on account of the second proviso to
section 36(1)(vii).

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 3.114 DIRECT TAX LAWS

Where the amount of such debt or part thereof has been taken into account in
computing the income of the assessee (on the basis of ICDSs without recording
the same in the accounts)
of the previous year in which such debt (or)
of an earlier previous year
has become irrecoverable

Such debt or part thereof shall be allowed in the previous year in which such debt
or part thereof becomes irrecoverable

(and)
It shall be deemed that such debt or part thereof has been written off as
irrecoverable in the accounts

III. Deduction of differential amount of debts due as bad debts in the year of
recovery, to the extent of deficiency in recovery
If on the final settlement the amount recovered in respect of any debt, where
deduction had already been allowed, falls short of the difference between the debt
due and the amount of debt allowed, the deficiency can be claimed as a deduction
from the income of the previous year in which the ultimate recovery out of the debt is
made. It is permissible for the Assessing Officer to allow deduction in respect of a
bad debt or any part thereof in the assessment of a particular year and subsequently
to allow the balance of the amount, if any, in the year in which the ultimate recovery
is made, that is to say, when the final result of the process of recovery comes to be
known.
Recovery of a bad debt subsequently [Section 41(4)] - If a deduction has been
allowed in respect of a bad debt under section 36, and subsequently the amount
recovered in respect of such debt is more than the amount due after the allowance
had been made, the excess shall be deemed to be the profits and gains of business
or profession and will be chargeable as income of the previous year in which it is
recovered, whether or not the business or profession in respect of which the
deduction has been allowed is in existence at the time.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.115

Example: For P.Y. 2023-24, bad debts of ` 40,000 was allowed by the Assessing Officer out
of total bad debts of ` 75,000. Subsequently, ` 44,000 is recovered during P.Y. 2024-25.
Actual bad debts of the assessee after recovery = ` 75,000 – ` 44,000 i.e. ` 31,000 but the
bad debts allowed in P.Y. 2023-24 were ` 40,000, so the excess ` 9,000 that was allowed
in P.Y. 2023-24 would be deemed to be the profits and gains of business or profession of
P.Y. 2024-25 and will be chargeable as income of the P.Y. 2024-25 in which it is recovered.

(12) Provision for bad and doubtful debts in cases of specified banks [Section 36(1)(viia)]
(i) A scheduled bank which is not a bank incorporated by or under the laws of a country
outside India or a non-scheduled bank or a co-operative bank other than a primary
agricultural credit society or a primary co-operative agricultural and rural
development bank, the following deductions will be allowed:
(a) an amount not exceeding 8.5% of the total income (computed before making
any deduction under this clause and Chapter VI-A), and
(b) an amount not exceeding 10% of the aggregate average advances made by
the rural branches of such bank computed in the manner prescribed by the
CBDT.
Accordingly, Rule 6ABA prescribed the manner for computation of aggregate
average advance. The aggregate average advances made by the rural
branches of a scheduled bank shall be computed in the following manner–
(i) the amounts of advances made by each rural branch as outstanding at
the end of the last day of each month comprised in the previous year
shall be aggregated separately;
(ii) the sum so arrived at in the case of each such branch shall be divided
by the number of months for which the outstanding advances have
been taken into account for the purposes of clause (i)
(iii) the aggregate of the sums so arrived at in respect of each of the rural
branches shall be the aggregate average advances made by the rural
branches of the scheduled bank.
Such scheduled bank or a non-scheduled bank shall, at its option, be allowed
in any of the relevant assessment years, deduction in respect of any provision
made by it for any assets classified by the RBI as doubtful assets or loss
assets in accordance with the guidelines issued by it in this behalf, for an

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amount not exceeding 5% of the amount of such assets shown in the books of
account of the bank on the last day of the previous year.

Such scheduled bank or a non-scheduled bank shall, at its option, be allowed

a further deduction in excess of the limits specified in the foregoing
provisions, for an amount not exceeding the income derived from redemption
of securities in accordance with a scheme framed by the Central Government.
It is also provided that this deduction shall not be allowed unless such income
has been disclosed in the return of income under the head "Profits and gains
of business or profession".
Meaning of certain terms:
Term Meaning
Scheduled Bank It refers to the State Bank of India or any of its
subsidiaries or any of the nationalised banks and would
also include any other bank which is listed in the
Second Schedule to the Reserve Bank of India Act,
1934.
Non-Scheduled Bank This refers to a banking company as defined in clause
(c) of section 5 of the Banking Regulation Act, 1949
which is not a scheduled bank.
Rural branch A branch of a scheduled bank or a non-scheduled bank
situated in a place which has a population of not more
than 10,000 according to the last preceding census of
which the relevant figures have been published before
the first day of the previous year.
Co-operative bank, Shall have the same meaning assigned in Explanation
primary agriculture to section 80P(4).
credit society, primary
co-operative
agricultural and rural
development bank

(ii) Foreign Banks: In the case of foreign banks the deduction will be an amount not
exceeding 5% of the total income (computed before making any deduction under
this clause and Chapter VI-A).

(iii) Public financial institutions: A public financial institution, a State Financial

Corporation and a State Industrial Investment Corporation will be entitled to a
deduction in respect of provision for bad and doubtful debts made out of profits. The

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.117

maximum amount to be allowed as a deduction will be limited to 5% of its total

income before making any deduction in respect of the provision for bad and doubtful
debt or in respect of any deduction in Chapter VI-A.
(iv) Non-Banking Financial Companies (NBFCs): Since Non-Banking Financial
Companies (NBFCs) are also engaged in financial lending to different sectors of
society, deduction on account of provision for bad and doubtful debts of an amount
not exceeding 5% of total income (before making any deduction under section
36(1)(viia) and Chapter VI-A) would be allowed in the case of NBFCs also.
Meaning of certain terms:
Terms Meaning
Public Financial Shall have the meaning assigned to it in section 4A of the
Institution Companies Act, 1956 9
State Financial A financial corporation established under section 3 or
Corporation section 3A or an institution notified under section 46 of the
State Financial Corporations Act, 1951.
State Industrial A Government company within the meaning of Section 617
Investment of the Companies Act, 1956 10 engaged in the business of
Corporation providing long-term finance for industrial projects and
eligible for deduction under clause (viii) of this sub-section.
Non-Banking Shall have the same meaning assigned to it in Section 45-
Financial I(f) of the Reserve Bank of India Act, 1934. Accordingly, it
Company means
(i) a financial institution which is a company
(ii) a non-banking institution which is a company and
which has as its principal business the receiving of
deposits, under any scheme or arrangement or in any
other manner, or lending in any manner
(iii) such other non-banking institution or class of such
institutions, as the Bank may, with the previous
approval of the Central Government and by
notification in the Official Gazette, specify.

9 Now section 2(72) of the Companies Act, 2013

10 Now section 2(45) of the Companies Act, 2013

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Provision for bad and doubtful debts in cases of specified banks/FIs/NBFCs

Indian scheduled banks

Non-scheduled banks Foreign Banks
Co-operative banks* Public Financial Institutions
State Financial Corporations
State Industrial Investment
Maximum 8.5% of Total Corporations
Income [before deduction
u/s 36(1)(viia) and Non-Banking Financial Companies
Chapter VI-A]
+
Maximum 5% of Total
Maximum 10% of Income [before
aggregrate average deduction u/s 36(1)(viia)
advances made by and Chapter VI-A]
Rural branches

* other than a primary agricultural credit society or primary co-operative agricultural and rural development bank

(13) Special deduction to specified entities engaged in eligible business [Section 36(1)(viii)]
(i) This section provides deduction in respect of any special reserve created and
maintained by a specified entity.
(ii) Amount of deduction: The quantum of deduction, however, should not exceed
20% of the profits derived from eligible business computed under the head “Profits
and gains of business or profession” (before making any deduction under this
clause) carried to such reserve account.
However, where the aggregate amount carried to such reserve account exceeds
twice the amount of paid up share capital and general reserve, no deduction shall be
allowed in respect of such excess.
In simple terms, quantum of deduction shall be the least of the following
(i) Amount transferred to special reserve
(ii) 20% of profit derived from eligible business (before this deduction)
(iii) 200% of paid up capital and general reserve less aggregate amount carried to
Special Reserve account.

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(iii) Eligible business for specified entities: The eligible business for different entities
specified are given in the table below –
Specified entity Eligible business
1. (a) Financial Corporation Business of providing long-term finance
specified in section 4A of for -
the Companies Act, 1956 11 (i) industrial or agricultural
(b) Financial corporation development or
which is a public sector (ii) development of infrastructure facility
company in India; or
(c) Banking company (iii) development of housing in India.
(d) Co-operative bank (other
than a primary agricultural
credit society or a primary
co-operative agricultural
and rural development
bank)
2. A housing finance company Business of providing long-term finance
for the construction or purchase of
residential house in India.
3. Any other financial corporation Business of providing long-term finance
including a public company for development of infrastructure facility
in India.

(iv) Infrastructure facility has been defined to mean -

(a) (1) an infrastructure facility as defined in the Explanation to clause (i) of
sub-section (4) of section 80-IA i.e.

(i) a road including toll road, a bridge or a rail system;

(ii) a highway project including housing or other activities being an
integral part of the highway project;
(iii) a water supply project, water treatment system, irrigation
project, sanitation and sewerage system or solid waste
management system; and
(iv) a port, airport, inland waterway or inland port or a navigational
channel in the sea

11 Section 2(72) of the Companies Act, 2013

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(2) any other public facility of a similar nature as may be notified by the
CBDT in this behalf in the Official Gazette and which fulfils the
prescribed conditions;
Notification of public facilities as infrastructure facility for the
purpose of section 36(1)(viii) [Notification No. 188/2006, dated
20.7.2006]
The following public facilities have been notified by the CBDT as
infrastructure facility for purposes of section 36(1)(viii)-
(i) Inland Container Depot and Container Freight Station notified
under the Customs Act, 1962
(ii) Mass Rapid Transit system

(iii) Light Rail Transit system

(iv) Expressways
(v) Intra-urban or semi-urban roads like ring roads or urban by-
passes or flyovers
(vi) Bus and truck terminals
(vii) Subways
(viii) Road dividers
(ix) Bulk Handling Terminals which are developed or maintained or
operated for development of rail system
(x) Multilevel Computerized Car Parking.
Conditions to be fulfilled by a public facility to be eligible to be
notified as an infrastructure facility [Notification No.187/2006
dated 20.7.2006]:
Rule 6ABAA has been inserted in the Income-tax Rules, 1962 which
specifies the conditions to be fulfilled by a public facility to be eligible to
be notified as an infrastructure facility in accordance with the
provisions of clause (d) of the Explanation to clause (viii) of sub-
section (1) of section 36. The conditions specified therein are -

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(i) it is owned by a company registered in India or by a consortium

of such companies or by an authority or a board or a corporation
or any other body established or constituted under any Central
or State Act;
(ii) it has entered into an agreement with the Central Government
or a State Government or a local authority or any other statutory
body for (a) developing or (b) operating and maintaining or (c)
developing, operating and maintaining a new infrastructure
facility similar in nature to an infrastructure facility referred to in
the Explanation to section 80-IA(4)(i);
(iii) it has started or starts operating and maintaining such
infrastructure facility on or after 1st April, 1995.
(b) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-
section (4) of section 80-IA (i.e. an undertaking providing telecommunication
services, an undertaking developing, developing and operating, maintaining
and operating an industrial park or SEZ notified by the Central Government,
an undertaking generating, distributing or transmitting power, substantial
renovation and modernization of existing network of transmission or
distribution lines); and
(c) an undertaking referred to in sub-section (10) of section 80-IB i.e. an
undertaking developing and building housing projects approved by a local
authority.
(v) Long term finance - Long-term finance means any loan or advance where the terms
under which moneys are loaned or advanced provide for repayment along with
interest thereof during a period of not less than 5 years.
Amount withdrawal from special reserve [Section 41(4A)] - Where a deduction has been
allowed in respect of any special reserve created and maintain under section 36(1)(viii), and
subsequently the amount is withdrawn from such special reserve then such amount shall be
deemed to be the profits and gains of business or profession and will be chargeable as
income of the previous year in which such amount is withdrawn.
If the amount is withdrawn in a previous year in which the business is no longer in
existence, the taxability would arise in the above manner as though the business is in
existence in that previous year.

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(14) Expenses on family planning by a company [Section 36(1)(ix)] - Any expenditure of

revenue nature bona fide incurred by a company for the purpose of promoting family
planning amongst its employees will be allowed as a deduction in computing the company’s
business income;
• Where, the expenditure is of a capital nature, one-fifth of such expenditure will be
deducted in the previous year in which it was incurred and in each of the four
immediately succeeding previous years.
• This deduction is allowable only to companies and not to other assessees.
• The assessee would be entitled to carry forward and set off the unabsorbed part
of the allowance in the same way as unabsorbed depreciation.
The capital expenditure on promoting family planning will be treated in the same way as
capital expenditure for scientific research for purposes of dealing with the profit or loss on
the sale or transfer of the asset including a transfer on amalgamation.
(15) Deduction for expenditure incurred by entities established under any Central, State or
Provincial Act [Section 36(1)(xii)] - Any expenditure (not being in the nature of capital
expenditure) incurred by a corporation or a body corporate, by whatever name called, if –
(i) it is constituted or established by a Central, State or Provincial Act;
(ii) such corporation or body corporate is notified by the Central Government in the
Official Gazette for this purpose having regard to the objects and purposes of the
Act;
(iii) the expenditure is incurred for the objects and purposes authorised by the Act under
which it is constituted and established.
Accordingly, the Central Government has notified the Oil Industry Development Board for
the purpose of deduction under section 36(1)(xii).
(16) Deduction of contribution by a public financial institution to Credit guarantee fund
trust for small industries [Section 36(1)(xiv)]

(i) Section 36(1)(xiv) provides for deduction of any sum paid by a public financial
institution by way of contribution to such credit guarantee fund trust for small
industries notified by the Central Government in the Official Gazette.

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(ii) Public financial institution has the meaning assigned to it in section 4A 12 of the
Companies Act, 1956.

(17) Deduction of securities transaction tax paid [Section 36(1)(xv)] - The amount of
securities transaction tax paid by the assessee during the year in respect of taxable
securities transactions entered into in the course of business shall be allowed as deduction
under section 36 subject to the condition that such income from taxable securities
transactions is included under the head ‘Profits and gains of business or profession’.
Thus, securities transaction tax paid would be allowed as a deduction like any other
business expenditure.
(18) Deduction for commodities transaction tax paid in respect of taxable commodities
transactions [Section 36(1)(xvi)]
(i) Section, 36(1)(xvi) provides that an amount equal to the CTT paid by the assessee in
respect of the taxable commodities transactions entered into in the course of his
business during the previous year shall be allowable as deduction, if the income
arising from such taxable commodities transactions is included in the income
computed under the head “Profits and gains of business or profession”.
(ii) A ‘taxable commodities transaction’ means a transaction of sale of commodity
derivatives or sale of commodity derivatives based on prices or indices of prices of
commodity derivatives or option on commodity derivatives or option in goods in
respect of commodities, other than agricultural commodities, traded in recognised
stock exchange.
(iii) A “commodity derivative” means –
(a) A contract for delivery of goods which is not a ready delivery contract
(b) A contract for differences which derives its value from prices or indices of
prices -
(i) of such underlying goods; or

(ii) of related services and rights, such as warehousing and freight; or

(iii) with reference to weather and similar events and activities having a
bearing on the commodity sector.

12 Section 2(72) of the Companies Act, 2013

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(19) Amount of expenditure incurred by a co-operative society for purchase of sugarcane

at price fixed by the Government allowable as deduction [Section 36(1)(xvii)] - Section
36(xvii) provides for deduction of expenditure incurred by a co-operative society engaged in
the business of manufacture of sugar for purchase of sugarcane at a price equal to or less
than the price fixed or approved by the Government.

Expenditure By a Co-operative Engaged in the business

incurred society of manufacture of sugar

Such price should be ≤ price

fixed or approved by the for purchase of
Government. sugarcane at a
price

The CBDT has, vide Circular no. 18/2021 dated 25.10.2021, clarified that the phrase 'price
fixed or approved by the Government' includes price fixation by State Governments through
State-level Acts/Orders or other legal instruments that regulate the purchase price for
sugarcane, including State Advised Price, which may be higher than the Statutory Minimum
Price/ Fair and Remunerative Price fixed by the Central Government.
(20) Marked to market loss [Section 36(1)(xviii)] - Marked to market loss or other expected
loss as computed in accordance with the ICDS notified under section 145(2), shall be
allowed as deduction. ICDS I provides that marked to market losses would not be allowed
unless the same is in accordance with any other ICDS. Therefore, only marked to market
losses specifically permitted under any other ICDS would be allowable as deduction under
section 36.
(18) Residuary Expenses [Section 37]
(1) Revenue expenditure incurred for purposes of carrying on the business, profession
or vocation - This is a residuary section under which only business expenditure is
allowable but not the business losses, e.g., those arising out of embezzlement, theft,
destruction of assets, misappropriation by employees etc. The deduction is limited only to
the amount actually expended and does not extend to a reserve created against a
contingent liability.
(2) Conditions for allowance: The following conditions should be fulfilled in order that a
particular item of expenditure may be deductible under this section:

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(a) The expenditure should not be of the nature described in sections 30 to 36.
(b) It should have been incurred by the assessee in the accounting year.

(c) It should be in respect of a business carried on by the assessee the profits of which
are being computed and assessed.
(d) It must have been incurred after the business was set up.

(e) It should not be in the nature of any personal expenses of the assessee.
(f) It should have been laid out or expended wholly and exclusively for the purposes
of such business.
(g) It should not be in the nature of capital expenditure.
(h) The expenditure should not have been incurred by the assessee for any purpose
which is an offence or is prohibited by law.
This section is thus limited in scope. It does not permit an assessee to make all deductions
which a prudent trader would make in ascertaining his own profit. It might be observed that
the section requires that the expenditure should be wholly and exclusively laid out for
purpose of the business but not that it should have been necessarily laid out for such
purpose. Therefore, expenses wholly and exclusively laid out for the purpose of trade are,
subject to the fulfilment of other conditions, allowed under this section even though the
outlay is unnecessary.
(3) Expenditure incurred on Keyman insurance policy: CBDT Circular no. 762/1998 dated
18.02.1998 clarifies that the premium paid on the Keyman Insurance Policy is allowable as
business expenditure.
Taking into account the Explanation to Section 10(10D) and the CBDT Circular no. 762
dated 18.02.1998, Courts have held that a Keyman Insurance Policy is not confined to a
policy taken for an employee but also extends to an insurance policy taken with respect to
the life of another person who is connected in any manner whatsoever with the business of
the subscriber (assessee).

The High Court of Punjab and Haryana has, in the case of M/s. Ramesh Steels, ITA No.
437 of 2015, vide judgement dated 2.2.2016, reiterating the above view, held that, “the said
policy when obtained to secure the life of a partner to safeguard the firm against a
disruption of the business is equally for the benefit of the partnership business which may
be effected as a result of premature death of a partner. Thus, the premium on the Keyman

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Insurance Policy of partner of the firm is wholly and exclusively for the purpose of business
and is allowable as business expenditure”.

In view of the above, the CBDT has clarified that in case of a firm, premium paid by the firm
on the Keyman Insurance Policy of a partner, to safeguard the firm against a disruption of
the business, is an admissible expenditure under section 37 of the Act.

(4) Explanation 1 to section 37(1) - This Explanation provides that any expenditure incurred
by the assessee for any purpose which is an offence or is prohibited by law shall not be
allowed as a deduction or allowance.
(5) Explanation 3 to section 37(1) – It is clarified that the expression “expenditure incurred by
an assessee for any purpose which is an offence or which is prohibited by law” in (4) above
would include and would be deemed to have always included the expenditure incurred by
an assessee, -
(i) for any purpose which is an offence under any law for the time being in force, in India
or outside India or which is prohibited by any law for the time being in force, in India
or outside India; or
(ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not
carrying on a business or exercising a profession, and acceptance of such benefit or
perquisite by such person is in violation of any law or rule or regulation or guidelines,
as the case may be, for the time being in force, governing the conduct of such
person; or
(iii) to compound an offence under any law for the time being in force, in India or outside
India [Explanation 3 to section 37(1)].
(v) to settle proceedings initiated in relation to contravention under such law as may be
notified by the Central Government in this behalf.
For eg: expenses incurred in providing freebies to medical practitioner by pharmaceutical
and allied health sector industry are in violation of the provisions of Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations. Hence, such expenditure is
considered to be expenses prohibited by the law and not allowed in the hands of such
pharmaceutical or allied health sector industry or other assessee which has provided
aforesaid freebies.
The Supreme Court, in Apex Laboratories Pvt. Ltd. v. DCIT (2022) 442 ITR 1, held that the
incentives (or "freebies") given by the pharmaceutical company, to the doctors, had a direct

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result of exposing the recipients to the odium of sanctions, leading to a ban on their practice
of medicine. Those sanctions are mandated by law, as they are embodied in the code of
conduct and ethics, which are normative, and have legally binding effect. The conceded
participation of the assessee – Pharmaceutical company, i.e., the provider or donor, was
plainly prohibited, as far as their receipt by the medical practitioners was concerned. That
medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a
prohibition on the part of their giver, or donor, i.e., pharmaceutical company.
Thus, pharmaceutical companies’ gifting freebies to doctors is clearly “prohibited by law”,
and not allowed to be claimed as a deduction under section 37(1). Doing so would wholly
undermine public policy.
Explanation 3 inserted in section 37(1) is in consonance with the above Supreme Court
judgement.
(6) Disallowance of CSR expenditure [Explanation 2 to Section 37(1)]
(i) Section 135 of the Companies Act, 2013 read with Schedule VII thereto and
Companies (Corporate Social Responsibility) Rules, 2014 are the special provisions
under the new company law regime imposing mandatory CSR obligations in respect
of companies having net worth/turnover/net profit exceeding specified threshold
limits. Such companies have to spend a specified percentage of their average net
profits on CSR activities.
(ii) Under section 37(1) of the Income-tax Act, 1961, only expenditure, not covered
under sections 30 to 36, and incurred wholly and exclusively for the purposes of the
business is allowed as a deduction while computing taxable business income. The
issue under consideration is whether CSR expenditure is allowable as deduction
under section 37.
(iii) It has now been clarified that for the purposes of section 37(1), any expenditure
incurred by an assessee on the activities relating to corporate social responsibility
referred to in section 135 of the Companies Act, 2013 shall not be deemed to have
been incurred for the purpose of business and hence, shall not be allowed as
deduction under section 37.
(iv) The rationale behind the disallowance is that CSR expenditure, being an application
of income, is not incurred wholly and exclusively for the purposes of carrying on
business.

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(v) However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that
CSR expenditure, which is of the nature described in sections 30 to 36, shall be
allowed as deduction under those sections subject to fulfillment of conditions, if any,
specified therein.
(7) Advertisements in souvenirs of political parties: Section 37(2B) disallows any deduction
on account of advertisement expenses representing contributions made by any person
carrying on business or profession in computing the profits and gains of the business or
profession. It has specifically been provided that this provision for disallowance would apply
notwithstanding anything to the contrary contained in section 37(1).
In other words, the expenditure representing contribution for political purposes would
become disallowable even in those cases where the expenditure is otherwise incurred by
the assessee in his character as a trader and the amount is wholly and exclusively incurred
for the purpose of the business.
Accordingly, a taxpayer would not be entitled to any deduction in respect of expenses
incurred by him on advertisement in any souvenir, brochure, tract or the like published by
any political party, whether it is registered with the Election Commission of India or not.
(8) Deduction in respect of cost of production allowable under section 37 in the case of
Abandoned Feature Films [Circular No. 16, dated 6.10.2015]
The deduction in respect of the cost of production of a feature film certified for release by
the Board of Film Censors in a previous year is provided in Rule 9A.

In the case of abandoned films, however, since certificate of Board of Film Censors is not
received, in some cases no deduction was allowed by applying Rule 9A of the Rules or by
treating the expenditure as capital expenditure.
The CBDT has examined the matter in light of judicial decisions on this subject. The order
of the Hon’ble Bombay High Court dated 28.1.2015 in ITA 310 of 2013 in the case of Venus
Records and Tapes Pvt. Ltd. on this issue has been accepted and the aforesaid disputed
issue has not been further contested.
Consequently, it is clarified that Rule 9A does not apply to abandoned feature films and that
the expenditure incurred on such abandoned feature films is not to be treated as a capital
expenditure. The cost of production of an abandoned feature film is to be treated as
revenue expenditure and allowed as per the provisions of section 37 of the Income-tax
Act, 1961.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.129

ILLUSTRATION 11
Isac limited is a company engaged in the business of biotechnology. The net profit of the
company for the financial year ended 31.03.2025 is ` 35,25,890 after debiting the following
items:
S. No. Particulars `
1. Purchase price of raw material used for the purpose of in-house 11,80,000
research and development
2. Purchase price of asset used for in-house research and
development
(a) Land 5,00,000
(b) Building 3,00,000
3. Expenditure incurred on notified agricultural extension project 25,50,000
4. Expenditure on notified skill development project:
(a) Purchase of land 40,00,000
(b) Expenditure on training for skill development 32,50,000
5. Expenditure incurred on advertisement in the souvenir published 75,000
by a political party
6. Expenditure incurred on issue of right shares 80,000
7. Expenditure incurred on issue of debentures 50,000
8. Penalty paid under GST Act 35,000
9. Interest paid on loan taken from bank for payment of advance 60,000
income-tax
10. Provision for loss of subsidiary 85,000

Compute the income under the head “Profits and gains of business or profession” for the
A.Y. 2025-26 of Isac Ltd assuming that the company does not opt for the provisions of
section 115BAA.
SOLUTION
Computation of income under the head “Profits and gains of business or
profession” for the A.Y.2025-26

Particulars ` `
Net profit as per profit and loss account 35,25,890
Add: Items debited to profit and loss account, but to be
disallowed

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Purchase price of Land used in in-house research and

development - being capital expenditure not allowable as
deduction under section 35 5,00,000
Purchase price of building used in in-house research and
development - being capital expenditure, 100% of which is
allowable as deduction u/s 35(1)(iv) read with section -
35(2)
Purchase price of raw material used for the purpose of in-
house research and development – qualifies for 100%
deduction u/s 35(2AB) -
Expenditure incurred on notified agricultural extension
project – 100% deduction is allowed under section 35CCC -
Expenditure incurred on notified skill development project
- Purchase of land - being capital expenditure not
qualifying for deduction under section 35CCD 40,00,000
Expenditure incurred on notified skill development project
- Expenditure on training for skill development – 100%
deduction is allowed under section 35CCD -
Expenditure incurred on advertisement in the souvenir
published by a political party not allowed as deduction as
per section 37(2B) 75,000
Expenditure incurred on issue of right shares not allowed
as deduction since expenses is of capital nature 80,000
Expenditure incurred on issue of debentures [allowable] -
Penalty paid under GST Law not allowed as deduction 35,000
Interest paid on loan taken from bank for payment of 60,000
advance income-tax not allowed as deduction since the
same is not for the purpose of business or profession
Provision for loss of subsidiary not allowed as deduction 85,000 48,35,000
Profit and gains from business 83,60,890

Note: The expenditure incurred on advertisement in the souvenir published by a political

party is disallowed as per section 37(2B) while computing income under the head “Profit
and Gains of Business or Profession” but the same would be allowed as deduction under
section 80GGB from the gross total income of the company.
(9) In case of an assessee carrying on business, it is relevant to see whether an outlay
constitutes an expenditure “for the purpose of business” as used in section 37(1), for the

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purpose of claiming deduction thereunder. The source of funds from which the expenditure
is made is not relevant. Every application of income towards the business objective of the
assessee is a business expenditure. There can be an amount treated as a capital receipt
while the same amount expended may be a revenue expenditure. [National Co-operative
Development Corporation v. CIT [2020] 427 ITR 288 (SC)]
(19) Clarification regarding treatment of expenditure incurred for development of roads/
highways in Build-Operate-Transfer (BOT) agreements under the Income-tax Act,
1961 [Circular No. 09/2014, dated 23.04.2014]
The CBDT has, vide this Circular, clarified the tax treatment of expenditure incurred on
development and construction of infrastructural facilities like roads/highways on Build-Operate-
Transfer (BOT) basis with right to collect toll - whether the same is entitled to depreciation under
section 32(1)(ii) or can be amortized by treating it as an allowable business expenditure under the
relevant provisions of the Income- tax Act, 1961.
Generally, the BOT basis projects are entered into between the developer and the government or
the notified authority, on the following terms:
(i) In such projects, the developer, in terms of concessionaire agreement with Government or
its agencies, is required to construct, develop and maintain the infrastructural facility of
roads/highways which, inter alia, includes laying of road, bridges, highways, approach
roads, culverts, public amenities etc. at its own cost and its utilization thereof for a specified
period.
(ii) The possession of land is handed over to the assessee (i.e., the developer) by the
Government/ notified authority for the purpose of construction of the project without any
actual transfer of ownership. The assessee, therefore, has only a right to develop and
maintain such asset. It also enjoys the benefits arising from the use of asset through
collection of toll for a specified period, without having actual ownership over such asset.
Therefore, the rights in the land remain vested with the Government/notified agencies.
(iii) Since the assessee does not hold any rights in the project except recovery of toll fee to
recoup the expenditure incurred, it cannot be treated as an owner of the property, either
wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii). Thus,
claim of depreciation on toll ways is not allowable due to non-fulfillment of ownership
criteria in such cases.
(iv) Where the assessee incurs expenditure on a project for development of roads/highways, it
is entitled to recover cost incurred towards development of such facility (comprising of
construction cost and other pre-operative expenses) during construction period. Further,

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expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit
in the form of right to collect the toll during the period of agreement.
The Supreme Court, in Madras Industrial Investment Corporation Ltd. vs. CIT [1997] 225 ITR 802,
allowed the spreading over of liability over a number of years on the ground that there was
continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on
an infrastructure project for development of roads/highways under BOT agreement may be treated
as having been made/ incurred for the purposes of business or profession of the assessee and
same shall be allowed to be spread during the tenure of concessionaire agreement.
In view of the above, the CBDT, in exercise of the powers conferred under section 119, clarifies
that the cost of construction on development of infrastructure facility, being roads/highways under
BOT projects, may be amortized and claimed as allowable business expenditure under the Act in
the following manner:
(i) The amortization allowable may be computed at the rate which ensures that the whole of
the cost incurred in creation of infrastructural facility of road/highway is amortised evenly
over the period of concessionaire agreement after excluding the time taken for creation of
such facility.
(ii) Where an assessee has claimed any deduction out of initial cost of development of
infrastructure facility of roads/highways under BOT projects in earlier years, the total
deduction so claimed for the assessment years prior to assessment year under
consideration may be deducted from the initial cost of infrastructure facility of
roads/highways and the cost so reduced shall be amortised equally over the remaining
period of toll concessionaire agreement.
The clarification given in this Circular is applicable only to those infrastructure projects for
development of road/highways on BOT basis where ownership is not vested with the assessee
under the concessionaire agreement.

3.7 INADMISSIBLE DEDUCTIONS [SECTION 40]

By dividing the assessees into distinct groups, this section places absolute restraint on the
deductibility of certain expenses as follows:
In the case of any assessee, the following expenses are not deductible:
(1) Section 40(a)(i)
Any interest, royalty, fees for technical services or other sum chargeable under this Act, which is
payable,-

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.133

(a) outside India;

(b) in India to a non-resident, not being a company or to a foreign company,
on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or,
after deduction, has not been paid on or before the due date of filing of return specified under
section 139(1).

It is also provided that where in respect of any such sum, where tax has been deducted in any
subsequent year, or has been deducted in the previous year but paid after the due date of filing of
return under section 139(1), such sum shall be allowed as a deduction in computing the income of
the previous year in which such tax has been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is not deemed
as assessee in default under the first proviso to section 201(1) by reason that such payee –
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income, and the payer
furnishes a certificate to this effect from an accountant in such form as may be prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum on the date on
which return of income has been furnished by the payee.
Since the date of furnishing the return of income by the payee is taken to be the date on which the
payer has deducted tax at source and paid the same, such expenditure/payment in respect of
which the payer has failed to deduct tax at source shall be disallowed under section 40(a)(i) in the
year in which the said expenditure is incurred. However, such expenditure will be allowed as
deduction in the subsequent year in which the return of income is furnished by the payee, since tax
is deemed to have been deducted and paid by the payer in that year.

Clarification regarding disallowance of ‘other sum chargeable’ under section 40(a)(i)

[Circular No. 3/2015, dated 12-02-2015]
If there has been a failure in deduction or in payment of tax deducted in respect of any interest,
royalty, fees for technical services or other sum chargeable under the Act either payable in India to
non-corporate non-resident or a foreign company or payable outside India, then, disallowance of
the related expenditure/ payment is attracted under section 40(a)(i) while computing income
chargeable under the head “Profits and gains of business or profession”.

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The interpretation of the term ‘other sum chargeable’ in section 195 has been clarified in this
circular i.e. whether this term refers to the whole sum being remitted or only the portion
representing the sum chargeable to income-tax under the Act.
In its Instruction No. 2/2014, dated 26.02.2014, the CBDT has clarified that the Assessing Officer
shall determine the appropriate portion of the sum chargeable to tax as mentioned in section
195(1), to ascertain the tax liability on which the deductor shall be deemed to be an assessee in
default under section 201, in cases where no application is filed by the deductor for determining
the sum so chargeable under section 195(2).
In this circular, the CBDT has, in exercise of its powers under section 119, clarified that for the
purpose of making disallowance of ‘other sum chargeable’ under section 40(a)(i), the appropriate
portion of the sum which is chargeable to tax shall form the basis of disallowance. Further, the
appropriate portion shall be the same as determined by the Assessing Officer having jurisdiction
for the purpose of section 195(1). Also, where the determination of ‘other sum chargeable’ has
been made under sub-section (2), (3) or (7) of section 195 of the Act, such a determination will
form the basis for disallowance, if any, under section 40(a)(i).

(2) Section 40(a)(ia)

Section 40(a)(ia) provides that 30% of any sum payable to a resident, on which tax is deductible
at source under Chapter XVII-B, shall be disallowed if –
(i) such tax has not been deducted; or
(ii) such tax, after deduction, has not been paid on or before the due date specified in section
139(1).
If in respect of such sum, tax has been deducted in any subsequent year or has been deducted
during the previous year but paid after the due date specified in section 139(1), 30% of such sum
shall be allowed as deduction in computing the income of the previous year in which such tax has
been paid.
In case, assessee fails to deduct the whole or any part of tax on any such sum but is not deemed
as assessee in default under the first proviso to section 201(1) by reason that such payee –
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and the payer
furnishes a certificate to this effect from an accountant in such form as may be prescribed,
it would be deemed that the assessee has deducted and paid the tax on such sum.

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The date of deduction and payment of taxes by the payer shall be deemed to be the date on which
return of income has been furnished by the payee.

Since the date of furnishing the return of income by the payee is taken to be the date on which the
payer has deducted tax at source and paid the same, 30% of such expenditure/payment in respect
of which the payer has failed to deduct tax at source shall be disallowed under section 40(a)(ia) in
the year in which the said expenditure is incurred. However, 30% of such expenditure will be
allowed as deduction in the subsequent year in which the return of income is furnished by the
payee, since tax is deemed to have been deducted and paid by the payer in that year.

Example: Tax on royalty paid to Mr. A, a resident, has been deducted during the previous year
2024-25, the same has to be paid by 31st July/ 31ts October 2025, as the case may be. Otherwise,
30% of royalty paid would be disallowed in computing the income for A.Y. 2025-26. If in respect of
such royalty, tax deducted during the P.Y.2024-25 has been paid after 31st July/ 31st October,
2025, 30% of such royalty disallowed in A.Y. 2025-26, would be allowed as deduction in the year
of payment, i.e. AY 2026-27

ILLUSTRATION 12
Delta Ltd. credited the following amounts to the account of resident payees in the month of March,
2025 without deduction of tax at source. What would be the consequence of non-deduction of tax
at source by Delta Ltd. on these amounts during the financial year 2024-25, assuming that the
resident payees in all the cases mentioned below, have not paid the tax, if any, which was required
to be deducted by Delta Ltd.?

Particulars Amount
(`)
(1) Salary to its employees (credited and paid in March, 2025) 12,00,000
(2) Directors’ remuneration (credited in March, 2025 and paid in April, 2025) 28,000
Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2025
at the time of payment and remitted the same in July, 2025?
SOLUTION

Non-deduction of tax at source on any sum payable to a resident on which tax is deductible at
source as per the provisions of Chapter XVII-B would attract disallowance under section 40(a)(ia).
Therefore, non-deduction of tax at source on any sum paid by way of salary on which tax is
deductible under section 192 or any sum credited or paid by way of directors’ remuneration on
which tax is deductible under section 194J, would attract disallowance@30% under section

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40(a)(ia). Whereas in case of salary, tax has to be deducted under section 192 at the time of
payment, in case of directors’ remuneration, tax has to be deducted at the time of credit of such
sum to the account of the payee or at the time of payment, whichever is earlier. Therefore, in both
the cases i.e., salary and directors’ remuneration, tax is deductible in the P.Y.2024-25, since
salary was paid in that year and directors’ remuneration was credited in that year. Therefore, the
amount to be disallowed under section 40(a)(ia) while computing business income for A.Y.2025-26
is as follows –
Particulars Amount Disallowance
paid in ` u/s 40(a)(ia)@
30% (`)
(1) Salary 12,00,000 3,60,000
[tax is deductible under section 192]
(2) Directors’ remuneration 28,000 8,400
[tax is deductible under section 194J without any
threshold limit]
Disallowance under section 40(a)(ia) 3,68,400

If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2025-26 at the time of
payment and remitted to the Government, the amount of ` 8,400 would be allowed as deduction
while computing the business income of A.Y.2026-27.

Disallowance of any sum paid to a resident at any time during the previous year without
deduction of tax under section 40(a)(ia) [Circular No.10/2013, dated 16.12.2013]

There have been conflicting interpretations by judicial authorities regarding the applicability of
provisions of section 40(a)(ia), with regard to the amount not deductible in computing the income
chargeable under the head ‘Profits and gains of business or profession’. Some court rulings have
held that the provisions of disallowance under section 40(a)(ia) apply only to the amount which
remained payable at the end of the relevant financial year and would not be invoked to disallow the
amount which had actually been paid during the previous year without deduction of tax at source.
Departmental View: The CBDT’s view is that the provisions of section 40(a)(ia) would cover not
only the amounts which are payable as on 31st March of a previous year but also amounts which
are payable at any time during the year. The statutory provisions are amply clear and in the
context of section 40(a)(ia), the term "payable" would include "amounts which are paid during the
previous year".

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ILLUSTRATION 13
During the financial year 2024-25, the following payments/expenditure were made/incurred by
Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31.3.2024 was
` 99 lakhs):
(i) Interest of ` 45,000 was paid to Rehman & Co., a resident partnership firm, without
deduction of tax at source;
(ii) ` 10,00,000 was paid as salary to a resident individual without deduction of tax at source;
(iii) Commission of ` 16,000 was paid to Mr. Vidyasagar on 2.7.2024 without deduction of tax at
source.
Briefly discuss whether any disallowance arises under the provisions of section 40(a)(ia) of the
Income-tax Act, 1961 assuming that the payees in all the cases mentioned above, have not paid
the tax, if any, which was required to be deducted by Mr. Raja?
SOLUTION
Disallowance under section 40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee
fails to deduct tax at source as is required under the Act, or having deducted tax at source, fails to
remit the same to the credit of the Central Government within the stipulated time limit.
(i) The obligation to deduct tax at source from interest paid to a resident arises under section
194A in the case of an individual, whose total turnover in the immediately preceding
previous year, i.e., P.Y.2023-24 exceeds ` 1 crore. Thus, in present case, since the
turnover of the assessee is less than ` 100 lakhs, he is not liable to deduct tax at source.
Hence, disallowance under section 40(a)(ia) is not attracted in this case.
(ii) The disallowance of 30% of the sums payable under section 40(a)(ia) would be attracted in
respect of all sums on which tax is deductible under Chapter XVII-B. Section 192, which
requires deduction of tax at source from salary paid, is covered under Chapter XVII-B. The
obligation to deduct tax at source under section 192 arises, in the hands all assessee-
employer even if the turnover amount does not exceed ` 1 crore in the immediately
preceding previous year.
Therefore, in the present case, the disallowance under section 40(a)(ia) is attracted for
failure to deduct tax at source under section 192 from salary payment. However, only 30%
of the amount of salary paid without deduction of tax at source would be disallowed i.e.
` 3,00,000 (` 10 lakhs × 30%).

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(iii) The obligation to deduct tax at source under section 194-H from commission paid in excess
of ` 15,000 to a resident arises in the case of an individual, whose total turnover in the
immediately preceding previous year, i.e., P.Y.2023-24 exceeds ` 1 crore. Thus, in present
case, since the turnover of the assessee is less than ` 1 crore, he is not liable to deduct tax
at source under section 194H. Mr. Raja is not required to deduct tax at source u/s 194M
also since the aggregate of such commission to Mr. Vidyasagar does not exceed ` 50 lakh
during the P.Y. 2024-25. Therefore, disallowance under section 40(a)(ia) is not attracted in
this case.
(3) Section 40(a)(ib)
Section 40(a)(ib) provides that where any consideration is paid or payable to a non-resident
for a specified service on which equalisation levy is deductible, and such levy has not been
deducted or after deduction, has not been paid on or before the due date under section
139(1), then, such expenses incurred by the assessee towards consideration for specified
service shall not be allowed as deduction.
However, where in respect of such consideration, if the equalisation levy has been
deducted in any subsequent year or has been deducted during the previous year but paid
after the due date specified under section 139(1), such sum shall be allowed as deduction
in computing the income of the previous year in which such levy has been paid.
(4) Section 40(a)(ii)
Any sum paid on account of rate or tax levied on the profits or gains of any business or
profession or assessed at a proportion of, or on the basis of any such profits and gains is
not allowed as deduction from business income.
(a) Any sum paid outside India (on account of any rate or tax levied) which is eligible for
tax relief under section 90 or deduction from the income-tax payable under section
91 is not allowable and is deemed to have never been allowable as a deduction
under section 40(a).
(b) However, the tax payers will continue to be eligible for tax credit in respect of
income-tax paid in a foreign country in accordance with the provisions of section 90
or section 91, as the case may be.
(c) Any sum paid outside India (on account of any rate or tax levied) and eligible for
relief under section 90A will not be allowed as a deduction.

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(d) The term “tax” would include and would be deemed to have always included any
surcharge or cess, by whatever name called, on such tax. Hence, tax including
surcharge and cess would be disallowed while computing business income.
(5) Section 40(a)(iib)
(i) any amount paid by way of royalty, licence fee, service fee, privilege fee, service
charge, etc., which is levied exclusively on, or
(ii) any amount appropriated, directly or indirectly, from a State Government
undertaking, by the State Government (SG)
A State Government undertaking includes –
(a) A corporation established by or under any Act of the State Government;
(b) A company in which more than 50% of the paid up equity share capital is held by the
State Government;
(c) A company in which more than 50% of the paid up equity share capital is held singly
or jointly by (a) or (b);
(d) A company or corporation in which the State Government has the right to appoint the
majority of directors or to control the management or policy decisions
(e) An authority, a board or an institution or a body established or constituted by or
under any Act of the State Government or owned or controlled by the State
Government.
(6) Section 40(a)(iii)
Any sum which is chargeable under the head ‘Salaries’ if it is payable outside India or to a
non-resident and if the tax has not been paid thereon nor deducted therefrom under
Chapter XVII-B.
(7) Section 40(a)(iv)
Any contribution to a provident fund or the fund established for the benefit of employees of
the assessee, unless the assessee has made effective arrangements to make sure that tax
shall be deducted at source from any payments made from the fund which are chargeable
to tax under the head ‘Salaries’.
(8) Section 40(a)(v)

Tax paid on perquisites on behalf of employees is not deductible - In case of an

employee, deriving income in the nature of perquisites (other than monetary payments), the

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amount of tax on such income paid by his employer is exempt from tax in the hands of that
employee.

Correspondingly, such payment is not allowed as deduction from the income of the
employer. Thus, the payment of tax on perquisites by an employer on behalf of employee
will be exempt from tax in the hands of employee but will not be allowable as deduction in
the hands of the employer.
In the case of any firm assessable as such or a limited liability partnership (LLP) the following
amounts shall not be deducted in computing the business income
Section 40(b)
(1) Remuneration to non-working partner - Any salary, bonus, commission, remuneration by
whatever name called, to any partner who is not a working partner. (In the following
discussion, the term ‘remuneration’ is applied to denote payments in the nature of salary,
bonus, commission);
(2) Remuneration to a working partner not authorized by deed - Any remuneration paid to
the working partner or interest to any partner which is not authorised by or which is incon-
sistent with the terms of the partnership deed
(3) Remuneration to a working partner or interest to a partner authorized by deed but
relates to an earlier period - It is possible that the current partnership deed may authorise
payments of remuneration to any working partner or interest to any partner for a period
which is prior to the date of the current partnership deed. The approval by the current
partnership deed might have been necessitated due to the fact that such payment was not
authorised by or was inconsistent with the earlier partnership deed. Such payments of
remuneration or interest will also be disallowed. However, it should be noted that the
current partnership deed cannot authorise any payment which relates to a period prior to
the date of earlier partnership deed.
Next, by virtue of a further restriction contained in section 40(b)(iii), such remuneration paid
to the working partners will be allowed as deduction to the firm from the date of such
partnership deed and not for any period prior thereto.
Example: If a firm incorporates the clause relating to payment of remuneration to the
working partners, by executing an appropriate deed, say, on July 1, 2024 but effective from
April 1, 2024 the firm would get deduction for the remuneration paid to its working partners
from July 1, 2024 onwards, but not for the period from April 1 to June 30. It will not be

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possible to give retrospective effect to oral agreements entered into vis-a-vis such
remuneration prior to putting the same in a written partnership deed.

(4) Interest to any partner in excess of 12% p.a.- Any interest payment authorised by the
partnership deed falling after the date of such deed to the extent such interest exceeds 12%
simple interest p.a.

(5) Remuneration to a working partner in excess of prescribed limits - Any remuneration

paid to a working partner, authorised by a partnership deed and falling after the date of the
deed in excess of the following limits:
Book Profits Quantum of deduction
On the first ` 6 lakh of book profit or in ` 3,00,000 or 90% of book profit, whichever
case of loss is higher
on the balance of book profit 60% of book profit

(6) Meaning of certain terms:

Term Meaning
Book Profit The net profit as shown in the profit and loss account for the relevant
previous year computed in accordance with the provisions for computing
income from profits and gains [Explanation 3 to section 40(b)].
The above amount should be increased by the remuneration paid or
payable to all the partners of the firm if the same has been deducted while
computing the net profit.
Working An individual who is actively engaged in conducting the affairs of the business
partner or profession of the firm of which he is a partner [Explanation 4 to section
40(b)]

ILLUSTRATION 14
A firm assessed as such has paid ` 8,50,000 as remuneration to its partners for the
P.Y.2024-25, in accordance with its partnership deed, and it has a book profit of ` 10 lakh as
computed under section 40(b). What is the remuneration allowable as deduction?
SOLUTION
The allowable remuneration calculated as per the limits specified in section 40(b)(v) would be –
Particulars `
On first ` 6 lakh of book profit [` 6,00,000 × 90%] 5,40,000
On balance ` 4 lakh of book profit [` 4,00,000 × 60%] 2,40,000
7,80,000

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The excess amount of ` 70,000 (i.e., ` 8,50,000 – ` 7,80,000) would be disallowed as per
section 40(b)(v).
(7) Explanations to section 40(b)
(i) Where an individual is a partner in a firm in a representative capacity:
(a) interest paid by the firm to such individual otherwise than as partner in a
representative capacity shall not be taken into account for the purposes of this
clause.
(b) interest paid by the firm to such individual as partner in a representative capacity
and interest paid by the firm to the person so represented shall be taken into
account for the purposes of this clause [Explanation 1 to section 40(b)]
(ii) Where an individual is a partner in a firm otherwise than in a representative capacity,
interest paid to him by the firm shall not be taken into account if he receives the
same on behalf of or for the benefit of any other person [Explanation 2 to section
40(b)].

Example: Mr. A is a partner in ABC & Co. on behalf of Shah HUF. Interest to its partners @15% is
authorised by ABC & Co. ABC & Co. pays ` 7 lakhs as interest to Mr. A out of which ` 4 lakhs on
the funds advanced by Mr. A in his individual capacity and ` 3 lakhs on the funds advanced by him
in his representative capacity on behalf of Shah HUF. The interest of ` 4 lakhs paid to Mr. A in his
individual capacity is allowed as deduction subject to section 40A(2) and shall not be taken into
account for purpose of section 40(b). Whereas the interest paid to Mr. A in his representative
capacity would be allowed to the extent of ` 2.40 lakhs i.e., ` 3 lakhs/15% x 12%.

Note - Presently, there is no provision for deduction of tax at source on payment of salary,
remuneration, interest, bonus, or commission to partners by the partnership firm. W.e.f. 1.4.2025,
a new section 194T has been introduced by the Finance (No. 2) Act, 2024 which requires
partnership firms to deduct tax at source (TDS) @10% on any sum paid to partners, such as
salary, remuneration, commission, bonus, or interest. No deduction is required if the sum or
aggregate of such sum does not exceed ` 20,000 during the financial year. Please note that the
TDS provision under section 194T would be effective from 1.4.2025.

ILLUSTRATION 15
Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ` 17,00,000 before
deduction of the following items:
(1) Salary of ` 40,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership).
(2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.143

(3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of
capital eligible for interest ` 5,00,000.
Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the assessment year 2025-26 as per section 40(b).

SOLUTION
(i) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per the profit
and loss account for the relevant previous year computed in the manner laid down in Chapter
IV-D as increased by the aggregate amount of the remuneration paid or payable to the
partners of the firm if the same has been already deducted while computing the net profit.
In the present case, the net profit given is before deduction of depreciation on plant and
machinery, interest on capital of partners and salary to the working partners. Therefore, the
book profit shall be as follows:
Computation of Book Profit of the firm under section 40(b)
Particulars ` `
Net Profit (before deduction of depreciation, salary and 17,00,000
interest)
Less: Depreciation under section 32 1,50,000
Interest @ 12% p.a. [being the maximum allowable
as per section 40(b)] (` 5,00,000 × 12%) 60,000 2,10,000
Book Profit 14,90,000

(ii) Salary actually paid to working partners = ` 40,000 × 2 × 12 = ` 9,60,000.

As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed
subject to the following limits -
On the first ` 6,00,000 of book profit or ` 3,00,000 or 90% of book profit, whichever is
in case of loss more
On the balance of book profit 60% of the balance book profit

Therefore, the maximum allowable working partners’ salary for the A.Y. 2025-26 in this
case would be:
Particulars `
On the first ` 6,00,000 of book profit [(` 3,00,000 or 90% of ` 6,00,000) 5,40,000
whichever is more]
On the balance of book profit [60% of (` 14,90,000 - ` 6,00,000)] 5,34,000
Maximum allowable partners’ salary 10,74,000

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Hence, allowable working partners’ salary for the A.Y. 2025-26 as per the provisions of
section 40(b)(v) is ` 9,60,000.
In the case of Association of persons or body of individuals, following amounts shall not be
deducted in computing the business income
Section 40(ba)
Any payment of interest, salary, commission, bonus or remuneration made by an association of
persons or body of individuals to its members will also not be allowed as a deduction in computing
the income of the association or body.
There are three Explanations to section 40(ba):

Explanation 1 - Where interest is paid by an AOP or BOI to a member who has paid interest to the
AOP/BOI, the amount of interest to be disallowed under clause (ba) shall be limited to the net
amount of interest paid by AOP/BOI to the partner.
Explanation 2 - Where an individual is a member in an AOP/BOI in a representative capacity,
interest paid by AOP/BOI to such individual or by such individual to AOP/ BOI otherwise than as
member in a representative capacity shall not be taken into account for the purposes of clause
(ba). But interest paid to or received from each person in his representative capacity shall be taken
into account.
Explanation 3 - Where an individual is a member in his individual capacity, interest paid to him in
his representative capacity shall not be taken into account.

3.8 EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN

CERTAIN CIRCUMSTANCES [SECTION 40A]
(1) Payments to relatives and associates
Section 40A(2) provides that where the assessee incurs any expenditure in respect of which a
payment has been or is to be made to a specified person [See column (2) of Table below) so much
of the expenditure as is considered to be excessive or unreasonable shall be disallowed by the
Assessing Officer. While doing so he shall have due regard to:

(a) the fair market value of the goods, service of facilities for which the payment is made; or
(b) the legitimate needs of the business or profession carried on by the assessee; or
(c) the benefit derived by or accruing to the assessee from such a payment.

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Assessee Specified Person

(1) (2)
Individual 1. Any relative of the individual assessee
2. Any person who carries on a business or profession, if
• the individual has a substantial interest in the business of that
person or
• any relative of the individual has a substantial interest in the
business of that person
Company, Firm, 1. Any director, partner of the firm or member of the family or association
HUF or AOP or any relative of such director, partner or member or
2. In case of a company assessee, any individual who has substantial
interest in the business or profession of the company or any relative of
such individual or
3. Any person who carries on a business or profession, in which the
Company/ Firm/ HUF/ AOP or director of the company, partner of the
firm or member of the family or association or any relative of such
director, partner or member has substantial interest in the business of
that person
All assessees The following are specified persons:
Person who has Other related persons of such person, who has a
substantial substantial interest in the assessee’s business
interest in the
assessee’s
business
Company/ AOP/ • Any director of such company, partner of such
Firm/ HUF firm or the member of such family or association
or
• Any relative of such director, partner or member
or
• Any other company carrying on business or
profession in which the first mentioned company
has a substantial interest
A director, • Company/ Firm/ AOP/ HUF of which he is a
partner or director, partner or member or
member • Any other director/ partner/ member of the such
Company/ Firm/ AOP/ HUF or
• Any relative of such director, partner or member
Relative in relation to an Individual means the spouse, brother or sister or any lineal
ascendant or descendant of that individual [Section 2(41)].

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Substantial interest in a business or profession

A person shall be deemed to have a substantial interest in a business or profession if -
- in a case where the business or profession is carried on by a company, such person is, at
any time during the previous year, the beneficial owner of equity shares carrying not less
than 20% of the voting power and
- in any other case, such person is, at any time during the previous year, beneficially entitled
to not less than 20% of the profits of such business or profession.

(2) Payments in excess of ` 10,000 made otherwise than through prescribed modes
According to section 40A(3), where the assessee incurs any expenditure, in respect of which
payment or aggregate of payments made to a person in a day otherwise than by an account payee
cheque drawn on a bank or by an account payee bank draft or use of electronic system through
bank account or through such other prescribed electronic modes exceeds ` 10,000, such
expenditure shall not be allowed as a deduction.

The prescribed electronic modes are credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT
(National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay [CBDT
Notification No. 8/2020 dated 29.01.2020].
The provision applies to all categories of expenditure involving payments for goods or services
which are deductible in computing the taxable income.

Example:
If, in respect of an expenditure of ` 32,000 incurred by X Ltd., 4 cash payments of ` 8,000 are made
on a particular day to one Mr. Y – one in the morning at 10 a.m., one at 12 noon, one at 3 p.m. and
one at 6 p.m., the entire expenditure of ` 32,000 would be disallowed under section 40A(3), since
the aggregate of cash payments made during a day to Mr. Y exceeds ` 10,000.

Payments in excess of ` 10,000 made otherwise than through prescribed modes deemed to
be the income of the subsequent year, if expenditure has been allowed as deduction in any
previous year on due basis:
In case of an assessee following mercantile system of accounting, if an expenditure has been
allowed as deduction in any previous year on due basis, and payment has been made in a
subsequent year otherwise than by account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account or through such other prescribed electronic
modes such as credit card, debit card, net banking, IMPS (Immediate payment Service), UPI
(Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic
Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay, then the payment so made

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shall be deemed to be the income of the subsequent year if such payment or aggregate of payments
made to a person in a day exceeds ` 10,000 [Section 40A(3A)].
Increase in limit of cash payment, where payment made to transport operator: This limit of
` 10,000 has been raised to ` 35,000 in case of payment made to transport operators for plying,
hiring or leasing goods carriages. Therefore, payment or aggregate of payments up to ` 35,000 in
a day can be made to a transport operator otherwise than by way of account payee cheque or
account payee bank draft or use of electronic clearing system through a bank account or through
such other prescribed electronic modes such as credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money)
Aadhar Pay. In all other cases, the limit would continue to be ` 10,000.
Cases where disallowances would not be attracted:
(i) Loan transactions: It does not apply to loan transactions because advancing of loans or
repayments of the principal amount of loan does not constitute an expenditure deductible in
computing the taxable income. However, interest payments of amounts exceeding ` 10,000
at a time are required to be made by account payee cheques or drafts or electronic clearing
system or through such other prescribed electronic modes such as credit card, debit card,
net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS
(Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay as interest is a deductible expenditure.
(ii) Payment made by commission agents: This requirement does not apply to payment
made by commission agents for goods received by them for sale on commission or
consignment basis because such a payment is not an expenditure deductible in computing
the taxable income of the commission agent.
For the same reason, this requirement does not apply to advance payment made by the
commission agent to the party concerned against supply of goods.
However, where commission agent purchases goods on his own account but not on
commission basis, the requirement will apply. The provisions regarding payments by
account payee cheque or draft or electronic clearing system or through such other
prescribed electronic modes such as credit card, debit card, net banking, IMPS (Immediate
payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement),
NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar
Pay apply equally to payments made for goods purchased on credit.

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Cases and circumstances in which a payment or aggregate of payments exceeding ten

thousand rupees may be made to a person in a day, otherwise than by an account payee
cheque/ account payee bank draft/ use of ECS through a bank account or through such
other prescribed electronic modes [Rule 6DD]:
As per this rule, no disallowance under section 40A(3) shall be made and no payment shall be
deemed to be the profits and gains of business or profession under section 40A(3A) where a
payment or aggregate of payments made to a person in a day, otherwise than by an account
payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system
through a bank account or through such other prescribed electronic modes such as credit card,
debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface),
RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay, exceeds `10,000 in the cases and circumstances
specified hereunder, namely:
(a) where the payment is made to
(i) the Reserve Bank of India or any banking company;
(ii) the State Bank of India or any subsidiary bank;
(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit society;
(v) the Life Insurance Corporation of India;
(b) where the payment is made to the Government and, under the rules framed by it, such
payment is required to be made in legal tender;
(c) where the payment is made by
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any
other bank;

(iv) a bill of exchange made payable only to a bank;

(d) where the payment is made by way of adjustment against the amount of any liability
incurred by the payee for any goods supplied or services rendered by the assessee to such
payee;

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(e) where the payment is made for the purchase of -

(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy
or poultry farming; or
(iii) fish or fish products; or

(iv) the products of horticulture or apiculture,

to the cultivator, grower or producer of such articles, produce or products;
Notes -

(i) The expression ‘fish or fish products’ (iii) above would include ‘other marine products
such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.’.
(ii) The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would include,
besides the fishermen, any headman of fishermen, who sorts the catch of fish
brought by fishermen from the sea, at the sea shore itself and then sells the fish or
fish products to traders, exporters etc.
However, the above exception will not be available on the payment for the purchase
of fish or fish products from a person who is not proved to be a 'producer' of these
goods and is only a trader, broker or any other middleman, by whatever name called.
(f) where the payment is made for the purchase of the products manufactured or processed
without the aid of power in a cottage industry, to the producer of such products;
(g) where the payment is made in a village or town, which on the date of such payment is not
served by any bank, to any person who ordinarily resides, or is carrying on any business,
profession or vocation, in any such village or town;
(h) where any payment is made to an employee of the assessee or the heir of any such
employee, on or in connection with the retirement, retrenchment, resignation, discharge or
death of such employee, on account of gratuity, retrenchment compensation or similar
terminal benefit and the aggregate of such sums payable to the employee or his heir does
not exceed ` 50,000;
(i) where the payment is made by an assessee by way of salary to his employee after
deducting the income-tax from salary in accordance with the provisions of section 192 of
the Act, and when such employee -

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(i) is temporarily posted for a continuous period of fifteen days or more in a place other
than his normal place of duty or on a ship; and

(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment is made by any person to his agent who is required to make payment in
cash for goods or services on behalf of such person;

(k) where the payment is made by an authorised dealer or a money changer against purchase
of foreign currency or travelers cheques in the normal course of his business.
Note: Where any payment in respect of any expenditure is required to be made by an account
payee cheque/ account payee bank draft or use of electronic clearing system through a bank
account or through such other prescribed electronic modes in order that such expenditure may not
be disallowed as a deduction under section 40A(3), then the payment may be made by such
cheque or draft or electronic clearing system or through such other prescribed electronic modes.
No person is allowed to raise, in any suit or other proceeding, a plea based on the ground that the
payment was not made or tendered in cash or in any other manner.
This is notwithstanding anything contained in any other law for the time being in force or in any
contract.
(3) Disallowance of provision for gratuity
Section 40A(7) provides that no deduction would be allowable to any taxpayer carrying on any
business or profession in respect of any provision (whether called as provision or by any other
names) made by him towards the payment of gratuity to his employers on their retirement or on
the termination of their employment for any reason.
The reason for this disallowance is that, under section 36(1)(v), deduction is allowable in
computing the profits and gains of the business or profession in respect of any sum paid by a
taxpayer in his capacity as an employer in the form of contributions made by him to an approved
gratuity fund created for the exclusive benefit of his employees under an irrevocable trust. Further,
section 37(1) provides that any expenditure other than the expenditure of the nature described in
sections 30 to 36 laid out or expended, wholly and exclusively for the purpose of the business or
profession must be allowed as a deduction in computing the taxable income from business.
A reading of these two provisions clearly indicates that the intention of the legislature has always
been that the deduction in respect of gratuity be allowable to the employer either in the year in
which the gratuity is actually paid or in the year in which contributions to an approved gratuity fund
are actually made by employer.

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This provision, therefore, makes it clear that any amount claimed by the assessee towards
provision for gratuity, by whatever name called would be disallowable in the assessment of
employer even if the assessee follows the mercantile system of accounting.
However, no disallowance would be made as per section 40A(7) in the case where any provision is
made by the employer for the purpose of payment of sum by way of contribution to an approved
gratuity fund during the previous year or for the purpose of making payment of any gratuity that
has become payable during the previous year by virtue of the employee’s retirement, death,
termination of service etc.

Further, where any provision for gratuity for any reason has been allowed as a deduction to the
assessee for any assessment year, any sum paid out of such provision by way of contribution
towards an approved gratuity fund or by way to gratuity to employee shall not be allowed as
deduction to the assessee in the year in which it is paid.
(4) Contributions by employers to funds, trust etc. [Sections 40A(9)]
This sub-section has been introduced to curb the growing practice amongst employers to claim
deductions from taxable profits of the business of contributions made apparently to the welfare of
employees from which, however, no genuine benefit flows to the employees.
Accordingly, no deduction will be allowed where the assessee pays in his capacity as an employer,
any sum towards setting up or formation of or as contribution to any fund, trust, company,
association of persons, body of individuals, society registered under the Societies Registration Act,
1860 or other institution for any purpose.

However, where such sum is paid in respect of funds covered by sections 36(1)(iv), 36(1)(iva) and
36(1)(v) or any other law, then the deduction will not be denied.
(5) Marked to market loss or other expected loss [Sections 40A(13)]
Section 40A(13) provides that no deduction or allowance in respect of any marked to market loss
or other expected loss shall be allowed except as allowable under section 36(1)(xviii). 36(1)(xviii)
provides that marked to market loss or other expected loss as computed in accordance with the
ICDS notified under section 145(2), would be allowed as deduction. ICDS I provide that marked to
market losses would not be allowed unless the same is in accordance with any other ICDS.
Therefore, only marked to market losses specifically permitted under any other ICDS would be
allowable as deduction under section 36. Other marked to market losses would not be allowed as
deduction as per section 40A(13). This amendment was effective from A.Y. 2017-18.

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3.9 PROFITS CHARGEABLE TO TAX [SECTION 41]

This section enumerates certain receipts which are deemed to be income under the head
“business or profession.” Such receipts would attract charge even if the business from which they
arise had ceased to exist prior to the year in which the liability under this section arises. The
particulars of such receipts are given below:
(1) Remission or cessation of trading liability [Section 41(1)]
Suppose an allowance or deduction has been made in any assessment year in respect of loss,
expenditure or trading liability incurred by A. Subsequently, if A has obtained, whether in cash or in
any manner whatsoever, any amount in respect of such loss or expenditure of some benefit in
respect of such trading liability by way of remission or cessation thereof, the amount obtained by
A, or the value of benefit accruing to him shall be taxed as income of that previous year. It does
not matter whether the business or profession in respect of which the allowance or deduction has
been made is in existence in that year or not.
It is possible that after the above allowance in respect of loss, expenditure, or trading liability has
been given to A, he could have been succeeded in his business by another person. In such a
case, the successor will be liable to be taxed in respect of any such benefit received by him during
a subsequent previous year.
Successor in business:
(i) Where there has been an amalgamation of a company with another company, the
successor will be the amalgamated company.
(ii) Where a firm carrying on a business or profession is succeeded by another firm the
successor will be the other firm.
(iii) In any other case, where one person is succeeded by any other person in that business or
profession the other person will be the successor.
(iv) In case of a demerger, the successor will be the resulting company.
Remission or cessation of a trading liability includes remission or cessation of liability by a
unilateral act of the assessee by way of writing off such liability in his accounts.
(2) Balancing charge, sale of capital asset used for scientific research, recovery of a bad
debt subsequently and withdrawal from reserves created [Section 41(2), (3), (4)
& (4A)]

The provisions of section 41(2) relating to balancing charge, section 41(3) relating to sale of
capital assets acquired for scientific research, section 41(4) dealing with recovery of bad debts and

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of section 41(4A) relating to withdrawal from special reserve created have been dealt with earlier
under the respective items.

(3) Brought forward losses of defunct business [Section 41(5)]

In cases where a receipt is deemed to be profit of a business under section 41 relating to a
business that had ceased to exist and there is an unabsorbed loss, not being a speculation loss,
which arose in that business during the previous year in which it had ceased to exist, it would be
set off against income that is chargeable under this section even after the expiry of 8 years.

3.10 OTHER PROVISIONS

(1) Special provisions for deduction in case of business for prospecting etc. for mineral
oil [Section 42]
This section enables an assessee to claim an allowance which may on general principles be
inadmissible, e.g., allowance in respect of expenditure which would be regarded as an accretion to
capital on the ground that it brings into existence an asset of enduring benefit or to constitute initial
expenditure incurred on the setting up of a profit-earning machinery in motion. It must further be
noted that this concession can be availed of only in relation to contract or arrangements entered
into by the Central Government for prospecting for, or the extraction or production of mineral oils.
(i) Allowable expenses
The allowance permissible under this section shall be in relation to
(a) the expenditure by way of infructuous or abortive exploration expenses in respect of an
area surrendered prior to the beginning of commercial production by the assessee;
(b) after the beginning of commercial production, the expenditure incurred by the assessee,
whether before or after such commercial production in respect of drilling or exploration
activities or services or in respect of physical assets used in that connection; and
(c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant
to the previous year in which commercial production is begun and for such succeeding
years as may be specified in the agreement.
(ii) Amount of deduction
The sum of those allowances should be computed and deduction should be made in the manner
specified in the agreement entered into by the Central Government with any person for the
association or participation of the Central Government or any authorized person by it in such
business for the prospecting or exploration of mineral oil.

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It has been specifically provided that the other provisions of the Act are being deemed, for the
purpose of this allowance, to have been modified to the extent necessary to give effect to the
terms of the agreement. It may be noted that allowances in this regard are made in lieu of or in
addition to the other allowances permissible under the Act, depending upon the terms of the
agreement.
(iii) Taxability in case of transfer
Transaction Manner of deduction
(1) Subject to the provisions of the agreement entered into by the Central Government,
where the business of assessee consisting of the prospecting for or extraction or
production of petroleum and natural gas is transferred or any interest therein is
transferred, wholly or partly, in accordance with the aforesaid agreement,
Case 1: Where the The expenditure remaining unallowed as reduced by the
proceeds of the proceeds of transfer shall be allowed in the previous year
transfer are less than in which the business or interest has been transferred.
the expenditure Amount of deduction = Expenditure remain unallowed –
incurred remaining Sale proceeds
unallowed
Case 2: Where the The excess amount or expenditure allowed till date (i.e.,
proceeds of the difference between expenditure incurred in connection with
transfer of whole or the business or to obtain interest therein and the
any part of the expenditure remaining unallowed), whichever is less,
business or interest shall be chargeable to tax as profits and gains of business
therein exceed the in the previous year in which the business or interest
amount of expenditure therein has been transferred.
remaining unallowed Taxable as profits and gains from business and profession =
Sale proceeds – Expenditure remain unallowed
Whichever
OR
is less
Expenditure allowed till date
If the business or interest therein is transferred in a
previous year in which the business is no longer in
existence, the taxability would arise in the above manner
as though the business is in existence in that previous
year.
Case 3: Where the No deduction for such expenditure shall be allowed in the
proceeds of the previous year in which business or interest therein is
transfer are not less transferred or in respect of any subsequent previous year
than the amount of or years.
expenditure incurred Amount of deduction = NIL
remaining unallowed.

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Case 4: Where Deduction of unallowed expenditure as reduced by the

transfer of the proceeds of transfer from the expenditure remaining
business or interest is unallowed
not covered under Allowable deduction = Unallowed expenditure – Sale
Case 2 above proceeds
(2) Transfer of business in a scheme of amalgamation
If the amalgamating The provisions of section 42 will apply to amalgamated
company sells or company as they would have applied to amalgamating
transfers the business company as if the latter has not transferred the business or
to the amalgamated interest therein.
company, being an The tax treatment in cases 1, 2, 3 & 4 given in (1) above
Indian company under will not apply to the amalgamating company.
the scheme of
amalgamation
(3) Transfer of business in a scheme of demerger
If the demerged The provisions of section 42 will apply to resulting
company sells or company as they would have applied to demerged
transfers the business company as if the latter has not transferred the business or
to the resulting interest therein.
company, being an The tax treatment in cases 1, 2, 3 & 4 given in (1) above
Indian company under will not apply to the demerged company.
the scheme of
demerger

Note: Mineral oil includes petroleum and natural gas.

(2) Changes in the rate of exchange of currency [Section 43A]
(i) The section provides that where an assessee has acquired any asset from a foreign country
for the purpose of his business or profession, and due to a change thereafter in the
exchange rate of the two currencies involved, there is an increase or decrease in the
liability (expressed in Indian rupees) of the assessee at the time of making the payment,
the following values may be changed accordingly with respect to the increase or decrease
in such liability:

(a) the actual cost of the asset under section 43(1)

(b) the amount of capital expenditure incurred on scientific research under section
35(1)(iv)
(c) the amount of capital expenditure incurred by a company for promoting family
planning amongst its employees under section 36(1)(ix)

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(d) the cost of acquisition of a non-depreciable capital asset falling under section 48.
The amount arrived at after making the above adjustment shall be taken as the amount of
capital expenditure or the cost of acquisition of the capital asset, as the case may be.
(ii) Where the whole or any part of the liability aforesaid is met, not by the assessee, but,
directly or indirectly, by any other person or authority, the liability so met shall not be taken
into account for the purposes of this section.
(iii) Where the assessee has entered into a contract with authorised dealer as defined in
section 2 of the Foreign Exchange Management Act, 1999 for providing him with a specified
sum in a foreign currency on or after a stipulated future date at the rate of exchange
specified in the contract to enable him to meet the whole or any part of the liability
aforesaid, the amount, if any, for adjustment under this section shall be computed with
reference to the rate of exchange specified therein.
(3) Taxation of foreign exchange fluctuation [Section 43AA]
(i) Section 43AA provides that, subject to the provisions of section 43A, any gain or loss
arising on account of any change in foreign exchange rates shall be treated as income or
loss, as the case may be, which shall be computed in accordance with the notified ICDS
i.e., ICDS VI: The effects of changes in foreign exchange rates.

(ii) Gain or loss arising on account of the effects of change in foreign exchange rates shall be
in respect of all foreign currency transactions, including those relating to –
(a) monetary items and non-monetary items;
(b) translation of financial statements of foreign operations
(c) forward exchange contracts;
(d) foreign currency translation reserves.
(4) Certain Deductions to be made only on actual payment [Section 43B]
The following sums are allowed as deduction only in that previous year in which such sum is
actually paid i.e., on actual payment basis.

(a) Any sum payable by way of tax, duty, cess or fee, by whatever name called, under any law
for the time being in force, or

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(b) Any sum payable by the assessee as an employer by way of contribution to any
provident fund or superannuation fund or gratuity fund or any other fund for the welfare
of employees, or
(c) Bonus or Commission for services rendered payable to employees, or
(d) Any sum payable by the assessee as interest on any loan or borrowing from any public
financial institution or a State Financial Corporation or a State Industrial Investment
Corporation, or
(da) Any sum payable by the assessee as interest on any loan or borrowing from notified
class of non-banking financial companies, in accordance with the terms and conditions
of the agreement governing such loan or borrowing, or
(e) Interest on any loan or advance from a scheduled bank or co-operative bank other
than a primary agricultural credit society or a primary co-operative agricultural and rural
development bank, in accordance with the terms and conditions of the agreement governing
such loan or borrowing, or

(f) Any sum paid by the assessee as an employer in lieu of earned leave of his employee,
or
(g) Any sum payable by the assessee to the Indian Railways for use of Railway assets.
For the purpose of claiming deduction of the sums referred to above in clauses (a) to (g) in the
relevant previous year in which the expenditure is incurred, the above sums have to be paid by
the assessee on or before the due date for furnishing the return of income under section
139(1) in respect of the previous year in which the liability to pay such sum was incurred and the
evidence of such payment is furnished by the assessee along with such return.
Conversion of interest into a loan or borrowing or debenture or any other instrument

Explanation 3C, 3CA & 3D clarifies that if any sum payable by the assessee as interest on any
such loan or borrowing or advance referred to in (d), (da) and (e) above, is converted into a loan or
borrowing or advance or debenture or any other instrument by which the liability to pay is deferred
to a future date, the interest so converted and not “actually paid” shall not be deemed as actual
payment, and hence would not be allowed as deduction. The clarificatory explanations only
reiterate the rationale that conversion of interest into a loan or borrowing or advance or debenture
or any other instrument by which the liability to pay is deferred to a future date does not amount to
actual payment.

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The manner in which the converted interest will be allowed as deduction has been clarified in
Circular No.7/2006 dated 17.7.2006. The unpaid interest, whenever actually paid to the bank or
financial institution, will be in the nature of revenue expenditure deserving deduction in the
computation of income. Therefore, irrespective of the nomenclature, the deduction will be allowed
in the previous year in which the converted interest is actually paid.
Meaning of Non-banking financial company:
(i) a financial institution which is a company;

(ii) a non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or lending
in any manner;
(iii) such other non-banking institution or class of such institutions, as the bank may, specify
with the previous approval of the Central Government and by notification in the Official
Gazette.
ILLUSTRATION 16
Hari, an individual, carried on the business of purchase and sale of agricultural commodities like
paddy, wheat, etc. He borrowed loans from Andhra Pradesh State Financial Corporation (APSFC)
and Indian Bank and has not paid interest as detailed hereunder:
`
(i) Andhra Pradesh State Financial Corporation (P.Y. 2023-24 & 2024-25) 15,00,000
(ii) Indian Bank (P.Y. 2024-25) 30,00,000
45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the year 2024-
25, converted the above interest payable by Hari to them as a loan repayable in 60 equal
installments. During the year ended 31.3.2025, Hari paid 5 installments to APSFC and 3
installments to Indian Bank.
Hari claimed the entire interest of ` 45,00,000 as an expenditure while computing the income from
business of purchase and sale of agricultural commodities. Discuss whether his claim is valid and
if not what is the amount of interest, if any, allowable.

SOLUTION
According to section 43B, any interest payable on the term loans to specified financial institutions
and any interest payable on any loans and advances to, inter alia, scheduled banks shall be
allowed only in the year of payment of such interest irrespective of the method of accounting
followed by the assessee. Where there is default in the payment of interest by the assessee, such

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unpaid interest may be converted into loan. Such conversion of unpaid interest into loan shall not
be construed as payment of interest for the purpose of section 43B. The amount of unpaid interest
so converted as loan shall be allowed as deduction only in the year in which the converted loan is
actually paid.
In the given case of Hari, the unpaid interest of ` 15,00,000 due to APSFC and of
` 30,00,000 due to Indian Bank was converted into loan. Such conversion would not amount to
payment of interest and would not, therefore, be eligible for deduction in the year of such
conversion. Hence, claim of Hari that the entire interest of ` 45,00,000 is to be allowed as
deduction in the year of conversion is not tenable. The deduction shall be allowed only to the
extent of repayment made during the financial year. Accordingly, the amount of interest eligible for
deduction for the A.Y.2025-26 shall be calculated as follows:
Interest Number of Amount per Instalments Interest
outstanding Instalments instalment paid allowable (`)
(`) (`)
APSFC 15 lakh 60 25,000 5 1,25,000
Indian Bank 30 lakh 60 50,000 3 1,50,000
Total amount eligible for deduction 2,75,000

Clarification on non-applicability of section 43B in respect of employee's Contribution to

welfare funds [Explanation 5 to section 43B]
As per section 2(24)(x), any sum received by an assessee, being an employer from his employee
as contribution to any provident fund or superannuation fund or any fund set up under Employee’s
State Insurance Act, 1948 or any other fund for the welfare of employees would be considered as
the income of an employer.
The deduction in respect of above sum will be allowed to the assessee under section 36(1)(va)
only if such sum is credited by the assessee to the employee’s account in the relevant fund on or
before the due date, being the date specified under the relevant Act, Rule, order or notification
issued thereunder.
As per section 43B, any sum payable by the assessee as an employer by way of contribution to
any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of
employees, would be allowable during any P.Y. if the same has been paid on or before the 'due
date' applicable in his case for furnishing the return of income under section 139(1) in respect of
that P.Y.

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Explanation 5 clarifies that the provisions of section 43B regarding allowability of certain
expenditure in a previous year only on actual payment basis (i.e., payment on or before the due
date of filing of return of income for relevant assessment year), does not apply and would deemed
never to be applied to employee’s contribution received by employer towards any welfare fund. In
effect, clause (b) of section 43B covers only employer’s contribution to provident fund,
superannuation fund, gratuity fund or any other fund for welfare of employees, for remittance of
which extended time limit upto due date of filing return u/s 139(1) is available; however, it does not
include within its scope, employees’ contribution to such funds received by the employer, which
has to be credited to the employee’s account in the relevant fund on or before the due date
specified under the relevant Act, Rule etc. Amount credited after the said due date but on or before
the due date under section 139(1) would not be eligible for deduction.
Section 43B [Clause (h)]
Any sum payable by the assessee to a micro or small enterprise beyond the time-limit specified in
section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 would be allowed
as deduction only in that previous year in which such sum is actually paid.
Section 15 of the of the Micro, Small and Medium Enterprises Development Act, 2006 mandates
payment of goods or services to supplier, being a micro or small enterprises by the buyer on or
before the date agreed upon between them in writing i.e., as per the written agreement, which
cannot be more than 45 days from the day of acceptance or the day of deemed acceptance of any
goods or services by a buyer from a supplier. If there is no such written agreement, the payment
shall be made before the appointed day i.e., within 15 days.
If the sum payable by the assessee to a micro or small enterprise is paid as per written agreement
(maximum within 45 days) or within 15 days in case of no agreement, the deduction can be
claimed on accrual basis if mercantile method of accounting is followed by the assessee.

However, if the sum payable by the assessee to a micro or small enterprise is not paid as per
written agreement or within 15 days in case of no agreement, the deduction would be allowed in
the previous year in which it is actually paid.

Example: Mr. A has purchased goods of ` 10,000 from A & Co., a micro enterprise on 1.3.2025.
As per the written agreement between them, the payment has to be made by 5.4.2025. Mr. A
follows mercantile method of accounting.
(i) If Mr. A paid the sum on 2.4.2025

Since Mr. A paid the sum on or before 5.4.2025, the deduction would be allowed in P.Y. 2024-25.

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(ii) If Mr. A paid the sum on 20.4.2025

Since Mr. A paid the sum beyond the time limit, the deduction would be allowed in the year of
actual payment i.e., P.Y. 2025-26.

Meaning of Micro and Small enterprise

S. No. Meaning
(1) Micro Enterprise
Investment in Plant and Machinery or AND Turnover ≤ ` 5 crore
Equipment ≤ ` 1 crore
(2) Small Enterprise
Investment in Plant and Machinery or AND Turnover ≤ ` 50 crore
Equipment ≤ ` 10 crore
Any sum payable means a sum for which the assessee incurred liability in the previous year even
though such sum might not have been payable within that year under the relevant law.
(5) Special provision for computation of cost of acquisition of certain assets [Section 43C]

(i) Where an asset acquired under a scheme of amalgamation is sold by an amalgamated

company as its stock-in-trade then in computing the profits and gains derived from sale of
such stock-in-trade, the cost of acquisition of stock-in-trade to the amalgamated company
shall be the cost of acquisition of the asset to the amalgamating company as increased by
the cost, if any, of any improvement thereto and the expenditure incurred wholly and
exclusively in connection with such a transfer.

(ii) The provisions of section 43C will thus apply to the following cases of revaluation:

(a) When the stock-in-trade of the amalgamating company is taken over at revalued
price by the amalgamated company under the scheme of amalgamation.

(b) Where a capital asset of the amalgamating company is taken over as stock-in-trade
by the amalgamated company after revaluation under the scheme of amalgamation.

(iii) The situation referred to at (b) above will in turn cover three situations:

(a) When the capital asset is converted to stock-in-trade by the amalgamating company
with revaluation and the revalued asset is taken over by the amalgamated company
under the scheme of amalgamation.
(b) Where the capital asset is taken over as stock-in-trade by the amalgamated
company at revalued price at the time of amalgamation.

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(c) Where the capital asset of the amalgamating company is taken over by the
amalgamated company as a capital asset and has been converted into stock-in-trade
and revalued.
(iv) In a case referred to (c) above, where the revaluation and conversion of capital asset into
stock-in-trade takes place in the hands of the amalgamated company, the provisions of
section 45(2) will apply. In such a case, the provisions of section 43C will not apply. This
has been done with a view to ensure that a tax payer does not face double taxation in
respect of the same transaction. However, when the stock-in-trade referred to in item (ii)(a)
as well as at (a) and (b) of (iii) above are sold, the provisions of section 43C will apply.
(v) A similar provision in section 43C has also been made to cover cases where the asset sold
as stock-in-trade has been acquired by the assessee either by way of full or partial partition
of HUF or under a gift or will or an irrevocable trust and such asset is sold as stock-in-trade.
(6) Stamp Duty Value of land and building to be taken as the full value of consideration
in respect of transfer, even if the same are held by the transferor as stock-in-trade
[Section 43CA]
(i) Section 43CA has been inserted as an anti-avoidance measure to provide that where the
consideration for the transfer of an asset (other than capital asset), being land or building or
both, is less than the stamp duty value, the value so adopted or assessed or assessable
(i.e., the stamp duty value) shall be deemed to be the full value of the consideration for the
purposes of computing income under the head “Profits and gains of business of profession”.
However, if the stamp duty value does not exceed 110% of the consideration received or
accruing then, such consideration shall be deemed to be the full value of consideration for
the purpose of computing profits and gains from transfer of such asset.
(ii) Further, where the date of an agreement fixing the value of consideration for the transfer of
the asset and the date of registration of the transfer of the asset are not same, the stamp
duty value may be taken as on the date of the agreement for transfer instead of on the date
of registration for such transfer, provided at least a part of the consideration has been
received by way of an account payee cheque/account payee bank draft or use of ECS
through a bank account or through such other prescribed electronic modes on or before the
date of the agreement.
The prescribed electronic modes include credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross
Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for
Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].

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(iii) The Assessing Officer may refer the valuation of the asset to a valuation officer as defined in
section 2(r) of the Wealth-tax Act, 1957 in the following cases -

(1) Where the assessee claims before any Assessing Officer that the value adopted or
assessed or assessable by the authority for payment of stamp duty exceeds the fair
market value of the property as on the date of transfer and

(2) the value so adopted or assessed or assessable by such authority has not been
disputed in any appeal or revision or no reference has been made before any other
authority, court or High Court.
(iv) Where the value ascertained by the Valuation Officer exceeds the value adopted or
assessed or assessable by the Stamp Valuation Authority, the value adopted or assessed
or assessable shall be taken as the full value of the consideration received or accruing as a
result of the transfer.
The term “assessable” covers transfers executed through power of attorney.
The term ‘assessable’ has been defined to mean the price which the stamp valuation authority
would have, notwithstanding anything to the contrary contained in any other law for the time being
in force, adopted or assessed, if it were referred to such authority for the purposes of the payment
of stamp duty.

Date of Actual Stamp duty Stamp duty Full value of Remark

transfer consideration value on the value on consideration
of land / date of the date of
building agreement registration
held as ` in lakhs
stock-
in-trade
Example:
1/9/2024 100 120 210 120 As part of the
(` 10 lakhs (1/7/2024) (1/9/2024) consideration is
received by received by A/c
A/c payee payee cheque on the
cheque on date of agreement,
1/7/2024) Stamp duty value
(SDV) on the date of
agreement to be
adopted as full value
of consideration,

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since the SDV

exceeds 110% of
consideration i.e.,
` 110 lakhs.
Example:
1/9/2024 100 109 130 130 SDV on the date of
(` 10 lakhs (1/7/2024) (1/9/2024) registration to be
received by adopted as full value
cash on of consideration and
1/7/2024) such SDV exceeds
110% of
consideration i.e.,
` 110 lakhs. Since
part of consideration
is received by cash
on the date of
agreement, the SDV
on the date of
agreement cannot
be considered vis-à-
vis actual
consideration.
Example:
31/1/2025 100 109 130 100 Actual sales
(` 10 lakhs (1/7/2024) (31/1/2025) consideration would
received by A/c be the full value of
payee cheque consideration, since
on 1/7/2024) SDV on the date of
agreement does not
exceed 110% of
actual consideration.
SDV on the date of
agreement can be
considered vis-à-vis
actual consideration,
since part of the
consideration has
been received by
account payee

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.165

cheque on the date of

agreement.
Example:
31/3/2025 100 120 130 130 Stamp duty value of
(Full amount (1/5/2024) (31/3/2025) the date of
received in registration would be
cash on the the full value of
date of consideration since
registration) the stamp duty value
exceeds 110% of
consideration i.e.,
` 110 lakhs.

(7) Income from construction and service contracts [Section 43CB]

The profits and gains arising from a construction contract or a service contract shall be computed
on the basis of percentage of completion method (POCM) in accordance with the notified ICDS
i.e., ICDS III: Construction Contracts.
However, the profits and gains arising from a service contract shall be computed on the basis of -
Method Condition
Project completion method If the duration of the contract is not more than 90 days
Straight line method If the contract involves indeterminate number of acts over a
specific period of time

For the purpose of percentage of completion method, project completion method or straight line method –
(i) the contract revenue shall include retention money;
(ii) the contract cost shall not be reduced by any incidental income in the nature of interest,
dividends or capital gains.
(8) Special Provision in case of income of Public Financial Institutions [Section 43D]

In the case of
- a public financial institution or
- a scheduled bank or

- a co-operative bank other than primary agricultural credit society or a primary co-operative
agricultural and rural development bank or
- a State financial corporation or

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 3.166 DIRECT TAX LAWS

- a State industrial investment corporation or

- notified class of non-banking financial companies,
the income by way of interest on such categories of bad and doubtful debts, as may be prescribed
having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall
be chargeable to tax in the previous year in which it is credited to the profit and loss account by
the said institutions for that year or in the previous in which it is actually received by it, whichever
is earlier.

3.11 COMPULSORY MAINTENANCE OF ACCOUNTS

[SECTION 44AA]
(1) Maintain the books of account and other documents by notified profession [Section
44AA(1)]: This section provides that every person carrying on the legal, medical, engi-
neering or architectural profession or accountancy or technical consultancy or interior
decoration or any other profession as has been notified by the CBDT in the official gazette
must statutorily maintain such books of accounts and other documents as may enable
the assessing officer to compute his total income in accordance with the provisions
of the Income-tax Act, 1961.

Notified professions: The professions notified so far are as the profession of authorised
representative; the profession of film artist (actor, camera man, director, music director, art
director, dance director, editor, singer, lyricist, story writer, screen play writer, dialogue
writer and dress designer); the profession of Company Secretary; and information
technology professionals.

Prescribed books of accounts & other documents: The CBDT has been authorised,
having due regard to the nature of the business or profession carried on by any class of
persons, to prescribe by rules the books of account and other documents including
inventories, wherever necessary, to be kept and maintained by the taxpayer, the particulars
to be contained therein and the form and manner in which and the place at which they
must be kept and maintained.
Rules pertaining to maintenance of books of accounts & other documents:
Rule 6F of the Income-tax Rules contains the details relating to the books of account and
other documents to be maintained by certain professionals under section 44AA(1).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.167

Prescribed class of persons: As per Rule 6F, every person carrying on legal, medical,
engineering, or architectural profession or the profession of accountancy or technical
consultancy or interior decoration or authorised representative or film artist shall keep and
maintain the books of account and other documents specified in Rule 6F(2) in the following
cases :
– if his gross receipts exceed ` 1,50,000 in all the 3 years immediately preceding
the previous year; or
– if, where the profession has been newly set up in the previous year, his gross
receipts are likely to exceed ` 1,50,000 in that year.

Note: Students may note that professionals whose gross receipts are less than the
specified limits given above are also required to maintain books of account but these have
not been specified in the Rule.
In other words, they are required to maintain (as per point (1) above) such books of account
and other documents as may enable the Assessing Officer to compute the total income in
accordance with the provisions of this Act.

Prescribed books of accounts and other documents [Sub-rule (2) of Rule 6F]: The
following books of account and other documents are required to be maintained.
(i) a cash book;
(ii) a journal, if accounts are maintained on mercantile basis;
(iii) a ledger;
(iv) Carbon copies of bills and receipts issued by the person whether machine numbered
or otherwise serially numbered, in relation to sums exceeding ` 25;
(v) Original bills and receipts issued to the person in respect of expenditure incurred by
the person, or where such bills and receipts are not issued, payment vouchers
prepared and signed by the person, provided the amount does not exceed ` 50.
Where the cash book contains adequate particulars, the preparation and signing of
payment vouchers is not required.

In case of a person carrying on medical profession, he will be required to maintain the

following in addition to the list given above:
(i) a daily case register in Form 3C.

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(ii) an inventory under broad heads of the stock of drugs, medicines and other
consumable accessories as on the first and last day of the previous year used for his
profession.
Place at which books to be kept and maintained: The books and documents shall be
kept and maintained at the place where the person is carrying on the profession, or where
there is more than one place, at the principal place of his profession. However, if he
maintains separate set of books for each place of his profession, such books and
documents may be kept and maintained at the respective places.

Period for which the books of account and other documents are required to be kept
and maintained: The Central Board of Direct Taxes has also been empowered to
prescribe, by rules, the period for which the books of account and other documents are
required to be kept and maintained by the taxpayer.
Prescribed period: The above books of account and documents shall be kept and
maintained for a minimum of 6 years from the end of the relevant assessment year.
ILLUSTRATION 17
Vinod is a person carrying on profession as film artist. His gross receipts from profession
are as under:
`
Financial year 2021-22 1,15,000
Financial year 2022-23 1,80,000
Financial year 2023-24 2,10,000
What is his obligation regarding maintenance of books of accounts for Assessment Year
2025-26 under section 44AA of Income-tax Act, 1961?

SOLUTION
Section 44AA(1) requires every person carrying on any profession, notified by the Board in
the Official Gazette (in addition to the professions already specified therein), to maintain
such books of account and other documents as may enable the Assessing Officer to
compute his total income in accordance with the provisions of the Income-tax Act, 1961.

As per Rule 6F, a person carrying on a notified profession shall be required to maintain
specified books of accounts, only if:
(i) his gross receipts in all the three years immediately preceding the relevant previous
year has exceeded ` 1,50,000; or

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.169

(ii) it is a new profession which is setup in the relevant previous year, it is likely to
exceed ` 1,50,000 in that previous year.
In the present case, Vinod is a person carrying on profession as film artist, which is a
notified profession. Since his gross receipts have not exceeded ` 1,50,000 in financial year
2021-22, the requirement under section 44AA to compulsorily maintain the prescribed
books of account is not applicable to him for A.Y. 2025-26.
Mr. Vinod, however, required to maintain such books of accounts as would enable the
Assessing Officer to compute his total income.
(2) Maintenance of books of account and other documents by persons carrying on
business or profession [other than notified professions referred to in section
44AA(1)] [Section 44AA(2)]:
I. In case of Individual or HUF: An Individual or HUF carrying on any business or
profession (other than notified professions specified in section 44AA(1)) must
maintain such books of account and other documents as may enable the Assessing
Officer to compute his total income in accordance the provisions of the Income-tax
Act, 1961 in the following circumstances:
(i) Existing business or profession: In cases where the income from the
existing business or profession exceeds ` 2,50,000 or the total sales,
turnover or gross receipts, as the case may be, in the business or
profession exceed ` 25,00,000 in any one of three years immediately
preceding the accounting year; or
(ii) Newly set up business or profession: In cases where the business or
profession is newly set up in any previous year, if his income from business
or profession is likely to exceed ` 2,50,000 or his total sales, turnover or
gross receipts, as the case may be, in the business or profession are likely
to exceed ` 25,00,000 during the previous year.
II. Person (other than individual or HUF): Every person (other than individual or HUF)
carrying on any business or profession (other than the notified professions referred
to in section 44AA(1)) must maintain such books of account and other documents as
may enable the Assessing Officer to compute his total income in accordance the
provisions of the Income-tax Act, 1961 in the following circumstances:
(i) Existing business or profession: In cases where the income from the business
or profession exceeds ` 1,20,000 or the total sales, turnover or gross
receipts, as the case may be, in the business or profession exceed ` 10,00,000
in any one of three years immediately preceding the accounting year; or

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 3.170 DIRECT TAX LAWS

(ii) Newly set up business or profession: In cases where the business or

profession is newly set up in any previous year, if his income from business or
profession is likely to exceed ` 1,20,000 or his total sales, turnover or
gross receipts, as the case may be, in the business or profession are likely
to exceed ` 10,00,000 during the previous year;
III. Showing lower income as compared to income computed on presumptive basis
under section 44AE or (section 44BB or section 44BBB) 13: Where profits and
gains from the business are calculated on a presumptive basis under section 44AE
or section 44BB or section 44BBB and the assessee has claimed that his income is
lower than the profits or gains so deemed to be the profits and gains of his business.
IV. Where the provisions of section 44AD(4) are applicable in his case and his
income exceeds the basic exemption limit in any previous year: In cases, where
an assessee not eligible to claim the benefit of the provisions of section 44AD(1) for
five assessment years subsequent to the assessment year relevant to the previous
year in which the profit has not been declared in accordance with the provisions of
44AD(1) and his income exceeds the basic exemption limit during the previous year.
(3) Penalty for failure to maintain books of account [Section 271A]: If a person fails to
keep and maintain any such books of account and other documents as required by section
44AA in respect of any previous year or to retain such books of account and other
documents for the specified period, the Assessing Officer or the Joint Commissioner
(Appeals) or the Commissioner (Appeals) may direct a penalty of ` 25,000 would be
leviable under section 271A.

3.12 AUDIT OF ACCOUNTS OF CERTAIN PERSONS

CARRYING ON BUSINESS OR PROFESSION
[SECTION 44AB]
(1) Requirement of Tax Audit: It is obligatory for the persons mentioned in column (2) of the
table below, carrying on business or profession, to get his accounts audited before the
“specified date” by a Chartered Accountant, if the conditions mentioned in the
corresponding row of column (3) are satisfied

13Section 44BB and 44BBB will be discussed in Chapter 21: Non-resident taxation in Module 4 of the Study
Material.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.171

Persons When tax audit is required?

(1) (2) (3)
I In case of a person carrying on
business
(a) In case of a person carrying on If his total sales, turnover or gross receipts
business in business > ` 1 crore in the relevant PY
Note – The requirement of audit u/s 44AB
does not apply to a person who declares
profits and gains for the previous year on
presumptive basis u/s 44AD(1).
If in case of such person carrying If his total sales, turnover or gross receipts
on business - in business > ` 10 crore in the relevant PY
(i) Aggregate cash receipts in the
relevant PY ≤ 5% of total
receipts (including receipts for
sales, turnover, gross receipts);
and
(ii) Aggregate cash payments in the
relevant PY ≤ 5% of total
payments (including amount
incurred for expenditure)
Note – For this purpose, the payment or receipt, as the case may be, by a cheque
drawn on a bank or by a bank draft, which is not account payee, would be deemed
to be the payment or receipt, as the case may be, in cash.
(b) In case of an assessee covered u/s If such assessee claims that the profits and
44AE i.e., an assessee engaged in gains from business in the relevant P.Y.
the business of plying, hiring or are lower than the profits and gains
leasing goods carriages who owns computed on a presumptive basis u/s 44AE
not more than 10 goods carriages [i.e.,` 1000 per ton of gross vehicle weight
at any time during the P.Y. or unladen weight in case of each heavy
goods vehicle and ` 7,500 for each
vehicle, other than heavy goods vehicle, for
every month or part of the month for which
the vehicle is owned by the assessee].
(c) In case of an eligible assessee If he declares profit for any of the five
carrying on business, whose total successive PYs (say, P.Y.2024-25) not in
turnover, sales, gross receipts ≤ ` accordance with section 44AD (i.e., he
200 lakhs, and who has opted for declares profits lower than 8% or 6% of
section 44AD in any earlier PY total turnover, sales or gross receipts, as
(say, P.Y. 2023-24) the case may be, in that year), then, he

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In case of an eligible assessee cannot opt for section 44AD for five
carrying on business, whose successive PYs after the year of such
aggregate cash receipts in the default (i.e., from P.Y.2025-26 to P.Y.2029-
relevant PY ≤ 5% of total turnover 30). For the year of default (i.e., P.Y.2024-
or gross receipts and whose total 25) and five successive previous years
turnover, sales, gross receipts (i.e., P.Y.2025-26 to P.Y.2029-30), he has
≤ ` 300 lakhs, and who has opted to maintain books of account u/s 44AA and
for section 44AD in any earlier PY get them audited u/s 44AB, if his income
(say, P.Y. 2023-24) exceeds the basic exemption limit.
II In case of persons carrying on
profession
(a) In case of a person carrying on If his gross receipts in profession > ` 50
profession lakh in the relevant PY.
Note – The requirement of audit u/s 44AB
does not apply to a person who declares
profits and gains for the previous year on
presumptive basis u/s 44ADA(1).
(b) In case of an assessee carrying on If such resident assessee claims that the
a notified profession under section profits and gains from such profession in
44AA(1) i.e., legal medical, the relevant PY are lower than the profits
engineering, accountancy, and gains computed on a presumptive
architecture, interior decoration, basis u/s 44ADA (50% of gross receipts)
technical consultancy, whose gross and his income exceeds the basic
receipts ≤ ` 50 lakhs exemption limit in that PY.
In case of an assessee carrying on
a notified profession under section
44AA(1) i.e., legal medical,
engineering, accountancy,
architecture, interior decoration,
technical consultancy, whose
aggregate cash receipts in the
relevant PY ≤ 5% of total gross
receipts and whose gross receipts
≤ ` 75 lakhs

(2) Audit Report: The persons mentioned above would have to furnish by the specified date a
report of the audit in the prescribed forms. For this purpose, the Board has prescribed under
Rule 6G, Forms 3CA/3CB/3CD containing forms of audit report and particulars to be
furnished therewith. The audit report furnished may be revised by the person by getting
revised report of audit from a chartered accountant, duly signed and verified by such
chartered accountant, if there is payment by such person after furnishing of report which
necessitates recalculation of disallowance under section 40 or section 43B. The said

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.173

revised audit report has to be furnished before the end of the relevant assessment year for
which the report pertains.

(3) Accounts audits under other statutes are considered: In cases where the accounts of a
person are required to be audited by or under any other law before the specified date, it will
be sufficient if the person gets his accounts audited under such other law before the
specified date and also furnish by the said date the report of audit in the prescribed form in
addition to the report of audit required under such other law.
Thus, for example, the provision regarding compulsory audit does not imply a second or
separate audit of accounts of companies whose accounts are already required to be audited
under the Companies Act, 2013. The provision only requires that companies should get
their accounts audited under the Companies Act, 2013 before the specified date and in
addition to the report required to be given by the auditor under the Companies Act, 2013
furnish a report for tax purposes in the form to be prescribed in this behalf by the CBDT.
(4) Specified date: The expression “specified date” in relation to the accounts of the
previous year or years relevant to any assessment year means the date one month prior to
the due date for furnishing the return of income under section 139(1).
The due date for filing return of income in case of assessees (other than companies) who
are required to get their accounts audited is 31 st October of the relevant assessment year.
Hence, the specified date for tax audit would be 30th September of the relevant assessment
year. 14

(5) Non-applicability: The requirement of audit under section 44AB does not apply to a person
who derives income of the nature referred to in (sections 44B and 44BBA) 15 .
(6) Penal provision: If any person fails to get his accounts audited in respect of any previous
year or furnish the audit report by the specified date, penalty of lower of (a) and (b)
mentioned below would be leviable on such person –
(a) ½% of total sales, turnover or gross receipts, as the case may be, in business or of
the gross receipts in profession, in such previous year; or
(b) ` 1,50,000 [Section 271B].

14 In case of a person whose due date for filing return of income is 30th November of the relevant
assessment year, the specified date for tax audit would be 31st October of the relevant assessment year.
15 Section 44B and 44BBA will be discussed in Chapter 21: Non-resident taxation in Module 4 of the Study

Material.

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 3.174 DIRECT TAX LAWS

3.13 SPECIAL PROVISIONS FOR COMPUTING PROFITS

AND GAINS OF BUSINESS ON PRESUMPTIVE BASIS
[SECTION 44AD/ 44ADA/ 44AE]
Particulars Section 44AD Section 44ADA Section 44AE
(1) Eligible Assessee Resident individual, Resident individual An assessee
HUF or Partnership or resident owning not more
firm (but not LLP) partnership firm (but than 10 goods
engaged in eligible not LLP) engaged in carriages at any
business and who has any profession time during the
not claimed deduction specified u/s 4AA(1), P.Y.
under section 10AA or namely, legal,
Chapter VIA under “C medical,
– Deductions in engineering,
respect of certain architectural
incomes” profession or
Non-applicability of profession of
section 44AD in accountancy or
respect of the technical
following persons: consultancy or
interior decoration or
- A person
notified profession
carrying on
(authorized
profession
representative, film
specified u/s
artist, company
44AA(1);
secretary, profession
- A person earning of information
income in the technology)
nature of
commission or
brokerage;
- A person
carrying on any
agency
business.
(2) Eligible business/ Any business, other Any profession Business of
profession than business specified under plying, hiring or
referred to in section section 44AA(1), leasing goods
44AE, whose total whose gross carriages
turnover/ gross receipts ≤ ` 50
receipts in the P.Y. ≤ lakhs in the
` 200 lakhs relevant P.Y.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.175

Any business, other Any profession

than business specified u/s
referred to in section 44AA(1), whose
44AE, whose total gross receipts
turnover/gross ≤ ` 75 lakhs in the
receipts in the P.Y. relevant P.Y., if
≤ ` 300 lakhs in the aggregate cash
relevant P.Y., if receipts in the
aggregate cash relevant PY ≤ 5% of
receipts in the total gross
relevant PY ≤ 5% of receipts.
total turnover or
gross receipts.
In effect, if the In effect, if the gross
turnover of business receipts from
is > ` 200 lakhs profession is > ` 50
≤ ` 300 lakhs, the lakhs ≤ ` 75 lakhs,
benefit of section the benefit of section
44AD can be availed 44ADA can be
only if aggregate cash availed only if
receipts in relevant aggregate cash
P.Y. ≤ 5% of total receipts in relevant
turnover or gross P.Y. ≤ 5% of total
receipts. gross receipts.
Note: For this purpose, the receipt of amount or
aggregate of amounts by a cheque drawn on a
bank or by a bank draft, which is not account
payee, would be deemed to be the receipt in
cash.
(3) Presumptive 8% of total turnover/ 50% of gross For each heavy
income sales/gross receipts receipts of such goods vehicle
or a sum higher than profession or a sum ` 1,000 per ton
the aforesaid sum higher than the of gross vehicle
claimed to have been aforesaid sum weight or
earned by the claimed to have unladen weight,
assessee. been earned by the as the case may
6% of total turnover/ assessee. be, for every
gross receipts in month or part of
respect of the amount a month;
of total turnover/ For each
sales/ gross receipts vehicle, other
received by A/c payee than heavy
cheque/ bank draft/ goods vehicle:

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 3.176 DIRECT TAX LAWS

ECS through a bank ` 7,500 per

account or through month or part of
such other prescribed a month during
electronic modes which such
(credit card, debit vehicle is owned
card, net banking, by the assessee
IMPS, UPI, RTGS, or an amount
NEFT, and BHIM claimed to have
Aadhar Pay) during been actually
the P.Y. or before earned from such
due date of filing of vehicle,
return u/s 139(1) in whichever is
respect of that P.Y. higher.
(or) such higher sum
claimed to have been
earned by the
assessee.
(4) Non-allowability Deductions allowable under sections 30 to 38 shall be deemed
of deductions to have been given full effect to and no further deduction shall
while computing be allowed.
presumptive
Even in case of a firm, Even in case of a In case of a firm,
income
salary and interest firm, salary and salary and
paid to partners is not interest paid to interest paid to
deductible. partners is not partners is
deductible. deductible
subject to the
conditions and
limits specified in
section 40(b).
(5) Written down WDV of any asset of an eligible business/profession shall be
value of asset deemed to have been calculated as if the eligible assessee had
claimed and had been actually allowed depreciation for each of
the relevant assessment years.
(6) Requirement of If eligible assessee If eligible assessee If eligible
maintenance of declares profits and declares profits and assessee
books of account gains in accordance gains in accordance declares profits
u/s 44AA and with the provisions of with the provisions of and gains in
audit u/s 44AB section 44AD, he is section 44ADA, he is accordance with
not required to not required to the provisions of
maintain books of maintain books of section 44AE, he
account u/s 44AA or account u/s 44AA or is not required to
get them audited u/s get them audited u/s maintain books
44AB. 44AB. of account u/s

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.177

However, if after However, if the 44AA or get them

declaring profits on assessee claims his audited u/s
presumptive basis u/s profits to be lower 44AB.
44AD, say, for than the profits However, if the
A.Y.2025-26, non- computed by assessee claims
declaration of profits applying the his profits to be
on presumptive basis presumptive rate, he lower than the
for any of the 5 has to maintain profits computed
successive A.Y.s books of account by applying the
thereafter (i.e., from and other documents presumptive rate,
A.Y.2026-27 to u/s 44AA(1) and get he has to
A.Y.2030-31), say, for his accounts maintain books
A.Y. 2027-28, would audited u/s 44AB, if of account u/s
disentitle the his total income > 44AA(2) and get
assessee from basic exemption his accounts
claiming profits on limit for that year. audited u/s
presumptive basis for 44AB.
five successive AYs
subsequent to the AY
relevant to the PY of
such non-declaration
(i.e., from
A.Y.2028-29 to
A.Y. 2032-33). In
such a case, the
assessee would have
to maintain books of
account and other
documents u/s
44AA(2) and get his
accounts audited u/s
44AB, if his total
income exceeds the
basic exemption
limit in those years.
(7) Advance tax The eligible assessee The eligible The eligible
obligation opting for section assessee opting for assessee has to
44AD is required to section 44ADA is pay advance tax
pay advance tax by required to pay in four
15th March of the advance tax by 15th installments [See
financial year (F.Y.). March of the F.Y. Chapter 13 in
Module 3 for
details].

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 3.178 DIRECT TAX LAWS

Meaning of certain terms for the purpose of section 44AE:

[Link] Term Meaning
(1) Heavy goods vehicle any goods carriage, the gross vehicle weight of which
exceeds 12,000 kilograms.
(2) Gross vehicle weight total weight of the vehicle and load certified and registered
by the registering authority as permissible for that vehicle.
(3) Unladen weight the weight of a vehicle or trailer including all equipment
ordinarily used with the vehicle or trailer when working but
excluding the weight of driver or attendant and where
alternative parts or bodies are used the unladen weight of
the vehicle means the weight of the vehicle with the heaviest
such alternative body or part

The CBDT clarified that in respect of a “heavy goods vehicle” i.e. any goods carriage vehicle
whose gross vehicle weight exceeds 12.000 kilograms, the profits and gains from each goods
carriage would be at the rate of ` 1,000 per ton of gross vehicle weight for every month or part of
the month.
However, in respect of a tractor or a road-roller. where the gross vehicle weight is not applicable,
and unladen weight exceeds 12,000 Kilograms. the profits and gains from each goods carriage
shall be at the rate of ` 1,000 per ton of unladen weight for every month or part of the month
[Clarification dated 14.8.2019].
Example:
Let us consider the following particulars relating to a resident individual, Mr. A, being an eligible
assessee carrying on retail trade business whose total turnover do not exceed ` 2 crore in any of
the previous years relevant to A.Y.2025-26 to A.Y.2027-28

Particulars A.Y.2025-26 A.Y.2026-27 A.Y.2027-28

Total turnover (`) 1,80,00,000 1,90,00,000 2,00,00,000
Amount received through prescribed electronic 1,60,00,000 1,45,00,000 1,80,00,000
modes on or before 31st October of the A.Y.
Income offered for taxation (`) 11,20,000 12,30,000 10,00,000
% of gross receipts 6% on ` 1.60 6% on ` 1.45 5% on ` 2
crore and 8% crore and 8% crore
on ` 20 lakhs on ` 45 lakhs
Offered income as per presumptive taxation Yes Yes No
scheme u/s 44AD

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.179

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under section 44AD for
A.Y.2025-26 and A.Y.2026-27 and offers income of ` 11.20 lakh and ` 12.30 lakh on gross receipts of
` 1.80 crore and ` 1.90 crore, respectively.
However, for A.Y.2027-28, he offers income of only ` 10 lakh on turnover of ` 2 crore, which
amounts to 5% of his gross receipts. He needs to maintain books of account under section 44AA
and gets the same audited under section 44AB. Since he has not offered income in accordance
with the provisions of section 44AD(1) for five consecutive assessment years, after A.Y. 2025-26,
he will not be eligible to claim the benefit of section 44AD for next five assessment years
succeeding A.Y.2027-28 i.e., from A.Y.2028-29 to 2032-33.
ILLUSTRATION 18
Mr. Praveen engaged in retail trade, reports a turnover of ` 2,98,50,000 for the financial year
2024-25. Amount received in cash during the P.Y. 2024-25 is ` 14,00,000 and balance through
prescribed electronic modes on or before 31st July 2025. His income from the said business as per
books of account is ` 15,00,000 computed as per the provisions of Chapter IV-D “Profits and gains
from business or Profession” of the Income-tax Act, 1961. Retail trade is the only source of income
for Mr. Praveen. A.Y. 2024-25 was the first year for which he declared his business income in
accordance with the provisions of presumptive taxation u/s 44AD.

(i) Is Mr. Praveen also eligible for presumptive determination of his income chargeable to tax
for the assessment year 2025-26?
(ii) If so, determine his income from retail trade as per the applicable presumptive provision.
(iii) In case Mr. Praveen wants to declare profits as per books of account from retail trade, what
are his obligations under the Income-tax Act, 1961?
(iii) What is the due date for filing his return of income under both the options?
SOLUTION
(i) Yes. Since his cash receipts during the P.Y. does not 5% of the total turnover
(14,00,000/2,98,50,000 x 100) and his total turnover for the F.Y.2024-25 is below ` 300
lakhs, he is eligible for presumptive taxation scheme under section 44AD in respect of his
retail trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under section 44AD,
would be ` 18,19,000 (` 1,12,000, being 8% of ` 14,00,000 + ` 17,07,000, being 6% of
` 2,84,50,000).

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(iii) Mr. Praveen had declared profit for the previous year 2023-24 in accordance with the
presumptive provisions and if he wants to declare profits as per books of account which is
lower than the presumptive income for any of the five consecutive assessment years i.e.,
A.Y. 2025-26 to A.Y. 2029-30, he would not be eligible to claim the benefit of presumptive
taxation for five assessment years subsequent to the assessment year relevant to the
previous year in which the profit has not been declared in accordance the presumptive
provisions i.e. if he declares profits lower than the presumptive income in say P.Y. 2024-25
relevant to A.Y.2025-26, then, he would not be eligible to claim the benefit of presumptive
taxation for A.Y. 2026-27 to A.Y. 2030-31.
Consequently, Mr. Praveen is required to maintain the books of accounts and get them
audited under section 44AB, since his income exceeds the basic exemption limit.

(iv) In case he declares presumptive income under section 44AD, the due date would be 31st
July, 2025.
In case he declares profits as per books of account which is lower than the presumptive
income, he is required to get his books of account audited, in which case the due date for
filing of return of income would be 31st October, 2025.
ILLUSTRATION 19
Mr. X commenced the business of operating goods vehicles on 1.4.2024. He purchased the following
vehicles during the P.Y.2024-25. Compute his income under section 44AE for A.Y.2025-26.
Gross Vehicle Weight Number Date of purchase
(in kilograms)
(1) 7,000 2 10.04.2024
(2) 6,500 1 15.03.2025
(3) 10,000 3 16.07.2024
(4) 11,000 1 02.01.2025
(5) 15,000 2 29.08.2024
(6) 15,000 1 23.02.2025

Would your answer change if the two goods vehicles purchased in April, 2024 were put to use only
in July, 2024?
SOLUTION
Since Mr. X does not own more than 10 vehicles at any time during the previous year 2024-25, he
is eligible to opt for presumptive taxation scheme under section 44AE. ` 1,000 per ton of gross

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.181

vehicle weight or unladen weight per month or part of the month for each heavy goods vehicle and
` 7,500 per month or part of month for each goods carriage other than heavy goods vehicle,
owned by him would be deemed as his profits and gains from such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000
kg.
(1) (2) (3) (4)
Number of Date of No. of months for which No. of months × No. of
Vehicles purchase vehicle is owned vehicles [(1) × (3)]
Heavy goods vehicle
2 29.08.2024 8 16
1 23.02.2025 2 2
18
Goods vehicle other than heavy goods vehicle
2 10.4.2024 12 24
1 15.3.2025 1 1
3 16.7.2024 9 27
1 2.1.2025 3 3
55

The presumptive income of Mr. X under section 44AE for A.Y.2025-26 would be -
` 6,82,500, i.e., 55 × ` 7,500, being for other than heavy goods vehicle + 18 x ` 1,000 x 15 ton
being for heavy goods vehicle.
The answer would remain the same even if the two vehicles purchased in April, 2024 were put to
use only in July, 2024, since the presumptive income has to be calculated per month or part of the
month for which the vehicle is owned by Mr. X.

3.14 METHOD OF COMPUTING DEDUCTION IN THE CASE

OF BUSINESS REORGANISATION OF CO-
OPERATIVE BANKS [SECTION 44DB]
(1) This section provides the manner in which the deduction under the following sections are to
be allowed in a case where business reorganisation of a co-operative bank has taken place
during the financial year –

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(i) Section 32 (Depreciation);

(ii) Section 35D (Amortisation of certain preliminary expenses);
(iii) Section 35DD (Amortisation of expenses in case of amalgamation or demerger);
(iv) Section 35DDA (Amortisation of expenditure incurred under voluntary retirement
scheme).
(2) Quantum of Deduction to predecessor co-operative bank: The amount of deduction
allowable to the predecessor co-operative bank under the above-mentioned sections has to
be determined in accordance with the following formula-
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank if the
business reorganisation had not taken place;
B= the number of days comprised in the period beginning with the 1st day of the
financial year and ending on the day immediately preceding the date of business
reorganisation; and
C= the total number of days in the financial year in which the business reorganisation
has taken place.
(3) Quantum of Deduction to successor co-operative bank or to the converted banking
company: The amount of deduction allowable to the successor co-operative bank or to the
converted banking company under the above-mentioned sections has to be determined in
accordance with the formula -
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank if the
business reorganisation had not taken place;
B= the number of days comprised in the period beginning with the date of business
reorganisation and ending on the last day of the financial year; and
C= the total number of days in the financial year in which the business reorganisation has
taken place.

Example:
Let us take a case where the deduction allowable under section 32 to the predecessor co-
operative bank is, say, ` 1,20,000 and the business re-organisation took place on
1.11.2024. Then, the deduction allowable to the predecessor co-operative bank under
section 32 would be ` 70,356 i.e., ` 1,20,000 x 214/365. The deduction allowable to the

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.183

successor co-operative bank or to the converted banking company would be ` 49,643 i.e.,
` 1,20,000 x 151/365.

(4) Manner for computing deduction: In a case where an undertaking of the predecessor co-
operative bank entitled to the deduction under sections 35D, 35DD or 35DDA is transferred
before the expiry of the period specified therein to a successor co-operative bank or to a
converted banking company on account of business reorganisation, the provisions of
section 35D, section 35DD or section 35DDA shall apply to the successor co-operative
bank or to converted banking company in the financial years subsequent to the year of
business reorganisation as they would have applied to the predecessor co-operative bank,
as if the business reorganisation had not taken place.
(5) Meaning of certain terms:
Term Meaning
Business The reorganisation of business involving the amalgamation or
reorganisation demerger of a co-operative bank or conversion of a primary co-
operative bank.
Conversion Transition of a primary co-operative bank to a banking company
under the scheme of the RBI as notified vide its circular no.
DCBR. CO. LS. PCB. Cir. No. 5/07.01.000/2018-19, dated
27.09.2018.
Converted A banking company formed as a result of conversion from primary
banking company co-operative bank.
Co-operative The meaning assigned to it in clause (cci) of section 5 of the
bank Banking Regulation Act, 1949 i.e., a primary co-operative bank or
Central Co-operative bank or a State co-operative bank.
Banking company The meaning assigned to it in clause (c) of section 5 of the
Banking Regulation Act, 1949 i.e., any company which transacts
the business of banking in India.
Predecessor co- The amalgamating co-operative bank or the demerged co-
operative bank operative bank or primary co-operative bank which has been
succeeded as a result of conversion, as the case may be.
Primary co- The meaning assigned to it in clause (ccv) of section 5 of the
operative bank Banking Regulation Act, 1949 i.e., a co-operative society, other
than a primary agricultural credit society –
(i) the primary object or principal business of which is the
transaction of banking business;
(ii) the paid-up share capital and reserves of which are not less
than ` 1 lakh; and

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(iii) The bye-laws of which do not permit admission of any other

co-operative society as a member. However, it shall not
apply to the admission of a co-operative bank as a member
by reason of such co-operative bank subscribing to the
share capital of such co-operative society out of funds
provided by the State Government for this purpose.
Successor co- the amalgamated co-operative bank or the resulting bank, as the
operative bank case may be.
Amalgamated co- (1) a co-operative bank with which one or more amalgamating
operative bank co-operative banks merge; or
(2) a co-operative bank formed as a result of merger of two or
more amalgamating co-operative banks.
Amalgamating co- (1) a co-operative bank which merges with another co-operative
operative bank bank; or
(2) every co-operative bank merging to form a new co-operative
bank.
Amalgamation the merger of an amalgamating co-operative bank or banks with
an amalgamated co-operative bank, in such a manner that –
(1) all the assets and liabilities of the amalgamating co-
operative bank or banks immediately before the merger
(other than the assets transferred, by sale or distribution
on winding up, to the amalgamated co-operative bank)
become the assets and liabilities of the amalgamated co-
operative bank;
(2) the members holding 75% or more voting rights in the
amalgamating co-operative bank become members of the
amalgamated co-operative bank; and
(3) the shareholders holding 75% or more in value of the shares
in the amalgamating co-operative bank (other than the shares
held by the amalgamated co-operative bank or its nominee or
its subsidiary, immediately before the merger) become
shareholders of the amalgamated co-operative bank.
Demerger The transfer by a demerged co-operative bank of one or more of its
undertakings to any resulting co-operative bank, in such manner
that-
(1) all the assets and liabilities of the undertaking or
undertakings immediately before the transfer become the
assets and liabilities of the resulting co-operative bank;
(2) the assets and the liabilities are transferred to the resulting
co-operative bank at values (other than change in the
value of assets consequent to their revaluation) appearing
in its books of account immediately before the transfer;

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.185

(3) the resulting co-operative bank issues, in consideration of

the transfer, its membership to the members of the
demerged co-operative bank on a proportionate basis;
(4) the shareholders holding 75% or more in value of the
shares in the demerged co-operative bank (other than
shares already held by the resulting bank or its nominee or
its subsidiary immediately before the transfer), become
shareholders of the resulting co-operative bank, otherwise
than as a result of the acquisition of the assets of the
demerged co-operative bank or any undertaking thereof by
the resulting co-operative bank;
(5) the transfer of the undertaking is on a going concern basis; and
(6) the transfer is in accordance with the conditions specified
by the Central Government, by notification in the Official
Gazette, having regard to the necessity to ensure that the
transfer is for genuine business purposes.
Demerged co- the co-operative bank whose undertaking is transferred, pursuant
operative bank to a demerger, to a resulting bank.
Resulting co- (1) one or more co-operative banks to which the undertaking
operative bank of the demerged co-operative bank is transferred in a
demerger; or
(2) any co-operative bank formed as a result of demerger.

ILLUSTRATION 20
Alpha Co-operative Bank amalgamated with Beta Co-operative Bank on 1.12.2024. The
depreciation for the year ended 31.3.2025 calculated as per Income-tax Rules, 1962, allowable to
Alpha Co-operative Bank had the amalgamation had not taken place amounts to ` 2,40,000.
Compute the deduction on account of depreciation allowable in the hands of Alpha Co-operative
Bank and Beta Co-operative Bank for A.Y. 2025-26.
SOLUTION
(i) The amount of deduction allowable to the amalgamating co-operative bank (i.e. Alpha Co-
operative bank, in this case) under section 32 has to be determined in accordance with the
following formula -
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank (i.e. Alpha
Co-operative bank, in this case) if the business reorganisation had not taken place.
In this case, the amount of deduction is ` 2,40,000.

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B= the number of days comprised in the period beginning with the 1st day of the
financial year (i.e., 1.4.2024, in this case) and ending on the day immediately
preceding the date of business reorganization (i.e., 30.11.2024, in this case); and
C= the total number of days in the financial year in which the business reorganisation
has taken place (i.e., 365 days).

(ii) The amount of deduction allowable to the amalgamated co-operative bank (i.e. Beta Co-
operative bank, in this case) under section 32 has to be determined in accordance with the
formula -
B
A×
C
A= the amount of deduction allowable to the predecessor co-operative bank (i.e. Alpha
Co-operative bank, in this case) if the business reorganisation had not taken place.
In this case, the amount of deduction is ` 2,40,000.
B= the number of days comprised in the period beginning with the date of business
reorganisation (i.e. 1.12.2024, in this case) and ending on the last day of the
financial year (i.e. 31.3.2025); and
C= the total number of days in the financial year in which the business reorganisation
has taken place (i.e. 365 days).
(iii) In this case, the deduction that would have been allowable under section 32 to Alpha co-
operative bank had the business reorganization had not taken place is ` 2,40,000 and the
business re-organisation took place on 1.12.2024. Therefore, the deduction allowable to Alpha
co-operative bank under section 32 would be `1,60,438 i.e., ` 2,40,000 x 244/365. The
deduction allowable to Beta co-operative bank would be ` 79,562 i.e., ` 2,40,000 x 121/365.

3.15 COMPUTATION OF BUSINESS INCOME IN CASES

WHERE INCOME IS PARTLY AGRICULTURAL AND
PARTLY BUSINESS IN NATURE
(1) Income from the manufacture of rubber [Rule 7A]
(i) Income derived from the sale of centrifuged latex or cenex or latex based crepes or
brown crepes or technically specified block rubbers manufactured or processed from
field latex or coagulum obtained from rubber plants grown by the seller in India shall

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be computed as if it were income derived from business, and 35% of such income
shall be deemed to be income liable to tax.

(ii) In computing such income, an allowance shall be made in respect of the cost of
planting rubber plants in replacement of plants that have died or become
permanently useless in an area already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost, no deduction shall be
made in respect of the amount of any subsidy which, under the provisions of clause
(31) of section 10, is not includible in the total income.

(2) Income from the manufacture of coffee [Rule 7B]

(i) Income derived from the sale of coffee grown and cured by the seller in India shall
be computed as if it were income derived from business, and 25% of such income
shall be deemed to be income liable to tax.
(ii) Income derived from the sale of coffee grown cured, roasted and grounded by the
seller in India, with or without mixing of chicory or other flavouring ingredients, shall
be computed as if it were income derived from business, and 40% of such income
shall be deemed to be income liable to tax.
(iii) In computing such income, an allowance shall be made in respect of the cost of
planting coffee plants in such replacement of plants that have died or become
permanently useless in an area already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost, no deduction shall be
made in respect of the amount of any subsidy which, under the provisions of section
10(31), is not includible in the total income.
(3) Income from the manufacture of tea [Rule 8]
(i) Income derived from the sale of tea grown and manufactured by the seller in India
shall be computed as if it were income derived from business, and 40% of such
income shall be deemed to be income liable to tax.

(ii) In computing such income, an allowance shall be made in respect of the cost of
planting bushes in replacement of bushes that have died or become permanently
useless in an area already planted, if such area has not previously been abandoned,
and for the purpose of determining such cost, no deduction shall be made in respect
of the amount of any subsidy which, under the provision of section 10(30), is not
includible in the total income.

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Taxability in case of composite income: A Summary

Rule Nature of composite income Business Agricultur
income al Income
(Taxable) (Exempt)
7A Income from sale of rubber products derived 35% 65%
from rubber plants grown by the seller in India
7B Income from sale of coffee
- grown and cured by the seller in India 25% 75%
- grown, cured, roasted and grounded by the
seller in India 40% 60%
8 Income from sale of tea grown and 40% 60%
manufactured by the seller in India

ILLUSTRATION 21
Miss Vivitha, a resident and ordinarily resident in India, has derived the following income from
various operations (relating to plantations and estates owned by her) during the year ended
31-3-2025:
S. No. Particulars `
(i) Income from sale of centrifuged latex processed from rubber plants 3,00,000
grown in Darjeeling.
(ii) Income from sale of coffee grown and cured in Yercaud, Tamil Nadu. 1,00,000
(iii) Income from sale of coffee grown, cured, roasted and grounded, in 2,50,000
Colombo. Sale consideration was received at Chennai.
(iv) Income from sale of tea grown and manufactured in Shimla. 4,00,000
(v) Income from sapling and seedling grown in a nursery at Cochin. Basic 80,000
operations were not carried out by her on land.

You are required to compute the business income and agricultural income of Miss Vivitha for the
assessment year 2025-26.
SOLUTION

Computation of business income and agricultural income of Ms. Vivitha for the A.Y.2025-26
Sr. Source of income Gross Business Agricultural
No. (`) income income
% ` `
(i) Sale of centrifuged latex from rubber 3,00,000 35% 1,05,000 1,95,000
plants grown in India.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.189

(ii) Sale of coffee grown and cured in India. 1,00,000 25% 25,000 75,000
(iii) Sale of coffee grown, cured, roasted and 2,50,000 100% 2,50,000 -
grounded outside India. (See Note 1
below)
(iv) Sale of tea grown and manufactured in 4,00,000 40% 1,60,000 2,40,000
India
(v) Saplings and seedlings grown in nursery
in India (See Note 2 below) 80,000 Nil 80,000
Total 5,40,000 5,90,000
Notes:
1. Where income is derived from sale of coffee grown, cured, roasted and grounded by the
seller in India, 40% of such income is taken as business income and the balance as
agricultural income. However, in this question, these operations are done in Colombo,
Sri Lanka. Hence, there is no question of such apportionment and the whole income is
taxable as business income. Receipt of sale proceeds in India does not make this
agricultural income. In the case of an assessee, being a resident and ordinarily resident, the
income arising outside India is also chargeable to tax.
2. Explanation 3 to section 2(1A) provides that the income derived from saplings or seedlings
grown in a nursery would be deemed to be agricultural income whether or not the basic
operations were carried out on land.

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SIGNIFICANT SELECT CASES

[Link]. Case Law

1. Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC);
Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500 (SC); and
Raj Dadarkar and Associates v. ACIT (2017) 394 ITR 592 (SC)

Issue Analysis & Decision

Would rental income from In Chennai Properties and Investments Ltd. v. CIT (2015)
the business of leasing out 373 ITR 673, the Supreme Court observed that holding of
properties be taxable the properties and earning income by letting out of these
under the head “Income properties is the main objective of the company. Further, in
from house property” or the return of income filed by the company and accepted by
“Profits and gains from the Assessing Officer, the entire income of the company
business or profession”? comprised of income from letting out of such properties. The
Supreme Court, accordingly, held that such income was
taxable as business income. Likewise, in Rayala Corporation
(P) Ltd. v. Asst. CIT (2016) 386 ITR 500, the Supreme Court
noted that the assessee was engaged only in the business of
renting its properties and earning rental income therefrom
and accordingly, held that such income was taxable as
business income. However, in Raj Dadarkar and Associates
v. ACIT (2017) 394 ITR 592, on account of lack of sufficient
material to prove that substantial income of the assessee
was from letting out of property, the Supreme Court held that
the rental income has to be assessed as “Income from house
property”.
Note: The Finance (No. 2) Act, 2024 inserted an Explanation
3 to section 28 and clarified that the income from letting out
of a residential house or a part of the house by the owner
would be chargeable to tax under the head “Income from
house property” and will no longer be considered under the
head “Profits and gains of business or profession” even
though the main business of the assessee is to let out

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the residential house properties. Accordingly, the rationale

of the above rulings hold good only in respect of letting out of
commercial properties.

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

Issue Analysis & Decision

Whether interest income The interest income from the deposits made by the assessee
on margin money is inextricably linked to the business of the assessee and
deposited with bank for such income, therefore, cannot be treated as income under
obtaining bank guarantee the head ‘Income from other sources’. The margin money
to carry on business, requirement was an essential element for obtaining the bank
taxable the head ‘Profits guarantee. If the assessee had not furnished bank
and Gains from Business guarantee, it would not have got the contract.
or Profession’ or under
Therefore, the interest income received on funds kept as
the head ‘Income from
margin money for obtaining the bank guarantee would be
other sources?
taxable under the head “Profits and gains of business or
profession”.

3. I.C.D.S. Ltd. v. CIT (2013) 350 ITR 527 (SC)

Issue Analysis & Decision

Can depreciation on Section 32 imposes a twin requirement of “ownership” and

leased vehicles be denied “usage for business” as conditions for claim of depreciation
to the lessor on the ground thereunder. As far as usage of the asset is concerned, the
that the vehicles are section requires that the asset must be used in the course of
registered in the name of business. It does not mandate actual usage by the assessee
the lessee and that the itself. In this case, the assessee did use the vehicles in
lessor is not the actual the course of its leasing business. Hence, this
user of the vehicles? requirement of section 32 has been fulfilled,
notwithstanding the fact that the assessee was not the
actual user of the vehicles.

As long as the assessee-lessor has a right to retain the legal

title against the rest of the world, he would be the owner of
the asset in the eyes of law. In this regard, the following
provisions of the lease agreement are noteworthy –

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• The assessee is the exclusive owner of the vehicle at all

points of time;
• The assessee is empowered to repossess the vehicle, in
case the lessee committed a default;
• At the end of the lease period, the lessee was obliged to
return the vehicle to the assessee;
• The assessee had a right of inspection of the vehicle at
all times.
The proof of ownership lies in the lease agreement itself,
which clearly points in favour of the assessee. The
assessee-lessor was, therefore, entitled to claim
depreciation in respect of vehicles leased out since it
has satisfied both the requirements of section 32,
namely, ownership of the vehicles and its usage in the
course of business.

4. CIT v. BSES Yamuna Powers Ltd (2013) 358 ITR 47 (Delhi)

CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 0049 (Delhi)
Federal Bank Ltd. v. ACIT (2011) 332 ITR 319 (Kerala)

Issue Analysis & Decision

What is the eligible rate of Computer accessories and peripherals such as

depreciation in respect of printers, scanners and server etc. form an integral
computer accessories, part of the computer system and they cannot be used
peripherals and UPS without the computer. Since they are part of the
under the Income-tax Act, computer system, they would be eligible for
1961? depreciation at the higher rate of 40% applicable to
computers including computer software.
Depreciation on UPS is allowable@40%, being the
eligible rate of depreciation on computers including
computer software, and not at the general rate of 15%
applicable to plant and machinery.

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Can EPABX and mobile EPABX and mobile phones are not computers and
phones be treated as therefore, are not entitled to higher depreciation@40%.
computers to be entitled to
higher depreciation?

5. CIT v. Ceebros Hotels Private Limited [2018] 409 ITR 423 (Mad)

Issue Analysis & Decision

Can an assessee setting As the application for three star category classification was
up a hotel claim deduction granted with no discrepancy during inspection, the assessee
under section 35AD for the could not be penalised for the delay on the part of the
relevant previous year, on concerned authority (the Hotel and Restaurant Approval and
the basis that it had Classification Committee, in the instant case) to complete
commenced its operations inspection before the end of the financial year. Under section
and made an application 35AD, deduction is available from the previous year in which
for three-star category the assessee commences operation of the specified
classification in beginning business i.e., hotel business, in this case. Section 35AD
of the said previous year, does not mandate that the date of the certificate has to be
even though the same was with effect from a particular date.
granted by the authority
Thus, the assessee is entitled to claim the deduction under
only in the next year due
section 35AD for the relevant previous year, since the
to the requirement of
provision which was introduced to encourage the
completion of inspection?
establishment of hotels of a particular category is a beneficial
provision, and hence, should be read and interpreted liberally.

6. Berger Paints India Ltd v. CIT (2017) 393 ITR 113 (SC)

Issue Analysis & Decision

Whether “premium” on Share premium collected by the assessee on its subscribed

subscribed share capital is issued share capital could not be part of “capital employed
“capital employed in the in the business of the company” for the purpose of section
business of the company” 35D(3)(b). If it were the intention of the legislature to treat
u/s 35D to be eligible for a share premium as being “capital employed in the business
deduction? of the company”, it would have been explicitly mentioned.
Moreover, Sl. No. IV(i) in Form MGT- 7 read with section 92
of the Companies Act, 2013 dealing with capital structure of
the company provides the break-up of “issued share

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capital” and “subscribed share capital” which does not

include share premium at the time of subscription. Hence,
in the absence of the reference in section 35D, share
premium is not a part of the capital employed. Also,
section 52 of the Companies Act, 2013 requires a company
to transfer the premium amount to be kept in a separate
account called “securities premium account”. The
assessee is, therefore, not entitled to claim deduction
u/s 35D in relation to the premium amount received
from shareholders at the time of share subscription.

7. Shasun Chemicals & Drugs Ltd v. CIT (2016) 388 ITR 1 (SC)

Issue Analysis & Decision

In a case where payment The embargo contained in section 43B(b) or section
of bonus due to 40A(9) does not come in the way of the assessee’s
employees is paid to a claim, since the bonus was ultimately paid to the
trust and such amount is employees before the due date as per the statutory
subsequently paid to the requirement. Therefore, the payment in respect of bonus
employees before the is allowable as deduction.
stipulated due date, would
the same be allowable u/s
36(1)(ii) while computing
business income?

8. CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 49 (Delhi)

Issue Analysis & Decision

What is the nature of The expenditure on glow sign boards displayed at dealer
expenditure incurred on outlets is revenue in nature due to the following reasons-
glow-sign boards
(i) The expenditure incurred by the assessee on glow
displayed at dealer
sign boards does not bring into existence an asset or
outlets - capital or
advantage for the enduring benefit of the business,
revenue?
which is attributable to the capital.
(ii) The glow sign board is not an asset of permanent
nature. It has a short life.
(iii) The materials used in the glow sign boards decay
with the effect of weather. Therefore, it requires

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.195

frequent replacement. Consequently, the assessee

has to incur expenditure on glow sign boards
regularly in almost each year.
(iv) The assessee incurred expenditure on the glow sign
boards with the object of facilitating the business
operation and not with the object of acquiring asset of
enduring nature.

9. CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 (Kar.)

Issue Decision
Would the expenditure The expenditure incurred on the issue and collection of
incurred on issue and debentures would be treated as revenue expenditure even in
collection of convertible case of convertible debentures, i.e., the debentures which
debentures be treated as had to be converted into shares at a later date.
revenue expenditure or
capital expenditure?

10. CIT v. Priya Village Roadshows Ltd. (2011) 332 ITR 594 (Delhi)

Issue Analysis & Decision

Would expenditure incurred Since the feasibility studies were conducted by the assessee
on feasibility study for the existing business with a common administration and
conducted for examining common fund and the studies were abandoned without
proposals for technological creating a new asset, the expenses were of revenue nature.
advancement relating to
the existing business be
classified as a revenue
expenditure, where the
project was abandoned
without creating a new
asset?

11. National Co-operative Development Corporation v. CIT (2020) 427 ITR 288 (SC)

Issue Analysis & Decision

Is source of funds from In case of an assessee carrying on business, it is relevant

which expenditure is to see whether an outlay constitutes an expenditure “for
incurred for the purpose the purpose of business” as used in section 37(1), for the

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 3.196 DIRECT TAX LAWS

of business relevant for purpose of claiming deduction thereunder. The source of

the purpose of funds from which the expenditure is made is not
allowability of deduction relevant. Every application of income towards the
u/s 37(1)? business objective of the assessee is a business
expenditure. There can be an amount treated as a capital
receipt while the same amount expended may be a
revenue expenditure.

12. CIT v. Kap Scan and Diagnostic Centre P. Ltd. (2012) 344 ITR 476 (P&H)

Issue Analysis & Decision

Can the commission paid As per the Indian Medical Council (Professional Conduct,
to doctors by a diagnostic Etiquette and Ethics) Regulations, 2002, no physician shall
centre for referring give, solicit, receive, or offer to give, solicit or receive, any
patients for diagnosis be gift, gratuity, commission or bonus in consideration of a
allowed as a business return for referring any patient for medical treatment.
expenditure u/s 37 or
The demanding as well as paying of such commission is bad
would it be treated as
in law. It is not a fair practice and is opposed to public policy
illegal and against public
and should be discouraged. Thus, the commission paid to
policy to attract
doctors for referring patients for diagnosis is not
disallowance?
allowable as business expenditure.

13. Shanti Bhushan v. CIT (2011) 336 ITR 26 (Delhi)

Issue Analysis & Decision

Can the expenditure Though the definition of “plant” as per the provisions of
incurred on heart surgery section 43(3) is inclusive in nature, such plant must have
of an assessee, being a been used as a business tool which is not true in case of
lawyer by profession, be heart. Therefore, the heart cannot be said to be plant for
allowed as business the business or profession of the assessee. Therefore,
expenditure u/s 31, by the expenditure on heart surgery is not allowable as
treating it as current repairs to plant u/s 31.
repairs considering heart
Also, there is no direct nexus between the expenses
as plant and machinery, or
incurred by the assessee on the heart surgery and his
u/s 37, by treating it as
efficiency in the professional field. Therefore, the claim
expenditure incurred
for allowing the said expenditure u/s 37 is also not
wholly and exclusively for

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.197

the purpose of business or tenable. Hence, the heart surgery expenses shall not be
profession? allowed as a business expenditure of the assessee under the
Income-tax Act, 1961.

14. CIT v. Neelavathi & Others (2010) 322 ITR 643 (Karn)

Issue Analysis & Decision

Can payment to police Any payment made to the police illegally amounts to bribe
personnel and gundas to and such illegal gratification cannot be considered as an
keep away from the allowable deduction. Similarly, any payment to a gunda as
cinema theatres run by a precautionary measure so that he shall not cause any
the assessee be allowed disturbance in the theatre run by the assessee is an illegal
as deduction? payment for which no deduction is allowable under the Act.

15. Millennia Developers (P) Ltd. v. DCIT (2010) 322 ITR 401 (Karn.)

Issue Analysis & Decision

Is the amount paid by a The assessee, a private limited company carrying on

construction company as business activity as a developer and builder, claimed the
regularization fee for amount paid by way of regularization fee for the deviations
violating building bye-laws made while constructing a structure and for violating the plan
allowable as deduction? sanctioned in terms of the building bye-laws, approved by
the municipal authorities as per the provisions of the
Karnataka Municipal Corporations Act, 1976.
As per the provisions of the Karnataka Municipal
Corporations Act, 1976, the amount paid to compound
an offence is obviously a penalty and hence, does not
qualify for deduction u/s 37. Merely describing the
payment as a compounding fee would not alter the
character of the payment.

16. CIT v. Maruti Suzuki India Limited (2018) 407 ITR 165 (Del)

Issue Analysis & Decision

Can payments made by The non-resident agent who operated outside India did
an assessee to a non- not have any income arising in India. Accordingly, the
resident agent who does commission earned by a non- resident agent who was

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 3.198 DIRECT TAX LAWS

not have any income in the business of selling Indian goods abroad, did
assessable in India be not accrue or arise in India, and hence, no tax was
disallowed u/s 40(a)(i) for deductible on such commission payment to a non-
non-deduction of tax at resident agent.
source on the ground that
Since the assessee has made payment to a non-resident
no application was made
agent and such income is not chargeable to tax in India,
by the assessee u/s
section 40(a)(i) could not be invoked to disallow deduction
195(2) for making
of such payment for non-deduction of tax at source while
deduction of tax at
computing the business income of the assessee.
source at Nil rate?

17. CIT v. Great City Manufacturing Co. (2013) 351 ITR 156 (All)

Issue Analysis & Decision

Can remuneration paid to Section 40(b)(v) prescribes the limit of remuneration to

working partners as per working partners, and deduction is allowable up to such
the partnership deed be limit while computing the business income. If the
considered as remuneration paid is within the ceiling limit provided u/s
unreasonable and 40(b)(v), then, recourse to provisions of section
excessive for attracting 40A(2)(a) cannot be taken.
disallowance u/s
The Assessing Officer is only required to ensure that the
40A(2)(a), even though the
remuneration is paid to the working partners mentioned in
same is within the
the partnership deed, the terms and conditions of the
statutory limit prescribed
partnership deed provide for payment of remuneration to the
u/s 40(b)(v)?
working partners and the remuneration is within the limits
prescribed u/s 40(b)(v). If these conditions are complied
with, then, the Assessing Officer cannot disallow any part of
the remuneration on the ground that it is excessive by
invoking the provisions of section 40A(2)(a).

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.199

TEST YOUR KNOWLEDGE

Questions
1. Examine critically the following cases in the context of provisions contained in the Income-
tax Act, 1961 relevant for Assessment Year 2025-26. Support the answers with relevant
case laws and workings.
(a) Mr. Janak is proprietor of M/s. Yash Texnit which is engaged in garment
manufacturing business. The entire block of Plant & Machinery chargeable to
depreciation @ 15%, has 20 different machinery items as at 31-03-2025. One of the
machineries used for packing had become obsolete and was discarded by Mr. Janak
in July 24.

Assessee filed its return for A.Y. 2025-26 claiming total depreciation of ` 40 lakhs
which includes ` 4 lakhs being the depreciation claimed on the machinery item
discarded by Mr. Janak. The A.O. disallowed the claim of depreciation of ` 4 lakhs
during the course of scrutiny assessment.
Comment on the validity of action taken by A.O.
(b) X. Ltd. issued debentures in the previous year 2024-25, which were to be matured at
the end of 5 years. The debenture holder was given an option of one time upfront
payment of ` 60 per debenture on account of interest which was to be immediately
paid by the company. As per the option exercised by the debenture holders,
company paid interest upfront to them in the first year itself and the same was
claimed as deduction in the return of the company. But in the accounts, the interest
expenditure was shown as deferred expenditure to be written off over a period of 5
years. During the course of assessment, the Assessing Officer spread the upfront
interest paid over a period of five year term of debentures and allowed only one-fifth
of the amount in the previous year 2024-25. Examine the correctness of the action of
Assessing Officer.
2. Compute the quantum of depreciation available under section 32 of the Income-tax Act,
1961 in respect of the following items of Plant and Machinery purchased by PQR Textile
Ltd., by paying through account payee cheque, which is engaged in the manufacture of
textile fabrics, for the year ended 31-3-2025. Assume company does not opt for the
provisions of section 115BAA or section 115BAB:

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 3.200 DIRECT TAX LAWS

(` in crores)
New machinery installed on 1-5-2024 84
New Windmill purchased and installed on 18-6-2024 22
Lorries for transporting goods to sales depots (purchased and put to 3
use in July, 2024)
Items purchased after 30th November 2024:
Fork-lift-trucks, used inside factory 4
Computers installed in office premises 1
Computers installed in factory 2
New imported machinery 12

The new imported machinery arrived at Chennai port on 30-03-2025 and was installed on
3-4-2025. All other items were installed during the year ended 31-3-2025.
The company was newly started during the year.
Also, compute the WDV of the various blocks of assets as on 1.4.2025 after charging
depreciation for P.Y. 2024-25.
3. (A) Examine the taxability and/ or allowability of the following receipts or expenditures
under the provisions of the Income-tax Act, 1961, for the assessment year 2025-26:
(i) Secret commission was paid during the previous year 2024-25.
(ii) P Ltd. paid dollars equivalent to ` 50 lakhs as sales commission for the year
ended 31.03.2025, without deducting tax at source, to Mr. Rodrigues, a citizen
of UK and non-resident who acted as agent for booking orders, from various
customers who are outside India.
(B) Can the following transactions be covered under section 43B for disallowance?
(i) A bank guarantee given by a company towards disputed tax liabilities.
(ii) Interest payable to Goods and Services Tax Department but not paid before
the due date specified in section 139(1).
4. ILT Limited is engaged in manufacturing of pipes and tubes. The profit and loss account of
the company for the year ended 31st March, 2025 shows a net profit of ` 405 lakhs. The
following information and particulars are furnished to you. You are required to compute total
income of the company for Assessment Year 2025-26 indicating reasons for treatment of
each item, assuming that the company has not opted for special provisions under section
115BAA or 115BAB.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.201

(i) A group free air ticket was provided by a supplier for reaching a certain volume of
purchase during the financial year 2024-25. The same is encashed by the company
for ` 10 lakhs in April 2024 and credited to General Reserve Account.
(ii) A regular supplier of raw materials agreed for settlement of ` 8 lakhs instead of ` 10
lakhs for poor quality of material supplied during the previous year which was not
given effect in the running account of the supplier.
(iii) Andhra Bank sanctioned and disbursed a term loan in the financial year 2021-22 for a
sum of ` 50 lakhs. Interest of ` 8 lakhs was in arrears. The bank has converted the
arrear interest into a new loan repayable in 10 equal instalments. During the year, the
company has paid 2 instalments and the amount so paid has been reduced from Funded
Interest in the Balance Sheet.

(iv) The company remitted ` 5 lakhs as interest to a company incorporated in USA on a

loan taken 2 years ago. Tax deducted under section 195 from such interest has been
deposited by the company on 15th July, 2025. The said interest was debited to profit
and loss account.
(v) Sandeep, a sales executive stationed at HO at Delhi, was on official tour in
Bangalore from 31st May, 2024 to 18th June, 2024 and 28th September, 2024 to 15th
October, 2024 for the business development. The company has paid Sandeep's
salary in cash, from its local office at Bangalore for the month of May, 2024 (payable
on 1st June) and September 2024 (payable on 1st October), amounting to ` 45,000
and ` 47,000 respectively (net of TDS and other deduction), as Sandeep has no
bank account at Bangalore. These were included in the amount of “salary” debited to
Profit and Loss Account.
(vi) The company has contributed ` 50,000 by account payee cheque to an electoral
trust and the same stands included under the head "General Expenses".
5. G Ltd., a company in which public are substantially interest, is engaged in the business of
growing and manufacturing tea in India. For the previous year ended 31.03.2024, its
composite business profits before allowing deduction u/s 33AB is ` 60,00,000. On
01.09.2024, it deposited a sum of ` 11,00,000 in the Tea Development Account. During the
previous year 2022-23, G Ltd. had incurred a business loss of ` 14,00,000 which has been
carried forward. On 25.01.2025, it withdrew ` 10 lakhs, from deposit account which is
utilized as under:

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 3.202 DIRECT TAX LAWS

` 6,00,000 for purchase on non-depreciable asset as per the scheme specified.

` 3,00,000 for purchase of machinery to be installed in the office premises.
` 1,00,000 was spent for the purpose of scheme on 5.4.2025.
(i) You are required to determine business income of G Ltd. and the tax consequences
that may arise from the above transactions in the A.Y. 2025-26.
(ii) What will be the consequence if the asset which was purchased for ` 6,00,000 is
sold for ` 8,00,000 in April, 2025.
6. The trading and profit and loss account of Pingu Trading Pvt. Ltd. having business of
agricultural produce, consumer items and other products for the year ended 31.03.2025 is
as under:
Trading Account

Particulars ` Particulars `
Opening Stock 3,75,000 Sales 1,55,50,000
Purchases 1,25,75,000 Closing Stock 4,50,000
Freight & Cartage 1,26,000
Gross profit 29,24,000
1,60,00,000 1,60,00,000

Profit and Loss Account

Particulars ` Particulars `
Bonus to staff 47,500 Gross profit 29,24,000
Rent of premises 53,500 Income-tax refund 20,000
Advertisement 5,000 Warehousing charges 15,00,000
Bad Debts 75,000
Interest on loans 1,67,500
Depreciation 71,500
Goods and Services tax 1,08,350
demand paid
Miscellaneous expenses 5,25,650
Net profit of the year 33,90,000
44,44,000 44,44,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.203

On scrutiny of records, the following further information and details were extracted/
gathered:

(i) There was a survey under section 133A on the business premises on 31.3.2025 in
which it was revealed that the value of closing stocks of 31.3.2024 was ` 8,75,000
and a sale of ` 75,000 made on 13.3.2025 was not recorded in the books. The value
of closing stocks after considering these facts and on the basis of inventory prepared
by the department as on 31.3.2025 worked out at ` 12,50,000, which was accepted
to be correct and not disputed.
(ii) Income-tax refund includes amount of ` 4,570 of interest allowed thereon.
(iii) Bonus to staff includes an amount of ` 7,500 paid in the month of December 2024,
which was provided in the books on 31.03.2024.
(iv) Rent of premises includes an amount of ` 5,500 incurred on repairs. The assessee
was under no obligation to incur such expenses as per rent agreement.
(v) Advertisement expenses include an amount of ` 2,500 paid for advertisement
published in the souvenir issued by a political party. The payment is made by way of
an account payee cheque.
(vi) Miscellaneous expenses include:
(a) amount of ` 15,000 paid towards penalty for non-fulfillment of delivery
conditions of a contract of sale for the reasons beyond control,
(b) amount of ` 1,00,000 paid to the wife of a director, who is working as junior
lawyer for taking an opinion on a disputed matter. The junior advocate of High
Courts normally charge only ` 25,000 for the same opinion,
(c) amount of ` 1,00,000 paid to an Electoral Trust by cheque.

(vii) Goods and Services Tax demand paid includes an amount of ` 5,300 charged as
penalty for delayed filing of returns and ` 12,750 towards interest for delay in deposit
of tax.

(viii) The company had made an investment of ` 25 lakhs on the construction of a

warehouse in rural area for the purpose of storage of agricultural produce. This was
made available for use from 15.09.2024 and the income from this activity is credited
in the Profit and Loss account under the head “Warehousing charges”.
(ix) Depreciation under the Income-tax Act, 1961 works out at ` 65,000.

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(x) Interest on loans includes an amount of ` 80,000 paid to Mr. X, a resident, on which
tax was not deducted.

Compute the income chargeable to tax for assessment year 2025-26 of Pingu Trading Pvt.
Ltd, ignoring MAT and provisions of section 115BAA. Support your answer with working
notes.

7. (a) A Ltd. paid IDBI (a public financial institution) a lump sum pre-payment premium of
` 1.2 lakhs on 7.4.2024 for restructuring its debts and reducing its rate of interest. It
claimed the entire sum as business expenditure for the P.Y.2024-25. The Assessing
Officer, however, held that the pre-payment premium should be amortised over a
period of 10 years (being the tenure of the restructured loan), and thus, allowed only
10% of the pre-payment premium in the P.Y.2024-25. Discuss, with reasons, whether
the contention of A Ltd. is correct or that of the Assessing Officer.
(b) Explain the tax treatment of emergency spares (of plant and machinery) acquired
during the year which, even though kept ready for use, have not actually been used
during the relevant previous year.
8. “Easy Call Ltd.”, to provide telecom services in Mumbai, obtained a licence on 1.4.2022 for
a period of 10 years ending on 31.3.2032 against a fee of ` 27 lakhs to be paid in 3
installments of ` 9 lakhs each by April, 2022, April, 2023 and April, 2024, respectively. The
company has commenced business on 1.4.2023.
Explain, how the payment made for licence fee shall be dealt with under the Income-tax
Act, 1961 and the amount, if any, deductible for A.Y. 2025-26.
9. Alpha Ltd., a manufacturing company, has disclosed a net profit of ` 12.50 lakhs for the
year ended 31st March, 2025. You are required to compute the taxable income (ignore the
provisions of section 115BAA) of the company for the Assessment year 2025-26, after
considering the following information, duly explaining the reasons for each item of
adjustment:

(i) Advertisement expenditure debited to profit and loss account includes the sum of
` 60,000 paid in cash to the sister concern of a director, the market value of which is
` 52,000.
(ii) Repairs of plant and machinery debited to profit and loss account includes ` 1.80
lakhs towards replacement of worn out parts of machineries. Such expenditure does
not increase the future benefit from the asset beyond its previously assessed
standard of performance.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.205

(iii) A sum of ` 6,000 on account of liability foregone by a creditor has been taken to
general reserve. The original purchases was debited to the Profit & Loss Account in
the A.Y.2020-21.
(iv) Sale proceeds of import entitlements amounting to ` 1 lakh has been credited to
Profit & Loss Account, which the company claims as capital receipt not chargeable to
income-tax.
(v) Being also engaged in the biotechnology business, the company incurred the
following expenditure on in-house research and development as approved by the
prescribed authority:
(a) Research equipments purchased ` 1,50,000.
(b) Remuneration paid to scientists ` 50,000.

The total amount of ` 2,00,000 is debited to the profit and loss account.
10. (i) A corporation was set up by the State Government transferring all the buses owned
by it for a consideration of ` 75 lakhs, which was discharged by the Corporation by
issue of equity shares. The Corporation in its assessment claimed depreciation. Can
the depreciation be denied in the Corporation’s hands on the ground that there was
no registration of the buses in favour of the Corporation?

(ii) Ravi succeeded to his father’s business in the year 2022. In the previous year ended
31.3.2025, Ravi has written off the balance in the name of ‘Y’ which relates to supply
made by his father, when he carried on business. Ravi desires to know whether the
write off could be eligible for deduction.
Answers
1. (a) The issue under consideration is whether disallowance of depreciation made by the
Assessing Officer with regard to the discarded asset, in arriving at the written down
value of the block of assets, is justified.

One of the conditions for claim of depreciation under section 32 is that the eligible
asset must have been put to use for the purpose of business or profession.
The other aspect to considered is whether merely discarding an obsolete machinery,
which is physically available, will attract the expression “moneys payable” appearing
in section 43(6), so as to deduct its value from the written down value of the block.

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The facts in the present case are similar to facts in the case of CIT v. Yamaha Motor
India Pvt. Ltd. (2010) 328 ITR 297, wherein the Delhi High Court observed that the
expression "used for the purposes of the business" in section 32 when used with
respect to discarded machinery would mean the use in the business, not only in the
relevant financial year/previous year, but also in the earlier financial years.
The discarded machinery may not be actually used in the relevant previous year but
depreciation can be claimed as long as it was used for the purposes of business in
the earlier years provided the block continues to exist in the relevant previous year.
Therefore, the condition for claiming depreciation in respect of the discarded
machine would be satisfied if it was used in the earlier previous years for the
business.
For the purpose of section 43(6), “moneys payable” means the sale price, in case of
sale, or the insurance, salvage or compensation moneys payable in respect of the
asset. In this case, the machinery has not been sold as machinery or scrap or
disposed off, and it continues to exist. Hence, there is no “moneys payable” in this
case, which alone is deductible while computing the WDV of the block to which it
belongs.
Applying the rationale of the above case, the action of the Assessing Officer in
disallowing ` 4 lakhs, being the depreciation claim attributable to discarded
machinery, on the ground that the same was not put to use in the relevant previous
year, is invalid, since the said machinery was put to use in the earlier previous years.
(b) The issue under consideration is whether, in a case where debentures are issued
with maturity at the end of five years, and the debenture holders are given an option
of upfront payment of interest in the first year itself, can the entire upfront interest
paid, be claimed as deduction by the company in the first year or should the same be
deferred over a period of five years; and would the treatment of such interest as
deferred revenue expenditure in the books of account have any impact on the tax
treatment.
The facts of the case are similar to the facts in Taparia Tools Ltd. v. JCIT (2015) 372
ITR 605, wherein the above issue came up before the Supreme Court. In that case,
it was observed that under section 36(1)(iii), the amount of interest paid in respect of
capital borrowed for the purposes of business or profession, is allowable as
deduction.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.207

The moment the option for upfront payment was exercised by the subscriber, the
liability of X Ltd. to make the payment in that year had arisen. Not only had the
liability arisen in the previous year in question, it was even quantified and discharged
as well in that very year.
As per the rationale of the Supreme Court ruling in Taparia Tools Ltd.’s case, when
the deduction of entire upfront payment of interest is allowable as per the Income-tax
Act, 1961, the fact that a different treatment was given in the books of account could
not be a factor which would bar the company from claiming the entire expenditure as
a deduction.
Accordingly, the action of the Assessing Officer in spreading the upfront interest paid
over the five year term of debentures and restricting the deduction in the P.Y.2024-25
to one-fifth of the upfront interest paid is not correct. The company is eligible to claim
the entire amount of interest paid upfront as deduction under section 36(1)(iii) in the
P.Y.2024-25.
2. Computation of depreciation allowance under section 32 for the A.Y. 2025-26
Particulars Normal Additional
Depreciati- Depreciati-
on [u/s on [u/s
32(1)(ii)] 32(1)(iia)]
(` in crores)
(A) Plant and Machinery (15% block) (Put to use for
180 days or more)
- New machinery installed on 01.05.2024 84.00 84.00
- Lorries for transporting goods to depots 3.00 -
87.00 84.00
Normal Depreciation @15% & additional deprecation 13.05 16.80
@20%
(B) Plant and Machinery (15% block) (Put to use for
less than 180 days – hence, depreciation is
restricted to 7.5%, being 50% of 15%)
- Fork-lift trucks, used inside a factory 4.00 4.00
Normal Depreciation @ 7.5% & additional 0.30 0.40
depreciation @10%

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(C) Plant and Machinery (40% block) (Put to use for

less than 180 days, hence depreciation
restricted to 20%, i.e., 50% of 40%)
- Computers installed in office premises 1.00 -
- Computers installed in factory 2.00 2.00
3.00 2.00
Normal depreciation @20% & additional 0.60 0.20
depreciation@10%
(D) Plant and Machinery (40% block) (Put to use for
180 days or more) (See Note 1)
- New windmill purchased and installed on 22.00 22.00
18.06.2024
Normal Depreciation @ 40% & additional 8.80 4.40
depreciation @ 20%
Total depreciation and additional depreciation
- Plant and Machinery (15% block) (A +B) 13.35 17.20
- Plant and Machinery (40% block) (C + D) 9.40 4.60
Depreciation available under section 32 = ` 44.55
crores

Computation of Written Down Value (WDV)

after charging depreciation for P.Y. 2024-25
Particulars Plant & Machinery
15% 40%
(` in crores)
WDV as on 01.04.2024 (The company was started during Nil Nil
the year – as given in question)
Add: Plant and Machinery acquired during the year
- New Machinery installed on 84.00
01.05.2024
- Lorries for transporting 3.00
goods to sales depots
- Fork-lift trucks, used inside 4.00
factory

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.209

- New imported machinery 12.00 103.00 -

- New Windmill purchased - 22.00
and installed on 18.6.2024
- Computers installed in office - 1.00
premises
- Computers installed in factory - 2.00
103.00 25.00
Less: Asset sold during the year Nil Nil
WDV as on 31.3.2025 (before charging depreciation) 103.00 25.00
Less: Depreciation for the P.Y.2024-25
- Normal depreciation 13.35 9.40
- Additional depreciation 17.20 4.60
WDV as on 1.4.2025 (after charging depreciation for 72.45 11.00
P.Y. 2024-25)

Notes:
(1) Windmills and any specially designed devices which run on windmills installed on or
after 1.4.2014 would be eligible for depreciation @ 40%.

(2) New imported machinery was not installed during the previous year 2024-25. Hence,
it would not be eligible for additional depreciation for A.Y. 2025-26. It would also not
be eligible for normal depreciation for A.Y 2025-26, since it was not put to use in the
P.Y.2024-25 being the year of acquisition.
(3) It may be noted that investment in the following plant and machinery would not be
eligible for additional depreciation under section 32(1)(iia):

(a) Lorries for transporting goods to sales depots, being vehicles/road transport
vehicles; and
(b) Computers installed in office premises.

(4) As per section 2(28) of the Motor Vehicles Act, 1988, the definition of a “vehicle”
excludes, inter alia, a vehicle of special type adopted for use only in a factory or in
any enclosed premises. Therefore, fork-lift trucks used inside the factory would not
fall within the definition of “vehicle”. Hence, it is eligible for additional deprecation
under section 32(1)(iia).

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3. (A) (i) Secret commission is one of the forms of commission payment generally
made by business organizations. Secret commission is a payment for
obtaining business orders or contracts from parties and /or customers and
paid to employees and / or officials of those parties and / or customers or
companies from whom business orders are obtained by the assessee.
Explanation 1 below section 37(1) of Income-tax Act, 1961 provides that any
expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law, shall not be deemed to have been incurred for the
purpose of business and no deduction or allowance shall be made in respect
of such expenditure. In view of the Explanation, any expenditure incurred for a
purpose which is an offence and prohibited by law cannot be allowed as
expenditure. Therefore, since secret commission payment is a payment for an
offence prohibited by law, the same cannot be allowed as deduction.
(ii) A foreign agent of an Indian exporter operates in his own country and no part
of his income accrues or arises in India. His commission is usually remitted
directly to him and is, therefore, not received by him or on his behalf in India.
The commission paid to the non-resident agent for services rendered outside
India is, thus, not chargeable to tax in India.
Since commission income for booking orders by non-resident who remains
outside India is not subject to tax in India, disallowance under section 40(a)(i)
is not attracted in respect of payment of commission to such non-resident
outside India even though tax has not been deducted at source. Thus, the
amount of ` 50 lakhs remitted to Mr. Rodrigues outside India in foreign
currency towards commission would not attract disallowance under section
40(a)(i) for non-deduction of tax at source.
(B) (i) For claiming deduction of any expense enumerated under section 43B, the
requirement is, the actual payment and not deemed payment. Furnishing of
bank guarantee cannot be equated with actual payment. Actual payment
requires that money must flow from the assessee to the public exchequer as
specified in section 43B. Therefore, deduction of an expense covered under
section 43B cannot be claimed by merely furnishing a bank guarantee [CIT v.
McDowell & Co Ltd (2009) 314 ITR 167 (SC)]
(ii) Interest payable to Goods and Services Tax department is part of Goods and
Services Tax.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.211

Therefore, interest payable to Goods and Services Tax department, which is

not paid before the “due date” of filing of return of income, would attract
disallowance under section 43B [Mewar Motors v. CIT (2003) 260 ITR 218
(Raj)]
4. Computation of total income of ILT Ltd. for the A.Y.2025-26

Particulars ` (in lakhs)

Profits and gains from business or profession
Net profit as per profit and loss account 405.00
Add : Items debited to profit and loss account, but to be
disallowed and items not considered in accounts but to be
taxed
Value of group free air ticket provided by a supplier is taxable as 10
business income under section 28(iv), as the value of any benefit,
whether convertible into money or not, arising from business is
taxable as business income.
Amount waived by the supplier of raw materials is a deemed 2
income under section 41(1), as the expenditure was allowed as
deduction in the last year and there is a benefit by way of
remission or cessation of a trading liability. The fact that effect was
not given in the running account of supplier is not relevant.
Interest payable outside India to a foreign company is allowable -
[See Note 1 below]
Contribution to electoral trust is not an allowable expenditure while
computing business income. Hence, the same has to be added
back, since it is included in general expenses. 0.50
Salary paid to employee Sandeep is eligible for deduction.
Disallowance under section 40A(3) will not apply [See Note 2 - 12.50
below]
417.50
Less: Amount of deduction allowable
Under section 43B, interest on loan due to any scheduled bank,
etc. is allowed as deduction, if such interest is actually paid
irrespective of the method of accounting followed by the assessee.
Conversion of arrear interest into a fresh loan by a bank cannot be
considered as actual payment of interest. However, the amount of

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 3.212 DIRECT TAX LAWS

funded interest (i.e., converted loan) actually paid is allowable as

deduction. Hence, ` 1,60,000, being two instalments of ` 80,000 1.60
each, actually paid is deductible.
Business Income 415.90
Gross total income 415.90
Less: Deduction under Chapter VI-A
Deduction under section 80GGB in respect of contribution by the
assessee company to an electoral trust. 0.50
Total Income 415.40

Notes:
1. Since tax has been deducted on interest payable outside India to a foreign company
during the previous year 2024-25 and the same has been deposited before the due
date of filing return of income under section 139(1), disallowance under section
40(a)(i) is not attracted. Since the interest has already been debited to profit and loss
account, no further adjustment is required.
2. In respect of payment of salary to sales executive in cash, no disallowance under
section 40A(3) is to be made as the payments fall within the scope of Rule 6DD(i).
Salary paid to him in cash is allowable as the executive was temporarily posted for a
continuous period of more than 15 days in Bangalore which is not the place of his
normal duty. Further tax was deducted from such salary under section 192 and he
does not maintain any bank account in Bangalore. No disallowance under section
40A(3) is attracted in respect of such salary.
5. (i) Computation of Business Income of G Ltd.
and tax consequences for the A.Y. 2025-26

Particulars `
` 10,00,000 being the amount withdrawn from Tea Development
Account has to be utilized in the prescribed manner, otherwise, the
withdrawn amount would be chargeable to tax as business income.
In the given case, the taxability of withdrawal amount based on their
utilization is as follows:
- ` 6,00,000, out of the amount withdrawn from the deposit Not
account, utilised for purchase of non-depreciable asset as per taxable
the specified scheme.
[As per section 33AB(6), no deduction would be allowed
under section 33AB since amount is spent out of ` 11 lakh

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.213

deposited in Tea Development Account, which has already

been allowed as deduction in A.Y.2024-25 (See Working
Note below)].
- ` 3,00,000, being the amount utilized for purchase of 3,00,000
machinery to be installed in the office premises is not a
permissible utilization. Hence, the amount would be deemed
as profits and gains of business of the previous year 2024-25
as per section 33AB(4).
- ` 1,00,000 was spent for the purpose of scheme on 1,00,000
05.04.2025. As per section 33AB(7), this amount would be
taxable since the same is not utilized during the same
previous year (i.e., P.Y. 2024-25) in which the amount is
withdrawn from the deposit account.
When any part of withdrawal amount becomes taxable, the agricultural and non-
agricultural portions of income must be segregated.
Accordingly, ` 1,60,000, being 40% of ` 4,00,000 (` 3,00,000 + ` 1,00,000)
would be chargeable to tax as business income and the balance ` 2,40,000,
being 60% of ` 4,00,000 would be agricultural income exempt from tax.

Working Note:
Computation of Business Income of G Ltd. for the A.Y. 2024-25

Particulars `
Composite business profits before allowing deduction under 60,00,000
section 33AB
Less: Deduction under section 33AB(1) would be the lower of:
- Amount deposited in Tea Development Account on or
before 30.9.2024 [i.e., ` 11,00,000]
- 40% of profits of such business [i.e., ` 24,00,000, being 11,00,000
40% of ` 60,00,000]
49,00,000
Less: 60% of ` 49,00,000, being agricultural income [as per Rule 8] 29,40,000
Business income 19,60,000
Less: Brought forward business loss of A.Y.2023-24 set-off as per 14,00,000
section 72
Business income chargeable to tax 5,60,000

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 3.214 DIRECT TAX LAWS

(ii) Consequences, if asset purchased out of deposit account is sold during the
previous year 2025-26

As per section 33AB(8), if the asset is sold before the expiry of eight years from the end
of the previous year in which it was acquired, then, the cost of such asset shall be
deemed to be the profits and gains from business or profession of the previous year in
which asset is sold.
Therefore, ` 6,00,000 would be deemed to be the business income (composite) for
the A.Y.2026-27. However, since the full cost of the asset was deducted in the
assessment year 2024-25 (being part of ` 11 lakh deposited in Tea Development
Account) before segregation of agricultural income and non-agricultural income, the
agricultural and non-agricultural portions of income should be segregated in the year
in which such amount becomes taxable on account of sale of asset before the expiry
of eight years. Therefore, ` 3,60,000, being 60% of ` 6,00,000 would represent
agricultural income. The balance ` 2,40,000 being 40% of ` 6,00,000 would be
chargeable to tax as business income.
Moreover, the difference between the sale consideration and purchase price of the
asset would be chargeable to tax as “Short term capital gains”, which is computed as
follows:
Sales consideration 8,00,000
Less: Cost of acquisition 6,00,000

Short term capital gain 2,00,000

6. Computation of Income of Pingu Trading Pvt. Ltd.
chargeable to tax for the A.Y.2025-26

Particulars `
Net profit as per profit and loss account 33,90,000
Less: Income-tax refund credited in the profit and loss account, out of
which interest is to be considered separately under the head
“Income from other sources” 20,000
33,70,000
Add: Expenses either not allowable or to be considered
separately but charged in the profit & loss account
- Repair expenses on rented premises where assessee is -
under no obligation to incur such expenses are not allowable

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.215

as per section 30(a)(i). However, if such expenses are

required for carrying on the business efficiently, the same are
allowable under section 37. In this case, assuming that such
expenses are required for carrying on business efficiently, the
same are allowable under section 37.
- Advertisement in the souvenir of political party not allowable 2,500
as per section 37(2B) (See Note 2)
- Payment made to the wife of a director examined as per
section 40A(2) and the excess payment made to be 75,000
disallowed (See Note 4)
- Payment made to electoral trust by cheque (See Note 5) 1,00,000
- Penalty levied by the Goods and Services tax department for 5,300
delayed filing of returns not allowable as being paid for
infraction of law (See Note 6)
- Depreciation as per books 71,500
- 30% of interest paid on loan paid to Mr. X, a resident, without
deduction of tax at source not allowable as per section 24,000
40(a)(ia)
36,48,300
Less: Depreciation allowable as per Income-tax Act, 1961 65,000
35,83,300
Less: Income from specified business (warehousing charges) credited
to profit and loss account, to be considered separately (See 15,00,000
Note 7)
Income from business (other than specified business) 20,83,300
Add: Difference in the value of stocks detected on survey under section 3,75,000
133A on 31.03.2025 chargeable as income (See Note 8)
24,58,300
Computation of income/ loss from specified business (See Note 7)
Income from specified business ` 15,00,000
Less: Deduction under section 35AD @ 100% of `25 ` 25,00,000
lakhs
Loss from specified business to be carried forward as
per section 73A ` (10,00,000)
Income from Other Sources
Interest on income-tax refund 4,570
Gross Total Income 24,62,870

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Less: Deduction under section 80GGB

Contribution to political party (See Note 2) ` 2,500
Contribution to an Electoral trust (See Note 5) ` 1,00,000 1,02,500
Total Income 23,60,370
Notes:
(1) Bonus for the previous year 2023-24 paid after the due date for filing return for that
year would have been disallowed under section 43B for the P.Y.2023-24. However,
when the same has been paid in December 2024, it should be allowed as deduction
in the P.Y.2024-25 (A.Y.2025-26). Since it is already included in the figure of bonus
to staff debited to profit and loss account of this year, no further adjustment is
required.
(2) The amount of ` 2,500 paid for advertisement in the souvenir issued by a political
party attracts disallowance under section 37(2B). However, such expenditure falls
within the meaning assigned to “contribute” under section 293A of the Companies
Act, 1956, and is hence, eligible for deduction under section 80GGB. Any
contribution to the political party or electoral trust made by way of cash is not allowed
as deduction under section 80GGB. Since in the present case, the payment to the
political party is made by way of an account payee cheque, it is allowed as deduction
under section 80GGB.
(3) The penalty of ` 15,000 paid for non-fulfilment of delivery conditions of a contract for
reasons beyond control is not for the breach of law but was paid for breach of
contractual obligations and therefore, is an allowable expense.
(4) It has been assumed that ` 25,000 is the reasonable payment for the wife of
Director, working as a junior lawyer, since junior advocates of High Courts normally
charge only ` 25,000 for the same opinion and therefore, the balance ` 75,000 has
been disallowed.
(5) Payment to an electoral trust qualifies for deduction under section 80GGB since the
payment is made by way of a cheque. However, since the amount has been debited to
profit and loss account, the same has to be added back for computing business income.
(6) The interest of ` 12,750 paid on the delayed deposit of goods and services tax is for
breach of contract and hence, is allowable as deduction. However, penalty of
` 5,300 for delay in filing of returns is not allowable since it is for breach of law.

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.217

(7) Deduction @ 100% of the capital expenditure is available under section 35AD in
respect of specified business of setting up and operating a warehouse facility for
storage of agricultural produce which commences operation on or after 1.04.2012. It
is presumed that ` 25 lakhs does not include expenditure on acquisition of any land.
The loss from specified business under section 35AD (warehousing) should be
segregated from the income from other businesses, since, as per section 73A(1), any
loss computed in respect of any specified business referred to in section 35AD shall not
be set off except against profits and gains, if any, of any other specified business.

In view of the provisions of section 73A(1), the loss of ` 10 lakhs from the specified
business cannot be set-off against income from other businesses. Such loss has to
be carried forward to be set-off against profit from specified business in the next
assessment year. The return should be filed on or before the due date under section
139(1) for carry forward of such losses.
(8) The business premises were surveyed and differences in the figures of opening and
closing stocks and sales were found which have not been disputed and accepted by
the assessee. Therefore, the trading account for the year is to be re-cast to arrive at
the correct amount of the gross profit/ net profit for the purpose of return of income to
be filed for the previous year ended on 31.3.2025.
Revised Trading Account
Particular ` Particular `
Opening Stock 8,75,000 Sales 1,56,25,000
(` 1,55,50,000 + ` 75,000)
Purchases 1,25,75,000 Closing Stock 12,50,000
Freight and Cartage 1,26,000
Gross Profit 32,99,000
1,68,75,000 1,68,75,000

The difference of gross profit of ` 32,99,000 - ` 29,24,000 = ` 3,75,000 is to be

added as income of the business for the year as undisclosed income 16.
7. (a) This issue came up before the Delhi High Court in CIT v. Gujarat Guardian Ltd
(2009) 177 Taxman [Link] Court observed that the assessee company’s claim for

16 No loss (whether brought forward or otherwise) or unabsorbed depreciation under section 32(2) can be set-off
against undisclosed income.

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 3.218 DIRECT TAX LAWS

deduction has to be allowed in one lump sum keeping in view the provisions of
section 43B(d), which provide that any sum payable by the assessee as interest on
any loan or borrowing from any financial institution shall be allowed to the assessee
in the year in which the same is paid, irrespective of the periods, in which the liability
to pay such sum is incurred by the assessee according to the method of accounting
regularly followed by the assessee. The High Court concurred with the Tribunal’s
view supporting the assessee that in terms of section 36(1)(iii) read with section
2(28A), the deduction for pre-payment premium was allowable. Since there was no
dispute that the pre-payment premium was nothing but interest and that it was paid
to a public financial institution i.e. IDBI, the Court held that, in terms of section
43B(d), the assessee’s claim for deduction has to be allowed in the year in which the
payment has actually been made.
Therefore, applying the ratio of the above case, the contention of A Ltd. is correct
and not that of the Assessing Officer.
Note – Section 36(1)(iii) provides for deduction of interest paid in respect of capital
borrowed for the purposes of business or profession. Section 2(28A) defines interest
to include, inter alia, any other charge in respect of the moneys borrowed or debt
incurred. Section 43B provides for certain deductions to be allowed only on actual
payment. From a combined reading of these three sections, it can be inferred that –
(i) pre-payment premium represents interest as per section 2(28A);
(ii) such interest is deductible as business expenditure as per section 36(1)(iii);
(iii) such interest is deductible in one lump-sum on actual payment as per section
43B(d).

(b) As per ICDS V on Tangible Fixed Assets, machinery spares shall be charged to the
revenue as and when consumed. When such spares can be used only in connection
with an item of tangible fixed asset and their use is expected to be irregular, they
shall be capitalised. Where the spares are capitalised as per the above requirement,
the issue as to provision of depreciation arises – whether depreciation can be
provided where such spares are kept ready for use or is it necessary that they are
actually put to use. This issue was dealt with by the Delhi High Court in CIT v. Insilco
Ltd (2010) 320 ITR 322. The Court observed that the expression “used for the
purposes of business” appearing in section 32 also takes into account emergency
spares, which, even though ready for use, yet are not consumed or used during the

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.219

relevant period. This is because these spares are specific to a fixed asset, namely
plant and machinery, and form an integral part of the fixed asset. These spares will,
in all probability, be useless once the asset is discarded and will also have to be
disposed of. In this sense, the concept of passive use which applies to standby
machinery will also apply to emergency spares. Therefore, once the spares are
considered as emergency spares required for plant and machinery, the assessee
would be entitled to capitalize the entire cost of such spares and claim depreciation
thereon.

Note – One of the conditions for claim of depreciation is that the asset must be “used
for the purpose of business or profession”. In the past, courts have held that, in
certain circumstances, an asset can be said to be in use even when it is “kept ready
for use”. For example, depreciation can be claimed by a transport company on spare
engines kept in store in case of need, though they have not actually been used by
the company. Hence, in such cases, the term “use” embraces both active use and
passive use for business purposes.
8. The payment made for acquiring the licence to operate telecom services in Mumbai shall be
subject to deduction as per the scheme in section 35ABB. As per section 35ABB, any
amount actually paid for obtaining licence to operate telecommunication services shall be
allowed as deduction in equal instalments during the number of years for which the license
is in force.
If the payment is made before the commencement of business: The deduction shall be
allowed beginning with the year of commencement of business.
In any other case: It will be allowed commencing from the year of payment. Deduction
shall be allowed up to the year in which the license shall cease to be in force.
The amount of deduction available for A.Y. 2025-26 is worked out below:-
(1) (2) (3) (4) = (3)/(2)
Previous year of Unexpired period Instalment Deduction in respect
payment of license paid (`) of each instalment (`)
2022-23 9 years 9,00,000 1,00,000
2023-24 9 years 9,00,000 1,00,000
2024-25 8 years 9,00,000 1,12,500
27,00,000 3,12,500

The deduction under section 35ABB from assessment year 2025-26 shall be ` 3,12,500.

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9. Computation of taxable income of Alpha Ltd. for the A.Y.2025-26

Particulars `
Net profit as per profit and loss account 12,50,000
Add: Items debited to profit and loss A/c but not deductible or income
to be taxed
1. Payment of advertisement expenditure of `60,000
(i) ` 8,000, being the excess payment to a relative disallowed
under section 40A(2) 8,000
(ii) As the payment is made in cash and since the remaining amount
of ` 52,000 exceeds ` 10,000, 100% shall be disallowed under 52,000
section 40A(3)
2. Under section 31, expenditure relatable to current repairs regarding
plant, machinery or furniture is allowed as deduction.
The test to determine whether replacement of parts of machinery
amounts to repair or renewal is whether the replacement is one
which is in substance replacement of defective parts or replacement
of the entire machinery or substantial part of the entire machinery
[CIT v. Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21 (Pat)].
Here expenditure on repairs does not bring in any new asset into
existence. Such replacement can only be considered as current
repairs. Hence, no adjustment is required.
Further, as per ICDS V on Tangible Fixed Assets, only an
expenditure that increases the future benefits from the existing asset
beyond its previously assessed standard of performance has to be
added to the actual cost.
3. Liability foregone by creditor chargeable as business income but not 6,000
credited to profit and loss account [taxable under section 41(1)]
4. Sale proceeds of import entitlements. The sale of the rights gives -
rise to profits or gains taxable under section 28(iiia). As the amount
has already been credited to profit and loss account, no further
adjustment is necessary.
5. Expenditure on in-house research and development is entitled to a
weighted deduction of 100% of the expenditure (both capital and
revenue) so incurred under section 35(2AB)(1). As the amount has
already been debited to profit and loss account, no further -
adjustment is necessary
Taxable Income 13,16,000

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 PROFITS AND GAINS OF BUSINESS OR PROFESSION 3.221

10. (i) The decision of the Supreme Court in Mysore Minerals Ltd v. CIT (1999) 239 ITR
775 is relevant in the context of the facts stated. The term “asset used” in section 32
must be assigned a wider meaning and anyone in possession of property in his own
title, exercising dominion over the property, to the exclusion of others and having the
right to use and enjoy it, must be taken to be the owner.
Registration of the buses is only a formality to perfect the title and does not bar
enjoyment. The Corporation cannot, therefore, be denied depreciation on the buses.
A similar decision was also taken in CIT v. J & K Tourism Development Corporation
(2001) 248 ITR 94 (J&K).
(ii) The deduction of bad debt is allowed if it is written off in the books of account of the
assessee. In this case, Ravi has succeeded to the business carried on by his father.
Under clause (vii) of section 36(1) the amount has been written off in the books of
account as irrecoverable is eligible for deduction provided the debt has been taken
into account in computing the income of the business in an earlier previous year
[vide section 36(2)].
Therefore, Ravi is eligible for deduction in respect of the amount due in the name of
Y which is written off in the books of account as bad debt, even though the debt
represents the amount due for the supplies made by previous owner viz. deceased
father of Ravi.[CIT v. T. Veerabhadra Rao, K. Koteswara Rao and Co (1985) 155 ITR
152 (SC)].

© The Institute of Chartered Accountants of India

CHAPTER 4

CAPITAL GAINS

LEARNING OUTCOMES

After studying this chapter, you would be able to -

 appreciate the scope of income chargeable under this head;
 examine the provisions of section 2(42A), relating to period of holding, for classification of a
capital asset as short-term capital asset and long-term capital asset;
 analyse and apply the provisions of section 47 to determine whether a particular transaction
would be considered/not be considered as transfer for the purpose of capital gains taxation;
 determine the cost of acquisition/ improvement and indexed cost of acquisition/ improvement,
in case of a short-term capital asset and long-term capital asset, respectively for the purpose
of computing the capital gains;
 compute capital gains on transfer of depreciable assets;
 compute capital gains in case of market linked debenture and other specified securities;
 compute capital gains in case of slump sale;
 determine the quantum of exemption available on investment of capital gains/ net
consideration arising on transfer of certain assets and appreciate the conditions to be satisfied
to avail such exemption;
 compute the capital gains chargeable to tax applying the charging and deeming provisions
and giving effect to the exemptions available in respect of capital gains;
 identify the cases where an Assessing Officer can make a reference to the Valuation Officer;
 appreciate the concessional tax treatment available for short-term capital gains and for long
term capital gains on transfer of listed equity shares/ units of an equity oriented fund/ units of
a business trust;
 compute the tax liability applying the special rates of tax on long-term capital gains and
short-term capital gains arising on transfer of listed equity shares/ units of an equity oriented
fund and the normal rates of tax on capital gains arising on transfer of other short-term capital
assets and other long-term capital assets.

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 4.2 DIRECT TAX LAWS

4.1 INTRODUCTION
Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the
previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will
be deemed to be the income of the previous year in which the transfer took place. In this charging
section, two terms are important. One is “capital asset” and the other is “transfer”.
Hence, in this chapter on capital gains, we begin our discussion with the definition of “capital
asset” and “transfer”. Thereafter, we will proceed to discuss the various circumstances under
which capital gains tax is levied. There are certain transactions which are not to be regarded as
transfer for the purposes of capital gains. These transactions have also been discussed in this
chapter. There is a separate method of computation of capital gains in respect of depreciable
assets. Also, there are exemptions in cases where capital gains/net sales consideration are
invested in specified assets. All these aspects are being discussed in this chapter.

4.2 CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities
in accordance with the SEBI regulations.
(c) any unit linked insurance policy (ULIP) issued on or after 1.2.2021, to which exemption
under section 10(10D) does not apply on account of applicability of the fourth and fifth
provisos thereof.
A ULIP which is issued on or after 1.2.2021 whose premium payable exceeds ` 2,50,000
for any of the previous years during the term of such policy would be a capital asset [Forth
proviso to section 10(10D)].
In a case where premium is payable by a person for more than one ULIP issued on or after
1.2.2021 and the aggregate of premium payable on such ULIPs exceed ` 2,50,000 for any
of the previous years during the term of any such ULIP(s), the exemption under section
10(10D) would be available in respect of any of those ULIPs (at the option of the assessee)
whose aggregate premium payable does not exceed ` 2,50,000 for any of the previous
years during their term. All other ULIPs would be capital assets [Fifth proviso to section
10(10D)].

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 CAPITAL GAINS 4.3

However, it does not include—

(i) Stock-in trade: Any stock-in-trade [other than securities referred to in (b) above],
consumable stores or raw materials held for the purpose of the business or profession of
the assessee;
Whether a particular asset is stock-in-trade or capital asset does not depend upon the
nature of the item, but the manner in which the same is held. The item would be stock-in-
trade in the hands of the assessee who deals or trades in that item; however, the same item
would be capital asset for the assessee who holds it as an investment.
Example: A dealer in real estate holds a piece of land as stock-in-trade. But the same will
be capital asset for an assessee who holds it as an investment.

The exclusion of stock-in-trade from the definition of capital asset is only in respect of sub-
clause (a) above and not sub-clause (b). This implies that even if the nature of such
security in the hands of the Foreign Portfolio Investor is stock in trade, the same would be
treated as a capital asset and the profit on transfer would be taxable as capital gains.

Further, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that the
income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be
in the nature of capital gain, irrespective of the presence or otherwise in India, of the Fund
manager managing the investments of the assessee.

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

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 4.4 DIRECT TAX LAWS

Definition of Jewellery - Jewellery is a capital asset and the profits or

gains arising from the transfer of jewellery held for personal use are chargeable to tax under
the head “capital gains”. For this purpose, the expression ‘jewellery’ includes the following:

(i) Ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious
or semi-precious stones and whether or not worked or sewn into any wearing apparel;

(ii) Precious or semi-precious stones, whether or not set in any furniture, utensil or other
article or worked or sewn into any wearing apparel.

(iii) Rural agricultural land in India i.e., agricultural land in India which is not situated in any
specified area.

As per the definition that only rural agricultural lands in India are excluded from the purview
of the term ‘capital asset’. Hence urban agricultural lands constitute capital assets.
Accordingly, the agricultural land described in (a) and (b) below, being land situated within
the specified urban limits, would fall within the definition of “capital asset”, and transfer of
such land would attract capital gains tax -

(a) agricultural land situated in any area within the jurisdiction of a municipality or
cantonment board having population of not less than ten thousand, or

(b) agricultural land situated in any area within such distance, measured aerially, in
relation to the range of population as shown hereunder -

Shortest aerial distance from Population according to the last

the local limits of a preceding census of which the relevant
municipality or cantonment figures have been published before the
board referred to in item (a) first day of the previous year.

(i) ≤ 2 kms > 10,000

(ii) > 2 kms ≤ 6 kms > 1,00,000

(iii) > 6 kms ≤ 8 kms > 10,00,000

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 CAPITAL GAINS 4.5

Example
Area Shortest aerial Population according to the Is the land
distance from the local last preceding census of situated in
limits of a municipality which the relevant figures this area a
or cantonment board have been published before capital
referred to in item (a) the first day of the previous asset?
year.
(i) A 1 km 9,000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes
(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(vi) F 5 kms 12,00,000 Yes
(vii) G 6 kms 8,000 No
(viii) H 7 kms 4,00,000 No
(ix) I 8 kms 10,50,000 Yes
(x) J 9 kms 15,00,000 No

Explanation regarding gains arising on the transfer of urban agricultural land -

Explanation 1 to section 2(1A) clarifies that capital gains arising from transfer of any
agricultural land situated in any non-rural area (as explained above) will not constitute
agricultural revenue within the meaning of section 2(1A).
In other words, the capital gains arising from the transfer of such urban agricultural lands
would not be treated as agricultural income for the purpose of exemption under section
10(1). Hence, such gains would be exigible to tax under section 45.
(iv) Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National
Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991 issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2018
notified by the Central Government.

Note – ‘Property’ includes and shall be deemed to have always included any rights in or in relation
to an Indian company, including rights of management or control or any other rights whatsoever.

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 4.6 DIRECT TAX LAWS

CAPITAL ASSET [Section

2(14)]

Property of any kind held Any securities A ULIP which is issued on or after 1.2.2021, to
by an assessee, whether held by a FII which exemption u/s 10(10D) does not apply on
or not connected with his which has a/c of premium payable exceeding ` 2,50,000
business or profession invested in such for any of the PYs during the term of such
securities as policy.
per SEBI In a case where premium is payable for more
Regulations than one ULIP issued on or after 1.2.2021 and
the agg. of premium payable on such ULIPs >
` 2,50,000 for any of the PYs during the term of
any such ULIP(s), the exemption u/s 10(10D)
would be available in respect of any of those
ULIPs (at the option of the assessee) whose
agg. premium payable does not exceed
` 2,50,000 for any of the PYs during their term.
All other ULIPs would be capital assets.

EXCLUSIONS

Stock-in- Personal Effects Rural 6½ Gold Bonds, Gold Deposit

trade, [i.e., movable Agricultural 1977, 7% Gold Bonds issued
consumable property including Land Bonds, 1980, under Gold
stores, raw wearing apparel and National Deposit Scheme,
materials furniture held for Defence Gold 1999/ Deposit
held for personal use by the Bonds, 1980, Certificates issued
business or assessee or his Special Bearer under the Gold
profession family] Bonds, 1991 Monetisation
issued by the Scheme, 2015/
Central Govt. 2018 notified by
the Central Govt.

EXCLUSIONS FROM PERSONAL

EFFECTS

Jewellery Archaeological Drawings Paintings & Any work

collections Sculptures of art

These assets are hence, capital assets u/s 2(14)

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 CAPITAL GAINS 4.7

4.3 SHORT TERM AND LONG TERM CAPITAL ASSETS

• Definition – As per section 2(42A), short-term capital asset means a capital asset held by
an assessee for not more than 36 months immediately preceding the date of its transfer.

However, w.e.f. 23.7.2024, a capital asset will be a short-term capital asset if it is held by
an assessee for not more than 24 months immediately preceding the date of its transfer.
As per section 2(29A), long-term capital asset means a capital asset which is not a short-
term capital asset.
Accordingly, based on the period of holding capital assets would be classified as short-term
or long-term capital asset as follows:
Capital Asset STCG, if held for LTCG, if held for
In case transfer takes place before 23.7.2024
• Security (other than unit) listed in
a recognized stock exchange ≤ 12 months > 12 months
• Unit of equity oriented fund/unit of immediately preceding immediately
UTI the date of its transfer preceding the date
of its transfer
• Zero Coupon bond
• Unlisted shares ≤ 24 months > 24 months
• Land or building or both immediately preceding immediately
the date of its transfer preceding the date
of its transfer
• Listed units of a business trust ≤ 36 months > 36 months
• Unlisted securities other than immediately preceding immediately
shares the date of its transfer preceding the date
of its transfer
• Other capital assets
In case transfer takes place on or after 23.7.2024
• Security listed in a recognized ≤ 12 months > 12 months
stock exchange including listed immediately preceding immediately
units of a business trust the date of its transfer preceding the date
• Unit of equity-oriented fund/unit of of its transfer
UTI
• Zero Coupon bond
• Other capital assets ≤ 24 months > 24 months
immediately preceding immediately
the date of its transfer preceding the date
of its transfer

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 4.8 DIRECT TAX LAWS

Note – As per section 50AA, capital gains arising from transfer of the following assets
would always be capital gains arising from transfer of short-term capital assets
irrespective of the period of holding of such assets -
- units of a specified mutual fund acquired on or after 1.4.2023,
- market linked debentures,
- unlisted bond and unlisted debenture which is transferred or redeemed or
matures on or after 23.7.2024.
Meaning of certain terms:

Term Meaning
Equity oriented A fund set up under a scheme of a mutual fund specified under
fund [Clause (a) section 10(23D) or under a scheme of an insurance company
of Explanation comprising ULIPs issued on or after 1.2.2021, to which exemption
to section 112A] under section 10(10D) does not apply on account of applicability of
the fourth and fifth provisos thereof
and
(i) in a case where the fund invested in the units of another fund
which is traded on a recognised stock exchange –
I. a minimum of 90% of the total proceeds of such fund is
invested in the units of such other fund; and
II. such other fund also invests a minimum of 90% of its total
proceeds in the equity shares of domestic companies listed
on a recognised stock exchange; and
(ii) in any other case, a minimum of 65% of the total proceeds of
such fund is invested in the equity shares of domestic companies
listed on a recognised stock exchange.
However, the percentage of equity shareholding or unit held in
respect of the fund, as the case may be, shall be computed with
reference to the annual average of the monthly averages of the
opening and closing figures.
In case of a scheme of an insurance company comprising ULIPs
issued on or after 1.2.2021, to which exemption u/s 10(10D) does not
apply on account of applicability of the fourth and fifth provisos
thereof, the minimum requirement of 90% or 65%, as the case may
be, mentioned in (i) and (ii) above, is required to be satisfied
throughout the term of such insurance policy.

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 CAPITAL GAINS 4.9

Zero Coupon A bond

Bond [Section
- issued by any infrastructure capital company or infrastructure
2(48)]
capital fund or infrastructure debt fund notified by the Central
Government under section 10(47) or a public sector company or a
scheduled bank on or after 1st June, 2005,
- in respect of which no payment and benefit is received or
receivable before maturity or redemption from such issuing entity
and
- which the Central Government may notify in this behalf.

Note: The income from transfer of a Zero coupon bond (not being held as stock-in-trade) is
to be treated as capital gains. Section 2(47)(iva) provides that maturity or redemption of a
Zero coupon bond shall be treated as a transfer for the purposes of capital gains tax.
The definitions of the terms “infrastructure capital company” and “infrastructure capital fund”
have already been discussed in Chapter 3 – “Profits and gains from business and
profession”.

Applicability of tax on capital gains in the hands of the unit holders where the term of
the units of Mutual Funds under the Fixed Maturity Plans has been extended [Circular
No. 6/2015, dated 09-04-2015]
Fixed Maturity Plans (FMPs) are closed ended funds having a fixed maturity date wherein
the duration of investment is decided upfront.
Some Asset Management Companies (AMCs) administering mutual funds have offered
extension of the duration of the FMPs by providing to the investor an option of roll-over of
FMPs in accordance with the provisions of Regulation 33(4) of the SEBI (Mutual Funds)
Regulation, 1996.
The CBDT has, vide this Circular, clarified that the roll over in accordance with the aforesaid
regulation will not amount to transfer as the scheme remains the same.
Accordingly, no capital gains will arise at the time of exercise of the option by the investor to
continue in the same scheme. The capital gains will, however, arise at the time of
redemption of the units or opting out of the scheme, as the case may be.

• Determination of period of holding [Clause (i) of Explanation 1 to section 2(42A)]: In

determining period of holding of any capital asset by the assessee in the circumstances stated in
column (1), the period shall be determined by considering the period specified in Column (2).

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 4.10 DIRECT TAX LAWS

Determination of period of holding

S. Circumstances Period to be
No. (Column 1) reckoned/included/excluded, as the
case may be
(Column 2)
1 Where shares held in a company The period subsequent to the date of
in liquidation liquidation of company shall be
excluded.
2 Where asset becomes the The period for which the capital asset
property of an assessee by virtue was held by the previous owner shall be
of section 49(1) included.
3 Where inventory of business is Period from the date of conversion or
converted into or treated as a treatment as a capital asset shall be
capital asset by the assessee considered.
4 Where share(s) in the Indian The period for which the share(s) was
company (amalgamated held by the assessee in the
company), becomes the property of amalgamating company shall be
an assessee in lieu of share(s) held included.
by him in the amalgamating
company at the time of transfer
referred under section 47(vii).
5 Where the share or any other Period from the date of allotment of such
security is subscribed by the share or security shall be reckoned.
assessee on the basis of right to
subscribe to any share or security
or by the person in whose favour
such right is renounced by the
assessee
6 Where the right to subscribe to Period from the date of offer of such right
any share or security, which is by the company or institution shall be
renounced in favour of any other reckoned.
person
7 Where any financial asset is Period from the date of allotment of such
allotted without any payment and financial asset shall be reckoned.
on the basis of holding of any other
financial asset
8 Where share(s) in the Indian The period for which the share(s) were
company being a resulting held by the assessee in demerged
company becomes the property of company shall be included.
an assessee in consideration of
demerger.

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 CAPITAL GAINS 4.11

9 Where trading or clearing rights The period for which the person was a
of a recognised stock exchange in member of the recognised stock
India is acquired by a person exchange immediately prior to such
pursuant to demutualisation or demutualisation or corporatisation shall
corporation of a recognised stock be included.
exchange in India as referred to in
section 47(xiii)
10 Where equity share(s) in a The period for which the person was a
company allotted pursuant to member of the recognised stock
demutualisation or corporation of a exchange immediately prior to such
recognised stock exchange in India demutualisation or corporatisation shall
as referred to in section 47(xiii) be included.
11 Where unit of a business trust, The holding period for which the share(s)
allotted pursuant to transfer of held by the assessee shall be included.
share(s) as referred to in section
47(xvii)
12 Where unit(s) becomes the property The period for which the unit(s) in the
of the assessee in consideration of consolidating scheme of the mutual fund
transfer of unit(s) in the were held by the assessee shall be
consolidated scheme of the included.
mutual fund referred to in section
47(xviii)
13 Where share(s) of a company is Period from the date on which a request
acquired by the non-resident for such redemption was made shall be
assessee on redemption of Global reckoned.
Depository Receipts referred to in
section 115AC(1)(b) held by such
assessee
14 Where equity share in a company The period for which the preference
becomes the property of the assessee shares were held by the assessee shall
by way of conversion of preference be included.
shares into equity shares referred
under section 47(xb)
15 Where unit(s) becomes the property The period for which the unit(s) in the
of the assessee in consideration of consolidating plan of a mutual fund
transfer of unit(s) in the scheme was held by the assessee shall
consolidated plan of a mutual be included.
fund scheme as referred to in
section 47(xix)
16 In case of a unit or units in a Period for which the original unit or units
segregated portfolio referred under in the main portfolio were held by the
section 49(2AG) assessee shall also be reckoned.

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 4.12 DIRECT TAX LAWS

17 (i) Electronic Gold Receipt [EGR] The period for which such gold was held
issued by a Vault Manager in by the assessee prior to conversion into
respect of gold deposited as the Electronic Gold Receipt
referred to in section 47(viid)
[Conversion of gold into EGR
not regarded as transfer by
virtue of section 47(viid)]
(ii) Gold released in respect of an The period for which such Electronic
Electronic Gold Receipt as Gold Receipt was held by the assessee
referred to in section 47(viid) prior to its conversion into gold.
[Conversion of EGR into Gold
not regarded as transfer by
virtue of section 47(viid)]
18 Where any specified security or Period from the date of allotment or
sweat equity shares allotted or transfer of such specified security or
transferred, directly or indirectly, by sweat equity shares shall be reckoned.
the employer free of cost or at
concessional rate to his employees
(including former employees)
“Specified security” means the securities as defined in section 2(h) of the
Securities Contracts (Regulation) Act, 1956 and, where employees’ stock option
has been granted under any plan or scheme therefor, includes the securities
offered under such plan or scheme.
“Sweat equity shares” means equity shares issued by a company to its
employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.

• Period of holding in respect of other capital assets [Clause (ii) of Explanation 1 to

section 2(42A)] - The period for which any capital asset is held by the assessee shall be
determined in accordance with any rules made by the CBDT in this behalf.
Accordingly, the CBDT has inserted Rule 8AA in the Income-tax Rules, 1962 to provide for
method of determination of period of holding of capital assets, other than the capital assets
mentioned in clause (i) of Explanation 1 to section 2(42A).

- In the case of a capital asset, being a share or debenture of a company, which

becomes the property of the assessee in the circumstances mentioned in section
47(x), there shall be included the period for which the bond, debenture, debenture-
stock or deposit certificate, as the case may be, was held by the assessee prior to
the conversion.

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 CAPITAL GAINS 4.13

Note: Section 47(x) provides that any transfer by way of conversion of bonds or
debentures, debenture-stock or deposit certificates in any form, of a company into
shares or debentures of that company shall not be regarded as transfer for the
purposes of levy of capital gains tax.
- In case of a capital asset which became the property of the Indian subsidiary
company in consequence to conversion of a branch of a foreign company referred to
in section 115JG(1), the period for which the asset was held by the said branch of
the foreign company and by the previous owner, if any, who has acquired the capital
asset by a mode of acquisition referred to in clause (i)/(ii)/(iii)/(iv) of section 49(1) or
section 115JG(1) shall be included. Section 115JG has been discussed in detail in
Chapter 21: Non-resident Taxation in Module 4.
- In case of the amount which is chargeable to tax as income of specified entity under
section 45(4) under the head - "Capital gains", the amount or a part of it shall be
deemed to be from transfer of short-term capital asset or long term capital asset, as
the case may be, mentioned in column (2), if it is attributed to capital asset
mentioned in the corresponding row in column (3) –

Deemed capital gains from Type of capital asset of specified entity

transfer of capital asset
(2) (3)
1. Capital gains from transfer (a) capital asset which is short term capital
of a short term capital asset asset at the time of taxation of amount under
section 45(4); or
(b) capital asset forming part of block of asset;
or
(c) capital asset being self-generated asset and
self-generated goodwill as defined in section
45(4)
2. Capital gains from transfer Capital asset which is not covered in 1. above
of a long term capital and is long term capital asset at the time of
asset(s) taxation of amount under section 45(4).

4.4 TRANSFER: WHAT IT MEANS? [SECTION 2(47)]

The Act contains an inclusive definition of the term ‘transfer’. Accordingly, transfer in relation to a
capital asset includes the following types of transactions:—

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 4.14 DIRECT TAX LAWS

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

Example: Acquisition of industrial undertaking under the Industries (Development and

Regulation) Act, 1951.

(iv) the owner of a capital asset may convert/treated the same into/as the stock-in-trade of a
business carried on by him. Such conversion/treatment is treated as transfer; or

Example: Where an investor in shares starts a business of dealing in shares and treats
existing investments as stock-in-trade of the newly set up business, such conversion shall
be regarded as transfer for the purpose of capital gains.

(v) the maturity or redemption of a zero coupon bond; or

(vi) possession of an immovable property in consideration of part-performance of a contract

referred to in section 53A of the Transfer of Property Act, 1882.

Example: A enters into an agreement for the sale of his house. The purchaser gives the
entire sale consideration to A. A hands over complete rights of possession to the purchaser
since he has received the entire sale consideration though house is not yet registered in the
name of the buyer. Under the Income-tax Act, the above transaction is considered as
transfer.

(vii) transactions which have the effect of transferring or enabling the enjoyment of an
immovable property.

Example: A person may become a member of a co-operative society, company or other

association of persons which may be building houses/ flats. When he pays an agreed amount,
the society etc. hands over possession of the house to the person concerned. No conveyance
deed is registered. For the purpose of income-tax, the above transaction is a transfer.

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 CAPITAL GAINS 4.15

Note – Section 2(47) provides an inclusive definition of “transfer”, in relation to a capital asset.
Explanation 2 to section 2(47) clarifies that ‘transfer’ includes and shall be deemed to have always
included –

(1) disposing of or parting with an - directly or indirectly,

asset or any interest therein, or
- absolutely or conditionally,
(2) creating any interest in any asset - voluntarily or involuntarily
in any manner whatsoever
by way of an agreement (whether entered into in India or outside India) or otherwise.
The above transactions would be deemed as a transfer notwithstanding that such transfer of rights
has been characterised as being effected or dependent upon or flowing from the transfer of a
share or shares of a company registered or incorporated outside India.

4.5 SCOPE AND YEAR OF CHARGEABILITY [SECTION 45]

(1) General Provision [Section 45(1)]
Any profits or gains arising from the transfer of a capital asset effected in the previous year (other
than exemptions covered under this chapter) shall be chargeable to income-tax under this head in
the previous year in which the transfer took place.

Year of chargeability - Capital gains are chargeable as the income of the previous year in which
the sale or transfer takes place. In other words, for determining the year of chargeability, the
relevant date of transfer is not the date of the agreement to sell, but the actual date of sale i.e., the
date on which the effect of transfer of title to the property as contemplated by the parties has taken
place [Alapati Venkataramiah v. CIT [1965] 57 ITR 185 (SC)].
However, as already noted, Income-tax Act has recognised certain transactions as transfer in spite
of the fact that conveyance deed might not have been executed and registered.

(2) Insurance receipts [Section 45(1A)]

Where any person receives any money or other assets under any insurance from an insurer on
account of damage to or destruction of any capital asset, as a result of -

♦ flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

♦ riot or civil disturbance; or

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♦ accidental fire or explosion; or

♦ action by an enemy or action taken in combating an enemy (whether with or without
declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to
income-tax under the head “Capital gains” and shall be deemed to be the income of the such
person for the previous year in which such money or other asset was received.
Full value of consideration: In order to compute capital gains, the value of any money or the fair
market value of other assets on the date of such receipt shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of such capital assets.
(3) Unit Linked Insurance Policy Receipts [Section 45(1B)]
Where any person receives, at any time during any previous year, any amount, including the
amount allocated by way of bonus, on such policy under a unit linked insurance policy (ULIP)
issued on or after 1.2.2021, to which exemption under section 10(10D) does not apply on account
of the applicability of the fourth and fifth provisos thereof, then, any profits or gains arising from
receipt of such amount by such person shall be chargeable to income-tax under the head "Capital
gains" and shall be deemed to be the income of such person of the previous year in which such
amount was received.

Any ULIP which is issued on or after 1.2.2021 whose premium payable exceeds ` 2,50,000 for any
of the previous years during the term of such policy would be a capital asset [Forth proviso to
section 10(10D)].
In a case where premium is payable by a person for more than one ULIP issued on or after
1.2.2021 and the aggregate of premium payable on such ULIPs exceed ` 2,50,000 for any of the
previous years during the term of any such ULIP(s), the exemption under section 10(10D) 1 would
be available in respect of any of those ULIPs (at the option of the assessee) whose aggregate
premium payable does not exceed ` 2,50,000 for any of the previous years during their term [Fifth
proviso to section 10(10D)].

Thus, the amount received under any other ULIP(s) issued on or after 1.2.2021 (referred to as
specified ULIPs) to which exemption under section 10(10D) does not apply on account of
applicability of the fourth and fifth provisos thereof, would be taxable under section 45(1B). The
income from such specified ULIPs taxable is to be calculated in such manner as may be
prescribed.

1
Subject to fulfilment of other conditions under section 10(10D).

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 CAPITAL GAINS 4.17

Accordingly, Rule 8AD prescribes the following manner to compute capital gains on receipt of
amount under such specified ULIPs. Where any person receives at any time during any previous
year any amount under such specified ULIP, including the amount allocated by way of bonus on
such policy, then, —

Situation Capital gains arising from receipt of amount during the previous
year in which such amount is received
(i) Where the amount is A-B, where
received for the first A = the amount received for the first time under such specified ULIP
time under such during the previous year, including the amount allocated by way of
specified ULIP during bonus on such specified policy; and
the previous year,
B = the aggregate of the premium paid during the term of such
specified ULIP till the date of receipt of the amount as referred to in
“A”
(ii) Where the amount is C-D, where
received under such C = the amount received under such specified ULIP during the
specified ULIP during previous year, at any time after the receipt of the amount as referred
the previous year, at to in (i) above, including the amount allocated by way of bonus on
any time after the such policy.
receipt of the amount
Note - The amount which has already been considered for
as referred to in (i)
calculation of taxable amount during the earlier previous year(s)
would not be included in “C”.
D = the aggregate of the premium paid during the term of such
specified ULIP till the date of receipt of the amount as referred to in
“C” as reduced by “B” i.e., the premium that has already been
considered for calculation of taxable amount during the earlier
previous year(s).

The capital gains as computed in above table would be deemed to be the capital gains arising
from the transfer of a unit of an equity-oriented fund set up under a scheme of an insurance
company comprising unit linked insurance policies.
(4) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]
A person who is the owner of a capital asset may convert the same or treat it as stock-in-trade of
the business carried on by him. As noted above, the conversion/treatment is a transfer.
As per section 45(2), notwithstanding anything contained in section 45(1), being the charging
section, the profits or gains arising from the above conversion or treatment will be chargeable to
income-tax as his income of the previous year in which such stock-in-trade is sold or
otherwise transferred by him.

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 4.18 DIRECT TAX LAWS

Full value of consideration: In order to compute the capital gains, the fair market value of the
asset on the date of such conversion or treatment shall be deemed to be the full value of the
consideration received as a result of the transfer of the capital asset.

Components of
income arising Manner of computation of
on subsequent capital gains and business
sale of stock-in- income
trade
FMV on the date of conversion
(-) Cost/ Indexed Cost of
acquisition/ Improvement
Capital
Gains Indexation benefit would be
Conversion of considered in relation to the
capital asset year of conversion of capital
asset into stock-in-trade
into stock-in-
trade Business
Income Sale price of stock-in-trade (-)
FMV on the date of conversion

Note – Both Capital Gains and Business income are chargeable to tax in the year in which
stock-in-trade is sold or otherwise transferred.
ILLUSTRATION 1
X converts his capital asset (acquired on June 10, 2005 for ` 60,000) into stock-in-trade on March
10, 2024. The fair market value on the date of the above conversion was ` 5,50,000. He
subsequently sells the stock-in-trade so converted for ` 6,00,000 on June 10, 2024. Examine the
tax implication.
Cost Inflation Index - F.Y. 2005-06: 117; F.Y. 2023-24: 348; F.Y. 2024-25: 363.
SOLUTION
Since the capital asset is converted into stock-in-trade during the previous year relevant to the
A.Y. 2024-25, it will be a transfer under section 2(47) during the P.Y.2023-24. However, the profits
or gains arising from the above conversion will be chargeable to tax during the A.Y. 2025-26, since
the stock-in-trade has been sold only on June 10, 2024. For this purpose, the fair market value on
the date of such conversion (i.e. 10th March, 2024) will be the full value of consideration.

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 CAPITAL GAINS 4.19

The capital gains will be computed after deducting the indexed cost of acquisition from the full
value of consideration since the transfer (i.e., conversion of capital asset into stock in trade) took
place during the P.Y. 2023-24. The cost inflation index for 2005-06 i.e., the year of acquisition is
117 and the index for the year of transfer i.e., 2023-24 is 348. The indexed cost of acquisition is
` 60,000 × 348/117 = ` 1,78,462. Hence, ` 3,71,538 (i.e., ` 5,50,000 – ` 1,78,462) will be treated
as long-term capital gains chargeable to tax during the A.Y.2025-26. During the same assessment
year, ` 50,000 (` 6,00,000 - ` 5,50,000) will be chargeable to tax as business profits.
(5) Transfer of beneficial interest in securities [Section 45(2A)]
As per section 45(2A), where any person has had at any time during the previous year any
beneficial interest in any securities, then, any profits or gains arising from the transfer made by the
depository or participant of such beneficial interest in respect of securities shall be chargeable to
tax as the income of the beneficial owner of the previous year in which such transfer took place
and shall not be regarded as income of the depository who is deemed to be the registered owner
of the securities by virtue of section 10(1) of the Depositories Act, 1996.
Full value of consideration and period of holding: For the purposes of section 48 and proviso
to section 2(42A), the cost of acquisition and the period of holding of securities shall be
determined on the basis of the first-in-first-out (FIFO) method.
When the securities are transacted through stock exchanges, it is the established procedure that
the brokers first enter into contracts for purchase/ sale of securities and thereafter, follow it up with
delivery of shares, accompanied by transfer deeds duly signed by the registered holders.
♦ The seller is entitled to receive the consideration agreed to as on the date of contract.
♦ Thus, it is the date of broker's note that should be treated as the date of transfer in case of
sale transactions of securities provided such transactions are followed up by delivery of
shares and also the transfer deeds.
♦ Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned
to take place directly between the parties and not through stock exchanges.
♦ The date of contract of sale as declared by the parties shall be treated as the date of
transfer provided it is followed up by actual delivery of shares and the transfer deeds.
Where securities are acquired in several lots at different points of time, the First-In-First-Out
(FIFO) method shall be adopted to reckon the period of the holding of the security, in cases where
the dates of purchase and sale could not be correlated through specific numbers of the scrips.
In other words, the assets acquired last will be taken to be remaining with the assessee while
assets acquired first will be treated as sold. Indexation, wherever applicable, for long-term assets

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 4.20 DIRECT TAX LAWS

will be regulated on the basis of the holding period determined in this manner - CBDT Circular No.
704, dated 28.4.1995.
Meaning of certain terms:
Term Meaning
Beneficial owner A person whose name is recorded as such with a depository.
Depository A company formed and registered under the Companies Act, 1956 2 and
which has been granted a certificate of registration under section 12(1A)
of the Securities and Exchange Board of India Act, 1992.
Security Such security as may be specified by SEBI.
(6) Introduction of capital asset as capital contribution [Section 45(3)]
Where a person transfers a capital asset to a firm, AOP or BOI in which he is already a partner/
member or is to become a partner/ member by way of capital contribution or otherwise, the profits
or gains arising from such transfer will be chargeable to tax as income of the previous year in
which such transfer takes place.
Full value of consideration: For this purpose, the full value of the consideration will be deemed
to be the amount recorded in the books of account of the firm, AOP or BOI as the value of the
capital asset.
(7) Tax implications on receipt of money or capital asset or stock-in trade by a partner or
a member on dissolution or reconstitution of firm/AOPs/BOIs [Section 9B and 45(4)]
Tax implications on receipt of capital assets or stock in trade or both on dissolution or
reconstitution of firm/AOP or BOI [Section 9B]
(i) Deemed transfer in the hands of specified entity - Where a specified person (partner
of a firm/member of AoP/BoI) receives during the previous year any capital asset or stock in
trade or both from a specified entity (firm/AoP/BoI, as the case may be) in connection with the
dissolution or reconstruction of such specified entity, then such specified entity would be
deemed to have transferred such capital asset or stock in trade or both, as the case may be, to
the specified person in the year in which such capital asset or stock in trade or both are
received by the specified person.
(ii) Year of taxability – Any profits and gains from such deemed transfer of capital asset or
stock in trade or both, as the case may be, by the specified entity shall be deemed to be the
income of such specified entity of the previous year in which such capital asset or stock in
trade or both were received by the specified person.

2 Now Companies Act, 2013

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 CAPITAL GAINS 4.21

(iii) Head of income – Any profit and gains from such deemed transfer of capital asset would
be chargeable to income-tax as income of such specified entity under the head “Capital gains”.
Any profits and gains from such deemed transfer of stock in trade would be chargeable to tax
under the head “Profits and gains from business or profession”, in accordance with the provisions
of this Act.
(iv) Full value of consideration - In order to compute the capital gains, the fair market
value of the capital asset or stock in trade or both on the date of its receipt by the specified
person shall be deemed to be the full value of the consideration received or accruing as a
result of such deemed transfer of the capital asset or stock in trade or both by the specified entity.
Tax implications on receipt of money or capital assets or both on reconstitution of firm/AOP
or BOI [Section 45(4)]
(i) Deemed income in the hands of specified entity – Where a specified person receives
during the previous year any money or capital asset or both from a specified entity in connection
with the reconstitution of such specified entity, then any profits or gains arising from such
receipt by the specified person shall be chargeable to income-tax as income of such specified
entity under the head “Capital gains”.
(ii) Year of taxability – Such profits and gains shall be deemed to be the income of specified
entity of the previous year in which such money or capital asset or both were received by
the specified person.
(iii) Computation of such profits and gains from such receipt – Notwithstanding anything
to the contrary contained in this Act, such profits or gains shall be determined in accordance with
the following formula –
A** = B + C – D
A = Income chargeable to income-tax u/s 45(4) as income of the specified entity under the
head "Capital gains"
B = Value of any money received by the specified person from the specified entity on the date of
such receipt;
C = The amount of fair market value of the capital asset received by the specified person from the
specified entity on the date of such receipt; and
D = The amount of balance in the capital account (represented in any manner) of the specified
person in the books of account of the specified entity at the time of its reconstitution.

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 4.22 DIRECT TAX LAWS

Balance in the capital account of the specified person in the books of account of the specified
entity is to be calculated without taking into account the increase in the capital account of the
specified person due to the following
- revaluation of any asset or
- self-generated goodwill or
- any other self-generated asset.
"self-generated goodwill" and "self-generated asset" mean goodwill or asset, as the case may be,
which has been acquired without incurring any cost for purchase or which has been generated
during the course of the business or profession.

** If the value of "A" in the above formula is negative, its value shall be deemed to be zero.

(iv) Taxability u/s 45(4) is in addition to taxability under section 9B – When a capital asset
is received by a specified person from a specified entity in connection with the reconstitution of
such specified entity, the provisions of this section shall operate in addition to the provisions of
section 9B and the taxation under section 9B shall be worked out independently.

(v) Definition of certain terms commonly used under both section 9B and 45(4):
Terms Meaning
Specified person a person, who is a partner of a firm or member of AOPs or BOIs (not
being a company or a co-operative society) in any previous year.
Specified entity a firm or other AOPs or BOIs (not being a company or a co-operative
society)
Reconstitution of Where
the specified entity (a) one or more of its partners or members, as the case may be, of
such specified entity ceases to be partners or members; or
(b) one or more new partners or members, as the case may be, are
admitted in such specified entity in such circumstances that one or
more of the persons who were partners or members, as the
case may be, of the specified entity, before the change, continue
as partner or partners or member or members after the
change; or
(c) all the partners or members, as the case may be, of such
specified entity continue with a change in their respective share
or in the shares of some of them

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 CAPITAL GAINS 4.23

Note: The case of dissolution of specified entity which is dealt in section 9B is not covered under
section 45(4). The taxability of receipt of money by a partner of a firm/ member of AoP/BoI on
reconstitution of firm/AoP/BoI, as the case may be, is dealt with only in section 45(4) and not in
section 9B. The taxability of receipt of stock-in-trade by a partner of a firm/member of AoP/BoI on
reconstitution is dealt with in section 9B. Therefore, it is only receipt of capital asset by a partner of
a firm/member of an AoP/BoI on reconstitution of the firm/AoP/BoI which is taxable under section
9B and under section 45(4).
(vi) Type of capital gain from capital asset received by specified person from specified
entity in connection with its reconstitution [Section 2(42A) Rule 8AA]: In case of the amount
which is chargeable to tax as income of specified entity under section 45(4) under the head -
"Capital gains", the amount or a part of it shall be deemed to be from transfer of short-term capital
asset or long term capital asset, as the case may be, mentioned in column (2), if it is attributed to
capital asset mentioned in the corresponding row in column (3) -

Deemed capital gains from Type of capital asset of specified entity

transfer of capital asset
(2) (3)
1. Capital gains from transfer of a (a) capital asset which is short term capital asset at
short term capital asset the time of taxation of amount under section
45(4); or
(b) capital asset forming part of block of asset; or
(c) capital asset being self-generated asset and self-
generated goodwill as defined in section 45(4)
2. Capital gains from transfer of a Capital asset which is not covered in 1. above and is
long term capital asset(s) long term capital asset at the time of taxation of
amount under section 45(4).

(vii) Attribution of capital gains: For the purpose of section 48(iii), where the amount is
chargeable to income-tax as income of specified entity under section 45(4), the specified entity
shall attribute such amount to capital asset remaining with the specified entity in the prescribed
manner:

Accordingly, Rule 8AB provides that the specified entity shall attribute such amount to capital
asset remaining with the specified entity in the following manner:

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 4.24 DIRECT TAX LAWS

S. No. Particulars Attribution to the capital assets remaining

with the specified entity
Where the aggregate of the value of money and the fair market value of the capital asset
received by the specified person from the specified entity, in excess of the balance in his
capital account, chargeable to tax under section 45(4) -
(i) relates to revaluation of any capital increase in, or recognition
asset or valuation of self-generated of, value of that asset
asset or self-generated goodwill, of the
because of revaluation or
the specified entity. amount
x valuation
charged
The revaluation should be based on aggregate of increase in, or
u/s
a valuation report obtained from a recognition of, value of all
45(4)
registered valuer. assets because of the
revaluation or valuation
(ii) does not relate to revaluation of any the amount charged to tax under section 45(4)
capital asset or valuation of self shall not be attributed to any capital asset
generated asset or self-generated
goodwill, of the specified entity
(iii) relate only to the capital asset the amount charged to tax under section 45(4)
received by the specified person shall not be attributed to any capital asset
from the specified entity

The specified entity shall furnish the details of amount attributed to capital asset remaining with the
specified entity in Form No. 5C.
Form No. 5C shall be furnished on or before the due date referred to in the Explanation 2 below
section 139(1) for the assessment year in which the amount is chargeable to tax under section 45(4).
It is clarified that revaluation of an asset or valuation of self-generated asset or self-generated
goodwill does not entitle the specified entity for the depreciation on the increase in value of that
asset on account of its revaluation or recognition of the value of self-generated asset or self-
generated goodwill due to its valuation.
(viii) Power of CBDT to issue guidelines [Section 9B(4) and 9B(5)] - If any difficulty arises
in giving effect to the provisions of section 9B and section 45(4), the CBDT may issue guidelines
for the purpose of removing the difficulty with the approval of the Central Government.

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 CAPITAL GAINS 4.25

Every guideline issued by the CBDT shall be laid before each House of Parliament, and shall be
binding on the income-tax authorities and on the assessee.

Guidelines under section 9B and section 45(4) of the Income-tax Act, 1961 [Circular No.
14/2021 dated 2.7.2021]
The amount taxed under section 45(4) is required to be attributed to the remaining capital assets
of the specified entity, so that when such capital assets get transferred in the future, the amount
attributed to such capital assets gets reduced from the full value of the consideration and to that
extent the specified entity does not pay tax again on the same amount.
This attribution is given only for the purposes of section 48. Section 48 only applies to capital
assets which are not forming block of assets. For capital assets forming block of assets there is
section 43(6)(c) to determine written down value of the block of asset and section 50 to determine
the capital gains arising on transfer of such assets.
However, the Act has not yet provided that amount taxed under section 45(4) can also be
attributed to capital assets forming part of block of assets and which are covered by these two
provisions.
The CBDT has, vide this circular, clarified that Rule 8AB also applies to capital assets forming part
of block of assets. Wherever the terms capital asset is appearing in the Rule 8AB, it refers to
capital asset whose capital gains is computed under section 48 as well as capital asset forming
part of block of assets. Further, wherever reference is made for the purposes of section 48, such
reference may be deemed to include reference for the purposes of section 43(6)(c) and section 50.
It is further clarified that in case the capital asset remaining with the specified entity is forming part
of a block of asset, the amount attributed to such capital asset under rule 8AB shall be reduced
from the full value of the consideration received or accruing as a result of subsequent transfer of
such asset by the specified entity, and the net value of such consideration shall be considered for
reduction from the written down value of such block under section 43(6)(c) or for calculation of
capital gains, as the case may be, under section 50.
For the purposes of understanding and for removing difficulties, if any, the application of section
9B and section 45(4) is explained with the help of the following examples:
Example 1: There are three partners “A”, “B” and "C" in a firm "FR", having one third share each.
Each partner has a capital balance of ` 10 lakh in the firm. There are three pieces of lands “S”, “T”
and “U” in that firm and there is no other capital asset in that firm. Book value of each of the land is
` 10 lakh. All these three lands were acquired by the firm more than two years ago.

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 4.26 DIRECT TAX LAWS

Partner “A” wishes to exit. The firm revalues its lands based on valuation report from a registered
valuer, as defined in rule 11U, and as per that valuation report fair market value of lands “S” and
“T” is ` 70 lakh each, while fair market value of land “U” is ` 50 lakh. On the exit of partner “A", the
firm decides to give him ` 11 lakh of money and land “U” to settle his capital balance on
14.5.2024.
In accordance with the provisions of section 9B, it would be deemed that the firm “FR" has
transferred land “U” to the partner "A" at its fair market value of ` 50 lakh. Let us assume that the
indexed cost of acquisition of land “U" is ` 15 Iakh.

Now on account of the deeming provisions of section 9B, it is deemed that the firm “FR" has
transferred land “U” to partner “A". Thus, an amount of ` 50 lakh less ` 15 lakh would be charged
to tax in the hands of firm “FR" under the head “Capital gains”. For partner “A", the cost of
acquisition of this land would be ` 50 lakh. Hence, the amount of ` 35 lakh is charged to long term
capital gains and let us assume that the tax is ` 7 lakh (assume no surcharge or cess just for ease
of calculation and illustration purposes).
This, net book profit after tax of ` 33 lakh (capital gains of ` 40 lakh without indexation less tax of
` 7 lakh) is to be credited in the capital account of each of the three partners, i.e. ` 11 lakh each.
Thus partner “A" capital account would increase to ` 21 lakh. This exercise is required to be
carried out since section 9B mandates that it is to be deemed that the firm “FR" has transferred the
land “U" to partner "A" and the long term capital gains of ` 35 lakh is chargeable to tax in the
hands of the firm “FR".
As against capital balance of ` 21 lakh, partner “A" has received ` 61 lakh (` 11 lakh of money
plus land “U" of fair market value of ` 50 lakh). Thus ` 40 lakh is required to be charged to tax
under section 45(4). This shall be in addition to an amount of ` 35 lakh charged to tax under
section 9B.
On account of clause (iii) of section 48, read with rule 8AB, this ` 40 lakh is to be attributed to the
remaining assets of the firm “FR" on the basis of increase in their value due to revaluation based
on the valuation report of registered valuer. In this case as per revaluation there are only two
capital assets remaining; lands “S" and “T". In both cases the value has increased by ` 60 lakh
each. Thus, out of ` 40 lakh, ` 20 lakh shall be attributed to land “S" and ` 20 lakh to land “T".
When either of these lands gets sold, this amount attributed to them would be reduced from sales
consideration under clause (iii) of section 48.

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 CAPITAL GAINS 4.27

The amount of ` 40 lakh which is charged to tax under section 45(4) shall be charged as long term
capital gains in view of rule 8AA(5), since the amount of ` 40 lakh is attributed to land “S" and land
“T" which are both long term capital assets at the time of taxation of ` 40 lakh under section 45(4).
Example 2: There are three partners “A", “B" and “C" in a firm “FR", having one third share each.
Each partner has a capital balance of ` 10 lakh in the firm. There are three pieces of lands “S", “T"
and “U" in that firm and there is no other capital asset in that firm. All these three lands were
acquired by the firm more than two years ago.
Book value of each of the land is ` 10 lakh. Partner “A" wishes to exit. The firm sells land “U" on
20.6.2024 for its fair market value of ` 50 lakh. Let us assume that the indexed cost of acquisition
of land “U" is ` 15 lakh. Thus, an amount of ` 50 lakh less ` 15 lakh would be charged to tax in
the hands of firm “FR" under the head “Capital gains". Hence, the amount of ` 35 lakh is charged
to long term capital gains and let us assume that the tax is ` 7 lakh (assume no surcharge or cess
just for ease of calculation and illustration purposes).
This, net book profit after tax of ` 33 lakh (capital gains of ` 40 lakh without indexation less tax of
` 7 lakh) is to be credited in the capital account of each of the three partners, i.e. ` 11 lakh each.
Thus, partner “A” capital account would increase to ` 21 lakh.
Partner “A” decides to exit the firm “FR”. The firm revalues its lands “S” and “T” based on valuation
report from a registered valuer, as defined in Rule 11U, and as per that valuation report fair market
value of lands “S” and “T” is ` 70 lakh each. On the exit of partner “A”, the firm decides to give him
` 61 lakh of money to settle his capital balance. Thus, as against capital balance of ` 21 lakh,
partner “A” has received ` 61 lakh of money. Thus ` 40 lakh is required to be charged to tax
section 45(4). This will be in addition to ` 35 lakh already charged to capital gains.
On account of section 48(iii), read with rule 8AB, this ` 40 lakh is to be attributed to the remaining
assets of the firm “FR” on the basis of increase in their value due to revaluation based on the
valuation report of registered valuer. In this case, as per revaluation, there are only two capital
assets remaining: lands “S” and “T”. In both cases, the value has increased by ` 60 lakh each.
Thus, out of ` 40 lakh, ` 20 lakh shall be attributed to land “S” and ` 20 Lakh to land “’T’’. When
either of these lands gets sold, this amount attributed to them would be reduced from sales
consideration under section 48(iii).

The amount of ` 40 lakh which is charged to tax under section 45(4) shall be charged as long term
capital gains in view of rule 8AA(5), since the amount of ` 40 lakh is attributed to land “S” and land
“T” which are both long term capital assets at the time of taxation of ` 40 lakh under section 45(4).
Note: The final result in both example 1 and 2 is same due to the operation of section 9B.

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 4.28 DIRECT TAX LAWS

Example 3: There are three partners “A”, “B” and “C” in a firm “FR”, having one third share each.
Each partner has a capital balance of ` 100 lakh in the firm. There is a piece of land “S” of book
value of ` 30 lakh. There is patent “T” of written down value of ` 45 lakh. And there is cash of
` 225 lakh. The land was acquired by the firm more than two years ago. The patent was acquired/
developed/ registered one year back.
Partner “A” wishes to exit. The firm revalues its land and patent based on valuation report from a
registered valuer, as defined in rule 11U, and as per that valuation report, fair market value of land
“S” is ` 45 lakh and fair market value of patent “T” is ` 60 lakh. As per the valuation report, there
is also self-generated goodwill of ` 30 lakh. On the exit of partner “A”, the firm decides to give him
` 75 lakh in money and land “S" to settle his capital balance on 14.7.2024.
In accordance with the provisions of section 9B, it would be deemed that the firm “FR" has
transferred land “S" to the partner “A" at its fair market value of ` 45 lakh. Let us assume that the
indexed cost of acquisition of land “S" is ` 45 lakh.
Now, on account of the deeming provisions of section 9B, it is deemed that the firm “FR" has
transferred land “S" to partner “A". However, since the sale consideration is equal to indexed cost
of acquisition, there will not be any capital gains tax. For partner “A", the cost of acquisition of this
land would be ` 45 lakh.
The net book profit of ` 15 lakh (capital gains of ` 15 lakh without indexation) is to be credited in
the capital account of each of the three partners, i.e., ` 5 lakh each. Thus, partner “A" capital
account would increase to ` 105 lakh. This exercise is required to be carried out since section 9B
mandates that it is to be deemed that the firm “FR" has transferred the land “S" to partner “A".
Thus, any gain in the books is to be apportioned to partners' capital accounts.
As against capital balance of ` 105 lakh, partner “A" has received ` 120 lakh (money of ` 75 Lakh
plus land “S" of fair market value of ` 45 lakh). Thus, ` 15 lakh is required to be charged to tax
under section 45(4).
On account of section 48(iii), read with rule 8AB and this guidance note, this ` 15 lakh is to be
attributed to the remaining capital assets of the firm “FR" on the basis of increase in the value due
to revaluation of existing capital assets, or due to recognition of the value of self-generated
goodwill, based on the valuation report of registered valuer. In this case, as per this report, the
value of patent “T" has increased by ` 15 lakh and the self-generated goodwill value has been
recognised at ` 30 lakh. Thus, one third of ` 15 lakh (i.e. ` 5 lakh) would be attributed to patent
“T", while two third of ` 15 lakh (i.e. ` 10 lakh) would be attributed to self-generated goodwill. ` 5
lakh attributed to patent “T" shall not be added to the block of the assets and no depreciation shall
be available on the same. When patent “T" gets transferred subsequently, this ` 5 lakh attributed

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 CAPITAL GAINS 4.29

shall be reduced from the full value of the consideration received or accruing as a result of transfer
of patent “T" by the firm “FR", and the net value shall be considered for reduction from the written
down value of the intangible block under section 43(6)(c) or for calculation of capital gains, as the
case may be, under section 50. (Refer guidance in paragraph 5 of this circular). Let us say that
Patent T is sold for ` 25 lakh. ` 5 lakh shall be reduced from ` 25 lakh and only net amount of
` 20 lakh shall be considered for reduction from the written down value of the intangible block
under section 43(6)(c) or for calculation of capital gains, as the case may be, under section 50.
Similarly, when goodwill gets sold subsequently, ` 10 lakh would be reduced from its sales
consideration under section 48(iii).
The amount ` 15 lakh which is charged to tax under section 45(4) shall be charged as short term
capital gains, as ` 5 lakh is attributed to the Patent “T" which is part of block of assets and ` 10
lakh is attributed to self-generated goodwill. In accordance with rule 8AA(5), both of these are to
be characterised as short term capital gains.
Note: For the purpose of calculation of depreciation under section 32, the written down value of
the block of asset “intangible" of which Patent “T" is part, would remain ` 45 lakh and would not be
increased to ` 60 lakh due to revaluation during the year. In this regard it may be highlighted that
the following provisions are relevant in determining the amount on which depreciation is allowable
under the Act:
• Explanation 2 of section 32(1) provides that the term "written down value of the block of
assets" shall have the same meaning as in section 43(6)(c).

• Section 43(6)(c), with respect to block of assets, inter alia, provides that the aggregate of the
written down values of all the assets falling within that block of assets at the beginning of the
previous year is to be increased by the actual cost of any asset falling within that block,
acquired during the previous year. This clause does not allow any increase on account of
revaluation.
• Section 43(1) which defines “Actual cost" as actual cost of the assets to the assessee. In
revaluation, there is no actual cost to the assessee.
Further, section 32 does not allow depreciation on goodwill. If in the given example “self-generated
goodwill" is replaced by “self-generated asset", even then, the depreciation will not be admissible
on the amount of ` 30 lakh recognised in valuation. In this regard it may be highlighted that the
above mentioned provisions, in the immediate preceding paragraph, are also applicable to “self-
generated asset" and since there is no actual cost to assessee in case of “self-generated asset",
depreciation is not allowable under section 32 on an asset whose actual cost is nil.

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(8) Compensation on compulsory acquisition [Section 45(5)]

Sometimes, a building or some other capital asset belonging to a person is taken over by the
Central Government by way of compulsory acquisition. In that case, the consideration for the
transfer is determined by the Central Government or RBI. When the Central Government pays the
above compensation, capital gains may arise. Such capital gains are chargeable as income of
the previous year in which such compensation or part thereof, was first received.

Enhanced Compensation- Many times, persons whose capital assets have been taken over by
the Central Government and who get compensation from the government go to the court of law for
enhancement of compensation. If the court awards a compensation which is higher than the
original compensation, the difference thereof will be chargeable to capital gains in the year in
which the same is received from the government.
Cost of acquisition in case of enhanced compensation - For this purpose, the cost of
acquisition and cost of improvement shall be taken to be nil.
Compensation received in pursuance of an interim order deemed as income chargeable to
tax in the year of final order - In order to remove the uncertainty regarding the year in which the
amount of compensation received in pursuance of an interim order of the court is to be charged to
tax, a proviso has been inserted after clause (b) to provide that such compensation shall be
deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the
final order of such court, Tribunal or other authority is made.
Reduction of enhanced compensation - Where capital gain has been charged on the
compensation received by the assessee for the compulsory acquisition of any capital asset or
enhanced compensation received by the assessee and subsequently such compensation is
reduced by any court, tribunal or any authority, the assessed capital gain of that year shall be
recomputed by taking into consideration the reduced amount. This re-computation shall be done
by way of rectification under section 155.
Death of the transferor- It is possible that the transferor may die before he receives the enhanced
compensation. In that case, the enhanced compensation or consideration will be chargeable to tax
in the hands of the person who receives the same.
(9) Taxability of capital gains in case of Specified Agreement [Section 45(5A)]
Genuine hardship on account of taxability of capital gains in the year of transfer of property
to developer: The definition of 'transfer', inter alia, includes any arrangement or transaction where
any rights are handed over in execution of part performance of contract, even though the legal title
has not been transferred.

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 CAPITAL GAINS 4.31

Applying the definition of transfer, under these development agreements, the transfer took place in
the year in which the owner of the immovable property, being land or building or both handed over
the immovable property to the developer.
Consequently, the capital gains tax liability in the hands of the owner would arise in the year in
which the possession of immovable property is handed over to the developer for development of a
project, in spite of the fact that the consideration thereof (i.e. the actual constructed property) will
be received only after a couple of years.
Deferment of taxability of capital gains: With a view to minimise the genuine hardship which the
owner of land or building may face in paying capital gains tax in the year of transfer, section
45(5A) provides that
- in case of an assessee being individual or Hindu undivided family,
- who enters into a specified agreement for development of a project,
- the capital gain arises from such transfer shall be chargeable to income-tax as income of
the previous year in which the certificate of completion for the whole or part of the
project is issued by the competent authority.
Meaning of Specified Agreement: Specified agreement means the registered agreement in
which a person owing land or building or both, agrees to allow another person to develop a real
estate project on such land or building or both, in consideration of a share, being land or building
or both in such project, whether with or without payment of part of the consideration in cash.
Full value of consideration: For the purpose of section 48, the stamp duty value of his share,
being land or building or both, in the project on the date of issuing of said certificate of completion
as increased by any consideration received in cash or by a cheque or draft or by any other mode,
if any, shall be deemed to be the full value of the consideration received or accruing as a result of
the transfer of the capital asset.
Non-applicability of the beneficial provision: It may, however, be noted these beneficial
provisions would not apply, where the assessee transfers his share in the project on or before the
date of issue of said completion certificate and the capital gain tax liability would be deemed to
arise in the previous year in which such transfer took place. In such a case, full value of
consideration received or accruing shall be determined by the general provisions of the Act.
[Proviso to section 45(5A)]

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Meaning of certain terms:

Term Meaning
Competent authority The authority empowered to approve the building plan by or under any
law for the time being in force
Stamp duty value The value adopted or assessed or reassessable by any authority of
Government for the purpose of payment of stamp duty in respect of an
immovable property being land or building or both.
Taxability of capital gains in case of Specified Agreement: At a Glance

Individual/ HUF entering into specified

agreement for development of project

Is the individual/ HUF transferring his share No Is the individual/ HUF

in the project after the date of issue of transferring his share in the
completion certificate? project on or before the date of
issue of completion certificate?
Yes Yes
Capital gains tax liability would arise in the Capital gains tax liability would
P.Y. in which Certificate of Completion arise in the P.Y. in which the
for whole or part of project is issued by the property is handed over to
Competent Authority the developer

Stamp duty value of his share, on the date of

issue of certificate of completion (+)
Consideration in cash or cheque or draft or
any other mode = Full Value of
Consideration as per section 45(5A)

Full value of consideration deemed to be

the cost of acquisition for determining
capital gains on subsequent sale of share
of developed property [Section 49(7)]

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 CAPITAL GAINS 4.33

4.6 CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY

COMPANIES IN LIQUIDATION [SECTION 46]
(1) In the hands of liquidated company: Where the assets of a company are distributed to
its shareholders on its liquidation, such distribution shall not be regarded as a transfer by
the company for the purposes of section 45 [Section 46(1)].

The above section is restricted in its application to the circumstances mentioned therein
i.e., the assets of the company must be distributed to shareholders on the liquidation of
the company. If, however, the liquidator sells the assets of the company resulting in a
capital gain and distributes the funds so collected, the company will be liable to pay tax
on such gains.

(2) In the hands of shareholders: Shareholders receive money or other assets from the
company on its liquidation. They will be chargeable to income-tax under the head ‘capital
gains’ in respect of the market value of the assets received on the date of distribution, or
the moneys so received by them. The portion of the distribution which is attributable to
the accumulated profits of the company is to be treated as dividend income of the
shareholder under section 2(22)(c), which would be taxable in the hands of shareholders
under the head “Income from other sources”. The same will be deducted from the amount
received/ fair market value for the purpose of determining the full value of consideration
for computation of capital gains.

(3) Capital gains tax on subsequent sale by the shareholders: If the shareholder, after
receipt of any such asset on liquidation of the company, transfers it, then Fair Market
Value on the date of distribution would be treated as cost of acquisition of such asset.

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 4.34 DIRECT TAX LAWS

Capital Gains on
distribution of assets by
companies in liquidation
[Section 46]

In the hands of the In the hands of the

company [Section shareholders
46(1)] [Section 46(2)]

Distribution is not a
transfer
Distribution attributable to Money received (+) FMV of
accumulated profits of the assets distributed (-)
company deemed dividend u/s
2(22)(c)
No capital gains tax
liability
Deemed dividend u/s Full value of
2(22)(c) consideration for the
purpose of section 48

Taxable in the hands of To be considered for

shareholders as “Income computing Capital
from Other Sources” Gains in the hands of
shareholders

4.7 CAPITAL GAINS ON BUYBACK OF SHARES OR

OTHER SECURITIES [SECTION 46A]
(1) In case of shares of a company other than a domestic company and specified
securities: Any consideration received by a holder of specified securities (other than
shares of a domestic company) from any company on purchase of its specified securities
is chargeable to tax in the hands of the holder of specified securities. The difference
between the cost of acquisition and the value of consideration received by the holder of
securities is chargeable to tax as capital gains in his hands. The computation of capital
gains shall be made in accordance with the provisions of section 48.

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 CAPITAL GAINS 4.35

Such capital gains shall be chargeable in the year in which such securities were
purchased by the company. For this purpose, “specified securities” shall have the same
meaning as given in Explanation to section 77A of the Companies Act, 1956 3.

As per Section 68 of the Companies Act, 2013, "specified securities" includes employees' stock
option or other securities as may be notified by the Central Government from time to time.

Note – As far as shares are concerned, this provision would be attracted in the hands of the
shareholder only if the shares are bought back by a company, other than a domestic
company.

(2) In case of buy back of shares effected before 1.10.2024 by domestic companies: In
case of buyback of shares (whether listed or unlisted) before 1.10.2024 by a domestic
company, additional income-tax@20% (plus surcharge @12% and cess@4%) is leviable in
the hands of the company [Link], the income arising to the shareholders in respect
of such buyback of shares by the domestic company is exempt under section 10(34A),
since the domestic company is liable to pay additional income-tax on the buyback of
shares.
(3) In case of buy back of shares effected on or after 1.10.2024 by domestic companies:
In case of buyback of shares (whether listed or unlisted) on or after 1.10.2024 by a
domestic company, the sum paid by a domestic company for purchase of its own shares
would be treated as dividend and taxable under the head “Income from Other Sources” in
the hands of shareholders. No deduction for expenses would be available against such
dividend income.
Consequently, as per section 46A, value of consideration received by a shareholder on buy
back of shares by a domestic company would be Nil and the difference between the cost of
acquisition and the value of consideration received by the shareholder will result into capital
loss. The same can be set off and carried forward as per the applicable set-off & carry
forward provisions of the Act. If it is long-term capital loss, it can be set-off only against
long-term capital gains. If it is a short-term capital loss, it can set-off against both long term
capital gains and short term capital gains. For details, refer Chapter: 7: Aggregation of
income, Set-off and Carry Forward of Losses.

3 Now section 68 of the Companies Act, 2013

4
Under section 115QA

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 4.36 DIRECT TAX LAWS

4.8 IMPORTANT DEFINITIONS

(a) Amalgamation [Section 2(1B)] - “Amalgamation”, in relation to companies, means
- the merger of one or more companies with another company or
- the merger of two or more companies to form one company
(the company or companies which so merge being referred to as the amalgamating
company or companies and the company with which they merge or which is formed as a
result of the merger, as the amalgamated company) in such a manner that -
(i) all the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation;
(ii) all the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of the
amalgamation;
(iii) shareholders holding not less than three-fourth in value of the shares in the
amalgamating company or companies (other than shares already held therein
immediately before the amalgamation by, or by a nominee for, the amalgamated
company or its subsidiary) become shareholders of the amalgamated company by
virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by another
company pursuant to the purchase of such property by the other company or as a result of
the distribution of such property to the other company after the winding up of the first
mentioned company.
(b) Demerger [Section 2(19AA)] - “Demerger”, in relation to companies, means the transfer,
pursuant to a scheme of arrangement under sections 230 to 232 of the Companies Act,
2013, by a demerged company of its one or more undertaking to any resulting company in
such a manner that -
(i) all the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting company by
virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the resulting
company by virtue of the demerger;

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 CAPITAL GAINS 4.37

(iii) the property and the liabilities of the undertaking or undertakings being transferred
by the demerged company are transferred at values appearing in its books of
account immediately before the demerger;
However, this provision does not apply where, in compliance to the Indian Accounting
Standards specified in Annexure to the Companies (Indian Accounting Standards)
Rules, 2015, the resulting company records the value of the property and the liabilities
of the undertaking or undertakings at a value different from the value appearing in the
books of account of the demerged company, immediately before the demerger.
(iv) the resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis except where the
resulting company itself is a shareholder of the demerged company;
Note - If the resulting company is a shareholder of the demerged company, it cannot
issue shares to itself. However, the resulting company has to issue shares to the
other shareholders of the demerged company.
(v) the shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or, its subsidiary) become
shareholders of the resulting company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the property or assets of the
demerged company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under section
72A(5) by the Central Government in this behalf.
Explanation in respect of Certain Terms:
Explanation Term Particulars
1 Undertaking Includes
- any part of an undertaking or a unit or division
of an undertaking or
- a business activity taken as a whole,
However, it does not include individual assets or
liabilities or any combination thereof not constituting
a business activity.
2 Liabilities Includes
(a) the liabilities which arise out of the activities or
operations of the undertaking;

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 4.38 DIRECT TAX LAWS

(b) the specific loans or borrowings (including

debentures) raised, incurred and utilised
solely for the activities or operations of the
undertaking; and
(c) in cases, other than those referred to in clause
(a) or clause (b), so much of the amounts of
general or multipurpose borrowings, if any, of
the demerged company as stand in the same
proportion which the value of the assets
transferred in a demerger bears to the total
value of the assets of such demerged
company immediately before the demerger.
3 Property For the purpose of determining the value of the
property, any change in the value of assets conse-
quent to their revaluation shall be ignored.
4&5 Splitting up or (i) Splitting up or the reconstruction of
reconstruction - any authority or
- a body constituted or established under
a Central, State or Provincial Act, or
- a local authority or
- a public sector company,
into separate authorities or bodies or local
authorities or companies, as the case may be,
shall be deemed to be a demerger if such split
up or reconstruction fulfils such conditions as
may be notified by the Central Government in
the Official Gazette.
(ii) The reconstruction or splitting up of a
company, which ceased to be a public sector
company as a result of transfer of its shares
by the Central Government, into separate
companies, shall be deemed to be a
demerger, if such reconstruction or splitting up
has been made to give effect to any condition
attached to the said transfer of shares and
also fulfils such other conditions as may be
notified by the Central Government.
6 Reconstruction The reconstruction or splitting up of a public sector
or splitting up company into separate companies shall be deemed
of a public to be a demerger, if such reconstruction or splitting
sector up has been made to transfer any asset of the
company demerged company to the resulting company and the
resulting company ––

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 CAPITAL GAINS 4.39

(i) is a public sector company on the appointed

day indicated in such scheme, as may be
approved by the Central Government or any
other body authorised under the provisions of
the Companies Act, 2013 or any other law for
the time being in force governing such public
sector companies in this behalf; and
(ii) fulfils such other conditions as may be notified
by the Central Government.

(c) Demerged company [Section 2(19AAA)] - Demerged company means the company
whose undertaking is transferred, pursuant to a demerger, to a resulting company.
(d) Resulting company [Section 2(41A)] - Resulting company means one or more companies
(including a wholly owned subsidiary thereof) to which the undertaking of the demerged
company is transferred in a demerger and, the resulting company in consideration of such
transfer of undertaking, issues shares to the shareholders of the demerged company and
includes any authority or body or local authority or public sector company or a company
established, constituted or formed as a result of demerger.

4.9 TRANSACTIONS NOT REGARDED AS TRANSFER

[SECTION 47]
Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of
capital gains tax:

(1) (2) (3) (4)

Clause of Particulars of transfer of Asset transferred Conditions to be
section 47 capital asset referred to in fulfilled
column (3)
47(i) Any distribution on the total or Any capital asset -
partial partition of a HUF
47(iii) Any transfer by an individual Any capital asset. -
or HUF under a gift or will or
an irrevocable trust
[Upto A.Y. 2024-25, transfer
of a capital asset (other than
shares, debentures or
warrants allotted by a
company under any ESOP)

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 4.40 DIRECT TAX LAWS

under a gift or will or

irrevocable trust by any
person was not considered
as a transfer]
47(iv) Any transfer by a holding Any capital asset (a) The parent company
company to its subsidiary or its nominees must
company hold the whole of the
shares of the
subsidiary company;
and
(b) The subsidiary
company must be an
Indian company.
47(v) Any transfer by a subsidiary Any capital asset (a) The whole of share
company to the holding capital of the
company subsidiary company
must be held by the
holding company;
and
(b) The holding
company must be an
Indian company.
The exemption mentioned
in section 47(iv) or (v) will
not apply if a capital asset
is transferred as stock-in-
trade.
47(vi) Any transfer by the Any capital asset The amalgamated
amalgamating company to the company should be an
amalgamated company, in a Indian company
scheme of amalgamation.
47(via) Any transfer by the Capital asset, being (a) At least 25% of the
amalgamating foreign shares held in an Indian shareholders of the
company to the amalgamated company amalgamating foreign
foreign company, in a scheme company must
of amalgamation of two continue to remain
foreign companies. shareholders of the
amalgamated foreign
company;
(b) Such transfer should
not attract capital
gains in the country

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 CAPITAL GAINS 4.41

in which the
amalgamating
company is
incorporated.
47(viaa) Any transfer by a banking Any capital asset -
company to banking
institution, in a scheme of
amalgamation of the banking
company with the banking
institution, sanctioned and
brought into force by the
Central Government under
section 45(7) of the Banking
Regulation Act, 1949.
47(viab) Any transfer by the Capital asset, being (a) At least 25% of the
amalgamating foreign share of a foreign shareholders of the
company to the amalgamated company, referred to in amalgamating foreign
foreign company, in a scheme Explanation 5 to section company must
of amalgamation of two 9(1)(i), which derives, continue to remain
foreign companies. directly or indirectly, its shareholders of the
value substantially from amalgamated foreign
the share or shares of company;
an Indian company (b) Such transfer should
not attract capital
gains in the country
in which the
amalgamating
company is
incorporated.
47(vib) Any transfer, in a demerger, Any capital asset The resulting company
by the demerged company to should be an Indian
the resulting company company.
47(vic) Any transfer by the demerged Capital asset, being a (a) The shareholders
foreign company to the share or shares held in holding at least
resulting foreign company, in an Indian company three-fourths in value
a scheme of demerger of a of the shares of the
foreign company. demerged foreign
company continue to
remain shareholders
of the resulting
foreign company;
(b) Such transfer should
not attract tax on

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 4.42 DIRECT TAX LAWS

capital gains in the

country, in which the
demerged foreign
company is
incorporated.
However, the provisions
of sections 391 to 394 of
the Companies Act,
1956 5, shall not apply in
case of demergers
referred to in this clause.
47(vica) Any transfer by the Any capital asset -
predecessor co-operative
bank to the successor co-
operative bank or to the
converted banking company,
in a business reorganization
of co-operative bank.
47(vicb) Any transfer by a shareholder Capital asset, being a If the transfer is made in
of predecessor co-operative share or shares held by consideration of the
bank, in a business him in the predecessor allotment to him of any
reorganization. co-operative bank share or shares in the
successor co-operative
bank or the converted
banking company.
Note – Refer to section
44DB for the meanings of
“business
reorganisation”,
“converted banking
company”, “predecessor
co-operative bank” and
“successor co-operative
bank”.
47(vicc) Any transfer by the demerged Capital asset, being a (a) The shareholders
foreign company to the share of a foreign holding at least
resulting foreign company, in company referred to in three-fourths in value
a scheme of demerger of a Explanation 5 to section of the shares of the
foreign company 9(1)(i), which derives, demerged foreign
directly or indirectly, its company continue to
value substantially from remain shareholders

5
Sections 230 to 232 of the Companies Act, 2013

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 CAPITAL GAINS 4.43

the share or shares of of the resulting

an Indian company foreign company;
(b) Such transfer should
not attract capital
gains in the country
in which the
demerged foreign
company is
incorporated.
However, the provisions
of sections 391 to 394 of
the Companies Act,
19563, shall not apply in
case of demergers
referred to in this clause.
47(vid) Any transfer or issue of Capital asset, being The transfer or issue
shares by the resulting shares should be made in
company, in a scheme of consideration of
demerger to the shareholders demerger of the
of the demerged company. undertaking.
47(vii) Any transfer by a shareholder Capital asset, being (a) The transfer is made
of amalgamating company, in shares held in the in consideration of
a scheme of amalgamation of amalgamating company the allotment to him
companies of any share in the
amalgamated
company, except
where the
shareholder itself is
the amalgamated
company; and
(b) The amalgamated
company should be
an Indian company.
Example:
Let us take a case where A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd.
amalgamates with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A Ltd., being the
amalgamated company, cannot issue shares to itself. However, A Ltd. has to issue shares to the
other shareholders of B Ltd.
47(viia) Any transfer by a non-resident Capital asset, being Conditions laid down in
to another non-resident bonds or Global section 115AC(1) should
outside India. Depository Receipts be fulfilled:

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 4.44 DIRECT TAX LAWS

(GDRs) referred to in (a) Bonds should be of:

section 115AC(1) (i) an Indian
company (issued
in accordance
with Notified
scheme of
Central
Government); or
(ii) a public sector
company sold by
the Government
and purchased
by the non-
resident in
foreign currency
(b) GDRs should be
issued:
(i) in accordance
with notified
scheme of
Central
Government
against initial
issue of shares
of an Indian
company and
purchased by
the non-resident
in foreign
currency; or
(ii) against the
shares of a
public sector
company sold
by the
Government
and purchased
by him in
foreign
currency
through an
approved
intermediary;
or

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 CAPITAL GAINS 4.45

(iii) issued or
reissued in
accordance
with Notified
Scheme of
Central
Government
against the
existing shares
of an Indian
company
purchased by
him in foreign
currency
through an
approved
intermediary.
47(viiaa) Any transfer, made outside Capital asset, being a -
India, by a non-resident to rupee denominated
another non-resident. bond of an Indian
company issued outside
India
47(viiab) Any transfer of specified capital Capital asset, being The consideration for
assets by a non-resident on a - A bond or GDR such transaction is paid
recognised stock exchange referred to in section or payable in foreign
located in any International 115AC(1) (or) currency.
Financial Services Centre
- A rupee denominated
(IFSC)
bond of an Indian
company (or)
- A derivative (or)
- Any other security
notified by the Central
Government.
Accordingly, the Central
Government has, vide
Notification No. 16/2020,
dated 5.3.2020,
Notification No. 89/2022
dated 3.8.2022 and
Notification No. 71/2023
dated 12.9.2023,
specified the following
securities:

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 4.46 DIRECT TAX LAWS

(i) foreign currency

denominated bond;
(ii) unit of a Mutual
Fund;
(iii) unit of a business
trust;
(iv) foreign currency
denominated equity
share of a company;
(v) unit of Alternative
Investment Fund;
(vi) Bullion Depository
Receipt with
underlying bullion
(vii) unit of investment
trust, being REITs or
an InvITs;
(viii) unit of a scheme (a
scheme of a fund
management entity
launched under IFSC
Authority (Fund
Management)
Regulations, 2022);
(ix) unit of a Exchange
Traded Fund
launched under IFSC
Authority (Fund
Management)
Regulations, 2022
which are listed on a
recognised stock
exchange located in any
IFSC in accordance with
the regulations made by
the SEBI under the
SEBI Act 1992 or the
IFSC Authority under
the IFSC Authority Act
2019, as the case may
be.

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 CAPITAL GAINS 4.47

47(viiac) Any transfer, in a relocation, Any capital asset -

of a capital asset by the
original fund to the resulting
fund
47(viiad) Any transfer by a shareholder Capital asset, being Transfer of capital asset
or unit holder or interest share or unit or interest should be in
holder of original fund, in a held by the shareholder consideration for the
relocation of fund. in the original fund share or unit or interest in
the resultant fund.
Original fund – Original Fund means
(A) a fund established or incorporated or registered outside India, which collects funds from its
members for investing it for their benefit and fulfils the following conditions, namely-
(i) the fund is not a person resident in India;
(ii) the fund is a resident of a country or a specified territory with which an agreement
referred to in section 90(1) or 90A(1) has been entered into; or is established or
incorporated or registered in a country or a specified territory as may be notified by the
Central Government in this behalf;
(iii) the fund and its activities are subject to applicable investor protection regulations in the
country or specified territory where it is established or incorporated or is a resident; and
(iv) fulfils such other conditions as may be prescribed;
Accordingly, vide Notification No. 80/2022 dated 8.7.2022, Rule 21AL prescribes that the
aggregate participation or investment in the original fund, directly or indirectly, by persons
resident in India shall not exceed 5% of the corpus of such fund at the time of transfer of a
capital asset to a resultant fund being a Category III AIF.
(B) an investment vehicle, in which Abu Dhabi Investment Authority is the direct or indirect sole
shareholder or unit holder or beneficiary or interest holder and such investment vehicle is
wholly owned and controlled, directly or indirectly, by the Abu Dhabi Investment Authority or
the Government of Abu Dhabi; or
(C) a fund notified by the Central Government subject to the conditions specified.
Relocation - Transfer of assets of the original fund, or of its wholly owned special purpose
vehicle, to a resultant fund on or before 31.3.2025, where consideration for such transfer is
discharged in the form of share or unit or interest in the resulting fund to –
(i) shareholder or unit holder or interest holder of the original fund, in the same proportion in
which the share or unit or interest was held by such shareholder or unit holder or interest
holder in such original fund, in lieu of their shares or units or interests in the original fund; or
(ii) the original fund, in the same proportion as referred to in (i), in respect of which the share or
unit or interest is not issued by resultant fund to its shareholder or unit holder or interest
holder.

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Resultant fund - A fund established or incorporated in India in the form of a trust or a company or
a limited liability partnership, which
(i) has been granted a certificate of registration as a Category I or Category II or Category III
AIF, and is regulated under the SEBI (Alternative Investment Fund) Regulations, 2012 made
under the SEBI Act, 1992 or regulated under the IFSC Authority (Fund Management)
Regulations, 2022 made under the IFSC Authority Act, 2019; and
(ii) is located in any IFSC as referred to in section 80LA(1A).
47(viiae) Any transfer by India Any capital asset The institution should be
Infrastructure Finance Company set up under an Act of
Limited to an institution Parliament and notified
established for financing the by the Central
infrastructure and development. Government.
47(viiaf) Any transfer by a public sector Any capital asset Transfer should be under
company to another public a plan approved by the
sector company notified by the Central Government.
Central Government for this
purpose or to the Central
Government or to a State
Government.
47(viib) Any transfer of a capital asset Capital asset, being a The transfer should be
made outside India by a non- Government Security through an intermediary
resident to another non-resident. carrying a periodic dealing in settlement of
payment of interest. securities.
47(viic) Any transfer by way of Capital asset, being -
redemption by an individual Sovereign Gold Bond
issued by the RBI under
the Sovereign Gold
Bond Scheme, 2015
Sovereign Gold Bond Scheme, 2015
This scheme of the Government of India is intended to reduce the demand for physical gold and
consequently, reduce the foreign exchange outflow due to import of gold. The two-fold benefits of
this scheme are:
(1) The gold bond would serve as a substitute for physical gold; and
(2) The gold bond would provide security to the individual investor investing in gold for meeting
their social obligation.
47(viid) Any transfer of a capital asset Capital asset, being Vault Manger – Any
conversion of gold into person who carries on or
Electronic Gold Receipt intends to carry on the
issued by a Vault business of providing
Manager, or conversion vaulting services.

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 CAPITAL GAINS 4.49

of Electronic Gold Vaulting service” in

Receipts into gold. relation to gold means
the storage and
safekeeping of gold
deposited with the Vault
Manager, by the
depositor, for the
purpose of trading in
Electronic Gold Receipt
and providing services
incidental thereto, and
includes—(i)utilizing the
services of assayers
empanelled with the
Stock Exchanges for
testing as per the gold
standard, wherever
required; (ii) coordination
with depositories for
creation, transfer and
extinguishment of
Electronic Gold Receipt;
and (iii) providing deposit,
storage and withdrawal
services to the beneficial
owners
47(ix) Any transfer to the Government (i) work of art -
or to a University or the National (ii) archaeological,
Museum, National Art Gallery, scientific or art
National Archives or any other collection
public museum or institution
(iii) book
notified by the Central
Government to be of national (iv) manuscript
importance or to be of renown (v) drawing
throughout any State (vi) painting
(vii) photograph or
(viii) print.
47(x) Any transfer by way of Capital asset, being -
conversion of bonds or deben- bonds or debentures,
tures, debenture-stock or debenture-stock or
deposit certificates in any form, deposit certificates in
of a company into shares or any form, of a company
debentures of that company

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47(xa) Any transfer by way of Capital asset, being Conditions laid down in
conversion of bonds into shares bonds referred to in section 115AC(1) should
or debentures of any company section 115AC(1)(a) be fulfilled i.e., Bonds
should be of:
(i) an Indian company
(issued in accordance
with Notified scheme
of Central
Government); or
(ii) a public sector
company sold by the
Government and
purchased by the
non-resident in
foreign currency
47(xb) Any transfer by way of Conversion of -
conversion of preference shares preference shares of a
of a company into equity shares company
of that company
47(xii) Any transfer under a scheme Land of a sick industrial Such transfer is made in
prepared and sanctioned under company the period commencing
section 18 of the Sick Industrial from the previous year in
Companies (Special Provisions) which the said company
Act, 1985, by a sick industrial has become a sick
company which is managed by industrial company and
its workers’ co-operative ending with the previous
year during which the
entire net worth of such
company becomes equal
to or exceeds the
accumulated losses.
47(xiii) - Transfer of a capital asset or - Any capital asset or Discussed in detail at
intangible asset by a firm to a intangible asset the end of this table
company on succession of the
firm by a company in the
business carried on by the firm
- Transfer of a capital asset by
AOP/BOI to company
- Capital Asset
consequent to
demutualisation or
corporatisation of a
recognised stock exchange
in India

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47(xiiia) Any transfer of a membership Capital asset, being -

right by a member of recognised membership right
stock exchange in India for
acquisition of shares and trading
or clearing rights acquired by such
member in that recognised stock
exchange in accordance with a
scheme for demutualisation or
corporatisation approved by SEBI
47(xiiib) - Transfer of capital asset or - Any Capital asset or Discussed in detail at
intangible asset by private intangible asset the end of this table
company or unlisted public
company to LLP
- Transfer of shares held in the - Capital asset, being
company by the shareholder shares in the
as a result of conversion of the company
company into a LLP
47(xiv) Transfer of capital asset or Capital asset or (i) All assets and
intangible asset by sole intangible asset liabilities of the sole
proprietary concern to a proprietary concern
company on succession of the relating to the
sole proprietary concern by the business
company immediately before
the succession
should become the
assets and liabilities
of the company;
(ii) The sole proprietor
should hold not less
than 50% of the total
voting power in the
company, and his
shareholding should
continue in such
manner for a period
of 5 years from the
date of succession;
(iii) The sole proprietor
should not receive
any consideration or
benefit in any form,
directly or indirectly,

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 4.52 DIRECT TAX LAWS

other than by way of

allotment of shares
in the company.
47(xv) Any transfer in a scheme for - -
lending of any securities under an
agreement or arrangement which
the assessee has entered into with
the borrower of such securities and
which is subject to the guidelines
issued by SEBI or the RBI
47(xvi) Transfer of capital asset under Discussed in detail at
Reverse Mortgage the end of this table
47(xvii) Any transfer of a capital asset to Capital asset, being Capital asset should be
a business trust share of a special transferred in exchange
purpose vehicle of units allotted by that
trust to the transferor
47(xviii) Any transfer by a unit holder in the A unit or units, held by Transfer is made in
consolidating scheme of a mutual him in the consolidating consideration of the
fund scheme of a mutual fund allotment to unit holder of
a capital asset, being a
unit or units, in the
consolidated scheme of
the mutual fund.
However, this exemption
would be available only
if, the consolidation
takes place of two or
more schemes of equity
oriented fund or of two or
more schemes of a fund
other than equity
oriented fund.
47(xix) Any transfer by a unit holder in A unit or units, held by Transfer should be made
the consolidating plan of a him in the consolidating in consideration of the
mutual fund scheme plan of a mutual fund allotment to unit holder
scheme of a capital asset, being
a unit or units, in the
consolidated plan of that
scheme of the mutual
fund.

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 CAPITAL GAINS 4.53

Consolidating scheme - The scheme of a mutual fund which merges under the process of
consolidation of the schemes of mutual fund in accordance with the SEBI (Mutual Funds)
Regulations, 1996 made under SEBI Act, 1992.
Consolidated scheme - The scheme with which the consolidating scheme merges or which is
formed as a result of such merger.
Consolidating plan - The plan within a scheme of a mutual fund which merges under the process
of consolidation of the plans within a scheme of mutual fund in accordance with the SEBI (Mutual
Funds) Regulations, 1996 made under SEBI Act, 1992.
Consolidated plan - The plan with which the consolidating plan merges or which is formed as a
result of such merger.
Mutual Fund - A mutual fund specified under section 10(23D), i.e.,
(i) a Mutual Fund registered under the SEBI Act, 1992 or regulations made thereunder;
(ii) such other Mutual Fund set up by a public sector bank or a public financial institution or
authorised by the Reserve Bank of India and subject to conditions notified by the Central
Government.
47(xx) Any transfer of a capital asset Capital asset, being an Transfer should be in
held by a public sector company interest in a joint exchange of shares of a
venture. company incorporated
outside India by the
Government of a foreign
State, in accordance with
the laws of that foreign
State.
Joint venture" means a
business entity, as may
be notified by the Central
Government.

ILLUSTRATION 2

M held 2000 shares in a company ABC Ltd. This company amalgamated with another company
during the previous year ending 31-3-2025. Under the scheme of amalgamation, M was allotted
1000 shares in the new company. The market value of shares allotted is higher by ` 50,000 than
the value of holding in ABC Ltd.

The Assessing Officer proposes to treat the transaction as an exchange and to tax ` 50,000 as
capital gain. Is he justified?

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 4.54 DIRECT TAX LAWS

SOLUTION
In the above example, assuming that the amalgamated company is an Indian company, the
transaction is squarely covered by the exemption under section 47(vii) and the proposal of the
Assessing Officer to treat the transaction as an exchange is not justified.
Transfer of capital asset or intangible asset on succession of the firm by a company or by
AOP/ BOI to company consequent to demutualisation or corporatisation of a recognised
stock exchange [Section 47(xiii)]:
Any transfer of a capital asset or intangible asset (in the case of a firm) –
(i) by a firm to a company where such firm is succeeded by that company; or
(ii) to a company in the course of demutualisation or corporatisation of a recognised stock
exchange in India as a result of which an AOP or BOI is succeeded by that company.
Conditions –
(i) All assets and liabilities of the firm or AOP or BOI relating to the business immediately before
the succession become the assets and liabilities of the company;
(ii) All the partners of the firm immediately before the succession become the shareholders of
the company in the same the proportion in which their capital accounts stood in the books of
the firm on the date of succession;
(iii) The partners of the firm do not receive any consideration or benefit in any form, directly or
indirectly, other than by way of allotment of shares in the company;
(iv) The partners of the firm together hold not less than 50% of the total voting power in the
company, and their shareholding continues in such manner for a period of 5 years from the
date of succession;
(v) The demutualisation or corporatisation of a recognised stock exchange in India is carried out
in accordance with a scheme for demutualisation or corporatisation approved by SEBI.
Transfer of capital asset or intangible asset by private company and share held by
shareholder to LLP in a conversion of private company into a LLP [Section 47(xiiib)]:
(i) Any transfer of a capital asset or intangible asset by a private company or unlisted public
company to a LLP or
(ii) Any transfer of a share or shares held in a company by a shareholder on conversion of a
company into a LLP
in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008.

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Conditions –
(i) All assets and liabilities of the company immediately before the conversion become the
assets and liabilities of the LLP;
(ii) all the shareholders of the company immediately before the conversion become partners of
the LLP and their capital contribution and profit sharing ratio in the LLP are in the same
proportion as their shareholding in the company on the date of conversion;
(iii) No consideration other than share in profit and capital contribution in the LLP arises to the
shareholders;
(iv) The erstwhile shareholders of the company continue to be entitled to receive at least 50% of
the profits of the LLP for a period of 5 years from the date of conversion;
(v) The total sales, turnover or gross receipts in business of the company should not exceed
` 60 lakh in any of the three preceding previous years;
(vi) The total value of assets as appearing in the books of account of the company in any of the
three previous years preceding the previous year in which the conversion takes place, should
not exceed ` 5 crore; and
(vii) No amount is paid, either directly or indirectly, to any partner out of the accumulated profit of
the company for a period of 3 years from the date of conversion.
Transfer of capital asset under Reverse Mortgage [Section 47(xvi)]:
Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and
notified by the Central Government.
The Reverse Mortgage scheme is for the benefit of senior citizens, who own a residential house
property. In order to supplement their existing income, they can mortgage their house property
with a scheduled bank or housing finance company, in return for a lump-sum amount or for a
regular monthly/ quarterly/ annual income. The senior citizens can continue to live in the house
and receive regular income, without the botheration of having to pay back the loan.
The loan will be given up to, say, 60% of the value of residential house property mortgaged. Also,
the bank/housing finance company would undertake a revaluation of the property once every 5
years. The borrower can use the loan amount for renovation and extension of residential property,
family’s medical and emergency expenditure etc., amongst others. However, he cannot use the
amount for speculative or trading purposes.

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The Reverse Mortgage Scheme, 2008, includes within its scope, disbursement of loan by an
approved lending institution, in part or in full, to the annuity sourcing institution, for the purposes of
periodic payments by way of annuity to the reverse mortgagor. This would be an additional mode
of disbursement i.e., in addition to direct disbursements by the approved lending institution to the
Reverse Mortgagor by way of periodic payments or lump sum payment in one or more tranches.
An annuity sourcing institution has been defined to mean Life Insurance Corporation of India or
any other insurer registered with the Insurance Regulatory and Development Authority.
Maximum Period of Reverse Mortgage Loan:
Mode of disbursement Maximum period of loan
(a) Where the loan is disbursed directly 20 years from the date of signing the agreement by
to the Reverse Mortgagor the reverse mortgagor and the approved lending
institution.
(b) Where the loan is disbursed, in part The residual life time of the borrower.
or in full, to the annuity sourcing
institution for the purposes of
periodic payments by way of
annuity to the Reverse Mortgagor

The bank will recover the loan along with the accumulated interest by selling the house after the
death of the borrower. The excess amount will be given to the legal heirs. However, before
resorting to sale of the house, preference will be given to the legal heirs to repay the loan and
interest and get the mortgaged property released.
Therefore, section 47(xvi) clarifies that any transfer of a capital asset in a transaction of reverse
mortgage under a scheme made and notified by the Central Government would not amount to a
transfer for the purpose of capital gains.

Exemption of income received in a transaction of reverse mortgage [Section 10(43)]: Section

10(43), further, provides that the amount received by the senior citizen as a loan, either in lump
sum or in instalments, in a transaction of reverse mortgage would be exempt from income-tax.

Capital gains tax liability would be attracted only at the stage of alienation of the mortgaged
property by the bank/ housing finance company for the purposes of recovering the loan.

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ILLUSTRATION 3
In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2024-25, he gifted it to his son at the
time of marriage. Fair market value (FMV) of the gold on the day the gift was made was
` 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1945 for ` 20,000. It is given
to one of the family members in the P.Y. 2024-25 at the time of partition of the family. FMV
on the day of partition was ` 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are converted into
500 shares worth ` 85,000 in November 2024 by the company.
SOLUTION
We know that capital gains arise only when we transfer a capital asset. The liability of capital gains
tax in the situations given above is discussed as follows:
(i) As per the provisions of section 47(iii), transfer of a capital asset by an individual under a
gift is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax
liability does not arise in the given situation.
(ii) As per the provisions of section 47(i), transfer of a capital asset (being in kind) on the total
or partial partition of Hindu undivided family is not regarded as transfer for the purpose of
capital gains. Therefore, capital gains tax liability does not arise in the given situation.
(iii) As per the provisions of section 47(x), transfer by way of conversion of bonds or
debentures, debenture stock or deposit certificates in any form of a company into shares or
debentures of that company is not regarded as transfer for the purpose of capital gains.
Therefore, capital gains tax liability does not arise in the given situation.
ILLUSTRATION 4
Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified
reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek
did not repay the loan on maturity and hence gave possession of the house to the bank, to
discharge his loan. How will the treatment of long-term capital gain be on such reverse mortgage
transaction?

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SOLUTION
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government shall not be considered as a
transfer for the purpose of capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be regarded as
a transfer. Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in
lump sum or in instalment, in a transaction of reverse mortgage would be exempt from income-tax.
Therefore, the monthly instalment amounts received by Mr. Abhishek would not be taxable.
However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged
property by the bank for the purposes of recovering the loan.

4.10 WITHDRAWAL OF EXEMPTION IN CERTAIN CASES

Section 47A provides for withdrawal of the benefit of exemption given by section 47 in certain cases.
(1) Conditions for transfer of capital asset by holding to its wholly owned subsidiary and
vice versa [Section 47(iv) or 47(v)]: As noted above, capital gains arising from the
transfer of a capital asset by a company to its wholly owned subsidiary company is exempt
from tax.
Similarly, capital gains arising from the transfer of a capital asset by the subsidiary
company to its 100% holding company is also exempt from tax, provided under both
circumstances the transferee is an Indian company.
Section 47A provides that the above exemption will be withdrawn if at any time before the
expiry of 8 years from the date of transfer of a capital asset referred to above
(1) such capital asset is converted by the transferee company or is treated by it as
stock-in-trade of its business; or

(2) the parent company or its nominees ceases to hold the whole of the share capital of
the subsidiary company.
In the above two cases, the amount of capital gains exempt from tax by virtue of the
provisions contained in section 47 will be deemed to be the income of the transferor
company chargeable under the head ‘capital gains’ of the year in which such transfer took
place.

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(2) Transfer of membership of a recognised stock exchange for shares [Section 47(xi)]:
Capital gains not charged to tax under clause (xi) of section 47 shall be deemed to be the
income chargeable under the head “capital gains” of the previous year in which such
transfer took place if the shares of the company received in exchange for transfer of
membership in a recognised stock exchange, are transferred at any time before the expiry
of 3 years from the date of such transfer.
(3) Transfer of capital asset or intangible asset on succession of firm/ sole proprietary
concern by a company [Section 47(xiii) or 47(xiv)]: Where any of the conditions laid
down in section 47(xiii) or (xvi), as the case may be, for succession of a firm or sole
proprietary concern by a company are not complied with, the amount of profits or gains
arising from the transfer of such capital asset or intangible asset shall be deemed to be the
profits and gains chargeable to tax of the successor company for the previous year in
which the conditions are not complied with.
(4) Transfer of capital asset or intangible asset by private company or unlisted public
company and share held by shareholder to LLP in a conversion of private company
or unlisted public company by a LLP [Section 47(xiiib)]: If subsequent to the conversion
of a private company or unlisted company into an LLP, any of the conditions laid down in
section 47(xiiib) are not complied with, the capital gains not charged under section 45 would
be deemed to be chargeable to tax in the previous year in which the conditions are not
complied with, in the hands of the LLP or the shareholder of the predecessor
company, as the case may be.

4.11 MODE OF COMPUTATION OF CAPITAL GAINS

[SECTION 48]
(1) Computation of capital gains: The income chargeable under the head ‘capital gains’ shall
be computed by deducting the following items from the full value of the consideration
received or accruing as a result of the transfer of the capital asset:
(i) Expenditure incurred wholly and exclusively in connection with such transfer like,
brokerage, stamp duty, registration fee, legal expenses etc.

(ii) The cost of acquisition and cost of any improvement thereto.

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However, the cost of acquisition of the asset or the cost of improvement thereto
would not include the deductions claimed in respect of interest u/s 24(b) or under the
provisions of Chapter VI-A.
Deduction from cost of acquisition of a unit of a business trust - The cost of
acquisition of a unit of a business trust has to be reduced -

 by any sum received by a unit holder from the business trust with respect to such
unit, which is not in the nature of interest and dividend referred to in section
10(23FC) or rental income referred to in section 10(23FCA) and
 which is not chargeable to tax in the hands of unit holders under section
56(2)(xii) and in the hands of business trust under section 115UA(2).
However, where transaction of transfer of a unit is not considered as transfer under
section 47 and cost of acquisition of such unit is determined under section 49, sum
received with respect to such unit before such transaction as well as after such
transaction has to be reduced from the cost of acquisition.

(iii) in case of value of any money or capital asset received by a specified person from a
specified entity referred to in section 45(4), the amount chargeable to income-tax
as income of such specified entity under that section which is attributable to the
capital asset being transferred by the specified entity, calculated in the
prescribed manner [The manner of attribution is prescribed under Rule 8AB,
which was discussed in earlier paras along with section 45(4)].
(2) No deduction in respect of STT paid: No deduction, however, shall be allowed in
computing the income chargeable under the head “Capital Gains” in respect of any amount
paid on account of securities transaction tax under Chapter VII of the Finance (No.2)
Act, 2004.
(3) Cost inflation index: Under section 48, for computation of long-term capital gains
arising from the transfer which takes place before 23.7.2024, the cost of acquisition and
cost of improvement will be increased by applying the cost inflation index (CII). Once the
cost inflation index is applied to the cost of acquisition and cost of improvement, it becomes
indexed cost of acquisition and indexed cost of improvement.

“Cost Inflation Index” in relation to a previous year means such index as may be notified by
the Central Government having regard to 75% of average rise in the Consumer Price Index
(Urban) for the immediately preceding previous year to such previous year.

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Indexed cost of acquisition means an amount which bears to the cost of acquisition, the
same proportion as CII for the year in which the asset is transferred bears to the CII for the
first year in which the asset was held by the assessee or for the year beginning on 1st April,
2001, whichever is later.
Similarly, indexed cost of any improvement means an amount which bears to the cost of
improvement, the same proportion as CII for the year in which the asset is transferred bears
to the CII for the year in which the improvement to the asset took place.
Below is the summary showing the indexation benefit available to different types of long-
term capital assets which are transferred before 23.7.2024 -

Long-term capital assets which are transferred before Indexation benefit

23.7.2024
Bonds or debentures No
Capital indexed bonds issued by the Government Yes
Sovereign Gold Bond issued by the RBI under the Sovereign Gold Yes
Bond Scheme, 2015
Depreciable assets N.A. since it will be
Unit of a specified mutual fund acquired on or after 1.4.2023 short term capital
Marked linked debentures gain
Equity share in a company on which STT is paid both at the time of No
acquisition and transfer
Unit of equity oriented fund or unit of business trust on which STT is No
paid at the time of transfer
Other long-term capital assets Yes

Consequent to the amendment made by the Finance (No. 2) Act, 2024 in section 48, no
indexation benefit is allowable on long-term capital gains arising on transfer of any
capital assets taking place on or after 23.7.2024.
Computation of tax on LTCG on transfer of land or building or both on or after
23.7.2024 [Section 112]
A resident individual or HUF, while computing tax on LTCG on transfer of land or building or
both, has the option to take the benefit of indexation under section 112 in respect of long-
term capital gains arising on transfer of land or building or both which is acquired before
23.7.2024 and transferred on or after 23.7.2024. Accordingly, LTCG on transfer of such
land or building or both are subject to lower of tax @12.5% (on LTCG computed without
indexation benefit) or @20% (on LTCG computed with indexation benefit).

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It may be noted that this benefit to a resident individual or HUF is to be given only while
computing tax on LTCG under section 112 on transfer of land or building or both and not
while computing Income under the head “Capital Gains” which would form part of gross total
income/total income. Thus, for computing income under the head “Capital Gains” to be
included in gross total income, indexation benefit is not to be given even in case of resident
individual/HUF transferring land or building or both on or after 23.7.2024 which was
acquired before 23.7.2024.
The cost inflation indices for the financial years so far have been notified as under:
Financial Year Cost Inflation Index
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317
2022-23 331
2023-24 348
2024-25 363

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(4) Full value of consideration of shares, debentures or warrants issued under ESOP in
case of transfer under a gift etc. upto A.Y. 2024-25 - In case where shares, debentures
or warrants allotted by a company directly or indirectly to its employees under the
Employees' Stock Option Plan or Scheme in accordance with the guidelines issued in this
behalf by the Central Government are transferred under a gift or irrecoverable trust, then
the market value on the date of such transfer shall be deemed to be the full value of
consideration received or accruing as a result of transfer of such asset.
(5) Special provision for non-residents - In case of non-residents who invest foreign
exchange to acquire capital assets, capital gains arising from the transfer of shares or
debentures of an Indian company is to be computed in the following manner:
• The cost of acquisition, the expenditure incurred wholly and exclusively in connection
with the transfer and the full value of the consideration are to be converted into the
same foreign currency with which such shares were acquired. The conversion has to
be done at the average of Telegraphic Transfer Buying Rate (TTBR) and Telegraphic
Transfer Selling Rate (TTSR) on the respective dates.
• The resulting capital gains shall be reconverted into Indian currency by applying the
TTBR on the date of transfer.
The aforesaid manner of computation of capital gains shall be applied for every purchase
and sale of shares or debentures of an Indian company. This will provide relief from risk of
foreign currency fluctuation to non-residents. Rule 115A is relevant for this purpose. Benefit
of indexation will not be applied in this case.
Note – Refer to Chapter 21: Non-resident Taxation of Module 4 where Rule 115A is
detailed.

On long-term capital gains arising from transfer of unlisted securities or shares of a

company in which public are not substantially interested, non-residents and foreign
companies are subject to tax at a concessional rate of 10% (without indexation benefit or
currency conversion) if such transfer takes place before 23.7.2024 and @12.5% (without
indexation benefit or currency conversion) if such transfer takes place on or after 23.7.2024
[Section 112].

Rupee Denominated Bonds (RDBs)

As a measure to enable Indian companies to raise funds from outside India, the RBI has
permitted them to issue rupee denominated bonds outside India. Accordingly, in case of

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non-resident assessees, any gains arising on account of appreciation of rupee between the
date of purchase and the date of redemption of rupee denominated bond of an Indian
company held by him against foreign currency in which investment is made shall not be
included in computation of full value of consideration. This would provide relief to the non-
resident investor who bears the risk of currency fluctuation.
Note – The benefit of currency fluctuation would not be applicable to the long-term capital gains
arising from the transfer of the following assets referred to in section 112A –
(i) equity share in a company on which STT is paid both at the time of acquisition and
transfer
(ii) unit of equity oriented fund or unit of business trust on which STT is paid at the time of
transfer.

4.12 ASCERTAINMENT OF COST IN SPECIFIED

CIRCUMSTANCES [SECTION 49]
A person becomes the owner of a capital asset not only by purchase but also by several other
methods. Section 49 gives guidelines as to how to compute the cost under different
circumstances.
Section Circumstance Cost of acquisition
49(1) Cost to previous owner deemed as cost of acquisition of asset:
Where the capital asset became the Cost for which the previous owner of the
property of the assessee: property acquired it.
(i) on any distribution of assets on the
total or partition of a HUF; Notes –
(ii) under a gift or will by an Cost of improvement – To the cost of
individual or HUF (by any acquisition, the cost of improvement to
person upto 31.3.2024); the asset, incurred by the previous
(iii) by succession, inheritance or owner or the assessee on or after
devolution; 1.4.2001 must be added.
(iv) on any distribution of assets on the Period of holding - It may be noted that
liquidation of a company; section 2(42A) provides that in all such
(v) under a transfer to revocable or an cases, for determining the period for
irrevocable trust; which the capital asset is held by the
(vi) under any transfer of capital asset transferee, the period of holding of the
by a holding company to its wholly asset by the previous owner shall also
owned subsidiary Indian company be considered.
or by a subsidiary company to its

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 CAPITAL GAINS 4.65

100% holding Indian company, Benefit of indexation - The Bombay

referred to in section 47(iv) and High Court, in CIT v. Manjula J. Shah 16
47(v), respectively; Taxman 42, held that the indexed cost
(vii) under any transfer referred to in of acquisition in case of gifted asset has
section 47(vi) of a capital asset by to be computed with reference to the
amalgamating company to the year in which the previous owner first
amalgamated Indian company, in a held the asset and not the year in which
scheme of amalgamation; the assessee became the owner of the
(viii) under any transfer referred to in asset.
section 47(via) of shares held in As per the plain reading of the
an Indian company, in a scheme of provisions of section 48, however, the
amalgamation, by amalgamating indexed cost of acquisition would be
foreign company to the determined by taking CII for the year in
amalgamated foreign company; which asset is first held by the
(ix) under any transfer referred to in assessee.
section 47(viaa) by a banking
company to the banking institution, The benefit of indexation would be
in a scheme of amalgamation of available for the capital assets which are
the banking company with a transferred before 23.7.2024.
banking institution;
(x) under any transfer of a capital
asset, being a share of a foreign
company, which derives directly or
indirectly its value substantially
from the share(s) of an Indian
company, held by the
amalgamating foreign company to
the amalgamated foreign company,
in the scheme of amalgamation
referred to under section 47(viab);
(xi) under any transfer referred to in
section 47(vib), of a capital asset
by the demerged company to the
resulting Indian company, in a
scheme of demerger;
(xii) by any transfer of a capital asset,
being share(s) held in an Indian
company, by the demerged foreign
company to the resulting foreign
company, in a scheme of demerger
referred to in section 47(vic);
(xiii) by any transfer of a capital asset in
a business reorganization under
section 47(vica), by the

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predecessor co-operative bank to

the successor co-operative bank;
(xiv) by any transfer by a shareholder,
in a business reorganisation
referred to under section 47(vicb),
of a capital asset being a share or
shares held by him in the
predecessor co-operative bank, if
the transfer is made in
consideration of the allotment to
him of any share or shares in the
successor co-operative bank;
(xv) by transfer of a capital asset,
being a share in a foreign
company, which derives, directly
or indirectly, its value substantially
from the share or shares of an
Indian company, held by the
demerged foreign company to the
resulting foreign company in the
scheme of demerger referred
under section 47(vicc);
(xvi) by any transfer referred to in
section 47(viiac), in a relocation, of
a capital asset by the original fund
to the resulting fund;
(xvii) under any transfer referred to in
section 47(viiad) by a shareholder
or unit holder or interest holder, in
a relocation, of a capital asst being
a share or unit or interest held by
him in the original fund in
consideration for the share or unit
or interest in the resultant fund;
(xviii)under any transfer referred to in
section 47(viiae) of capital asset
by India Infrastructure Finance
Company Limited to an institution
established for financing the
infrastructure and development,
set up under any Act of Parliament
and notified by the Central
Government;

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(xix) under any transfer referred to in

section 47(viiaf) of a capital asset,
under a plan approved by the
Central Government, by a public
sector company to another public
sector company notified by the
Central Government for this purpose
or to the Central Government or to a
State Government;
(xx) by any transfer of capital asset or
intangible asset on succession of
a firm by a company in a business
carried on by it or any transfer of a
capital asset on succession of an
AOP/BOI by a company on
demutualisation or corporatisation
of a recognized stock exchange
referred to in section 47(xiii);
(xxi) under any transfer under section
47(xiiib) of a capital asset or
intangible asset by a private
company or unlisted public
company to a LLP;
(xxii) by any transfer of capital asset or
intangible asset on succession of
a sole proprietorship concern by a
company in a business carried on
by it, fulfilling the conditions
mentioned in section 47(xiv);
(xxiii) by conversion by an individual
of his separate property into a
HUF property, by the mode
referred to in section 64(2).
49(2) Shares received under the scheme of amalgamation
Where shares in an amalgamated The cost of acquisition to him of the
company which is an Indian company shares in the amalgamated company shall
become the property of the assessee in be taken as the cost of acquisition of the
consideration of the transfer of shares shares in the amalgamating company.
referred to in section 47(vii) held by him This also applies in relation to business
in the amalgamating company under a reorganization of a co-operative bank as
scheme of amalgamation referred to in section 44DB [Section
49(2E)].

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49(2A) Shares or debentures received during the process of conversion of bonds or

debentures, debenture stock or deposit certificates
Where a person becomes the owner of That part of the cost of debentures,
shares or debentures in a company debenture stock, bond or deposit
during the process of conversion of certificate in relation to which such asset
bonds or debentures, debenture stock (shares or debentures) is acquired by
or deposit certificates referred under that person.
section 47(x).
49(2AA) Specified security or sweat equity shares
Where the capital gain arises from the Fair market value which has been taken
transfer of specified security or sweat into account for perquisite valuation.
equity shares referred to in section
17(2)(vi)
49(2AAA) Rights received in a firm by shareholders on conversion of private or unlisted
public company into LLP
Where a shareholder of a company The cost of acquisition of the capital
receives rights in a partnership firm as asset being rights of a partner referred
consideration for transfer of shares on to in section 42 of the LLP Act, 2008
conversion of a company into a LLP shall be deemed to be the cost of
referred to in section 47(xiiib) acquisition to him of the shares in the
predecessor company, immediately
before its conversion.
49(2ABB) Shares acquired on redemption of Global Depository Receipts
Where the capital asset, being share or The cost of acquisition of the share or
shares of a company is acquired by a shares would be the price of such share
non-resident on redemption of GDR or shares prevailing on any recognized
referred to in section 115AC(1)(b) held stock exchange on the date on which a
by such assessee request for such redemption was made.
49(2AC) Unit of business trust in consideration of shares of a special purpose vehicle
Where the capital asset, being unit of a The cost of acquisition of the unit would
business trust, became the property of be deemed to be the cost of acquisition
the assessee in consideration of of the shares to him.
transfer of shares of a special purpose
vehicle as referred to in section 47(xvii)
49(2AD) Units acquired under consolidated scheme of Mutual Fund
Where the capital asset, being a unit or The cost of acquisition of the asset shall
units in a consolidated scheme of a be deemed to be the cost of acquisition
mutual fund, became the property of the to him of the unit or units in the
assessee in consideration of a transfer consolidating scheme of the mutual
referred to in section 47(xviii) fund.

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49(2AE) Equity shares received at the time of conversion of preference shares

Where equity shares of a company, That part of the cost of the preference
became the property of the assessee in share in relation to which such equity
consideration of transfer by way of shares are acquired by the assessee.
conversion of preference shares of the
company [Section 47(xb)]
49(2AF) Units acquired under consolidated plan of Mutual Fund scheme
Where the capital asset, being a unit or The cost of acquisition of the asset shall
units in a consolidated plan of a mutual be deemed to be the cost of acquisition
fund scheme, became the property of to him of the unit or units in the
the assessee in consideration of a consolidating plan of the scheme of the
transfer referred to in section 47(xix) mutual fund.
49(2AG)/ A unit or units in the segregated portfolio
49(2AH) In case of segregated portfolio The cost of acquisition of a unit or units
in the segregated portfolio shall be the
amount which bears, to the cost of
acquisition of a unit or units held by the
assessee in the total portfolio, the same
proportion as the net asset value of the
asset transferred to the segregated
portfolio bears to the net asset value of
the total portfolio immediately before the
segregation of portfolios.
The cost of the acquisition of the original
units held by the unit holder in the main
portfolio shall be deemed to have been
reduced by the amount as so arrived at
under sub-section (2AG)
Term Meaning
Main portfolio the scheme portfolio excluding the segregated portfolio
Segregated portfolio a portfolio, comprising of debt or money market
instrument affected by a credit event, that has been
segregated in a mutual fund scheme
Total portfolio the scheme portfolio including the securities affected
by the credit event
SEBI has, vide circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28,
2018, permitted creation of segregated portfolio of debt and money market
instruments by Mutual Fund schemes. As per the SEBI circular, all the existing unit
holders in the affected scheme as on the day of the credit event i.e. downgrade in
credit rating by a SEBI registered Credit Rating Agency (CRA), shall be allotted

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equal number of units in the segregated portfolio as held in the main portfolio. On
segregation, the unit holders come to hold same number of units in two schemes –
the main scheme and segregated scheme.
49(2AI) Shares of a company incorporated outside India by the Government of a
foreign State, in accordance with the laws of that foreign State
Where the capital asset, being shares The cost of acquisition of such asset
of a company incorporated outside India would be deemed to be the cost of
by the Government of a foreign State, in acquisition to it of the interest in the joint
accordance with the laws of that foreign venture.
State as referred to in section 47(xx),
became the property of the assessee
49(2C) Shares received in the resulting company in the scheme of demerger
In case of 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 the
same proportion as the net book value
of the assets transferred in a demerger
bears to the net worth of the demerged
company immediately before such
demerger.
Cost of acquisition of shares in the
B
resulting company = A ×
C
A = Cost of acquisition of shares held in
the demerged company
B = Net book value of the assets
transferred in a demerger
C = Net worth of the demerged company
i.e., the aggregate of the paid up
share capital and general reserves
as appearing in the books of
account of the demerged company
immediately before the demerger.

“Net worth” means the aggregate of the paid up share capital and general
reserves as appearing in the books of account of the demerged company
immediately before the demerger.

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49(2D) Shares held in the demerged company

In case of demerger The cost of acquisition of the original

shares held by the shareholder in the
demerged company shall be deemed to
have been reduced by the amount as so
arrived under the sub-section (2C)
The provisions of section 49(2C) and
49(2D) also applies in relation to
business reorganization of a co-
operative bank as referred to in section
44DB.
49(3) Capital asset transferred by holding company to its wholly owned subsidiary
Indian company or vice a versa, in case of attraction of section 47A

Where the capital gain arising from the The cost of acquisition of such asset to
transfer of a capital asset referred to in the transferee-company shall be the
section 47(iv) or section 47(v) is cost for which such asset was acquired
deemed to be income chargeable under by it.
the head "Capital gains" by virtue of the
provisions contained in section 47A
49(4) Property subject to tax under section 56(2)(x)

Where the capital gain arises from the The value taken into account for the
transfer of such property which has purposes of section 56(2)(x).
been subject to tax under section
56(2)(x)
49(6) Specified capital asset referred under clause (c) of the Explanation to section
10(37A) [Refer diagram at the end of this table]

Where the capital gain arises from the The cost of acquisition of such
transfer of a reconstituted plot or land, reconstituted plot or land shall be
(received by the assessee in lieu of deemed to be its stamp duty value as on
land or building or both transferred the last day of the second financial year
under the Land Pooling Scheme of after the end of the financial year in
Andhra Pradesh) which has been which the possession of the said plot or
transferred after the expiry of 2 years land was handed over to the assessee.
from the end of the financial year in
which the possession of such plot or
land was handed over to the assessee

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Exemption in respect of capital gains arising on transfer of Specified Capital

Assets under the Land Pooling Scheme notified under the provisions of
Andhra Pradesh Capital Region Development Authority Act, 2014
[Section 10(37A)]
♦ As per section 96 of the Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2014, the specified
compensation received by the landowner in lieu of acquisition of land is exempt
from income tax. The Land Pooling Scheme is an alternative form of
arrangement made by the Government of Andhra Pradesh for formation of new
capital city of Amaravati to avoid land acquisition disputes and lessen the
financial burden associated with payment of compensation under that Act.
♦ In Land Pooling Scheme, the compensation in the form of reconstituted plot
or land is provided to land owners. However, the existing provisions of the
Act do not provide for exemption from tax on transfer of land under the land
pooling scheme as well as on transfer of Land Pooling Ownership
Certificates (LPOCs) or reconstituted plot or land.
♦ With a view to provide relief to an individual or Hindu undivided family who
was the owner of such land as on 2nd June, 2014, and has transferred their
land under the Land Pooling Scheme notified under the provisions of Andhra
Pradesh Capital Region Development Authority Act, 2014, clause (37A) of
section 10 provides that in respect of said persons, capital gains arising from
the transfer of the specified capital assets shall not be chargeable to tax
under the Act:

Meaning of Specified Capital Asset:

Specified Capital Assets means
- the land or building or both owned by the assessee as on 2nd June, 2014
and which has been transferred under the land pooling scheme; or
- the land pooling ownership certificate (LPOC) issued to the assessee in lieu
of transferred land or building or both or
- the reconstituted plot or land, as the case may be received by the assessee
in lieu of land or building or both in accordance with the scheme, if such plot
or land, as the case may be, so received is transferred within two years from
the end of the financial year in which the possession of such plot or land
was handed over to him.

49(7) Capital asset, being share in the project referred under section 45(5A)

Where the capital gain arises from the The cost of acquisition of such asset,
transfer of a capital asset, being share would be the amount which is deemed
in the project, in the form of land or as full value of consideration in that sub-

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 CAPITAL GAINS 4.73

building or both, referred to in section section i.e., stamp duty value on the
45(5A) which is chargeable to tax in the date of issue of certificate of completion
previous year in which the completion plus cash consideration.
of certificate for the whole or part of the
However, this does not apply to a capital
project is issued by the competent
asset, being share in the project which
authority)
is transferred on or before the date of
issue of said completion certificate.

49(8) Capital assets of entities in case of levy of tax on accreted income under
section 115TD
The cost of acquisition of such asset
Where the capital gain arises from the
shall be deemed to be the fair market
transfer of an asset, being the asset
value of the asset which has been taken
held by a trust or an institution in
into account for computation of accreted
respect of which accreted income has
income as on the specified date referred
been computed, and the tax has been
to in section 115TD(2).
paid thereon in accordance with the
provisions relating to tax on accreted Note: Refer to Chapter 10 on
income of certain trusts and institutions “Assessment of Trusts and Institutions,
under Chapter XII-EB Political Parties and Other Special
Entities” for understanding the concept
of related income.

49(9) Capital asset which was used by the assessee as an inventory before its
conversion into capital asset

Where the capital gain arises from the The fair market value of the inventory as
transfer of a capital asset which was used on the date on such conversion
by the assessee as inventory earlier determined in the prescribed manner
before its conversion into capital asset

49(10) Capital asset, being an Electronic Gold Receipt or Gold

Where a capital asset, being an The cost of gold in the hands of the
Electronic Gold Receipt issued by a person in whose name Electronic Gold
Vault Manager became the property of Receipt is issued.
the person as consideration for transfer
of gold [Section 47(viid)]
Where gold is released against an The cost of the Electronic Gold Receipt
Electronic Gold Receipt, which became in the hands of such person.
the property of the person as
consideration for transfer of Electronic
Gold Receipt [Section 47(viid)]

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Taxability/ Exemption of Capital Gains arising on transfer of Specified Capital Assets

Land or Building or both

owned by the assessee as
on 2.6.2014

Transferred under Land Transfer exempt from

Pooling Scheme of A.P. capital gains u/s 10(37A)

Allotment of LPOCs to
landowners

Sale of LPOCs by Allotment of reconstituted plot

Landowners or land to landowner

Transfer of reconstituted plot Transfer of reconstituted

or land within 2 years from plot or land after 2 years
the end of the P.Y. in which from the end of the P.Y. in
he receives possession which he receives
possession

Exempt from Transfer exempt from Subject to Capital

capital gains capital gains u/s Gains
u/s 10(37A) 10(37A)

Stamp duty value on the last date of

the second F.Y. after the end of the
F.Y. of possession deemed as cost of
acquisition

ILLUSTRATION 5
Neerja was carrying on the textile business under a proprietorship concern, Neerja Textiles. On
30.12.2024 the business of Neerja Textiles was succeeded by New Look Textile Private Limited
and all the assets and liabilities of Neerja Textiles on that date became the assets and liabilities of
New Look Textile Private Limited and Neerja was given 52% share in the share capital of the
company. No other consideration was given to Neerja on account of this succession.
The assets and liabilities of Neerja Textiles transferred to the company include an urban land
which was acquired by Neerja on 19.7.2013 for ` 9,80,000. The company sold the same on
30.03.2025 for ` 16,00,000.

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 CAPITAL GAINS 4.75

Examine the tax implication of the above-mentioned transaction and compute the income
chargeable to tax in such case(s).
Cost Inflation Index: F.Y. 2013-14: 220; F.Y. 2024-25: 363
SOLUTION
Taxability in case of succession of Neerja Textiles by New Look Textile Private Limited
As per provisions of section 47(xiv), in case a proprietorship concern is succeeded by a company
in the business carried by it and as a result of which any capital asset or intangible asset is
transferred to the company, then the same shall not be treated as transfer and will not be
chargeable to capital gain tax in case the following conditions are satisfied:
(1) all the assets and liabilities of sole proprietary concern becomes the assets and liabilities of
the company.
(2) the shareholding of the sole proprietor in the company is not less than 50% of the total
voting power of the company and continues to remain as such for a period of 5 years from
the date of succession.
(3) the sole proprietor does not receive any consideration or benefit in any form from the
company other than by way of allotment of shares in the company.
In the present case, all the conditions mentioned above are satisfied therefore, the transfer of
capital asset by Neerja Textiles to New Look Textile Private Limited shall not attract capital gain
tax provided Neerja continues to hold 50% or more of voting power of New Look Textiles Private
Limited for a minimum period of 5 years.
Taxability in case of transfer of land by New Look Textile Private Limited
As per the provisions of section 49(1) and Explanation 1 to section 2(42A), in case a capital asset
is transferred in the circumstances mentioned in section 47(xiv), the cost of the asset in the hands
of the company shall be the cost of the asset in the hands of the sole proprietor. Consequently, for
the determining the period of holding of the asset, the period for which the asset is held by the sole
proprietor shall also be considered.

Therefore, in the present case, the urban land shall be a long-term capital asset since it is held for
more than 24 months by New Look Textile Private Limited and Neerja Textiles taken together.
Cost of acquisition of land in the hands of the company shall be ` 9,80,000 i.e., the purchase cost
of the land in the hands of Neerja.

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Computation of capital gain chargeable to tax in the hands of New Look Textile Private Ltd.
Particulars `
Net Sale Consideration 16,00,000
Less: Cost of acquisition 9,80,000
Long-term capital gain 6,20,000

Note: Indexation benefit would not be available to New Look Textile Private Ltd. since transfer
took place on or after 23.7.2024.

4.13 COST OF ACQUISITION [SECTION 55(2)]

Cost of acquisition is the price that the assessee has paid, or the amount that the assessee has
incurred, for acquisition of the asset. Expenses incurred for completing the title are a part of the
cost of acquisition. For eg: Stamp duty.

Cost of acquisition in relation to the following assets is as follows:

(1) Goodwill of a business or profession or a trademark or brand name associated with a

business or profession or any other intangible asset or a right to manufacture,
produce or process any article or thing, or right to carry on any business or
profession, tenancy rights, stage carriage permits and loom hours, or any other right

(i) In case of acquisition from previous owner: In the case of the above capital
assets, if the assessee has purchased them from a previous owner, the cost of
acquisition means the amount of the purchase price.

Example:
If A purchases a stage carriage permit from B for ` 2 lakhs, ` 2 lakhs will be the cost
of acquisition for A.

However, in case of a capital asset, being goodwill of a business or profession, in

respect of which depreciation under section 32(1) has been obtained by the
assessee in any previous year (upto P.Y.2019-20), the cost of acquisition of such
goodwill would be the amount of the purchase price as reduced by the total amount
of depreciation (upto P.Y.2019-20) obtained by the assessee under section 32(1).
(ii) In case of circumstances mentioned under section 49(1)(i)/(ii)/(iii)/(iv): In cases
where the capital asset became the property of the assessee by any of the following
modes from the previous owner, and such capital assets were acquired by the

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previous owner by purchase, cost of acquisition to the assessee will be the amount
of the purchase price for such previous owner:-

(1) On any distribution of assets on the total or partial partition of a Hindu

undivided family.
(2) Under a gift or will by an individual or HUF (Upto A.Y. 2024-25, gift or will
by any person).
(3) By succession, inheritance or devolution.
(4) On any distribution of assets on the liquidation of a company.

(5) Under a transfer to a revocable or an irrevocable trust.

(6) Under any transfer of a capital asset referred to in section 47(iv)/(v)/(vi)/(via)/
(via)/(viaa)/(viab)/(vib)/(vic)/(vica)/(vicb)/(vicc)/(viiac)/(viiad)/(viiae)/(viiaf)/(xiii)/
(xiiib)/(xiv)
(7) Where the assessee is a Hindu undivided family, by the mode referred to in
section 64(2) i.e., conversion of self-acquired property of a member of a HUF
into the property of the HUF (For details, read Chapter 6).
However, in case of a capital asset, being goodwill of a business or profession, in
respect of which depreciation under section 32(1) has been obtained by the
assessee in any previous year (upto P.Y.2019-20), the cost of acquisition of such
goodwill would be the amount of the purchase price for such previous owner as
reduced by the total amount of depreciation (upto P.Y.2019-20) obtained by the
assessee under section 32(1).
(iii) In any other case [i.e., in case of self-generated assets]: In case of self-generated
assets namely, goodwill of a business or profession or a trademark or brand name
associated with a business or profession or any other intangible asset or a right to
manufacture, produce or process any article or thing, or right to carry on any business
or profession, tenancy rights, stage carriage permits, or loom hours, or any other
right, the cost of acquisition will be taken to be Nil.
(2) Financial assets - Many a time, persons who own shares or other securities become
entitled to subscribe to any additional shares or securities. Further, they are also allotted
additional shares or securities without any payment. Such shares or securities are referred
to as financial assets in Income-tax Act. Section 55 provides the basis for ascertaining the
cost of acquisition of such financial assets.

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(i) Original shares (which form the basis of entitlement of rights shares): In
relation to the original financial asset on the basis of which the assessee becomes
entitled to any additional financial assets, cost of acquisition means the amount
actually paid for acquiring the original financial assets.
(ii) Rights entitlement (which is renounced by the assessee in favour of a person):
In relation to any right to renounce the said entitlement to subscribe to the financial
asset, when such a right is renounced by the assessee in favour of any person, cost
of acquisition shall be taken to be nil in the case of such assessee.

(iii) Rights shares acquired by the assessee: In relation to the financial asset, to which
the assessee has subscribed on the basis of the said entitlement, cost of acquisition
means the amount actually paid by him for acquiring such asset.
(iv) Rights shares which are purchased by the person in whose favour the
assessee has renounced the rights entitlement: In the case of any financial asset
purchased by the person in whose favour the right to subscribe to such assets has
been renounced, cost of acquisition means the aggregate of the amount of the
purchase price paid by him to the person renouncing such right and the amount paid
by him to the company or institution for acquiring such financial asset.
(v) Bonus Shares: In relation to the financial asset allotted to the assessee without any
payment and on the basis of holding of any other financial assets, cost of
acquisition shall be taken to be nil in the case of such assessee.
In other words, where bonus shares are allotted without any payment on the basis of
holding of original shares, the cost of such bonus shares will be nil in the hands of
the original shareholder.
Bonus shares allotted before 01.04.2001: However, in respect of bonus shares
allotted before 1.4.2001, although the cost of acquisition of the shares is nil, the
assessee may opt for the fair market value as on 1.4.2001 as the cost of acquisition
of such bonus shares.
Bonus shares allotted before 1.2.2018, on which STT has been paid at the time
of transfer – In case of transfer of bonus shares allotted before 1.2.2018 on which
STT has been paid at the time of transfer, the cost would be the higher of –
(i) Actual cost of acquisition (i.e., Nil, in case of bonus shares allotted on or
after 1.4.2001; and FMV on 1.4.2001, in case of business shares allotted
before 1.4.2001)

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(ii) Lower of –
(a) FMV as on 31.1.2018; and
(b) Actual sale consideration
(3) Equity shares received on demutualisation or corporatisation of a recognised stock
exchange – In relation to equity shares allotted to a shareholder of a recognised stock
exchange in India under a scheme for demutualisation or corporatisation approved by SEBI,
the cost of acquisition of such shares shall be the cost of acquiring his original membership
of the exchange.
(4) Clearing or trading right acquired on demutualisation or corporatisation of a recognised
stock exchange – The cost of a capital asset, being trading or clearing rights of a recognised
stock exchange acquired by a shareholder (who has been allotted equity share or shares under
such scheme of demutualisation or corporatisation), shall be deemed to be nil.
(5) Long-term capital assets referred to in section 112A
The cost of acquisition in relation to the long-term capital assets being,
 equity shares in a company on which STT is paid both at the time of purchase and
transfer or
 unit of equity oriented fund or unit of business trust on which STT is paid at the time
of transfer.
acquired before 1 st February, 2018 shall be the higher of
(i) cost of acquisition of such asset; and
(ii) lower of
(a) the fair market value of such asset; and
(b) the full value of consideration received or accruing as a result of the transfer
of the capital asset.
Meaning of Fair Market Value:
[Link]. Circumstance Fair Market Value
(i) In a case where the capital If there is trading in such asset on such
asset is listed on any exchange on 31.01.2018
recognised stock exchange The highest price of the capital asset quoted on
as on 31.01.2018 such exchange on the said date

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If there is no trading in such asset on such

exchange on 31.01.2018
The highest price of such asset on such
exchange on a date immediately preceding
31.01.2018 when such asset was traded on
such exchange.
(ii) In a case where the capital The net asset value of such unit as on the said
asset is a unit which is not date
listed on any recognised
stock exchange as on
31.01.2018
(iii) In a case where the capital An amount which bears to the cost of
asset is an equity share in a acquisition the same proportion as CII for the
company which is financial year 2017-18 bears to the CII for the
- not listed on a first year in which the asset was held by the
recognised stock assessee or on 01.04.2001, whichever is later.
exchange as on
31.01.2018 but listed on
such exchange on the
date of transfer
- not listed on a
recognized stock
exchange as on
31.01.2018 or which
became the property of
the assessee in
consideration of shares
which is not listed on
such exchange as on
31.1.2018 by way of
transaction covered
under section 47 but
listed on such exchange
subsequent to the date
of transfer (where
transfer is in respect of
sale of unlisted equity
shares under an offer
for sale to the public
included in an initial
public offer)
- listed on a recognised
stock exchange on the
date of transfer and

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which became the

property of the
assessee in
consideration of share
which is not listed on
such exchange as on
31.01.2018 by way of
transaction not
regarded as transfer
under section 47

(6) Any other capital asset–

(i) Where the capital asset become the property of the assessee before 1-4-2001,
cost of acquisition means the cost of acquisition of the asset to the assessee or the
fair market value of the asset on 1-4-2001 at the option of the assessee.
However, in case of capital asset, being land or building or both, the fair market
value of such asset on 1-4-2001 shall not exceed the stamp duty value, wherever
available, of such asset as on 1-4-2001.
(ii) Where the capital asset became the property of the assessee by any of the
modes specified in section 49(1): The cost of acquisition to the assessee will be
the cost of acquisition to the previous owner. Even in such cases, where the capital
asset became the property of the previous owner before 1-4-2001, the assessee has
got a right to opt for the fair market value as on 1-4-2001.
However, in case of capital asset, being land or building or both, the fair market
value of such asset on 1-4-2001 shall not exceed the stamp duty value, wherever
available, of such asset as on 1-4-2001.
Note: The provisions contained in (i) & (ii) of (6) above shall also apply to the financial
assets mentioned in (i) to (v) of (2) and long term capital assets referred to in section 112A
of (5) above.

(iii) Where the capital asset became the property of the assessee on the
distribution of the capital assets of a company on its liquidation and the
assessee has been assessed to capital gains in respect of that asset under section
46, the cost of acquisition means the fair market value of the asset on the date of
distribution.
(iv) A share or a stock of a company may become the property of an assessee under
the following circumstances:

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(a) the consolidation and division of all or any of the share capital of the company
into shares of larger amount than its existing shares.
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller
amount, or
(e) the conversion of one kind of shares of the company into another kind.
In the above circumstances the cost of acquisition to the assessee will mean the cost
of acquisition of the asset calculated with reference to the cost of acquisition of the
shares or stock from which such asset is derived.
(7) Where the cost for which the previous owner acquired the property cannot be
ascertained, the cost of acquisition to the previous owner means the fair market value on
the date on which the capital asset became the property of the previous owner.
Cost of Acquisition of assets: At a Glance

Sl. No. Nature of asset Cost of acquisition

1 Goodwill of business or profession,
trademark, brand name or any other
intangible asset etc., -
- Self generated Nil
- Acquired from previous owner Purchase price
However, in case of capital asset, being Purchase price as reduced by the total
goodwill of a business or profession, in amount of depreciation obtained by the
respect of which depreciation u/s 32(1) assessee under section 32(1).
has been obtained by the assessee in
any P.Y. (upto P.Y.2019-20)
- became the property of the assessee by Purchase price for such previous owner
way of distribution of assets on total or
partial partition of HUF, under a gift or will
by an individual or HUF (by any person
upto 31.3.2024), by succession,
inheritance, distribution of assets on
liquidation of a company, etc. and
previous owner has acquired it by
purchase
However, in case of capital asset, being Purchase price for such previous owner
goodwill of a business or profession which as reduced by the total amount of

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 CAPITAL GAINS 4.83

was acquired by the previous owner by depreciation obtained by the assessee u/s
purchase and in respect of which 32(1).
depreciation u/s 32(1) has been obtained
by the assessee in any P.Y. (upto
P.Y.2019-20)
2. Bonus Shares:
Allotted before 1.4.2001 FMV as on 1.4.2001
Allotted on or after 1.4.2001 Nil
Bonus shares allotted before 1.2.2018, on The higher of –
which STT has been paid at the time of (i) Actual cost of acquisition (i.e., Nil, in
transfer case of bonus shares allotted on or
after 1.4.2001; and
FMV on 1.4.2001, in case of bonus
shares allotted before 1.4.2001)
(ii) Lower of –
(a) FMV as on 31.1.2018; and
(b) Actual sale consideration
3 Right Shares:
Original shares (which form the basis of Amount actually paid for acquiring the
entitlement of rights shares) original shares
Rights entitlement (which is renounced by Nil
the assessee in favour of a person)
Rights shares acquired by the assessee Amount actually paid for acquiring the
rights shares
Rights shares which are purchased by the Purchase price paid to the renouncer of
person in whose favour the assessee has rights entitlement as well as the amount paid
renounced the rights entitlement to the company which has allotted the rights
shares.
4. Equity shares received on demutualisation Cost of acquisition of such shares shall be
or corporatisation of a recognised stock the cost of acquiring his original membership
exchange of the exchange.
5. Clearing or trading right acquired on NIL
demutualisation or corporatisation of a
recognised stock exchange

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6. Long term capital assets being, Cost of acquisition shall be the higher of
- equity shares in a company on (i) cost of acquisition of such asset;
which STT is paid both at the time of and
purchase and transfer or (ii) lower of
- unit of equity oriented fund or unit - the fair market value of
of business trust on which STT is such asset; and
paid at the time of transfer,
- the full value of
acquired before 1st February, 2018 consideration received or
accruing as a result of the
transfer of the capital
asset.
7. Any other capital asset
Where such capital asset became the Cost of the asset to the assessee, or FMV
property of the assessee before 1.4.2001 as on 1.4.2001, at the option of the
assessee.
However, in case of capital asset being
land or building, FMV as on 1.4.2001 shall
not exceed stamp duty value as on
1.4.2001.
Where capital assets became the property Cost to the previous owner or FMV as
of the assessee by way of distribution of on 1.4.2001, at the option of the
assets on total or partial partition of HUF, assessee.
under a gift or will by an individual or HUF However, in case of capital asset being
(by any person upto 31.3.2024), by land or building, FMV as on 1.4.2001
succession, inheritance, distribution of shall not exceed stamp duty value as on
assets on liquidation of a company, etc. 1.4.2001.
and the capital asset became the property
of the previous owner before 1.4.2001
The provisions contained in (7) above shall also apply to the assets mentioned in (2), (3)
and (6) above.
8. Where cost of the property in the hands of The FMV on the date on which the
previous owner cannot be ascertained capital asset become the property of
the previous owner would be considered
as cost of acquisition.

ILLUSTRATION 6
ABC Ltd. converts its capital asset acquired for an amount of ` 50,000 in June, 2004 into stock-in-
trade in the month of November, 2023. The fair market value of the asset on the date of

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 CAPITAL GAINS 4.85

conversion is ` 4,50,000. The stock-in-trade was sold for an amount of ` 6,50,000 in the month of
September, 2024. What will be the tax treatment?
Financial year Cost Inflation Index
2004-05 113
2023-24 348
2024-25 363

SOLUTION
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given
case. It arises in the year of conversion (i.e. P.Y. 2023-24) but will be taxable only in the year in
which the stock-in-trade is sold (i.e. P.Y. 2024-25). Profits from business will also be taxable in the
year of sale of the stock-in-trade (P.Y. 2024-25).

The long-term capital gains and business income for the A.Y.2025-26 are calculated as under:
Particulars ` `
Profits and Gains from Business or Profession
Sale proceeds of the stock-in-trade 6,50,000
Less: Cost of the stock-in-trade (FMV on the date of conversion) 4,50,000 2,00,000

Long Term Capital Gains

Full value of the consideration (FMV on the date of the conversion) 4,50,000
Less: Indexed cost of acquisition (` 50,000 x 348/113) 1,53,982 2,96,018

Note: For the purpose of indexation, the cost inflation index of the year in which the asset is
converted into stock-in-trade should be considered.
Since the transfer (conversion into stock-in-trade) took place in the P.Y. 2023-24, the benefit of
indexation would be available. The date of sale of stock-in trade is not relevant for determining
whether benefit of indexation would be available.
ILLUSTRATION 7
Ms. Usha purchases 1,000 equity shares in X (P) Ltd., an unlisted company, at a cost of ` 30 per
share (brokerage 1%) in January 1996. She gets 100 bonus shares in August 2000. She again
gets 1,100 bonus shares by virtue of her holding in February 2006. Fair market value of the shares
of X (P) Ltd. on April 1, 2001 is ` 80.

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 4.86 DIRECT TAX LAWS

On 1st January 2025, she transfers all her shares @ ` 200 per share (brokerage 2%).
Compute the capital gains taxable in the hands of Ms. Usha for the A.Y. 2025-26
Cost Inflation Index for F.Y. 2001-02: 100, F.Y.2005-06: 117 & F.Y.2024-25: 363.
SOLUTION
Computation of capital gains for the A.Y. 2025-26
Particulars `
1000 Original shares
Sale proceeds (1000 × ` 200) 2,00,000
Less : Brokerage paid (2% of ` 2,00,000) 4,000
Net sale consideration 1,96,000
Less : Cost of acquisition [` 80 × 1000] 80,000
Long term capital gains (A) 1,16,000
100 Bonus shares
Sale proceeds (100 × ` 200) 20,000
Less: Brokerage paid (2% of ` 20,000) 400
Net sale consideration 19,600
Less: Cost of acquisition [` 80 × 100] [See Note below] 8,000
Long term capital gains (B) 11,600
1100 Bonus shares
Sale proceeds (1100 × ` 200) 2,20,000
Less: Brokerage paid (2% of `2,20,000) 4,400
Net sale consideration 2,15,600
Less: Cost of acquisition NIL
Long term capital gain (C) 2,15,600
∴ Long term capital gain (A+B+C) 3,43,200

Note: Cost of acquisition of bonus shares acquired before 1.4.2001 is the FMV as on 1.4.2001
(being the higher of the cost or the FMV as on 1.4.2001).
ILLUSTRATION 8
Mr. R holds 1,000 shares in Star Minus Ltd., an unlisted company, acquired in the year 2001-02 at
a cost of ` 75,000. He has been offered right shares by the company in the month of April, 2024 at
` 160 per share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the
balance right shares in favour of Mr. Q for ` 30 per share in May 2024. All the shares are sold by

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 CAPITAL GAINS 4.87

Mr. R for ` 300 per share on 15.7.2024 and Mr. Q sells his shares in December 2024 at ` 280 per
share. What are the capital gains taxable in the hands of Mr. R and Mr. Q?
Financial year Cost Inflation Index
2001-02 100
2024-25 363
SOLUTION
Computation of capital gains in the hands of Mr. R for the A.Y.2025-26
Particulars `
1000 Original shares
Sale proceeds (1000 × ` 300) 3,00,000
Less: Indexed cost of acquisition [` 75,000 × 363/100] 2,72,250
Long-term capital gain (A) 27,750
200 Right shares
Sale proceeds (200 × ` 300) 60,000
Less: Cost of acquisition [` 160 × 200] [Note 1] 32,000
Short-term capital gain (B) 28,000
Sale of Right Entitlement
Sale proceeds (200 × ` 30) 6,000
Less: Cost of acquisition [Note 2] NIL
Short-term capital gain (C) 6,000
Capital Gains (A+B+C) 61,750

Note 1: Since the holding period of these shares is less than 24 months, they are short term
capital assets and hence cost of acquisition will not be indexed.
Note 2: The cost of the rights renounced in favour of another person for a consideration is taken to
be nil. The consideration so received is taxed as short-term capital gains in full. The period of
holding is taken from the date of the rights offer to the date of the renouncement.
Computation of capital gains in the hands of Mr. Q for the A.Y.2025-26
Particulars `
Sale proceeds (200 shares × ` 280) 56,000
Less: Cost of acquisition [200 shares × (` 30 + ` 160)] [See Note below] 38,000
Short-term capital gain 18,000

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Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the
company. Since the holding period of these shares is less than 24 months, they are short term
capital assets.

4.14 COST OF IMPROVEMENT [SECTION 55(1)]

(1) Goodwill or any other intangible asset of a business, etc. [Section 55(1)(b)(1)]: In
relation to a capital asset being goodwill or any other intangible asset of a business or a
right to manufacture, produce or process any article or thing, or right to carry on any
business or profession or any other right, the cost of improvement shall be taken to be Nil.

(2) Any other capital asset [Section 55(1)(b)(2)]:

Circumstance Cost of improvement
(i) Where the capital asset became the property of the previous owner or the
assessee before 1.4.2001
(a) In a case covered u/s 49(1), All expenditure of a capital nature
where the capital asset became incurred in making any addition or
the property of the previous owner alteration to the capital asset on or after
and the assessee before 1.4.2001 1.4.2001 by the assessee.
(b) In a case covered u/s 49(1), All expenditure of a capital nature
where the capital asset became incurred in making any addition or
the property of the previous owner alteration to the capital asset on or after
before 1.4.2001 but became the 1.4.2001 by the previous owner and
property of the assessee on or the assessee.
after 1.4.2001
(c) In a case not covered u/s 49(1) All expenditure of a capital nature
incurred in making any addition or
alteration to the capital asset on or after
1.4.2001 by the assessee.
(ii) Where the capital asset became the property of the previous owner and the
assessee on or after 1.4.2001
(a) In a case covered u/s 49(1) All expenditure of a capital nature
incurred in making any addition or
alteration to the capital asset by the
previous owner and the assessee.
(b) In a case not covered u/s 49(1) All expenditure of a capital nature incurred
in making any addition or alteration to the
capital asset by the assessee after it
became the assessee’s property.

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In a nutshell, in a case covered under section 49(1), cost of improvement would include
expenditure of a capital nature on addition or alteration to the capital asset by the previous
owner or the assessee or both on or after 1.4.2001. In a case not covered under section
49(1), cost of improvement would include expenditure of a capital nature on addition or
alteration to the capital asset by the assessee on or after 1.4.2001.
However, cost of improvement does not include any expenditure which is deductible in
computing the income chargeable under the head “Income from house property”, “Profits
and gains of business or profession” or “Income from other sources”. Routine expenses on
repairs and maintenance do not form part of cost of improvement.
ILLUSTRATION 9
X & sons, HUF, purchased a land for ` 1,20,000 in the P.Y. 2002-03. In the P.Y. 2006-07, a
partition took place when Mr. A, a coparcener, is allotted this plot valued at ` 1,50,000. In P.Y.
2007-08, he had incurred expenses of ` 2,35,000 towards fencing of the plot. Mr. A sells this plot
of land for ` 15,00,000 in June 2024 after incurring expenses to the extent of ` 20,000. You are
required to compute the capital gain for the A.Y.2025-26.
Financial year Cost Inflation Index
2002-03 105
2006-07 122
2007-08 129
2024-25 363

SOLUTION
Computation of taxable capital gains for the A.Y.2025-26

Particulars ` `
Sale consideration 15,00,000
Less: Expenses incurred for transfer 20,000
14,80,000
Less: (i) Indexed cost of acquisition (` 1,20,000 ×363/105) 4,14,857
(ii) Indexed cost of improvement (` 2,35,000 ×363/129) 6,61,279 10,76,136
Long term capital gains 4,03,864

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Note –The indexation benefit is given from the year in which the capital asset is acquired by the
previous owner i.e., P.Y. 2002-03. This is as per the view expressed by Bombay High Court in CIT
v. Manjula J. Shah 16 Taxman 42. However, as per the plain reading of the provisions of section
48, the indexation benefit would be available from the year in which the asset is first held by the
assessee. In that case, the indexed cost of acquisition would have to be calculated by considering
the Cost Inflation Index of F.Y.2006-07.
ILLUSTRATION 10
Mr. C purchases a house property for ` 1,06,000 on May 15, 1975. The following expenses are
incurred by him for making addition/alternation to the house property:
Particulars `
a. Cost of construction of first floor in 1982-83 3,10,000
b. Cost of construction of the second floor in 2002-03 7,35,000
c. Reconstruction of the property in 2012-13 5,50,000

Fair market value of the property on April 1, 2001 is ` 8,50,000 and stamp duty value on the said
date was ` 8,10,000. The house property is sold by Mr. C on July 10, 2024 for ` 78,00,000
(expenses incurred on transfer: ` 50,000). Compute the capital gain for the assessment year
2025-26.
Cost Inflation Index: F.Y. 2001-02: 100, F.Y. 2002-03: 105, F.Y. 2012-13: 200, F.Y. 2024-25: 363
SOLUTION
Computation of capital gain of Mr. C for the A.Y.2025-26
Particulars ` `
Gross sale consideration 78,00,000
Less: Expenses on transfer 50,000
Net sale consideration 77,50,000
Less: Indexed cost of acquisition (Note 1) 29,40,300
Less: Indexed cost of improvement (Note 2) 35,39,250 64,79,550
Long-term capital gain 12,70,450
Notes:

Indexed cost of acquisition: ` 8,10,000 × 363/100 = ` 29,40,300

Fair market value on April 1, 2001 (actual cost of acquisition is ignored as it is lower than market
value on April 1, 2001) however, it should not exceed ` 8,10,000, being the stamp duty value on
1.4.2001.

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Indexed cost of improvement is determined as under:

Particulars `
Construction of first floor in 1982-83 Nil
(expenses incurred prior to April 1, 2001 are not considered)
Construction of second floor in 2002-03 (i.e., ` 7,35,000 × 363/105) 25,41,000
Alternation/reconstruction in 2012-13 (i.e., ` 5,50,000 × 363/200) 9,98,250
Indexed cost of improvement 35,39,250

4.15 COMPUTATION OF CAPITAL GAINS IN CASE OF

DEPRECIABLE ASSETS [SECTIONS 50 & 50A]
(1) Transfer of depreciable assets [Section 50]: Section 50 provides for the computation of
capital gains in case of depreciable assets. It may be noted that where the capital asset is a
depreciable asset forming part of a block of assets, section 50 will have overriding effect in
spite of anything contained in section 2(42A) which defines a short-term capital asset.

Accordingly, where the capital asset is an asset forming part of a block of assets in respect
of which depreciation has been allowed, the provisions of sections 48 and 49 shall be
subject to the following modifications:
• Where the full value of consideration received or accruing for the transfer of the
asset plus the full value of such consideration for the transfer of any other capital
asset falling with the block of assets during previous year exceeds the aggregate of
the following amounts namely:
(1) expenditure incurred wholly and exclusively in connection with such
transfer(s);
(2) WDV of the block of assets at the beginning of the previous year;
(3) the actual cost of any asset falling within the block of assets acquired during
the previous year
such excess shall be deemed to be the capital gains arising from the transfer of
short-term capital assets.
• Where all assets in a block are transferred during the previous year, the block itself
will cease to exist. In such a situation, the difference between the sale value of the
assets and the WDV of the block of assets at the beginning of the previous year

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together with the actual cost of any asset falling within that block of assets acquired
by the assessee during the previous year will be deemed to be the capital gains
arising from the transfer of short- term capital assets.

Transfer of depreciable assets : Tax consequences

No Yes
Is V > C ? Does the C (-) V is
block cease STCL
to exist?
Yes No
V (-) C is C (-) V is the Closing
STCG WDV of the block

Symbol Description
V Full value of consideration
C Opening WDV of Block (+) Actual Cost of Asset acquired in the Block
during the P.Y. (+) Expenses in connection with transfer of asset
STCG Short Term Capital Gain
STCL Short Term Capital Loss
WDV Written Down Value

(2) Cost of acquisition in case of power sector assets [Section 50A]: With respect to the
power sector, in case of depreciable assets referred to in section 32(1)(i), the provisions of
sections 48 and 49 shall apply subject to the modification that the WDV of the asset [as
defined in section 43(6)], as adjusted, shall be taken to be the cost of acquisition.
ILLUSTRATION 11
Rajawat & Co., a sole proprietorship owns six machines, put in use for business in March, 2023.
The depreciation on these machines is charged @15%. The opening balance of these machines
after providing depreciation for P.Y. 2023-24 was ` 8,50,000. Three of the old machines were sold
on 10th June, 2024 for ` 11,00,000. A second hand plant was bought for ` 8,50,000 on 30th
November, 2024.

You are required to:

(i) determine the claim of depreciation for Assessment Year 2025-26.
(ii) compute the capital gains liable to tax for Assessment Year 2025-26.

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(iii) If Rajawat & Co. had sold the three machines in June, 2024 for ` 21,00,000, will there be
any difference in your above workings? Examine.
SOLUTION
(i) Computation of depreciation for A.Y.2025-26

Particulars `
Opening balance of the block as on 1.4.2024 [i.e., W.D.V. as on 31.3.2024 8,50,000
after providing depreciation for P.Y. 2023-24]
Add: Purchase of second hand plant during the year in November, 2024 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2025 6,00,000

Since the value of the block as on 31.3.2025 comprises of a new asset which has been put
to use for less than 180 days, depreciation is restricted to 50% of the prescribed percentage
of 15% i.e. depreciation is restricted to 7½%. Therefore, the depreciation allowable for the
year is ` 45,000, being 7½% of ` 6,00,000.

(ii) The provisions under section 50 for computation of capital gains in the case of depreciable
assets can be invoked only under the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than
the value of the block.
(b) When all the assets are transferred for a consideration more than the value of the
block.

(c) When all the assets are transferred for a consideration less than the value of the
block.
Since in the first two cases, the sale consideration is more than the written down value of
the block, the computation would result in short term capital gains.
In the third case, since the written down value exceeds the sale consideration, the resultant
figure would be a short-term capital loss.

In the given case, capital gains will not arise as the block of asset continues to exist, and some
of the assets are sold for a price which is lesser than the written down value of the block.

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(iii) If the three machines are sold in June, 2024 for ` 21,00,000, then short term capital gains
would arise, since the sale consideration is more than the aggregate of the written down
value of the block at the beginning of the year and the additions made during the year.

Particulars ` `
Sale consideration 21,00,000
Less: Opening balance of the block as on 1.4.2024 [i.e., W.D.V. 8,50,000
as on 31.3.2024 after providing depreciation for P.Y. 2023-24]
Purchase of second hand plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000

4.16 COMPUTATION OF CAPITAL GAINS IN CASE OF

MARKET LINKED DEBENTURES [SECTION 50AA]
(1) Transfer of unit of a Specified Mutual Fund or Market Linked Debenture or unlisted
bond or unlisted debenture: Section 50AA provides for the computation of capital gains in
case of transfer or redemption or maturity of

- unit(s) of a Specified Mutual Fund acquired on or after 1.4.2023 or

- a Market Linked Debenture or

- an unlisted bond or unlisted debentures which is transferred or redeemed or matures

on or after 23.7.2024.

Section 50AA will have an overriding effect in spite of anything contained in section 2(42A)
which defines a short-term capital asset and section 48 providing the manner of
computation of capital gains.

Accordingly, capital gain arising from the transfer or redemption or maturity of unit of a
Specified Mutual Fund acquired on or after 1.4.2023 or Market Linked Debenture or an
unlisted bond or unlisted debentures which is transferred or redeemed or matures on or
after 23.7.2024 would be deemed to be short term capital gains and chargeable to tax at
normal rate of tax.
(2) Computation of capital gains: The full value of consideration received or accruing as a
result of the transfer or redemption or maturity of such debenture or unit or bond as reduced
by the cost of acquisition of the debenture or unit and the expenditure incurred wholly and

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exclusively in connection with such transfer or redemption or maturity would be deemed to

be the capital gains.
(3) No deduction in respect of STT: No deduction would be allowed in computing the income
chargeable under the head “Capital Gains” in respect of any sum paid on account of
securities transaction tax (STT).

(4) Meaning of certain terms:

Term Meaning
Market Linked A security
Debenture (i) which has an underlying principal component in the form of debt
security; and
(ii) where the returns are linked to market returns on other underlying
securities or indices.
It includes any security classified or regulated as a market linked
debenture by the SEBI.
Specified A Mutual Fund where not more than 35% of its total proceeds is
Mutual Fund invested in the equity shares of domestic companies.
However, the percentage of equity shareholding held in respect of the
Specified Mutual Fund shall be computed with reference to the annual
average of the daily closing figures.

4.17 CAPITAL GAINS IN RESPECT OF SLUMP SALE

[SECTION 50B]
(1) Meaning of slump sale [Section 2(42C)] – Slump sale means transfer of one or more
undertakings, by any means, for a lump sum consideration without values being assigned to
the individual assets and liabilities in such transfer.
Term Meaning
Undertaking It includes any part of an undertaking, or a unit or division of
[Explanation 1] an undertaking or a business activity taken as a whole, but
does not include individual assets or liabilities or any
combination thereof not constituting a business activity.
Transfer Meaning assigned to it in section 2(47) [It would include sale,
[Explanation 3] exchange, relinquishment of capital asset, extinguishment of
any rights therein, compulsory acquisition under any law etc.
– See detailed definition in page 4.13]

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Note - The determination of the value of an asset or liability for the sole purpose of payment
of stamp duty, registration fees or other similar taxes or fees shall not be regarded as
assignment of values to individual assets or liabilities.
(2) Capital gains – Whether long-term or short-term? [Section 50B(1)] - Any profits or gains
arising from the slump sale of one or more undertakings held for more than 36 months,
shall be chargeable to income-tax as capital gains arising from the transfer of long-term
capital assets and shall be deemed to be the income of the previous year in which the
transfer took place.
Any profits and gains arising from such transfer of one or more undertakings held by the
assessee for not more than 36 months shall be deemed to be short-term capital gains.
(3) Deemed cost of acquisition and cost of improvement [Section 50B(2)(i)] - The net
worth of the undertaking or the division, as the case may be, shall be deemed to be the cost
of acquisition and the cost of improvement for the purposes of sections 48 and 49 in relation
to capital assets of such undertaking or division transferred. No indexation benefit would be
available even if it is results in a long-term capital gain, irrespective of the date of transfer of
the undertaking i.e., whether before or on or after 23.7.2024.
(4) Deemed full value of consideration [Section 50B(2)(ii)] – Fair market value of the capital
assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to
be the full value of the consideration received or accruing as a result of the transfer of such
capital asset.
Accordingly, the CBDT has inserted Rule 11UAE to determine fair market value of the
capital assets.
The fair market value of the capital assets shall be the FMV1 or FMV2, whichever is
higher.
FMV1 = The fair market value of the capital assets transferred by way of slump sale
determined in accordance with the formula
A+B+C+D - L, where,
A = Book value of all the assets (other than jewellery, artistic work, shares,
securities and immovable property) as appearing in the books of accounts of
the undertaking or the division transferred by way of slump sale as reduced by
the following amount which relate to such undertaking or the division, —
(i) any amount of income-tax paid, if any, less the amount of income-tax
refund claimed, if any; and
(ii) any amount shown as asset including the unamortised amount of
deferred expenditure which does not represent the value of any asset;

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B = The price which the jewellery and artistic work would fetch if sold in the open
market on the basis of the valuation report obtained from a registered valuer;
C = Fair market value of shares and securities as determined in the manner
provided in rule 11UA(1);
D = The value adopted or assessed or assessable by any authority of the
Government for the purpose of payment of stamp duty in respect of the
immovable property;
L = Book value of liabilities as appearing in the books of accounts of the
undertaking or the division transferred by way of slump sale, but not including
the following amounts which relates to such undertaking or division, namely: —
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares and
equity shares where such dividends have not been declared before the
date of transfer at a general body meeting of the company;
(iii) reserves and surplus, by whatever name called, even if the resulting
figure is negative, other than those set apart towards depreciation;
(iv) any amount representing provision for taxation, other than amount of
income-tax paid, if any, less the amount of income-tax claimed as refund,
if any, to the extent of the excess over the tax payable with reference to
the book profits in accordance with the law applicable thereto;
(v) any amount representing provisions made for meeting liabilities, other
than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of
dividends payable in respect of cumulative preference shares
FMV2 = The fair market value of the consideration received or accruing as a result of
transfer by way of slump sale determined in accordance with the formula –
E+F+G+H, where,
E = value of the monetary consideration received or accruing as a result of the transfer;
F = fair market value of non-monetary consideration received or accruing as a
result of the transfer represented by property referred to in rule 11UA(1)
determined in the manner provided in rule 11UA(1) for the property covered in
that sub-rule;
G = the price which the non-monetary consideration received or accruing as a
result of the transfer represented by property, other than immovable property,
which is not referred to in rule 11UA(1) would fetch if sold in the open market
on the basis of the valuation report obtained from a registered valuer, in
respect of property;
H = the value adopted or assessed or assessable by any authority of the
Government for the purpose of payment of stamp duty in respect of the

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immovable property (i.e., Stamp duty value) in case the non-monetary

consideration received or accruing as a result of the transfer is represented by
the immovable property.
The fair market value of the capital assets shall be determined on the date of slump
sale and for this purpose, valuation date shall also mean the date of slump sale.
(5) Report of a Chartered Accountant - Every assessee, in the case of slump sale, shall
furnish in the prescribed form on or before 30th September of the A.Y. [i.e., the specified
date referred under section 44AB, being the date one month prior to the due date for filing
return of income under section 139(1)], a report of a chartered accountant indicating the
computation of net worth of the undertaking or division, as the case may be, and certifying
that the net worth of the undertaking or division has been correctly arrived at in accordance
with the provisions of this section [Sub-section (3)].
(6) Meaning of Certain Terms:
Explanation Term Particulars
1 Net worth Aggregate value of total assets of the undertaking or
division as reduced by the value of liabilities of such
undertaking or division as appearing in the books of
account.
However, any change in the value of assets on
account of revaluation of assets shall not be
considered for this purpose.
2 Aggregate value In the case of depreciable assets: The written down
of total assets of value of block of assets determined in accordance
undertaking or with the provisions contained in sub-item (C) of item
division (i) of section 43(6)(c);
In case of capital asset, being goodwill of a
business or profession, which has not been
acquired by the assessee by purchase from a
previous owner [self-generated goodwill]: Nil
Capital asset in respect of which 100% deduction is
claimed: In case of capital assets in respect of which
the whole of the expenditure has been allowed or is
allowable as a deduction under section 35AD: Nil;
For all other assets: Book value

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Capital Gains on Slump Sale of an Undertaking [Section 50B]

Is the undertaking held for more than 36 months before
transfer?

Yes No

Resultant capital gain is LTCG Resultant capital gain is STCG

(No indexation benefit would be available))

LTCG is taxable@ 20% if transfer takes place before 23.7.2024 Normal rates of taxation
LTCG is taxable@ 12.5% if transfer takes place on or after 23.7.2024

Computation of capital gains on slump sale

Full value of Consideration = Fair

Deemed cost of acquisition/cost of
market value of the capital assets (-) improvement
on the date of transfer*

Net Worth

Aggregate value of total Value of liabilities of the

assets of the undertaking** (-) undertaking appearing in the
books of account

In case of In case of In case of capital

In case of
self- assets, where the
depreciable generated other
whole expd has been
assets goodwill allowed u/s 35AD assets

WDV as per section (+) Nil (+) (+)

Nil Book value
43(6)(c)
*
Higher of FMV1 and FMV2
**Ignore revaluation effect

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ILLUSTRATION 12
M/s Sriram Enterprises, a proprietorship having 2 units. Unit 1 is transferred on 1.4.2024 by way of
slump sale for a total consideration of ` 14 lakhs. Unit 1 was started in the year 2005-06. The
expenses incurred for this transfer were ` 38,000. Balance Sheet as on 31.3.2024 is as under:
Liabilities Total Assets Unit 1(`) Unit 2 (`) Total
(`) (`)
Own Capital 17,00,000 Land 13,00,000 3,00,000 16,00,000
Revaluation Reserve (for 5,00,000 Machinery 4,00,000 2,00,000 6,00,000
land of unit 1)
Bank loan (70% for unit 4,00,000 Debtors 2,00,000 1,40,000 3,40,000
1)
Trade creditors (25% for 3,50,000 Patents 2,50,000 1,60,000 4,10,000
unit 1)
Total 29,50,000 Total 21,50,000 8,00,000 29,50,000

Other information:
(i) Revaluation reserve is created by revising upward the value of the land of Unit 1. The
stamp duty value on 1.4.2024 is ` 10 lakhs.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Patents were acquired on 1.7.2022 on which no depreciation has been charged.
(iv) The value of machinery represents the written down value as per the Income-tax Act, 1961.
Compute the capital gain for the assessment year 2025-26.
SOLUTION
Computation of capital gains on slump sale of Unit 1

Particulars `
Full value of consideration [Fair market value on 1.4.2024] 14,82,500
Less: Expenses on sale 38,000
Net sale consideration 14,44,500
Less: Net worth (See Note 1 below) 11,73,125
Long-term capital gain 2,71,375

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Notes:
1. Computation of Full value of consideration
Particulars `
Fair market value of the capital assets transferred by way of slump sale
Building, being an immovable property [stamp duty value on 1.4.2024, 10,00,000
being the date of slump sale] [A]
Machinery [Book value as appearing in the books of accounts] [B] 4,00,000
Debtors [Book value as appearing in the books of accounts] [C] 2,00,000
Patents [Book value as appearing in the books of accounts] [D] 2,50,000
18,50,000
Less: Liabilities of Unit 1 [` 29,50,000 - ` 1,20,000 - ` 2,62,500] [L]
25,67,500
Excluding
(i) Own Capital 17,00,000
(ii) Revaluation reserve 5,00,000 22,00,000 3,67,500
Fair market value of the capital assets transferred by way of slump sale 14,82,500
[A+B+C+D- L] [FMV1]
Fair market value of the consideration received or accruing as a result of 14,00,000
transfer by way of slump sale [value of the monetary consideration
received] [FMV2]
Full value of consideration [Higher of FMV1 or FMV2] 14,82,500

2. Computation of net worth of Unit 1 of Akash Enterprises

Particulars ` `
Land (excluding ` 5 lakhs on account of revaluation) 8,00,000
Machinery 4,00,000
Debtors 2,00,000
Patents (See Note 2 below) 1,40,625
Total assets 15,40,625
Less: Creditors [` 3,50,000 x 25%] 87,500
Bank Loan [` 4,00,000 x 70%] 2,80,000 3,67,500
Net worth 11,73,125

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3. Written down value of patents as on 1.4.2024

Value of patents `
Cost as on 1.7.2022 2,50,000
Less: Depreciation @ 25% for Financial Year 2022-23 62,500
WDV as on 1.4.2023 1,87,500
Less: Depreciation for Financial Year 2023-24 46,875
WDV as on 1.4.2024 1,40,625

For the purposes of computation of net worth, the written down value determined as per
section 43(6) has to be considered in the case of depreciable assets. The problem has been
solved assuming that the Balance Sheet values of ` 4 lakh and ` 8 lakh (` 13 lakh – ` 5 lakh)
represent the written down value of machinery and building, respectively, of Unit 1.

4. Since the Unit is held for more than 36 months, capital gain arising would be long-term
capital gain. However, indexation benefit is not available in case of slump sale.

4.18 DEEMED FULL VALUE OF CONSIDERATION FOR

COMPUTING CAPITAL GAINS [SECTION 50C, 50CA & 50D]
S. Capital Section Circumstance Deemed Full Value of
No. Asset consideration for
computing Capital
Gains
1. Land or 50C (1) If Stamp Duty Value > 110% of Stamp Duty Value
Building or consideration received or accruing
both as a result of transfer
(a) If date of agreement is Stamp Duty Value on
different from the date of the date of agreement
transfer and whole or part of
the consideration is received
by way of account payee
cheque or bank draft or ECS
or through such other
prescribed electronic mode
(IMPS, UPI, RTGS, NEFT,
Net banking, debit card, credit

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card or BHIM Aadhar Pay) on

or before the date of
agreement
(b) If date of agreement is Stamp Duty Value on
different from the date of the date of transfer
transfer but the whole or part
of the consideration has not
been received by way of
account payee cheque or
bank draft or ECS or through
such other prescribed
electronic mode (IMPS, UPI,
RTGS, NEFT, Net banking,
debit card, credit card or
BHIM Aadhar Pay) on or
before the date of agreement

However, if the stamp duty value Actual consideration so

on the date of agreement or the received
date of transfer, as the case may
be ≤ 110% of the sale
consideration received.
Example:
Let us take a case where for
transfer of building –
• the actual consideration is
` 100 lakh;
• the stamp duty value on the
date of agreement is ` 109
lakh; and
• the stamp duty value on the
date of transfer is ` 112 lakh
(i) If any part of the
consideration is paid by
prescribed electronic mode
on or before the date of
agreement

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The actual consideration of

` 100 lakh would be the full
value of consideration, since
stamp duty value of ` 109
lakhs on the date of
agreement does not exceed
110% of actual consideration
of ` 100 lakhs.
(ii) If no part of the
consideration is paid by
prescribed electronic mode
on or before the date of
agreement
Stamp duty value of ` 112
lakhs on the date of transfer
would be the full value of
consideration, since the same
exceeds 110% of actual
consideration of ` 100 lakhs.
(2) Where the Assessing Officer refers
the valuation to a Valuation Officer,
on the assessee’s claim that the
stamp duty value exceeds the FMV
of the property on the date of
transfer and the stamp duty value
has not been disputed in any
appeal or revision or no reference
has been made before any other
authority, court or High Court
(a) If Valuation by Valuation Stamp Duty Value
Officer > Stamp Duty Value
(b) If Valuation by Valuation Valuation by Valuation
Officer < Stamp Duty Value Officer
155(15) (3) If stamp duty value has been Value so revised in such
adopted as full value of appeal or revision
consideration, and subsequently
the value is revised in any appeal
or revision

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2. Shares 50CA If consideration received or accruing as FMV of such share

other than a result of transfer < FMV of such share determined in the
quoted determined in the prescribed manner prescribed manner
shares The provisions of this section would not,
however, be applicable to any
consideration received or accruing as a
result of transfer by such class of
persons and subject to such conditions
as may be prescribed.
Prescribed class of persons for the purpose of section 50CA
Rule 11UAD provides that the provisions of section 50CA shall not apply to transfer of any
movable property, being unquoted shares, of a company and its subsidiary and the
subsidiary of such subsidiary by an assessee, where -
(i) the Tribunal, on an application moved by the Central Government under section 241 of
the Companies Act, 2013, has suspended the Board of Directors of such company and
has appointed new directors nominated by the Central Government under section 242
of the said Act; and
(ii) share of such company and its subsidiary and the subsidiary of such subsidiary has
been transferred pursuant to a resolution plan approved by the Tribunal under section
242 of the Companies Act, 2013 after affording a reasonable opportunity of being
heard to the jurisdictional Principal Commissioner or Commissioner.
Meaning of certain terms
(1) A company shall be a subsidiary of another company, if such other company holds
more than half in nominal value of the equity share capital of the company.
(2) Tribunal shall have the same meaning assigned to it in section 2(90) of the
Companies Act, 2013 i.e., National Company Law Tribunal constituted under section
408 of the said Act.
Note: The fair market value of the shares other than quoted shares would be determined in the
manner provided in sub-clause (b) or sub-clause (c), as the case may be, of Rule 11UA(1)(c) and for
this purpose the reference to valuation date in the Rule 11U and 11UA shall mean the date on which
the capital asset, being share other than quoted shares of a company is transferred (Rule 11UAA) 6.
3. Any Capital 50D Where the consideration received or FMV of the said asset on
asset accruing as a result of the transfer of a the date of transfer
capital asset by an assessee is not
ascertainable or cannot be determined

6
For detailed reading of Rule 11U to 11UAA of the Income-tax Rules, 1962, refer to Annexure 3 at the end of this
module

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Meaning of certain terms:

S. Term Section Meaning

No.
(i) Stamp Duty 50C The value adopted or assessed or assessable by any
Value authority of a State Government (Stamp Valuation
Authority) for the purpose of payment of stamp duty
(ii) Assessable 50C The term ‘assessable’ has been defined to mean the price
which the stamp valuation authority would have,
notwithstanding anything to the contrary contained in any
other law for the time being in force, adopted or assessed, if
it were referred to such authority for the purposes of the
payment of stamp duty. The term “assessable” has been
added to cover transfers executed through power of
attorney.
(iii) Quoted Shares 50CA The share quoted on any recognised stock exchange with
regularity from time to time, where the quotation of such
share is based on current transaction made in the ordinary
course of business.

4.19 ADVANCE MONEY RECEIVED [SECTION 51]

It is possible for an assessee to receive some advance in regard to the transfer of capital asset.
Due to the break-down of the negotiation, the assessee may have retained the advance.
Section 51 provides that while calculating capital gains, the above advance retained by the
assessee must go to reduce the cost of acquisition. However, if advance has been received and
retained by the previous owner and not the assessee himself, then the same will not go to reduce
the cost of acquisition of the assessee.

Section 56(2)(ix) provides for the taxability of any sum of money, received as an advance or
otherwise in the course of negotiations for transfer of a capital asset. Consequently, such sum
shall be chargeable to income-tax under the head ‘Income from other sources’, if such sum is
forfeited on or after 1st April, 2014 and the negotiations do not result in transfer of such capital
asset.
In order to avoid double taxation of the advance received and retained, section 51 provides that
where any sum of money received as an advance or otherwise in the course of negotiations for
transfer of a capital asset has been included in the total income of the assessee for any previous

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year in accordance with section 56(2)(ix), then, such amount shall not be deducted from the cost
for which the asset was acquired or the written down value or the fair market value, as the case
may be, in computing the cost of acquisition.
However, any such sum of money forfeited before 1st April, 2014, will be deducted from the cost of
acquisition before applying indexation, if any, for computing capital gains.
Tax treatment of advance money forfeited on
failure of negotiations for transfer of a capital
asset [Sections 51 & 56(2)(ix)]

If advance was If advance was

received and received and
forfeited forfeited on or
before 1-4-2014 after 1-4-2014

Advance forfeited to be deducted while Advance forfeited to be taxed

determining Cost of acquisition for under 56(2)(ix) as Income
computing capital gains from other sources

Taxability is postponed to Tax liability is attracted in

the year of actual transfer of the year of forfeiture of
capital asset. advance

ILLUSTRATION 13
Mr. Kay purchases a house property on April 10, 1992 for ` 65,000. The fair market value of the
house property on April 1, 2001 was ` 2,70,000 and Stamp duty value was ` 2,20,000. On August
31, 2004, Mr. Kay enters into an agreement with Mr. Jay for sale of such property for ` 3,70,000
and received an amount of ` 60,000 as advance. However, as Mr. Jay did not pay the balance
amount, Mr. Kay forfeited the advance. In May 2008, Mr. Kay constructed the first floor by
incurring a cost of ` 2,35,000. Subsequently, in January 2009, Mr. Kay gifted the house to his
brother Mr. Dee. On June 10, 2024, Mr. Dee sold the house for ` 15,00,000.
CII for F.Y.2001-02: 100; 2004-05: 113; 2008-09: 137; 2024-25: 363.

Compute the capital gains in the hands of Mr. Dee for A.Y.2025-26.

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SOLUTION
Computation of taxable capital gains of Mr. Dee for A.Y.2025-26

Particulars ` `
Sale consideration 15,00,000
Less: Indexed cost of acquisition (` 2,20,000 × 363/100) 7,98,600
Indexed cost of improvement (` 2,35,000 × 363/137) 6,22,664 14,21,264
Long-term capital gain 78,736

Note: For the purpose of capital gains, holding period is considered from the date on which the
house was purchased by Mr. Kay, till the date of sale. The house property was acquired before 1st
April, 2001, higher of fair market value on 1.4.2001 or actual cost of acquisition can be considered
as cost of acquisition. However, fair market value cannot exceed stamp duty value on 1.4.2001.
Amount forfeited by previous owner, Mr. Kay, shall not be deducted from cost of acquisition.
As per the view expressed by Bombay High Court in CIT v. Manjula J. Shah 16 Taxman 42, in
case the cost of acquisition of the capital asset in the hands of the assessee is taken to be cost of
such asset in the hands of the previous owner, the indexation benefit would be available from the
year in which the capital asset is acquired by the previous owner. Accordingly, the indexed cost of
acquisition is calculated by taking the CII of F.Y.2001-02, since the Fair Market Value as on
1.4.2001 has been taken as the cost of acquisition.
Alternative view – As per the plain reading of the provisions of section 48, indexation benefit
would be available from the year in which the capital asset is first held by the assessee. In such
case, indexed cost of acquisition would have to be calculated by taking the CII of F.Y. 2008-09 i.e.,
the year in which the house was gifted by Mr. Kay to Mr. Dee.
Note - Since the property was gifted prior to 1.10.2009, it is a case falling u/s 49(1) and not 49(4).
Accordingly, the cost of acquisition of the previous owner, Mr. Kay, or the FMV as on 1.4.2001 (since
the asset was acquired by the previous owner, Mr. Kay, before 1.4.2001), has to be considered.
ILLUSTRATION 14
Mr. X purchases a house property in December 1993 for ` 5,25,000 and an amount of ` 1,75,000
was spent on the improvement and repairs of the property in March, 1997. The property was
proposed to be sold to Mr. Z in the month of May, 2007 and an advance of ` 40,000 was taken
from him. As the entire money was not paid in time, Mr. X forfeited the advance and subsequently
sold the property to Mr. Y in the month of March, 2025 for ` 52,00,000. The fair value of the

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property on April 1, 2001 was ` 11,90,000 and Stamp duty value on the said date was
` 10,20,000. What is the capital gain chargeable in the hands of Mr. X for the A.Y. 2025-26?
Financial year Cost Inflation Index
2001-02 100
2007-08 129
2024-25 363
SOLUTION
Capital gains in the hands of Mr. X for the A.Y.2025-26 is computed as under
Particulars `
Sale proceeds 52,00,000
Less: Cost of acquisition [Note 1] 9,80,000
Cost of improvement [Note 2] -
Long term capital gains 42,20,000

Note 1: Computation of indexed cost of acquisition

Cost of acquisition (higher of fair market value as on April 1, 2001 and the 10,20,000
actual cost of acquisition. Fair market value, however, should not exceed
` 10,20,000, being the stamp duty value on 1.4.2001)
Less: Advance taken and forfeited before 1.4.2014 40,000
Note 2: Any improvement cost incurred prior to 1.4.2001 is to be ignored.
Note 3: Since the house property was acquired before 23.7.2024 and transferred on or after
23.7.2024, while computing tax on such LTCG, Mr. X has the option to pay tax under section 112
at lower of 12.5% (on LTCG computed without indexation benefit) or 20% (on LTCG computed with
indexation benefit).

4.20 EXEMPTION OF CAPITAL GAINS

Exemption of Capital Gains

Exemption under section

Exemption under Section 10 54/54B/54D/54EC/54F/
54G/54GA

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(1) Exemption under section 10

The following are the exemption in respect of capital gains under section 10:
(i) Exemption of capital gain on transfer of a unit of Unit Scheme, 1964 (US 64) [Section
10(33)]
This clause provides that any income arising from the transfer of unit of US 64, shall be
exempt from tax. Such transfer should take place on or after 1.4.2002.
(ii) Exemption of capital gains on compulsory acquisition of agricultural land situated
within specified urban limits [Section 10(37)]
With a view to mitigate the hardship faced by the farmers whose agricultural land situated in
specified urban limits has been compulsorily acquired, clause (37) provide to exempt the
capital gains arising to an individual or a HUF from transfer of urban agricultural land by
way of compulsory acquisition.
Such exemption is available where the compensation or the enhanced compensation or
consideration, as the case may be, is received on or after 1.4.2004.
The exemption is available only when such land has been used for agricultural purposes
during the immediately preceding two years from the date of transfer by such individual
or a parent of his or by such HUF.

Clarification on taxability of the compensation received by the land owners for the
land acquired under the Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) [Circular No.
36/2016, dated 25-10-2016]
The RFCTLARR Act which came into effect from 1st January, 2014, in section 96, inter alia
provides that income-tax shall not be levied on any award or agreement made (except
those made under section 46) under the RFCTLARR Act. Therefore, compensation received
for compulsory acquisition of land under the RFCTLARR Act (except those made under
section 46 of RFCTLARR Act), is exempted from the levy of income-tax.

As no distinction has been made between compensation received for compulsory

acquisition of agricultural land and non-agricultural land in the matter of providing
exemption from income-tax under the RFCTLARR Act, the exemption provided under
section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided under
the existing provisions of Income-tax Act, 1961.

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The CBDT has clarified that compensation received in respect of award or agreement which
has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall
also not be taxable under the provisions of Income-tax Act, 1961 even if there is no specific
provision for exemption of such compensation in the Income-tax Act, 1961.
ILLUSTRATION 15
Mr. Kumar has an agricultural land costing ` 6 lakh in Lucknow on 1.4.2003 and has been
using it for agricultural purposes till 1.8.2012 when the Government took over compulsory
acquisition of this land. A compensation of ` 12 lakhs was settled. The compensation was
received by Mr. Kumar on 1.7.2024. Compute the amount of capital gains taxable in the
hands of Mr. Kumar.
Cost Inflation Index: 2003-04: 109, 2012-13: 200, 2024-25: 363
SOLUTION
In the given problem, compulsory acquisition of an urban agricultural land has taken place
and the compensation is received after 1.4.2004. This land had also been used for at least
2 years by the assessee himself for agricultural purposes. Thus, as per section 10(37),
entire capital gains arising on such compulsory acquisition will be fully exempt and nothing
is taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e.,
A.Y.2025-26.
ILLUSTRATION 16
Will your answer be different if Mr. Kumar had by his own will sold this land to his friend
Mr. Sharma? Examine.
SOLUTION
As per section 10(37), exemption is available if compulsory acquisition of urban agricultural
land takes place. Since the sale is out of own will and desire, the provisions of this section
are not attracted and the capital gains arising on such sale will be taxable in the hands of
Mr. Kumar.
ILLUSTRATION 17
Will your answer be different if Mr. Kumar had not used this land for agricultural activities?
Examine and compute the amount of capital gains taxable in the hands of Mr. Kumar, if any.
SOLUTION
As per section 10(37), exemption is available only when such land has been used for
agricultural purposes during the preceding two years by such individual or his parent or by

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such HUF. Since the assessee has not used it for agricultural activities, the provisions of this
section are not attracted and the capital gains arising on such compulsory acquisition will be
taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e., A.Y. 2025-26.
Computation of capital gains
Particulars Amount (`)
Sales consideration 12,00,000
Less: Cost of acquisition (` 6,00,000 x 200/109) 11,00,917
Long term capital Gains 99,083

ILLUSTRATION 18
Will your answer be different if the land belonged to ABC Ltd. and not Mr. Kumar and
compensation on compulsory acquisition was received by the company? Examine.
SOLUTION
Section 10(37) exempts capital gains arising to an individual or a HUF from transfer of
agricultural land by way of compulsory acquisition. If the land belongs to ABC Ltd., a
company, the provisions of this section are not attracted and the capital gains arising on
such compulsory acquisition will be taxable in the hands of ABC Ltd.

(2) Exemption of Capital Gains under section 54/54B/54D/54EC/54F/54G/54GA

(i) Capital Gains on sale of residential house [Section 54]
Eligible assessees – Individual & HUF

Conditions to be fulfilled
• There should be a transfer of residential house (buildings or lands appurtenant
thereto)
• It must be a long-term capital asset
• Income from such house should be chargeable under the head “Income from house
property”
• Where the amount of capital gains exceeds ` 2 crore
Where the amount of capital gain exceeds ` 2 crore, one residential house in India
should be –
 purchased within 1 year before or 2 years after the date of transfer (or)

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 constructed within a period of 3 years after the date of transfer.

• Where the amount of capital gains does not exceed ` 2 crore
Where the amount of capital gains does not exceed ` 2 crore, the assessee i.e.,
individual or HUF, may at his option,
 purchase two residential houses in India within 1 year before or 2 years
after the date of transfer (or)
 construct two residential houses in India within a period of 3 years after the
date of transfer.
Where during any assessment year, the assessee has exercised the option to
purchase or construct two residential houses in India, he shall not be subsequently
entitled to exercise the option for the same or any other assessment year.
This implies that if an assessee has availed the option of claiming benefit of section
54 in respect of purchase of two residential houses in Jaipur and Jodhpur, say, in
respect of capital gains of ` 1.50 crores arising from transfer of residential house at
Mumbai in the P.Y.2024-25 then, he will not be entitled to avail the benefit of section
54 again in respect of purchase of two residential houses in, say, Pune and Baroda,
in respect of capital gains of ` 1.20 crores arising from transfer of residential house
in Jaipur in the P.Y.2027-28, even though the capital gains arising on transfer of the
residential house at Jaipur does not exceed ` 2 crore.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the Capital Gains Account Scheme (CGAS)
[Refer points (viii) and (ix) of this sub-heading (2)]. However, the capital gain in excess
of ` 10 crore would not be taken into account for the purpose of deposit in CGAS.
• Amount utilised by the assessee for purchase or construction of new asset and the
amount so deposited shall be deemed to be the cost of new asset. The deemed cost
of the new asset would be restricted to ` 10 crores for the purpose of exemption
under section 54.
Quantum of Exemption
• If cost of new residential house or houses, as the case may be ≥ long-term capital
gains, entire long-term capital gains is exempt.
• If cost of new residential house or houses, as the case may be < long-term capital
gains, long-term capital gains to the extent of cost of new residential house is exempt

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However, if the cost of new residential house(s) exceeds ` 10 crores, the amount
exceeding ` 10 crore would not be taken into account for exemption. It means the maximum
exemption that can be claimed by the assessee u/s 54 is ` 10 crore.

Examples
1. If the long-term capital gains is ` 2.05 crores and the cost of the new house is
` 3 crores, then, the entire long-term capital gains of ` 2.05 crores is exempt.
2. If long-term capital gains is ` 2.05 crores and cost of new house is ` 1.55 crores,
then, long-term capital gains is exempt only upto ` 1.55 crores. Balance ` 50 lakhs
is taxable u/s 112.
Example
(1) (2) (3) (4) (5)
[Link]. LTCG Cost of new Amount in column Exempt LTCG
computed residential (3) or ` 10 crore, [Lower of column
house whichever is lower (2) and column (4)]
(1) ` 7 crore ` 12 crore ` 10 crore ` 7 crore
(2) ` 12 crore ` 14 crore ` 10 crore ` 10 crore
(3) ` 11 crore ` 9 crore ` 9 crore ` 9 crore
(4) ` 15 crore ` 13 crore ` 10 crore ` 10 crore
Examples
1. If the LTCG is ` 8 crore and the assessee has incurred ` 5 crore in construction of
new residential house upto the due date u/s 139(1) i.e., 31.7.2025/ 31.10.2025, as
the case may be, then, as per section 54(2), he can deposit the amount of ` 3 crore
not appropriated by him towards construction of house upto 31.7.2025/31.10.2025,
as the case may be, in Capital Gains Account Scheme (CGAS) for claiming
exemption under section 54. If he deposits, say, ` 2 crore, in CGAS on or before the
due date u/s 139(1), the deemed cost of the new residential house would be ` 7
crore (` 5 crore + ` 2 crore). The amount exempt u/s 54 would be ` 7 crore.
2. If the LTCG is ` 14 crore and the assessee has already incurred ` 7 crore in
construction of new residential house upto 31.7.2025/31.10.2025, as the case may
be, then, as per section 54(2), he can deposit the difference of ` 3 crore (` 10 crore
- ` 7 crore) in CGAS for claiming exemption u/s 54. If he deposits, say, ` 2 crore in
CGAS on or before the due date u/s 139(1), the deemed cost of the new residential

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house would be ` 9 crore (` 7 crore + ` 2 crore). The amount exempt under section
54 would be ` 9 crore.
Consequences of transfer of new asset before 3 years
• If the new asset is transferred before 3 years from the date of its acquisition or
construction, then, cost of the asset will be reduced by capital gains exempted earlier
for computing capital gains.
• Example: The long-term capital gains is ` 2.05 crore and the cost of the new house
is ` 3 crore, the entire long-term capital gains of ` 2.05 crore will be exempt. If the
new house was sold after 18 months for ` 5 crore, then, short term capital gain
chargeable to tax would be –

Particulars `
Net Consideration 5,00,00,000
Less: Cost of acquisition minus capital gains exempt earlier
(` 3,00,00,000 – ` 2,05,00,000) 95,00,000
Short term capital gains chargeable to tax 4,05,00,000

ILLUSTRATION 19
Mr. Cee purchased a residential house on July 20, 2022 for ` 10,00,000 and made some
additions to the house incurring ` 2,00,000 in August 2022. He sold the house property in
April, 2024 for ` 20,00,000. Out of the sale proceeds, he spent ` 5,00,000 to purchase
another house property in September, 2024.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y. 2025-26?
SOLUTION
The house is sold before 24 months from the date of purchase. Hence, the house is a short-
term capital asset and no benefit of indexation would be available.
Particulars `
Sale consideration 20,00,000
Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000
Short-term capital gains 8,00,000

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Note: The exemption of capital gains under section 54 is available only in case of long-term
capital asset. As the house is short-term capital asset, Mr. Cee cannot claim exemption
under section 54. Thus, the amount of taxable short-term capital gains is ` 8,00,000.
(ii) Capital Gains on transfer of agricultural land [Section 54B]
Eligible assessee – Individual & HUF

Conditions to be fulfilled
• There should be a transfer of urban agricultural land.
• Such land must have been used for agricultural purposes by the assessee, being an
individual or his parent, or a HUF in the 2 years immediately preceding the date of
transfer.
• He should purchase another agricultural land (urban or rural) within 2 years from the
date of transfer.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS [Refer points (viii) and (ix) of this
sub-heading (2)]. Amount utilised by the assessee for purchase of new asset and
the amount so deposited shall be deemed to be the cost of new asset.
Quantum of exemption
• If cost of new agricultural land ≥ capital gains, entire capital gains is exempt.
• If cost of new agricultural land < capital gains, capital gains to the extent of cost of
new agricultural land is exempt.

Examples
1. If the capital gains is ` 3 lakhs and the cost of the new agricultural land is ` 4 lakhs,
then the entire capital gains of ` 3 lakhs is exempt.
2. If capital gains is ` 3 lakhs and cost of new agricultural land is ` 2 lakhs, then capital
gains is exempt only upto ` 2 lakhs.

Consequences of transfer of new agricultural land before 3 years

• If the new agricultural land is transferred before 3 years from the date of its
acquisition, then cost of the land will be reduced by capital gains exempted earlier
for computing capital gains of new agricultural land.

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• However, if the new agricultural land is a rural agricultural land, there would be no
capital gains on transfer of such land.

• Continuing in the above example, if the new agricultural land (urban land) is sold
after, say, 1 year for ` 6 lakhs, then short-term capital gain chargeable to tax would
be –
Particulars `
Net consideration 6,00,000
Less: Cost of acquisition minus capital gains exempt earlier 1,00,000
(` 4,00,000 – ` 3,00,000)
Short-term capital gains chargeable to tax 5,00,000

(iii) Capital Gains on transfer by way of compulsory acquisition of land and building of an
industrial undertaking [Section 54D]
Eligible assessee – Any assessee

Conditions to be fulfilled
• There must be compulsory acquisition of land and building or any right in land or
building forming part of an industrial undertaking.
• The land and building should have been used by the assessee for purposes of the
business of the industrial undertaking in the 2 years immediately preceding the date
of transfer.
• The assessee must purchase any other land or building or any right in land or
building or construct any building (for shifting or re-establishing the existing
undertaking or setting up a new industrial undertaking) within 3 years from the date
of transfer.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS [Refer points (viii) and (ix) of this
sub-heading (2)]. Amount utilised by the assessee for purchase of new asset and the
amount so deposited shall be deemed to be the cost of new asset.
Quantum of exemption
• If cost of new asset ≥ Capital gains, entire capital gains is exempt.
• If cost of new asset < Capital gains, capital gains to the extent of cost of new asset is
exempt.

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Note: The exemption in respect of capital gains from transfer of capital asset would be
available even in respect of short-term capital asset, being land or building or any right in
any land or building, provided such capital asset is used by assessee for the industrial
undertaking belonging to him, even if he was not the owner for the said period of 2 years.

Consequences of transfer of new asset before 3 years

• If the new asset is transferred before 3 years from the date of its purchase or
construction, then cost of the asset will be reduced by capital gains exempted earlier
for computing capital gains.
ILLUSTRATION 20
PQR Ltd. purchased a land for industrial undertaking in May 2004, at a cost of ` 3,50,000.
The above property was compulsorily acquired by the State Government at a compensation
of ` 13,00,000 in the month of January, 2025. The compensation was received in February,
2025. The company purchased another land for its industrial undertaking at a cost of
` 2,00,000 in the month of March, 2025. What is the amount of the capital gains chargeable
to tax in the hands of the company for the A.Y. 2025-26?
Financial year Cost Inflation Index
2004-05 113
2024-25 363

SOLUTION
Computation of capital gains in the hands of PQR Ltd. for the A.Y.2025-26
Particulars `
Sale proceeds (Compensation received) 13,00,000
Less: Cost of acquisition 3,50,000
9,50,000
Less: Exemption under section 54D (Cost of acquisition of land for its 2,00,000
undertaking)
Taxable long-term capital gain 7,50,000

(iv) Capital Gains not chargeable on investment in certain bonds [Section 54EC]

Eligible assessee – Any assessee

Conditions to be fulfilled
• There should be transfer of a long-term capital asset being land or building or both.

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• Such asset can also be a depreciable asset being a building held for more than 24
months. [CIT v. Dempo Company Ltd (2016) 387 ITR 354 (SC)]

• The capital gains arising from such transfer should be invested in a long-term
specified asset within 6 months from the date of transfer.
• Long-term specified asset means specified bonds, redeemable after 5 years, issued
on or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural
Electrification Corporation Limited (RECL) or any other bond notified by the Central
Government in this behalf.
• The assessee should not transfer or convert or avail loan or advance on the security
of such bonds for a period of 5 years from the date of acquisition of such bonds.

Note - In case of conversion of capital asset into stock in trade and subsequent sale
of stock in trade - Period of 6 months to be reckoned from the date of sale of stock in trade
for the purpose of section 54EC exemption [CBDT Circular No.791 dated 2-6-2000].

Quantum of exemption
Capital gains or amount invested in specified bonds, whichever is lower.
Ceiling limit for investment in long-term specified asset
The maximum investment which can be made in notified bonds or bonds of NHAI and
RECL, out of capital gains arising from transfer of one or more assets, during the previous
year in which the original asset is transferred and in the subsequent financial year cannot
exceed ` 50 lakhs.
Violation of condition
In case of transfer or conversion of such bonds or availing loan or advance on security of
such bonds before the expiry of 5 years, the capital gain exempted earlier shall be taxed as
long-term capital gain in the year of violation of condition.
ILLUSTRATION 21
Long-term capital gain of ` 75 lakh arising from transfer of building on 1.5.2024 will be fully
exempt from tax if such capital gain is invested in the bonds redeemable after five years,
issued by NHAI under section 54EC. Examine with reasons whether the given statement is
true or false having regard to the provisions of the Income-tax Act, 1961.

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SOLUTION
False: The exemption under section 54EC has been restricted, by limiting the maximum
investment in long term specified assets (i.e., bonds of NHAI or RECL or any other bond
notified by Central Government in this behalf, redeemable after 5 years) to ` 50 lakh,
whether such investment is made during the relevant previous year or the subsequent
previous year, or both. Therefore, in this case, the exemption under section 54EC can be
availed only to the extent of ` 50 lakh, provided the investment is made before 1.11.2024
(i.e., within six months from the date of transfer).
Exemption of Long-term capital gains on sale of residential house

Investment in one or two residential Investment in bonds of NHAI/RECL or

houses, as the case may be, in India any other notified bond

Exemption u/s 54 Exemption u/s 54EC*

Purchase within 1 year before or 2 Investment within 6 months

years after and construction within 3 from the date of transfer
years after the date of transfer

Capital Gains or Cost of new house Capital Gains or amount invested in bonds,
(subject to a maximum of ` 10 crore) whichever is lower, is exempt maximum upto
whichever is lower, is exempt ` 50 lakhs

* Theexemption under section 54EC is available in respect of capital gains on transfer of capital
asset being land or building or both.
(v) Capital gains in cases of investment in residential house [Section 54F]
Eligible assessees: Individuals/ HUF

Conditions to be fulfilled
• There must be transfer of a long-term capital asset, not being a residential house.

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• Transfer of plot of land is also eligible for exemption

• The assessee should -
♦ Purchase one residential house situated in India within a period of 1 year
before or 2 years after the date of transfer; or
♦ Construct one residential house in India within 3 years from the date of
transfer.
• If such investment is not made before the date of filing of return of income, then the
net sale consideration has to be deposited under the CGAS [Refer points (viii) and
(ix) of this sub-heading (2)]. However, the net consideration in excess of ` 10 crore
would not be taken into account for the purpose of deposit in CGAS.
• Amount utilised by the assessee for purchase or construction of new asset and the
amount so deposited shall deemed to be the cost of new asset. The deemed cost of
new asset would be restricted to ` 10 crores for the purpose of exemption under
section 54F.
• The assessee should not own more than one residential house on the date of
transfer.
• The assessee should not –

♦ purchase any other residential house within a period of 2 years or

♦ construct any other residential house within a period of 3 years
from the date of transfer of the original asset.
Quantum of exemption
• If cost of new residential house ≥ Net sale consideration of original asset, entire
capital gains is exempt.

• If cost of new residential house < Net sale consideration of original asset, only
proportionate capital gains is exempt i.e.
Amount invested in new residential house
LTCG×
Net sale consideration

However, if the cost of new residential house/ amount invested in new residential house
exceeds ` 10 crore, the amount exceeding ` 10 crore would not be taken into account for
exemption.

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Example
(1) (2) (3) (4) (5)
Amount in
Net LTCG Cost of new column (3) or
Consider- computed residential ` 10 crores, Exempt LTCG
ation house whichever is
lower
(1) ` 15 crore ` 7.5 ` 12 crore ` 10 crore ` 7.5 crore x 10/15 = ` 5
crore crore
(2) ` 20 crore ` 12 crore ` 15 crore ` 10 crore ` 12 crore x 10/20 = ` 6
crore
(3) ` 16 crore ` 12 crore ` 8 crore ` 8 crore ` 12 crore x 8/16 = ` 6
crore
(4) ` 10 crore ` 6 crore ` 10 crore ` 10 crore ` 6 crore x 10/10 = ` 6
crore
(5) ` 12 crore ` 6 crore ` 12 crore ` 10 crore ` 6 crore x 10/12 = ` 5
crore
Examples
1. If the net consideration is ` 9 crore, the capital gain is ` 4.50 crore and the amount
incurred for construction of new residential house upto 31.7.2025/31.10.2025, as the
case may be, is ` 5 crore, then, as per section 54F(4), the assessee can deposit the
amount of ` 4 crore (i.e., ` 9 crore – ` 5 crore) not appropriated towards construction
upto 31.7.2025/ 31.10.2025, as the case may be, in CGAS for claiming exemption u/s
54F. If the assessee has deposited, say, ` 3 crore on or before 31.7.2025/
31.10.2025, as the case may be, the deemed cost of new residential house would be
` 8 crore (` 5 crore + ` 3 crore). The exemption u/s 54F would be ` 4 crore [i.e.,
` 4.50 crore x ` 8 crore/` 9 crore].
2. If the net consideration is ` 15 crore, the capital gain is ` 7.50 crore and the amount
incurred for construction of new residential house upto 31.7.2025/31.10.2025, as the
case may be, is ` 6 crore, the assessee can deposit ` 4 crore [i.e., ` 10 crore – ` 6
crore] on or before 31.7.2025/31.10.2025, as the case may be, in CGAS for claiming
exemption u/s 54F. If the assessee has deposited, say, ` 3 crore on or before the due
date of filing return u/s 139(1), the deemed cost of new residential house would be ` 9
crore (` 6 crore + ` 3 crore). The exemption u/s 54F would be ` 4.50 crore [i.e.,
` 7.50 crore x ` 9 crore/` 15crore].

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ILLUSTRATION 22
From the following particulars, compute the taxable capital gains of Mr. D for A.Y.2025-26 -
Particulars Amount (`)
Cost of jewellery [Purchased in F.Y.2005-06] 4,52,000
Sale price of jewellery sold in June 2024 14,50,000
Expenses on transfer 7,000
Residential house purchased in March 2025 5,00,000

The Cost Inflation Index are as follows:

Financial Year Cost Inflation Index

2005-06 117
2024-25 363

SOLUTION
Computation of taxable capital gains for A.Y.2025-26
Particulars `
Gross consideration 14,50,000
Less: Expenses on transfer 7,000
Net consideration 14,43,000
Less: Indexed cost of acquisition (` 4,52,000 × 363/117) 14,02,359
40,641
Less: Exemption under section 54F (` 40,641 × ` 5,00,000/ ` 14,43,000) 14,082
Taxable long-term capital gains 26,559

Consequences if the new house is transferred within 3 years from the date of its
purchase
If the new asset is transferred before the expiry of 3 years from the date of its purchase or
construction, as the case may be, then capital gains arises on transfer of the new house
and the capital gains exempted earlier under section 54F would be taxable as long-term
capital gains.

Note – In case the new residential house is sold after 2 years, the capital gains would be long-
term capital gains and indexation benefit would be available.

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Consequences where assessee purchases any other residential house within 2 years
or constructs within 3 years from the date of transfer of original asset

The capital gain exempted earlier under section 54F would be deemed to be long-term
capital gains and chargeable to tax in the previous year in which such residential house is
purchased or constructed.

(vi) Exemption of capital gains for shifting of industrial undertaking from urban areas
[Section 54G]
Eligible assessees: Any assessee
Conditions to be fulfilled
• There should be a shifting of the industrial undertaking from an urban area to any
other area other than an urban area.

• There should be a transfer of machinery, plant, building or land or any right in

building or land used for the business of an industrial undertaking situated in an
urban area.
• Such transfer should be in the course of, or in consequence of, shifting the industrial
undertaking from an urban area to any other area other than an urban area.
• The capital gain (short-term or long-term) should be utilised for any of the following
purposes within 1 year before or 3 years after the date of transfer –
♦ purchase of new plant and machinery for the purposes of business of the
industrial undertaking in the area to which the said undertaking is shifted;
♦ acquisition of building or land or construction of building for the purposes of
his business in the said area;
♦ shifted the original asset and transferred the establishment of such industrial
undertaking from the urban area to the other area;
♦ incurred expenses on such other purpose as may be specified in a scheme
framed by the Central Government.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS. [Refer points (viii) at the end of
this sub-heading (2)]. Amount utilised by the assessee for purchase of new asset
and expenses of shifting and the amount so deposited shall be deemed to be the
cost of new asset.

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Quantum of exemption
• If cost of new assets plus expenses incurred for the specified purpose ≥ Capital
gains, entire capital gains (short-term or long-term) is exempt.
• If cost of new assets plus expenses incurred for the specified purpose < Capital
gains, capital gains (short-term or long-term) to the extent of such cost and expenses
is exempt.
Consequences if the new asset is transferred within a period of 3 years
If the new asset is transferred within a period of 3 years of its purchase or construction,
then the capital gain, which was exempt earlier under section 54G would be deducted from
the cost of acquisition of the new asset for the purpose of computation of capital gains in
respect of the transfer of the new asset.

(vii) Exemption of capital gains on transfer of certain capital assets in case of shifting of
an industrial undertaking from an urban area to any SEZ [Section 54GA]
Eligible assesses – Any assessee
Conditions to be fulfilled
• There must be transfer of capital assets
• Such transfer must be effected in the course of, or in consequence of the shifting of
an industrial undertaking from an urban area to any SEZ, whether developed in an
urban area or not.
• The capital asset should be either machinery or plant or building or land or any rights
in building or land used for the purposes of the business of an industrial undertaking
situated in an urban area.
• The assessee should, within a period of 1 year before or 3 years after the date of
transfer,
♦ purchase machinery or plant for the purposes of business of the industrial
undertaking in the SEZ;
♦ acquire building or land or construct building for the purposes of his business
in the SEZ;
♦ shifted the original asset and transferred the establishment of such industrial
undertaking from the urban area to the SEZ; and

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♦ incurred expenses for such other purposes as may be specified in a scheme

framed by the Central Government.
• If such investment is not made before the date of filing of return of income, then the
capital gain has to be deposited under the CGAS [Refer points (viii) at the end of this
sub-heading (2)]. Amount utilised by the assessee for purchase of new asset and
expenses of shifting and the amount so deposited shall be deemed to be the cost of
new asset.
Quantum of exemption
• If cost of new assets plus expenses incurred for shifting ≥ Capital gains, entire
capital gains (short-term or long-term) is exempt.
• If cost of new assets plus expenses incurred for shifting < Capital gains, capital gains
(short-term or long-term) to the extent of such cost and expenses is exempt.
Consequences if the new asset is transferred within a period of 3 years
• If the new asset is transferred within a period of 3 years of its purchase or
construction, then the capital gain, which was exempt earlier under section 54GA
would be deducted from the cost of acquisition of the new asset for the purpose of
computation of capital gains in respect of the transfer of the new asset.
(viii) Capital Gains Account Scheme (CGAS)
Under sections 54, 54B, 54D, 54F, 54G and 54GA, capital gains is exempt to the extent of
investment of such gains/ net consideration (in the case of section 54F) in specified assets
within the specified time. If such investment is not made before the date of filing of return of
income, then the capital gain or net consideration (in case of exemption under section 54F)
has to be deposited under the CGAS. However, the capital gain in excess of ` 10 crore would
not be taken into account for the purpose of deposit in CGAS in case of section 54 and the net
consideration in excess of ` 10 crore would not be taken into account for the purpose of deposit
in CGAS in case of section 54F.
Time limit
Such deposit in CGAS should be made before filing the return of income or on or before the
due date of filing the return of income, whichever is earlier. In such cases, the amount
already utilized for purchase or construction of new asset plus the amount deposited under
the CGAS on or before due date u/s 139(1) would be deemed to be the cost of new asset.
However, for the purpose of sections 54 and 54F, the amount so deemed to be the cost of
the new asset cannot exceed ` 10 crore.

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Proof of such deposit should be attached with the return. The deposit can be withdrawn for
utilization for the specified purposes in accordance with the scheme.

Consequences if the amount deposited in CGAS is not utilized within the stipulated
time of 2 years / 3 years
If the amount deposited is not utilized for the specified purpose within the stipulated period,
then the unutilized amount shall be charged as capital gain of the previous year in
which the specified period expires. In the case of section 54F and 54GB, proportionate
amount will be taxable.
CBDT Circular No.743 dated 6.5.96 clarifies that in the event of death of an individual
before the stipulated period, the unutilized amount is not chargeable to tax in the hands of
the legal heirs of the deceased individual. Such unutilized amount is not income but is a
part of the estate devolving upon them.
(ix) Extension of time for acquiring new asset or depositing or investing amount of
Capital Gain [Section 54H]

In case of compulsory acquisition of the original asset, where the compensation is not
received on the date of transfer, the period available for acquiring a new asset or making
investment in CGAS under sections 54, 54B, 54D, 54EC and 54F would be considered from
the date of receipt of such compensation and not from the date of the transfer.

4.21 REFERENCE TO VALUATION OFFICER [SECTION

55A]
Section 55A provides that the Assessing Officer may refer the valuation of a capital asset to a
Valuation Officer in the following circumstances with a view to ascertaining the fair market value of
the capital asset for the purposes of capital gains -
(i) In a case where the value of the asset as claimed by the assessee is in accordance with the
estimate made by a registered valuer, if the Assessing Officer is of the opinion that the
value so claimed is at variance with its fair market value.
Under this provision, the Assessing Officer can make a reference to the Valuation Officer in
cases where the fair market value is taken to be the sale consideration of the asset. An
Assessing Officer can also make a reference to the Valuation Officer in a case where the
fair market value of the asset as on 01.04.2001 is taken as the cost of the asset, if he is of
the view that there is any variation between the value as on 01.04.2001 claimed by the

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assessee in accordance with the estimate made by a registered valuer and the fair market
value of the asset on that date.

(ii) If the Assessing Officer is of the opinion that the fair market value of the asset exceeds the
value of the asset as claimed by the assessee by more than 15% of the value of asset as so
claimed or by more than ` 25,000.

(iii) The Assessing Officer is of the opinion that, having regard to the nature of asset and other
relevant circumstances, it is necessary to make the reference.

4.22 TAX ON SHORT TERM CAPITAL GAINS IN RESPECT

OF EQUITY SHARES/ UNITS OF AN EQUITY
ORIENTED FUND/ UNITS OF A BUSINESS TRUST
[SECTION 111A]
(1) Applicability of concessional rate of tax: This section provides for a concessional rate of
tax on the short-term capital gains on transfer of -
(i) an equity share in a company or
(ii) a unit of an equity oriented fund or

(iii) a unit of a business trust.

(2) Concessional rate of tax in respect of STCG on transfer of certain assets: The
concessional rate of tax on the short-term capital in respect of transfer of above-mentioned
assets is as follow:
Date of transfer Rate of Tax
before 23.7.2024 15%
on or after 23.7.2024 20%

(3) Conditions: The conditions for availing the benefit of this concessional rate are –
(i) the transaction of sale of such equity share or unit should be entered into on or after
1.10.2004, being the date on which Chapter VII of the Finance (No. 2) Act, 2004
came into force; and

(ii) such transaction should be chargeable to securities transaction tax under the said
Chapter.

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However, short-term capital gains arising from transactions undertaken in foreign currency
on a recognized stock exchange located in an International Financial Services Centre
(IFSC) would be taxable at a concessional rate of 15% or 20%, as the case may be, even
though STT is not leviable in respect of such transaction.
(4) Adjustment of Unexhausted Basic Exemption Limit: In the case of resident individuals
or HUF, if the basic exemption is not fully exhausted by any other income, then, such short-
term capital gain will be reduced by the unexhausted basic exemption limit and only the
balance would be taxed at 15% or 20%, as the case may be. However, the benefit of
availing the basic exemption limit is not available in the case of non-residents.
(5) No deduction under Chapter VI-A against STCG taxable under section 111A:
Deductions under Chapter VI-A cannot be availed in respect of such short-term capital
gains on equity shares of a company or units of an equity oriented fund or unit of a
business trust included in the total income of the assessee.

4.23 TAX ON LONG TERM CAPITAL GAINS [SECTION 112]

(1) Concessional rate of tax: Where the total income of an assessee includes long-term
capital gains, tax is payable by the assessee at special rates on such long-term capital
gains. The treatment of long-term capital gains in the hands of different types of assessees
are as follows –

S. Long-term capital asset (LTCA) Rate of tax

No.
I. Where transfer takes place before 23.7.2024
(i) Unlisted securities, or shares of a Non-corporate non-resident/
closely held company foreign company - 10% without the
benefit of indexation and foreign
currency fluctuation
Other Assessees – 20% with
indexation benefit
(ii) Listed securities (other than a unit) or a - 10% without indexation or
zero-coupon bond - 20% with indexation benefit
whichever is more beneficial to the
assessee
(iii) Other Assets (other than taxable u/s - 20% with indexation benefit
112A)

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II. Where transfer takes place on or after 23.7.2024

(i) Land or building or both if acquired before Individual or HUF, being a resident
23.7.2024 – 12.5% without indexation or 20%
with indexation benefit, whichever is
more beneficial to the assessee
Other Assessees – 12.5% without
indexation
(ii) - Land or building or both if acquired on 12.5% without indexation
or after 23.7.2024 [In case of non-residents, LTCG on
or transfer of unlisted securities, or
- Other Assets (other than taxable u/s shares of a closely held company,
112A) would be taxable @12.5% without
indexation and foreign currency
fluctuation]

Important Points to remember –

(1) For Individuals or HUF (Residents): Where the total income as reduced by such
long-term capital gains is below the maximum amount which is not chargeable to
income-tax then such long-term capital gains shall be reduced by the amount by
which the total income as so reduced falls short of the maximum amount which is not
chargeable to income-tax and the tax on the balance of such long-term capital gains
will be taxed at 20% (with indexation) or 12.5% (without indexation), depending on
the date of transfer.
(2) Debentures or Bonds: In respect of debentures or bonds (whether listed or
unlisted) transferred or redeemed or matured before 23.7.2024, the resultant capital
gains will be considered either long-term or short-term, based on the holding period,
and taxed accordingly. If unlisted debentures or bonds are transferred or redeemed
or matured on or after 23.7.2024, the resulting capital gains will always be treated as
short-term, regardless of the holding period. Indexation benefit is in any case not
available for bonds/debentures, even if transferred before 23.07.2024.

(3) Non-Residents and Foreign Companies: Long-term capital gains from the transfer
of listed shares (other than listed equity shares covered u/s 112A) or debentures of
an Indian company (acquired in foreign currency) will be taxed as follows:
- 20% (without indexation, but with foreign currency fluctuation adjustments) if
the transfer takes place before 23.7.2024.

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- 12.5% (without indexation, but with foreign currency fluctuation adjustments) if

the transfer takes place on or after 23.7.2024.

(4) No Chapter VI-A deduction against LTCG: The provisions of section 112 make it
clear that the deductions under Chapter VIA cannot be availed in respect of the long-
term capital gains included in the total income of the assessee.

4.24 TAX ON LONG TERM CAPITAL GAINS ON CERTAIN

ASSETS [SECTION 112A]
(1) Applicability of concessional rate of tax: Section 112A provides that notwithstanding
anything contained in section 112, a concessional rate of tax will be leviable on the long-
term capital gains exceeding ` 1,25,000 on transfer of –
(a) an equity share in a company or
(b) a unit of an equity oriented fund or
(c) a unit of a business trust.
(2) Concessional rate of tax in respect of LTCG on transfer of certain assets: The
concessional rate of tax on the long-term capital in respect of transfer of above-mentioned
assets is as follows:
Date of transfer Rate of Tax
before 23.7.2024 10% on LTCG exceeding` 1,25,000
on or after 23.7.2024 12.5% on LTCG exceeding` 1,25,000
However, the total exemption on LTCG in a previous year cannot exceed
` 1,25,000.

(3) Conditions: The conditions for availing the benefit of this concessional rate are–
(a) In case of equity share in a company, STT has been paid on acquisition and transfer
of such capital asset
(b) In case of unit of an equity oriented fund or unit of business trust, STT has been paid
on transfer of such capital asset.

However, the Central Government may, by notification in the Official Gazette, specify the
nature of acquisition of equity share in a company on which the condition of payment of
STT on acquisition would not be applicable.

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Accordingly, the Central Government has, vide notification No. 60/2018, dated 1st October,
2018, notified that the condition of chargeability of STT shall not apply to the acquisition of
equity shares entered into
- before 1st October, 2004 or
- on or after 1st October, 2004 which are not chargeable to STT, other than the
following transactions.
In effect, only in respect of the following transactions mentioned in column (2), the
requirement of paying STT at the time of acquisition for availing the benefit of concessional
rate of tax under section 112A would apply. In may be noted that the exceptions are listed
in column (3) against the transaction. The requirement of payment of STT at the time of
acquisition for availing benefit of concessional tax rate under section 112A will not apply to
acquisition transactions mentioned in column (3).

(1) (2) (3)

Transaction Non-applicability of condition of chargeability of STT
(a) Where acquisition Where acquisition of listed equity share in a company –
of existing listed
equity share in a (i) has been approved by the Supreme Court, High
company whose Court, National Company Law Tribunal, Securities
equity shares are and Exchange Board of India or Reserve Bank of
not frequently India in this behalf;
traded in a (ii) is by any non-resident in accordance with foreign direct
recognised stock investment guidelines issued by the Government of
exchange of India India;
is made through a
preferential issue (iii) is by an investment fund referred to in clause (a) of
Explanation 1 to section 115UB or a venture capital
fund referred to in section 10(23FB) or a Qualified
Institutional Buyer;
(iv) is through preferential issue to which the provisions of
chapter VII of the Securities and Exchange Board of
India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 does not apply.

(b) Where transaction Following acquisitions of listed equity share in a company

for acquisition of made in accordance with the provisions of the Securities
existing listed Contracts (Regulation) Act, 1956:

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equity share in a (i) acquisition through an issue of share by a company

company is not other than through preferential issue referred to in (a);
entered through a
recognised stock (ii) acquisition by scheduled banks, reconstruction or
exchange in India securitisation companies or public financial institutions
during their ordinary course of business;
(iii) acquisition approved by the Supreme Court, High
Courts, National Company Law Tribunal, Securities and
Exchange Board of India or Reserve Bank of India in this
behalf;
(iv) acquisition under employee stock option scheme or
employee stock purchase scheme framed under the
Securities and Exchange Board of India (Employee
Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines,1999;
(v) acquisition by any non-resident in accordance with
foreign direct investment guidelines of the
Government of India;
(vi) acquisition in accordance with Securities and
Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulation, 2011;
(vii) acquisition from the Government;
(viii) acquisition by an investment fund referred to in clause
(a) to Explanation 1 to section 115UB or a venture
capital fund referred to in section 10(23FB) or a
Qualified Institutional Buyer;
(ix) acquisition by mode of transfer referred to in section
47 (e.g., transfer of capital asset under a gift, an
irrevocable trust, transfer of capital asset between
holding company and its subsidiary, transfer pursuant
to amalgamation, demerger, etc.) or section 50B
(slump sale) or section 45(3) (Introduction of capital
asset as capital contribution in firm/ AOPs/ BOIs) or
section 45(4) (Tax implications on receipt of money or
capital assets or both on reconstitution of firm/AOP or
BOI) of the Income-tax Act, if the previous owner or
the transferor, as the case may be, of such shares
has not acquired them by any mode referred to in (a),
(b) or (c) listed in column (2) [other than the
exceptions listed in column (3)]

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(c) acquisition of equity share of a company during the period beginning from the date
on which the company is delisted from a recognised stock exchange and ending on
the date immediately preceding the date on which the company is again listed on a
recognised stock exchange in accordance with the Securities Contracts
(Regulation) Act, 1956 read with SEBI Act,1992 and the rules made thereunder.

Further, long-term capital gains arising from transaction undertaken on a recognized stock
exchange located in an International Financial Service Centre (IFSC) would be taxable at a
concessional rate of 10% or 12.5%, as the case may be, where the consideration for
transfer is received or receivable in foreign currency, even though STT is not leviable in
respect of such transaction.

(3) Adjustment of Unexhausted Basic Exemption Limit: In the case of resident individuals
or HUF, if the basic exemption is not fully exhausted by any other income, then such long-
term capital gain exceeding ` 1,25,000 will be reduced by the unexhausted basic exemption
limit and only the balance would be taxed at 10% or 12.5%, as the case may be.

However, the benefit of adjustment of unexhausted basic exemption limit is not available in
the case of non-residents. It is also not available in case of resident AOPs and BOIs.

(4) No deduction under Chapter VI-A against LTCG taxable under section 112A:
Deductions under Chapter VI-A cannot be availed in respect of such long-term capital gains
on equity shares of a company or units of an equity oriented fund or unit of a business trust
included in the total income of the assessee.

(5) No benefit of rebate under section 87A against LTCG taxable under section 112A:
Rebate under section 87A is not available in respect of tax payable @10% on LTCG under
section 112A.

Subsequent to insertion of section 112A, the CBDT has issued clarification F. No.
370149/20/2018-TPL dated 04.02.2018 in the form of a Question and Answer format to clarify
certain issues raised in different for a on various issues relating to the new tax regime for taxation
of long-term capital gains. The relevant questions raised and answers to such questions as per the
said Circular are given hereunder. [Answers to certain questions have been revised incorporating
the effect of amendments by the Finance (No. 2) Act, 2024]:

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 CAPITAL GAINS 4.135

Q 1. What is the meaning of long term capital gains under the new tax regime for long
term capital gains?
Ans 1. Long term capital gains mean gains arising from the transfer of long-term capital asset.
It provides for a new long-term capital gains tax regime for the following assets –
(i). Equity Shares in a company listed on a recognised stock exchange;
(ii). Unit of an equity oriented fund; and
(iii). Unit of a business trust.
The concessional tax rate u/s 112A applies to the above assets, if–
a. the assets mentioned in (i) and (ii) are held for a period of “more than 12 months”
from the date of acquisition and the asset mentioned in (iii) is held for a period of
“more than 36 months” if transfer takes place before 23.7.2024. However, the period
of holding would be “more than 12 months” if transfer of any of above assets take
place on or after 23.7.2024.; and
b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the
case of equity shares acquired after 1.10.2004, STT is required to be paid even at
the time of acquisition (subject to notified exemptions).
Q 2. What is the point of chargeability of the tax?
Ans 2. The tax will be levied only upon transfer of the long-term capital asset on or after 1st April,
2018, as defined in section 2(47) of the Act.
Q 3. What is the method for calculation of long-term capital gains?
Ans 3. The long-term capital gains will be computed by deducting the cost of acquisition from the
full value of consideration on transfer of the long-term capital asset.
Q 4. How do we determine the cost of acquisition for assets acquired on or before 31st
January, 2018?
Ans 4. The cost of acquisition for the long-term capital asset acquired on or before 31st January,
2018 will be the actual cost.
However, if the actual cost is less than the fair market value of such asset as on 31st
January, 2018, the fair market value will be deemed to be the cost of acquisition.
Further, if the full value of consideration on transfer is less than the fair market value, then
such full value of consideration or the actual cost, whichever is higher, will be deemed to be
the cost of acquisition.

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Q 5. Please provide illustrations for computing long-term capital gains in different

scenarios, in the light of answer to question 4.
Ans 5. The computation of long-term capital gains in different scenarios is illustrated as under
Scenario 1 – An equity share is acquired on 1st January, 2017 at ` 100, its fair market
value is ` 200 on 31st January, 2018 and it is sold on 1st April, 2024 at ` 250. As the
actual cost of acquisition is less than the fair market value as on 31st January, 2018, the
fair market value of ` 200 will be taken as the cost of acquisition and the long-term capital
gain will be ` 50 (` 250 – ` 200).
Scenario 2 – An equity share is acquired on 1st January, 2017 at ` 100, its fair market
value is ` 200 on 31st January, 2018 and it is sold on 1st April, 2024 at ` 150. In this case,
the actual cost of acquisition is less than the fair market value as on 31st January, 2018.
However, the sale value is also less than the fair market value as on 31st January, 2018.
Accordingly, the sale value of ` 150 will be taken as the cost of acquisition and the long-
term capital gain will be NIL (` 150 – ` 150).
Scenario 3 – An equity share is acquired on 1st January, 2017 at ` 100, its fair market
value is ` 50 on 31st January, 2018 and it is sold on 1st April, 2024 at ` 150. In this case,
the fair market value as on 31st January, 2018 is less than the actual cost of acquisition,
and therefore, the actual cost of ` 100 will be taken as actual cost of acquisition and the
long-term capital gain will be ` 50 (` 150 – ` 100).
Scenario 4 – An equity share is acquired on 1st January, 2017 at ` 100, its fair market value
is ` 200 on 31st January, 2018 and it is sold on 1st April, 2024 at ` 50. In this case, the actual
cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value
is less than the fair market value as on 31st January, 2018 and also the actual cost of
acquisition. Therefore, the actual cost of ` 100 will be taken as the cost of acquisition in this
case. Hence, the long-term capital loss will be ` 50 (` 50 – ` 100) in this case.
Q 6. Whether the cost of acquisition will be inflation indexed?
Ans 6. Third proviso to section 48, provides that the long-term capital gain will be computed without
giving effect to the provisions of the second proviso of section 48. Accordingly, it is clarified
that the benefit of inflation indexation of the cost of acquisition would not be available for
computing long-term capital gains.
Note – This is irrespective of whether the transfer takes place before or on or after
23.7.2024.

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Q 7. What will be the tax treatment of transfer made on or after 1st April 2018?
Ans 7. The long-term capital gains exceeding ` 1,25,000 arising from transfer of listed equity
shares/ units of equity oriented fund/business trust on or after 1st April, 2018 will be taxed at
10% (where transfer is made before 23.7.2024) or 12.5% (where transfer is made on or after
23.7.2024), as the case may be. However, there will be no tax on gains accrued upto 31st
January, 2018.
Q 8. What is the date from which the holding period will be counted?
Ans 8. The holding period will be counted from the date of acquisition.
Q 9. Whether tax will be deducted at source in case of gains by resident tax payer?
Ans 9. No. There will be no deduction of tax at source from the payment of long-term capital gains
to a resident tax payer.
Q 10. What will be the cost of acquisition in the case of bonus shares acquired before
1st February 2018?
Ans 10. The cost of acquisition of bonus shares acquired before 31st January, 2018 will be
determined as per section 55(2)(ac). Therefore, the fair market value of the bonus shares as
on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations
explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to
be exempt 7.
Q 11. What will be the cost of acquisition in the case of right share acquired before 1st
February 2018?
Ans 11. The cost of acquisition of right share acquired before 31st January, 2018 will be
determined as per section 55(2)(ac). Therefore, the fair market value of right share as on
31st January, 2018 will be taken as cost of acquisition (except in some typical situations
explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to
be exempt.
Q 12. What will be the treatment of long-term capital loss arising from transfer made on or
after 1st April, 2018?
Ans 12. Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed
to be set-off and carried forward in accordance with existing provisions of the Act.

7Subject to the notification issued by the Central Government to specify the nature of acquisition of equity
share in a company on which the condition of payment of STT on acquisition would not be applicable.

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Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss
can be carried forward to subsequent eight years for set-off against long-term capital gains.

ILLUSTRATION 23

Calculate the income-tax liability for the assessment year 2025-26 in the following cases:

Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Status Non-resident Non-resident Resident Non-
resident
Total income other than 2,40,000 3,10,000 5,90,000 4,80,000
long-term capital gain
Long-term capital gain 85,000 10,000 60,000 Nil
[Assume transfer took place from sale of from sale of listed from sale of
before 23.7.2024] vacant site equity shares (STT agricultural
paid on sale and land in rural
purchase of shares) area

(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax regime
and pay tax under the optional tax regime as per the normal provisions of the Act.
SOLUTION
(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC
Computation of income-tax liability for the A.Y.2025-26

Particulars Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Residential Non-resident Non-resident Resident Non-resident
Status
Applicable basic ` 3,00,000 ` 3,00,000 ` 3,00,000 ` 3,00,000
exemption limit
Asset sold Vacant site Listed equity Rural -
shares (STT agricultural land
paid on both
sale and
purchase of
shares)

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 CAPITAL GAINS 4.139

Long-term ` 85,000 ` 10,000 ` 60,000 -

capital gain (on [Taxable [exempt u/s (Exempt –not a
sale of above 112A since it is capital asset)
asset) @20% u/s 112]
less than
` 1,25,000]
Other income ` 2,40,000 ` 3,10,000 ` 5,90,000 ` 4,80,000
Tax liability
On LTCG ` 17,000 - - -
On Other Nil ` 500 ` 14,500 ` 9,000
income
` 17,000 ` 500 ` 14,500 ` 9,000
Less: Rebate u/s - - ` 14,500 -
87A
` 17,000 ` 500 Nil ` 9,000
Add: Health & ` 680 ` 20 Nil ` 360
education cess
(HEC) @4%
Total tax ` 17,680 ` 520 Nil ` 9,360
liability

Note: Since Mr. C is a resident whose total income does not exceed ` 7 lakhs, he is eligible for
rebate of ` 25,000 or the actual tax payable, whichever is lower, under section 87A.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default tax
regime and pay tax under the optional tax regime as per the normal provisions of the
Act
Computation of income-tax liability for the A.Y.2025-26

Particulars Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Residential Status Non-resident Non-resident Resident Non-resident
Applicable basic ` 2,50,000 ` 2,50,000 ` 5,00,000 ` 2,50,000
exemption limit
Asset sold Vacant site Listed equity shares Rural agricultural -
(STT paid on both land
sale and purchase
of shares)

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Long-term capital ` 85,000 ` 10,000 ` 60,000 -

gain (on sale of [Taxable [exempt u/s 112A (Exempt –not a
above asset) since it is less than capital asset)
@20% u/s
112] ` 1,25,000]

Other income ` 2,40,000 ` 3,10,000 ` 5,90,000 ` 4,80,000

Tax liability
On LTCG ` 17,000 - - -
On Other income Nil ` 3,000 ` 18,000 ` 11,500
` 17,000 ` 3,000 ` 18,000 ` 11,500
Less: Rebate u/s - - - -
87A
` 17,000 ` 3,000 ` 18,000 ` 11,500
Add: Health & ` 680 ` 120 ` 720 ` 460
education cess (HEC)
@4%
Total tax liability ` 17,680 ` 3,120 ` 18,720 ` 11,960

Notes:
Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic exemption limit of `
3,00,000 and ` 5,00,000 for persons over the age of 60 years and 80 years, respectively. Also,
they along with Mr. A, being non-residents are not eligible for rebate under section 87A even
though their total income does not exceed ` 5 lakh.

4.25 SURPLUS ON SALE OF SHARES AND SECURITIES -

WHETHER TAXABLE AS CAPITAL GAINS OR
BUSINESS INCOME? [CIRCULAR NO. 06/2016,
DATED 29-2-2016]
Section 2(14) defines the term "capital asset" to include property of any kind held by an assessee,
whether or not connected with his business or profession, but does not include any stock-in-trade
or personal assets subject to certain exceptions. As regards shares and other securities, the same
can be held either as capital assets or stock-in-trade/trading assets or both.

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Determination of the character of a particular investment in shares or other securities, whether the
same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination
and has led to a lot of uncertainty and litigation in the past.
Parameters laid down by CBDT and Courts to distinguish shares held as investments and
shares held as stock in trade

Over the years, the courts have laid down different parameters to distinguish the shares held as
investments from the shares held as stock-in-trade. The CBDT has also, through Instruction
No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the
said principles for guidance of the field formations.
Principles to determine whether gains on sale of listed shares and other securities would
constitute capital gains or business income
Disputes, however, continue to exist on the application of these principles to the facts of an
individual case since the taxpayers find it difficult to prove the intention in acquiring such
shares/securities. In this background, while recognizing that no universal principle in absolute
terms can be laid down to decide the character of income from sale of shares and securities (i.e.
whether the same is in the nature of capital gain or business income), CBDT realizing that major
part of shares/securities transactions takes place in respect of the listed ones and with a view to
reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars,
further instructs the Assessing Officers to take into account the following while deciding whether
the surplus generated from sale of listed shares or other securities would be treated as Capital
Gain or Business Income—
a) Where assessee opts to treat such shares and securities as stock-in-trade: Where the
assessee itself, irrespective of the period of holding the listed shares and securities, opts to
treat them as stock-in-trade, the income arising from transfer of such shares/securities
would be treated as its business income,
b) Listed shares and securities held for a period of more than 12 months: In respect of
listed shares and securities held for a period of more than 12 months immediately
preceding the date of its transfer, if the assessee desires to treat the income arising from
the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing
Officer. However, this stand, once taken by the assessee in a particular Assessment Year,
shall remain applicable in subsequent Assessment Years also and the taxpayers shall not
be allowed to adopt a different/contrary stand in this regard in subsequent years;

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c) Other cases: In all other cases, the nature of transaction (i.e. whether the same is in the
nature of capital gain or business income) shall continue to be decided keeping in view the
aforesaid Circulars issued by the CBDT.
Principles listed above not to apply in case of sham transactions
It is, however, clarified that the above shall not apply in respect of such transactions in
shares/securities where the genuineness of the transaction itself is questionable, such as bogus
claims of Long-term Capital Gain/Short Term Capital Loss or any other sham transactions.
Objective of formulation of principles: Reducing litigation and ensuring consistency
It is reiterated that the above principles have been formulated with the sole objective of reducing
litigation and maintaining consistency in approach on the issue of treatment of income derived
from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply
on the transactions involving transfer of shares and securities.

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SIGNIFICANT SELECT CASES

[Link]. Case Law

1. Seshasayee Steels P. Ltd. v. ACIT (2020) 421 ITR 46 (SC)

Issue Analysis & Decision

Can any transaction which Any transaction which has the effect of transferring or enabling
enables the enjoyment of the enjoyment of any immovable property would come within the
immovable property be of purview u/s 2(47)(vi). Section 2(47)(vi) appears to be to
considered as enjoyment bring within its tax net, a de facto transfer of any immovable
as a purported owner property. The expression 'enabling the enjoyment of' takes
thereof for being treated as colour from the earlier expression 'transferring', so that it is
a “transfer” of a capital clear that any transaction which enables the enjoyment of
asset u/s 2(47)(vi) and levy immovable property must be enjoyment as a purported
of tax on capital gains owner thereof. The idea is to bring within the tax net,
arising therefrom? transactions, where, though title may not be transferred in law,
there is, in substance, a transfer of title in fact.
In this case, the assessee's rights in the immovable property
were extinguished on the receipt of the last cheque. Further,
the compromise deed could be stated to be a transaction which
had the effect of transferring the immovable property in
question. Accordingly, the transaction fell u/s 2(47)(ii) and (vi).
Hence, it is a transfer in relation to the capital asset and capital
gains tax liability would be attracted.

2. Balakrishnan v. Union of India & Others (2017) 391 ITR 178 (SC)

Issue Analysis & Decision

Would receipt of higher When proceedings were initiated under the Land Acquisition
compensation after Act, 1894, even if the compensation is negotiated and fixed, it
notification of compulsory would continue to remain as compulsory acquisition. Merely
acquisition change the because the compensation amount is agreed upon, the
character of transaction character of acquisition will not change from compulsory
into a voluntary sale, so as
acquisition to a voluntary sale. The claim of exemption from
to deny exemption u/s
capital gains u/s 10(37)(iii) is, therefore, tenable in law.
10(37)(iii)?

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3. CIT v. V.S. Dempo Company Ltd (2016) 387 ITR 354 (SC)

Issue Analysis & Decision

In a case where a The assessee cannot be denied exemption u/s 54EC, because
depreciable asset (building) firstly, there is nothing in section 50 to suggest that the fiction
held for more than 24 created therein is not restricted to only sections 48 and 49.
months is transferred, can Secondly, fiction created by the legislature has to be confined
benefit of exemption u/s for the purpose for which is created. Thirdly, section 54EC
54EC be claimed, if the does not make any distinction between depreciable and
capital gains on sale of non-depreciable asset for the purpose of re-investment of
such asset are reinvested capital gains in long term specified assets for availing the
in long-term specified exemption thereunder. Further, section 54EC specifically
assets within the specified provides that when the capital gain arising on the transfer a
time? long-term capital asset (being land or building or both) is
invested or deposited in long-term specified assets, the
assessee shall not be subject to capital gains to that extent.
Therefore, the exemption u/s 54EC cannot be denied to the
assessee on account of the fiction created in section 50.

4. Fibre Boards (P) Ltd v. CIT (2015) 376 ITR 596 (SC)

Issue Analysis & Decision

Can advance given for For the purpose of availing exemption, all that was required for
purchase of land, building, the assessee is to “utilise” the amount of capital gain for
plant and machinery purchase and acquisition of new machinery or plant and
tantamount to utilization of building or land. Since the entire amount of capital gain, in
capital gain for purchase this case, was utilized by the assessee by way of advance
and acquisition of new for acquisition of land, building, plant and machinery, the
machinery or plant and assessee is entitled to avail exemption/deduction u/s 54G.
building or land, for claim of
exemption u/s 54G?

5. CIT v. Aditya Kumar Jajodia (2018) 407 ITR 107 (Cal)

Issue Analysis & Decision

Can the amount incurred The assessee had inherited the immovable property under a
by the assessee towards will and the costs incurred by him for perfection of the title

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perfecting title of property from perpetual leasehold rights to the complete ownership
acquired through will, for had to be regarded as a cost of acquisition within the
making further sale, be meaning of sections 48 and 55, as the assessee was
included in the cost of transferring the complete ownership rights to the transferee,
acquisition for computing and not the leasehold rights.
capital gains?

6. CIT v. Manjula J. Shah (2013) 355 ITR 474 (Bom.)

Issue Decision

Would indexation benefit in The indexed cost of acquisition in case of gifted asset has
respect of the gifted asset to be computed with reference to the year in which the
apply from the year in previous owner first held the asset and not the year in
which the asset was first which the assessee became the owner of the asset.
held by the assessee or
The benefit of indexation would be available for the capital
from the year in which the
assets which are transferred before 23.7.2024.
same was first acquired by
the previous owner?

7. Sakthi Metal Depot v. CIT [2021] 436 ITR 1 (SC)

Issue Analysis & Decision

Would the depreciable The depreciable asset forming a part of block of assets within
asset forming part of block the meaning section 2(11) would not cease to be a part of the
of assets on which block of assets so long as the assessee continued business. In
depreciation is being this case, the building forming part of the block of assets would
allowed since its retain its character as such, even if one or two of the assets in
acquisition change its the block were not used for the business purposes in the last
character if it is not used couple of years. Consequently, the profits arising on sale of
for business purpose for such asset would be short-term capital gains.
the last two years, to the
effect that gain arising from
its transfer be considered
as long term capital gain
instead of short-term
capital gains?

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8. CIT v. Syed Ali Adil (2013) 352 ITR 0418 (A.P.)

CIT v. Ananda Basappa (2009) 309 ITR 329
CIT v. K.G. Rukminiamma (2011) 331 ITR 211

Issue Decision

Would an assessee be The assessee is entitled to investment in both the flats

entitled to exemption under purchased by him, since they were adjacent to each other
section 54 in respect of and had a common meeting point, thus, making it a single
purchase of two flats, residential unit.
adjacent to each other and
Note – Section 54 has been amended by the Finance Act,
having a common meeting
2019 to permit claim of deduction in respect of two residential
point?
houses purchased/constructed, where long-term capital gains
on sale of residential house does not exceed ` 2 crores.

However, this case law will still hold good since the exemption
for investment in two residential houses cannot be availed -
- where long term capital gains > ` 2 crores; and

- where long term capital gains ≤ ` 2 crores and

exemption of acquiring two properties was already
availed once

Even in these cases, the benefit of treating adjacent flats as

one residential house for the purpose of exemption under
section 54 would be available as per this High Court ruling.

Furthermore, even in cases where long term capital gains ≤

` 2 crores, the benefit of this case law can be availed and
benefit of one time exemption under section 54 can be
deferred and availed at a later point of time.

9. CIT v. Gurnam Singh (2010) 327 ITR 278 (P&H)

Issue Analysis & Decision

Can exemption u/s 54B be The agricultural land sold belonged to the assessee and the
denied solely on the ground sale proceeds were also used for purchasing agricultural land.
that the new agricultural land The possession of the said land was also taken by the

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purchased is not wholly assessee. Merely because the assessee’s son was shown
owned by the assessee, as in the sale deed as co-owner, deduction u/s 54B cannot be
the assessee’s son is a co- denied. Therefore, the assessee was entitled to deduction u/s
owner as per the sale deed? 54B.

10. CIT v. Kamal Wahal (2013) 351 ITR 4 (Delhi)

Issue Analysis & Decision

Can exemption u/s 54F be For the purpose of section 54F, a new residential house need not
denied solely on the necessarily be purchased by the assessee in his own name nor is
ground that the new it necessary that it should be purchased exclusively in his name.
residential house is
Having regard to the rule of purposive construction and the
purchased by the assessee
object of enactment of section 54F, the assessee is entitled
exclusively in the name of
to claim exemption u/s 54F in respect of utilization of sale
his wife?
proceeds of capital asset for investment in residential
house property in the name of his wife.

11. CIT v. Ravinder Kumar Arora (2012) 342 ITR 38 (Delhi)

Issue Analysis & Decision

In case of a house property The inclusion of his wife’s name in the sale deed was just to
registered in joint names, avoid any litigation after his death. All the funds invested in
can exemption u/s 54F be the said house were provided by the assessee, including the
allowed fully to the co- stamp duty and corporation tax paid at the time of the
owner who has paid whole registration of the sale deed of the said house. This fact was
of the purchase also clearly evident from the bank statement of the
consideration of the house assessee.
property or will it be
Section 54F mandates that the house should be purchased
restricted to his share in
by the assessee but it does not stipulate that the house
the house property?
should be purchased only in the name of the assessee. In
this case, the house was purchased by the assessee in his name
and his wife's name was also included additionally. Therefore,
the conditions stipulated in section 54F stand fulfilled and the
entire exemption claimed in respect of the purchase price of the
house property shall be allowed to the assessee.

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12. CIT v. Sambandam Udaykumar (2012) 345 ITR 389 (Kar.)

Issue Analysis & Decision

Can exemption u/s 54F be The condition precedent for claiming the benefit u/s 54F is that
denied to an assessee in capital gains realized from sale of capital asset should have
respect of investment been invested either in purchasing a residential house or in
made in construction of a constructing a residential house within the stipulated period. If
residential house, on the the assessee has invested the money in the construction of a
ground that the residential house, merely because the construction was not
construction was not completed in all respects and possession could not be taken
completed within 3 years within the stipulated period, would not disentitle him from
after the date on which claiming exemption u/s 54F. In fact, in this case, the assessee
transfer took place, on has taken possession of the residential building and is
account of pendency of living in the said premises despite the pendency of flooring
certain finishing work like work, electricity work, fitting of door and window shutters.
flooring, electrical fittings, Therefore, the assessee is entitled to exemption u/s 54F in
fittings of door shutter respect of the amount invested in construction within the
etc.? prescribed period.

13. Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)

Issue Analysis & Decision

Where the stamp duty When capital gain is assessed on notional basis as per the
value under section 50C provisions of section 50C, and the higher value i.e., the stamp
has been adopted as the duty value under section 50C has been adopted as the full value
full value of consideration, of consideration, the entire amount reinvested in the residential
can the reinvestment house within the prescribed period should be considered for the
made in acquiring a
purpose of exemption under section 54F, irrespective of the
residential property, which
source of funds for such reinvestment.
is in excess of the actual
net sale consideration, be For eg: if stamp duty value = ` 50 lakh, actual consideration =
considered for the ` 40 lakh, capital gains = ` 12 lakh, if ` 47 lakh is re-invested in
purpose of computation of residential house, then exemption u/s 54F = ` 12 lakh x ` 47
exemption under section lakh/ ` 50 lakh = ` 11.28 lakh (assuming gross and net
54F, irrespective of the consideration are same), irrespective of the source of balance
source of funds for such ` 7 lakh (` 47 lakh - ` 40 lakh) over and above actual
reinvestment? consideration.

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14. Hindustan Unilever Ltd. v. DCIT (2010) 325 ITR 102 (Bom.)

Issue Analysis & Decision

Can exemption u/s 54EC In order to avail the exemption u/s 54EC, the capital gains have
be denied on account of to be invested in a long-term specified asset within a period of
the bonds being issued six months from the date of transfer. Where the assessee has
after six months of the made the payment within the six month period, and the
date of transfer even same is reflected in the bank account and a receipt has
though the payment for been issued as on that date, the exemption u/s 54EC cannot
the bonds was made by be denied merely because the bond was issued after the expiry
the assessee within the of the six month period or the date of allotment specified therein
six-month period? was after the expiry of the six month period.

15. Principal CIT v. Gujarat State Fertilizers and Chemicals Limited (2018) 409 ITR 378 (Guj)

Issue Analysis & Decision

Would sale of fertilizer Fertilizer subsidy given to an assessee to compensate the loss
bonds (issued in lieu of on sale of fertilisers should be treated as business income of the
government subsidy) at assessee. Due to cash crunch, the Government of India had
loss be treated as a discharged its dues of paying the subsidy by issue of fertilizer
business loss or a loss bonds. These bonds are saleable in the open market and the
under the head “Capital prices of such bonds are varying. In this case also, the assessee
gains”? received fertilizer bonds (in lieu of subsidy) which were sold at a
loss in the open market.
Since the subsidy would have been treated as business income,
loss on sale of fertilizer bonds issued is to be allowed as
business loss.

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TEST YOUR KNOWLEDGE

Questions
1. Hari has acquired a residential house property in Delhi on 15th April, 2002 for ` 9,00,000
and decided to sell the same on 3rd May, 2005 to Ms. Pari and an advance of ` 25,000 was
taken from her. The balance money was not paid by Ms. Pari and Hari has forfeited the
entire advance sum. On 3rd June, 2024, he has sold this house to Mr. Suri for ` 43,00,000.
On 4th April, 2024, he had purchased a residential house in Delhi for ` 7,00,000, where he
was staying with his family on rent for the last 5 years and paid the full amount as per the
purchase agreement. However, Hari does not possess any legal title till 31st March, 2025,
as such transfer was not registered with the registration authority.
Hari has purchased another old house in Chennai on 14th October, 2024 from Mr. X, an
Indian resident, by paying ` 5,00,000 and the purchase was registered with the
appropriate authority.
Determine the taxable capital gain arising from above transactions in the hands of Hari for
Assessment Year 2025-26.
[Cost inflation Index - 2002-03: 105; 2005-06: 117; 2024-25: 363]
2. Mr. Ganesh sold his residential house in Mumbai and earned long term capital gain of
` 2.5 crores. He purchased two residential flats adjacent to each other on the same day
vide two separate registered sale deeds from two different persons. The builder had
certified that he had effected necessary modification to make it one residential apartment.
Mr. Ganesh sought exemption under section 54 in respect of the investment made in
purchase of the two residential flats. The Assessing Officer, however, gave exemption
under section 54 to the extent of purchase of one residential flat only contending that since
the long-term capital gain exceeds ` 2 crore, sub-section (1) of section 54 clearly restricts
the benefit of exemption to purchase one residential house only and the two flats cannot
be treated as one residential unit since –

(i) the flats were purchased through different sale deeds; and
(ii) it was found by the Inspector that, before its sale to the assessee, the residential
flats were in occupation of two different tenants.

Examine the correctness of the contention of the Assessing Officer.

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3. Vijay, an individual, owned three residential houses which were let out. Besides, he and his
four brothers co-owned a residential house in equal shares. He sold one residential house
owned by him during the previous year relevant to the assessment year 2025-26. Within a
month from the date of such sale, the four brothers executed a release deed in respect of their
shares in the co-owned residential house in favour of Vijay for a monetary consideration.
Vijay utilised the entire long-term capital gain arising out of the sale of the residential
house for payment of the said consideration to his four brothers. Vijay is not using the
house, in respect of which his brothers executed a release deed, for his own residential
purposes, but has let it out to another person, who is using it for his residential purposes.
Is Vijay eligible for exemption under section 54 of the Income-tax Act, 1961 for the
assessment year 2025-26 in respect of the long-term capital gain arising from the sale of
his residential house, which he utilised for acquiring the shares of his brothers in the co-
owned residential house? Will the non-use of the new house for his own residential
purposes disentitle him to exemption?
4. Aries Tubes Private Ltd. went into liquidation on 1.6.2024. The company possessed of the
following funds prior to the distribution of assets to the shareholders:
`
Share Capital (issued on 1.4.2013) 5,00,000
Reserves prior to 1.6.2024 3,00,000
Excess realization in the course of liquidation 5,00,000
Total 13,00,000

There are 5 shareholders, each of whom received ` 2,60,000 from the liquidator in full
settlement. The shareholders desire to invest the resultant element of capital gain in long
term specified assets as defined in section 54EC. You are required to examine the various
issues and advice the shareholders about their liability to income tax.
5. Xavier had taken a loan under registered mortgage deed against the house, which was
purchased by him on 26.5.2002 for ` 5 lakhs. The said property was inherited by his son
Abraham in financial year 2009-10 as per Will.
For obtaining a clear title thereof, Abraham paid the outstanding amount of loan on
12.2.2010 of ` 15 lakhs. The said house property was sold by Abraham on 16.4.2025 for
` 55 lakhs. Examine with reasons the amount chargeable to capital gains for A.Y. 2025-26
(Cost Inflation Index 2002-03: 105, 2009-10: 148 and 2024-25: 363).

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6. Gama Ltd, located within the corporation limits decided in December, 2024 to shift its
industrial undertaking to non-urban area. The company sold some of the assets and
acquired new assets in the process of shifting. The relevant details are as follows:

(` in lakhs)
Particulars Land Building Plant & Furniture
Machinery
(i) Sale proceeds (sale effected in 8 18 16 3
March, 2025)
(ii) Cost of acquisition 4 10 12 2
(iii) WDV in terms of section 50 -- 4 5 2
(iv) Cost of new assets purchased
in July, 2025 for the purpose of 4 7 17 2
business in the new place

Compute the capital gains of Gama Ltd for the assessment year 2025-26.
7. The assessee was a company carrying on business of manufacture and sale of art-silk
cloth. It purchased machinery worth ` 4 lakhs on 1.5.2020 and insured it with United India
Assurance Ltd against fire, flood, earthquake etc., The written down value of the asset as
on 01.04.2024 was ` 1,87,850. The insurance policy contained a reinstatement clause
requiring the insurance company to pay the value of the machinery, as on the date of fire
etc., in case of destruction of loss. A fire broke out in August, 2024 causing extensive
damage to the machinery of the assessee rendering them totally useless. The assessee
company received a sum of ` 4 lakhs from the insurance company on 15th March, 2025.
Examine the issues arising on account on the transactions and their tax treatment.
(Cost inflation index for financial year 2020-21 and 2024-25 are 301 and 363, respectively)
8. Tani purchased a land at a cost of ` 35 lakhs in the financial year 2004-05 and held the
same as her capital asset till 31st May, 2023. Tani started her real estate business on 1st
June, 2023 and converted the said land into stock-in-trade of her business on the said date,
when the fair market value of the land was ` 210 lakhs.
She constructed 15 flats of equal size, quality and dimension. Cost of construction of each
flat is ` 10 lakhs. Construction was completed in January, 2025. She sold 10 flats at ` 30
lakhs per flat between January, 2025 and March, 2025. The remaining 5 flats were held in
stock as on 31st March, 2025.

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She invested ` 50 lakhs in bonds issued by National Highway Authority of India on 31st
March, 2025 and another ` 50 lakhs in bonds of Rural Electrification Corporation Ltd. in
April, 2025.
Compute the amount of chargeable capital gain and business income in the hands of Tani
arising from the above transactions for Assessment Year 2025-26 indicating clearly the
reasons for treatment of each item.
Cost Inflation Index: FY 2004-05: 113; FY 2023-24: 348; FY 2024-25: 363.
9. Following are the details of income provided by Mr. Singh, the assessee for the financial
year ended 31st March, 2025:
(i) Rental income from property at Bangalore - ` 3 lakhs, Standard Rent - ` 2,50,000,
Fair Rent - ` 2,80,000.
(ii) Municipal and water tax paid during 2024-25: Current year ` 35,000, Arrears -
` 1,50,000.
(iii) Interest on loan borrowed towards major repairs to the property: ` 1,50,000.

(iv) Arrears of rent of ` 30,000 received during the year, which was not charged to tax in
earlier years.
Further, the assessee furnished following additional information regarding sale of property
at Chennai:
(i) Mr. Singh's father acquired a residential house in April 2006 for ` 1,25,000 and
thereafter gifted this property to the assessee, Mr. Singh on 1st March, 2007.
(ii) The property, so gifted, was sold by Mr. Singh on 10th August 2024. The
consideration received was ` 25,00,000.
(iii) Stamp duty charges paid by the purchaser at the time of registration @ 13% (as per
statutory guidelines) was ` 3,90,000.
(iv) Out of the sale consideration received:
(a) On 02/01/2025, the assessee had purchased two adjacent flats, in the same
building, and made suitable modification to make it as one unit. The
investment was made by separate sale deeds, amount being ` 8,00,000 and
` 7,00,000, respectively.

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(b) On 10/l0/2024, ` 10 lakhs were invested in bonds issued by National

Highways Authority of India, but the allotment of the bonds was made on
1.2.2025.
Compute Mr. Singh's taxable income for assessment year 2025-26 assuming he has
exercised the option to shift out of the default tax regime under section 115BAC.

Cost inflation index: F.Y. 2006-07: 122; F.Y. 2024-25: 363

10. SS(P) Ltd., an Indian company having two undertakings engaged in manufacture of cement
and steel, decided to hive off cement division to RV(P) Ltd., an Indian company, by way of
demerger. The net worth of SS(P) Ltd. immediately before demerger was ` 40 crores. The
net book value of assets transferred to RV(P) Ltd. was ` 10 crores. The demerger was
made in January 2025. In the scheme of demerger, it was fixed that for each equity share of
` 10 each (fully paid up) of SS(P) Ltd., two equity shares of ` 10 each (fully paid up) were
to be issued.
One Mr. N.K. held 25,000 equity shares in SS(P) Ltd. which were acquired in the financial
year 2004-05 for ` 6,00,000. Mr. N.K. received 50,000 equity shares from RV(P) Ltd.
consequent to demerger in January 2025. He sold all the shares of RV(P) Ltd. for
` 8,00,000 in March, 2025. In this background you are requested to answer the following:
(i) Does the transaction of demerger attract any income tax liability in the hands of
SS(P) Ltd. and RV(P) Ltd.?
(ii) Compute the capital gain that could arise in the hands of Mr. N.K. on receipt of
shares of RV(P) Ltd.
(iii) Compute the capital gain that could arise in the hands of Mr. N.K. on sale of shares of
RV(P) Ltd.
(iv) Will the sale of shares by Mr. N.K. affect the tax benefits availed by SS(P) Ltd. and/or
RV(P) Ltd.?
(v) Is Mr. N.K. eligible to avail any tax exemption under any of the provisions of the
Income-tax Act, 1961 on the sale of shares of RV(P) Ltd.? If so, mention in brief.
Note: Financial Year Cost inflation index
2004-05 113

2024-25 363

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11. PQR Limited has two units - one engaged in manufacture of computer hardware and the
other involved in developing software. As a restructuring drive, the company has decided to
sell its software unit as a going concern by way of slump sale for ` 385 lakhs to a new
company called S Limited, in which it holds 74% equity shares.
The balance sheet of PQR limited as on 31st March 2025, being the date on which software
unit has been transferred, is given hereunder –
Balance Sheet as on 31.3.2025

Liabilities ` (in lakhs) Assets ` (in lakhs)

Paid up Share Capital 300 Fixed Assets
General Reserve 150 Hardware unit 170
Share Premium 50 Software unit 200
Revaluation Reserve 120 Debtors
Current Liabilities (Ascertained Hardware unit 140
liabilities)
Hardware unit 40 Software unit 110
Software unit 90 Inventories
Hardware unit 95
Software unit 35
750 750

Following additional information are furnished by the management:

(i) The Software unit is in existence since May, 2015.
(ii) Fixed assets of Software unit includes land which was purchased at ` 40 lakhs in the
year 2016 and revalued at ` 60 lakhs as on March 31, 2025. The stamp duty value
on 31.3.2025 is ` 55 lakhs.
(iii) Fixed assets of Software unit mirrored at ` 140 lakhs (` 200 lakhs minus land value
` 60 lakhs) is written down value of depreciable assets (Furniture and Plant &
machinery) as per books of account. However, the written down value of these assets
under section 43(6) of the Income-tax Act, 1961 is ` 90 lakhs.
(a) Ascertain the tax liability, which would arise from slump sale to PQR Limited,
assuming it does not opt for section 115BAA.
(b) What would be your advice as a tax-consultant to make the restructuring plan of the
company more tax-savvy, without changing the amount of sale consideration?

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12. Determine the capital gains/loss on transfer of listed equity shares (STT paid both at the
time of acquisition and transfer of shares) and units of equity oriented mutual fund (STT
paid at the time of transfer of units) for the A.Y.2025-26 and tax, if any, payable thereon, in
the following cases, assuming that these are the only transactions covered under section
112A during the P.Y.2024-25 in respect of these assessees:
(i) Mr. Prasun purchased 300 shares in A Ltd. on 20.5.2017 at a cost of ` 400 per
share. He sold all the shares of A Ltd. on 31.5.2024 for ` 1200. The price at which
these shares were traded in National Stock Exchange on 31.1.2018 is as follows –

Particulars Amount in `
Highest Trading Price 700
Average Trading Price 680
Lowest Trading Price 660

(ii) Mr. Raj purchased 200 units each of equity oriented funds, Fund A and Fund B on
1.2.2017 at a cost of ` 550 per unit. The units were not listed at the time of purchase.
Subsequently, units of Fund A were listed on 1.1.2018 and units of Fund B were listed on
1.2.2018 on the National Stock Exchange. Mr. Raj sold all the units on 3.8.2024 for
` 900 each. The details relating to quoted price on National Stock Exchange and net
asset value of the units are given hereunder:
Particulars Fund A Fund B
Amount in ` Amount in `
Highest Trading Price 750 (on 31.1.2018) 800 (on 1.2.2018)
Average Trading Price 700 (on 31.1.2018) 750 (on 1.2.2018)
Lowest Trading Price 650 (on 31.1.2018) 700 (on 1.2.2018)
Net Asset Value on 31.1.2018 800 950

13. Mr. Shyam purchased a house property on February 15, 1979 for ` 3,24,000. In addition,
he has also paid stamp duty @10% on the stamp duty value of ` 3,50,000.
In April, 2008, Mr. Shyam entered into an agreement with Mr. Mohan for sale of such
property for ` 14,35,000 and received an amount of ` 1,11,000 as advance. However, the
sale consideration did not materialize and Mr. Shyam forfeited the advance. In May 2015,
he again entered into an agreement for sale of said house for ` 20,25,000 to
Ms. Deepshikha and received ` 1,51,000 as advance. However, as Ms. Deepshikha did not
pay the balance amount, Mr. Shyam forfeited the advance. In August, 2015, Mr. Shyam
constructed the first floor by incurring a cost of ` 3,90,000.

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On November 15, 2024, Mr. Shyam entered into an agreement with Mr. Manish for sale of
such house for ` 30,50,000 and received an amount of ` 1,50,000 as advance through an
account payee cheque. Mr. Manish paid the balance entire sum and Mr. Shyam transferred
the house to Mr. Manish on February 20, 2025. Mr. Shyam has paid the brokerage @1% of
sale consideration to the broker.
On April 1, 2001, fair market value of the house property was ` 11,85,000 and Stamp duty
value was ` 10,70,000. Further, the Valuation as per Stamp duty Authority of such house
on 15th November, 2024 was ` 39,00,000 and on 20th February, 2025 was ` 41,00,000.
Compute the capital gains in the hands of Mr. Shyam for A.Y.2025-26. Also, compute the
tax liability under section 112, assuming that the basic exemption limit has been fully
exhausted against other income.
CII for F.Y. 2001-02: 100; F.Y. 2008-09: 137; F.Y. 2015-16: 254; F.Y. 2024-25: 363

Answers
1. Computation of taxable capital gain of Mr. Hari for the A.Y.2025-26

Particulars `
Sale proceeds 43,00,000
Less: Indexed cost of acquisition [Since the transfer took place before 30,25,000
23.7.2024] [See Note (i)]
Long Term Capital Gain 12,75,000
Less: Exemption under section 54 in respect of investment in house at Delhi
[See Note (ii)] 7,00,000
Exemption under section 54 in respect of investment in house at 5,00,000
Chennai [See Note (iii)]
Taxable long-term capital gain 75,000

Notes:
(i) Computation of indexed cost of acquisition

Particulars `
Cost of acquisition 9,00,000
Less: Advance taken and forfeited 25,000
Cost for the purpose of Indexation 8,75,000
Indexed cost of acquisition (` 8,75,000 x 363/105) 30,25,000

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Advance received and forfeited on or after 01.04.2014 is taxable under section

56(2)(ix). Such amount would not be reduced to compute indexed cost of acquisition
while determining capital gains on sale of such property.
However, in this case, since the advance was received and forfeited in the year
2005, such advance has to be reduced for calculating indexed cost of acquisition for
the purpose of arriving at capital gains.
(ii) In order to avail exemption of capital gains under section 54, residential house
should be purchased within 1 year before or 2 years after the date of transfer or
constructed within a period of 3 years after the date of transfer. In this case, Hari has
purchased the residential house in Delhi within one year before the date of transfer
and paid the full amount as per the purchase agreement, though he does not
possess any legal title till 31.3.2025 since the transfer was not registered with the
registration authority. However, for the purpose of claiming exemption under section
54, holding of legal title is not necessary. If the taxpayer pays the full consideration
in terms of the purchase agreement within the stipulated period, the exemption under
section 54 would be available. It was so held in Balraj v. CIT(2002) 254 ITR 22 (Del.)
and CIT v. Shahzada Begum (1988) 173 ITR 397 (A.P.).
(iii) As per section 54, since the amount of capital gain does not exceed ` 2 crore,
Mr. Hari can claim exemption thereunder in respect of investment made in two
residential houses situated in India.
However, if Mr. Hari exercises the option to claim exemption in respect of two
residential houses in Delhi and Chennai in P.Y. 2024-25, he shall not be
subsequently entitled to exercise the option for the same or any other assessment
year.
2. This issue came up before the Karnataka High Court in CIT v. D. Ananda Basappa (2009)
309 ITR 329. The Court observed that the assessee had shown that the flats were situated
side by side and the builder had also certified that he had effected modification of the flats
to make them one unit by opening the door between the apartments. Therefore, it was
immaterial that the flats were occupied by two different tenants prior to sale or that it was
purchased through different sale deeds. The Court observed that these were not the
grounds to hold that the assessee did not have the intention to purchase the two flats as
one unit. The Court held that the assessee was entitled to exemption under section 54 in
respect of purchase of both the flats to form one residential house.

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Applying the ratio of the above decision to the case on hand, Mr. Ganesh is entitled to
exemption under section 54 in respect of purchase of two flats to form one residential
house. Therefore, the contention of the Assessing Officer is not correct.
3. The long-term capital gain arising on sale of residential house would be exempt under
section 54 if it is utilized, inter alia, for purchase of one residential house situated in India
within one year before or two years after the date of transfer. Release by the other co-
owners of their share in co-owned property in favour of Vijay would amount to “purchase” by
Vijay for the purpose of claiming exemption under section 54 [CIT v. T.N. Arvinda Reddy
(1979) 120 ITR 46 (SC)]. Since such purchase is within the stipulated time of two years
from the date of transfer of asset, Vijay is eligible for exemption under section 54. As Vijay
has utilised the entire long-term capital gain arising out of the sale of the residential house
for payment of consideration to the other co-owners who have released their share in his
favour, he can claim full exemption under section 54.
There is no requirement in section 54 that the new house should be used by the assessee
for his own residence. The condition stipulated is that the new house should be utilised for
residential purposes and its income is chargeable under the head “Income from house
property”. This requirement would be satisfied even when the new house is let out for
residential purposes.
4. Under section 46(1), where the assets of a company are distributed to its shareholders on
its liquidation, such distribution shall not be regarded as transfer in the hands of the
company for the purpose of section 45.
However, under section 46(2), where the shareholder, on liquidation of a company, receives
any money or other assets from the company, he shall be chargeable to income-tax under
the head “capital gains”, in respect of the money so received or the market value of the
other assets on the date of distribution as reduced by the amount of dividend deemed under
section 2(22)(c) [chargeable to tax in the hands of shareholders under the head “Income
from other sources”] and the sum so arrived at shall be deemed to be the full value of the
consideration for the purposes of section 48.
As per section 2(22)(c), dividend includes any distribution made to the shareholders of a
company on its liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation, whether capitalized
or not.

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In this case, the accumulated profits immediately before liquidation is ` 3,00,000. The share
of each shareholder is ` 60,000 (being one-fifth of ` 3,00,000). An amount of ` 60,000 is
the deemed dividend under section 2(22)(c). The same is taxable in the hands of the
shareholder under the head “Income from other sources”.
Therefore, ` 2,00,000 [i.e. ` 2,60,000 minus ` 60,000, being the deemed dividend under
section 2(22)(c)] is the full value of consideration in the hands of each shareholder as per
section 46(2). Against this, the investment of ` 1,00,000 by each shareholder is to be
deducted to arrive at the capital gains of ` 1,00,000 of each shareholder. The benefit of
indexation is available to the shareholders (since the shares are held for more than 24
months, hence long-term capital asset and the transfer took place before 23.7.2024), but
could not be computed in the absence of required information. Since the equity shares are
not listed, it would not be liable for securities transaction tax and hence, the capital gain
(long term) would be taxable under section 112. Such long-term capital gain would be
taxable @20% with indexation benefit since the transfer took place before 23.7.2024.
Exemption under section 54EC is available only where there is an actual transfer of capital
assets and not in the case of deemed capital gain as per the decision rendered in the case
of CIT v. Ruby Trading Co (P) Ltd (2003) 259 ITR 54 (Raj). Therefore, exemption under
section 54EC will not be available in this case since it is deemed transfer and not actual
transfer. Furthermore, with effect from A.Y. 2019-20, exemption under section 54EC is
available only on transfer of long-term capital asset, being land or building or both.
5. The cost of inherited property to Mr. Abraham shall be the cost to the previous owner as per
provisions of section 49(1)(iiia) and therefore, ` 5 lakhs, being the cost to his father
(amount paid by his father on 26.5.2002 for acquiring the property) shall be the cost to Mr.
Abraham, who is the new owner. Payment of outstanding loan of the predecessor by the
successor for obtaining a clear title of the property by release of Mortgage Deed shall be
the cost of acquisition of the successor under section 48 read with section 55(2) of the Act
as held by the Apex Court in case of RM. Arunachalam v. CIT [1997] 227 ITR 222.
Computation of Taxable Capital Gain for the A.Y. 2025-26

Particulars `
Sale consideration of house property 55,00,000
Less: Indexed cost of acquisition (See Note below)
(i) Cost to previous owner (` 5,00,000 × 363/105) 17,28,571

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(ii) Loan amount paid by Mr. Abraham

(Benefit of CII is available since the loan amount was
paid in the financial year 2009-10) (` 15,00,000 × 36,79,054 54,07,625
363/148)
Capital gains 92,375

Note: Since the property was acquired by Mr. Abraham through inheritance, the cost of
acquisition will be cost to the previous owner.
As per the view expressed by Bombay High Court in CIT v. Manjula J. Shah 16 Taxman 42,
in case the cost of acquisition of the capital asset in the hands of the assessee is taken to
be cost of such asset in the hands of the previous owner, the indexation benefit would be
available from the year in which the capital asset is acquired by the previous owner.
Accordingly, the indexed cost of acquisition is calculated by taking the CII of F.Y.2002-03.
However, as per the plain reading of the provisions of section 48, indexation benefit would
be available only from the previous year in which Abraham first held the asset i.e. P.Y.
2009-10. In such case, the indexed cost of acquisition would be ` 49,05,405 (` 12,26,351 +
` 36,79,054) and long-term capital gain would be ` 5,94,595.
6. Section 54G deals with deduction in respect of any capital gain that may arise from the
transfer of an industrial undertaking situated in an urban area in the course of or in
consequence of shifting to a non-urban area.
If the assessee purchases new machinery or plant or acquires a building or land or
constructs a new building or shifts the original asset and transfers the establishment to the
new area, within 1 year before or 3 years after the date on which the transfer takes place,
then, instead of the capital gain being charged to tax, it shall be dealt with as under:
1. If the capital gain is greater than the cost of the new asset, the difference between
the capital gain and the cost of the new asset shall be chargeable as income ‘under
section 45’.
2. If the capital gain is equal to or less than the cost of the new asset, section 45 is not
to be applied.

The capital assets referred to in section 54G are machinery or plant or land or building or
any rights in building or land. Capital gain arising on transfer of furniture does not qualify for
exemption under section 54G. No exemption is therefore available under section 54G in
respect of investment of ` 2 lakhs in acquiring furniture.

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The first step therefore is to determine the capital gain arising out of the transfer and
thereafter apply the provisions of section 54G.

Particulars `
(a) Land – Sale proceeds (Non-depreciable asset) 8,00,000
Less: Cost of acquisition 4,00,000
Long term capital gain 4,00,000
Less: Cost of new assets purchased within three year after the
date of transfer (under section 54G) (See Note below) 3,00,000
Taxable Long-term capital gain 1,00,000
(b) Building – sale proceeds (depreciable assets) 18,00,000
Less: W.D.V. is deemed as cost of acquisition under section 50 4,00,000
Short-term capital gain 14,00,000
(c) Plant & machinery- sale proceeds (depreciable asset) 16,00,000
Less: WDV is deemed cost under section 50 5,00,000
Short-term capital gain 11,00,000
(d) Furniture - sale proceeds (depreciable asset) 3,00,000
Less: WDV is deemed cost under section 50 2,00,000
Short-term capital gain (A) 1,00,000

Summary `
Short term capital gain : Building 14,00,000
Short term capital gain : Plant & machinery 11,00,000
25,00,000
Less: Section 54G [New assets purchased] (See Note below) 25,00,000
Net short term capital gain (B) Nil
Total short-term capital gain (A)+(B) = ` 1 lakh

Note – Total exemption available under section 54G is ` 28 lakhs (` 4 lakhs + ` 7 lakhs +
` 17 lakhs). The exemption should first be exhausted against short term capital gain as the
incidence of tax in case of short-term capital gain is more than in case of long-term capital
gain. Therefore, ` 25 lakhs is exhausted against short term capital gain and the balance of
` 3 lakhs against long term capital gain.

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The taxable capital gains would be:

Long-term capital gains ` 1,00,000 (taxable @12.5% under section 112)
Short-term capital gains (furniture) ` 1,00,000 (taxable at applicable tax rates)
` 2,00,000
7. As per section 45(1A), where any person receives any money or other assets under an
insurance from an insurer on account of damage to or destruction of capital asset as a
result of, inter alia, accidental fire then, any profits and gains arising from the receipt of
such money or other assets, shall be chargeable to income tax under the head “Capital
Gains” and shall be deemed to be the income of such person of the previous year in which
such money or asset was received.
For the purpose of section 48, the money received or the market value of the asset shall be
deemed to be the full value of the consideration accruing as a result of the transfer of such
capital asset. Since the asset was destroyed and the money from the insurance company
was received in the previous year, there will be a liability to compute capital gains in respect
of the insurance moneys received by the assessee.
Under section 45(1A) any profits and gains arising from receipt of insurance moneys is
chargeable under the head “Capital gains”. For the purpose of section 48, the moneys
received shall be deemed to be the full value of the consideration accruing or arising. Under
section 50 the capital gains in respect of depreciable assets had to be computed in the
following manner (assuming it was the only asset in the block).
The computation of capital gain and tax implication is given below:
Full value of the consideration ` 4,00,000
Less: Written down value as on April 1st, 2024 ` 1,87,850
Short term capital gains ` 2,12,150
8. Computation of capital gains and business income of Tani for A.Y. 2025-26

Particulars `
Capital Gains
Fair market value of land on the date of conversion deemed as the full 2,10,00,000
value of consideration for the purposes of section 45(2)
Less: Indexed cost of acquisition [` 35,00,000 × 348/113] 1,07,78,761
1,02,21,239

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Proportionate capital gains arising during A.Y.2025-26 68,14,159

[` 1,02,21,239 × 2/3]
Less: Exemption under section 54EC 50,00,000
Capital gains chargeable to tax for A.Y.2025-26 18,14,159
Business Income
Sale price of flats [10 × ` 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion 1,40,00,000
[` 210 lakhs × 2/3]
Cost of construction of flats [10 × ` 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y.2025-26 60,00,000

Notes:
(i) The conversion of a capital asset into stock-in-trade is treated as a transfer under
section 2(47). It would be treated as a transfer in the year in which the capital asset
is converted into stock-in-trade.
(ii) However, as per section 45(2), the capital gains arising from the transfer by way of
conversion of capital assets into stock-in-trade will be chargeable to tax only in the
year in which the stock-in-trade is sold.
(iii) The indexation benefit for computing indexed cost of acquisition would, however, be
available only up to the year of conversion of capital asset to stock-in-trade and not
up to the year of sale of stock-in-trade.
(iv) For the purpose of computing capital gains in such cases, the fair market value of
the capital asset on the date on which it was converted into stock-in-trade shall be
deemed to be the full value of consideration received or accruing as a result of the
transfer of the capital asset.

In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats) is sold in the
P.Y.2024-25, only proportionate capital gains (i.e., 2/3rd) would be chargeable in the
A.Y.2025-26.
(v) On sale of such stock-in-trade, business income would arise. The business income
chargeable to tax would be computed after deducting the fair market value on the
date of conversion of the capital asset into stock-in-trade and cost of construction of
flats from the price at which the stock-in-trade is sold.

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(vi) In case of conversion of capital asset into stock-in-trade and subsequent sale of
stock-in-trade, the period of 6 months is to be reckoned from the date of sale of
stock-in-trade for the purpose of exemption under section 54EC [CBDT Circular
No.791 dated 2.6.2000]. In this case, since the investment in bonds of NHAI has
been made within 6 months of sale of flats, the same qualifies for exemption under
section 54EC. With respect to long-term capital gains arising in any financial year,
the maximum deduction under section 54EC would be ` 50 lakhs, whether the
investment in bonds of NHAI or RECL are made in the same financial year or next
financial year or partly in the same financial year and partly in the next financial year.
Therefore, even though investment of ` 50 lakhs has been made in bonds of NHAI
during the P.Y.2024-25 and investment of ` 50 lakhs has been made in bonds of RECL
during the P.Y.2025-26, both within the stipulated six month period, the maximum
deduction allowable for A.Y.2025-26, in respect of long-term capital gain arising on sale
of long-term capital asset(s) during the P.Y.2024-25, is only ` 50 lakhs.
9. Computation of taxable income of Mr. Singh for A.Y.2025-26

Particulars ` `
Income from house property
Gross Annual Value [Higher of Expected Rent & Actual Rent] 3,00,000
Expected Rent [lower of Fair Rent and Standard Rent] 2,50,000
Actual Rent 3,00,000
Less: Municipal taxes paid by Mr. Singh during the year
(including arrears) [` 35,000 + ` 1,50,000] 1,85,000
Net Annual Value (NAV) 1,15,000
Less: Deductions under section 24
(a) 30% of NAV 34,500
(b) Interest on loan borrowed for major repairs 1,50,000 1,84,500
(69,500)
Arrears of rent taxable under section 25A 30,000
Less: Deduction@30% 9,000 21,000
(48,500)
Capital Gains
Full value of consideration 30,00,000

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As per section 50C, the full value of consideration would be

the higher of -
Actual Consideration 25,00,000
Stamp Duty Value [` 3,90,000/13%] 30,00,000
Since stamp duty value > 110% of actual consideration
Less: Cost of acquisition
As per section 49(1), cost of acquisition of the
residential house gifted by Mr. Singh’s father to
Mr. Singh would be the cost for which Mr. Singh’s
father acquired the asset 1,25,000
28,75,000
Less: Exemption under section 54 (` 8,00,000 + ` 7,00,000)
Purchase of residential house within the stipulated
time (within one year before or two years after the date
of sale) [Where the flats are situated side by side and
the builder had effected the necessary modification to
make it as one house, the assessee would be entitled
to exemption under section 54 in respect of investment
in both the flats, despite the fact that they were
purchased by separate sale deeds] 15,00,000
[CIT v. Ananda Basappa (2009) 331 ITR 211 (Kar.)]
Note: Since two adjacent flats are treated as one
residential house, Mr. Singh can defer availing
exemption under section 54 in respect of two
residential houses (where capital gains do not exceed
` 2 crores) to a later assessment year.
Exemption under section 54EC
Investment in bonds of NHAI within six months from
the date of transfer. Where the payment for bonds has
been made within the six months period, exemption
under section 54EC would be available even if the
allotment of bonds was made after the expiry of the six 10,00,000 25,00,000
months [Hindustan Unilever Ltd. v. DCIT (2010) 325
ITR 102 (Bom.)]
Long-term capital gains 3,75,000
Total Income 3,26,500

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Note: It may be noted that since Mr. Singh has transferred residential house property on or
after 23.7.2024 which was acquired before the said date, he can opt to pay tax @20% on
LTCG (computed with indexation) or 12.5% on LTCG (computed without indexation)
whichever is beneficial to him.
10. (i) No, the transaction of demerger would not attract any income-tax liability in the
hands of SS(P) Ltd. or RV(P) Ltd.
As per section 47(vib), any transfer in a demerger, of a capital asset, by the
demerged company to the resulting company would not be regarded as “transfer” for
levy of capital gains tax if the resulting company is an Indian company.
Hence, capital gains tax liability would not be attracted in the hands of SS(P) Ltd.,
the demerged company, in this case, since RV(P) Ltd. is an Indian company.
(ii) There would be no capital gains tax liability in the hands of Mr. N.K. on receipt of
shares of RV (P) Ltd., since as per section 47(vid), any issue of shares by the
resulting company in a scheme of demerger to the shareholders of the demerged
company will not be regarded as “transfer” for levy of capital gains tax, if the issue is
made in consideration of demerger of the undertaking.
(iii) Yes, capital gains would arise in the hands of Mr. N.K. on sale of shares of RV (P)
Ltd.
Sale consideration 8,00,000
Less: Indexed cost of acquisition of shares of RV (P) Ltd.
Cost of acquisition of shares of RV(P) Ltd. as per section 49(2C):
Net book Value of assets transferred in a demerger
Cost of acquisition of shares of SS(P) Ltd. x
Net worth of the demerged company immidiately before demerger

10 crore
`6,00,000× = `1,50,000
40 crore

Cost of acquisition of shares of RV (P) Ltd. ` 1,50,000

Long-term capital gain (since period of holding of shares in demerged

company is also to be considered) ` 6,50,000
(iv) No, sale of shares by Mr. N.K. would not affect the tax benefits availed by SS(P) Ltd.
or RV (P) Ltd.

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One of the conditions to be satisfied is that the shareholders holding not less than
three-fourths in value of the shares in the demerged company become shareholders
of the resulting company by virtue of the demerger. It is presumed that the condition
is satisfied in this case.
There is no stipulation that they continue to remain shareholders for any period of time
thereafter.
(v) Since the resultant capital gain on sale of shares of RV(P) Ltd. is a long-term capital
gain (on account of the period of holding of shares in demerged company being
considered by virtue of section 2(42A)(g)), Mr. N.K. can avail exemption under
section 54F by investing the entire net consideration in purchase (within one year
before and two years after the date of transfer) or construction (within three years
after the date of transfer) of one residential house in India. If part of the net
consideration is invested, only proportionate exemption would be available.
11. (a) As per section 50B, any profits and gains arising from the slump sale effected in the
previous year shall be chargeable to income-tax as capital gains arising from the
transfer of capital assets and shall be deemed to be the income of the previous year
in which the transfer took place.
If the assessee owned and held the undertaking transferred under slump sale for
more than 36 months before slump sale, the capital gain shall be deemed to be long-
term capital gain. Indexation benefit is not available in case of slump sale as per
section 50B(2).
Ascertainment of tax liability of PQR Limited from slump sale of Software unit
Particulars ` (in lakhs)
Full value of consideration for slump sale of Software Unit 385
Less: Cost of acquisition, being the net worth of Software Unit 185
Long term capital gains arising on slump sale 200
(The capital gains is long-term as the Software Unit is held for more
than 36 months)
Tax liability on LTCG
Under section 112 @ 12.5% on ` 200 lakhs 25.00
Add: Surcharge@ 7% 1.75
26.75
Add: Health and Education cess@4% 1.07
27.82

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 CAPITAL GAINS 4.169

Working Note:
Computation of Full value of consideration

` (in lakhs)
Fair market value of the capital assets transferred by way of slump
sale
Land, being an immovable property [stamp duty value on 31.3.2025, 55
being the date of slump sale] [A]
Other Fixed assets (Furniture and Plant & machinery) [Book value 140
as appearing in the books of accounts] [` 200 lakhs - ` 60 lakhs]
[B]
Debtors [Book value as appearing in the books of accounts] [C] 110
Inventories [Book value as appearing in the books of accounts] [D] 35
340
Less: Liabilities of Software Unit [` 750 - ` 40] [L] 710
Excluding
(i) Paid up share capital 300
(ii) General Reserve 150
(ii) Share Premium 50
(iii) Revaluation reserve 120 620 90
Fair market value of the capital assets transferred by way of slump
sale [A+B+C+D- L] [FMV1] 250
Fair market value of the consideration received or accruing as a 385
result of transfer by way of slump sale [value of the monetary
consideration received] [FMV2]
Full value of consideration [Higher of FMV1 or FMV2] 385

Computation of net worth of Software Unit

` (in lakhs)
(1) Book value of non-depreciable assets
(i) Land (Revaluation not to be considered) 40
(ii) Debtors 110
(iii) Inventories 35

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 4.170 DIRECT TAX LAWS

(2) Written down value of depreciable assets under section

43(6) (See Note below) 90
Aggregate value of total assets 275
Less: Current liabilities of Software unit 90
Net worth of software unit 185

Note: For computing net worth, the aggregate value of total assets in the case of
depreciable assets shall be the written down value of the block of assets as per
section 43(6).
(b) Tax advice
(i) Transfer of any capital asset by a holding company to its 100% Indian
subsidiary company is exempt from capital gains under section 47(iv). Hence,
PQR Limited should try to acquire the remaining 26% equity shares in S Limited
then make the slump sale in the above said manner, in which case the slump
sale shall be exempt from tax. For this exemption, PQR Limited will have to
keep such 100% holding in S Limited for a period of 8 years from the date of
slump sale, otherwise the amount exempt would be deemed to be income
chargeable under the head “Capital Gains” of the previous year in which such
transfer took place.
(ii) Alternatively, if acquisition of 26% share is not feasible, PQR Limited may think
about demerger plan of Software Unit to get benefit of section 47(vib) of the
Income-tax Act, 1961.
12. (i) For the purpose of computation of long-term capital gains chargeable to tax under
section 112A, the cost of acquisition in relation to the long-term capital asset, being
an equity share in a company or a unit of an equity oriented fund or a unit of a
business trust acquired before 1st February, 2018 shall be the higher of
(a) cost of acquisition of such asset, i.e., actual cost; and

(b) lower of
(i) the fair market value of such asset as on 31.1.2018; and
(ii) the full value of consideration received or accruing as a result of the
transfer of the capital asset.
The fair market value of listed equity shares as on 31.1.2018 is the highest price
quoted on the recognized stock exchange as on that date.

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 CAPITAL GAINS 4.171

Accordingly, long-term capital gain on transfer of STT paid listed equity shares by
Mr. Prasun would be determined as follows:
The FMV of shares of A Ltd. would be ` 700, being the highest price quoted on
National Stock Exchange on 31.1.2018. The cost of acquisition of each equity share
in A Ltd. would be ` 700, being higher of actual cost i.e., ` 400 and ` 700 [being the
lower of FMV of ` 700 as on 31.1.2018 (i.e., the highest trading price) and actual
sale consideration of ` 1,200]. Thus, the long-term capital gain would be ` 1,50,000
i.e., (` 1,200 – ` 700) x 300 shares. The long-term capital gain of ` 25,000 (i.e., the
amount in excess of ` 1,25,000) would be subject to tax@10% under section 112A
(plus cess@4%), without benefit of indexation. The tax on capital gain @10.4%
would be ` 2,600 (` 25,000 x 10.4%)
(ii) In the case of units listed on recognised stock exchange on the date of transfer, the
FMV as on 31.1.2018 would be the highest trading price on recognised stock
exchange as on 31.1.2018 (if units are listed on that date), else, it would be the net
asset value as on 31.1.2018 (where units are unlisted on that date).
Accordingly, the FMV of units of Fund A as on 31.1.2018 would be ` 750 (being the
highest trading price on 31.1.2018, since the units of Fund A are listed on that date)
and the FMV of units of Fund B as on 31.1.2018 would be ` 950 (being the net asset
value as on 31.1.2018, since the units of Fund B are unlisted on that date).
The cost of acquisition of a unit of Fund A would be ` 750, being higher of actual
cost i.e., ` 550 and ` 750 (being the lower of FMV of ` 750 as on 31.1.2018 and
actual sale consideration of ` 900). Thus, the long-term capital gains on sale of
units of Fund A would be ` 30,000 (` 900 – ` 750) x 200 units.
The cost of acquisition of a unit of Fund B would be ` 900, being higher of actual
cost i.e., ` 550 and ` 900 (being the lower of FMV of ` 950 as on 31.1.2018 (net
asset value) and actual sale consideration of ` 900). Thus, the long-term capital
gains on sale of units of Fund B would be Nil (` 900 – ` 900) x 200 units.
Since the long-term capital gains on sale of units is ` 30,000, which is less than
` 1,25,000, the said sum is not chargeable to tax under section 112A.
13. Computation of Capital gains in the hands
of Mr. Shyam for A.Y. 2025-26
Particulars Amount (`) Amount (`)
Actual sale consideration 30,50,000
Valuation as per Stamp duty Authority on the date of 39,00,000
agreement

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 4.172 DIRECT TAX LAWS

(Where the actual sale consideration is less than the

value adopted by the Stamp Valuation Authority for the
purpose of charging stamp duty, and such stamp duty
value exceeds 110% of the actual sale consideration
then, the value adopted by the Stamp Valuation Authority
shall be taken to be the full value of consideration as per
section 50C.

However, where the date of agreement is different from the

date of registration, stamp duty value on the date of
agreement can be considered, provided the whole or part of
the consideration is received by way of account payee
cheque/bank draft or by way of ECS through bank account
or such other electronic mode as may be prescribed on or
before the date of agreement.
In the present case, since part of the payment is made by
account payee cheque on the date of agreement, the
stamp duty value on the date of agreement would be
considered as full value of consideration)
Deemed Full value of consideration [Since stamp duty 39,00,000
value on the date of agreement exceeds 110% of the
actual consideration, stamp duty value would be deemed
as Full Value of Consideration]
Less: Expenses on transfer (Brokerage @1% of 30,500
` 30,50,000)
Net sale consideration 38,69,500
Less: Cost of acquisition (Note 1) 9,59,000
Less: Cost of improvement 3,90,000 13,49,000
Long term capital gain 25,20,500

Computation of tax liability u/s 112

Particulars Amount (`)

On LTCG of ` 25,20,500 x 12.5% 3,15,063
Add: Health and Education cess @4% 12,603
3,27,666
On LTCG with indexation benefit
Net Sale consideration 38,69,500
Less: Indexed cost of acquisition [` 9,59,000 x 363/100] 34,81,170

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 CAPITAL GAINS 4.173

Less: Indexed cost of Improvement [` 3,90,000 x 363/254] 5,57,362

Long-term capital loss (1,69,032)
Since the computation results in a long term capital loss, if indexation benefit is given, the tax
u/s 112 would be Nil. However, this computation is only for determining tax liability, the said
loss can neither be set off nor carried forward.
Notes:
(1) Computation of cost of acquisition
Particulars Amount (`) Amount (`)
Cost of acquisition, 10,70,000
Being the higher of
(i) lower of Fair market value i.e., 10,70,000
` 11,85,000 and Stamp duty value i.e.,
` 10,70,000, on April 1, 2001
(ii) Actual cost of acquisition 3,59,000
(` 3,24,000 + ` 35,000, being stamp duty
@10% of ` 3,50,000)
Less: Advance money taken from
Mr. Mohan and forfeited 1,11,000
Cost of acquisition 9,59,000

(2) Where advance money has been received by the assessee, and retained by him, as
a result of failure of the negotiations, section 51 will apply. The advance retained by
the assessee will go to reduce the cost of acquisition. Accordingly, cost of acquisition
after reducing the advance money forfeited would be ` 9,59,000 [i.e. ` 10,70,000 –
` 1,11,000 (being the advance money forfeited during the P.Y.
2008-09)]. However, where the advance money is forfeited during the previous year
2014-15 or thereafter, the amount forfeited would be taxable under the head “Income
from Other Sources” and such amount will not be deducted from the cost of
acquisition of such asset while calculating capital gains. Hence, ` 1,51,000, being
the advance received from Ms. Deepshikha and retained by him, would have been
taxable under the head “Income from other sources” in the hands of Mr. Shyam in
A.Y.2016-17.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 5
7
INCOME FROM OTHER
SOURCES

LEARNING OUTCOMES
After studying this chapter, you would be able to -
 identify the income which are chargeable to tax under the head “Income
from other sources”;
 identify the admissible/ inadmissible deductions while computing
income under this head;
 examine the circumstance(s) when amount paid or payable by a closely
held company to the shareholder, being a beneficial owner or the
concern in which such shareholder has the substantial interest would be
deemed as dividend;
 examine the circumstances when any sum of money or property
transferred without consideration or for inadequate consideration would
be taxable in the hands of recipient and the exceptions thereto;
 compute the income under the head “Income from Other Sources” after
allowing the deductions available thereunder.

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 5.2 DIRECT TAX LAWS

5.1 INTRODUCTION
Any income, profits or gains includible in the total income of an assessee, which cannot be
included under any of the preceding heads of income, is chargeable under the head ‘Income from
other sources’. Thus, this head is the residuary head of income and brings within its scope all the
taxable income, profits or gains of an assessee which fall outside the scope of any other head.
Therefore, when any income, profit or gain does not fall precisely under any of the other specific
heads but is chargeable under the provisions of the Act, it would be charged under this head.

5.2 METHOD OF ACCOUNTING [SECTION 145]

Income chargeable under the head “Income from other sources” has to be computed in
accordance with the cash or mercantile system of accounting regularly employed by the assessee.
Under section 145(2), the Central Government is empowered to notify in Gazette from time to time,
income computation and disclosure standards to be followed by any class of assessees or in
respect of any class of income.
Accordingly, Central Government has notified ten ICDSs to be followed by all assessees (other
than an individual or a HUF who is not required to get his accounts of the previous year audited in
accordance with the provisions of section 44AB) following the mercantile system of accounting, for
the purpose of computation of income chargeable to income-tax under the head “Profits and gains
from business or profession” or “Income from other sources”.
Text of notified ICDSs is given as an Annexure at the end of this module.

5.3 INCOMES CHARGEABLE UNDER THIS HEAD

[SECTION 56]
(1) Income chargeable only under the head ‘Income from Other Sources’:
(i) Dividend income [Section 56(2)(i)]

Dividend income is always taxable under the head “Income from other sources”. The term
‘dividend’ as used in the Act has a wider scope and meaning than under the general law.

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 INCOME FROM OTHER SOURCES 5.3

Dividend [covered by sections 2(22)(a) to (e)]:

According to section 2(22), the following receipts are deemed to be dividend:
(a) Distribution of accumulated profits, entailing the release of company’s assets - Any
distribution of accumulated profits, whether capitalised or not, by a company to its
shareholders is dividend if it entails the release of all or any part of its assets.

Note: If accumulated profits are distributed in cash, it is dividend in the hands of the share-
holders. Where accumulated profits are distributed in kind, for example by delivery of
shares etc. entailing the release of company’s assets, the market value of such shares on
the date of such distribution is deemed dividend in the hands of the shareholder.
(b) Distribution of debentures, deposit certificates to shareholders and bonus shares to
preference shareholders - Any distribution to its shareholders by a company of debenture,
debenture stock or deposit certificate in any form, whether with or without interest, and any
distribution of bonus shares to preference shareholders to the extent to which the company
possesses accumulated profits, whether capitalised or not, will be deemed as dividend.
The market value of such bonus shares is deemed as dividend in the hands of the
preference shareholder.
In the case of debentures, debenture stock etc., their value is to be taken at the market rate
and if there is no market rate they should be valued according to accepted principles of
valuation.
Note: Bonus shares given to equity shareholders are not treated as dividend.

(c) Distribution on liquidation - Any distribution made to the shareholders of a company on

its liquidation, to the extent to which the distribution is attributable to the accumulated
profits of the company immediately before its liquidation, whether capitalised or not, is
deemed to be dividend income.
Note: Any distribution made out of the profits of the company after the date of the
liquidation cannot amount to dividend. It is a repayment towards capital.
(d) Distribution on reduction of capital - Any distribution to its shareholders by a company on
the reduction of its capital, to the extent to which the company possessed accumulated
profits, whether capitalised or not, shall be deemed to be dividend.

(e) Advance or loan by a closely held company to its shareholder – Any payment by a
company in which the public are not substantially interested of any sum by way of advance

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 5.4 DIRECT TAX LAWS

or loan to any shareholder who is the beneficial owner of 10% or more of the voting power
of the company will be deemed to be dividend to the extent of the accumulated profits. If the
loan is not covered by the accumulated profits, it is not deemed to be dividend.
Advance or loan by a closely held company to a specified concern - Any payment by a
company in which the public are not substantially interested, to any concern (i.e. HUF/ Firm/
AOP/ BOI/ Company) in which a shareholder, having the beneficial ownership of atleast
10% of the equity shares is a member or a partner and in which he has a substantial
interest (i.e. atleast 20% share of the income of the concern) will be deemed to be dividend.

Also, any payments by such a closely held company on behalf of, or for the individual
benefit of any such shareholder will also be deemed to be dividend. However, in both cases
the ceiling limit of dividend is to the extent of accumulated profits.
Exceptions: The following payments or loan given would not be deemed as dividend:
(i) Loan granted in the ordinary course of business - If the loan is granted in the
ordinary course of its business and lending of money is a substantial part of the
company’s business, the loan or advance to a shareholder or to the specified
concern is not deemed to be dividend.
(ii) Dividend paid is set off against the deemed dividend - Where a loan had been
treated as dividend and subsequently, the company declares and distributes
dividend to all its shareholders including the borrowing shareholder, and the dividend
so paid is set off by the company against the previous borrowing, the adjusted
amount will not be again treated as a dividend.
Note: Subsequent repayment of loan or charge of interest at market rate does not make
any difference in the applicability of section 2(22)(e).
(f) Amount received by shareholder on buy-back of shares by domestic companies - In
case of buyback of shares (whether listed or unlisted) before 1.10.2024 by a domestic
companys, additional income-tax@20% (plus surcharge @12% and cess@4%) is leviable
in the hands of the company under section 115QA. Consequently, the income arising to the
shareholders in respect of such buyback of shares by the domestic company is exempt
under section 10(34A).
However, in case of buyback of shares (whether listed or unlisted) on or after 1.10.2024 by
a domestic company,, any sum paid by the domestic company for purchase of its own
shares would be deemed as dividend in the hands of shareholders and shall be charged to

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 INCOME FROM OTHER SOURCES 5.5

income tax at applicable tax rates. No deduction for expenses would be available against
such dividend income while determining the income from other sources.
Below here is the example to understand the provisions of section 46A and section 2(22)(f):
No. of shares of A Ltd. bought in 2020 By Mr. B @` 40 per share 100 shares

Total cost of acquisition ` 4,000

(100 x ` 40)
No. of shares bought back in November 2024 by A Ltd. @` 60 per share 20 shares
Income taxable as deemed dividend u/s 2(22)(f) [` 60 per share x 20 shares] ` 1,200

Long-term capital loss on such buyback as per section 46A (Value of ` 800
consideration - COA) (Nil - ` 40 x 20) [Such LTCL can be set-off against other
LTCG or it can be carried forward to the next year for set-off against other
LTCG]
No. of shares sold in December 2025 by Mr. B @` 70 per share 50 Shares
Long-term capital Gain (` 70 x 50 – ` 40 x 50) ` 1,500
Chargeable long-term capital gain in P.Y. 2025-26 after set-off of long-term ` 700
capital loss [` 1,500 – ` 800] would be

Exceptions
The following also do not constitute “dividend” -

(i) Distribution in respect of non-participating shares issued for full cash consideration –
Any distribution made in accordance with (c) or (d) in respect of any share issued for full
cash consideration and the holder of such share is not entitled to participate in the surplus
asset in the event of liquidation.
(ii) Payment on buy back of shares - Any payment made by a company on purchase of its
own shares upto 30th September, 2024, from a shareholder in accordance with the
provisions of section 77A of the Companies Act, 1956 1;
(iii) Distribution of shares to the shareholders on demerger by the resulting company -
Any distribution of shares on demerger by the resulting company to the shareholders of the
demerged company (whether or not there is a reduction of capital in the demerged
company).

1 Now section 58 of the Companies Act, 2013

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 5.6 DIRECT TAX LAWS

Meaning of “accumulated profits”

Accumulated profits in point (a), (b), (d) and (e) above include all profits of the company up to the
date of distribution or payment of dividend.
Building & Machinery Depreciation fund not to be included in accumulated profits. - CIT v. Jaldu
Rama Rao (1983) 140 ITR 168 (Andhra Pradesh)

Accumulated profits include in point (c) all profits of the company up to the date of liquidation
whether capitalised or not. But where liquidation is consequent to the compulsory acquisition of an
undertaking by the Government or by any corporation owned or controlled by the Government, the
accumulated profits do not include any profits of the company prior to the 3 successive previous
years immediately preceding the previous year in which such acquisition took place.
In the case of an amalgamated company, the accumulated profits, whether capitalized or not, of
the amalgamating company on the date of amalgamation shall be included in the accumulated
profits, whether capitalized or not or loss, as the case may be, of the amalgamated company.
Clarification regarding trade advance not to be treated as deemed dividend under section
2(22)(e) – [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that "dividend" includes any payment by a company in which public are
not substantially interested, of any sum by way of advance or loan to a shareholder who is the
beneficial owner of shares holding not less than 10% of the voting power, or to any concern in
which such shareholder is a member or a partner and in which he has a substantial interest or any
payment by any such company on behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company in either case possesses accumulated profits.
The CBDT observed that some Courts in the recent past have held that trade advances in the
nature of commercial transactions would not fall within the ambit of the provisions of section
2(22)(e) and such views have attained finality. Some illustrations /examples of trade
advances/commercial transactions held to be not covered under section 2(22)(e) are as follows:
(i) Advances were made by a company to a sister concern and adjusted against the dues for job
work done by the sister concern. It was held that amounts advanced for business transactions do
not to fall within the definition of deemed dividend under section 2(22)(e) [CIT vs. Creative Dyeing
& Printing Pvt. Ltd. [NJRS] 2009-LL-0922-2, ITA No. 250 of 2009, Delhi High Court].
(ii) Advance was made by a company to its shareholder to install plant and machinery at the
shareholder's premises to enable him to do job work for the company so that the company
could fulfil an export order. It was held that as the assessee proved business expediency, the

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 INCOME FROM OTHER SOURCES 5.7

advance was not covered by section 2(22)(e) [CIT vs Amrik Singh, [NJRS] 2015-LL-0429-5,
ITA No. 347 of 2013, P & H High Court]
(iii) A floating security deposit was given by a company to its sister concern against the use of
electricity generators belonging to the sister concern. The company utilised gas available to it
from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It
was held that the security deposit made by the company to its sister concern was a business
transaction arising in the normal course of business between two concerns and the
transaction did not attract section 2(22)(e) [CIT, Agra vs Atul Engineering Udyog, [NJRS]
2014-LL-0926-121, ITA No. 223 of 2011, Allahabad High Court]
In view of the above, the CBDT has, vide this circular, clarified that it is a settled position that trade
advances, which are in the nature of commercial transactions, would not fall within the ambit of the
word 'advance' in section 2(22)(e) and therefore, the same would not to be treated as deemed
dividend.

Basis of charge of dividend [Section 8]

Dividend declared or distributed or paid by a company is deemed to be the income of the

shareholder in the previous year in which it is so declared or distributed or paid, as the case may be.

Deemed dividend u/s 2(22)(a)/(b)/(c)/(d) – Distribution by a company which is deemed as

dividend u/s 2(22)(a)/(b)/(c)/(d) would be the income of the previous year in which it is so
distributed.

Deemed dividend u/s 2(22)(e) – Payment of advance or loan to a shareholder or a concern, as

the case may be, which is deemed as dividend u/s 2(22)(e) will be the income of the previous year
in which it is so paid.

Interim dividend – Interim dividend would be deemed to be the income of the previous year in
which such dividend is unconditionally made available by the company to the members who are
entitled to it.

Tax rate on dividend income - Any income by way of dividend received by a resident from a
company, whether domestic or foreign, is taxable in the hands of shareholder at normal rates of
tax.
ILLUSTRATION 1

Dhaval is in business of manufacturing customized kitchen equipments. He is also the Managing

Director and held nearly 65% of the paid-up share capital of Aarav (P) Ltd. A substantial part of the

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 5.8 DIRECT TAX LAWS

business of Dhaval is obtained through Aarav (P) Ltd. For this purpose, Aarav (P) Ltd. passed on
the advance received from its customers to Dhaval to execute the job work entrusted to him.

The Assessing Officer held that the advance money received by Dhaval is in the nature of loan
given by Aarav (P) Ltd. to him and accordingly is deemed dividend within the meaning of
provisions of section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer, therefore, made
the addition by treating advance money as deemed dividend.
Examine whether the action of the Assessing Officer is tenable in law.
SOLUTION
As per section 2(22)(e), in case a company, not being a company in which the public are
substantially interested, makes payment of any sum by way of advance or loan to a shareholder
holding not less than 10% of voting power/share capital of the company, then, the payment so
made shall be deemed to be dividend in the hands of such shareholder to the extent to which the
company possesses accumulated profits.
In the present case, Dhaval is holding 65% of the paid-up capital of Aarav (P) Ltd. Aarav (P) Ltd.
has passed on advance received from its customers to Dhaval for execution of job work entrusted
to Dhaval.
Since Aarav (P) Ltd. is not a company in which public are substantially interested, the applicability
of the provisions of section 2(22)(e) in respect of such transaction has to be examined. In CIT v.
Rajkumar (2009) 318 ITR 462 (Del.), it was held that trade advance given to the shareholder which
is in the nature of money transacted to give effect to a commercial transaction, would not amount
to deemed dividend under section 2(22)(e). The Delhi High Court ruling in CIT v. Ambassador
Travels (P) Ltd. (2009) 318 ITR 376 also supports the above view.
In the present case, the payment is made to Dhaval by Aarav (P) Ltd. for execution of work is in
the course of commercial business transaction and therefore, it cannot be treated as deemed
dividend under section 2(22)(e). Hence, the action of the Assessing Officer is not tenable in law.
Note – This can also be answered on the basis of Circular No. 19/2017, dated 12.06.2017. The
CBDT has, in its circular clarified that it is a settled position that trade advances, which are in the
nature of commercial transactions, would not fall within the ambit of the word 'advance' in section
2(22)(e) and therefore, the same would not to be treated as deemed dividend. Since, the payment
is made to Dhaval by Aarav (P) Ltd. for execution of work is in the course of commercial business
transaction and therefore, the advance cannot be treated as deemed dividend under section
2(22)(e). Hence, the action of the Assessing Officer is not tenable in law.

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 INCOME FROM OTHER SOURCES 5.9

ILLUSTRATION 2
MNO (P) Ltd. is a company in which the public are not substantially interested. K is a shareholder
of the company holding 15% of the equity shares. The accumulated profits of the company as on
1.10.2024 amounted to ` 10,00,000. The company lent ` 1,00,000 to K by an account payee bank
draft on 1.10.2024. The loan was not connected with the business of the company. K repaid the
loan to the company by an account payee bank draft on 30.3.2025. Examine the effect of the
borrowal and repayment of the loan by K on the computation of his total income for the
assessment year 2025-26.
SOLUTION
As per section 2(22)(e), any payment by a company, in which the public are not substantially
interested, by way of advance or loan to a shareholder, being a person who is the beneficial owner
of shares holding not less than 10% of the voting power, shall be treated as dividend to the extent
to which the company possesses accumulated profits.
In the instant case, MNO (P) Ltd. is a company in which the public are not substantially interested.
The company has accumulated profits of ` 10,00,000 on 1.10.2024. The loan given by the
company to K was not in the course of its business. K holds more than 10% of the equity shares in
the company. Therefore, assuming that K has voting power equivalent to his shareholding, section
2(22)(e) comes into play. Deemed dividend of ` 1,00,000 under section 2(22)(e) would be taxable
in the hands of Mr. K at normal rates of tax.
Under section 2(22)(e), the liability arises the moment the loan is borrowed by the shareholder and
it is immaterial whether the loan is repaid before the end of the accounting year or not. Therefore,
the repayment of loan by K to the company on 30.3.2025 will not affect the taxability of the sum of
` 1,00,000 as deemed dividend.
(ii) Casual Income [Section 56(2)(ib)]
Casual income means income in the nature of winning from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort, gambling, betting etc. Such
winnings are chargeable to tax at a flat rate of 30% under the head “Income from Other Sources”.

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 5.10 DIRECT TAX LAWS

(iii) Interest received on compensation/ enhanced compensation deemed to be income in

the year of receipt and taxable under the head “Income from Other Sources” [Section
56(2)(viii)]
(a) As per section 145(1), income chargeable under the head “Profits and gains of business or
profession” or “Income from other sources”, shall be computed in accordance with either
cash or mercantile system of accounting regularly employed by the assessee.
(b) Section 145B(1) provides that notwithstanding anything contained in section 145(1), the
interest received by an assessee on compensation or on enhanced compensation shall be
deemed to be his income of the previous year in which it is received, irrespective of the
method of accounting followed by the assessee.

(c) Section 56(2)(viii) provides that income by way of interest received on compensation or on
enhanced compensation referred to in section 145B(1) shall be assessed as “Income from
other sources” in the year in which it is received.

(iv) Advance forfeited due to failure of negotiations for transfer of a capital asset to be
taxable as “Income from other sources” [Section 56(2)(ix)]

(a) Prior to A.Y.2015-16, any advance retained or received in respect of a negotiation for
transfer which failed to materialise is reduced from the cost of acquisition of the asset or the
written down value or the fair market value of the asset, at the time of its transfer to
compute the capital gains arising therefrom as per section 51. In case the asset transferred
is a long-term capital asset, indexation benefit would be on the cost so reduced.

(b) With effect from A.Y.2015-16, section 56(2)(ix) provides for the taxability of any sum of
money, received as an advance or otherwise in the course of negotiations for transfer of a
capital asset. Such sum shall be chargeable to income-tax under the head ‘Income from
other sources’, if such sum is forfeited and the negotiations do not result in transfer of such
capital asset.

(c) In order to avoid double taxation of the advance received and retained, section 51 was
amended to provide that where any sum of money received as an advance or otherwise in
the course of negotiations for transfer of a capital asset, has been included in the total
income of the assessee for any previous year, in accordance with section 56(2)(ix), such
amount shall not be deducted from the cost for which the asset was acquired or the written
down value or the fair market value, as the case may be, in computing the cost of
acquisition.

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 INCOME FROM OTHER SOURCES 5.11

(d) It may be noted that advance received and forfeited upto 31.3.2014 has to be reduced from
cost of acquisition while computing capital gains, since such advance would not have been
subject to tax under section 56(2)(ix). Only the advance received and forfeited on or after
1.4.2014 would be subject to tax under section 56(2)(ix). Hence, such advance would not
be reduced from the cost of acquisition for computing capital gains.

Tax Treatment of advance money [Sections 51 and 56(2)(ix)]

Received and Received and

forfeited before forfeited after
01.04.2014 01.04.2014

Advance forfeited to be deducted from cost of Taxable under "Income from Other
acquisiton for computing capital gains in the year Sources" in the year of forfeiture of
of actual trasnfer of asset advance

(v) Any sum of money or value of property received without consideration or for
inadequate consideration to be subject to tax in the hands of the recipient [Section 56(2)(x)]
In order to prevent the practice of receiving sum of money or the property without consideration or
for inadequate consideration, section 56(2)(x) brings to tax any sum of money or the value of any
property received by any person without consideration or the value of any property received for
inadequate consideration.
(a) Sum of Money: If any sum of money is received without consideration and the aggregate
value of which exceeds ` 50,000, the whole of the aggregate value of such sum is
chargeable to tax.
(b) Immovable property [Land or building or both]:

I. If an immovable property is received

(a) Without consideration: the stamp duty value of such property would be taxed
as the income of the recipient, if it exceeds ` 50,000.

(b) For Inadequate consideration: If consideration is less than the stamp duty
value of the property and the difference between the stamp duty value and
consideration is more than the higher of –

(i) ` 50,000 and

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 5.12 DIRECT TAX LAWS

(ii) 10% of consideration,

the difference between the stamp duty value and the consideration shall be
chargeable to tax in the hands of the assessee as “Income from other sources”.
It may be noted that the above limit shall be considered for each property
separately.

II. Value of property to be considered where the date of agreement is different

from date of registration: Taking into consideration the possible time gap between
the date of agreement and the date of registration, the stamp duty value may be
taken as on the date of agreement instead of the date of registration, if the date of
the agreement fixing the amount of consideration for the transfer of the immovable
property and the date of registration are not the same, provided whole or part of the
consideration has been paid by way of an account payee cheque or an account
payee bank draft or by use of electronic clearing system (ECS) through a bank
account or through such prescribed electronic mode on or before the date of
agreement.
The prescribed electronic modes notified are credit card, debit card, net banking,
IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real
Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM
(Bharat Interface for Money) Aadhar Pay as other electronic modes of payment
[CBDT Notification No. 8/2020 dated 29.01.2020].
III. If the stamp duty value of immovable property is disputed by the assessee, the
Assessing Officer may refer the valuation of such property to a Valuation Officer. In
such a case, the provisions of section 50C and section 155(15) shall, as far as may
be, apply for determining the value of such property. As per section 50C, if such
value is less than the stamp duty value, the same would be taken for determining the
value of such property, for computation of income under this head in the hands of the
buyer.
(c) Movable Property [Property other than immovable property]:
If movable property is received

(i) Without consideration: The aggregate fair market value of such property on the
date of receipt would be taxed as the income of the recipient, if it exceeds ` 50,000.

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 INCOME FROM OTHER SOURCES 5.13

(ii) For inadequate consideration: If the difference between the aggregate fair market
value and such consideration exceeds ` 50,000, such difference would be taxed as
the income of the recipient.
(d) Applicability of section 56(2)(x): The provisions of section 56(2)(x) would apply only to
the specified property which is the nature of a capital asset of the recipient and not stock-in-
trade, raw material or consumable stores of any business of the recipient. Therefore, only
transfer of a specified capital asset, without consideration or for inadequate consideration
would attract the provisions of section 56(2)(x).
(e) The table below summarizes the scheme of taxability of gifts –

Nature of asset Taxable value

1 Money The whole amount if the same exceeds ` 50,000.
2 Movable property (i) Without consideration:
The aggregate fair market value of the property, if it exceeds
` 50,000.
(ii) Inadequate consideration:
The difference between the aggregate fair market value and
the consideration, if such difference exceeds ` 50,000.
3 Immovable (i) Without consideration:
property The stamp value of the property, if it exceeds ` 50,000.
(ii) Inadequate consideration:
The difference between the stamp duty value and the
consideration, if such difference is more than the higher of
` 50,000 and 10% of consideration.

(f) Non-applicability of section 56(2)(x): However, any sum of money or value of property
received in the following circumstances would be outside the ambit of section 56(2)(x) -
(i) from any relative; or
(ii) on the occasion of the marriage of the individual; or

(iii) under a will or by way of inheritance; or

(iv) in contemplation of death of the payer or donor, as the case may be; or
(v) from any local authority as defined in the Explanation to section 10(20); or

(vi) from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution referred to in section 10(23C); or

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 5.14 DIRECT TAX LAWS

(vii) from or by any trust or institution registered under section 12A or section 12AA or
section 12AB; or
However, where sum of money or property has been received by specified persons
under section 13(3), this relaxation is not available and section 56(2)(x) would be
applicable.
(viii) by any fund or trust or institution or any university or other educational institution or
any hospital or other medical institution referred to in Section 10(23C)(iv)/(v)/
(vi)/(via).
(ix) by way of transaction not regarded as transfer under section 47(i)/(iv)/(v)/(vi)/(via)/
(viaa)/(vib)/(vic)/(vica)/(vicb)/(vid)/(vii)/(viiac)/(viiad)/(viiae)/(viiaf).
(x) from an individual by a trust created or established solely for the benefit of relative of the
individual.
(xi) by an individual, from any person, in respect of any expenditure actually incurred by
him on his medical treatment or treatment of any member of his family, for any
illness related to COVID-19 subject to conditions notified by the Central Government.
Accordingly, the Central Government has, vide Notification No. 91/2022 dated
5.8.2022, specified the following conditions –
The individual has to keep a record of the following documents, namely:-
(a) the COVID-19 positive report of the individual or his family member, or
medical report if clinically determined to be COVID-19 positive through
investigations in a hospital or an in-patient facility by a treating physician for a
person so admitted;
(b) all necessary documents of medical diagnosis or treatment of the individual or
family member due to COVID-19 or illness related to COVID-19 suffered
within 6 months from the date of being determined as a COVID-19 positive;
The details of the amount so received in any financial year has to be furnished in
Form No. 1 to the Income-tax Department within 9 months from the end of such
financial year.
(xii) by a member of the family of a deceased person –
(A) from the employer of the deceased person (without any limit); or
(B) from any other person or persons to the extent that such sum or aggregate of
such sums ≤ ` 10 lakhs,

where the cause of death of such person is illness related to COVID-19 and the
payment is –

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 INCOME FROM OTHER SOURCES 5.15

(i) received within 12 months from the date of death of such person; and
(ii) subject to such other conditions notified by the Central Government.
Accordingly, the Central Government has, vide Notification No. 92/2022 dated
5.8.2022, specified the following conditions –
1. (i) the death of the individual should be within 6 months from the date of
testing positive or from the date of being clinically determined as a COVID-
19 case, for which any sum of money has been received by the member of
the family;
(ii) the family member of the individual has to keep a record of the following
documents,
(a) the COVID-19 positive report of the individual, or medical report if
clinically determined to be COVID-19 positive through investigations
in a hospital or an inpatient facility by a treating physician;
(b) a medical report or death certificate issued by a medical practitioner
or a Government civil registration office, in which it is stated that
death of the person is related to corona virus disease (COVID-19).
2. The details of such amount received in any financial year has to be furnished in Form
A to the Assessing Officer within 9 months from the end of such financial year.
(xiii) from such class of persons and subject to such conditions, as may be prescribed.
Accordingly, CBDT has inserted Rule 11UAC to notify that the provisions of section
56(2)(x) would not be applicable to the following transactions –
S. No. Property Received by Condition
1. Any a resident of an where the Central Government by
immovable unauthorized notification in the Official Gazettee,
property, colony in the regularised the transactions of such
being land or National Capital immovable property based on the
building or Territory of latest Power of Attorney, Agreement
both Delhi to Sale, Will, possession letter and
other documents including documents
evidencing payment of consideration
for conferring or recognising right of
ownership or transfer or mortgage in
regard to such immovable property in
favour of such resident.

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 5.16 DIRECT TAX LAWS

Resident means a person having physical possession of property on

the basis of a registered sale deed or latest set of Power of Attorney,
Agreement to Sale, Will, possession letter and other documents
including documents evidencing payment of consideration in respect of a
property in unauthorised colonies and includes their legal heirs but does
not include tenant, licensee or permissive user.
Unauthorised colony means a colony or development comprising of a
contiguous area, where no permission has been obtained for approval of
layout plan or building plans and has been identified for regularisation of
such colony in pursuance to the notification number S.O. 683(E), dated
the 24th March, 2008, of the Delhi Development Authority.
2. Any movable Shareholder Where,
property, (i) the Tribunal, on an application
being moved by the Central
unquoted Government under section 241
shares, of a of the Companies Act, 2013, has
company and suspended the Board of
its subsidiary Directors of such company and
and the has appointed new directors
subsidiary of nominated by the Central
such Government under section 242
subsidiary of the said Act; and
(ii) share of company and its
subsidiary and the subsidiary of
such subsidiary has been
received pursuant to a resolution
plan approved by the Tribunal
under section 242 of the
Companies Act, 2013 after
affording a reasonable
opportunity of being heard to the
jurisdictional Principal
Commissioner or Commissioner.
A company shall be a subsidiary of another company, if such other
company holds more than half in nominal value of the equity share
capital of the company;
3. Any movable Investor or where the said share has been
property, investor bank allotted by the reconstructed bank
being equity (SBI) (Yes Bank) under the Yes Bank
shares, of Limited Reconstruction Scheme, 2020
the at ` 10 per share (Face value - ` 2
reconstructed per share; Premium - ` 8 per share).
bank

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 INCOME FROM OTHER SOURCES 5.17

4. Any movable a person It should be received from a public

property, sector company or the Central
being equity Government or any State Government
shares, of a under strategic disinvestment.
public sector
company or a
company
Strategic disinvestment - Sale of shareholding by the Central
Government or any State Government or a public sector company, in a
public sector company or in a company, which results in
- reduction of its shareholding to below 51% and
- transfer of control to the buyer.
The condition of reduction below 51% would apply only in a case where
shareholding of the Central Government or the State Government or the
public sector company was above 51% before such sale of shareholding.
The requirement of transfer of control may be carried out by the Central
Government or the State Government or the public sector company or
any two of them or all of them.
5. Any movable The fund It should be received in lieu of shares
property, management or units or interest held by the
being shares entity of the investment manager entity in the
or units or resultant fund original fund, pursuant to the
interest in the relocation, subject to the following
resultant fund conditions, namely –
(i) not less than 90% of shares or
units or interest in the fund
management entity of the
resultant fund are held by the
same entity(ies) or person(s) in
the same proportion as held by
them in the investment manager
entity of the original fund; and
(ii) not less than 90% of the
aggregate of shares or units or
interest in the investment
manager entity of the original
fund was held by such entity(ies)
or person(s).

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 5.18 DIRECT TAX LAWS

(g) Meaning of certain terms:

Term Meaning
Property A capital asset of the assessee, namely,-
(a) immovable property being land or building or both,
(b) shares and securities,
(c) jewellery,
(d) archaeological collections,
(e) drawings,
(f) paintings,
(g) sculptures,
(h) any work of art or bullion.
It also includes virtual digital asset.
Relative (a) In case of an individual –
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the
individual;
(vii) spouse of any of the persons referred to above.
(b) In case of Hindu Undivided Family, any member thereof.
Family For the purpose of (xi) and (xii), family, in relation to an individual means
(i) the spouse and children of the individual; and
(ii) the parents, brothers and sisters of the individual or any of them,
wholly or mainly dependent on the individual.

SUMMARY
Immovable Property

In the hands of transferor In the hands of

transferee

If the asset is held as a If the asset is held as a Asset is held as Capital

Capital Asset Stock-in-trade asset

Section 50C apply - Capital Section 43CA apply - Section 56(2)(x) apply -
Gain Business Income Income from other sources

© The Institute of Chartered Accountants of India

 Tax/TDS implications on transfer of immovable property for inadequate consideration

In the hands of the seller In the hands of the buyer

Is the date of agreement different from Is the consideration for transfer of

the date of registration? L & B and SDV less than ` 50
If L & B are held If L & B are held lakhs?
as stock-in-trade as Capital Asset Yes No
Yes No
Is whole or part of the SDV on the

© The Institute of Chartered Accountants of India

No
Section 43CA will apply consideration paid by way of date of
Section 50C will apply No Tax is to be Tax @1% of the
A/c payee Cheque/ Bank registration

s
Ye
Draft/ ECS or through such would be deducted higher is
other prescribed electronic considered deductible at the
Is date of agreement mode on or before the date time of credit or
SDV on the date different from the date of of agreement? payment,
of registration may
registration? whichever is
be taken as the Yes
full value of earlier u/s 194-IA
INCOME FROM OTHER SOURCES

SDV on the date of

consideration, if No agreement may be
SDV exceeds Yes
110% of the actual
considered Difference between SDV and actual
consideration consideration taxable u/s 56(2)(x), if such
Is whole or part of the difference is more than the higher of ` 50,000
SDV on the date of
consideration received by and 10% of consideration, where L & B are held
way of A/c payee cheque/ agreement may be taken as Capital Asset
5.19

Bank Draft or ECS through as the full value of

Bank A/c or through such Yes consideration, if such SDV
No other prescribed electronic exceeds 110% of actual L & B – Land and Building other
mode on or before the date consideration than agricultural land
of agreement? SDV – Stamp Duty Value
 5.20 DIRECT TAX LAWS

ILLUSTRATION 3
Mr. A, a dealer in shares, received the following without consideration during the P.Y.2024-25 from
his friend Mr. B, -
(1) Cash gift of ` 75,000 on his anniversary, 15th April, 2024.
(2) Bullion, the fair market value of which was ` 60,000, on his birthday, 19th June, 2024.
(3) A plot of land at Faridabad on 1st July, 2024, the stamp value of which is ` 5 lakh on that
date. Mr. B had purchased the land in April, 2009.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd.
@ ` 400 each on 19th June, 2024, the fair market value of which was ` 600 each on that date.
Mr. A sold these shares in the course of his business on 23rd June, 2024.
Further, on 1st November, 2024, Mr. A took possession of property (building) booked by him two
years back at ` 20 lakh. The stamp duty value of the property as on 1st November, 2024 was ` 32
lakh and on the date of booking was ` 23 lakh. He had paid ` 1 lakh by account payee cheque as
down payment on the date of booking.
On 1st March, 2025, he sold the plot of land at Faridabad for ` 7 lakh.
Compute the income of Mr. A chargeable under the head “Income from other sources” and “Capital
Gains” for A.Y.2025-26.
SOLUTION
Computation of “Income from other sources” of Mr. A for the A.Y.2025-26

Particulars `
(1) Cash gift is taxable under section 56(2)(x), since it exceeds ` 50,000 75,000
(2) Since bullion is included in the definition of property, therefore, when bullion 60,000
is received without consideration, the same is taxable, since the aggregate
fair market value exceeds ` 50,000
(3) Stamp value of plot of land at Faridabad, received without consideration, is 5,00,000
taxable under section 56(2)(x)
(4) Difference of ` 2 lakh in the value of shares of X Ltd. purchased from Mr. C, -
a dealer in shares, is not taxable as it represents the stock-in-trade of Mr. A.
Since Mr. A is a dealer in shares and it has been mentioned that the shares
were subsequently sold in the course of his business, such shares represent
the stock-in-trade of Mr. A.

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 INCOME FROM OTHER SOURCES 5.21

(5) Difference between the stamp duty value of ` 23 lakh on the date of booking
and the actual consideration of ` 20 lakh paid is taxable under section 3,00,000
56(2)(x) since the difference exceeds ` 2 lakh being, the higher of ` 50,000
and 10% of consideration.
Income from Other Sources 9,35,000
Computation of “Capital Gains” of Mr. A for the A.Y.2025-26
Particulars `
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to tax under
section 56(2)(x) as per section 49(4)] 5,00,000
Short-term capital gains 2,00,000

Note – The resultant capital gains will be short-term capital gains since for calculating the period
of holding, the period of holding of previous owner is not to be considered.
ILLUSTRATION 4
Discuss the taxability or otherwise of the following in the hands of the recipient under section
56(2)(x) of the Income-tax Act, 1961 -
(i) Akhil HUF received ` 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister).
Akhil is the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is ` 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25 th
marriage anniversary. The fair market value on that date was ` 100 per share. He also
received jewellery worth ` 45,000 (FMV) from his nephew on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board examination.
The fair market value of the car is ` 5,25,000.
SOLUTION
Taxable/ Amount Reason
Non-taxable liable to
tax (`)
(i) Taxable 75,000 Sum of money exceeding ` 50,000 received without
consideration from a non-relative is taxable under section
56(2)(x). Daughter of Mr. Akhil’s sister is not a relative of
Akhil HUF, since she is not a member of Akhil HUF.

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 5.22 DIRECT TAX LAWS

(ii) Non-taxable Nil Immovable property received without consideration by a HUF

from its relative is not taxable under section 56(2)(x). Since
Nitisha is a member of the HUF, she is a relative of the HUF.
However, income from such asset would be included in the
hands of Nitisha under 64(2).
(iii) Taxable 55,000 As per provisions of section 56(2)(x), in case the aggregate
fair market value of property, other than immovable property,
received without consideration exceeds ` 50,000, the whole
of the aggregate value shall be taxable. In this case, the
aggregate fair market value of shares (` 10,000) and
jewellery (` 45,000) exceeds ` 50,000. Hence, the entire
amount of ` 55,000 shall be taxable.
(iv) Non-taxable Nil Car is not included in the definition of property for the
purpose of section 56(2)(x), therefore, the same shall not be
taxable.

ILLUSTRATION 5
Mr. Hari, a property dealer, sold a building in the course of his business to his friend Mr. Rajesh, who
is a dealer in automobile spare parts, for ` 90 lakh on 1.1.2025, when the stamp duty value was
` 150 lakh. The agreement was, however, entered into on 1.9.2024 when the stamp duty value was
` 140 lakh. Mr. Hari had received a down payment of ` 15 lakh by a crossed cheque from
Mr. Rajesh on the date of agreement. Discuss the tax implications in the hands of Mr. Hari and
Mr. Rajesh, assuming that Mr. Hari has purchased the building for ` 75 lakh on 12th July, 2023.
Would your answer be different if Hari was a share broker instead of a property dealer?
SOLUTION
Case 1: Tax implications if Mr. Hari is a property dealer

In the hands of Mr. Hari In the hands of Mr. Rajesh

In the hands of Hari, the provisions of section Since Mr. Rajesh is a dealer in automobile
43CA would be attracted, since the building spare parts, the building purchased would
represents his stock-in-trade and he has be a capital asset in his hands. The
transferred the same for a consideration less than provisions of section 56(2)(x) would be
the stamp duty value; and the stamp duty value attracted in the hands of Mr. Rajesh who
exceeds 110% of consideration. has received immovable property, being a
Under section 43CA, the option to adopt the capital asset, for inadequate consideration
stamp duty value on the date of agreement can be and the difference between the
exercised only if whole or part of the consideration consideration and stamp duty value
has been received on or before the date of exceeds ` 9,00,000, being the higher of
agreement by way of account payee cheque or ` 50,000 and 10% of consideration.
draft or by use of ECS through a bank account or

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 INCOME FROM OTHER SOURCES 5.23

through credit card, debit card, net banking, IMPS Therefore, ` 60 lakh, being the difference
(Immediate payment Service), UPI (Unified between the stamp duty value of the
Payment Interface), RTGS (Real Time Gross property on the date of registration (i.e.,
Settlement), NEFT (National Electronic Funds ` 150 lakh) and the actual consideration
Transfer), and BHIM (Bharat Interface for Money) (i.e., ` 90 lakh) would be taxable under
Aadhar Pay on or before the date of agreement. In section 56(2)(x) in the hands of Mr.
this case, since the down payment of ` 15 lakh is Rajesh, since the payment on the date of
received on the date of agreement by crossed agreement is made by crossed cheque
cheque and not account payee cheque, the option and not account payee cheque/draft or
cannot be exercised. ECS or through credit card, debit card, net
Therefore, ` 75 lakh, being the difference banking, IMPS (Immediate payment
between the stamp duty value on the date of Service), UPI (Unified Payment Interface),
transfer i.e., ` 150 lakh, and the purchase price RTGS (Real Time Gross Settlement),
i.e., ` 75 lakh, would be chargeable as business NEFT (National Electronic Funds
income in the hands of Mr. Hari, since stamp duty Transfer), and BHIM (Bharat Interface for
value exceeds 110% of the consideration. Money) Aadhar Pay.

Case 2: Tax implications if Mr. Hari is a share broker

In the hands of Mr. Hari In the hands of Mr. Rajesh
In case Mr. Hari is a share broker and not a There would be no difference in the taxability
property dealer, the building would represent in the hands of Mr. Rajesh, whether Mr. Hari
his capital asset and not stock-in-trade. In is a property dealer or a stock broker, (except
such a case, the provisions of section 50C where the property transferred in a residential
would be attracted in the hands of Mr. Hari, unit fulfilling the stipulated conditions, which is
since building is transferred for a not so in this case).
consideration less than the stamp duty value; Therefore, the provisions of section 56(2)(x)
and the stamp duty value exceeds 110% of would be attracted in the hands of Mr. Rajesh
consideration. who has received immovable property, being
Thus, ` 75 lakh, being the difference a capital asset, for inadequate consideration
between the stamp duty value on the date and the difference between the consideration
of registration (i.e., ` 150 lakh) and the and stamp duty value exceeds ` 9,00,000,
purchase price (i.e., ` 75 lakh) would be being the higher of ` 50,000 and 10% of
chargeable as short-term capital gains. consideration.
It may be noted that under section 50C, the Therefore, ` 60 lakh, being the difference
option to adopt the stamp duty value on the between the stamp duty value of the property
date of agreement can be exercised only if on the date of registration (i.e., ` 150 lakh)
whole or part of the consideration has been and the actual consideration (i.e., ` 90 lakh)
received on or before the date of agreement would be taxable under section 56(2)(x) in the
by way of account payee cheque or draft or by hands of Mr. Rajesh, since the payment on
use of ECS through a bank account or through the date of agreement is made by crossed
credit card, debit card, net banking, IMPS cheque and not account payee cheque/draft
(Immediate payment Service), UPI (Unified or ECS or through credit card, debit card, net
Payment Interface), RTGS (Real Time Gross banking, IMPS (Immediate payment Service),

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Settlement), NEFT (National Electronic Funds UPI (Unified Payment Interface), RTGS (Real
Transfer), and BHIM (Bharat Interface for Time Gross Settlement), NEFT (National
Money) Aadhar Pay on or before the date of Electronic Funds Transfer), and BHIM (Bharat
agreement. In this case, since the down Interface for Money) Aadhar Pay.
payment of ` 15 lakhs has been received on
the date of agreement by crossed cheque and
not account payee cheque, the option cannot
be exercised.

(vi) Compensation or any other payment received in connection with termination of his
employment [Section 56(2)(xi)]
Any compensation or any other payment, due to or received by any person, by whatever name
called, in connection with the termination of his employment or the modification of the terms and
conditions relating thereto shall be chargeable to tax under this head. However, if it is received
from employer, then it is taxable u/s 17(3)(i) under the head “Income from Salaries”.

(vii) Any specified sum received by a unit holder from a business trust during the
previous year [Section 56(2)(xii)]
Section 56(2)(xii) provides that any specified sum received by a unit holder from a business trust
during the previous year with respect to unit held by him at any time during the previous year
would be chargeable to tax in the hands of unit holder under the head “Income from other
sources”.
Specified sum is to be computed in the following manner:

Specified sum = A (-) B (-) C (which shall be zero if sum of B and C is greater than A)

A Aggregate of sum distributed by the business trust with respect to such unit, during the previous
year or during any earlier previous year or years, to such unit holder, who holds such unit on
the date of distribution of sum or to any other unit holder who held such unit at any time prior to
the date of such distribution, which is –
(a) not in the nature of interest and dividend referred to in section 10(23FC) or rental income
referred to in section 10(23FCA); and
(b) not chargeable to tax in the hands of the business trust under section 115UA(2)

B Amount at which such unit was issued by the business trust; and

C Amount charged to tax under this clause in any earlier previous year;

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 INCOME FROM OTHER SOURCES 5.25

(viii) Sum received, including the amount allocated by way of bonus, under a LIP other
than under a ULIP and keyman insurance policy, which is not exempt u/s 10(10D)
[Section 56(2)(xiii)]
Any sum received under a life insurance policy, including the sum allocated by way of bonus on
such policy would not be included in the total income of a person [Section 10(10D)].

The following table summarizes the exemption available under section 10(10D) vis-a-vis the date
of issue of such policies and the corresponding condition to be satisfied for exemption -
Exemption u/s 10(10D)
In respect of policies Any sum received under a LIP including the sum allocated by way
issued before 1.4.2003 of bonus is exempt.
In respect of policies Any sum received under a LIP including the sum allocated by way of
issued between 1.4.2003 bonus is exempt.
and 31.3.2012 However, exemption would not be available if the premium payable
for any of the years during the term of the policy exceeds 20% of
“actual capital sum assured”.
In respect of policies Any sum received under a LIP including the sum allocated by way
issued on or after of bonus is exempt.
1.4.2012 but before However, exemption would not be available if the premium payable
1.4.2013 for any of the years during the term of the policy exceeds 10% of
actual capital sum assured.
In respect of policies (a) Where the insurance is on the life of a person with
issued on or after disability or severe disability as referred to in section 80U
1.4.2013 or a person suffering from disease or ailment as specified
under section 80DDB.
Any sum received under a LIP including the sum allocated
by way of bonus is exempt. However, exemption would not
be available if the premium payable for any of the years
during the term of the policy exceeds 15% of “actual capital
sum assured”
(b) Where the insurance is on the life of any person, other
than mentioned in (a) above
Any sum received under a LIP including the sum allocated by
way of bonus is exempt. However, exemption would not be
available if the premium payable for any of the years during
the term of the policy exceeds 10% of “actual capital sum
assured”.
In respect of ULIP issued Any sum received under a ULIP including the sum allocated by
on or after 1.2.2021 way of bonus is exempt.

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However, exemption would not be available if the premium payable

for any of the years during the term of the policy exceeds 10% or
15%, as the case may be, of “actual capital sum assured.
Further, exemption would also not be available with respect to ULIP
issued on or after 1.2.2021, if the amount of premium payable
exceeds ` 2,50,000 for any of the previous years during the term of
such ULIP. Such ULIP would be specified ULIP, which is a capital
asset.
In a case where premium is payable by a person for more than
one ULIP issued on or after 1.2.2021 and the aggregate of
premium payable on such ULIPs exceed ` 2,50,000 for any of the
previous years during the term of any such ULIPs, exemption
would be available in respect of any of those ULIPs, at the option
of the assessee, whose aggregate premium payable does not
exceed ` 2,50,000 for any of the previous years during their term.
All other ULIPs would be specified ULIPs, which are capital
assets.
Meaning of ULIP - ULIP means a life insurance policy which has
components of both investment and insurance and is linked to a
unit defined under IRDA (ULIP) Regulations, 2019 issued by IRDA
under the Insurance Act, 1938 and the IRDA Act, 1999.
In respect of life Any sum received under a LIP including the sum allocated by way
insurance policies of bonus is exempt.
issued on or after However, exemption would not be available if the premium payable
1.4.2023 for any of the years during the term of the policy exceeds 10% or
15%, as the case may be, of “actual capital sum assured.
Further, exemption would also not be available if the amount of
premium payable exceeds ` 5,00,000 for any of the previous years
during the term of such policy.
In a case where premium is payable by a person for more than
one LIP (other than ULIP) issued on or after 1.4.2023 and the
aggregate of premium payable on such policies exceed
` 5,00,000 for any of the previous years during the term of any
such policy(ies), exemption would be available in respect of any of
those LIPs (other than ULIP), at the option of the assessee,
whose aggregate premium payable does not exceed ` 5,00,000
for any of the previous years during their term.
Any sum is received on the death of a person is exempt irrespective of the annual premium
payable on the ULIP/LIP. The condition of payment of premium of 10% or 15% or 20% or
` 5,00,000 would not be applicable.

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 INCOME FROM OTHER SOURCES 5.27

Exemption is not available in respect of amount received from an insurance policy taken for
disabled person under section 80DD: Any sum received under section 80DD(3) shall not be
exempt under section 10(10D). Accordingly, if the dependent disabled, in respect of whom an
individual or the member of the HUF has paid or deposited any amount in any scheme of LIC or
any other insurer, predeceases the individual or the member of the HUF, the amount so paid or
deposited shall be deemed to be the income of the assessee of the previous year in which such
amount is received. Such amount would not be exempt u/s 10(10D).
Exemption is not available in respect of the sum received under a Keyman insurance policy:
Any sum received under a Keyman insurance policy shall also not be exempt.
Explanation 1 to section 10(10D) defines “Keyman insurance policy” as a life insurance policy
taken by one person on the life of another person who is or was the employee of the first-
mentioned person or is or was connected in any manner whatsoever with the business of the first-
mentioned person. The term includes within its scope a keyman insurance policy which has been
assigned to any person during its term, with or without consideration. Therefore, such policies shall
continue to be treated as a keyman insurance policy even after the same is assigned to the
keyman. Consequently, the sum received by the keyman on such policies, being “keyman
insurance policies”, would not be exempt u/s 10(10D).
Unit Linked Insurance Policies
In order to deter the practice of high net worth individuals from claiming exemption u/s 10(10D) by
investing in ULIPs with huge premium, additional condition has been stipulated u/s 10(10D) in
respect of ULIPs issued on or after 1.2.2021.
In case where an assessee has a Single ULIP issued on or after 1.2.2021 - Exemption u/s
10(10D) would not be available with respect to any ULIP issued on or after 1.2.2021, if the amount
of premium payable exceeds ` 2,50,000 for any of the previous years during the term of such
ULIP. Such ULIP would be a specified ULIP, which is a capital asset.
In case where an assessee has multiple ULIPs issued on or after 1.2.2021 - In a case where
premium is payable by a person for more than one ULIP issued on or after 1.2.2021 and the
aggregate of premium payable on such ULIPs exceed ` 2,50,000 for any of the previous years
during the term of any such ULIP(s), exemption u/s 10(10D) would be available in respect of any of
those ULIPs, at the option of the assessee, whose aggregate premium payable does not exceed
` 2,50,000 for any of the previous years during their term. All other ULIPs would be specified
ULIPs, which are capital assets under section 2(14)(c). However, to get exemption u/s 10(10D),
the condition of annual premium not exceeding 10% of the actual capital sum assured also needs
to be satisfied.

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Exemption in case of death of a person - In case any sum is received on the death of a person,
exemption u/s 10(10D) would be available irrespective of the annual premium payable of the ULIP.

Guidelines by CBDT: In case any difficulty arises in giving effect to the provisions of this clause,
the CBDT may issue guidelines for the purpose of removing the difficulty with the previous
approval of the Central Government.

Accordingly, the CBDT has, with the approval of the Central Government, vide Circular No.
2/2022, dated 19.01.2022, issued the following guidelines in respect of ULIPs –
Situation 1: No sum including any sum allocated by way of bonus (such sum hereinafter referred
as “consideration”) is received by the assessee on any ULIPs which are issued on or after
1.2.2021 (such ULIPs hereinafter referred as “eligible ULIPs”) during any previous year preceding
the current previous year or consideration has been received on such eligible ULIPs in an earlier
previous year but has not been claimed exempt. In such a situation, the exemption u/s 10(10D)
would be determined as under:
I. Where the assessee has received consideration, during the current P.Y., under one
eligible ULIP only
Circumstance Eligibility for exemption u/s 10(10D)
If the amount of premium payable on such Such consideration would be eligible for
eligible ULIP does not exceed ` 2,50,000 exemption u/s 10(10D).
for any of the PYs during the term of such [Refer Example 1 given below]
eligible ULIP and annual premium does not
exceed 10% of actual capital sum assured
If the amount of premium payable on such Such consideration would not be eligible
eligible ULIP > ` 2,50,000 for any of the for exemption u/s 10(10D).
PYs during the term of such eligible ULIP [Refer Example 2 given below]

Example 1:
ULIP A
Date of issue 1.4.2021
Annual premium 2,50,000
Sum assured 25,00,000
Consideration received as on 01.11.2031 on maturity 32,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

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Eligibility for exemption u/s 10(10D) - The consideration received would be exempt u/s
10(10D) in A.Y. 2032-33, since the annual premium payable on the policy does not exceed
` 2,50,000 and also does not exceed 10% of actual capital sum assured.
Example 2:
ULIP A
Date of issue 1.4.2021
Annual premium 5,00,000
Sum assured 50,00,000
Consideration received as on 01.11.2031 on maturity 60,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) - The consideration received would not be exempt
u/s 10(10D) in A.Y. 2032-33 since the annual premium payable on the eligible ULIP
exceeds ` 2,50,000.
II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible ULIP
Circumstance Eligibility for exemption u/s 10(10D)
If the aggregate of the amount of Such consideration would be eligible for
premium payable on such eligible ULIPs exemption under u/s 10(10D).
does not exceed ` 2,50,000 for any of [Refer Example 3 given below]
the PYs during the term of such eligible
ULIPs and the annual premium ≤ 10% of
actual capital sum assured
If the aggregate of the amount of Consideration in respect of any of those
premium payable on such eligible ULIPs eligible ULIPs whose aggregate amount of
> ` 2,50,000 for any of the PYs during premium payable does not exceed
the term of such eligible ULIP ` 2,50,000 for any of the PYs during their
term would be eligible for exemption u/s
10(10D), provided their annual premium ≤
10% of actual capital sum assured.
[Refer Examples 4 and 5 given below]

Example 3:
ULIP A B
Date of issue 1.4.2021 1.4.2021
Annual premium 1,00,000 1,50,000

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 5.30 DIRECT TAX LAWS

Sum assured 10,00,000 15,00,000

Consideration received as on 01.11.2031 on maturity 12,00,000 18,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for ULIP “A” and ULIP “B” does not exceed ` 2,50,000 during the term of these policies.
Further, annual premium payable in respect of ULIP “A” and ULIP “B” does not exceed 10%
of actual capital sum assured. Therefore, the consideration received under ULIP “A” and “B”
would be exempt u/s 10(10D) in A.Y. 2032-33
Example 4:
ULIP A B C
Date of issue 1.4.2021 1.4.2021 1.4.2021
Annual premium 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 15,00,000 30,00,000
Consideration received as on 01.11.2031 on 12,00,000 18,00,000 34,00,000
maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for ULIP “A”, ULIP “B” and ULIP “C” exceeds ` 2,50,000 during the term of these policies.
However, the consideration received under ULIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2032-33, since aggregate of annual premium payable for these two policies does not
exceed ` 2,50,000 for any previous year during the term of these two policies and also
does not exceed 10% of actual capital sum assured.
Consequently, the consideration received under ULIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2032-33.

Example 5:
ULIP X A B C
Date of issue 1.4.2020 1.4.2021 1.4.2021 1.4.2021
Annual premium 2,50,000 1,00,000 1,50,000 3,00,000
Sum assured 25,00,000 10,00,000 15,00,000 30,00,000
Consideration received as on 30,00,000
01.11.2030 on maturity

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 INCOME FROM OTHER SOURCES 5.31

Consideration received as on 12,00,000 18,00,000 34,00,000

01.11.2031 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2031-32.

Eligibility for exemption u/s 10(10D) - The consideration received under ULIP “X” would
be exempt u/s 10(10D) in A.Y. 2031-32 since annual premium does not exceed 10% of the
actual capital sum assured. Moreover, as the policy has been issued before 1.2.2021, limit
of ` 2,50,000 of amount of premium payable is not applicable.
The aggregate of annual premium payable for ULIP “A”, ULIP “B” and ULIP “C” (being
ULIPs issued on or after 1.2.2021) exceeds ` 2,50,000 during the term of these policies.
However, the consideration received under ULIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2032-33, since aggregate of annual premium payable for these two policies does not
exceed ` 2,50,000 for any previous year during the term of these two policies and annual
premium payable in respect of these policies does not exceed 10% of actual capital sum
assured.
Consequently, the consideration received under ULIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2032-33.
Situation 2: Consideration has been received by the assessee under any one or more eligible
ULIPs during any P.Y. preceding the current P.Y. and it has been claimed to be exempt u/s
10(10D). Such eligible ULIPs are referred as “Earlier Exempt Eligible ULIPs (EEE ULIPs)” in this
paragraph and corresponding examples and reference to eligible ULIPs shall not include EEE
ULIPs. The exemption u/s 10(10D) would be determined as under:

I. Where the assessee has received consideration, during the current P.Y., under one
eligible ULIP only
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate amount of premium payable on Consideration under such eligible ULIP
such eligible ULIP and EEE ULIPs does not would be eligible for exemption u/s
exceed ` 2,50,000 for any of the PYs during 10(10D).
the term of such eligible ULIP and annual [Refer Example 6]
premium in respect of eligible ULIP does not
exceed 10% of actual capital sum assured.
If aggregate amount of premium payable on Consideration under such eligible ULIP
such eligible ULIP and EEE ULIPs > would not be eligible for exemption u/s
` 2,50,000 for any of the PYs during the term 10(10D).
of such eligible ULIP [Refer Example 7]

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 5.32 DIRECT TAX LAWS

Example 6:
ULIP X A
Date of issue 1.4.2021 1.4.2022
Annual premium 2,00,000 50,000
Sum assured 20,00,000 5,00,000
Consideration received as on 01.11.2031 on maturity 25,00,000
Consideration received as on 01.11.2032 on maturity 6,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

Eligibility for exemption u/s 10(10D) – The consideration under ULIP “X” would be
exempt u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000
and also does not exceed 10% of actual capital sum assured.
The consideration received under ULIP “A” will also be exempt u/s 10(10D) in A.Y. 2033-34
since aggregate of the annual premium payable for ULIP “A” and ULIP “X” does not exceed
` 2,50,000 for the [Link]. 2022-23 to 2031-32 and the annual premium of ULIP “A” does not
exceed 10% of actual capital sum assured.

Example 7:
ULIP X A
Date of issue 1.4.2021 1.4.2022
Annual premium 2,00,000 1,00,000
Sum assured 20,00,000 10,00,000
Consideration received as on 01.11.2031 on maturity 25,00,000
Consideration received as on 01.11.2032 on maturity 12,00,000
Note – The assessee did not receive any consideration under any other eligible ULIPs
in earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

Eligibility for exemption u/s 10(10D) – The consideration under ULIP “X” would be
exempt u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000
and also does not exceed 10% of actual capital sum assured.
The consideration received under ULIP “A” will not be exempt u/s 10(10D) in A.Y. 2033-34
since aggregate of the annual premium payable for ULIP “A” and ULIP “X” (both ULIPs
issued on or after 1.2.2021) exceeds ` 2,50,000.

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 INCOME FROM OTHER SOURCES 5.33

II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible ULIP
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate of the amount of premium Consideration received would be eligible
payable on such eligible ULIPs and EEE for exemption under u/s 10(10D).
ULIPs does not exceed ` 2,50,000 for any
of the PYs during the term of such eligible
ULIPs and annual premium in respect of
eligible ULIPs also does not exceed 10% of
actual capital sum assured.
If aggregate of the amount of premium Consideration in respect of any of those
payable on such eligible ULIPs and EEE eligible ULIPs (whose aggregate amount
ULIPs > ` 2,50,000 for any of the PYs of premium along with the aggregate
during the term of such eligible ULIPs amount of premium of EEE ULIPs does
not exceed ` 2,50,000 for any of the PYs
during their term) would be eligible for
exemption u/s 10(10D).
[Refer Examples 8, 9 and 10 given
below]

Example 8:
ULIP X A B C
Date of issue 1.4.2021 1.4.2022 1.4.2022 1.4.2022
Annual premium 2,00,000 1,00,000 1,50,000 3,00,000
Sum assured 20,00,000 10,00,000 15,00,000 30,00,000
Consideration received as on 25,00,000
01.11.2031 on maturity
Consideration received as on 12,00,000 18,00,000 34,00,000
01.11.2032 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
In this case, the aggregate of the annual premium payable for ULIP “A”, ULIP “B” and ULIP
“C” along with the premium for ULIP “X” exceeds ` 2,50,000 during the term of these

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 5.34 DIRECT TAX LAWS

policies. Hence, the consideration received under ULIPs “A”, “B” and “C” will not be exempt
u/s 10(10D) in A.Y. 2033-34.

Alternative treatment: If the consideration under ULIP “X” was not claimed to be exempt
u/s 10(10D) in A.Y. 2032-33 by the assessee, then, the consideration received under ULIP
“A” and ULIP “B” would be exempt u/s 10(10D) in A.Y.2033-34 since the aggregate of the
annual premium payable for the ULIPs “A” and “B” together did not exceed ` 2,50,000 for
any of the previous years during the term of these two policies.
Example 9:
ULIP X A B C
Date of issue 1.4.2021 1.4.2022 1.4.2022 1.4.2022
Annual premium 1,00,000 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 10,00,000 15,00,000 30,00,000
Consideration received as on 12,00,000
01.11.2031 on maturity
Consideration received as on 12,00,000 18,00,000 34,00,000
01.11.2032 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2032-33, except ULIP X in P.Y. 2031-32.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y. 2032-33, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
In this case, the aggregate of the annual premium payable for ULIP “A”, ULIP “B” and ULIP
“C” along with the premium for ULIP “X” exceeds ` 2,50,000 during the term of these
policies.
However, the consideration received under ULIPs “A” or “B” (any one) can be claimed as
exempt u/s 10(10D) in A.Y. 2033-34.
If the consideration received under ULIP “A” claimed to be exempt as aggregate of the
annual premium payable for ULIP “X” and “A” did not exceed ` 2,50,000 for any of the PYs.,
the consideration received under ULIP “B” would not be exempt.
If the consideration received under ULIP “B” claimed to be exempt as aggregate of the
annual premium payable for ULIP “X” and “B” did not exceed ` 2,50,000 for any of the PYs.,
the consideration received under ULIP “A” would not be exempt. Exemption for
consideration received under ULIP “B” is preferred as it is more beneficial to the assessee.

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 INCOME FROM OTHER SOURCES 5.35

Alternative treatment: If the consideration under ULIP “X” was not claimed to be exempt
u/s 10(10D) in A.Y. 2032-33 by the assessee, then the consideration received under ULIP
“A” and ULIP “B” would be exempt u/s 10(10D) in A.Y. 2033-34 since the aggregate of the
annual premium payable for the ULIPs “A” and “B” together did not exceed ` 2,50,000 for
any of the previous years during the term of these two policies.
It may be noted that in every case, the consideration received for ULIP “C” would not be
exempt u/s 10(10D).
Example 10:
ULIP X Y A B C
Date of issue 1.4.2021 1.4.2021 1.4.2022 1.4.2022 1.4.2022
Annual premium 1,00,000 1,00,000 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 10,00,000 10,00,000 15,00,000 30,00,000
Consideration received on 6,00,000
surrender as on 1.7.2025
Consideration received as 12,00,000
on 01.11.2031 on maturity
Consideration received as 12,00,000 18,00,000 34,00,000
on 01.11.2032 on maturity
Note – The assessee did not receive any consideration under any other eligible ULIPs in
earlier P.Y. preceding the P.Y.2032-33, except ULIP “X” and “Y”.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y.2026-27, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
The consideration received under ULIP “Y” would be exempt u/s 10(10D) in A.Y. 2032-33,
since the aggregate of annual premium payable for ULIP “X” and “Y” does not exceed
` 2,50,000 and annual premium payable for ULIP “Y” does not exceed 10% of actual capital
sum assured.
The consideration received under ULIPs “A”, ULIP “B” and ULIP “C” would not be exempt
u/s 10(10D) in A.Y. 2033-34, since aggregate of annual premium payable for these three
policies and ULIP “X” and “Y” exceeds ` 2,50,000.
Alternative treatment: If the consideration on surrender under ULIP “X” was not claimed to
be exempt u/s 10(10D) in A.Y. 2026-27 by the assessee, then the consideration received
under ULIP “Y” would be exempt and the consideration received under ULIP “A” or ULIP “B”

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 5.36 DIRECT TAX LAWS

(any one) can be exempt u/s 10(10D) in A.Y. 2033-34. If the consideration received under
ULIP “A” claimed to be exempt, as aggregate of the annual premium payable for ULIP “Y”
and “A” did not exceed ` 2,50,000 for any of the PYs., the consideration received under
ULIP “B” would not be exempt.
If the consideration received under ULIP “B” is claimed to be exempt as aggregate of the
annual premium payable for ULIP “Y” and “B” did not exceed ` 2,50,000 for any of the PYs.,
the consideration received under ULIP “A” would not be exempt. Exemption for
consideration received under ULIP “B” is preferred as it is more beneficial to the assessee.

If the consideration on surrender of ULIP “X” and on maturity of ULIP “Y” were not claimed
to be exempt under section 10(10D) in A.Y.2026-27 and A.Y.2032-33, respectively, then
consideration received under both ULIP “A” and ULIP “B” would be exempt in A.Y.2033-34
(being ULIPs issued on or after 1.2.2021, whose aggregate consideration does not exceed
` 2,50,000).
It may be noted that, in every case, consideration received under ULIP “C” would not be
exempt under section 10(10D).
Life Insurance Policies (Other than Unit Linked Insurance Policies)
In case where an assessee has a single life insurance policy (other than ULIP) issued on or
after 1.4.2023 - Exemption u/s 10(10D) would not be available with respect to any life insurance
policy (other than ULIP) issued on or after 1.4.2023, if the amount of premium payable exceeds
` 5,00,000 for any of the previous years during the term of such life insurance policy.
In case where an assessee has multiple life insurance policies (other than ULIPs) issued on
or after 1.4.2023 - In a case where premium is payable by a person for more than one life
insurance policies (other than ULIPs) issued on or after 1.4.2023 and the aggregate of premium
payable on such life insurance policies exceed ` 5,00,000 for any of the previous years during the
term of any such LIP(s), exemption u/s 10(10D) would be available in respect of any of those LIPs,
at the option of the assessee, whose aggregate premium payable does not exceed ` 5,00,000 for
any of the previous years during their term. However, to get exemption u/s 10(10D), the condition
of annual premium not exceeding 10% of the actual capital sum assured also needs to be
satisfied.

Exemption in case of death of a person - In case any sum is received on the death of a person,
exemption u/s 10(10D) would be available irrespective of the annual premium payable of the LIP.

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 INCOME FROM OTHER SOURCES 5.37

Guidelines by CBDT: In case any difficulty arises in giving effect to the provisions of this clause,
the CBDT may issue guidelines for the purpose of removing the difficulty with the previous
approval of the Central Government.
Accordingly, the CBDT has, with the approval of the Central Government, vide Circular No.
15/2023, dated 16.08.2023, issued the following guidelines in respect of LIPs (other than ULIPs)–

Situation 1: No sum of any nature including bonus (such sum hereinafter referred as
“consideration”) is received by the assessee on any LIPs which are issued on or after 1.4.2023
(such LIPs hereinafter referred as “eligible LIPs”) during any previous year preceding the current
previous year or consideration has been received on such eligible LIPs in an earlier previous year
but has not been claimed exempt. In such a situation, the exemption u/s 10(10D) would be
determined as under:
I. Where the assessee has received consideration, during the current P.Y., under one
eligible LIP only
Circumstance Eligibility for exemption u/s 10(10D)
If the amount of premium payable on such eligible Such consideration would be eligible for
LIP does not exceed ` 5,00,000 for any of the PYs exemption u/s 10(10D).
during the term of such eligible LIP and annual [Refer Example 11 and 12 given
premium does not exceed 10% of actual capital below]
sum assured
If the amount of premium payable on such eligible Such consideration would not be eligible
LIP > ` 5,00,000 for any of the PYs during the term for exemption u/s 10(10D).
of such eligible LIP [Refer Example 13 given below]

Example 11:
LIP A
Date of issue 1.4.2013
Annual premium 6,00,000
Sum assured 60,00,000
Consideration received as on 01.11.2023 on maturity 70,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2023-24.

Eligibility for exemption u/s 10(10D) - The consideration received under LIP “A” would be
exempt u/s 10(10D) in A.Y. 2024-25 since annual premium does not exceed 10% of the
actual capital sum assured. Moreover, as the policy has been issued before 1.4.2023, limit
of ` 5,00,000 of amount of premium payable is not applicable, since it is not an eligible
ULIP.

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 5.38 DIRECT TAX LAWS

Example 12:
LIP A
Date of issue 1.4.2023
Annual premium 5,00,000
Sum assured 50,00,000
Consideration received as on 01.11.2033 on maturity 52,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) - The consideration received would be exempt u/s
10(10D) in A.Y. 2034-35, since the annual premium payable on the policy does not exceed
` 5,00,000 and also does not exceed 10% of actual capital sum assured.
Example 13:
LIP A
Date of issue 1.4.2023
Annual premium 6,00,000
Sum assured 60,00,000
Consideration received as on 01.11.2033 on maturity 70,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) - The consideration received would not be exempt
u/s 10(10D) in A.Y. 2034-35 since the annual premium payable on the eligible LIP exceeds
` 5,00,000.
II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible LIP
Circumstance Eligibility for exemption u/s 10(10D)
If the aggregate of the amount of premium Such consideration would be eligible for
payable on such eligible LIPs does not exemption under u/s 10(10D).
exceed ` 5,00,000 for any of the PYs [Refer Example 14 given below]
during the term of such eligible LIPs and
the annual premium ≤ 10% of actual
capital sum assured
If the aggregate of the amount of premium Consideration in respect of any of those eligible
payable on such eligible LIPs > ` 5,00,000 LIPs whose aggregate amount of premium
for any of the PYs during the term of such payable does not exceed
eligible LIP ` 5,00,000 for any of the PYs during their term
would be eligible for exemption u/s 10(10D),

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 INCOME FROM OTHER SOURCES 5.39

provided their annual premium ≤ 10% of actual

capital sum assured.
[Refer Examples 15, 16 and 17 given below]

Example 14:
LIP A B
Date of issue 1.4.2023 1.4.2023
Annual premium 3,00,000 2,00,000
Sum assured 30,00,000 20,00,000
Consideration received as on 01.11.2033 on maturity 32,00,000 21,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for LIP “A” and LIP “B” does not exceed ` 5,00,000 during the term of these
policies.
Further, annual premium payable in respect of LIP “A” and LIP “B” does not exceed 10% of
actual capital sum assured. Therefore, the consideration received under LIP “A” and “B”
would be exempt u/s 10(10D) in A.Y. 2034-35
Example 15:
LIP A B
Date of issue 1.4.2023 1.4.2023
Annual premium 4,50,000 5,50,000
Sum assured 45,00,000 55,00,000
Consideration received as on 01.11.2033 on maturity 52,00,000 60,00,000
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) – In this case, the aggregate of the annual premium
payable for LIP “A” and LIP “B” exceeds ` 5,00,000 during the term of these policies.

However, the consideration received under LIP “A” would be exempt u/s 10(10D) in A.Y.
2034-35, since its annual premium payable does not exceed ` 5,00,000 for any previous
year during the term of the policy and also does not exceed 10% of actual capital sum
assured.
Consequently, the consideration received under LIP “B” alone would not be exempt u/s
10(10D) in A.Y. 2034-35.

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 5.40 DIRECT TAX LAWS

Example 16:
LIP A B C
Date of issue 1.4.2023 1.4.2023 1.4.2023
Annual premium 1,00,000 3,50,000 6,00,000
Sum assured 10,00,000 35,00,000 60,00,000
Consideration received as on 01.11.2033 on 12,00,000 40,00,000 70,00,000
maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2033-34.

Eligibility for exemption u/s 10(10D) - The aggregate of annual premium payable for LIP
“A”, LIP “B” and LIP “C” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIPs “A” and “B” would be exempt u/s 10(10D) in A.Y.
2034-35, since aggregate of annual premium payable for these two policies does not exceed
` 5,00,000 for any previous year during the term of these two policies and annual premium
payable in respect of these policies does not exceed 10% of actual capital sum assured.
Consequently, the consideration received under LIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2034-35.
Example 17:
LIP X A B C
Date of issue 1.4.2022 1.4.2023 1.4.2023 1.4.2023
Annual premium 5,50,000 1,00,000 3,50,000 6,00,000
Sum assured 55,00,000 10,00,000 35,00,000 60,00,000
Consideration received as on 01.11.2032 62,00,000
on maturity
Consideration received as on 01.11.2033 12,00,000 40,00,000 70,00,000
on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2033-34, except LIP X in P.Y. 2032-33.

Eligibility for exemption u/s 10(10D) - The consideration received under LIP “X” would be
exempt u/s 10(10D) in A.Y. 2032-33, since annual premium does not exceed 10% of the
actual capital sum assured. Moreover, as the policy has been issued before 1.4.2023, limit
of ` 5,00,000 on amount of premium payable is not applicable, since LIP “X” is not an
eligible LIP.

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 INCOME FROM OTHER SOURCES 5.41

The aggregate of annual premium payable for LIP “A”, LIP “B” and LIP “C” (being LIPs
issued on or after 1.4.2023) exceeds ` 5,00,000 during the term of these policies.

However, the consideration received under LIPs “A” and “B” would be exempt u/s 10(10D)
in A.Y. 2034-35, since aggregate of annual premium payable for these two policies does not
exceed ` 5,00,000 for any previous year during the term of these two policies and annual
premium payable in respect of these policies does not exceed 10% of actual capital sum
assured.
Consequently, the consideration received under LIP “C” alone would not be exempt u/s
10(10D) in A.Y. 2034-35.
Situation 2: Consideration has been received by the assessee under any one or more eligible
LIPs (i.e., issued on or after 1.4.2023) during any P.Y. preceding the current P.Y. and it has been
claimed to be exempt u/s 10(10D). Such eligible LIPs are referred as “Earlier Exempt Eligible LIPs
(EEE LIPs)” in this paragraph and corresponding examples and reference to eligible LIPs shall not
include EEE LIPs. The exemption u/s 10(10D) would be determined as under:
I. Where the assessee has received consideration, during the current P.Y., under one
eligible LIP only
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate amount of premium payable on Consideration under such eligible LIP would
such eligible LIP and EEE LIPs does not exceed be eligible for exemption u/s 10(10D).
` 5,00,000 for any of the PYs during the term of
such eligible LIP and annual premium in respect
of eligible LIP does not exceed 10% of actual
capital sum assured.
If aggregate amount of premium payable on Consideration under such eligible LIP would
such eligible LIP and EEE LIPs > ` 5,00,000 for not be eligible for exemption u/s 10(10D).
any of the PYs during the term of such eligible
LIP

II. Where the assessee has received consideration, during the current P.Y., under more
than one eligible LIP
Circumstance Eligibility for exemption u/s 10(10D)
If aggregate of the amount of premium Consideration received would be eligible for
payable on such eligible LIPs and EEE exemption under u/s 10(10D).
LIPs does not exceed ` 5,00,000 for
any of the PYs during the term of such
eligible LIPs and annual premium in
respect of eligible LIPs also does not
exceed 10% of actual capital sum

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 5.42 DIRECT TAX LAWS

assured.
If aggregate of the amount of premium Consideration in respect of any of those eligible LIPs
payable on such eligible LIPs and EEE (whose aggregate amount of premium along with the
LIPs > ` 5,00,000 for any of the PYs aggregate amount of premium of EEE LIPs does not
during the term of such eligible LIPs exceed ` 5,00,000 for any of the PYs during their
term) would be eligible for exemption u/s 10(10D).
[Refer Examples 18, 19 and 20 given below]

Example 18:
LIP X A B C
Date of issue 1.4.2023 1.4.2024 1.4.2024 1.4.2024
Annual premium 4,50,000 1,00,000 1,50,000 6,00,000
Sum assured 45,00,000 10,00,000 15,00,000 60,00,000
Consideration received as on 50,00,000
01.11.2033 on maturity
Consideration received as on 12,00,000 18,00,000 70,00,000
01.11.2034 on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2034-35, except LIP X in P.Y. 2033-34.

Eligibility for exemption u/s 10(10D) - The consideration under LIP “X” would be exempt
u/s 10(10D) in P.Y. 2033-34, since the annual premium does not exceed ` 5,00,000 and
also does not exceed 10% of actual capital sum assured.
In this case, the aggregate of the annual premium payable for LIP “A”, LIP “B” and LIP “C”
along with the premium for LIP “X” exceeds ` 5,00,000 during the term of these policies.
The aggregate of the annual premium payable for LIP “A” and the premium for LIP “X” also
exceeds ` 5,00,000 during the term of these policies.
Consequently, the consideration received under LIP “A”, LIP “B” and LIP “C” would not be
exempt u/s 10(10D) in A.Y. 2035-36.
Example 19:
LIP X A B C
Date of issue 1.4.2023 1.4.2024 1.4.2024 1.4.2024
Annual premium 2,50,000 2,00,000 2,50,000 6,00,000
Sum assured 25,00,000 20,00,000 25,00,000 60,00,000
Consideration received as on 30,00,000
01.11.2033 on maturity

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 INCOME FROM OTHER SOURCES 5.43

Consideration received as on 24,00,000 38,00,000 70,00,000

01.11.2034 on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2034-35, except LIP X in P.Y. 2033-34.

Eligibility for exemption u/s 10(10D) - The consideration under LIP “X” would be exempt
u/s 10(10D) in P.Y. 2033-34, since the annual premium does not exceed ` 5,00,000 and
also does not exceed 10% of actual capital sum assured.
In this case, the aggregate of the annual premium payable for LIP “A”, LIP “B” and LIP “C”
along with the premium for LIP “X” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIPs “A” or “B” (any one) can be claimed as
exempt u/s 10(10D) in A.Y. 2035-36.
If the consideration received under LIP “A” is claimed to be exempt as aggregate of the
annual premium payable for LIP “X” and “A” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “B” would not be exempt.
If the consideration received under LIP “B” is claimed to be exempt as aggregate of the
annual premium payable for LIP “X” and “B” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “A” would not be exempt. Exemption for consideration
received under LIP “B” is preferred as it is more beneficial to the assessee.

Alternative treatment: If the consideration under LIP “X” was not claimed to be exempt u/s
10(10D) in A.Y. 2034-35 by the assessee, then, the consideration received under LIP “A”
and LIP “B” would be exempt u/s 10(10D) in A.Y. 2035-36 since the aggregate of the annual
premium payable for the LIPs “A” and “B” together did not exceed ` 5,00,000 for any of the
previous years during the term of these two policies. However, the most beneficial
treatment is to claim LIP “X” and “B” as exempt.
It may be noted that in every case, the consideration received for LIP “C” would not be
exempt u/s 10(10D).
Example 20:
LIP X Y A B C
Date of issue 1.4.2023 1.4.2023 1.4.2024 1.4.2024 1.4.2024
Annual premium 2,00,000 2,00,000 2,00,000 3,00,000 6,00,000
Sum assured 20,00,000 20,00,000 20,00,000 30,00,000 60,00,000
Consideration received on 12,00,000
surrender as on 1.7.2033

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 5.44 DIRECT TAX LAWS

Consideration received as 24,00,000

on 01.11.2034 on maturity
Consideration received as 24,00,000 36,00,000 70,00,000
on 01.11.2035 on maturity
Note – The assessee did not receive any consideration under any other eligible LIPs in earlier
P.Y. preceding the P.Y.2035-36, except LIP “X” and “Y”.

Eligibility for exemption u/s 10(10D) - The consideration under LIP “X” would be exempt
u/s 10(10D) in A.Y.2034-35, since the annual premium does not exceed ` 5,00,000 and
also does not exceed 10% of actual capital sum assured.
The consideration received under LIP “Y” would be exempt u/s 10(10D) in A.Y. 2035-36,
since the aggregate of annual premium payable for LIP “X” and “Y” does not exceed
` 5,00,000 and annual premium payable for LIP “Y” does not exceed 10% of actual capital
sum assured.

The consideration received under LIPs “A”, ULIP “B” and ULIP “C” would not be exempt u/s
10(10D) in A.Y. 2036-37, since aggregate of annual premium payable for these three
policies and LIP “X” and “Y” exceeds ` 5,00,000.
Alternative treatment: If the consideration on surrender under LIP “X” was not claimed to
be exempt u/s 10(10D) in A.Y. 2034-35 by the assessee, then the consideration received
under LIP “Y” would be exempt and the consideration received under LIP “A” or LIP “B”
(any one) can be exempt u/s 10(10D) in A.Y. 2036-37. If the consideration received under
LIP “A” is claimed to be exempt, as aggregate of the annual premium payable for LIP “Y”
and “A” did not exceed ` 5,00,000 for any of the PYs., the consideration received under LIP
“B” would not be exempt.
If the consideration received under LIP “B” is claimed to be exempt as aggregate of the
annual premium payable for LIP “Y” and “B” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “A” would not be exempt. Exemption for consideration
received under LIP “B” is preferred as it is more beneficial to the assessee.
If the consideration on surrender of LIP “X” and on maturity of LIP “Y” were not claimed to
be exempt under section 10(10D) in A.Y.2034-35 and A.Y.2035-36, respectively, then
consideration received under both LIP “A” and LIP “B” would be exempt in A.Y.2036-37
(being LIPs issued on or after 1.4.2023, whose aggregate consideration does not exceed
` 5,00,000).

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 INCOME FROM OTHER SOURCES 5.45

It may be noted that, in every case, consideration received under LIP “C” would not be
exempt under section 10(10D).

Example 21:
LIP A B C
ULIP X Y
Date of issue 1.4.2021 1.4.2023 1.4.2023 1.4.2023 1.4.2023
Annual premium 1,00,000 1,00,000 1,00,000 1,50,000 3,00,000
Sum assured 10,00,000 10,00,000 10,00,000 15,00,000 30,00,000
Consideration received 6,00,000 6,00,000
on surrender as on
1.7.2033
Consideration received 12,00,000 18,00,000 34,00,000
as on 01.11.2034 on
maturity
Note – The assessee did not receive any consideration under any other eligible LIPs or ULIPs
in earlier P.Y. preceding the P.Y.2034-35, except ULIP “X” and LIP “A”.

Eligibility for exemption u/s 10(10D) - The consideration under ULIP “X” would be exempt
u/s 10(10D) in A.Y. 2034-35, since the annual premium does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
The consideration under ULIP “Y” would be exempt u/s 10(10D) in A.Y.2035-36, since the
aggregate of annual premium for UIP “X” and ULIP “Y” does not exceed ` 2,50,000 and
also does not exceed 10% of actual capital sum assured.
The consideration under LIP “A” would be exempt u/s 10(10D) in A.Y.2034-35, since the
annual premium does not exceed ` 5,00,000 and also does not exceed 10% of actual
capital sum assured.
In this case, the aggregate of the annual premium payable for LIP “B” and LIP “C” along
with the premium for LIP “A” exceeds ` 5,00,000 during the term of these policies.
However, the consideration received under LIPs “B” or “C” (any one) can be claimed as
exempt u/s 10(10D) in A.Y. 2035-36.

If the consideration received under LIP “B” is claimed to be exempt as aggregate of the
annual premium payable for LIP “A” and “B” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “C” would not be exempt.

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 5.46 DIRECT TAX LAWS

If the consideration received under LIP “C” is claimed to be exempt as aggregate of the
annual premium payable for LIP “A” and “C” did not exceed ` 5,00,000 for any of the PYs.,
the consideration received under LIP “B” would not be exempt. Exemption for consideration
received under LIP “C” should be preferred as it is more beneficial to the assessee.
Alternative treatment: If the consideration under LIP “A” was not claimed to be exempt u/s
10(10D) in A.Y. 2034-35 by the assessee, then the consideration received under LIP “B”
and LIP “C” would be exempt u/s 10(10D) in A.Y. 2035-36 since the aggregate of the
annual premium payable for the LIPs “B” and “C” together did not exceed ` 5,00,000 for any
of the previous years during the term of these two policies. This would be most beneficial to
the assessee.
Clarification on GST Component: It is also clarified by the CBDT that the premium payable/
aggregate premium payable for a life insurance policy/policies, other than a ULIP, issued on or
after 1.4.2023, for any previous year, would be exclusive of the amount of GST payable on such
premium.
Clarification on premium of Term life insurance policy: It is further clarified by the CBDT that
the limit of ` 5,00,000 of amount of premium payable would not be applicable in case of a term life
insurance policy i.e. where sum under a life insurance policy is only paid to the nominee in case of
the death of the person insured during the term of the policy and no amount is paid to anyone if
the insured person survives the policy tenure.
Hence, any sum received under a term insurance policy shall continue to be exempt under section
10(10D), irrespective of the amount of the premium payable in respect of such policy. Further the
premium paid for such policies would not be counted for checking the limit of ` 5,00,000 of amount
of premium payable.
Taxability of sum received under a LIP which is not exempt u/s 10(10D) [Section 56(2)(xiii)]
Where any sum is received (including the amount allocated by way of bonus) at any time during a
previous year, under a life insurance policy, other than the sum
(i) received under a ULIP
(ii) received under a Keyman insurance policy
which is not exempt under section 10(10D), the sum so received as exceeds the aggregate of the
premium paid during the term of such life insurance policy, and not claimed as deduction under
any other provision of the Act, computed in the prescribed manner, would be chargeable to tax
under the head “Income from other sources”.

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 INCOME FROM OTHER SOURCES 5.47

Accordingly, the CBDT has, vide this notification, notified Rule 11UACA to compute the income
chargeable to tax under section 56(2)(xiii). Where any person receives at any time during any
previous year any sum under such LIP, then, the income chargeable to tax under section 56(2)(xiii)
during the previous year in which such sum is received has to be computed in the following manner -
Situation Income chargeable to tax during the previous year in
which such sum is received
(i) Where the sum is received for the A-B, where
first time under the LIP during the A = the sum or aggregate of sum received under the LIP
previous year (first previous year) during the first previous year; and
B = the aggregate of the premium paid during the term of
the LIP till the date of receipt of the sum in the first previous
year that has not been claimed as deduction under any
other provision of the Act.
(ii) where the sum is received under C-D, where
the LIP during the previous year C = the sum or aggregate of sum received under the LIP
subsequent to the first previous during the subsequent previous year; and
year (subsequent previous year) D = the aggregate of the premium paid during the term of
the LIP till the date of receipt of the sum in the subsequent
previous year not being premium which –
(a) has been claimed as deduction under any other
provision of the Act; or
(b) is included in “B” or “D” in any of the previous
year(s).

“Sum received under a LIP” means any amount, by whatever name called, received under such
policy which is not exempt under section 10(10D), other than the sum–
(a) received under a ULIP; or
(b) received under a Keyman insurance policy
(2) Income chargeable under the head “Income from other sources” only if not
chargeable under the head “Profits and gains of business or profession” -
(i) Any sum received by an employer-assessee from his employees as contributions to any
provident fund, superannuation fund or any other fund for the welfare of the employees.
(ii) Income from letting out on hire, machinery, plant or furniture.
(iii) Where letting out of buildings is inseparable from the letting out of machinery, plant or
furniture, the income from such letting.
(iv) Interest on securities

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 5.48 DIRECT TAX LAWS

However, the following Interest income arising to certain persons would be exempt
under section 10(15):

(a) Income by way of interest, premium on redemption or other payment on notified

securities, bonds, annuity certificates or other savings certificates is exempt subject
to such conditions and limits as may be specified in the notification.

Interest on Post Office Savings Bank Account would be exempt from tax to the
extent of:
(1) ` 3,500 in case of an individual account.
(2) ` 7,000 in case of a joint account.
(b) Interest payable —
(1) by public sector companies on certain specified bonds and debentures subject
to the conditions which the Central Government may specify by notification,
including the condition that the holder of such bonds or debentures registers his
name and holding with that company;
Accordingly, the Central Government has specified tax free bonds issued by
India Infrastructure Company Ltd. and tax free, secured, redeemable, non-
convertible Bonds of the Indian Railway Finance Corporation Ltd. (IRFCL),
National Highways Authority of India (NHAI), Rural Electrification Corporation
Ltd. (RECL), Housing and Urban Development Corporation Ltd. (HUDCL),
Power Finance Corporation (PFC),Jawaharlal Nehru Port Trust, Dredging
Corporation of India Limited, Ennore Port Limited and The Indian Renewable
Energy Development Agency Limited, the interest from which would be exempt
under this section.
(2) by Government of India on deposit made by an employee of the Central or
State Government or a public sector company in accordance with the scheme
as may be notified of the moneys due to him on account of his retirement while
on superannuation or otherwise. It is significant that this scheme is not
applicable to non-Government employees.
The term ‘industrial undertaking’ means any undertaking which is engaged in:
(i) the manufacture or processing of goods; or
(ii) the manufacture of computer software or recording of programmes on

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any disc, tape, perforated media or other information device; or

(iii) the business of generation or generation and distribution of electricity or
any other form of power; or
(iv) the business of providing telecommunication services; or
(v) mining; or

(vi) construction of ships, or

(vii) the business of ship-breaking; or
(viii) the operation of ships or aircrafts or construction or operation of rail
systems.
For the purposes of the clause, “interest” shall not include interest paid on
delayed payment of loan or default if which is more than 2% p.a. over the rate of
interest payable in terms of such loan. Interest would include hedging
transaction charges on account of currency fluctuation.
(c) Bhopal Gas Victims - Section 10(15)(v) provides exemption in respect of interest on
securities held by the Welfare Commissioner, Bhopal Gas Victims, Bhopal, in the
Reserve Bank’s Account No. SL/DH 048. Recently, in terms of an order of the
Supreme Court to finance the construction of a hospital at Bhopal to serve the
victims of the gas leak, the shares of the Union Carbide Indian Ltd., have been sold.
The scope of the above exemption has been extended to interest on deposits for the
benefit of the victims of the Bhopal Gas Leak disaster. Such deposits can be held in
such account with the RBI or with a public sector bank as the Central Government
may notify in the Official Gazette.
(d) Interest on Gold Deposit Bond issued under the Gold Deposit Scheme, 1999 or
deposit certificates issued under the Gold Monetization Scheme, 2015 notified by the
Central Government.
(e) Interest on bonds, issued by –

(1) a local authority; or

(2) a State Pooled Finance Entity
and specified by the Central Government by notification in the Official Gazette.

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“State Pooled Finance Entity” means such entity which is set up in accordance
with the guidelines for the Pooled Finance Development Scheme notified by the
Central Government in the Ministry of Urban Development.
Accordingly, the Central Government has specified the “Tax-free Pooled Finance
Development Bonds” under Pooled Finance Development Fund Scheme of
Government of India, interest from which would be exempt under section 10(15).
(3) Keyman Insurance Policy
Any sum received under a Keyman insurance policy including the sum allocated by way of bonus
on such policy is chargeable under the head “Income from other sources” if such income is not
chargeable under the head “Profits and gains if business or profession” or under the head
“Salaries” i.e. if such sum is received by any person other than the employer who took the policy
and the employee in whose name the policy was taken.
(4) Residual Income
Any income chargeable to tax under the Act, but not falling under any other head of income shall
be chargeable to tax under the head “Income from other sources” e.g. Salary received by an
MPs/MLAs will not be chargeable to income-tax under the head ‘Salary’ but will be chargeable as
“Income from other sources” under section 56.

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Interest from non-SLR Securities of Banks: Whether chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”? [Circular No. 18, dated
2.11.2015]
The issue addressed by this circular is whether in the case of banks, expenses relatable to
investment in non-SLR securities need to be disallowed under section 57(i), by considering interest
on non-SLR securities as “Income from other sources."
Section 56(1)(id) provides that income by way of interest on securities shall be chargeable to
income-tax under the head "Income from Other Sources", if the income is not chargeable to
income-tax under the head "Profits and Gains of Business and Profession".

The CBDT clarified that the investments made by a banking concern are part of the business
of banking. Therefore, the income arising from such investments is attributable to the business of
banking falling under the head "Profits and Gains of Business and Profession".

5.4 APPLICABLE RATE OF TAX IN RESPECT OF

CASUAL INCOME [SECTION 115BB]
(1) This section provides that income by way of winnings from lotteries, crossword puzzles,
races including horse races or card games and other games of any sort or from gambling or
betting of any form would be taxed at a flat rate of 30% plus surcharge, if applicable, plus
health and education cess @4%.
However, income by way of winnings from any online game would not be taxed under this
section.
(2) No expenditure or allowance can be allowed from such income.
(3) Deduction under Chapter VI-A is not allowable from such income.
(4) Adjustment of unexhausted basic exemption limit is also not permitted against such income.

5.5 APPLICABLE RATE OF TAX IN RESPECT OF

WINNINGS FROM ONLINE GAMES [SECTION
115BBJ]
(1) This section provides that net winnings from any online game would be taxed at a flat rate
of 30% plus surcharge, if applicable, plus health and education cess@4%.

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(2) No expenditure or allowance can be allowed from such income.

(3) Deduction under Chapter VI-A is not allowable from such income.

(4) Adjustment of unexhausted basic exemption limit is also not permitted against such income.

(5) Meaning of certain terms

S. No. Term Meaning
(i) Internet The combination of computer facilities and electromagnetic
transmission media, and related equipment and software, comprising
the interconnected worldwide network of computer networks that
transmits information based on a protocol for controlling such
transmission
(ii) Online game A game that is offered on the internet and is accessible by a user
through a computer resource including any telecommunication device

5.6 DEDUCTIONS ALLOWABLE [SECTION 57]

The income chargeable under the head “Income from other sources” shall be computed after
making the following deductions:
(1) In the case of dividend (other than deemed dividend arise on account of buy-back of
shares by a domestic company) or income in respect of units of a mutual fund specified
under section 10(23D) or income in respect of units of a specified company defined
in the Explanation to section 10(35): Interest expenditure to earn such income is allowed
as deduction subject to a maximum of 20% of such income included in the total income,
without deduction under this section.
No deduction in respect of any expenditure is allowed in case of deemed dividend arise on
account of buy-back of shares by a domestic company.
(2) In the case of interest on securities: Any reasonable sum paid by way of commission or
remuneration to a banker or any other person for the purpose of realising such interest on
behalf of the assessee.

(3) Income consists of recovery from employees as contribution to any provident fund
etc. in terms of section 2(24)(x): A deduction will be allowed in accordance with the
provisions of section 36(1)(va) i.e. to the extent the contribution is remitted before the due
date under the respective Acts.

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(4) Where the income to be charged under this head is from letting on hire of machinery,
plant and furniture, with or without building: The following items of deductions are
allowable in the computation of such income:
(i) the amount paid on account of any current repairs to the machinery, plant or
furniture.

(ii) the amount of any premium paid in respect of insurance against risk of damage or
destruction of the machinery or plant or furniture.
(iii) the normal depreciation allowance in respect of the machinery, plant or furniture, due
thereon.
(5) In the case of income in the nature of family pension: A deduction of a sum equal to 33-
1/3 per cent of such income or ` 15,000 (in case of option regime) or ` 25,000 (in case
of default regime), whichever is less, is allowable.
This deduction is allowable both under the default tax regime u/s 115BAC and under the
optional tax regime i.e., normal provisions of the Act.
For the purposes of this deduction “family pension” means a regular monthly amount
payable by the employer to a person belonging to the family of an employee in the event of
his death.

Exemption in respect of family pension

1. The family pension received by the widow or children or nominated heirs, of a
member of the armed forces (including para-military forces) of the Union, where
the death of such member has occurred in the course of operational duties, in
specified circumstances would, however, be exempt under section 10(19).
2. The family pension received by any member of the family of an individual who had
been in the service of Central or State Government and had been awarded “Param
Vir Chakra” or “Vir Chakra” or “Vir Chakra” or other notified gallantry awards would
be exempt under section 10(18)(ii).

(6) Any other expenditure not being in the nature of capital expenditure laid out or
expended wholly and exclusively for the purpose of making or earning such income.
(7) In case of income by way of interest on compensation/ enhanced compensation
received chargeable to tax under section 56(2)(viii): Deduction of 50% of such income.
No deduction would be allowable under any other clause of section 57 in respect of such
income.

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ILLUSTRATION 6
Interest on enhanced compensation received by Mr. G during the previous year 2024-25 is
` 5,00,000. Out of this interest, ` 1,50,000 relates to the previous year 2020-21, ` 1,65,000
relates to previous year 2021-22 and ` 1,85,000 relates to previous year 2022-23. Discuss the tax
implication, if any, of such interest income for A.Y.2025-26.
SOLUTION
The entire interest of ` 5,00,000 would be taxable in the year of receipt, namely, P.Y.2024-25.
Particulars `
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) @50% 2,50,000
Interest chargeable under the head “Income from other sources” 2,50,000

Chart summarising the taxability of compensation/enhanced compensation (including

interest) received on compulsory acquisition:

Initial Compensation will be taxable in the year in which first

instalment is received under the head 'Capital Gains'

Enhanced Compensation will be taxable as & when received under

the head 'Capital Gains'

Interest on compensation/ enhanced compensation is taxable in

year of receipt under the head 'Income from Other Sources' after
deduction of 50% of such interest

5.7 DEDUCTIONS NOT ALLOWABLE [SECTION 58]

No deduction shall be made in computing the “Income from other sources” of an assessee in
respect of the following items of expenses:

(1) In the case of any assessee:

(i) any personal expense of the assessee;

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(ii) any interest chargeable to tax under the Act which is payable outside India on which
tax has not been paid or deducted at source.

(iii) any payment taxable in India as salaries, if it is payable outside India unless tax has
been paid thereon or deducted at source.

(2) Any expenditure in respect of which a payment is made to a related person or made
in cash in excess of ` 10,000: In addition to these disallowances, section 58(2)
specifically provides that the disallowance of any expenditure in respect of which a payment
is made to a related person, to the extent the same is considered excessive or
unreasonable by the Assessing Officer, having regard to the FMV. and disallowance of
payment or aggregate of payments exceeding ` 10,000 made to a person during a day
otherwise than by account payee cheque or draft or ECS through bank account or through
such other prescribed electronic mode such as credit card, debit card, net banking, IMPS,
UPI, RTGS, NEFT, and BHIM Aadhar Pay covered by section 40A will be applicable to the
computation of income under the head ‘Income from other sources’ as well.

(3) Disallowance of 30% of expenditure: 30% of expenditure shall not be allowed, in respect
of a sum which is payable to a resident and on which tax is deductible at source, if

• such tax has not been deducted or;

• such tax after deduction has not been paid on or before the due date of return
specified in section 139(1).

In case, assessee fails to deduct the whole or any part of tax on any such sum but is not
deemed as assessee in default under the first proviso to section 201(1) by reason that such
payee –

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and
the payer furnishes a certificate to this effect from an accountant in such form as
may be prescribed,

it would be deemed that the assessee has deducted and paid the tax on such sum.

The date of deduction and payment of taxes by the payer shall be deemed to be the date on
which return of income has been furnished by the payee.

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(4) No deduction in respect of any expenditure incurred in connection with casual

income: No deduction in respect of any expenditure or allowance in connection with
income by way of earnings from lotteries, cross word puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of any form or nature
whatsoever shall be allowed in computing the said income.

The prohibition will not, however, apply in respect of the income of an assessee, being the
owner of race horses, from the activity of owning and maintaining such horses. In respect
of the activity of owning and maintaining race horses, expenses incurred shall be allowed
even in the absence of any stake money earned. Such loss shall be allowed to be carried
forward in accordance with the provisions of section 74A.

5.8 DEEMED INCOME CHARGEABLE TO TAX [SECTION 59]

The provisions of section 41(1) are made applicable, so far as may be, to the computation of
income under this head. Accordingly, where a deduction has been made in respect of a loss,
expenditure or liability and subsequently any amount is received or benefit is derived in respect of
such expenditure incurred or loss or trading liability allowed as deduction, then it shall be deemed
as income in the year in which the amount is received or the benefit is accrued.

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SIGNIFICANT SELECT CASES

S. No. Case Law

1. PCIT v. Dr. Ranjan Pai (2021) 431 ITR 250 (Karn)
Issue Analysis & Decision
Can bonus shares received The issue of bonus shares by capitalization of
by shareholders be taxable reserves is merely a reallocation of the company's
under the head ‘Income funds. There is no inflow of fresh funds or increase
from other sources’ as per in the capital employed, which remains the same.
the provisions of section Thus, there is no addition or alteration to the profit-
56(2)(x), as they are making apparatus and the total funds available with the
received without company remain the same. On the other hand, when a
consideration? shareholder gets bonus shares, the value of the original
shares held by him goes down and the market value as
well as intrinsic value of the two shares put together will
be the same or nearly the same as the value of original
share before the issue of bonus shares. Thus, any profit
derived by the assessee shareholder on account of
receipt of bonus shares is adjusted by depreciation
in the value of equity shares originally held by him.
Hence, the provisions of section 56(2)(x) would not
be attracted in the hands of the recipient
shareholders on receipt of bonus shares.
Note - This decision was rendered in the context of
section 56(2)(vii); however, the underlying principle
emanating therefrom applies with equal force in the
context of the present provisions contained in section
56(2(x). Accordingly, the issue and decision has been
presented with reference to section 56(2)(x).
2. CIT v. Sree Rama Multi Tech Ltd. (2018) 403 ITR 426 (SC)
Issue Analysis & Decision
Is interest income from The assessee-company was statutorily required to keep
share application money share application money in a separate account till the
deposited in bank eligible allotment of shares was completed. Part of the share
for set-off against public application money would normally have to be returned to
issue expenses or should unsuccessful applicants, and therefore, the entire share
such interest be subject to application money would not ultimately be appropriated
tax under the head ‘Income by the company. The interest earned was inextricably
from Other Sources’? linked with the requirement of raising share capital.

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Any surplus money deposited in the bank for the purpose

of earning interest is liable to be taxed as “Income from
Other Sources”. Here, the share application money was
deposited with the bank not to make additional income
but to comply with the statute. The interest accrued on
such deposit is merely incidental. Moreover, the issue of
shares relates to capital structure of the company and
hence, expenses incurred in connection with the issue of
shares are to be capitalized. Accordingly, the accrued
interest is not liable to be taxed as “Income from
Other Sources”; the same is eligible to be set-off
against public issue expenses.
3. Movaliya Bhikhubhai Balabhai v. ITO (TDS) (2016) 388 ITR 343 (Guj)
Issue Analysis & Decision
Is interest on enhanced The assessee has received interest u/s 28 of the Land
compensation u/s 28 of the Acquisition Act, 1894 which represents enhanced
Land Acquisition Act, 1894 value of land and thus, partakes the character of
assessable as capital gains compensation and not interest. Hence, interest u/s 28
or as income from other is liable to be taxed under the head of ‘Capital Gains’
sources? and not under ‘Income from Other Sources’. On the other
hand, interest u/s 34 of the Land Acquisition Act, 1894 is
for the delay in making payment after the compensation
amount is determined. Such amount is liable to be taxed
under the head ‘Income from Other Sources’.
Note: The Land Acquisition Act, 1894 has now been
repealed and replaced by the Right to Fair
Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013. Section 72
and Section 80 of the new legislation have similar
provisions regarding award of interest.
4. CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.)
Issue Analysis & Decision
What are the tests for U/s 2(22), “dividend” does not include, inter alia, any
determining “substantial advance or loan made to a shareholder by a company in
part of business” of lending the ordinary course of its business, where the lending of
company for the purpose of money is a substantial part of the business of the
application of exclusion company.
provision u/s 2(22)? Percentage of turnover in relation to the whole as
also the percentage of the profit in relation to the
whole and sometimes even percentage of manpower

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used for a particular part of the business in relation

to the total manpower or work force of the company
would be required to be taken into consideration for
determining the substantial part of business. The capital
employed for a specific division of a company in
comparison to total capital employed would also be
relevant to determine whether the part of the business
constitutes a substantial part.
5. CIT v. Vir Vikram Vaid (2014) 367 ITR 365 (Bom)
Issue Analysis & Decision
Can repair and The expenditure incurred by virtue of repairs and renovation on
renovation the premises cannot be brought within the definition of advance
expenses incurred or loan given to the shareholder having substantial interest in the
by a company in company, though he is the owner of the premises. It cannot be
respect of premises treated as payment by the company on behalf of the shareholder
leased out by a or for the individual benefit of such shareholder.
shareholder having Accordingly, the repair and renovation expenses in respect of
substantial interest premises owned by the shareholder having substantial
in the company, be interest in the company and occupied by the company
treated as deemed cannot be treated as deemed dividend.
dividend?
6. Pradip Kumar Malhotra v. CIT (2011) 338 ITR 538 (Cal.)
Issue Analysis & Decision
Can the loan or The phrase "by way of advance or loan" appearing in section
advance given to a 2(22)(e) must be construed to mean those advances or loans
shareholder by the which a shareholder enjoys simply on account of being a person
company, in return who is the beneficial owner of shares (not being shares entitled
for an advantage to a fixed rate of dividend whether with or without a right to
conferred on the participate in profits) holding not less than 10% of the voting
company by the power. In case such loan or advance is given to such
shareholder, be shareholder as a consequence of any further consideration which
deemed as is beneficial to the company received from such a shareholder,
dividend under such advance or loan cannot be deemed as dividend within the
section 2(22)(e)? meaning of the Act.
Thus, only gratuitous loan or advance given by a company to a
shareholder, who is the beneficial owner of shares holding not
less than 10% of the voting power, would come within the
purview of section 2(22)(e) but not cases where the loan or
advance is given in return for an advantage conferred upon the
company by such shareholder.

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7. CIT v. Ambassador Travels (P) Ltd. (2009) 318 ITR 376 (Del.)
Issue Analysis & Decision
Would the U/s 2(22)(e), loans and advances made out of accumulated
provisions of profits of a company in which public are not substantially
deemed dividend interested to a beneficial owner of shares holding not less than
u/s 2(22)(e) be 10% of the voting power or to a concern in which such
attracted in respect shareholder has substantial interest is deemed as dividend.
of financial However, this provision would not apply in the case of advance
transactions made in the course of the assessee’s business as a trading
entered into in the transaction.
normal course of The assessee was involved in booking of resorts for the
business? customers of these companies and entered into normal
business transactions as a part of its day-to-day business
activities. Such financial transactions cannot under any
circumstances be treated as loans or advances received by
the assessee from these concerns for the purpose of
application of section 2(22)(e).
8. CIT v. Manjoo and Co. (2011) 335 ITR 527 (Kerala)
Issue Analysis & Decision
Can winnings of The receipt of the prize money is not in his capacity as a lottery
prize money on distributor but as a holder of the lottery ticket which won the
unsold lottery prize. The Lottery Department also does not treat it as business
tickets held by the income received by the distributor but instead treats it as prize
distributor of lottery money paid on which tax is deducted at source.
tickets be assessed Further, winnings from lotteries are assessable under the
as business income special provisions of section 115BB, irrespective of the head
and be subject to under which such income falls.
normal rates of tax
instead of the rates
prescribed u/s
115BB?

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TEST YOUR KNOWLEDGE

Questions
1. Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid up capital of
` 20 lakhs. The balance as at 31.03.2024 in General Reserve was ` 6 lakhs. The company
on 1.04.2024 gave an interest-free loan of ` 5 lakhs to its Supervisor having salary of
` 4,000 p.m., who in turn on 15.4.2024 advanced the said amount of loan so taken from the
company to Shri Parimal. The Assessing Officer had treated the amount of advance as
deemed dividend. Is the action of Assessing Officer correct?
2. Mr. Santhanam holding 25% voting power in VKS Manufacturing Private Limited permitted
his own land to be mortgaged to a bank for enabling the company to obtain a loan. Mr.
Santhanam requested the company to release the property from the mortgage. The
company failed to do so, but for retaining the benefit of bank loan it gave an advance of
` 10 lakhs to Mr. Santhanam, which was authorized by a resolution passed by the Board of
Directors. The company's accumulated profit on the date of payment of advance was ` 50
lakhs. The Assessing Officer proposes to treat the amount of ` 10 lakhs as deemed
dividend by invoking the provision of section 2(22)(e).
Is the proposition of the Assessing Officer correct in law?
3. An enterprise engaged in manufacturing of steel balls discontinued its activities and decided
to lease out its factory building, plant and machinery and furniture from 1.4.2024 on a
consolidated lease rent of ` 50,000 per month. Compute the income for Assessment Year
2025-26 of the assessee from following information: `
(i) Interest received on deposits 1,00,000
(ii) Brokerage paid on hundi loan taken 2,000
(iii) Interest paid on hundi and other loans which were given as deposits
on interest to others 75,000
(iv) Expenses incurred on repairs of building, plant and machinery 15,000
(v) Fire insurance premium of plant and machinery and furniture 12,000
(vi) Depreciation for the year 1,47,500
(vii) Legal fees paid to an advocate for drafting and registering
the lease agreement 1,500

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(viii) Factory licence fees paid for the year 1,000

(ix) There is unabsorbed depreciation of ` 2,75,000 of the Assessment Years 2023-24 and
2024-25.
(x) Interest paid in (iii) above includes an amount of ` 25,000 remitted to a non-resident
outside India on which tax was not deducted at source.

4. In July 2024, Mr. Pervez employed as Marketing Manager in a Pharma company, received
a Maruti car as gift from a distributor of the company. The value of the gifted car is
estimated at ` 2,60,000. Is the value of car taxable as income? If so, under what head it is
taxable?

Answers
1. The company had advanced a loan to an employee who in turn had advanced the same to
the Managing Director of the company holding 70% of its capital. By virtue of the provisions
of section 2(22)(e), the same shall be treated as the payment by a company in which public
are not substantially interested, on behalf of, or for individual benefit of any such share
holder (who holds not less than 10% of the voting power), to the extent to which the
company possesses accumulated profits.

In this case, the company has reserves of ` 6 lakhs on 31st March of the preceding year
and the amount of loan advanced on 1st April is ` 5 Lakhs. Therefore, the payment is to be
treated as deemed dividend. The amount of interest-free loan of ` 5 lakhs given by the
company to the supervisor who in turn had given the same to Mr. Parimal, shall be
construed as the amount given for the benefit of Mr. Parimal and would be treated as
deemed dividend. This has been held by the Supreme Court in the case of L.
Alagusundaram Chettiar v. CIT (2001) 252 ITR 893.
2. The issue under consideration is whether loan or advance given to a shareholder by the
company, in return of an advantage or benefit conferred on the company by the
shareholder, can be deemed as dividend under section 2(22)(e) of the Income-tax Act, 1961
in the hands of the shareholder
The facts of the case are similar to the facts in Pradip Kumar Malhotra v. CIT (2011) 338
ITR 538, wherein the above issue came up before the Calcutta High Court.
The High Court observed that the phrase "by way of advance or loan" appearing in section
2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys
simply on account of being a person who is the beneficial owner of shares (not being

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shares entitled to a fixed rate of dividend whether with or without a right to participate in
profits) holding not less than 10% of the voting power.

In case such loan or advance is given to such shareholder as a consequence of any further
consideration received from such a shareholder which is beneficial to the company, such
advance or loan cannot be a deemed dividend within the meaning of the Act.

Thus, gratuitous loan or advance given by a company to a shareholder, who is the

beneficial owner of shares holding not less than 10% of the voting power, would come
within the purview of section 2(22)(e) to the extent of accumulated profits of the company
but not the cases where the loan or advance is given in return for an advantage conferred
upon the company by such shareholder.
In this case, advance of ` 10 lakhs was given by VKS Manufacturing (P) Ltd. to Mr.
Santhanam holding 25% of voting power in lieu of non-release of his personal property from
mortgage thereby enabling the company to retain the benefit of loan obtained from bank.
Therefore, applying the rationale of the Calcutta High Court ruling in Pradip Kumar
Malhotra’s case, such advance cannot be brought within the purview of section 2(22)(e),
since it was not in the nature of gratuitous advance but was given to protect the interest of
the company.
The proposition of the Assessing Officer to treat the amount of ` 10 lakhs as deemed dividend
by invoking the provisions of section 2(22)(e) in this case is, therefore, not correct.
3. The income derived from leased assets shall be chargeable to tax as 'Income from other
sources' under section 56(2)(iii) but the computation thereof shall be made after allowing
deductions specified under sections 30, 31 and 32 subject to section 38. This is as per the
provisions of section 57(ii) and 57(iii).
Computation of income under the head “Income from other sources”
Particulars ` `
(A) Lease Rent for 12 months @ ` 50,000 p.m. 6,00,000
Less: Expenses and deductions allowable under section
57(ii) & 57(iii):
Repairs 15,000
Fire Insurance Premium 12,000
Legal expenses for drafting of lease agreement 1,500
Factory Licence fee 1,000
Depreciation for the year 1,47,500

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 5.64 DIRECT TAX LAWS

Unabsorbed depreciation of earlier assessment

years – eligible for deduction (Note 1) 2,75,000 4,52,000
1,48,000
(B) Interest on Deposits 1,00,000
Less: Expenses allowable under section
57(i)
Brokerage ` 2,000
Interest on hundi loans (Note 2) ` 50,000 52,000 48,000
Total Income 1,96,000

Notes:
1. Unabsorbed depreciation of ` 2,75,000 pertains to earlier assessment years. The
unabsorbed depreciation shall form part of the current year depreciation and can be
set off against any other head of income. Accordingly, the amount of ` 2,75,000 is
adjustable/ allowed to be set off against 'Income from other sources'.
2. Since deposits are made by investing amount received on hundi and other loans, the
interest on hundi and other loans would be eligible for deduction from the income arising
on such deposits.
However, interest paid to non-resident is not eligible for deduction as the tax has not
been deducted at source.

4. Mr. Pervez, an employee of a Pharma company, has received a car as a gift from a
distributor of the company. Since there is no employer-employee relationship in this case
between the distributor and Mr. Pervez, the value of gift is not a perquisite chargeable to
tax under the head “Salaries”.
Section 56(2)(x) brings within its scope the value of any property received by any person.
For this purpose, “property” means immovable property being land or building or both,
shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures,
any work of art or bullion.
Therefore, for the purpose of attracting the provisions of section 56(2)(x) for chargeability
under the head “Income from Other Sources”, an individual should be in receipt of property
as defined therein. Since, car is not included in the definition of “property”, the provisions of
section 56(2)(x) would not be attracted in the hands of Mr. Pervez.

© The Institute of Chartered Accountants of India

CHAPTER 6
INCOME OF OTHER PERSONS
INCLUDED IN ASSESSEE’S
TOTAL INCOME
LEARNING OUTCOMES
After studying this chapter, you would be able to -
 examine the cases where clubbing provisions would be attracted;
 examine the circumstances when income of minor child, has to be
included in the hands of parent and exemption available in respect of
such included income;
 examine the circumstances when the income of HUF has to be included
in the hands of its member(s);
 apply the clubbing provisions to determine the amount of income which
need to be included in the hands of another person;
 examine the cases of cross transfers to determine the person in whose
hands the income arising from assets transferred has to be included and
the portion of income that has to be included;
 compute the income under different heads of income after applying the
clubbing provisions.

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 6.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Transfer of income
without transfer of asset Transfer by way of
[Section 60] a trust which is not
revocable during Transferor As and when
Income arising from the life time of the derives no power to
revocable transfer of Exception beneficiary or in direct or revoke arises,
assets [Section 62] case of any other indirect benefit clubbing
[Section 61] transfer, not from such provisions
revocable during income would apply
the lifetime of the
transferee
Remuneration to
Where spouse possesses
spouse from a concern
technical or professional
in which individual has Exception
Income of other persons included in assessee's total

qualifications, clubbing
a substantial interest
provisions will not apply
[Section 64(1)(ii)]

Income arising to spouse from an asset*

Spouse's transferred without adequate consideration or not
Income in connection with an agreement to live apart
[Section 64(1)(iv)]
income

Income arising to any person or AOPs from

assets transferred without adequate consideration
for the benefit of spouse [Section 64(1)(vii)]

All income of a minor is

clubbed with the income of Income from manual work
parent, whose total income or from skill, talent or
excluding minor's income, is specialised knowledge or
greater. Exemption of upto experience will not be
Minor's income
` 1,500 per child is available Exceptions clubbed
[Section 64(1A)]
u/s 10(32) if that parent has
exercised the option of shifting
out of the default tax regime Income of a minor child
provided under section suffering from disability
115BAC(1A). mentioned u/s 80U shall
not be clubbed
Income arising to son's wife from an asset
transferred without adequate consideration
[Section 64(1)(vi)]

Income of Income arising to any person or AOPs from assets

son's wife transferred without adequate consideration for the
benefit of sons's wife
[Section 64(1)(viii)]

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.3

6.1 CLUBBING OF INCOME – AN INTRODUCTION

Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income.
However, there are certain cases where an assessee has to pay tax in respect of income of
another person. The provisions for the same are contained in sections 60 to 65 of the Act. These
provisions have been enacted to counteract the tendency on the part of the tax-payers to dispose
off their property or transfer their income in such a way that their tax liability can be avoided or
reduced.
These provisions can be categorized as follows:
• Income of other persons included in an assessee’s total income [Sections 60-63]

• Income of other persons included in an Individual’s total income [Section 64]

Note - In the case of individuals, income-tax is levied on a slab system on the total income. The
tax system is progressive i.e., as the income increases, the applicable rate of tax increases. Some
taxpayers in the higher income bracket have a tendency to divert some portion of their income to
their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance,
clubbing provisions have been incorporated in the Act, under which income arising to certain
persons (like spouse, minor child etc.) have to be included in the income of the person who has
diverted his income for the purpose of computing tax liability.

6.2 INCOME OF OTHER PERSONS INCLUDIBLE IN

ASSESSEE’S TOTAL INCOME
(1) Transfer of income without transfer of asset [Section 60]
(i) If any person transfers the income from any asset without transferring the asset itself, such
income is to be included in the total income of the transferor.
(ii) It is immaterial whether the transfer is revocable or irrevocable and whether it was made
before the commencement of this Act or after its commencement.
Example: Mr. A confers the right to receive rent in respect of his house property on his wife,
Mrs. A, without transferring the house itself to her. In this case, the rent received by Mrs. A will be
clubbed with the income of Mr. A.
(2) Income arising from revocable transfer of assets [Section 61]
All income arising to any person by virtue of a revocable transfer of assets is to be included in the
total income of the transferor.

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 6.4 DIRECT TAX LAWS

Meaning of revocable transfer [Section 63]

Transfer is deemed to be revocable if—
(i) it contains any provision for the retransfer, directly or indirectly, of the whole or any part of
the income or assets to the transferor, or
(ii) it gives, in any way to the transferor, a right to reassume power, directly or indirectly, over
the whole or any part of the income or the assets.
This clubbing provision will operate even if only part of income of the transferred asset had been
applied for the benefit of the transferor. Once the transfer is revocable, the entire income from the
transferred asset is includible in the total income of the transferor.

Exception where clubbing provisions are not attracted even in case of revocable transfer
[section 62]
Section 61 will not apply to any income arising to any person if there is -
(i) a transfer by way of trust which is not revocable during the life time of the beneficiary; and

(ii) any other transfer, which is not revocable during the life time of the transferee.
In the above cases, the income from the transferred asset is not includible in the total income of
the transferor, provided the transferor derives no direct or indirect benefit from such income.
If the transferor receives direct or indirect benefit from such income, such income is to be included
in his total income even though the transfer may not be revocable during the life time of the
beneficiary or transferee, as the case may be.
As and when the power to revoke the transfer arises, the income arising by virtue of such transfer
will be included in the total income of the transferor.

6.3 INCOME OF OTHER PERSONS INCLUDIBLE IN AN

INDIVIDUAL’S TOTAL INCOME

(1) Clubbing of income arising to spouse

(I) Income by way of remuneration from a concern in which the individual has
substantial interest [Section 64(1)(ii)]
(i) Remuneration in cash or kind to spouse from a concern in which the individual has a
substantial interest is to be clubbed: In computing the total income of any individual, all
such income which arises, directly or indirectly, to the spouse of such individual by way of

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.5

salary, commission, fees or any other form of remuneration, whether in cash or in kind, from
a concern in which such individual has a substantial interest shall be included.

Circumstances when an
individual is deemed to
have substantial interest in
a concern

Where the concern is a

In any other case
company

If equity shares carrying 20% or more If such person is entitled, or such

of voting power are beneficially owned person and one or more of his
by such person or partly by such relatives are entitled in the
person and partly by one or more of aggregate, to receive 20% or
his relatives at any time during the more profit of such concern at
P.Y. any time during the P.Y.

The term ‘relative’ in relation to an individual means the husband, wife, brother or sister or any
lineal ascendant or descendant of that individual [Section 2(41)].

(ii) Clubbing provisions will not apply where remuneration is received on account of
technical or professional qualifications: Clubbing provisions, however, does not apply
where the spouse of the said individual possesses technical or professional qualifications
and the income to the spouse is solely attributable to the application of his/her technical or
professional knowledge or experiences. In such an event, the income arising to such
spouse is to be assessed in his/her hands.
(iii) Both husband and wife have substantial interest in a concern: Where both husband
and wife have substantial interest in a concern and both are in receipt of income by way of
salary etc. from the said concern, such income will be includible in the hands of that
spouse, whose total income, excluding such income is higher.
Where any such income is once included in the total income of either spouse, income arising in the
succeeding year shall not be included in the total income of the other spouse unless the Assessing
Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary to do
so.

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 6.6 DIRECT TAX LAWS

ILLUSTRATION 1
Mr. Arun holds shares carrying 55% voting power in MNO (P) Ltd. Mrs. Anamika, wife of Mr. Arun
is working as a computer software programmer in MNO (P) Ltd. at a salary of ` 35,000 p.m. She
is, however, not qualified for the job. The other income of Mr. Arun & Mrs. Anamika are ` 7,30,000
& ` 4,20,000, respectively. Compute the gross total income of Mr. Arun and Mrs. Anamika for the
A.Y.2025-26 if they are paying tax under default tax regime.
SOLUTION
Mr. Arun holds shares carrying 55% voting power in MNO (P) Ltd i.e., a substantial interest in the
company. His wife is working in the same company without any professional qualifications for the
same. Thus, by virtue of the clubbing provisions of the Act, the salary received by Mrs. Anamika
from MNO (P) Ltd. will be clubbed in the hands of Mr. Arun.
Computation of Gross total income of Mr. Arun
Particulars ` `
Salary received by Mrs. Anamika (` 35,000 × 12) 4,20,000
Less: Standard deduction under section 16(ia) 75,000 3,45,000
Other Income 7,30,000
Gross total income 10,75,000
The gross total income of Mrs. Anamika is ` 4,20,000.
ILLUSTRATION 2

Will your answer be different if Mrs. Anamika was qualified for the job?
SOLUTION

If Mrs. Anamika possesses professional qualifications for the job, then the clubbing provisions
shall not be applicable.
Gross total income of Mr. Arun = ` 7,30,000 (other income)

Gross total income of Mrs. Anamika = Salary received by Mrs. Anamika [` 35,000×12] less
` 75,000, being the standard deduction under section 16(ia) plus other income [` 4,20,000] =
` 7,65,000
ILLUSTRATION 3
Mr. Binu holds shares carrying 33% voting power in Yamma (P) Ltd. Mrs. Babita is working as an
accountant in Yamma (P) Ltd. getting income under the head salary (computed) of ` 3,60,000
without any qualification in accountancy. Mr. Binu also receives ` 32,000 as interest on securities.

© The Institute of Chartered Accountants of India

 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.7

Mrs. Babita owns a house property which she has let out. Rent received from tenants is ` 6,500
p.m. Compute the gross total income of Mr. Binu and Mrs. Babita for the A.Y. 2025-26.
SOLUTION
Since Mrs. Babita is not professionally qualified for the job, the clubbing provisions shall be
applicable.
Computation of Gross total income of Mr. Binu
Particulars `
Income from salary of Mrs. Babita (Computed) 3,60,000
Income from other sources
- Interest on securities 32,000
3,92,000

Computation of gross total income of Mrs. Babita

Particulars ` `
Income from Salary Nil
[clubbed in the hands of Mr. Binu]
Income from house property
Gross Annual Value [` 6,500 × 12] 78,000
Less: Municipal taxes paid -
Net Annual Value (NAV) 78,000
Less: Deductions under section 24
- 30% of NAV i.e., 30% of ` 78,000 23,400
- Interest on loan - 54,600
Gross total income 54,600

(II) Income arising to the spouse from an asset transferred without adequate
consideration [Section 64(1)(iv)]

(i) Transfer of asset (other than house property): Where there is a transfer of an asset
(other than house property), directly or indirectly, from one spouse to the other, otherwise
than for adequate consideration or in connection with an agreement to live apart, any
income arising to the transferee-spouse from the transferred asset, either directly or
indirectly, shall be included in the total income of the transferor-spouse.
(ii) Transfer of house property: In the case of transfer of house property, the provisions are
contained in section 27. If an individual transfers a house property to his spouse, without

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 6.8 DIRECT TAX LAWS

adequate consideration or otherwise than in connection with an agreement to live apart, the
transferor shall be deemed to be the owner of the house property and its annual value will
be taxed in his hands.
(iii) Income from accretion of the transferred asset: It may be noted that any income from
the accretion of the transferred asset is not to be clubbed with the income of the transferor
i.e., the income arising on transferred assets alone has to be clubbed. However, income
earned by investing such income (arising from transferred asset) cannot be clubbed.
(iv) Meaning of adequate consideration: It is also to be noted that natural love and affection
do not constitute adequate consideration. Therefore, where an asset is transferred without
adequate consideration, the income from such asset will be clubbed in the hands of the
transferor.
(v) Transferred asset invested in business: Where the assets transferred, directly or
indirectly, by an individual to his spouse are invested by the transferee in the business,
proportionate income arising to the transferee from such investment is to be included in the
total income of the transferor. If the investment is in the nature of contribution of capital,
proportionate interest receivable by the transferee from the firm will be clubbed with the
income of the transferor.
Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the previous year to the total investment in the business
or by way of capital contribution in a firm as a partner, as the case may be, by the
transferee as on that day.

ILLUSTRATION 4
Mr. Rahul started a proprietary business on 01.04.2023 with a capital of ` 6,00,000. He incurred a
loss of ` 3,00,000 during the year 2023-24. To overcome the financial position, his wife
Mrs. Radha, a software engineer, gave a gift of ` 7,00,000 on 01.04.2024, which was immediately
invested in the business by Mr. Rahul. He earned a profit of ` 5,00,000 during the year 2024-25.
Compute the amount to be clubbed in the hands of Mrs. Radha for the Assessment Year 2025-26.
If Mrs. Radha gave the said amount as loan, what would be the amount to be clubbed?
SOLUTION

Section 64(1)(iv) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of
the individual, if the income earned is from the assets (other than house property) transferred
directly or indirectly to the spouse of the individual, otherwise than for adequate consideration or in
connection with an agreement to live apart.

© The Institute of Chartered Accountants of India

 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.9

In this case, Mr. Rahul received a gift of ` 7,00,000 on 1.4.2024 from his wife Mrs. Radha, which
he invested in his business immediately. The income to be clubbed in the hands of Mrs. Radha for
the A.Y. 2025-26 is computed as under:
Particulars Mr. Rahul’s capital Capital contribution Total (`)
contribution (`) out of gift from
Mrs. Radha (`)
Capital as on 1.4.2024 3,00,000 7,00,000 10,00,000
(6,00,000 – 3,00,000)
Profit for P.Y.2024-25 to be 1,50,000 3,50,000 5,00,000
apportioned on the basis of 3 7
capital employed on the first �5,00,000× � �5,00,000× �
10 10
day of the previous year i.e.
as on 1.4.2024 (3:7)

Therefore, the income to be clubbed in the hands of Mrs. Radha for the A.Y.2025-26 is
` 3,50,000.
In case, Mrs. Radha gave the said amount of ` 7,00,000 as a bona fide loan, then, clubbing
provisions would not be attracted.
Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mr. Rahul, since he
has received a sum of money exceeding ` 50,000 without consideration from a relative i.e., his
wife.
(III) Transfer of assets for the benefit of spouse [Section 64(1)(vii)]
All income arising directly or indirectly to any person or association of persons, from the assets
transferred, directly or indirectly, to such person or association of persons by an individual without
adequate consideration is includible in the income of the individual to the extent such income is
used by the transferee for the immediate or deferred benefit of the transferor’s spouse.

(2) Clubbing of income arising to son’s wife

(I) Income arising to son’s wife from the assets transferred without adequate
consideration by the father-in-law or mother-in-law [Section 64(1)(vi)]
(i) Asset transferred without adequate consideration: Where an asset is transferred,
directly or indirectly, by an individual to his or her son’s wife without adequate
consideration, the income from such asset is to be included in the total income of the
transferor.

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 6.10 DIRECT TAX LAWS

(ii) Asset transferred invested in the business: For this purpose, where the assets
transferred directly or indirectly by an individual to his or her son’s wife are invested by the
transferee in the business, proportionate income arising from such investment is to be
included in the total income of the transferor. If the investment is in the nature of
contribution of capital, the proportionate interest receivable from firm will be clubbed with
the income of the transferor.
Such proportion has to be computed by taking into account the value of the aforesaid
investment as on the first day of the previous year to the total investment in the business
or by way of capital contribution in a firm as a partner, as the case may be, by the
transferee as on that day.

(II) Transfer of assets for the benefit of son’s wife [Section 64(1)(viii)]
All income arising directly or indirectly, to any person or association of persons from the assets trans-
ferred, directly or indirectly, without adequate consideration, to such person or association of persons
by an individual will be included in the total income of the individual to the extent such income is used
by the transferee for the immediate or deferred benefit of the transferor’s son’s wife.
Note: Where any asset is transferred by a person to any other person without consideration or for
inadequate consideration, the provisions of 56(2)(x) would get attracted in the hands of transferee,
if conditions specified thereunder are satisfied.

ILLUSTRATION 5
Mrs. Komal transferred her immovable property to TPS Co. Ltd. subject to a condition that out of
the rental income, a sum of ` 42,000 per annum shall be utilized for the benefit of her son’s wife.
Mrs. Komal claims that the amount of ` 42,000 (utilized by her son’s wife) should not be included
in her total income as she no longer owned the property.
Examine with reasons whether the contention of Mrs. Komal is valid in law.
SOLUTION
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset,
directly or indirectly, otherwise than for adequate consideration, to any person to the extent to
which the income from such asset is for the immediate or deferred benefit of son’s wife. Such
income shall be included in computing the total income of the transferor-individual.

Therefore, income of ` 42,000 meant for the benefit of daughter-in-law is chargeable to tax in the
hands of transferor i.e., Mrs. Komal in this case.
Hence, the contention of Mrs. Komal is not valid in law.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.11

Note - In order to attract the clubbing provisions under section 64(1)(viii), the transfer should be
otherwise than for adequate consideration. In this case, it is presumed that the transfer is
otherwise than for adequate consideration and therefore, the clubbing provisions are attracted.
Moreover, the provisions of section 56(2)(x) will also get attracted in the hands of TPS Co Ltd., if
the conditions specified thereunder are satisfied.
If it is presumed that the transfer was for adequate consideration, the provisions of section
64(1)(viii) and section 56(2)(x) would not be attracted.

(3) Clubbing of minor’s income

(i) All income of a minor is to be included in the income of his parent.
(ii) However, the income derived by the minor from manual work or from any activity involving
his skill, talent or specialized knowledge or experience will not be included in the income of
his parent.
(iii) The income of the minor will be included in the income of that parent, whose total income is
greater.
(iv) Once clubbing of minor’s income is done with that of one parent, it will continue to be
clubbed with that parent only, in subsequent years. The Assessing Officer, may, however,
club the minor’s income with that of the other parent, if, after giving the other parent an
opportunity to be heard, he is satisfied that it is necessary to do so.
(v) Where the marriage of the parents does not subsist, the income of the minor will be
includible in the income of that parent who maintains the minor child in the relevant
previous year.
(vi) However, the income of a minor child suffering from any disability of the nature specified in
section 80U shall not be included in the hands of the parent but shall be assessed in the
hands of the child.
(vii) It may be noted that the clubbing provisions are attracted even in respect of income of
minor married daughter.
Exemption in respect of clubbed income of minor [Section 10(32)]
In case the income of an individual (i.e., the parent) includes the income of his/her minor child in
terms of section 64(1A), such parent shall be entitled to exemption of ` 1,500 in respect of each
minor child. However, if income of any minor so includible is less than ` 1,500, then the entire
income shall be exempt.

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 6.12 DIRECT TAX LAWS

Exemption under section 10(32) would be available to the parent only if he/she exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A). The same
would not be available to him/her under the default tax regime where he/she computes his/her total
income as per section 115BAC and pays tax at the concessional rates provided thereunder.

(viii) In case the asset transferred to a minor child (not being a minor married daughter) without
consideration or for inadequate consideration is a house property, then, by virtue of section
27(i), the transferor-parent will be the deemed owner of the house property. Therefore, the
income from house property will be taxable in the hands of the transferor-parent, being the
deemed owner and not in the hands of the minor child. Consequently, clubbing provisions
under section 64(1A) would not be attracted in respect of such income, due to which the
benefit of exemption u/s 10(32) (discussed above) cannot be availed against such income.

However, if the house property is transferred by a parent to his or her minor married
daughter, without consideration or for inadequate consideration, then, section 27(i) is not
attracted. In such a case, the income from house property will be included u/s 64(1A) in the
hands of that parent, whose total income before including minor child’s income is higher;
and benefit of exemption u/s 10(32) can be availed by that parent in respect of the income
so included if he/she exercises the option of shifting out of the default tax regime provided
under section 115BAC(1A).

Child in relation to an individual includes a step-child and an adopted child of that individual.
[Section 2(15B)]

ILLUSTRATION 6

Mr. Arvind has three minor children – two twin daughters, aged 12 years, and one son, aged 16
years. Income of the twin daughters is ` 2,500 p.a. each and that of the son is ` 1,200 p.a. Mrs.
Avani (wife of Mr. Arvind) has transferred her flat to her minor son on 1.4.2024 out of natural love
and affection. The flat was let out on the same date and the rental income from the flat is ` 10,000
p.m. Compute the income, in respect of minor children, to be included in the hands of
Mr. Arvind and Mrs. Avani under section 64(1A) assuming that Mr. Arvind’s total income is higher
than Mrs. Avani’s total income, before including income of minor children and both Mr. Arvind and
Mrs. Avani exercise the option of shifting out of the default tax regime provided under section
115BAC(1A).

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.13

SOLUTION
Taxable income, in respect of minor children, in the hands of Mr. Arvind is
Particulars ` `
Twin minor daughters [` 2,500 × 2] 5,000
Less: Exempt under section 10(32) [` 1,500 × 2] 3,000 2,000

Minor son 1,200

Less: Exemption under section 10(32) would be lower of ` 1200, 1,200 Nil
being the income of minor son or ceiling limit of ` 1500
Income to be clubbed in the hands of Mr. Arvind 2,000

Note – As per section 27(i), Mrs. Avani is the deemed owner of house property transferred to her
minor son. Natural love and affection do not constitute adequate consideration for this purpose.
Accordingly, the income from house property of ` 84,000 [i.e., ` 1,20,000 (-) ` 36,000, being 30%
of ` 1,20,000) would be taxable directly in her hands as the deemed owner of the said property.
Consequently, clubbing provisions under section 64(1A) would not be attracted in respect of
income from house property, owing to which exemption u/s 10(32) cannot be availed by her.

6.4 CROSS TRANSFERS

In the case of cross transfers also (e.g., A making gift of ` 50,000 to the wife of his brother B for
the purchase of a house by her and a simultaneous gift by B to A’s minor son of shares in a foreign
company worth ` 50,000 owned by him), the income from the assets transferred would be
assessed in the hands of the deemed transferor if the transfers are so intimately connected that
they form part of a single transaction, and each transfer constitutes consideration for the other by
being mutual or otherwise. Thus, in the instant case, the transfers have been made by A and B to
persons who are not their spouse or minor child so as to circumvent the provisions of this section,
showing that such transfers constituted consideration for each other.
The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142, observed that if two
transactions are inter-connected and are parts of the same transaction in such a way that it can be
said that the circuitous method was adopted as a device to evade tax, the implication of clubbing
provisions would be attracted. Accordingly, the income arising to Mrs. B from the house property
should be included in the total income of B and the dividend from shares transferred to A’s minor
son would be taxable in the hands of A, assuming that Mr. A’s income is higher than that of Mrs. A.
This is because A and B are the indirect transferors to their minor child and spouse, respectively,
of income-yielding assets, so as to reduce their burden of taxation.

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 6.14 DIRECT TAX LAWS

ILLUSTRATION 7
Mr. Madan gifted a sum of ` 6.5 lakhs to his brother's wife on 14-6-2024. On 12-7-2024, his
brother gifted a sum of ` 5.2 lakhs to Mr. Madan's wife. The gifted amounts were invested as fixed
deposits in banks by Mrs. Madan and wife of Mr. Madan's brother on 01-8-2024 at 9% interest.
Examine the consequences of the above under the provisions of the Income-tax Act, 1961 in the
hands of Mr. Madan and his brother.
SOLUTION
In the given case, Mr. Madan gifted a sum of ` 6.5 lakhs to his brother’s wife on 14.06.2024 and
simultaneously, his brother gifted a sum of ` 5.2 lakhs to Mr. Madan’s wife on 12.07.2024. The
gifted amounts were invested as fixed deposits in banks by Mrs. Madan and his brother’s wife.
These transfers are in the nature of cross transfers. Accordingly, the income from the assets
transferred would be assessed in the hands of the deemed transferor because the transfers are so
intimately connected to form part of a single transaction and each transfer constitutes
consideration for the other by being mutual or otherwise.
If two transactions are inter-connected and are part of the same transaction in such a way that it
can be said that the circuitous method was adopted as a device to evade tax, the implication of
clubbing provisions would be attracted. It was so held by the Apex Court in CIT vs. Keshavji
Morarji (1967) 66 ITR 142.
Accordingly, the interest income arising to Mrs. Madan in the form of interest on fixed deposits
would be included in the total income of Mr. Madan and interest income arising in the hands of his
brother’s wife would be taxable in the hands of Mr. Madan’s brother as per section 64(1), to the
extent of amount of cross transfers i.e., ` 5.2 lakhs.
This is because both Mr. Madan and his brother are the indirect transferors of the income to their
respective spouses with an intention to reduce their burden of taxation.
However, the interest income earned by his spouse on fixed deposit of ` 5.2 lakhs alone would be
included in the hands of Mr. Madan’s brother and not the interest income on the entire fixed
deposit of ` 6.5 lakhs, since the cross transfer is only to the extent of ` 5.2 lakhs.

6.5 CONVERSION OF SELF-ACQUIRED PROPERTY INTO

THE PROPERTY OF A HINDU UNDIVIDED FAMILY
[SECTION 64(2)]
Section 64(2) deals with the case of conversion of self-acquired property into property of a Hindu
undivided family.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.15

(1) Where an individual, who is a member of the HUF, converts at any time after 31-12-1969,
his individual property into property of the HUF of which he is a member or throws such
property into the common stock of the family or otherwise transfers such individual property,
directly or indirectly, to the family otherwise than for adequate consideration, the income
from such property shall continue to be included in the total income of the individual.
(2) Where the converted property has been partitioned, either by way of total or partial partition,
the income derived from such converted property as is received by the spouse on partition
will be deemed to arise to the spouse from assets transferred indirectly by the individual to
the spouse and consequently, such income shall also be included in the total income of the
individual who effected the conversion of such property.
(3) Where income from the converted property is included in the total income of an individual
under section 64(2), it will be excluded from the total income of the family or, as the case
may be, of the spouse of the individual.

6.6 INCOME INCLUDES LOSS

It is significant to note that as per the Explanation 2 to section 64, ‘income’ would include ‘loss’.
Accordingly, where the specified income to be included in the total income of the individual is a loss,
such loss will be taken into account while computing the total income of the individual. It is significant
to note that this Explanation applies to clubbing provisions under both sections 64(1) and 64(2).

6.7 DISTINCTION BETWEEN SECTION 61 AND SECTION 64

It may be noted that the main distinction between the two sections is that section 61 applies only to
a revocable transfer made by any person while section 64 applies to revocable as well as irrevo-
cable transfers made only by individuals.

Note - Clubbing provisions are attracted in respect of income arising from the assets
transferred, however, income arising on accretion of income arising from transferred asset,
would not be clubbed except in case of minor child.

6.8 LIABILITY OF PERSON IN RESPECT OF INCOME

INCLUDED IN THE INCOME OF ANOTHER PERSON
[SECTION 65]
Sections 61 to 64 provide for clubbing of income of one person in the hands of the other in
circumstances specified therein. However, service of notice of demand (in respect of tax on such

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 6.16 DIRECT TAX LAWS

income) may be made upon the person to whom such asset is transferred (i.e., the transferee). In
such a case, the transferee is liable to pay that portion of tax levied on the transferor which is
attributable to the income so clubbed.
Similar provision will be applicable in case of deemed ownership of house property under section
27 i.e., transfer of house property otherwise than for adequate consideration to spouse, not being
in connection with agreement to live apart or to minor child not being a minor married daughter.
ILLUSTRATION 8
Mr. Ravi has gifted his only house property to his wife, Mrs. Ravi, and his married daughter,
Mrs. Divya. The Assessing Officer has served a notice of demand on Mr. Ravi for payment of tax
for the income derived from the said house property. Examine the validity of the Assessing
Officer’s action.
SOLUTION
As per section 27(i), an individual who transfers otherwise than for adequate consideration any
house property to his spouse, not being a transfer in connection with an agreement to live apart, or
to a minor child not being a married daughter shall be deemed to be the owner of the house
property so transferred.
Mr. Ravi, in this case, would be the deemed owner only in respect of the share of house property
transferred to his wife Mrs. Ravi without consideration and not for the share of the house property
transferred to his married daughter Mrs. Divya.
Since Mr. Ravi is the deemed owner of the share of house property transferred to his wife without
consideration, the income derived from the house property, to the extent attributable to the share
of property transferred to his wife without consideration, would be taxable in his hands under the
head “Income from house property”.
However, as per section 65, the notice of demand can be served on Mrs. Ravi for payment of that
portion of tax levied on Mr. Ravi attributable to the income derived [by virtue of section 27(i)], from
the share of house property transferred to Mrs. Ravi, and standing in her name.

However, the income derived from house property, attributable to the share of property transferred
to his married daughter without consideration, would be taxable in the hands of his daughter. Such
income would not be taxable in the hands of Mr. Ravi. Mr. Ravi will not be responsible for the
payment of tax attributable to aforesaid share of income of daughter from house property.
Thus, the action of the Assessing Officer in serving notice of demand on Mr. Ravi for payment of
tax for the entire income derived from the said house property is not valid.

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 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.17

TEST YOUR KNOWLEDGE

Questions
1. Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution to the firm as on
01-04-2024 was ` 5 lakhs, out of which ` 3 lakhs was contributed out of her own sources
and ` 2 lakhs was contributed out of gift from her husband.
As further capital was needed by the firm, she further invested ` 2 lakhs on 01.05.2024 out
of the funds gifted by her husband. The firm paid interest on capital of ` 80,000 and share
of profit of ` 60,000 for the financial year 2024-25.
Advise Mr. F as to the applicability of the provisions of section 64(1)(iv) and the manner
thereof in respect of the above referred transactions.
2. Mr. A has gifted a house property valued at ` 50 lakhs to his wife, Mrs. B, who in turn has
gifted the same to Mrs. C, their daughter-in-law. The house was let out at ` 25,000 per
month throughout the year. Compute the total income of Mr. A and Mrs. C.
Will your answer be different if the said property was gifted to his son, husband of Mrs. C?
3. Mr. Korani transferred 2,000 debentures of ` 100 each of Wild Fox Ltd. to his wife
Mrs. Rekha Korani on 03.10.2023 without consideration. The company paid interest of
` 30,000 in September, 2024 which was deposited by Mrs. Korani with Kartar Finance Co.
in October, 2024. Kartar Finance Co. paid interest of ` 3,000 upto March, 2025. How would
both the interest income be charged to tax in A.Y. 2025-26?
4. Mr. Rose, out of his own funds, had taken an FDR for ` 10,00,000 bearing interest @10%
p.a. payable half-yearly in the name of his wife Lilly. The interest earned during the financial
year 2024-25 of ` 1,00,000 was invested by Mrs. Lilly in the business of packed spices
which resulted in a net profit of ` 55,000 for the year ended 31.03.2025. How shall the
interest on FDR and income from business be taxed for the Assessment Year 2025-26?
5. Naresh is a fashion designer having lucrative business. His wife is a model. Naresh pays
her monthly salary of ` 10,000. The Assessing Officer while admitting that the salary is an
admissible deduction, in computing the total income of Naresh had applied the provisions of
section 64(1) and had clubbed the income (salary) of his wife in Naresh hands.

Discuss the correctness of the action of the Assessing Officer.

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 6.18 DIRECT TAX LAWS

Answers
1. As per section 64(1)(iv), in computing the total income of any individual, there shall be
included all such income as arises, directly or indirectly, subject to the provisions of section
27(i), to the spouse of such individual from assets transferred directly or indirectly to the
spouse by such individual otherwise than for adequate consideration or in connection with
an agreement to live apart.
In this instant case, Mr. F has gifted money to his wife, Mrs. E. Mrs. E, in turn, invested
such gifted money in the capital of a partnership firm, of which she is a partner. Mrs. E has
also contributed a sum of ` 3 lakhs out of her own resources to the capital of the firm.
As per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv),
where the assets transferred, directly or indirectly, by an individual to his spouse are
invested by the transferee in the nature of contribution of capital as a partner in a firm,
proportionate interest on capital will be clubbed with the income of the transferor. Such
proportion has to be computed by taking into account the value of the aforesaid investment
as on the first day of the previous year to the total investment by way of capital
contribution as a partner in the firm as on that day.
In view of the above provision, interest received by Mrs. E from the firm shall be included in
total income of Mr. F to the extent of ` 32,000 i.e., ` 80,000 x ` 2,00,000/ ` 5,00,000.
Share of profit amounting to ` 60,000 is exempt from income-tax under the provisions of
section 10(2A). The provisions of section 64 will not apply, if the income from the
transferred asset itself is exempt from tax.
Note: It is assumed that rate of interest on capital contributed by Mrs. E does not exceed
12% p.a.
2. As per section 27(i), an individual who transfers otherwise than for adequate consideration
any house property to his spouse, not being a transfer in connection with an agreement to
live apart, shall be deemed to be the owner of the house property so transferred.
Therefore, in this case, Mr. A would be the deemed owner of the house property transferred
to his wife Mrs. B without consideration.
As per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or
indirectly, to her by an individual otherwise than for adequate consideration would be
included in the total income of such individual.

© The Institute of Chartered Accountants of India

 INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S
TOTAL INCOME 6.19

Income from let-out property is ` 2,10,000 [i.e., ` 3,00,000, being the actual rent calculated
at ` 25,000 per month less ` 90,000, being deduction under section 24 @30% of
` 3,00,000]
In this case, income of ` 2,10,000 from let-out property arising to Mrs. C, being Mr. A’s
son’s wife, would be included in the income of Mr. A, applying the provisions of section 27(i)
and section 64(1)(vi). Such income would, therefore, not be taxable in the hands of Mrs. C.
In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64
would not apply, since the son is not a minor child. Therefore, the income of ` 2,10,000
from letting out of property gifted to the son would be taxable in the hands of the son.
It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands of
the recipient of house property, since the receipt of property in each case was from a
“relative” of such individual. Therefore, the stamp duty value of house property would not be
chargeable to tax in the hands of the recipient of immovable property, even though the
house property was received by her or him without consideration.
Note - The first part of the question can also be answered by applying the provisions of
section 64(1)(vi) directly to include the income of ` 2,10,000 arising to Mrs. C in the hands
of Mr. A. [without first applying the provisions of section 27(i) to deem Mr. A as the owner of
the house property transferred to his wife Mrs. B without consideration], since section
64(1)(vi) speaks of clubbing of income arising to son’s wife from indirect transfer of assets
to her by her husband’s parent, without consideration. Gift of house property by Mr. A to
Mrs. C, via Mrs. B, can be viewed as an indirect transfer by Mr. A to Mrs. C.
3. As per section 64(1)(iv), income arising from assets transferred without adequate
consideration by an individual to his spouse is liable to be clubbed in the hands of the
individual. It may be noted that income on the asset transferred has to be clubbed but if
there is accretion to the asset, any further income derived on such accretion should not be
clubbed.

Therefore, applying the provisions of section 64(1)(iv), ` 30,000, being the interest on
debentures received by Mrs. Rekha Korani in September, 2024 will be clubbed with the
income of Mr. Korani, since he had transferred the debentures of the company without
consideration to her in October, 2023.
However, the interest of ` 3,000 upto March, 2025 earned by Mrs. Rekha Korani on the
interest on the debentures deposited by her with Kartar Finance Company shall be taxable
in her individual capacity and will not be clubbed with the income of Mr. Korani.

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 6.20 DIRECT TAX LAWS

4. Section 64(1)(iv) specifies that the income derived by the spouse of an assessee from the
assets transferred directly or indirectly without adequate consideration or intention to live
apart shall be clubbed with the income of the transferor. Therefore, the interest income of
` 1 lakh on the FDR of ` 10 lakhs for the F.Y.2024-25 shall be clubbed with the income of
Mr. Rose.
When Mrs. Lilly invested the interest income in a business and earned profits therefrom,
such profits shall not be clubbed with the income of her husband but shall be taxable in her
individual capacity. This is so because the income from the accretion of the transferred
assets is not to be clubbed with the income of the transferor [CIT v. M. S. S. Rajan (2001)
252 ITR 126 (Mad)].
5. This question is based on the principles laid down by Madras High Court in the case of CIT
v. Smt. R. Bharati (1999) 240 ITR 697 where the interpretation of the terms “professional
qualifications” and “knowledge” came up for consideration as per proviso to section 64(1).
These words do not necessarily connote a qualification conferred by a recognized university
after examining the candidate who has undergone a course of study in a technical subject
or course of study preparing him for a profession of law, accountancy etc. Accordingly, the
term “qualification” must be given a wide meaning as referring to the qualities which are
required to be possessed by a person performing the work that he does, so long as that
work is capable of being regarded as technical or professional.
The word “professional” is a term capable of very broad meaning and would encompass a
variety of occupations. A large number of occupations are being practiced which form a
source of livelihood and are capable of being regarded, as professions as long as they
require certain degree of skill. A person having skill, experience and competence in a line of
work can be regarded as professionally qualified for the purpose of section 64(1)(ii).
Applying the rationale of the Madras High Court ruling, a model, having skill, competence
and experience in her line can be considered as a professional. Hence, the action of the
Assessing Officer is not correct.

© The Institute of Chartered Accountants of India

CHAPTER 7
AGGREGATION OF INCOME,
SET OFF OR CARRY
FORWARD OF LOSSES

LEARNING OUTCOMES

After studying this chapter, you would be able to -

 identify the permissible inter-source and inter-head adjustments for set-off
of losses and the restrictions in inter-source and inter-head set-off of
losses;
 determine the unabsorbed losses which can be carried forward to the
subsequent assessment year for set-off against income of that year and
the maximum period of carry forward of such losses;
 appreciate the provisions regarding carry forward and set-off of losses
in case of closely held companies and eligible start-ups as also in case
of change in constitution of firms;
 appreciate the conditions which are required to be satisfied by the
amalgamating company and the amalgamated company for carry
forward and set-off of loss of the amalgamating company by the
amalgamated company;
 appreciate the special provisions for carry forward and set-off of losses
of a banking company against the profits of a banking institution under a
scheme of amalgamation;
 compute the gross total income of an assessee after applying the
provisions relating to set-off and carry forward and set-off of losses.

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 Set off and Carry forward & Set off of losses under normal provisions of the Act

Carry forward and Set-off of unabsorbed losses

7.2

Inter-source set-off of losses under the same head of

Inter-head adjustment
income

Unabsorbed loss from house property can be

carried forward for maximum 8 AYs for set-off
Exceptions against income from house property
Exceptions

Unabsorbed business loss can be carried forward

CHAPTER OVERVIEW

for maximum 8 AYs for set-off against profits and

gains from business or profession
Loss under the head Speculation loss, loss

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Loss from Long term “ Profits and gains of from specified business
speculative business capital loss business or u/s 35AD and loss from Unabsorbed loss from speculation business can
profession” cannot be the activity of owning be carried forward for maximum 4 AYs for set-off
set off against income and maintaining race against income from speculation business
DIRECT TAX LAWS

under the head horses cannot be set-off

Loss from specified business u/s “ Salaries” against income under Unabsorbed loss from specified business under
any other head section 35AD can be carried forward for indefinite
35AD
period for set-off against profit from any specified
business
Loss from the activity of owning and Long-term capital loss can be carried forward for
maintaining race horses maximum 8 AYs for set-off against long-term capital
gains
Loss from house
Loss under the head “ Capital gains” property can be set off Short-term capital loss can be carried forward for
cannot be set-off against income under against income under maximum 8 AYs for set-off against capital gains
any other head. any other head only to
the extent of
` 2 lakhs
Unabsorbed loss from the activity of owning and
maintaining race horses can be carried forward
for maximum 4 AYs for set-off against income
from the activity of owning and maintaining race
horses
 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.3
LOSSES

Notes - Following brought forward losses/ depreciation is not allowed to be set off while computing total income under the
special concessional tax regimes under section 115BAA/115BAB/115BAC/115BAD/115BAE -
1. Brought forward business loss of specified business u/s 35AD
2. Brought forward business loss on account of deduction u/s 35(1)(ii)/(iia)/(iii) or u/s 35(2AA) [or u/s 35(2AB), in case of
computation of total income under sections 115BAA/115BAB, applicable to companies].
3. Unabsorbed depreciation attributable to additional depreciation u/s 32(1)(iia).
This is because deductions u/s 35AD, u/s 35(i)(ii)/(iia)/(iii), u/s 35(2AA), u/s 35(2AB) and additional depreciation u/s 32(1)(iia)
are not allowable under the special concessional tax regimes.
In addition, in case of persons covered under section 115BAC, loss from house property cannot be set off against income
under other head and the same cannot be carried forward. Also, brought forward loss from self-occupied house property is not
allowed to be set-off while computing total income for A.Y.2025-26 under the default tax regime thereunder.

Other Provisions

Section 72A Section 72AA Section 72AB Section 78 Section 79

Carry forward and Carry forward and Carry forward and

set off of set off of set off of
accumulated accumulated accumulated loss Carry forward and
Carry forward and
business loss and business loss and and unabsorbed set off of losses in
set off of losses in
unabsorbed unabsorbed depreciation in case of change in
case of closely
depreciation in depreciation in a business constitution of firm
held companies
certain cases of scheme of reorganisation of or on succession
amalgamation/ amalgamation in co-operative
demerger etc. certain cases banks

7.1 AGGREGATION OF INCOME

In certain cases, some amounts are deemed as income in the hands of the assessee though they
are actually not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B,
69C and 69D. These are discussed in detail in Chapter 1. The Assessing Officer may require the
assessee to furnish explanation in such cases. If the assessee does not offer any explanation or
the explanation offered by the assessee is not satisfactory, the amounts referred to in these
sections would be deemed to be the income of the assessee. Such amounts have to be
aggregated with the assessee’s income.

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 7.4 DIRECT TAX LAWS

7.2 CONCEPT OF SET OFF AND CARRY FORWARD

OF LOSSES
Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry forward
of losses. In simple words, “Set-off” means adjustment of losses against the profits from another
source/head of income in the same assessment year. If losses cannot be set-off in the same year
due to inadequacy of eligible profits, then such losses are carried forward to the next assessment
year for adjustment against the eligible profits of that year. The maximum period for which different
losses can be carried forward for set-off has been provided in the Act.

7.3 INTER SOURCE ADJUSTMENTS [SECTION 70]

(1) Inter-source set-off of losses
Under this section, the losses incurred by the assessee in respect of one source shall be
set-off against income from any other source under the same head of income, since the
income under each head is to be computed by grouping together the net result of the
activities of all the sources covered by that head. In simpler terms, loss from one source of
income can be adjusted against income from another source, both the sources being under
the same head.

Example: Loss from one house property can be set off against the income from another
house property.
Example: Loss from one business, say textiles, can be set off against income from any
other business, say printing, in the same year as both these sources of income fall under
one head of income. Therefore, the loss in one business may be set-off against the profits
from another business in the same year.

(2) Impermissible inter-source set-off

Inter-source set-off, however, is not permissible in the following cases -
(i) Long-term capital loss [Section 70(3)]
Short-term capital loss is allowed to be set off against both short-term capital gain
and long-term capital gain. However, long-term capital loss can be set-off only
against long-term capital gain and not against short-term capital gain.

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.5
LOSSES

(ii) Speculation loss [Section 73(1)]

A loss in speculation business can be set-off only against the profits of any other
speculation business and not against any other business or professional income.
However, losses from other business can be adjusted against profits from
speculation business.
(iii) Loss from the activity of owning and maintaining race horses [Section 74A(3)]
Such loss can be set-off only against income from the activity of owning and
maintaining race horses.
(iv) Losses from specified business [Section 73A(1)]
A loss in any specified business referred in section 35AD can be set-off only against
any other specified business, whether eligible for deduction under 35AD or not.
However, losses from other business can be set-off against profits from specified
business
It must be noted that loss from an exempt source cannot be set-off against profits from a taxable
source of income. For example, share of loss from a partnership firm cannot be set-off against
business income, since share of income of the firm is exempt under section 10(2A).

7.4 INTER HEAD ADJUSTMENTS [SECTION 71]

Loss under one head of income can be adjusted or set off against income under another head.
However, the following points should be considered:
(1) Loss under any head other than capital gains: Where the net result of the computation
under any head of income (other than ‘Capital Gains’) is a loss, the assessee can set-off
such loss against his income assessable for that assessment year under any other head,
including ‘Capital Gains’.
(2) Loss under the head “Profits and gains from business or profession: Where the net
result of the computation under the head “Profits and gains of business or profession” is a
loss, such loss cannot be set off against income under the head “Salaries”. It shall be
allowed to set off from income under any other head except “Salaries”.
(3) Loss under the head “Capital Gains”: Where the net result of computation under the
head ‘Capital Gains’ is a loss, whether short term or long term, such capital loss cannot be
set-off against income under any other head.
(4) Loss under the head “Income from house property”: Where the net result of the
computation under the head “Income from house property” is a loss and the assessee has

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 7.6 DIRECT TAX LAWS

income assessable under any other head of income, the amount of such loss exceeding ` 2
lakhs would not be allowable to be set-off against income under the other head. In other
words, the maximum loss from house property which can be set-off against income from
any other head is ` 2 lakhs.
Note - The loss under the head “Income from house property” would not be allowable to be
set-off against income under the other head if an assessee (Individual/HUF/AOP(other than
Co-operative Society)/BOI/Artificial Juridical Person)) pays tax at concessional rate u/s
115BAC. However, if the assessee exercises the option of shifting out of the default tax
regime provided under section 115BAC(1A) and there is a loss under the head “Income
from house property” and the assessee has income assessable under any other head of
income, the maximum loss from house property which can be set-off against income from
any other head is ` 2 lakhs. In other words, in such case, the amount of such loss
exceeding ` 2 lakhs would not be allowable to be set-off against income under the other
head.
(5) Speculation loss and loss from the activity of owning and maintaining race horses
cannot be set off against income under any other head.

(6) Losses from Specified business u/s 35AD: In case of an assessee exercising the option
of shifting out of the default tax regime provided under section 115BAC(1A), loss from
specified business referred to in section 35AD can be set off only against income from any
other specified business. Such loss cannot be set off against income under any other head.
However, losses from other business can be set-off against profits from specified business.
If the income from a source is exempt from tax, loss from that exempt source cannot be set off
against taxable income from a different source or taxable income under a different head.

7.5 CARRY FORWARD AND SET OFF OF LOSS FROM

HOUSE PROPERTY [SECTION 71B]
(1) Set-off and Carry Forward & Set-off of losses:
(a) If the assessee, being an individual, HUF, AoP (other than Co-operative
Society), BoI or Artificial Juridical Person, exercises the option of shifting out
of the default tax regime provided under section 115BAC(1A): In any
assessment year, if there is a loss under the head “Income from house property”,
such loss will first be set-off against income from any other head to the extent of

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.7
LOSSES

` 2,00,000 during the same year. The unabsorbed loss will be carried forward to the
following assessment year to be set-off against income under the head “Income from
house property”.
(b) If such assessee referred to in (a) above pays tax at concessional rate u/s
115BAC: The loss under the head “Income from house property” would not be
allowable to be set-off against income under any other head. The unabsorbed loss
cannot be carried forward to the following assessment year..
(c) In case of other assessees (Companies/Firms/Co-operative Societies): In any
assessment year, if there is a loss under the head “Income from house property”,
such loss will first be set-off against income from any other head to the extent of
` 2,00,000 during the same year. The unabsorbed loss will be carried forward to the
following assessment year to be set-off against income under the head “Income from
house property”.
This is irrespective of whether or not the company opts for section 115BAA/115BAB
and whether or not the co-operative society opts for section 115BAD/115BAE.
(2) Maximum period for carry forward & set-off of losses: The loss under this head is
allowed to be carried forward upto 8 assessment years immediately succeeding the
assessment year in which the loss was first computed.
Note - It is to be remembered that once a particular loss is carried forward, it can be set off only
against the income from the same head in the forthcoming assessment years.

ILLUSTRATION 1
Mr. Kamal (aged 35 years) submits the following particulars pertaining to the A.Y.2025-26:
Particulars `
Income from salary (computed) 4,20,000
Loss from let-out property (-) 2,30,000
Business loss (-)1,20,000
Bank interest (FD) received 85,000

Compute the total income of Mr. Kamal for the A.Y.2025-26, assuming that
(i) He has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
(ii) He pays tax under the default tax regime.

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SOLUTION
(i) Computation of total income of Mr. Kamal for the A.Y.2025-26
under the normal provisions of the Act
Particulars Amount Amount
(`) (`)
Income from salary 4,20,000
Less: Loss from house property of ` 2,30,000 to be restricted to
` 2 lakhs by virtue of section 71(3A) (-) 2,00,000 2,20,000
Balance loss of ` 30,000 from house property to be carried
forward to next assessment year
Income from other sources (interest on fixed deposit with bank) 85,000
Less: Business loss of ` 1,20,000 set-off to the extent of (-) 85,000 -
` 85,000
(Business loss of ` 35,000 to be carried forward for set-off
against business income of the next assessment year)
Gross total income [See Note below] 2,20,000
Less: Deduction under Chapter VI-A Nil
Total income 2,20,000

Notes: (i) Gross Total Income includes salary income of ` 2,20,000 after adjusting loss of
` 2,00,000 from house property. The balance loss of ` 30,000 from house property to be carried
forward to next assessment year for set-off against income from house property of that year.
(ii) Business loss of ` 1,20,000 is set off to the extent of bank interest of ` 85,000 and
remaining business loss of ` 35,000 will be carried forward as it cannot be set off against
salary income.
(ii) Computation of total income of Mr. Kamal for the A.Y.2025-26
under default tax regime
Particulars Amount Amount
(`) (`)
Income from salary 4,20,000
Income from other sources (interest on fixed deposit with bank) 85,000
Less: Business loss of ` 1,20,000 set-off to the extent of (-) 85,000 -
` 85,000
(Business loss of ` 35,000 to be carried forward for set-off
against business income of the next assessment year)
Gross total income/ Total Income 4,20,000

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Notes: (i) Under the default tax regime, loss from house property cannot be set off against
income under any other head and cannot be carried forward to next assessment year.

(ii) Business loss of ` 1,20,000 is set off to the extent of bank interest of ` 85,000 and
remaining business loss of ` 35,000 will be carried forward as it cannot be set off against
salary income.

7.6 CARRY FORWARD AND SET OFF OF BUSINESS

LOSSES [SECTION 72]
Under the Act, the assessee has the right to carry forward the losses under the head of business
and profession in cases where such loss cannot be set-off due to the absence or inadequacy of
income under any other head in the same year. The loss so carried forward can be set-off against
the profits of subsequent previous years.
Section 72 covers the carry forward and set-off of losses arising from a business or profession.
Conditions
The assessee’s right to carry forward business losses under this section is, however, subject to
the following conditions:-
(1) The loss should have been incurred in business, profession or vocation.
(2) The loss should not be in the nature of a loss in the business of speculation.
(3) Loss from one business can be carried forward & set-off against the income from any
other business: The loss may be carried forward and set-off against the income from
business or profession though not necessarily against the profits and gains of the same
business or profession in which the loss was incurred.
However, a loss carried forward cannot, under any circumstances, be set-off against the
income from any head other than “Profits and gains of business or profession”.
(4) Person who incurred the loss alone is entitled to carry forward & set-off the loss: The
loss can be carried forward and set off only against the profits of the assessee who incurred
the loss. That is, only the person who has incurred the loss is entitled to carry forward or set
off the same. Consequently, the successor of a business cannot carry forward or set off the
losses of his predecessor except in the case of succession by inheritance.

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(5) Maximum period for carry forward & set-off of losses: A business loss can be carried
forward for a maximum period of 8 assessment years immediately succeeding the
assessment year in which the loss was incurred.
(6) Rehabilitation of business [Proviso to section 72(1)]
If there is a loss sustained in a business which is discontinued in the circumstances
mentioned under section 33B and such business is re-established, reconstructed or revived
by the assessee within 3 years from the end of previous year of discontinuation, the loss
attributable to such business
(i) shall be allowed to be set off against the profits and gains, if any, of that business or
any other business carried on by him and assessable for that assessment year, and
(ii) if the loss cannot be wholly so set off, the amount of balance loss to be carried to the
following assessment year and so on for 7 assessment years immediately
succeeding provided such re-established business is continued to be carried by the
assessee.
Note: Circumstances referred to in section 33B
The business is formed as re-establishment, reconstruction or revival by the assessee of
the business of such industrial undertaking which is discontinued by reason of extensive
damage to or destruction of any building, machinery, plant or furniture owned by the
assessee and used for the purpose of such business.
Such damage or destruction should be affected as a direct result of flood, typhoon,
hurricane, cyclone, earthquake or other convulsion of nature or riot or civil disturbance or
accidental fire or explosion or action by an enemy or action taken in combating an enemy.
ILLUSTRATION 2
Mr. Vikas, a resident individual, furnishes the following particulars for the P.Y.2024-25:
Particulars `
Income from salary (computed) 50,000
Income from house property (24,000)
Income from non-speculative business (24,000)
Income from speculative business (6,000)
Short-term capital losses 25,000
Long-term capital gains taxable u/s 112 21,000

What is the total income chargeable to tax for the A.Y.2025-26, assuming that he pays tax under
section 115BAC?

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SOLUTION
Total income of Mr. Vikas for the A.Y. 2025-26
Particulars Amount Amount
(`) (`)
Income from salaries 50,000
Income from house property
Loss from house property can neither be set-off nor can be carried Nil
forward, since Mr. Vikas is paying tax under the default tax regime
u/s 115BAC
Profits and gains of business and profession
Business loss to be carried forward [Note (i)] (24,000)
Speculative loss to be carried forward [Note (ii)] (6,000)
Capital Gains
Long term capital gain taxable u/s 112 21,000
Short term capital loss of ` 25,000 set-off against long-term capital (21,000)
gains to the extent of ` 21,000 [Note (iii)]
Nil
Balance short term capital loss of ` 4,000 to be carried forward
[Note (iii)]
Taxable income 50,000

Notes:
(i) Business loss cannot be set-off against salary income. Therefore, loss of ` 24,000 from the
non-speculative business cannot be set off against the income from salaries. Hence, such
loss has to be carried forward to the next year for set-off against business profits, if any.
(ii) Loss of ` 6,000 from the speculative business can be set off only against the income from
the speculative business. Hence, such loss has to be carried forward.
(iii) Short term capital loss can be set off against both short term capital gain and long term
capital gain. Therefore, short term capital loss of ` 25,000 can be set-off against long-term
capital gains to the extent of ` 21,000. The balance short term capital loss of ` 4,000
cannot be set-off against any other income and has to be carried forward to the next year
for set-off against capital gains, if any.

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7.7 CARRY FORWARD AND SET OFF OF ACCUMULATED

BUSINESS LOSSES AND UNABSORBED
DEPRECIATION IN CERTAIN CASES OF
AMALGAMATION/ DEMERGER, ETC. [SECTION 72A]
(1) Amalgamation
Applicability: This section applies where there has been an amalgamation of –

(i) a company owning an industrial undertaking or a ship or a hotel with another company; or
(ii) a banking company with a specified bank; or
(iii) one or more public sector company or companies with one or more public sector company
or companies; or
(iv) erstwhile public sector company (i.e., a company which was a public sector company in
earlier previous years and ceases to be a public sector company by way of strategic
disinvestment by the Government) with one or more company or companies, if the share
purchase agreement entered into under strategic disinvestment restricted immediate
amalgamation of the said public sector company and the amalgamation is carried out within
five year from the end of the previous year in which the restriction on amalgamation in the
share purchase agreement ends.
Strategic disinvestment means sale of shareholding by the Central Government or any
State Government or a public sector company, in a public sector company or in a company,
which results in reduction of its shareholding to below 51% and transfer of control to the
buyer.
However, the condition of reduction of shareholding below 51% would apply only in a case
where shareholding of the Central Government or the State Government or the public
sector company was above 51% before such sale of shareholding.

Further, the requirement of transfer of control to the buyer may be carried out by the Central
Government or the State Government or the public sector company or any two of them or
all of them.

As per section 2(27) of the Companies; Act, 2013, control shall include the right to appoint
majority of the directors or to control the management or policy decisions exercisable by a
person or persons acting individually or in concert, directly or indirectly, including by virtue

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of their shareholding or management rights or shareholders agreements or voting

agreements or in any other manner.

Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by
amalgamated company in case of amalgamation: It provides that the accumulated loss and
unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or
unabsorbed depreciation, as the case may be, of the amalgamated company for the previous year
in which the amalgamation took place. Other provisions of the Act relating to set off and carry
forward shall also apply accordingly.
However, in case of an amalgamation of erstwhile public sector company, with one or more
company or companies, the accumulated loss and the unabsorbed depreciation of the
amalgamating company, which is deemed to be the loss or, as the case may be, the allowance for
unabsorbed depreciation of the amalgamated company, shall not be more than the accumulated
loss and unabsorbed depreciation of the public sector company as on the date on which the public
sector company ceases to be a public sector company as a result of strategic disinvestment.

Conditions for availing benefit under this section

(i) Conditions to be fulfilled by the amalgamating company
(a) The amalgamating company should have been engaged in the business, in which
the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more
years.
(b) The amalgamating company has held continuously as on the date of amalgamation,
at least 3/4th of the book value of the fixed assets held by it, 2 years prior to the
date of amalgamation.
(ii) Conditions to be fulfilled by the amalgamated company
(a) The amalgamated company should hold at least 3/4th of the book value of fixed
assets of the amalgamating company acquired as a result of amalgamation for a
minimum period of 5 years from the effective date of amalgamation.
(b) The amalgamated company continues the business of the amalgamating company
for at least 5 years.
(c) The amalgamated company must also fulfill such other conditions prescribed under
Rule 9C for the revival of the business of the amalgamating company or to ensure
that the amalgamation is for genuine business purpose -

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(1) The amalgamated company shall achieve the level of production of at least
50% of the installed capacity (capacity of production as on the date of
amalgamation) of the said undertaking before the end of 4 years from the date
of amalgamation and continue to maintain the said minimum level of
production till the end of 5 years from the date of amalgamation. Central
Government has the power to modify this requirement on an application made
by the amalgamated company.
(2) The amalgamated company shall furnish to the Assessing Officer a certificate
in the prescribed form verified by a Chartered Accountant in this regard.
Consequences of non-fulfillment of specified conditions: In case the above specified
conditions are not fulfilled, that part of carry forward of loss and unabsorbed depreciation
remaining to be utilized by the amalgamated company shall lapse and such loss or depreciation as
has been set-off shall be treated as the income in the year in which there is a failure to fulfill the
conditions.
(2) Demerger
Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by
resulting company in case of demerger: Where there has been a demerger of an undertaking,
• the accumulated loss and the unabsorbed depreciation directly relatable to the undertaking
transferred by the demerged company to the resulting company shall be allowed to be
carried forward and set off in the hands of the resulting company.
• if the accumulated loss or unabsorbed depreciation is not directly relatable to the
undertaking, the same will be apportioned between the demerged company and the
resulting company in the same proportion in which the value of the assets retained by the
demerged company and have been transferred to the resulting company.

Conditions for availing benefit under this section: The Central Government is empowered to
notify such conditions as it considers necessary to ensure that the demerger is for genuine
business purpose.
(3) Re-organisation of business
Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by
company in case of succession: In case of re-organisation of business, whereby a firm is
succeeded by a company as per the provisions of section 47(xiii), or a sole proprietary concern is
succeeded by a company as per the provisions of section 47(xiv), then the accumulated business
loss and the unabsorbed depreciation of the firm/proprietary concern, as the case may be, shall be

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deemed to be the loss or depreciation allowance of the successor company for the previous year
in which the business re-organisation took place. Other provisions of the Act relating to set-off and
carry forward will apply accordingly.
Consequences of non-fulfillment of specified conditions: If it is found that any of the
conditions laid down in the corresponding sub-sections (xiii) or (xiv) of section 47 have not been
complied with, the set-off of loss or allowance of depreciation made in any previous year in the
hands of the successor company shall be deemed to be the income of the company chargeable to
tax in the year in which the conditions have been violated.
(4) Conversion of a company into LLP [Section 72A(6A)]
Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by LLP in
case of conversion: In case of re-organisation of business, whereby a private company or
unlisted company is succeeded by a LLP as per the provisions of section 47(xiiib), then the
successor LLP would be allowed to carry forward and set-off the business loss and unabsorbed
depreciation of the predecessor company.
Consequences of non-fulfillment of specified conditions: If the entity fails to fulfill the
conditions specified in section 47(xiiib), the benefit of set-off of business loss/unabsorbed
depreciation availed by the LLP would be deemed to be the profits and gains of the LLP
chargeable to tax in the previous year in which the LLP fails to fulfill any of the conditions.
(5) Meanings of certain terms
Term Particulars
Accumulated loss It means so much of the loss of
- the predecessor firm or
- the proprietary concern or
- the private company or unlisted public company or
- the amalgamating company or
- the demerged company, as the case may be,
under the head “Profit and gains of business or profession” (not
being a loss sustained in a speculation business) which such
predecessor firm or the proprietary concern or the company or
amalgamating company or demerged company, would have been
entitled to carry forward and set off under the provisions of section 72,
if the re-organisation of business or amalgamation or demerger had
not taken place.
Industrial undertaking It means any undertaking which is engaged in -
(i) the manufacture or processing of goods;

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(ii) the manufacture of computer software;

(iii) the business of generation or distribution of electricity or any
other form of power;
(iv) providing telecommunication services, whether basic or
cellular, including radio paging, domestic satellite service,
network of trunking, broad band network and internet services.
(v) mining;
(vi) the construction of ships, aircraft or rail systems.
Unabsorbed Unabsorbed depreciation means so much of the allowance for
depreciation depreciation of
- the predecessor firm or
- the proprietary concern or
- the private company or unlisted public company or
- the amalgamating company or
- the demerged company, as the case may be,
which remains to be allowed and which would have been allowed to
the predecessor firm or the proprietary concern or the company or
amalgamating company or demerged company, as the case may be,
under the provisions of this Act, if the re-organisation of business or
amalgamation or demerger had not taken place
Specified bank It means the State Bank of India (SBI) constituted under the SBI Act,
1955 or a subsidiary bank as defined in the SBI (Subsidiary Banks)
Act, 1959 or a corresponding new bank constituted under section 3 of
the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 or under section 3 of the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1980.

7.8 CARRY FORWARD AND SET OFF OF

ACCUMULATED BUSINESS LOSSES AND
UNABSORBED DEPRECIATION IN A SCHEME OF
AMALGAMATION IN CERTAIN CASES [SECTION
72AA]
(1) Applicability: This section provides for carry forward and set off of accumulated loss and
unabsorbed depreciation allowance where there has been an amalgamation of -
(i) one or more banking company

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- with any other banking institution under a scheme sanctioned and brought into
force by the Central Government under section 45(7) of the Banking
Regulation Act, 1949; or
- with any other banking institution or a company subsequent to a strategic
disinvestment, wherein the amalgamation is carried out within 5 years from
the end of the previous year during which such strategic disinvestment is
carried out; or
(ii) one or more corresponding new bank or banks with any other corresponding new
bank under a scheme brought into force by the Central Government under section 9
of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or
under section 9 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980, or both, as the case may be, or
(ii) one or more Government company or companies with any other Government
company under a scheme sanctioned and brought into force by the Central
Government under section 16 of the General Insurance Business (Nationalisation)
Act, 1972.
(2) Allowability of carry forward and set-off of accumulated loss and unabsorbed
depreciation in case of amalgamation: The accumulated loss and unabsorbed
depreciation of such banking company or companies or amalgamating corresponding new
bank or banks or amalgamating Government company or companies shall be deemed to be
the loss or the allowance for depreciation of such banking institution or company or
amalgamated corresponding new bank or amalgamated Government company for the
previous year in which the scheme of amalgamation is brought into force. Accordingly, all
the provisions contained in the Income-tax Act, 1961, relating to set off and carry forward of
loss and unabsorbed depreciation would be applicable.
(3) Meaning of certain terms:
Term Meaning
Accumulated So much of the loss of the amalgamating banking company or
loss companies or amalgamating corresponding new bank or banks or
amalgamating Government company or companies under the head
"Profits and gains of business or profession" (not being a loss
sustained in a speculation business) which such amalgamating
banking company or companies or amalgamating corresponding new
bank or banks or amalgamating Government company or companies,

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would have been entitled to carry forward and set off under the
provisions of section 72, if the amalgamation had not taken place
Government It means a Government company as defined in section 2(45) of the
company Companies Act, 2013, which is engaged in the general insurance
business and which has come into existence by operation of section 4
or section 5 or section 16 of the General Insurance Business
(Nationalisation) Act, 1972
Unabsorbed It means so much of the allowance for depreciation of the
depreciation amalgamating banking company or companies or amalgamating
corresponding new bank or banks or amalgamating Government
company or companies which remains to be allowed and which would
have been allowed to such banking company or companies or
amalgamating corresponding new bank or banks or amalgamating
Government company or companies, if the amalgamation had not taken
place.

7.9 CARRY FORWARD AND SET OFF OF

ACCUMULATED LOSS AND UNABSORBED
DEPRECIATION IN BUSINESS REORGANISATION OF
CO-OPERATIVE BANKS [SECTION 72AB]
(1) Allowability of carry forward and set-off of accumulated loss and unabsorbed loss by
a co-operative bank in case of reorganisation: Under this section, in a case where the
amalgamation has taken place during the previous year, set-off of accumulated loss and the
unabsorbed depreciation of the predecessor co-operative bank will be allowed in the hands
of the successor co-operative bank as if the amalgamation had not taken place. All the
other provisions of this Act relating to set off and carry forward of loss and allowance for
depreciation would apply accordingly.
(2) Conditions for availing benefit under this section

(i) Conditions to be fulfilled by the predecessor co-operative bank

(a) It should have been engaged in the business of banking for three or more
years; and
(b) It has held at least 3/4thof the book value of fixed assets as on the date of the
business reorganisation, continuously for 2 years prior to the date of business
reorganisation;

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(ii) Conditions to be fulfilled by the successor co-operative bank

(a) It should hold at least 3/4thof the book value of fixed assets of the predecessor
co-operative bank acquired through business reorganisation, continuously for
a minimum period of 5 years immediately succeeding the date of business
reorganisation;
(b) It continues the business of the predecessor co-operative bank for a minimum
period of 5 years from the date of business reorganisation; and
(c) It fulfils such other conditions as may be prescribed to ensure the revival of
the business of the predecessor co-operative bank or to ensure that the
business reorganisation is for genuine business purpose.
(3) Quantum allowed of accumulated loss and unabsorbed depreciation: The amount of
set-off of the accumulated loss and unabsorbed depreciation allowable to the resulting co-
operative bank has to be calculated in the following manner -
(i) In a case where the whole of the amount of such loss or unabsorbed
depreciation is directly relatable to the undertakings transferred to the
resulting co-operative bank - the entire accumulated loss or unabsorbed
depreciation of the demerged co-operative bank is allowed to be set-off.
(ii) In a case where the accumulated loss or unabsorbed depreciation is not
directly relatable to the undertakings transferred to the resulting co-operative
bank - the amount which bears the same proportion to the accumulated loss or
unabsorbed depreciation of the demerged co-operative bank as the assets of the
undertaking transferred to the resulting co-operative bank bears to the assets of the
demerged co-operative bank.

Example:
If A Co-op Bank is the demerged co-operative bank and B Co-op Bank is the
resulting co-operative bank, the amount of set-off of the accumulated loss and
unabsorbed depreciation allowable to B Co-op. bank would be –
Assets of the undertaking transferred
Unabsorbed business loss/depreciation to B Co-op bank
×
of A Co-op bank Assets of A Co-op bank

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(4) Additional conditions for availing benefit under this section: The Central Government
may specify other conditions by notification in the Official Gazette as it considers
necessary, to ensure that the business reorganisation is for genuine business purposes.
(5) Period before and after business reorganization to constitute two different previous
years: The period commencing from the beginning of the previous year and ending on the
date immediately preceding the date of business reorganisation, and the period
commencing from the date of such business reorganisation and ending with the previous
year shall be deemed to be two different previous years for the purposes of set off and carry
forward of loss and allowance for depreciation.
Example:
If the date on which business re-organisation took place is 1.11.2024, then the period
between 1.4.2024 and 31.10.2024 and the period between 1.11.2024 and 31.3.2025 would
be deemed to be two different previous years for the purposes of set-off and carry forward
of unabsorbed business losses and depreciation.

(6) Consequences of non-fulfillment of specified conditions: In a case where the

conditions specified in (2) above or notified under (4) above are not complied with, the set-
off of accumulated loss or unabsorbed depreciation allowed in any previous year to the
successor co-operative bank shall be deemed to be the income of the successor co-
operative bank chargeable to tax for the year in which the conditions are not complied with.
(7) Meaning of certain terms
Term Particulars
Accumulated It means so much of loss of the amalgamating co-operative bank or
loss the demerged co-operative bank, as the case may be, under the head
“Profits and gains of business or profession” (not being a loss
sustained in a speculation business) which such amalgamating co-
operative bank or the demerged co-operative bank, would have been
entitled to carry forward and set-off under the provisions of section 72
as if the business reorganisation had not taken place.
Unabsorbed It means so much of the allowance for depreciation of the
depreciation amalgamating co-operative bank or the demerged co-operative bank,
as the case may be, which remains to be allowed and which would
have been allowed to such bank as if the business reorganisation had
not taken place.

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7.10 LOSSES IN SPECULATION BUSINESS [SECTION 73]

The meaning of the expression ‘speculative transaction’ as defined in section 43(5) and the
treatment of income from speculation business has already been discussed under the head
“Profits and gains of business or profession”.
(1) Set-off and Carry forward & set-off of loss from speculation business: Since
speculation is deemed to be a business distinct and separate from any other business
carried on by the assessee, the losses incurred in speculation can be neither set off in the
same year against any other non-speculation income nor be carried forward and set off
against other income in the subsequent years.

Therefore, if the losses sustained by an assessee in a speculation business cannot be set-

off in the same year against any other speculation profit, they can be carried forward to
subsequent years and set-off only against income from any speculation business carried on
by the assessee. Loss from the activity of trading in derivatives, however, is not to be
treated as speculative loss.
(2) Maximum period for carry forward & set-off of losses: The loss in speculation business
can be carried forward only for a maximum period of 4 years from the end of the relevant
assessment year in respect of which the loss was computed. Loss from the activity of
trading in derivatives, however, is not to be treated as speculative loss.
(3) When a business of a company deemed to be carrying on a speculation business:
The Explanation to this section provides that where any part of the business of a company
consists in the purchase and sale of the shares of other companies, such a company shall
be deemed to be carrying on speculation business to the extent to which the business
consists of the purchase and sale of such shares.
However, this deeming provision does not apply to the following companies –

(i) A company whose gross total income consists of mainly income chargeable under
the heads “Income from house property”, “Capital gains” and “Income from other
sources”;

(ii) A company, the principal business of which is –

(a) the business of trading in shares; or
(b) the business of banking; or

(c) the granting of loans and advances.

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Thus, these companies would be exempted from the operation of this Explanation.
Accordingly, if these companies carry on the business of purchase and sale of shares of
other companies, they would not be deemed to be carrying on speculation business.

7.11 CARRY FORWARD & SET OFF OF LOSSES BY

SPECIFIED BUSINESSES [SECTION 73A]
(1) Set-off and Carry forward & set-off of losses of specified business: Any loss computed
in respect of the specified business referred to in section 35AD shall be set off only against
profits and gains, if any, of any other specified business. The unabsorbed loss, if any, will
be carried forward for set off against profits and gains of any specified business in the
following assessment year and so on

Note - The loss of an assessee claiming deduction under section 35AD in respect of a specified
business can be set-off against the profit of another specified business under section 73A,
irrespective of whether the latter is eligible for deduction under section 35AD. An assessee can,
therefore, set-off the losses of a hospital or hotel which begins to operate after 1st April, 2010
and which is eligible for deduction under section 35AD, against the profits of the existing
business of operating a hospital (with atleast 100 beds for patients) or a hotel (of two-star or
above category), even if the latter is not eligible for deduction under section 35AD.

(2) Loss can be set-off indefinitely: There is no time limit specified for carry forward and set-
off and therefore, such loss can be carried forward indefinitely for set-off against income
from specified business.
Notes:
(i) Companies opting for section 115BAA/115BAB and Co-operative societies opting for
section 115BAD/115BAE are not eligible for deduction under section 35AD.
(ii) An assessee, being an Individual/HUF/AOP/BOI, paying tax under the default tax regime
under section 115BAC(1A) would not be entitled to deduction under section 35AD.
However, such person exercising the option of shifting out of the default tax regime
provided under section 115BAC(1A) and carrying on specified business, can claim
deduction u/s 35AD in respect of capital expenditure (other than land, goodwill and financial
instruments) incurred in respect of such business, subject to fulfillment of specified
conditions. Any loss computed in respect of the specified business referred to in section
35AD can, however, be set off only against profits and gains, if any, of any other specified
business. The unabsorbed loss, if any, will be carried forward for set off against profits and
gains of any specified business in the following assessment year and so on.

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7.12 LOSSES UNDER THE HEAD ‘CAPITAL GAINS’

[SECTION 74]
Carry forward & set-off of losses: Section 74 provides that where for any assessment year, the
net result under the head ‘Capital gains’ is short term capital loss or long term capital loss, the loss
shall be carried forward to the following assessment year to be set off in the following manner:
(1) Short-term capital loss: Where the loss so carried forward is a short-term capital loss, it
shall be set off against any capital gains, short term or long term, arising in that year.

(2) Long-term capital loss: Where the loss so carried forward is a long-term capital loss, it
shall be set off only against long term capital gain arising in that year.
(3) Loss under head capital gains: Net loss under the head capital gains cannot be set off against
income under any other head.
(4) Maximum period for carry forward & set-off of loss: Any unabsorbed loss shall be
carried forward to the following assessment year up to a maximum of 8 assessment years
immediately succeeding the assessment year for which the loss was first computed.

Note - Long-term capital gain exceeding ` 1,25,000 arising on sale of equity shares or units of
equity oriented fund or unit of business trust on which STT is paid
- in respect of equity shares, both at the time of acquisition and sale and
- in respect of units of equity oriented fund or unit of business trust, at the time of sale
is taxable under section 112A @10% or 12.5%, as the case may be. Long-term capital loss on sale
of such shares/units can, therefore, be set-off and carried forward for set-off against long-term
capital gains by virtue of section 70(3) and section 74.

ILLUSTRATION 3
During the P.Y. 2024-25, Mr. Chetan has the following income and the brought forward losses:

Particulars `
Short term capital gains on sale of shares 1,75,000
Brought forward Long-term capital loss of A.Y.2023-24 (96,000)
Short term capital loss of A.Y.2024-25 (42,000)
Long term capital gain u/s 112 85,000

What is the capital gain taxable in the hands of Mr. Chetan for the A.Y.2025-26?

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SOLUTION
Taxable capital gains of Mr. Chetan for the A.Y. 2025-26

Particulars ` `
Short term capital gains on sale of shares 1,75,000
Less: Brought forward short-term capital loss of the A.Y.2024-25 (42,000) 1,33,000

Long term capital gain 85,000

Less: Brought forward long-term capital loss of A.Y.2023-24 of
` 96,000 set-off to the extent of ` 85,000 (85,000) Nil
[See Note below]
Taxable short-term capital gains 1,33,000

Note: Long-term capital loss cannot be set off against short-term capital gain. Hence, the
unadjusted long term capital loss of A.Y.2023-24 of ` 11,000 (i.e., ` 96,000 – ` 85,000) has to be
carried forward to the next year to be set-off against long-term capital gains of that year.

7.13 LOSSES FROM THE ACTIVITY OF OWNING AND

MAINTAINING RACE HORSES [SECTION 74A(3)]
(1) Set-off and Carry forward & set-off of loss: According to provisions of section 74A(3), the
losses incurred by an assessee from the activity of owning and maintaining race horses
cannot be set-off against the income from any other source other than the activity of owning
and maintaining race horses.
(2) Maximum period for carry forward & set-off of losses: Such loss can be carried forward
for a maximum period of 4 assessment years immediately succeeding the assessment year
for which the loss was first computed, for being set-off against the income from the activity
of owning and maintaining race horses.
(3) Meaning of certain terms

Term Meaning
Amount of loss (i) In case assessee has no income by way of stake money –
incurred by the amount of revenue expenditure incurred by the assessee wholly &
assessee in exclusively for the purpose of maintaining race horses.
the activity of (ii) In case assessee has income by way of stake money - The
owning and amount by which such income by way of stake money falls short of the

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maintaining amount of revenue expenditure incurred by the assessee wholly &

race horses exclusively for the purpose of maintaining race horses. i.e. Loss =
Stake money – revenue expenditure for the purpose of maintaining
race horses.
Horse race A horse race upon which wagering or betting may be lawfully made.
Income by way The gross amount of prize money received on a race horse or race
of stake money horses by the owner thereof on account of the horse or horses or any
one or more of the horses winning or being placed second or in any
lower position in horse races.

ILLUSTRATION 4
Mr. Dinesh has the following income for the P.Y.2024-25-
Particulars `
Income from the activity of owning and maintaining the race horses 75,000
Income from textile business 95,000
Brought forward textile business loss (relating to A.Y. 2024-25) 50,000
Brought forward loss from the activity of owning and maintaining the race horses 96,000
(relating to A.Y.2022-23)

What is the total income in the hands of Mr. Dinesh for the A.Y. 2025-26?
SOLUTION
Total income of Mr. Dinesh for the A.Y. 2025-26

Particulars ` `
Income from the activity of owning and maintaining race horses 75,000
Less: Brought forward loss of ` 96,000 from the activity of owning and
maintaining race horses set-off to the extent of ` 75,000 75,000
Nil
Balance loss of ` 21,000 (` 96,000 – ` 75,000) from the activity of
owning and maintaining race horses to be carried forward to A.Y.2026-27
Income from textile business 95,000
Less: Brought forward business loss from textile business 50,000 45,000
Total income 45,000

Note: Loss from the activity of owning and maintaining race horses cannot be set-off against any
other source/head of income.

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7.14 CARRY FORWARD AND SET OFF OF LOSSES IN

CASE OF CHANGE IN CONSTITUTION OF FIRM OR
SUCCESSION [SECTION 78]
(1) Change in constitution of firm: Where there is a change in the constitution of a firm, so
much of the loss proportionate to the share of a retired or deceased partner remaining
unabsorbed (i.e. so much of the loss proportionate to the share of a retired or deceased
partner as exceeds his share of profits, if any, in the firm in respect of the previous year),
shall not be allowed to be carried forward by the firm. However, unabsorbed depreciation
can be carried forward without such restriction.
(2) Succession otherwise by inheritance: Where any person carrying on any business or
profession has been succeeded in such capacity by another person otherwise than by
inheritance, such other person shall not be allowed to carry forward and set off against his
income, any loss incurred by the predecessor.
(3) Succession by inheritance: Where there is a succession by inheritance, the legal heirs
are entitled to set-off the business loss of the predecessor. Such carry forward and set-off is
possible even if the legal heirs constitute themselves as a partnership firm. In such a case,
the firm can carry forward and set-off the business loss of the predecessor.

7.15 CARRY FORWARD AND SET OFF OF LOSSES IN

CASE OF CLOSELY HELD COMPANIES [SECTION 79]
(1) Carry forward and set-off of losses in case of closely held company not being an
eligible start-up referred to in section 80-IAC
In the case of a company in which the public are not substantially interested and not being
an eligible start-up referred to in section 80-IAC, no loss incurred in any year prior to the
previous year shall be carried forward and set-off against the income of the previous year,
unless

• on the last day of the previous year, the shares of the company carrying not less
than 51% of the voting power were beneficially held by persons
• who beneficially held shares of the company carrying not less than 51% of the voting
power on the last day of the year or years in which the loss was incurred.

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(2) Carry forward and set-off of losses in case of closely held company being an eligible
start-up referred to in section 80-IAC

In case of a company in which the public are not substantially interested but being an
eligible start-up as referred to in section 80-IAC, any unabsorbed loss of the company shall
be allowed to be carried forward and set off against the income of the previous year if either
of the conditions are satisfied –
(a) on the last day of the previous year, the shares of the company carrying not less
than 51% of the voting power were beneficially held by persons who beneficially held
shares of the company carrying not less than 51% of the voting power on the last
day of the year or years in which the loss was incurred; or
(b) all the shareholders of such company who held shares carrying voting power on the
last day of the previous year or years in which the loss was incurred continue to hold
those shares on the last day of such previous year in which the loss is to be set-off
and such loss has been incurred during the period of 10 years beginning from the
year of incorporation of such company.
(3) Non-applicability of restriction
This restriction shall, however, not apply:
(i) where a change in the voting power and shareholding takes place in a previous year
consequent upon the death of a shareholder or on account of transfer of shares by
way of gift to any relative of the shareholder making such gift;
(ii) where any change in shareholding takes place in an Indian company, being a
subsidiary of a foreign company, as a result of amalgamation or demerger of the
foreign company. However, this is subject to the condition that 51% of the
shareholders of the amalgamating/ demerged company continue to be shareholders
of the amalgamated/ resulting foreign company.
(iii) where a change in shareholding takes place in a previous year pursuant to a
resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after
affording a reasonable opportunity of being heard to the jurisdictional Principal
Commissioner or Commissioner.

(iv) to a company, and its subsidiary and the subsidiary of such subsidiary, where
(a) the Tribunal, on an application moved by the Central Government under
section 241 of the Companies Act, 2013, has suspended the Board of

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Directors of such company and has appointed new directors nominated by the
Central Government, under section 242 of the said Act; and

(b) a change in shareholding of a company, and its subsidiary and the subsidiary
of such subsidiary, has taken place in a previous year pursuant to a resolution
plan approved by the Tribunal under section 242 of the Companies Act, 2013
after affording a reasonable opportunity of being heard to the jurisdictional
Principal Commissioner or Commissioner.
(v) to a company to the extent that a change in the shareholding has taken place during
the previous year on account of
(a) relocation of a capital asset by the original fund to the resulting fund; and
(b) consequent transfer of a capital asset, being a share or unit or interest held
by a shareholder or unitholder or interest holder in the original fund, in
consideration for the share or unit or interest in the resultant fund [For the
meaning of the terms “relocation”, “original fund” and “resultant fund”, please
refer Chapter 4: Capital Gains]
(vi) to an erstwhile public sector company which has become so as a result of strategic
disinvestment by the Government (discussed in detail at 7.7) subject to the condition
that the ultimate holding company of such erstwhile public sector company
immediately after completion of the strategic disinvestment, continues to hold,
directly or through its subsidiary or subsidiaries, 51% of the voting power of the
erstwhile public sector company in aggregate.
However, if the above condition is not complied with in any previous year after the
completion of strategic disinvestment, the restriction mentioned in (1) or (2) above
shall apply for such previous year and subsequent previous year.
(4) Meaning of eligible start-up:

Company engaged in eligible business

Total turnover ≤ ` 100 crores Holds a certificate of eligible

Incorporated during the in the P.Y. relevant to the A.Y. for business from the notified Inter
period 1.4.2016-31.3.2025 which deduction is claimed under Ministerial Board of Certification
section 80-IAC

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(5) Meaning of eligible business:

A business carried out by an eligible start-up engaged in –
- Innovation, development or improvement of products or processes or services or
- a scalable business model with a high potential of employment generation or wealth
creation
(6) A company shall be a subsidiary of another company, if such other company holds more
than half in nominal value of the equity share capital of the company.

7.16 NO SET OFF OF LOSSES AGAINST UNDISCLOSED

INCOME BROUGHT TO TAX CONSEQUENT TO
SEARCH, REQUISITION AND SURVEY [SECTION 79A]
(1) No set-off of losses or unabsorbed depreciation against undisclosed income: No loss
(whether brought forward or otherwise) or unabsorbed depreciation under section 32(2) can
be set-off against undisclosed income included in the total income of any previous year of
an assessee [consequent to a search under section 132 or a requisition under section 132A
or a survey under section 133A (other than a survey conducted for TDS verification under
section 133A(2A))] while computing his total income for such previous year.
(2) Meaning of undisclosed income: Undisclosed income means -
(i) Income represented by any money, bullion, jewellery or other valuable article
or thing or any entry in the books of account: Any income of the previous year
represented, either wholly or partly, by any money, bullion, jewellery or other
valuable article or thing or any entry in the books of account or other documents or
transactions found in the course of a search under section 132 or a requisition under
section 132A or a survey under section 133A [other than under section 133A(2A)],
which has -
(A) not been recorded on or before the date of search or requisition or
survey, as the case may be, in the books of account or other documents
maintained in the normal course relating to such previous year; or
(B) not been disclosed to the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner before the date of
search or requisition or survey, as the case may be; or

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(ii) Income represented by any entry in respect of an expense: Any income of the
previous year represented, either wholly or partly, by any entry in respect of an
expense recorded in the books of account or other documents maintained in the
normal course relating to the previous year which is found to be false and which
would not have been found to be so, had the search not been initiated or the survey
not been conducted or the requisition not been made.

7.17 ORDER OF SET OFF OF LOSSES

As per the provisions of section 72(2), brought forward business loss is to be set-off before setting
off unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows -

(1) Current year depreciation under section 32(1)

(2) Current year capital expenditure on scientific research and current year expenditure on
family planning, to the extent allowed.

(3) Brought forward loss from business/profession [Section 72(1)]

(4) Unabsorbed depreciation [Section 32(2)]

(5) Unabsorbed capital expenditure on scientific research [Section 35(4)]

(6) Unabsorbed expenditure on family planning [Section 36(1)(ix)].

ILLUSTRATION 5
Mr. Varun has furnished his details for the A.Y.2025-26 as under:

Particulars `
Income from salaries (computed) 1,70,000
Income from speculation business 60,000
Loss from non-speculation business (40,000)
Short term capital gain 90,000
Long term capital loss of A.Y.2023-24 (30,000)
Winning from lotteries (gross) 20,000

What is the taxable income of Mr. Varun for the A.Y.2025-26?

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SOLUTION
Computation of taxable income of Mr. Varun for the A.Y.2025-26

Particulars ` `
Income from salaries 1,70,000
Income from speculation business 60,000
Less: Loss from non-speculation business (40,000) 20,000
Short-term capital gain 90,000
Winnings from lotteries
20,000
Taxable income 3,00,000

Note: Long term capital loss can be set off only against long term capital gain. Therefore, long
term capital loss of ` 30,000 has to be carried forward to the next assessment year.
ILLUSTRATION 6
Compute the gross total income of Mr. Fadnis for the A.Y.2025-26 from the information given
below –
Particulars `
Income from house property (computed) 1,25,000
Income from business (before providing for depreciation) 1,35,000
Short-term capital gains on sale of shares 56,000
Long-term capital loss from sale of property (brought forward from A.Y.2022-23) (90,000)
Income from tea business 1,20,000
Dividend from Indian companies carrying on agricultural operations (Gross) 1,20,000
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)

SOLUTION

Gross Total Income of Mr. Fadnis for the A.Y. 2025-26

Particulars ` `
Income from house property 1,25,000
Income from business
Profits before depreciation 1,35,000

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Less: Current year depreciation 26,000

1,09,000
Income from tea business (40% is business income) 48,000
1,57,000
Less: Brought forward business loss 45,000 1,12,000
Income from the capital gains
Short-term capital gains 56,000
Income from Other Sources
Dividend from Indian companies is chargeable to tax in the hands of 1,20,000
shareholders
Gross Total Income 4,13,000

Notes:
(1) Dividend from Indian companies of ` 1,20,000 is taxable in the hands of shareholders at
normal rate of tax.
(2) 60% of the income from tea business is treated as agricultural income and therefore,
exempt from tax.
(3) Long-term capital loss can be set-off only against long-term capital gains. Therefore, long-
term capital loss of ` 90,000 brought forward from A.Y.2022-23 cannot be set-off in the
A.Y.2025-26. It has to be carried forward for set-off against long-term capital gains, if any,
during A.Y.2026-27.

7.18 SUBMISSION OF RETURN OF LOSSES [SECTION 80]

As per section 80,
- business loss to be carried forward under section 72(1)
- speculation business loss to be carried forward under section 73(2)
- loss from specified business to carried forward under section 73A(2)

- loss under the head “Capital Gains” to be carried forward under section 74(1) and
- loss incurred in the activity of owning and maintaining race horses to be carried forward
under section 74A(3).

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which has not been determined in pursuance of a return filed under section 139(3) cannot be
carried forward and set-off. Thus, the assessee must have filed a return of loss under section
139(3) in order to carry forward and set off of such losses. Such a return of loss should be filed
within the time allowed under section 139(1).
In other words, the non-filing of a return of loss disentitles the assessee from carrying forward the
above specified losses sustained by him. Such a return should be filed within the time allowed
under section 139(1).

This condition does not apply to a loss from house property carried forward under section 71B and
unabsorbed depreciation carried forward under section 32(2).

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SIGNIFICANT SELECT CASES

1. CIT v. KBD Sugars and Distilleries Ltd. [2023] 454 ITR 800 (SC)

Issue Relevant provision of Law, analysis & decision

Can a resulting entity set off Relevant Provision of Law: Clause (vi) of Section 2(19AA)
and carry forward the losses lays down a condition that demerger in relation to companies
of the dysfunctional unit of means the transfer, pursuant to a scheme of arrangement
demerged entity? under section 230 to 232 of the Companies Act, 2013 by a
demerged company of its one or more undertakings to any
resulting company in such a manner that the transfer of the
undertaking is on a going concern basis.
Assessing Officer’s Contentions: The Assessing Officer
contented that the assessee was ineligible to the benefit of
brought forward loss under section 72A(4) for the reason
that the demerged company was dysfunctional since 1999
and, therefore, does not qualify to be a 'going concern'.
Since the undertaking not being a 'going concern', the
condition laid down in subclause (vi) of section 2(19AA) for
demerger stands violated.
Analysis and Decision: The Tribunal opined that the words
used 'on a going concern basis' in subclause (vi) of section 2
(19AA) only means that the transfer should be based on a
'going concern', and it does not mean that the undertaking
being transferred should be a 'going concern' as on the date
of transfer.
The 'scheme of demerger', which stands approved by the
High Courts and the jurisdictional Court, clearly establishes
the fact that the transfer of the undertaking is indeed on a
'going concern basis'. The assets, liabilities, employees,
debts, obligations, rights, etc., of the undertaking,
immediately prior to the demerger, stand entirely vested with
the assessee upon 'demerger'. This amounts to 'transfer of
the undertaking on a going concern basis'.
A simple reading of the same makes it very clear that the
assessee is eligible for the benefits under section 72A(4).
The Act does not state that the undertaking being demerged
ought to be a going concern at the time of demerger. It only
states that the undertaking being demerged should stand
transferred in a manner similar to the manner in which a
'going concern' is transferred.

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Accordingly, the High Court held that if a unit were running

and profitable, the same would not be available for
demerger. It would be incongruous to construe sub-clause
(vi) of section 2(19AA) to mean a running unit. The scheme
of demerger had been approved by the High Courts.
Therefore, the assessee was entitled to set off the brought
forward losses under section 72A(4).
The Apex Court affirmed the decision of the High Court.

2. Pramod Mittal v. CIT (2013) 356 ITR 456 (Delhi)

Issue Analysis & Decision

Can the loss suffered by an The partnership firm was dissolved and the take over of the
erstwhile partnership firm, running business of the firm by the erstwhile partner as a
which was dissolved, be sole proprietor was not a case of succession by inheritance.
carried forward for set-off by Hence, the carry forward of losses of the firm by the sole
the individual partner who proprietor for set-off against his income is not allowed.
took over the business of the Note - In CIT v. Madhukant M. Mehta (2001) 247 ITR 805
firm as a sole proprietor, (SC), the sole proprietor had expired and after his death, the
considering the succession heirs succeeded the business as a partnership concern.
as a succession by Therefore, the losses suffered by the deceased proprietor
inheritance? was allowed to be set-off by the partnership firm since the
case falls within the exception mentioned u/s 78(2), i.e., a
case of succession by inheritance.
Also, in Saroj Aggarwal v. CIT (1985) 156 ITR 497 (SC),
upon death of a partner, his legal heirs were inducted as
partners in the partnership firm. The partnership firm was not
dissolved on the death of the partner. The partnership firm
which suffered the losses continued with induction of the
legal heirs of the deceased partner. This, being a case of
succession by inheritance, the benefit of carry forward of
losses was given to the re-constituted partnership firm.
In the present case, however, the partnership firm was
dissolved and the take over of the running business of the
firm by the erstwhile partner as a sole proprietor was not a
case of succession by inheritance. Hence, the carry forward
of losses of the firm by the sole proprietor was not allowed in
this case.

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TEST YOUR KNOWLEDGE

Questions
1. X carrying on a business as sole proprietor, died on 31st March, 2025. On his death, the
same business was continued by his legal heirs, by forming a firm. As on 31st March 2025, a
determined business loss of ` 5 lakhs is to be carried forward under the Income-tax Act,
1961.
Does the firm consisting of all legal heirs of Mr. X, get a right to have this loss adjusted
against its current income?
2. ABC Limited owning an industrial undertaking was amalgamated with XYZ Limited on
01.04.2024. All the conditions of section 2(1B) were satisfied.
ABC Limited has the following brought forward losses as assessed till the Assessment Year
2024-25:

Particulars ` (in lakhs)

(i) Speculative Loss 4
(ii) Unabsorbed Depreciation 18
(iii) Unabsorbed expenditure of capital nature on scientific research 2
(iv) Business Loss 120

XYZ Limited has computed a profit of ` 140 lacs for the financial year 2024-25 before
setting off the eligible losses of ABC Limited but after providing depreciation at 15% per
annum on ` 150 lakhs, being the consideration at which plant and machinery were
transferred to XYZ Limited. The written down value as per Income-tax record of ABC
Limited as on 1st April, 2024 was ` 100 lakhs.
The above profit of XYZ Limited includes speculative profit of ` 10 lacs.

Compute the total income of XYZ Limited for Assessment Year 2025-26 and indicate the
losses/ other allowances to be carried forward by it.
3. Examine in brief about the treatment to be given in the following case under the Income-tax
Act, 1961, for A.Y.2025-26:
A loss of ` 85,000 was sustained by Simran in the activity of owning and maintaining
camels for races.

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4. M/s. JKLM, a firm, consists of four partners namely, J, K, L and M. They shared profits and
losses equally during the year ended 31.3.2024. The assessed business loss of the firm for
the assessment year 2024-25 which it is entitled to carry forward amounts to ` 3,60,000. A
new deed of partnership was executed among J, K, L and M on 1.4.2024 in terms of which
they agreed to share profits and losses in the ratio of [Link] respectively.
Compute the amount of business loss relating to the assessment year 2024-25, which the
firm is entitled to set off against its business income for the assessment year 2025-26. The
business income of the firm for the assessment year 2025-26 is ` 3,30,000. Your answer
should be supported by reasons.
5. An assessee sustained an unabsorbed depreciation in the previous year relevant to the
assessment year 2024-25, which could not be set off against income from any other head in
that assessment year. The assessee did not furnish the return of loss within the time
allowed under section 139(1) in respect of the relevant assessment year. However, the
assessee filed the return within the time allowed under section 139(4). Can the assessee
carry forward such unabsorbed depreciation for set off against income of the assessment
year 2025-26?

Answers
1. Section 78(2) provides that where a person carrying on any business or profession has
been succeeded in such capacity by another person, otherwise than by inheritance, then,
the successor is not entitled to carry forward and set-off the loss of the predecessor against
his income. This implies that generally, set-off of business losses should be claimed by the
same person who suffered the loss and the only exception to this provision is when the
business passes on to another person by inheritance.
The facts of case given in the question are similar to the case CIT v. Madhukant M. Mehta
(2001) 247 ITR 805, where the Supreme Court has held that if the business is succeeded
by inheritance, the legal heirs are entitled to the benefit of carry forward of the loss of the
predecessor. Even if the legal heirs constitute themselves as a partnership firm, the benefit
of carry forward and set off of the loss of the predecessor would be available to the firm.

In this case, the business of X was continued by his legal heirs after his death by
constituting a firm. Hence, the exception contained in section 78(2) along with the decision
of the Apex Court discussed above, would apply in this case. Therefore, the firm is entitled
to carry forward the business loss of ` 5 lakhs of X.

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 7.38 DIRECT TAX LAWS

2. Computation of total income of XYZ Limited for the A.Y. 2025-26

Particulars (` in lakhs)
Business income before setting-off brought forward losses of ABC 140.00
Ltd.
Add: Excess depreciation claimed in the scheme of
amalgamation of ABC Limited with XYZ Limited.
Value at which assets are transferred by ABC Ltd. 150
WDV in the books of ABC Ltd. 100
Excess accounted 50
Excess depreciation claimed in computing taxable
income of XYZ Ltd. [` 50 lacs × 15 %] [Explanation 2 to 7.50
section 43(6)]
147.50
Set-off of brought forward business loss of ABC Ltd. (120.00)
(See Notes 2 & 4)
Set-off of unabsorbed depreciation under section 32(2) (18.00)
read with section 72A (See Notes 2 & 4)
Set-off of unabsorbed capital expenditure under section
35(1)(iv) read with section 35(4) (See Note 5) (2.00)
Business income 7.50

Notes:
1. It is presumed that the amalgamation is within the meaning of section 72A of the
Income-tax Act, 1961.
2. In the case of amalgamation of companies, the unabsorbed losses and unabsorbed
depreciation of the amalgamating company shall be deemed to be the loss or
unabsorbed depreciation of the amalgamated company for the previous year in
which the amalgamation was effected and such business loss and unabsorbed
depreciation shall be carried forward and set-off by the amalgamated company for a
period of 8 years and indefinitely, respectively.

3. As per section 72A(7), the accumulated loss to be carried forward specifically

excludes loss sustained in a speculative business. Therefore, speculative loss of ` 4
lacs of ABC Ltd. cannot be carried forward by XYZ Ltd.
4. Section 72(2) provides that where any allowance or part thereof unabsorbed under
section 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed

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 AGGREGATION OF INCOME, SET OFF OR CARRY FORWARD OF
7.39
LOSSES

scientific research capital expenditure) is to be carried forward, effect has to be first

given to brought forward business losses under section 72.

5. Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed
depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in
respect of capital expenditure on scientific research related to the business carried
on by the assessee. Therefore, unabsorbed capital expenditure on scientific
research can be set-off and carried forward in the same manner as unabsorbed
depreciation.

6. The restriction contained in section 73 is only regarding set-off of loss computed in

respect of speculative business. Such a loss can be set-off only against profits of
another speculation business and not non-speculation business. However, there is
no restriction under the Income-tax Act, 1961 regarding set-off of normal business
losses against speculative income. Therefore, normal business losses can be set-off
against profits of a speculative business.
Consequently, there is no loss or allowance to be carried forward by XYZ Ltd. to the
F.Y. 2025-26.
3. Section 74A(3) lays down the provisions for set-off and carry forward of loss from the
activity of owning and maintaining race horses. According to provisions of section 74A(3),
the losses incurred by an assessee from the activity of owning and maintaining race horses
cannot be set-off against the income from any other source other than the activity of owning
and maintaining race horses. Since the scope of this section is confined to the activity of
owning and maintaining race horses only, therefore, set-off and carry forward of loss from
the activity of owning and maintaining camels is not covered under section 74A(3).
It is possible to take a view that the loss from the activity of owning and maintaining camels
for races may be governed by section 72 provided such activity amounts to business.
Accordingly, the loss from the activity of owning and maintaining of camels for races can be
set-off against any income (other than income from salary) of current year and unadjusted
amount shall be carried forward for set off against any business income for a maximum
period of 8 assessment years immediately succeeding the assessment year in which the
loss was incurred.
4. The firm is entitled to set off its brought forward business loss amounting to ` 3,60,000
relating to the assessment year 2024-25 to the extent of ` 3,30,000 against its business

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 7.40 DIRECT TAX LAWS

income of ` 3,30,000 for the assessment year 2025-26, as per the provisions of section
72(1).

The balance unabsorbed business loss of ` 30,000 relating to the assessment year 2024-
25 will be carried forward to assessment year 2026-27.
Section 78(1) which deals with carry forward and set-off of losses in the case of change in
constitution of firm is applicable only where there is retirement or death of a partner. It is
not applicable to a case where there is a change in the ratio of sharing profits and
losses amongst the existing partners. Therefore, section 78(1) is not applicable to the
case of M/s. JKLM.
5. Section 139(3) stipulates that an assessee claiming carry forward of loss under the heads
“Profits and gains of business or profession” or “Capital gains” should furnish the return of
loss within the time stipulated under section 139(1). There is no reference to “unabsorbed
depreciation” in section 139(3). The assessee, in the instant case, has filed the return
showing unabsorbed depreciation within the time prescribed under section 139(4). The
assessee is, therefore, entitled to carry forward such unabsorbed depreciation for set off
against the income of the subsequent assessment year.

© The Institute of Chartered Accountants of India

CHAPTER 8
DEDUCTIONS FROM GROSS
TOTAL INCOME
LEARNING OUTCOMES

After studying this chapter, you would be able to:

 appreciate the general provisions contained in “A – General” of Chapter VI-A
relating to deductions to be made in computing total income;
 analyse and apply the provisions of Chapter VI-A contained in “B –
Deductions in respect of certain payments” in problem solving and addressing
related issues;
 appreciate the provisions of Chapter VI-A contained in “C – Deductions in
respect of certain incomes” and “CA – Deductions in respect of other incomes”,
and analyse and apply the provisions in problem solving and addressing
related issues;
 compute the deduction allowable in the case of a person with disability under
section 80U;
 compute the aggregate deduction available under Chapter VI-A to an
assessee, if available, and thereafter, arrive at the total income of the
assessee;
 compute the deduction available under section 10AA for units established in
SEZs considering the conditions specified thereunder.

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 8.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Deductions from Gross Total Income

Deductions under Chapter VI-A

Deductions in Other Deduction

Deductions in Deductions in
respect of certain Deductions under section
respect of certain respect of other
payments 10AA
incomes incomes

8.1 GENERAL PROVISIONS

As we have seen earlier, section 10 exempts certain incomes. Such income are excluded from the
total income and do not enter into the computation process at all. On the other hand, Chapter VI-A
contains deductions from gross total income. Section 10AA also provides for a deduction in respect
of units established in SEZ from the total income of the assessee. The important point to be noted
here is that if there is no gross total income, then no deductions will be permissible.
This Chapter contains deductions in respect of certain payments, deductions in respect of certain
incomes, deductions in respect of other income and other deductions. It also includes deduction
under section 10AA.

Section 80A
(1) Section 80A(1) provides that in computing the total income of an assessee, there shall be
allowed from his gross total income, the deductions specified in sections 80C to 80U.

(2) According to section 80A(2), the aggregate amount of the deductions under this chapter shall
not, in any case, exceed the gross total income of the assessee. Therefore, the total income
after deductions will either be positive or nil. It cannot be negative due to deductions.

An assessee cannot have a loss as a result of the deduction under Chapter VI-A and claim to
carry forward the same for the purpose of set-off against his income in the subsequent year.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.3

(3) Section 80A(3) provides that in the case of AOP/BOI, if any deduction is admissible under
section 80G/80GGA/80GGC/80-IA/80-IB/80-ID/80-IE, no deduction under the same section
shall be made in computing the total income of a member of the AOP or BOI in relation to the
share of such member in the income of the AOP or BOI.
(4) The profits and gains allowed as deduction under section 10AA or under any provision of
Chapter VI-A under the heading "C.-Deductions in respect of certain incomes" in any
assessment year, shall not be allowed as deduction under any other provision of the Act for
such assessment year [Section 80A(4)];

(5) The deduction, referred to in (4) above, shall not exceed the profits and gains of the
undertaking or unit or enterprise or eligible business, as the case may be [Section 80A(4)];
(6) No deduction under any of the provisions referred to in (4) above, shall be allowed if the
deduction has not been claimed in the return of income [Section 80A(5)];
(7) The transfer price of goods and services between such undertaking or unit or enterprise or
eligible business and any other business of the assessee shall be determined at the market
value of such goods or services as on the date of transfer. This is notwithstanding anything
to the contrary contained in section 10AA or in any provision of Chapter VI-A under the
heading “C- Deductions in respect of certain incomes” [Section 80A(6)].
(8) For this purpose, the expression "market value" has been defined to mean,-
(a) in relation to any goods or services sold or supplied, the price that such goods or
services would fetch if these were sold by the undertaking or unit or enterprise or
eligible business in the open market, subject to statutory or regulatory restrictions, if
any;
(b) in relation to any goods or services acquired, the price that such goods or services
would cost if these were acquired by the undertaking or unit or enterprise or eligible
business from the open market, subject to statutory or regulatory restrictions, if any;
(c) if it is a specified domestic transaction referred to in section 92BA, - in relation to any
goods or services sold, supplied or acquired means the arm’s length price as defined
in section 92F(ii) of such goods or services.
(9) Where a deduction under any provision of this Chapter under the heading “C – Deductions in
respect of certain incomes” is claimed and allowed in respect of the profits of such specified
business for any assessment year, no deduction under section 35AD is permissible in
relation to such specified business for the same or any other assessment year.

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 8.4 DIRECT TAX LAWS

In short, once the assessee has claimed the benefit of deduction under section 35AD for a
particular year in respect of a specified business, he cannot claim benefit under Chapter VI-A
under the heading “C.-Deductions in respect of certain incomes” for the same or any other
year and vice versa.
Section 80AB
This section provides that for the purpose of calculation of deductions specified in Chapter VI-A
under the heading “C - Deductions in respect of certain incomes”, the income computed in
accordance with the provisions of the Act (before making any deduction under Chapter VI-A) shall
alone be regarded as income received by the assessee and which is included in his gross total
income. Accordingly, the deductions specified in the aforesaid sections will be calculated with
reference to the net income as computed in accordance with the provisions of the Act (before
making deduction under Chapter VI-A) and not with reference to the gross amount of such income.
This is notwithstanding anything contained in the respective sections of Chapter VI-A.
Section 80AC: Furnishing return of income on or before due date mandatory for
claiming deduction under Chapter VI-A under the heading “C.- Deductions in respect
of certain incomes”
(1) Section 80AC stipulates compulsory filing of return of income on or before the due date
specified under section 139(1), as a pre-condition for availing benefit of deductions under any
provision of Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”.
Table showing the deductions contained in Chapter VI-A under the
heading “C. – Deductions in respect of certain income”
Section Deduction
80-IA Deductions in respect of profits and gains from undertakings or enterprises
engaged in infrastructure development/ operation/ maintenance, generation/
transmission/ distribution of power etc.
80-IAB Deduction in respect of profits and gains derived by an undertaking or
enterprise engaged in development of SEZ
80-IAC Deduction in respect of profits and gains derived by an eligible start-up from
an eligible business
80-IB Deduction in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings
80-IBA Deduction in respect of profits and gains from housing projects/rental
housing projects
80-IE Deduction in respect of profits and gains from manufacture or production of
eligible article or thing, substantial expansion to manufacture or produce any

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.5

eligible article or thing or carrying on of eligible business in North-Eastern

States
80JJA Deduction in respect of profits and gains from business of collecting and
processing of bio-degradable waste
80JJAA Deduction in respect of employment of new employees
80LA Deduction in respect of certain income of Offshore Banking Units and
International Financial Services Centre
80M Deduction in respect of certain inter-corporate dividends
80P Deduction in respect of income of co-operative societies
80QQB Deduction in respect of royalty income, etc., of authors of certain books
other than text books
80RRB Deduction in respect of royalty on patents

(2) The effect of this provision is that in case of failure to file return of income on or before the
stipulated due date, the undertakings would lose the benefit of deduction under these
sections.
ILLUSTRATION 1
Examine the following statements with regard to the provisions of the Income-tax Act, 1961:
(a) For grant of deduction u/s 80-IB, filing of audit report in prescribed form is must for a
corporate assessee; filing of return within the due date laid down in section 139(1) is not
required.
(b) Filing of belated return under section 139(4) of the Income-tax Act, 1961 will debar an
assessee from claiming deduction under section 80-IE.
SOLUTION
(a) The statement is not correct. Section 80AC stipulates compulsory filing of return of income
on or before the due date specified under section 139(1), as a pre-condition for availing the
benefit of deduction, inter alia, under section 80-IB.
(b) The statement is correct. As per section 80AC, the assessee has to furnish his return of
income on or before the due date specified under section 139(1), to be eligible to claim
deduction under, inter alia, section 80-IE.

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 8.6 DIRECT TAX LAWS

Section 80B(5)

“Gross total income” means the total income computed in accordance with the provisions of the Act
without making any deduction under Chapter VI-A. “Computed in accordance with the provisions of
the Act” implies —
(1) that deductions under appropriate computation section have already been given effect to;

(2) that income of other persons, if includible under sections 60 to 64, has been included;
(3) the intra head and/or inter head losses have been adjusted; and
(4) that unabsorbed business losses, unabsorbed depreciation etc., have been set-off.
Two types of deductions are allowable from Gross Total Income - Deductions under Chapter VI-A
and Deduction under section 10AA which are discussed in this chapter.
Let us first consider the deductions allowable in respect of certain payments.

8.2 DEDUCTIONS IN RESPECT OF PAYMENTS

(1) Deduction in respect of investment in specified assets [Section 80C]
Section 80C provides for a deduction from the Gross Total Income, of savings in specified modes of
investments. The deduction under section 80C is available only to an individual or HUF.
Note - The deduction under section 80C is available only to an individual or HUF exercising the
option of shifting out of the default tax regime provided under section 115BAC(1A). It is not
available under the default tax regime under section 115BAC.

The maximum permissible deduction under section 80C is ` 1,50,000. The following are the
investments/contributions eligible for deduction –
(i) Contribution in Unit-linked Insurance Plan 1971
Contributions in the name of the individual, his or her spouse or any child of the individual for
participation in the Unit-linked Insurance Plan 1971. In case of a HUF, the contribution can
be in the name of any member.

(ii) Contribution in Unit-linked Insurance Plan of LIC Mutual Fund

Contributions in the name of the individual, his or her spouse or any child of the individual for
participation in any Unit linked Insurance Plan of the LIC Mutual Fund. In case of a HUF, the
contribution can be in the name of any member.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.7

(iii) Premium paid in respect of life insurance policy

Premium paid for insurance on the life of the individual, spouse or any child (minor or major)
and in the case of HUF, any member thereof. This will include a life policy and an
endowment policy.
The following is a tabular summary of the deduction allowable under section 80C vis-à-vis
the date of issue of such policies –
Deduction u/s 80C
In respect of policies Premium paid to the extent of 20% of “actual capital sum assured”
issued before
31.3.2012
In respect of policies Premium paid to the extent of 10% of “actual capital sum assured”
issued on or after
1.4.2012 but before
1.4.2013
In respect of policies (a) Where the insurance is on the life of a person with
issued on or after disability or severe disability as referred to in section
1.4.2013 80U or a person suffering from disease or ailment as
specified under section 80DDB.
Premium paid to the extent of 15% of “actual capital sum
assured”
(b) Where the insurance is on the life of any person, other
than mentioned in (a) above
Premium paid to the extent of 10% of “actual capital sum
assured”
Meaning of actual capital sum assured - Minimum amount assured under the policy on
happening of the insured event at any time during the term of the policy, not taking into
account–
(i) the value of any premium agreed to be returned; or
(ii) any benefit by way of bonus or otherwise over and above the sum actually assured,
which is to be or may be received under the policy by any person.

ILLUSTRATION 2
Compute the eligible deduction under section 80C for A.Y.2025-26 in respect of life insurance
premium paid by Mr. Hari during the P.Y.2024-25, the details of which are given hereunder, if
Mr. Hari has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A) -

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 8.8 DIRECT TAX LAWS

Date of Person insured Actual Insurance

issue of capital sum premium paid
policy assured during 2024-25
(` ) (` )
(i) 30/3/2012 Self 8,00,000 48,000
(ii) 1/5/2018 Spouse 1,50,000 20,000
(iii) 1/6/2021 Handicapped son (section 4,00,000 80,000
80U disability)

SOLUTION
Date of Person Actual Insurance Deduction Remark
issue of insured capital premium u/s 80C for (restricted
policy sum paid A.Y.2025- to % of
assured during 26 actual
2024-25 capital sum
(`) (`) (`) assured)

(i) 30/3/2012 Self 8,00,000 48,000 48,000 20%

(ii) 1/5/2018 Spouse 1,50,000 20,000 15,000 10%
(iii) 1/6/2021 Handicapped
son (section
80U disability) 4,00,000 80,000 60,000 15%
Total 1,23,000

ILLUSTRATION 3
What would your answer if Mr. Hari pays tax under default tax regime under section
115BAC?
SOLUTION
If Mr. Hari pays tax under default tax regime under section 115BAC, he would not be eligible
for deduction under section 80C.
(iv) Premium paid in respect of a contract for deferred annuity
Premium paid to effect and keep in force a contract for a deferred annuity on the life of the
individual and/or his or her spouse or any child, provided such contract does not contain any
provision for the exercise by the insured of an option to receive cash payments in lieu of the
payment of the annuity.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.9

It is pertinent to note here that a contract for a deferred annuity need not necessarily be with
an insurance company. It follows therefore that such a contract can be entered into with any
person.
(v) Any sum deducted from the salary payable of a Government employee for securing a
deferred annuity

Amount deducted by or on behalf of the Government from the salary of a Government

employee in accordance with the conditions of his service for securing a deferred annuity or
making provisions for his spouse or children. The excess, if any, over one-fifth of the salary
is to be ignored.
(vi) Contribution to SPF/PPF/RPF
Contributions to any provident fund to which the Provident Funds Act, 1925 applies and
recognized provident fund qualifies for deduction under section 80C.
Contribution made to any Provident Fund set up by the Central Government and notified in his
behalf (i.e., the Public Provident Fund established under the Public Provident Fund Scheme,
1968) also qualifies for deduction under section 80C. Such contribution can be made in the
name of the individual, his spouse and any child of the individual, and any member of the
family, in case of a HUF. The maximum limit for deposit in PPF is ` 1,50,000 in a year.
ILLUSTRATION 4
An individual assessee, resident in India, has made the following deposit/payment during the
previous year 2024-25:
Particulars `
Contribution to the public provident fund 1,50,000
Insurance premium paid on the life of the spouse (policy taken on 1.4.2018) 36,000
(Assured value ` 3,00,000)

What is the deduction allowable under section 80C for A.Y.2025-26 if the assessee has
exercised the option of shifting out of the default tax regime provided under section
115BAC(1A)?
SOLUTION
Computation of deduction under section 80C for A.Y.2025-26
Particulars `
Deposit in public provident fund 1,50,000

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 8.10 DIRECT TAX LAWS

Insurance premium paid on the life of the spouse

(Maximum 10% of the assured value ` 3,00,000, as the policy is taken
after 31.3.2012) 30,000
Total 1,80,000
However, the maximum permissible deduction u/s 80C is restricted to 1,50,000

(vii) Contribution to approved superannuation Fund

Contribution by an employee to an approved superannuation fund qualifies for deduction

under section 80C.
(viii) Any sum paid or deposited in Sukanya Samridhi Account

Subscription to any such security of the Central Government or any such deposit scheme as
the Central Government as may notify in the Official Gazette. Accordingly, Sukanya
Samriddhi Scheme has been notified to provide that any sum paid or deposited during the
previous year in the said Scheme, by an individual in the name of –
(a) any girl child of the individual; or
(b) any girl child for whom such individual is the legal guardian

would be eligible for deduction under section 80C.

Exemption on payment from Sukanya Samriddhi Account [Section 10(11A)]

Section 10(11A) provides that any payment from an account opened in accordance with the
Sukanya Samriddhi Account Rules, 2014, made under the Government Savings Bank Act,
1873, shall not be included in the total income of the assessee. Accordingly, the interest
accruing on deposits in, and withdrawals from any account under the said scheme would be
exempt.

(ix) Subscription to National Savings Certificates VIII

Subscription to any Savings Certificates under the Government Savings Certificates Act,
1959 notified by the Central Government in the Official Gazette (i.e. National Savings
Certificate (VIII Issue) issued under the Government Savings Certificates Act, 1959).
(x) Contribution to approved annuity plan of LIC
Contributions to approved annuity plans of LIC (New Jeevan Dhara and New Jeevan Akshay,
New Jeevan Dhara I and New Jeevan Akshay I, II and III) or any other insurer (Tata AIG

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.11

Easy Retire Annuity Plan of Tata AIG Life Insurance Company Ltd.) as the Central
Government may, by notification in the Official Gazette, specify in this behalf.

(xi) Subscription towards notified units of mutual fund or UTI

Subscription to any units of any mutual fund referred to in section 10(23D) or from the
Administrator or the specified company under any plan formulated in accordance with such
scheme notified by the Central Government;
(xii) Contribution to notified pension fund set up by mutual fund or UTI
Contribution by an individual to a pension fund set up by any Mutual Fund referred to in
section 10(23D) or by the Administrator or the specified company as the Central Government
may specify (i.e., UTI-Retirement Benefit Pension Fund set up by the specified company
referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act,
2002 as a pension fund).

“Specified company” means a company formed and registered under the Companies Act,
1956 1 and whose entire capital is subscribed by such financial institutions or banks as may
be specified by the Central Government, by notification in the Official Gazette, for the
purpose of transfer and vesting of the undertaking
“Administrator” means a person or a body of persons appointed as Administrator by the
Central Government. The Central Government shall appoint a person or a body of persons,
as the “Administrator of the specified undertaking of the Unit Trust of India” for the purpose
of taking over the administration thereof and the Administrator shall carry on the
management of the specified undertaking of the Trust for and on behalf of the Central
Government.
“Specified undertaking” includes all business, assets, liabilities and properties of the Trust
representing and relatable to the schemes and Development Reserve Fund.

(xiii) Contribution to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008
Subscription to any deposit scheme or contribution to any pension fund set up by the
National Housing Bank i.e., National Housing Bank (Tax Saving) Term Deposit Scheme,
2008.

1 Now Companies Act, 2013

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 8.12 DIRECT TAX LAWS

(xiv) Subscription to notified deposit scheme

Subscription to any such deposit scheme of
• a public sector company which is engaged in providing long-term finance for
construction, or purchase of houses in India for residential purposes or
• any such deposit scheme of any authority constituted in India by or under any law
enacted either for the purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development or improvement of cities,
towns and villages or for both.
The deposit scheme should be notified by the Central Government, for example, public
deposit scheme of HUDCO.
(xv) Payment of tuition fees to any university, college, school or other educational
institutions within India for full-time education for maximum 2 children
Payment of tuition fees by an individual assessee at the time of admission or thereafter to
any university, college, school or other educational institutions within India for the purpose of
full-time education of any two children of the individual. This benefit is only for the amount
of tuition fees for full-time education and shall not include any payment towards development
fees or donation or payment of similar nature and payment made for education to any
institution situated outside India.
(xvi) Repayment of housing loan including stamp duty, registration fee and other expenses
Any payment made towards the cost of purchase or construction of a new residential
house property. The income from such property –
(1) should be chargeable to tax under the head “Income from house property”;
(2) would have been chargeable to tax under the head “Income from house property” had
it not been used for the assessee’s own residence.
The approved types of payments are as follows:
(1) Any instalment or part payment of the amount due under any self-financing or other
schemes of any development authority, Housing Board or other authority engaged in
the construction and sale of house property on ownership basis; or
(2) Any instalment or part payment of the amount due to any company or a cooperative
society of which the assessee is a shareholder or member towards the cost of house
allotted to him; or

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(3) Repayment of amount borrowed by the assessee from:

(a) The Central Government or any State Government;
(b) Any bank including a co-operative bank;
(c) The Life Insurance Corporation;
(d) The National Housing Bank;
(e) Any public company formed and registered in India with the main object of
carrying on the business of providing long-term finance for construction or
purchase of houses in India for residential purposes which is eligible for
deduction under section 36(1)(viii);
(f) Any company in which the public are substantially interested or any
cooperative society engaged in the business of financing the construction of
houses;
(g) The assessee’s employer, where such employer is an authority or a board or a
corporation or any other body established or constituted under a Central or
State Act;
(h) The assessee’s employer where such employer is a public company or public
sector company or a university established by law or a college affiliated to such
university or a local authority or a co-operative society.
(4) Stamp duty, registration fee and other expenses for the purposes of transfer of such
house property to the assessee.
Inadmissible payments: However, the following amounts do not qualify for rebate:
(1) admission fee, cost of share and initial deposit which a shareholder of a company or a
member of a co-operative society has to pay for becoming a shareholder or member;
or
(2) the cost of any addition or alteration or renovation or repair of the house property after
the issue of completion certificate in respect of the house property or after the house
has been occupied by the assessee or any person on his behalf or after it has been
let out; or
(3) any expenditure in respect of which deduction is allowable under section 24.

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 8.14 DIRECT TAX LAWS

(xvii) Subscription to certain equity shares or debentures

Subscription to equity shares or debentures forming part of any eligible issue of capital
approved by the Board on an application made by a public company or as subscription to
any eligible issue of capital by any public financial institution in the prescribed form.
A lock-in period of three years is provided in respect of such equity shares or debentures. In
case of any sale or transfer of shares or debentures within three years of the date of
acquisition, the aggregate amount of deductions allowed in respect of such equity shares or
debentures in the previous year or years preceding the previous year in which such sale or
transfer has taken place shall be deemed to be the income of the assessee of such previous
year and shall be liable to tax in the assessment year relevant to such previous year.
A person shall be treated as having acquired any shares or debentures on the date on which
his name is entered in relation to those shares or debentures in the register of members or of
debenture-holders, as the case may be, of the public company.

(xviii) Subscription to certain units of mutual fund

Subscription to any units of any mutual fund referred to in section 10(23D) and approved by
the Board on an application made by such mutual fund in the prescribed form.

It is necessary that such units should be subscribed only in the eligible issue of capital of any
company.

Eligible issue of capital for (xvii) and (xviii) means an issue made by a public company
formed and registered in India or a public financial institution and the entire proceeds of the
issue are utilised wholly and exclusively for the purposes of any business referred to in
section 80-IA(4).

(xix) Investment in five year Term Deposit

Investment in term deposit -

(1) for a period of not less than five years with a scheduled bank; and

(2) which is in accordance with a scheme framed and notified by the Central Government
in the Official Gazette

qualifies as an eligible investment for availing deduction under section 80C.

The maximum limit for investment in term deposit is ` 1,50,000.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.15

Scheduled bank means -

(1) the State Bank of India

(2) a subsidiary bank of SBI, or

(3) a corresponding new bank constituted under section 3 of the -

(a) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or

(b) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or

(4) any other bank, being a bank included in the Second Schedule to the Reserve Bank
of India Act, 1934.

(xx) Subscription to notified bonds issued by NABARD

Subscription to such bonds issued by NABARD (as the Central Government may notify in the
Official Gazette) qualifies for deduction under section 80C.

(xxi) Deposit in Senior Citizens Savings Scheme Rules, 2004

Deposit in an account under the Senior Citizens Savings Scheme Rules, 2004 qualifies for
deduction under section 80C.

(xxii) Investment in five year Post Office time deposit

Investment in five year time deposit in an account under Post Office Time Deposit Rules,
1981 qualifies for deduction under section 80C.

(xxiii) Contribution to additional account under NPS

Contribution by a Central Government employee to additional account under NPS (specified

account) referred to in section 80CCD for a fixed period of not less than 3 years and which is
in accordance with the scheme 2 notified by the Central Government for this purpose qualifies
for deduction under section 80C. It may be noted that only the contribution to the additional
account under NPS will qualify for deduction under section 80C.

There are two types of NPS account i.e., Tier I and Tier II, to which an individual can
contribute. Section 80CCD provides deduction in respect of contribution to individual pension
account [Tier I account] under the NPS [referred to in section 20(2)(a) of the Pension Fund

2 National Pension Scheme Tier II- Tax Saver Scheme, 2020 notified for this purpose.

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 8.16 DIRECT TAX LAWS

Regulatory and Development Authority Act, 2013 (PFRDA)] whereas deduction under section
80C is allowable in respect of contribution by Central Government employee to additional
account [Tier II account] of NPS [referred to in section 20(3) of the PFRDA], which does not
qualify for deduction under section 80CCD. Thus, Tier II account is the additional account
under NPS, contribution to which would qualify for deduction under section 80C only
in the hands of a Central Government employee.

Termination of Insurance Policy or Unit Linked Insurance Plan or transfer of House Property
or withdrawal of deposit:
Where, in any previous year, an assessee:
(1) terminates his contract of insurance referred to in (iii) above, by notice to that effect or where
the contract ceases to be in force by reason of not paying the premium, by not reviving the
contract of insurance, -
(a) in case of any single premium policy, within two years after the date of
commencement of insurance; or
(b) in any other case, before premiums have been paid for two years; or
(2) terminates his participation in any Unit Linked Insurance Plan referred to in (i) or (ii) above,
by notice to that effect or where he ceases to participate by reason of failure to pay any
contribution, by not reviving his participation, before contributions in respect of such
participation have been paid for five years, or
(3) transfers the house property referred to in (xvi) above, before the expiry of five years from
the end of the financial year in which possession of such property is obtained by him, or
receives back, whether by way of refund or otherwise, any sum specified in (xvi) above,
then, no deduction will be allowed to the assessee in respect of sums paid during such previous
year and the total amount of deductions of income allowed in respect of the previous year or years
preceding such previous year, shall be deemed to be income of the assessee of such previous year
and shall be liable to tax in the assessment year relevant to such previous year.

Further, where any amount is withdrawn by the assessee from his account under the Senior
Citizens Savings Scheme or under the Post Office Time Deposit Rules before the expiry of a period
of 5 years from the date of its deposit, the amount so withdrawn shall be deemed to be the income
of the assessee of the previous year in which the amount is withdrawn. Accordingly, the amount so
withdrawn would be chargeable to tax in the assessment year relevant to such previous year. The
amount chargeable to tax would also include that part of the amount withdrawn which represents
interest accrued on the deposit.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.17

However, if any part of the amount relating to interest so received or withdrawn has been subject to
tax in any of the earlier years, such amount shall not be taxed again.

If any amount has been received by the nominee or legal heir of the assessee, on the death of such
assessee, the amount would not be chargeable to tax. But if the amount relating to interest on
deposit was not included in the total income of the assessee in any of any earlier years, then such
interest would be chargeable to tax.
ILLUSTRATION 5
Mr. Binu, aged about 40 years, has earned a lottery income of ` 1,30,000 (gross) during the
P.Y. 2024-25. He also has interest on Fixed Deposit of ` 35,000. He invested an amount of
` 20,000 in Public Provident Fund account and ` 34,000 in five years term deposit. What is the
total income of Mr. Binu for the A.Y.2025-26 if he has exercised the option of shifting out of the
default tax regime provided under section 115BAC(1A)?
SOLUTION
Computation of total income of Mr. Binu for A.Y.2025-26

Particulars ` `
Income from Other Sources
- Interest on Fixed Deposit 35,000
- Lottery income 1,30,000
Gross Total Income 1,65,000
Less: Deductions under Chapter VIA [See Note below]
Under section 80C
- Deposit in Public Provident Fund 20,000
- Investment in five years term deposit 34,000
54,000
Restricted to 35,000
Total Income 1,30,000

Note: Though the value of eligible investments is ` 54,000, however, deduction under Chapter VI-A
cannot exceed the gross total income exclusive of long term capital gains u/s 112/112A, short-term
capital gains covered under section 111A, winnings of lotteries etc. of the assessee.

Therefore, the maximum permissible deduction u/s 80C = ` 1,65,000 – ` 1,30,000 = ` 35,000.

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 8.18 DIRECT TAX LAWS

(2) Deduction in respect of contribution to certain pension funds [Section 80CCC]

(i) Eligible assessee - Where an assessee, being an individual, has in the previous year paid
or deposited any amount out of his income chargeable to tax to effect or keep in force a
contract for any annuity plan of LIC of India or any other insurer for receiving pension from
the fund set up by LIC or such other insurer, he shall be allowed a deduction in the
computation of his total income.
For this purpose, the interest or bonus accrued or credited to the assessee’s account shall
not be reckoned as contribution.

Note: Where any amount paid or deposited by the assessee has been taken into account for
the purposes of this section, a deduction under section 80C shall not be allowed with
reference to such amount.
(ii) Maximum Deduction: The maximum permissible deduction is ` 1,50,000 [Further, the
overall limit of ` 1,50,000 prescribed in section 80CCE will continue to be applicable i.e. the
maximum permissible deduction under sections 80C, 80CCC and 80CCD(1) put together is
` 1,50,000].
(iii) Deemed Income: Where any amount standing to the credit of the assessee in the fund in
respect of which a deduction has been allowed, together with interest or bonus accrued or
credited to the assessee’s account is received by the assessee or his nominee on account of
the surrender of the annuity plan in any previous year or as pension received from the
annuity plan, such amount will be deemed to be the income of the assessee or the nominee
in that previous year in which such withdrawal is made or pension is received. It will be
chargeable to tax as income of that previous year.

Note - The deduction under section 80CCC is available only to an individual exercising the option
of shifting out of the default tax regime provided under section 115BAC(1A). It is not available
under the default tax regime under section 115BAC.

(3) Deduction in respect of contribution to pension scheme notified by the Central

Government [Section 80CCD]

(i) Pension Scheme of Central Government: As per the “Restructured Defined Contribution
Pension System” applicable to new entrants to Government service, it is mandatory for
persons entering the service of the Central Government on or after 1st January, 2004, to
contribute 10% of their salary every month towards their pension account. A matching

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.19

contribution is required to be made by the Government to the said account. The benefit of
this scheme is also available to individuals employed by any other employer as well as to
self-employed individuals.

(ii) Deduction: Section 80CCD provides deduction in respect of contribution made to the
pension scheme notified by the Central Government.

Accordingly, in exercise of the powers conferred by section 80CCD(1), the Central

Government has notified the ‘Atal Pension Yojana (APY)’ as a pension scheme,
contribution to which would qualify for deduction under section 80CCD in the hands of the
individual.

(iii) Quantum of deduction

(a) Section 80CCD(1) provides a deduction for the amount paid or deposited by an
employee in his pension account subject to a maximum of 10% of his salary. The
deduction in the case of a self-employed individual would be restricted to 20% of his
gross total income in the previous year.

Note - Deduction u/s 80CCD(1) would be available to an individual only if he exercises

the option of shifting out of the default tax regime u/s 115BAC(1A) (i.e., if he pays tax
under the optional tax regime – the normal provisions of the Act).

Deduction under section 80CCD(1)

An individual employed
by CG on or after
01.01.2004
10% of
Eligible salary
An Individual employed
Assessee by any other employer

20% of
Any other individual
GTI
(b) Section 80CCD(1B) provides for an additional deduction of up to ` 50,000 in respect
of the whole of the amount paid or deposited by an individual assessee under NPS in
the previous year, whether or not any deduction is allowed under section 80CCD(1).

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 8.20 DIRECT TAX LAWS

Note - Deduction u/s 80CCD(1B) would be available to an individual only if he

exercises the option of shifting out of the default tax regime provided u/s 115BAC(1A)
(i.e., it is available only if he pays tax under the optional tax regime – normal
provisions of the Act)

(c) Whereas the deduction under section 80CCD(1) is subject to the overall limit of
` 1.50 lakh under section 80CCE (i.e., the maximum permissible deduction under
sections 80C, 80CCC and 80CCD(1) put together is ` 1,50,000), the deduction of
upto ` 50,000 under section 80CCD(1B) is in addition to the overall limit of ` 1.50
lakh provided under section 80CCE.
(d) Under section 80CCD(2), contribution made by the Central Government or State
Government or any other employer in the previous year to the said account of an
employee, is allowed as a deduction in computation of the total income of the
assessee.
(e) The entire employer’s contribution would be included in the salary of the employee.
However, deduction under section 80CCD(2) would be restricted to,
- In case of contribution made by the Central Government or State Government -
14% of salary and
- In case of contribution made by any other employer - 10% of salary (14% of salary
in case assessee is paying tax as per default tax regime under section
115BAC).

Notes:
1. Deduction u/s 80CCD(2) would be available to an individual irrespective of the regime
under which he pays tax.

2. The limit of ` 1,50,000 under section 80CCE does not apply to employer’s contribution to
pension scheme of Central Government which is allowable as deduction under section
80CCD(2).

3. No deduction will be allowed u/s 80C in respect of amounts paid or deposited by the
assessee, for which deduction has been allowed u/s 80CCD(1) or 80CCD(1B).
4. For computation of limit under section 80CCD(1) and (2), salary includes dearness
allowance, if the terms of employment so provide, but excludes all other allowances and
perquisites.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.21

(iv) Deemed income: The amount standing to the credit of the assessee in the pension account
(for which deduction has already been claimed by him under this section) and accretions to
such account, shall be taxed as income in the year in which such amounts are received by
the assessee or his nominee on -

(a) closure of the account or

(b) his opting out of the said scheme or

(c) receipt of pension from the annuity plan purchased or taken on such closure or opting out.

However, the amount received by the nominee on the death of the assessee under the
circumstances referred to in (a) and (b) above, shall not be deemed to be the income of the
nominee.

Further, the assessee shall be deemed not to have received any amount in the previous year
if such amount is used for purchasing an annuity plan in the same previous year.

Notes:

1. Exemption on payment from NPS Trust to an assessee on closure of his account or on

his opting out of the pension scheme [Section 10(12A)]

(i) As per section 80CCD, any payment from National Pension System Trust to an assessee on
account of closure or his opting out of the pension scheme is chargeable to tax.

(ii) Section 10(12A) provides that any payment from National Pension System Trust to an
assessee on account of closure or his opting out of the pension scheme referred to in
section 80CCD, to the extent it does not exceed 60% of the total amount payable to him
at the time of closure or his opting out of the scheme, shall be exempt from tax.

2. Exemption on payment from NPS Trust to an employee on partial withdrawal [Section

10(12B)]

To provide relief to an employee subscriber of NPS, section 10(12B) provides that any
payment from National Pension System Trust to an employee under the pension scheme
referred to in section 80CCD, on partial withdrawn made out of his account in accordance with
the terms and conditions specified under the Pension Fund Regulatory and Development
Authority Act, 2013 and the regulations made there under, shall be exempt from tax to the
extent it does not exceed 25% of amount of contributions made by him.

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(4) Limit on deductions under sections 80C, 80CCC & 80CCD(1) [Section 80CCE]

This section restricts the aggregate amount of deduction under section 80C, 80CCC and 80CCD(1)
to ` 1,50,000. It may be noted that the deduction of upto ` 50,000 under section 80CCD(1B) and
employer’s contribution to pension scheme, allowable as deduction under section 80CCD(2) in the
hands of the employee, would be outside the overall limit of ` 1,50,000 stipulated under section
80CCE.
The following table summarizes the ceiling limit under these sections –
Section Particulars Ceiling limit (`)
80C Investment in LIP, Deposit in PPF/SPF/RPF etc. 1,50,000
80CCC Contribution to certain pension funds 1,50,000
80CCD(1) Contribution to NPS of Government 10% of salary or 20% of
GTI, as the case may be.
80CCE Aggregate deduction under sections 80C, 80CCC & 1,50,000
80CCD(1)
80CCD(1B) Contribution to NPS notified by the Central 50,000
Government (outside the limit of ` 1,50,000 under
section 80CCE)
80CCD(2) Contribution by the Central Government or State 14% of salary
Government to NPS A/c of its employees (outside
the limit of ` 1,50,000 under section 80CCE)
Contribution by any other employer to NPS A/c of its
employees (outside the limit of ` 1,50,000 under
section 80CCE)
- Where assessee is paying tax as per optional 10% of salary
tax regime
- where assessee is paying tax as per default 14% of salary
regime u/s 115BAC(1A)
ILLUSTRATION 6
The basic salary of Mr. Arjun is ` 1,00,000 p.m. He is entitled to dearness allowance, which is 40%
of basic salary. 50% of dearness allowance forms part of pay for retirement benefits. Both
Mr. Arjun and his employer contribute 15% of basic salary to the pension scheme referred to in
section 80CCD. Examine the tax treatment in respect of such contribution in the hands of Mr. Arjun
if he has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
What would be your answer if Mr. Arjun pays tax under the default tax regime under section
115BAC?

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.23

SOLUTION
(i) Tax treatment in the hands of Mr. Arjun in respect of employer’s and own contribution
to pension scheme referred to in section 80CCD, where Mr. Arjun has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A) [i.e., where Mr. Arjun
pays tax under the normal provisions of the Act]
(a) Employer’s contribution to such pension scheme would be treated as salary since it is
specifically included in the definition of “salary” under section 17(1)(viii). Therefore,
` 1,80,000, being 15% of basic salary of ` 12,00,000, will be included in Mr. Arjun’s salary.
(b) Mr. Arjun’s contribution to pension scheme is allowable as deduction under section
80CCD(1). However, the deduction is restricted to 10% of salary. Salary, for this purpose,
means basic pay plus dearness allowance, if it forms part of pay for retirement benefits.
Therefore, deduction under section 80CCD for Mr. Arjun would be –
Particulars `
Basic salary = ` 1,00,000 × 12 = 12,00,000
Dearness allowance = 40% of ` 12,00,000 = ` 4,80,000
50% of Dearness Allowance forms part of pay = 50% of ` 4,80,000 2,40,000
Salary for the purpose of deduction under section 80CCD 14,40,000

Deduction under section 80CCD(1) is restricted to 10% of ` 14,40,000 (as

against actual contribution of ` 1,80,000, being 15% of basic salary of 1,44,000
` 12,00,000)
As per section 80CCD(1B), a further deduction of upto ` 50,000 is
allowable. Therefore, deduction under section 80CCD(1B) is ` 36,000 36,000
(` 1,80,000 - ` 1,44,000).

` 1,44,000 is allowable as deduction under section 80CCD(1). This would be taken into
consideration and be subject to the overall limit of ` 1,50,000 under section 80CCE.
` 36,000 allowable as deduction under section 80CCD(1B) is outside the overall limit of
` 1,50,000 under section 80CCE.
In the alternative, ` 50,000 can be claimed as deduction under section 80CCD(1B). The
balance ` 1,30,000 (` 1,80,000 - ` 50,000) can be claimed as deduction under section
80CCD(1).
(c) Employer’s contribution to pension scheme would be allowable as deduction under section
80CCD(2), subject to a maximum of 10% of salary. Therefore, deduction under section

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 8.24 DIRECT TAX LAWS

80CCD(2), would also be restricted to ` 1,44,000, even though the entire employer’s
contribution of ` 1,80,000 is included in salary under section 17(1)(viii). However, this
deduction of employer’s contribution of ` 1,44,000 to pension scheme would be outside the
overall limit of ` 1,50,000 under section 80CCE i.e., this deduction would be over and above
the other deductions which are subject to the limit of ` 1,50,000.
(ii) Where Mr. Arjun pays tax under the default tax regime under section 115BAC
Mr. Arjun would not be eligible for deduction under section 80CCD(1)/(1B) in respect of his
contribution to pension scheme under the default tax regime under section 115BAC. However, he
would be allowed deduction of upto ` 2,01,600 being 14% of salary [` 14,40,000, computed in (i)
above] under section 80CCD(2) in respect of employer’s contribution to pension scheme.
Accordingly, entire employer’s contribution of ` 1,80,000 would be allowed as deduction under
section 80CCD(2).
ILLUSTRATION 7
The gross total income of Mr. Neeraj for the A.Y.2025-26 is ` 9,00,000. He has made the following
investments/ payments during the F.Y.2024-25 –
Particulars `
(1) Contribution to PPF 1,30,000
(2) Payment of tuition fees to Sunrise School, Mumbai, for education of his 95,000
son studying in Class X
(3) Repayment of housing loan taken from Canara Bank 30,000
(4) Contribution to approved pension fund of LIC 1,05,000

Compute the eligible deduction under Chapter VI-A for the A.Y.2025-26 if Mr. Neeraj exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Computation of deduction under Chapter VI-A for the A.Y.2025-26
Particulars `
Deduction under section 80C
- Contribution to PPF 1,30,000
- Payment of tuition fees to Sunrise School, Mumbai, for education of his 95,000
son studying in Class X
- Repayment of housing loan 30,000
2,55,000
Restricted to ` 1,50,000, being the maximum permissible deduction u/s 80C 1,50,000

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.25

Deduction under section 80CCC

- Contribution to approved pension fund of LIC 1,05,000
2,55,000
As per section 80CCE, the aggregate deduction under section 80C, 80CCC and
80CCD(1) has to be restricted to ` 1,50,000
Deduction allowable under Chapter VIA for the A.Y.2025-26 1,50,000

(5) Deduction in respect of contribution to Agnipath Scheme [Section 80CCH]

(i) Meaning of Agnipath scheme: Agnipath scheme is a Central Government scheme
launched in 2022 for enrolment of Indian youth in the Indian Armed Forces.
(ii) Meaning of Agniveer Corpus Fund: The Agniveer Corpus Fund means a fund in which
consolidated contributions of all the Agniveers and matching contributions of the Central
Government along with interest on both these contributions are held.
(iii) Features of the Agnipath Scheme: Each Agniveer is to contribute 30% of his monthly
customized Agniveer Package to the individual’s Agniveer Corpus Fund. Further, the
Government will also contribute a matching amount to the ‘Agniveer Corpus Fund’. The
Government will also pay to the subscriber interest as approved from time to time on the
contributions standing in his account.
(iv) Quantum of deduction:
(a) Section 80CCH(1) provides a deduction for the amount paid or deposited by an
assessee, being an individual enrolled in the Agnipath Scheme and subscribing to the
Agniveer Corpus Fund on or after 1.11.2022, in his account in the Agniveer Corpus
Fund.

Note - Deduction u/s 80CCH(1) would be available to an individual only if he has

exercised the option of shifting out of the default tax regime provided u/s
115BAC(1A).

(b) Under section 80CCH(2), the whole amount of contribution made by the Central
Government to the said account of an assessee in the Agniveer Corpus Fund, is
allowed as a deduction in computation of the total income of the assessee.
(e) The entire Central Government’s contribution to the Agniveer Corpus Fund would be
included in the salary of the assessee. However, deduction under section 80CCH(2)
would be available for the same.

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 8.26 DIRECT TAX LAWS

Note - Deduction u/s 80CCH(2) would be available to an individual irrespective of the

regime under which he pays tax.
Exemption on payment from Agnipath Corpus Fund to a person enrolled under the Agnipath
Scheme or to his nominee [Section 10(12C)]
Any payment from the Agnipath Corpus Fund to a person enrolled under the Agnipath Scheme or to
his nominee would be exempt from tax.

(6) Deduction in respect of medical insurance premium [Section 80D]

(i) In case of an Individual
(a) Deduction in respect of insurance premium paid for family: A deduction to the
extent of ` 25,000 is allowed in respect of the following payments–
(1) premium paid to effect or keep in force an insurance on the health of self,
spouse and dependant children or
(2) any contribution made to the Central Government Health Scheme or

(3) such other health scheme as may be notified by the Central Government.
Contributory Health Service Scheme of the Department of Atomic Energy has
been notified by the Central Government.

(b) Deduction in respect of insurance premium for parents: A further deduction up to

` 25,000 is allowable to effect or to keep in force an insurance on the health of parents of
the assessee.

Quantum of deduction in case of senior citizen: An increased deduction of

` 50,000 (instead of ` 25,000) shall be allowed in case any of the persons mentioned
above is a senior citizen i.e., an individual resident in India of the age of 60 years or
more at any time during the relevant previous year.

(c) Deduction in respect of payment towards preventive health check-up: Section

80D provides that deduction to the extent of ` 5,000 shall be allowed in respect
payment made on account of preventive health check-up of self, spouse, dependant
children or parents made during the previous year. However, the said deduction of
` 5,000 is within the overall limit of ` 25,000 or ` 50,000, specified in (a) and (b)
above.

(d) Mode of payment: For claiming such deduction under section 80D, the payment can
be made:

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.27

(1) by any mode, including cash, in respect of any sum paid on account of
preventive health check-up;

(2) by any mode other than cash, in all other cases.

(e) Deduction for medical expenditure incurred on senior citizens: As a welfare

measure towards senior citizens i.e., person of the age of 60 years or more and
resident in India, who are unable to get health insurance coverage, deduction of upto
` 50,000 would be allowed in respect of any payment made on account of medical
expenditure in respect of a such person(s), if no payment has been made to keep in
force an insurance on the health of such person(s).

‘Senior citizen’ means an individual resident in India who is of the age of 60 years or
more at any time during the relevant previous year.

(ii) In case of a HUF

Deduction under section 80D is allowable in respect of premium paid to insure the health of
any member of the family. The maximum deduction available to a HUF would be ` 25,000
and in case any member is a senior citizen, ` 50,000.

Further, the amount paid on account of medical expenditure incurred on the health of any
member(s) of a family who is a senior citizen would qualify for deduction subject to a
maximum of ` 50,000 provided no amount has been paid to effect or keep in force any
insurance on the health of such person(s).

(iii) Other conditions

The other conditions to be fulfilled are that such premium should be paid by any mode, other
than cash, in the previous year out of his income chargeable to tax. Further, the medical
insurance should be in accordance with a scheme made in this behalf by -

(a) the General Insurance Corporation of India and approved by the Central Government
in this behalf; or

(b) any other insurer and approved by the Insurance Regulatory and Development
Authority.

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 8.28 DIRECT TAX LAWS

The following table summarizes the provisions of section 80D –

S. Nature of payment/ Expenditure on behalf of Deduction

No. expenditure
I (i) Any premium paid, In case of Self, spouse and
otherwise than by way individual dependent children ` 25,000
of cash, to keep in force
In case of Family member
an insurance on the
HUF
health
(ii) Contribution to Central
Government Health In case any of the above persons is of ` 50,000
Scheme (CGHS) the age of 60 years or more (+)
(iii) Preventive health check resident in India
up expenditure

II (i) Any premium paid, ` 25,000

otherwise than by way In case either or both the parents is of
of cash, to keep in force the age of 60 years or more + Resident
an insurance on the in India
health ` 50,000
(ii) Preventive health check Parents
up

Maximum ` 5,000 allowed as deduction for aggregate of preventive health check up

expenditure, by any mode including cash, mentioned in I and II (Subject to overall limit of
` 25,000 or ` 50,000, as the case may be)

III Amount paid on account of For self/ spouse/ parents + who is of

medical expenditure the age of 60 years or more + Resident
` 50,000
in India + no payment has been made
to keep in force an insurance on the
health of such person

Note: In case the individual or any of his family members is a senior citizen, the aggregate of
deduction, in respect of payment of premium, contribution to CGHS and medical expenditure
incurred, as specified in (I) & (III) above, cannot exceed ` 50,000.

In case one of the parents is a senior citizen who is covered under mediclaim policy and
another is also a senior citizen but not covered under mediclaim policy, the aggregate of
deduction, in respect of payment of medical insurance premium and medical expenditure
incurred, as specified in (II) & (III) above, cannot exceed ` 50,000.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.29

(iv) Deduction where premium for health insurance is paid in lump sum [Section 80D(4A)]
(a) Appropriate fraction of lump sum premium allowable as deduction: In a case
where mediclaim premium is paid in lumpsum for more than one year by:
(1) an individual, to effect or keep in force an insurance on his health or health of
his spouse, dependent children or parents; or
(2) a HUF, to effect or keep in force an insurance on the health of any member of
the family,
then, the deduction allowable under this section for each of the relevant previous year
would be equal to the appropriate fraction of such lump sum payment.

(b) Meaning of certain terms

Term Meaning
Appropriate fraction 1 ÷ Total number of relevant previous years
Relevant previous The previous year in which such lump sum amount is
year paid; and the subsequent previous year(s) during which
the insurance would be in force.
Note - Deduction under section 80D would be available to an individual/ HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 8
Mr. Ravi, aged 45 years, paid medical insurance premium of ` 22,000 during the P.Y.2024-25 to
insure his health as well as the health of his spouse. He also paid medical insurance premium of
` 47,000 during the year to insure the health of his father, aged 65 years, who is not dependant on
him. He contributed ` 4,600 to Central Government Health Scheme during the year. He has
incurred ` 3,000 in cash on preventive health check-up of himself and his spouse and ` 4,500 by
cheque on preventive health check-up of his father. Compute the deduction allowable under section
80D for the A.Y. 2025-26 if Mr. Ravi has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).
SOLUTION
Deduction allowable under section 80D for the A.Y.2025-26
Particulars Actual Maximum
Payment deduction
allowable
` `
A. Premium paid and medical expenditure incurred for self
and spouse
(i) Medical insurance premium paid for self and spouse 22,000 22,000

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 8.30 DIRECT TAX LAWS

(ii) Contribution to CGHS 4,600 3,000

(iii) Exp. on preventive health check-up of self & spouse 3,000 Nil
29,600 25,000
B. Premium paid and medical expenditure incurred for
father, who is a senior citizen
(i) Mediclaim premium paid for father, who is over 60 47,000 47,000
years of age
(ii) Expenditure on preventive health check-up of father 4,500 3,000
51,500 50,000
Total deduction under section 80D (` 25,000 + ` 50,000) 75,000

Notes:
(1) The total deduction under A.(i), (ii) and (iii) above should not exceed ` 25,000. Therefore,
the contribution to CGHS would be restricted to ` 3,000 [` 25,000 (-) ` 22,000] and
expenditure on preventive health check-up for self and spouse would be Nil [` 25,000 (-)
` 22,000 (-) ` 3,000].
(2) The total deduction under B. (i) and (ii) above should not exceed ` 50,000. Therefore, the
expenditure on preventive health check-up for father would be restricted to ` 3,000, being
[` 50,000 (-) ` 47,000].
(3) In this case, the total deduction allowed on account of expenditure on preventive health
check-up of self, spouse and father is ` 3,000, which is less than the maximum permissible
limit of ` 5,000.
ILLUSTRATION 9
Mr. Yatin, aged 48 years, paid medical insurance premium of ` 23,000 during the P.Y.2024-25 to
insure his health as well as the health of his spouse and dependant children. He also paid
medical insurance premium of ` 35,000 during the year to insure the health of his mother, aged
71 years, who is not dependant on him. He incurred medical expenditure of ` 24,000 on his
father, aged 78 years, who is not covered under mediclaim policy. His father is also not
dependent upon him. He contributed ` 6,500 to Central Government Health Scheme during the
year. Compute the deduction allowable under section 80D for the A.Y.2025-26 if Mr. Yatin has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Deduction allowable under section 80D for the A.Y.2025-26
Particulars `
(i) Medical insurance premium paid for self, spouse and
dependent children ` 23,000

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.31

(ii) Contribution to CGHS ` 6,500

` 29,500
restricted to 25,000
(iii) Mediclaim premium paid for mother, who is over 60 years of
age ` 35,000
(iv) Medical expenditure incurred for father, who is over 60 years of
age and not covered by any insurance ` 24,000
` 59,000
restricted to 50,000
75,000

(7) Deduction in respect of maintenance including medical treatment of a dependant

disabled [Section 80DD]

(i) Eligible assessee: Section 80DD provides deduction to an assessee, who is a resident in
India, being an individual or Hindu undivided family.

(ii) Payment qualifying for deduction:

(a) Any amount –

- incurred for the medical treatment (including nursing), training and

rehabilitation of a dependant, being a person with disability, or

- paid or deposited under a scheme framed in this behalf by the Life Insurance
Corporation or any other insurer or the Administrator or the Specified Company
as referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking
and Repeal) Act, 2002, for the maintenance of a dependant, being a person
with disability

qualifies for deduction.

(b) The benefit of deduction under this section is also available to assessees incurring
expenditure on maintenance including medical treatment of persons suffering from
autism, cerebral palsy and multiple disabilities.

(iii) Quantum of deduction: The quantum of deduction is ` 75,000 and in case of severe
disability (i.e. person with 80% or more disability) the deduction shall be ` 1,25,000.

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(iv) Conditions:
(a) The scheme should provide for payment of annuity or a lump sum amount for the
benefit of a dependant, being a person with disability,
I in the event of the death of the individual or member of the HUF, in whose name
subscription was made; or
II on attaining the age of 60 years or more by such individual or the member of the
HUF, and the payment or deposit to such scheme has been discontinued
and the assessee must nominate either the dependant, being a person with disability
or any other person or a trust to receive the payment on his behalf, for the benefit of
the dependant, being a person with disability.

(b) For claiming the deduction, the assessee shall have to furnish a copy of the
certificate issued by the medical authority under the Persons with Disability (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995 along with the
return of income under section 139.
(c) Where the condition of disability requires reassessment, a fresh certificate from the
medical authority shall have to be obtained after the expiry of the period mentioned
in the original certificate in order to continue to claim the deduction.
(v) Deemed income: If the dependent, being a person with disability, predeceases the
individual or the member of HUF, in whose name subscription was made, then, the amount
paid or deposited under the said scheme would be chargeable to tax in the hands of the
assessee (individual or member of HUF) in the previous year in which such amount is
received by him.
However, such deeming provisions would not apply, to the amount received by the
dependant, being a person with disability, before his death, by way of annuity or lump sum
under the scheme mentioned in II of (a) above i.e., when the individual or member of HUF
attains the age of 60 years or more, and the payment or deposit to such scheme has been
discontinued.
(vi) Meaning of “Dependant”:
Assessee Dependant
(1) Individual the spouse, children, parents, brother or sister of the individual who is
wholly or mainly dependant on such individual and not claimed
deduction under section 80U in the computation of his income

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(2) HUF a member of the HUF, wholly or mainly dependant on such HUF and
not claimed deduction under section 80U in the computation of his
income

Note - Deduction under section 80DD would be available to an individual/HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 10
Mr. Mohan is a resident individual. He deposits a sum of ` 60,000 with Life Insurance Corporation
every year for the maintenance of his disabled grandfather who is wholly dependant upon him. The
disability is one which comes under the Persons with Disabilities (Equal Opportunities, Protection of
Rights and Full Participation) Act, 1995. A copy of the certificate from the medical authority is
submitted. Compute the amount of deduction available under section 80DD for the A.Y. 2025-26 if
Mr. Mohan has exercised the option of shifting out of the default tax regime provided under section
115BAC(1A).
SOLUTION
Since the amount deposited by Mr. Mohan was for his grandfather, he will not be allowed any
deduction under section 80DD. The deduction is available if the individual assessee incurs any
expense for a dependant disabled relative. Grandfather does not come within the meaning of
“dependant” as defined under section 80DD.
ILLUSTRATION 11
What will be the deduction if Mr. Mohan had made this deposit for his dependant father?
SOLUTION

Since the expense was incurred for a dependant disabled relative, Mr. Mohan will be entitled to
claim a deduction of ` 75,000 under section 80DD, irrespective of the amount deposited. In case
his father has severe disability, the deduction would be ` 1,25,000.

(8) Deduction in respect of medical treatment etc. [Section 80DDB]

(i) Eligible assessee: This section provides deduction to an assessee, who is resident in India,
being an individual and Hindu undivided family. The deduction is available to an individual for
medical expenditure incurred on himself or a dependant. It is also available to a Hindu
undivided family (HUF) for such expenditure incurred on any of its members.

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(ii) Meaning of “Dependant”:

Assessee Dependant
(1) Individual the spouse, children, parents, brother or sister of the individual or any
of them, wholly or mainly dependant on such individual for his support
and maintenance.
(2) HUF a member of the HUF, wholly or mainly dependant on such HUF for his
support and maintenance.

(iii) Payment qualifying for deduction: Any amount actually paid for the medical treatment of
such disease or ailment as may be specified in the rules made in this behalf by the Board for
himself or a dependant, in case the assessee is an individual or for any member of a HUF, in
case the assessee is a HUF will qualify for deduction.
(iv) Quantum of deduction: The amount of deduction under this section shall be equal to the
amount actually paid or ` 40,000, whichever is less, in respect of that previous year in which
such amount was actually paid.
In case the amount is paid in respect of a senior citizen, i.e., a resident individual of the age
of 60 years or more at any time during the relevant previous year, then the deduction would
be the amount actually paid or ` 1,00,000, whichever is less.

The deduction under this section shall be reduced by the amount received, if any, under
insurance from an insurer, or reimbursed by an employer, for the medical treatment of the
assessee or the dependant.
(v) Maximum deduction: The maximum limit of deduction under section 80DDB for the various
categories of dependant are summarized hereunder:

Dependant Maximum limit (`)

(1) A senior citizen, being a resident individual 1,00,000
(2) Other than a senior citizen 40,000

(vi) Condition: No such deduction shall be allowed unless the assessee obtains the prescription
for such medical treatment from a neurologist, an oncologist, a urologist, a hematologist, an
immunologist or such other specialist, as may be prescribed.
Note - Deduction under section 80DDB would be available to an individual/HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).

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(9) Deduction in respect of interest loan taken for higher education [Section 80E]
(i) Eligible assessee: Section 80E provides deduction to an individual-assessee in respect of
any interest on loan paid by him in the previous year out of his income chargeable to tax.
(ii) Conditions: The loan must have been taken for the purpose of pursuing his higher
education or for the purpose of higher education of his or her relative. The loan must have
been taken from any financial institution or approved charitable institution.
(iii) Meaning of certain terms:
Term Meaning
(a) Relative Spouse and children of the individual or the student for whom
the individual is the legal guardian
(b) Higher education It means any course of study (including vocational studies)
pursued after passing the Senior Secondary Examination or
its equivalent from any school, board or university recognised
by the Central Government or State Government or local
authority or by any other authority authorized by the Central
Government or State Government or local authority to do so.
Therefore, interest on loan taken for pursuing any course
after Class XII or its equivalent, will qualify for deduction
under section 80E.
(c) Period of The deduction is allowed in computing the total income in
deduction respect of the initial assessment year (i.e., the assessment
year relevant to the previous year, in which the assessee
starts paying the interest on the loan) and seven assessment
years immediately succeeding the initial assessment year or
until the interest is paid in full by the assessee, whichever is
earlier.
(d) Approved It means an institution established for charitable purposes
charitable and approved by the prescribed authority under section
institution 10(23C) or an institution referred to in section 80G(2)(a).
(e) Financial It means –
institution (a) a banking company to which the Banking Regulation
Act, 1949 applies (including a bank or banking
institution referred to in section 51 of the Act); or
(b) any other financial institution which the Central
Government may, by notification in the Official
Gazette, specify in this behalf

Note - Deduction under section 80E would be available to an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).

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ILLUSTRATION 12
Mr. Gopal has taken three education loans on April 1, 2024, the details of which are given below:

Loan 1 Loan 2 Loan 3

For whose education loan was taken Gopal Son of Gopal Daughter of Gopal
Purpose of loan MBA B. Tech. [Link].
Amount of loan (`) 6,00,000 3,00,000 4,50,000
Annual repayment of loan (`) 1,20,000 48,000 88,000
Annual repayment of interest (`) 24,000 12,000 16,000

Compute the amount deductible under section 80E for the A.Y.2025-26 if Mr. Gopal has exercised
the option of shifting out of the default tax regime provided under section 115BAC(1A).
SOLUTION

Deduction under section 80E is available to an individual assessee exercising the option of shifting
out of the default tax regime provided under section 115BAC(1A), in respect of any interest paid by
him in the previous year in respect of loan taken for pursuing his higher education or higher
education of his spouse or children. Higher education means any course of study pursued after
senior secondary examination.

Therefore, interest repayment in respect of all the above loans would be eligible for deduction.

Deduction under section 80E = ` 24,000 + ` 12,000 + ` 16,000 = ` 52,000.

(10) Deduction for interest on loan borrowed for acquisition of house property by an
individual [Section 80EE]

(i) Eligible assessee: An individual who has taken a loan for acquisition of residential house
property from any financial institution. Interest payable on such loan would qualify for
deduction under this section.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.37

(ii) Conditions: The conditions to be satisfied for availing this deduction are as follows –

Value of house
≤ ` 50 lakhs
The assessee should
not own any Loan should be
residential house on Conditions sanctioned during the
the date of sanction of P.Y.2016-17
loan
Loan sanctioned
≤ ` 35 lakhs

(iii) Period of benefit: The benefit of deduction under this section would be available till the
repayment of loan continues.
(iv) Quantum of deduction: The maximum deduction allowable is ` 50,000. The deduction of
upto ` 50,000 under section 80EE is over and above the deduction of upto ` 2,00,000
available under section 24 for interest paid in respect of loan borrowed for acquisition of a
self-occupied property.

(v) No deduction under any other provision: The interest allowed as deduction under section
80EE will not be allowed as deduction under any other provision of the Act for the same or
any other assessment year.
(vi) Meaning of certain terms:
Term Meaning
(a) Financial institution  A banking company to which the Banking Regulation
Act, 1949 applies; or
 Any bank or banking institution referred to in section 51
of the Banking Regulation Act, 1949; or
 A housing finance company.
(b) Housing finance A public company formed or registered in India with the main
company object of carrying on the business of providing long-term
finance for construction or purchase of houses in India for
residential purposes.

Note - Deduction under section 80EE would be available to an individual only if he exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).

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ILLUSTRATION 13
Mr. Ankur purchased a residential house property for self-occupation at a cost of ` 48 lakh on
1.4.2017, in respect of which he took a housing loan of ` 35 lakh from Bank of India@11% p.a.
on the same date. The loan was sanctioned on 10 th March, 2017. Compute the eligible deduction
in respect of interest on housing loan for A.Y.2025-26 if Mr. Ankur has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A), assuming that the
entire loan was outstanding as on 31.3.2025 and he does not own any other house property.
SOLUTION

Particulars `
Interest deduction for A.Y.2025-26
(i) Deduction allowable while computing income under the head
“Income from house property”
Deduction under section 24(b) ` 3,85,000 [` 35,00,000 × 11%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income
Deduction under section 80EE ` 1,85,000 (` 3,85,000 – ` 2,00,000)
Restricted to 50,000

(11) Deduction in respect of interest payable on loan taken for acquisition of

residential house property [Section 80EEA]
(i) Eligible assessee: An individual who has taken a loan for acquisition of residential house
property from any financial institution. Interest payable on such loan would qualify for
deduction under this section.
(ii) Conditions: The conditions to be satisfied for availing this deduction are as follows –

Stamp Duty Value of

house ≤ ` 45 lakhs

Loan should be sanctioned by a

The individual should not own Financial Institution during the
any residential house on the Conditions
period from 1st April, 2019 and
date of sanction of loan 31st March, 2022

The individual should not

be eligible to claim
deduction u/s 80EE

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.39

(iii) Period of benefit: The benefit of deduction under this section would be available for interest
payable for each assessment year.

(iv) Quantum of deduction: The maximum deduction allowable is ` 1,50,000. The deduction of
upto ` 1,50,000 under section 80EEA is over and above the deduction available under
section 24(b) in respect of interest payable on loan borrowed for acquisition of a residential
house property.
(v) No deduction under any other provision: The interest allowed as deduction under section
80EEA will not be allowed as deduction under any other provision of the Act for the same or
any other assessment year.
(vi) Meaning of certain terms:
Term Meaning
(a) Financial • A banking company to which the Banking Regulation Act, 1949
institution applies; or
• Any bank or banking institution referred to in section 51 of the
Banking Regulation Act, 1949; or
• A housing finance company.
(b) Housing A public company formed or registered in India with the main object of
finance carrying on the business of providing long-term finance for construction
company or purchase of houses in India for residential purposes.
Note - Deduction under section 80EEA would be available to an individual only if he exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).

In case the individual assessee pays tax under default tax regime under section 115BAC

Deduction in respect of interest payable on loan borrowed

for acquisition of a residential house property

In case of self-occupied In case of let out or deemed

house property to be let out property

No interest deduction u/s No limit u/s 24(b). Entire interest payable

24(b) is allowable as deduction. However, loss
from house property cannot be set off
against income under any other head.
No deduction u/s 80EEA
No deduction u/s 80EEA

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In case the individual assessee has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A)
Deduction in respect of interest payable on loan borrowed for
acquisition of a residential house property

In case of self-occupied house In case of let out or deemed to be

property let out property

restricted to ` 2,00,000 u/s 24(b) No limit u/s 24(b). Entire interest payable is allowable
as deduction. However, section 71(3A) restricts set off
of loss from house property against income under any
other head to ` 2,00,000.
Deduction for interest upto
` 1,50,000 can be claimed u/s 80EEA
over and above deduction u/s 24(b) If there is a loss from house property and it is more
than ` 2,00,000, interest of
` 2,00,000 can be claimed as deduction u/s 24(b) and
balance interest upto
` 1,50,000 can be claimed u/s 80EEA.

(12) Deduction in respect of interest payable on loan taken for purchase of electric
vehicle [Section 80EEB]
(i) Eligible Assessee: An individual who has taken a loan for purchase of an electric vehicle
from any financial institution. Interest payable on such loan would qualify for deduction under
this section.
(ii) Conditions: The conditions to be satisfied for availing this deduction are as follows –

Loan should be taken

for purchase of an
electric vehicle
Loan should be
The assessee should Conditions sanctioned during the
be an individual. period between 1.4.2019
and 31.3.2023
Loan should be
sanctioned by a FI (bank
or specified NBFCs)

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.41

(iii) Period of benefit: The benefit of deduction under this section would be available for interest
payable on such loan for each assessment year.
(iv) Quantum of deduction: Interest payable, subject to a maximum of ` 1,50,000.
(v) No deduction under any other provision: The interest allowed as deduction u/s 80EEB
will not be allowed as deduction under any other provision of the Act for the same or any
other assessment year.
(vi) Meaning of certain terms:
Term Meaning
(a) Financial institution • A banking company to which the Banking Regulation
Act, 1949 applies; or
• Any bank or banking institution referred to in section 51
of the Banking Regulation Act, 1949; or
• Any deposit taking NBFC
• A systemically important non-deposit taking NBFC i.e., a
NBFC which is not accepting or holding public deposits
and having total assets of not less than
` 500 crore as per the last audited balance sheet and is
registered with the RBI.
(b) Electric Vehicle A vehicle which is powered exclusively by an electric motor
whose traction energy is supplied exclusively by traction
battery installed in the vehicle. The vehicle should have
electric regenerative braking system, which during braking
provides for the conversion of vehicle kinetic energy into
electrical energy.

Note - Deduction under section 80EEB would be available to an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 14
The following are the particulars relating to Mr. Arun, Mr. Barun, Mr. Chetan and Mr. Dinesh,
salaried individuals, for A.Y.2025-26 –
Particulars Mr. Arun Mr. Barun Mr. Chetan Mr. Dinesh
Amount of loan ` 43 lakhs ` 45 lakhs ` 20 lakhs ` 12 lakhs
taken
Loan taken from HFC Deposit taking Deposit taking Public sector
NBFC NBFC bank

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Date of sanction of 1.4.2021 1.4.2020 1.4.2020 30.3.2019

loan
Date of 1.5.2021 1.5.2020 1.5.2020 1.5.2019
disbursement of
loan
Purpose of loan Acquisition of Acquisition of Purchase of Purchase of
residential residential electric vehicle for electric vehicle
house property house property personal use for personal use
for self- for self-
occupation occupation
Stamp duty value ` 45 lakhs ` 48 lakhs - -
of house property
Cost of electric - - ` 22 lakhs ` 18 lakhs
vehicle
Rate of interest 9% p.a. 9% p.a. 10% p.a. 10% p.a.

Compute the amount of deduction, if any, allowable under the provisions of the Income-tax Act,
1961 for A.Y.2025-26 in the hands of Mr. Arun, Mr. Barun, Mr. Cehtan and Mr. Dinesh if they have
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A).
Assume that there has been no principal repayment in respect of any of the above loans upto
31.3.2025.
SOLUTION

Particulars `
Mr. Arun
Interest deduction for A.Y.2025-26
(i) Deduction allowable while computing income under the head “Income
from house property”
Deduction u/s 24(b) ` 3,87,000 [` 43,00,000 × 9%]
Restricted to 2,00,000
(ii) Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEA ` 1,87,000 (` 3,87,000 – ` 2,00,000)
Restricted to 1,50,000
Mr. Barun
Interest deduction for A.Y.2025-26
(i) Deduction allowable while computing income under the head “Income
from house property”

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Deduction u/s 24(b) ` 4,05,000 [` 45,00,000 × 9%]

Restricted to 2,00,000
(ii) Deduction under Chapter VI-A
Deduction u/s 80EEA is not permissible since: Nil
(i) loan is taken from NBFC
(ii) stamp duty value exceeds ` 45 lakh.
Deduction under section 80EEA would not be permissible due to either
violation listed above.
Mr. Chetan
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB for interest payable on loan taken for purchase of electric 1,50,000
vehicle [` 20 lakhs x 10% = ` 2,00,000, restricted to ` 1,50,000, being the
maximum permissible deduction]
Mr. Dinesh
Deduction under Chapter VI-A from Gross Total Income
Deduction u/s 80EEB is not permissible since loan was sanctioned before 1.4.2019. Nil

(13) Deduction in respect of donations to certain funds, charitable institutions etc.

[Section 80G]
(i) Eligible assessee: Where an assessee pays any sum as donation to eligible funds or
institutions, he is entitled to a deduction, subject to certain limitations, from the gross total
income.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an
artificial juridical person, deduction u/s 80G would not be available under the default tax
regime under section 115BAC(1A). Deduction under section 80G would be available only if
such person has exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A) and pays tax as per the optional tax regime under the regular provisions
of the Act.
In case of companies and co-operative societies, deduction would not be available if they opt
for the special provisions u/s 115BAA/115BAB and section 115BAD/115BAE, respectively. In
other words, deduction would be available only if companies and co-operative societies pay
tax under the normal provisions of the Act.

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(ii) Quantum of deduction: There are four categories of deductions. The following table gives
the details of the institutions and funds to which donations can be made for the purpose of
claiming deduction under section 80G, –
I Donation qualifying for 100% deduction, without any qualifying limit
(1) The National Defence Fund set up by the Central Government
(2) Prime Minister’s National Relief Fund.
(3) Prime Minister’s Armenia Earthquake Relief Fund
(4) The Africa (Public Contributions-India) Fund
(5) The National Children’s Fund
(6) The National Foundation for Communal Harmony
(7) Approved University or educational institution of national eminence
(8) Chief Minister’s Earthquake Relief Fund, Maharashtra
(9) Any fund set up by the State Government of Gujarat exclusively for providing
relief to the victims of the Gujarat earthquake
(10) Any Zila Saksharta Samiti for primary education in villages and towns and for
literacy and post-literacy activities
(11) National Blood Transfusion Council or any State Blood Transfusion Council
whose sole objective is the control, supervision, regulation or encouragement of
operation and requirements of blood banks
(12) Any State Government Fund set up to provide medical relief to the poor
(13) The Army Central Welfare Fund or Indian Naval Benevolent Fund or Air Force
Central Welfare Fund established by the armed forces of the Union for the
welfare of past and present members of such forces or their dependants.
(14) The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
(15) The National Illness Assistance Fund
(16) The Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund in respect
of any State or Union Territory
(17) The National Sports Development Fund set up by the Central Government
(18) The National Cultural Fund set up by the Central Government
(19) The Fund for Technology Development and Application set up by the Central
Government
(20) National Trust for welfare of persons with Autism, Cerebral Palsy, Mental
Retardation and Multiple Disabilities
(21) The Swachh Bharat Kosh, set up by the Central Government, other than the sum
spent by the assessee in pursuance of CSR u/s 135(5) of the Companies Act,
2013

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(22) The Clean Ganga Fund, set up by the Central Government, where such
assessee is a resident, other than the sum spent in pursuance of CSR u/s 135(5)
of the Companies Act, 2013
(23) The National Fund for Control of Drug Abuse constituted under section 7A of the
Narcotic Drugs and Psychotroic Substances Act, 1985
(24) Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund (PM
Cares Fund)
II Donation qualifying for 50% deduction, without any qualifying limit
(1) Prime Minister’s Drought Relief Fund
III Donation qualifying for 100% deduction, subject to qualifying limit
(1) The Government or to any approved local authority, institution or association as
may be approved for promotion of family planning
(2) Sum paid by a company as donation to the Indian Olympic Association or any
other association/institution established in India, as may be notified by the
Government established –
- for the development of infrastructure for sports or games, or
- the sponsorship of sports and games in India
IV Donation qualifying for 50% deduction, subject to qualifying limit
(1) Any Institution or Fund established in India for charitable purposes fulfilling
prescribed conditions under section 80G(5).
(2) The Government or any local authority for utilisation for any charitable purpose
other than the purpose of promoting family planning.
(3) An authority constituted in India by or under any other law enacted either for the
purpose
- of dealing with and satisfying the need for housing accommodation or
- of planning, development or improvement of cities, towns and villages, or both.
(4) Any Corporation established by the Central Government or any State
Government for promoting the interests of the members of a minority community
as referred in section 10(26BB).
(5) for renovation or repair of any such temple, mosque, gurdwara, church or other
place as notified by the Central Government to be of historic, archaeological or
artistic importance or to be a place of public worship of renown throughout any
State or States.

(iii) Qualifying limit: The eligible donations referred to in III and IV should be aggregated and
the sum total should be limited to 10% of the adjusted gross total income. This would be the
maximum permissible deduction.

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The donations qualifying for 100% deduction would be first adjusted from the maximum
permissible deduction and thereafter 50% deduction of the balance would be allowed.

Steps for computation of qualifying limit

Step 1: Compute adjusted total income i.e., the GTI as reduced by the following:
(i) Deductions under Chapter VI-A, except under section 80G
(ii) Short-term capital gain taxable under section 111A
(iii) Long-term capital gains taxable under sections 112 & 112A
(iv) Any income on which income-tax is not payable
(v) Income referred to in section 115A(1)(a), 115AB, 115AC, 115AD and 115D
Step 2: Calculate 10% of adjusted total income
Step 3: Calculate the actual donation, which is subject to qualifying limit (Total of
Category III and IV donations, shown in the table above)
Step 4: Lower of Step 2 or Step 3 is the maximum permissible deduction.
Step 5: The said deduction is adjusted first against donations qualifying for 100%
deduction (i.e., Category III donations). Thereafter, 50% of balance qualifies for
deduction under section 80G.

(iv) Conditions: Donation to any institution or fund referred in point no. (1) of (IV) above i.e.,
donation to whom would qualify for 50% deduction, subject to qualifying limit, shall be
eligible for deduction if it is established in India for charitable purposes and fulfill the
following conditions:

(1) The institution or fund is:

(a) constituted as a public charitable trust, or
(b) registered under the Societies Registration Act, 1860 or under any
corresponding law or under section 25 of the Companies Act, 1956 3, or
(c) a University established by law or
(d) any other educational institution recognized by the Government or by a
university established by law or affiliated to any university established by law
(e) an institution financed wholly or in part by the Government or a local authority
[Section 80G(5)(v)].

3 Section 8 of the Companies Act, 2013

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(2) Where such institution or fund derives any income, such income should not be liable
to inclusion in its total income under the provisions of section 10(23AA), 10(23C) or
11 or 12 [Section 80G(5)(i)].
However, in respect of profits and gains of business, the condition of such income
should not be liable to inclusion in its total income under the provisions of section 11
shall not be applicable if –
- the institution or fund maintains separate books of account in respect of such
business;
- the donation made to it are not used by it, directly or indirectly, for the purpose
of such business; and
- the institution or fund issues certificate to the donor in respect of the above
compliance.
Further, it may be noted that the assessee will not lose the benefit of deduction if:
(a) subsequent to the donation, any part of the income of the Institution has
become chargeable to tax due to non-compliance with any of the provisions of
section 11 or section 12 or section 12A.
(b) as a result of the operation of section 13(1)(c), exemption under section 11 or
section 12 is denied to the institution in relation to any income arising to it from
any investment made in a concern in which the person specified under section
13(3) has substantial interest and aggregate of fund so invested does not
exceed 5% of the capital of that concern. [Explanation 2 to section 80G]
(3) No part of the income or assets of the Institution or Fund is transferable or applied at
any time for any purposes other than charitable purpose [Section 80G(5)(ii)].

Such charitable purpose however does not include any purpose the whole or
substantially the whole of which is of a religious nature [Explanation 3 to Section
80G].
However, where an institution or fund incurs expenditure of a religious nature for an
amount not exceeding 5% of its total income in that previous year, such institution or
fund shall be deemed to be a fund or institution to which the provisions of this section
apply [Section 80G(5B)].

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(4) For the purposes of this section, an association or institution having as its object the
control, supervision, regulation or encouragement in India of such games or sports as
the Central Government may, by notification in the Official Gazette, specify in this
behalf, shall be deemed to be an institution established in India for a charitable
purpose. [Explanation 4 to Section 80G]
(5) The Institution or Fund is not expressed to be for the benefit of any particular religious
community or caste [Section 80G(5)(iii)].
An institution or fund established for the benefit of women and children or of
Scheduled Castes, Backward classes or Scheduled Tribes is not however to be
treated as an institution or fund for the benefit of a religious community or caste.
[Explanation 1 to Section 80G]
(6) The Institution or Fund maintains regular accounts of its receipt and expenditure
[Section 80G(5)(iv)].
(7) Such institution or fund must be approved by the Principal Commissioner or
Commissioner [Section 80G(5)(vi)]
First, second, third and fourth provisos to section 80G(5) provide that the institution or
fund has to make an application in the prescribed form and manner to the Principal
Commissioner (PC) or Commissioner (C), for grant of approval within the prescribed
time period and the PC or C will pass an order for grant of approval.
(8) Filing of statement of donation received by the institution or fund: The institution
or fund is required to prepare such statement for such period as may be prescribed
and deliver or cause to be delivered to the prescribed income-tax authority or the
person authorised by such authority such statement in such form and verified in such
manner and setting forth such particulars and within such time as may be prescribed
[Section 80G(5)(viii)].
The institution or fund can also deliver to the said prescribed authority a correction
statement for rectification of any mistake or to add, delete or update the information
furnished in the statement delivered under this sub-section in such form and verified
in such manner as may be prescribed.

(9) Furnishing of certificate to the donor: The institution or fund is also required to
furnish to the donor, a certificate specifying the amount of donation in such manner,
containing such particulars and within such time from the date of receipt of donation,
as may be prescribed [Section 80G(5)(ix)]

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Consequently, Explanation 2A to section 80G provides that claim of the assessee for
a deduction in respect of any donation made to an institution or fund, in the return of
income for any assessment year filed by him, is allowed on the basis of information
relating to said donation furnished by the institution or fund, subject to verification in
accordance with the risk management strategy formulated by the Board from time to
time.
(v) Other points:
(a) Where an assessee has claimed and has been allowed any deduction under this
section in respect of any amount of donation, the same amount will not qualify for
deduction under any other provision of the Act for the same or any other assessment
year [Section 80G(5A)].
(b) Donations in kind shall not qualify for deduction.
(c) No deduction shall be allowed in respect of donation of any sum exceeding
` 2,000 unless such sum is paid by any mode other than cash [Section 80G(5D)].

(d) The deduction under section 80G can be claimed whether it has any nexus with the
business of the assessee or not.
(e) As per Circular No.2/2005 dated 12.1.2005, in cases where employees make
donations to the Prime Minister’s National Relief Fund, the Chief Minister’s Relief
Fund or the Lieutenant Governor’s Relief Fund through their respective employers,
it is not possible for such funds to issue separate certificate to every such employee
in respect of donations made to such funds as contributions made to these funds
are in the form of a consolidated cheque. An employee who makes donations
towards these funds is eligible to claim deduction under section 80G. It is, hereby,
clarified that the claim in respect of such donations as indicated above will be
admissible under section 80G on the basis of the certificate issued by the Drawing
and Disbursing Officer (DDO)/ Employer in this behalf.
ILLUSTRATION 15
Mr. Arjun aged 45 years, has gross total income of ` 8,85,000 comprising of income from
salary and house property. He has made the following payments and investments:

(i) Premium paid to insure the life of her major daughter (policy taken on 1.4.2018)
(Assured value ` 1,80,000) – ` 20,000
(ii) Medical Insurance premium for self – ` 14,000; Spouse – ` 15,000

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(iii) Donation to a public charitable institution registered under 80G ` 50,000 by way of
cheque

(iv) LIC Pension Fund – ` 60,000

(v) Donation to National Children’s Fund - ` 25,000 by way of cheque

(vi) Donation to PM CARES Fund – ` 10,000 by way of cheque.

(vii) Donation to approved institution for promotion of family planning - ` 40,000 by way of
cheque

(viii) Deposit in PPF - ` 1,20,000

Compute the total income of Mr. Arjun for A.Y. 2025-26 if he exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A).
SOLUTION
Computation of Total Income of Mr. Arjun for A.Y. 2025-26
Particulars ` `
Gross Total Income 8,85,000
Less: Deduction under section 80C
Deposit in PPF 1,20,000
Life insurance premium paid for insurance of major
daughter (Maximum 10% of the assured value ` 1,80,000,
as the policy is taken after 31.3.2012) 18,000
1,38,000
Deduction u/s 80CCC in respect of LIC pension fund 60,000
1,98,000
As per section 80CCE, deduction u/s 80C & 80CCC is restricted 1,50,000
to
Deduction under section 80D
Medical Insurance premium in respect of self and spouse 29,000
Restricted to 25,000
Deduction under section 80G (See Working Note below) 90,500
Total income 6,19,500

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.51

Working Note: Computation of deduction under section 80G

Particulars of donation Amount % of deduction Deduction u/s
donated 80G (`)
(`)
(i) National Children’s Fund 25,000 100% 25,000
(ii) PM Cares Fund 10,000 100% 10,000
(iii) Approved institution for 40,000 100%, subject to 40,000
promotion of family planning qualifying limit
(iv) Public Charitable Trust 50,000 50% subject to 15,500
qualifying limit
(See Note
below)
90,500

Note - Adjusted total income = Gross Total Income (–) Amount of deductions under section
80C to 80U except section 80G i.e., ` 7,10,000, in this case., ` 71,000, being 10% of
adjusted total income is the qualifying limit, in this case.
Firstly, donation of ` 40,000 to approved institution for family planning qualifying for 100%
deduction subject to qualifying limit, has to be adjusted against this amount. Thereafter,
donation to public charitable trust qualifying for 50% deduction, subject to qualifying limit is
adjusted. Hence, the contribution of ` 50,000 to public charitable trust is restricted to
` 31,000 (being, ` 71,000 - ` 40,000), 50% of which would be the deduction under section
80G. Therefore, the deduction under section 80G in respect of donation to public charitable
trust would be ` 15,500, which is 50% of ` 31,000.

(14) Deduction in respect of rent paid [Section 80GG]

(i) Eligible assessee: Assessee, who is not in receipt of HRA qualifying for exemption under
section 10(13A) from employer and who pays rent for accommodation occupied by him for
residential purposes.

(ii) Conditions: The following conditions have to be satisfied for claiming deduction under
section 80GG -

(a) The assessee should not be receiving any house rent allowance exempt under
section 10(13A).

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(b) The expenditure incurred by him on rent of any furnished or unfurnished

accommodation should exceed 10% of his total income arrived at after all deductions
under Chapter VI A except section 80GG.
(c) The accommodation should be occupied by the assessee for the purposes of his own
residence.
(d) The assessee should fulfill such other conditions or limitations as may be prescribed,
having regard to the area or place in which such accommodation is situated and other
relevant considerations.
(e) The assessee or his spouse or his minor child or an HUF of which he is a member
should not own any accommodation at the place where he ordinarily resides or perform
duties of his office or employment or carries on his business or profession; or
(f) If the assessee owns any accommodation at any place other than that referred to
above, such accommodation should not be in the occupation of the assessee and its
annual value is not required to be determined under section 23(2)(a) or section
23(4)(a).
(g) The assessee should file a declaration in the prescribed form, confirming the details
of rent paid and fulfillment of other conditions, with the return of income.
(iii) Quantum of deduction: The deduction admissible will be the least of the following:

(a) Actual rent paid minus 10% of the total income of the assessee before allowing the
deduction, or
(b) 25% of such total income (arrived at after making all deductions under Chapter VI-A
but before making any deduction under this section), or
(c) Amount calculated at ` 5,000 p.m.
Note - Deduction under section 80GG would be available to an individual/HUF only if he/it exercises
the option of shifting out of the default tax regime provided under section 115BAC(1A).
ILLUSTRATION 16
Mr. Rakesh, a businessman, whose total income (before allowing deduction under section 80GG)
for A.Y.2025-26 is ` 4,60,000, paid house rent at ` 12,000 p.m. in respect of residential
accommodation occupied by him at Mumbai. Compute the deduction allowable to him under section
80GG for A.Y.2025-26 if he has exercised the option of shifting out of the default tax regime provided
under section 115BAC(1A).

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.53

SOLUTION
The deduction under section 80GG will be computed as follows:
(i) Actual rent paid less 10% of total income
` 1,44,000 (-) ` 46,000 (10% x ` 4,60,000) = ` 98,000
(ii) 25% of total income i.e., ` 4,60,000
= ` 1,15,000
(iii) Amount calculated at ` 5,000 p.m. = ` 60,000
Deduction allowable u/s 80GG [least of (i), (ii) and (iii)] = ` 60,000

(15) Deduction in respect of donations for scientific research or rural development

[Section 80GGA]
(i) Eligible assessee: Section 80GGA grants deduction in respect of the donations made for
scientific research or rural development by any assessee not having income chargeable
under the head “Profits and gains of business or profession”.
(ii) Donations qualifying for deduction:
(a) Any sum paid by the assessee in the previous year to a research association which
has, as its object, the undertaking of scientific research or to a University, college or
other institution to be used for scientific research; and
Such research association, University, college or institution must be approved under
section 35(1)(ii).
(b) Any sum paid to a research Association which has as its object the undertaking of
research in social science or statistical research, University, College or other
institution to be used for research in social science or statistical research.
Such Research Association, University, College or institution must be approved under
section 35(1)(iii).
(c) Any sum paid by the assessee in the previous year
- to an association or institution which has as its object the undertaking of any
programme of rural development to be used for carrying out any programme of
rural development approved by the prescribed authority for purposes of section
35CCA or

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- to an institution or association which has as its object the training of persons

for implementing programmes of rural development.

It is, however, essential that assessee furnishes the certificate from such institution or
association as referred to in section 35CCA(2) & (2A).
(d) Any sum paid to a public sector company or a local authority or to an association or
institution approved by the National Committee for carrying out any eligible project or
scheme.
(e) Further, it has been clarified that the deduction to which an assessee (i.e. donor) is
entitled on account of payment of any sum
- to a research association or university college or other institution for scientific
research or research in a social science or statistical research,
- an association or institution for carrying out the programme of rural
development
- public sector company or a local authority or to an association or institution
approved by the National Committee for carrying out any eligible project or
scheme
shall not be denied merely on the ground that subsequent to payment of such sum by
the assessee, the approval granted to any of the aforesaid entities or to such
programme is withdrawn.
(f) Any sum paid to a rural development fund set up and notified under section 35CCA.

(g) Any sum paid by the assessee in the previous year to National Urban Poverty
Eradication Fund (NUPEF).
(iii) Restrictions on deduction:
(a) No deduction under this section would be allowed in the case of an assessee whose
gross total income includes income which is chargeable under the head “Profits and
gains of business or profession.
(b) Where a deduction under this section is claimed and allowed for any assessment
year, deduction shall not be allowed in respect of such payment under any provision
of this Act for the same or any other assessment year.
(c) No deduction shall be allowed in respect of donation of any sum exceeding
` 2,000 unless such sum is paid by any mode other than cash.

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(d) Deduction under this section claimed by the assessee in the return of income for any
assessment year would be allowable on the basis of the information relating to
donation furnished by the payee to the prescribed income-tax authority or person
specified by such authority, subject to verification in accordance with the risk
management strategy formulated by the CBDT from time to time.

Note - An individual, HUF, AoP (other than a co-operative society) or BoI or an artificial juridical
person will be eligible for deduction u/s 80GGA only if such person has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A).

(16) Deduction in respect of contributions given by companies to political parties

[Section 80GGB]

(i) Deduction & Conditions: This section provides for deduction of any sum contributed in the
previous year by an Indian company not opting for section 115BAA/ 115BAB to any political
party or an electoral trust. However, no deduction shall be allowed in respect of any sum
contributed by way of cash.

(ii) Meaning of “contribute”: For the purposes of this section, the word “contribute” has the
same meaning assigned to it under section 293A of the Companies Act, 1956 4, which
provides that -
(a) a donation or subscription or payment given by a company to a person for carrying on
any activity which is likely to effect public support for a political party shall also be
deemed to be contribution for a political purpose;
(b) the expenditure incurred, directly or indirectly, by a company on advertisement in any
publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet
or the like) by or on behalf of a political party or for its advantage shall also be
deemed to be a contribution to such political party or a contribution for a political
purpose to the person publishing it.
(iii) Meaning of “Political party”: It means a political party registered under section 29A of the
Representation of the People Act, 1951.

4 Now section 182 of the Companies Act, 2013

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ILLUSTRATION 17

During the P.Y.2024-25, Sky Ltd., an Indian company contributed a sum of ` 3.5 lakh to an
electoral trust; and incurred expenditure of ` 52,000 on advertisement in a brochure of a political
party.
Is the company eligible for deduction in respect of such contribution/expenditure, assuming that the
contribution was made by cheque? If so, what is the quantum of deduction? Sky Ltd. does not opt
for section 115BAA/115BAB.
SOLUTION

An Indian company is eligible for deduction under section 80GGB in respect of any sum contributed
by it in the previous year to any political party or an electoral trust. Further, the word “contribute” in
section 80GGB has the meaning assigned to it in section 293A of the Companies Act, 1956, and
accordingly, it includes the amount of expenditure incurred on advertisement in a brochure of a
political party.
Therefore, Sky Ltd. is eligible for a deduction of ` 4,02,000 under section 80GGB in respect of sum
of ` 3.5 lakh contributed to an electoral trust and ` 52,000 incurred by it on advertisement in a
brochure of a political party.
It may be noted that there is a specific disallowance under section 37(2B) in respect of expenditure
incurred on advertisement in a brochure of a political party. Therefore, the expenditure of
` 52,000 would be disallowed while computing business income/ gross total income. However, the
said expenditure incurred by an Indian company is allowable as a deduction from gross total income
under section 80GGB.

(17) Deduction in respect of contributions given by any person to political

parties [Section 80GGC]

(i) Deduction & Conditions: This section provides for deduction of any sum contributed in the
previous year by any person to a political party or an electoral trust. However, no deduction
shall be allowed in respect of any sum contributed by way of cash.
(ii) Persons not eligible for deduction: This deduction will, however, not be available to a local
authority and an artificial juridical person, wholly or partly funded by the Government.
(iii) Meaning of “Political party”: It means a political party registered under section 29A of the
Representation of the People Act, 1951.

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Note - An individual, HUF, AoP (other than a co-operative society) or BoI would be eligible for
deduction u/s 80GGC only if such person has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A). A co-operative society will not be eligible for deduction
if it opts for special provisions of section 115BAD/115BAE.

8.3 DEDUCTIONS IN RESPECT OF CERTAIN INCOMES

(1) Deductions in respect of profits and gains from undertakings or enterprises
engaged in infrastructure development, etc. [Section 80-IA]
Applicability
Section 80-IA(1) provides a 10 year tax holiday to an assessee, whose gross total income includes
any profits and gains derived by an undertaking or enterprise from an eligible business i.e.,
business referred to in sub-section (4), namely :
(i) Infrastructure facility - Any enterprise carrying on the business of:
(a) developing; or
(b) operating and maintaining; or
(c) developing, operating and maintaining
(d) any infrastructure facility.
Conditions: However, such enterprise must fulfill the following conditions:
(1) It must be owned by a company registered in India or by a consortium of such
companies or by an authority or a board or a corporation or any other body
established or constituted under any Central or State Act.
(2) It has entered into an agreement with the Central or a State Government or a local
authority or statutory body for (i) developing or (ii) operating and maintaining, or (iii)
developing, operating and maintaining a new infrastructure facility.

(3) It starts operating and maintaining such infrastructure facility on or after 1-4-1995.
(4) However, where an enterprise which developed such infrastructure facility transfers it
to another enterprise on or after 1-4-1999, and such transferee enterprise operates
and maintains it according to the agreement drawn up with the Government, etc., this
section will apply to the transferee enterprise for the unexpired period of deduction
(which was available to the first enterprise).

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Meaning of “infrastructure facility”:

a port, airport, inland

a road, including toll waterway or inland port
road, a bridge or a rail or navigational channel
system in the sea

Infrastructure facility means

a water supply project,

a highway project water treatment system,
including housing or irrigation project, sanitation
other activities being and sewerage system or
an integral part of the solid waste management
highway project system

Note:
1. Structures at the ports for storage, loading and unloading etc. will be included in the
definition of port for the purpose of section 80-IA, if the concerned port authority has
issued a certificate that the said structures form part of the port.
2. Effluent treatment and conveyance system is a part of water treatment system and
would accordingly, qualify as an infrastructure facility for the purpose of section 80-IA.
3. The CBDT has, vide Circular No. 4/2010 dated 18.5.2010, clarified that widening of an
existing road by constructing additional lanes as a part of a highway project by an
undertaking would be regarded as a new infrastructure facility for the purpose of
section 80-IA(4)(i). However, simply relaying of an existing road would not be
classifiable as a new infrastructure facility for this purpose.
Note – Any enterprise which starts the development or operation and maintenance of the
infrastructure facility on or after 1.4.2017 will not be eligible for deduction under section
80-IA. Instead, they would be eligible for investment-linked tax deduction under section
35AD.

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(ii) Industrial parks : Any undertaking which

- develops,

- develops and operates, or

- maintains and operates

an industrial park.

Conditions:

(1) The undertaking begins to operate an industrial park in accordance with the scheme
framed and notified by the Central Government.

(2) The scheme is notified by the Government for the period beginning on 1-4-1997 and
ending on 31-3-2011 for industrial parks

(3) However, where an undertaking develops an industrial park on or after 1.4.1999 and
transfers the operation and maintenance to another undertaking (transferee
undertaking), the deduction to the transferee undertaking shall be available for the
remaining period in the ten consecutive assessment years, in such a manner as
would have been available to the transferor undertaking, as if the operation and
maintenance were not so transferred to the transferee undertaking.

Rule 18C lays down the following eligibility criteria for Industrial Parks to claim benefit under
section 80-IA(4)(iii) -

(1) The undertaking should begin to develop, develop and operate or maintain and
operate an industrial park any time during the period from 1.4.2006 to 31.3.2011.

(2) The undertaking and the Industrial Park should be notified by the Central Government
under the Industrial Park Scheme, 2008.

(3) The undertaking should continue to fulfill the conditions envisaged in the Industrial
Park Scheme, 2008.

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(iii) Power undertakings: Any undertaking which

is set up in any part of India for the generation or generation and

distribution of power. However, such undertaking must begin to
generate power at any time during the period between 1.4.1993 and
31.3.2017

starts transmission or distribution by laying a network of new

transmission or distribution lines at any time during the period from
1.4.1999 and 31.3.2017. However, the deduction shall be allowed
only in respect of profits derived from the laying of such network of
new lines for transmission or distribution

undertakes substantial renovation and modernisation of the existing

network of transmission or distribution lines at any time during the
period beginning on 1.4.2004 and ending on 31.3.2017

Meaning of “Substantial renovation and modernisation”:

‘Substantial renovation and modernisation’ means an increase in the plant and machinery in
the network of transmission or distribution lines by at least fifty per cent of the book value of
such plant and machinery as on 1st April, 2004.

(iv) Undertakings owned by an Indian company and set up for reconstruction or revival of
a power generating plant:

An undertaking owned by an Indian company and set up for

reconstruction or revival of a power generating plant

Such Indian company should be formed before 30.11.2005 with majority

equity participation by public sector companies for the purposes of
enforcing the security interest of the lenders to the company owning the
power generating plant
Such Indian company should have been notified before
31.12.2005 by the Central Government for the purposes of this
clause

Such undertaking should begin to generate or transmit or

distribute power before 31.3.2011

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.61

Rate of Deduction
The amount of deduction available will be 100% of the profits and gains derived from such business
for ten consecutive assessment years commencing at any time during the periods specified in
period of tax holiday/concession below.
Period of tax holiday/concession
Eligible business Period of tax holiday
1. For all eligible business except Assessee has the option to claim deduction for
business mentioned in point 2 below. 10 consecutive assessment years out of 15
years beginning from the year in which the
undertaking or the enterprise develops or begins
to operate the infrastructure facility or develops
industrial park or generates power or
commences transmission or distribution of power
or undertakes substantial renovation and
modernization of the existing transmission or
distribution lines.
2. In case of an infrastructure facility Assessee has the option to claim deduction for
being a public facility like – 10 consecutive assessment years out of 20
(i) a road, including a toll road, years beginning from the year in which the
bridge or rail system; or undertaking or the enterprise develops or begins
to operate the eligible business
(ii) a highway project including
housing or other activities which
are an integral part of the
highway project; or
(iii) a water supply project, water
treatment system, irrigation
project, sanitation and sewerage
system or solid waste
management system

Other provisions
(1) Eligible business to be considered as the only source of income: For the purpose of
computing deduction under this section, the profits and gains of the eligible business shall
be computed as if such eligible business were the only source of income of the assessee
during the relevant previous years [Sub-section (5)].

(2) Conditions to exempt profit from housing or other activities, being integral part of
highway project: Where housing or other activities are an integral part of a highway project

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and the profits and gains have been calculated in accordance with the section, the profits
shall not be liable to tax if the following conditions have been fulfilled:

(a) The profit has been transferred to a special reserve account; and
(b) the same is actually utilised for the highway project excluding housing and other
activities before the expiry of 3 years following the year of transfer to the reserve
account;
(c) The amount remaining unutilised shall be chargeable to tax as income of the year in
which the transfer to the reserve account took place [Sub-section (6)].

(3) Audit of accounts: The deduction shall be allowed to the undertaking only if the accounts of
the undertaking for the relevant previous year have been audited by a chartered accountant
and the assessee furnishes the audit report in the prescribed form, duly signed and verified
by such accountant, before the specified date referred to in section 44AB i.e., the date one
month prior to due date for filing return of income under section 139(1) [Sub-section (7)].
(4) Transfer of goods/services between eligible business and other business of the
assessee: Where any goods or services held for the purposes of the eligible business are
transferred to any other business carried on by the assessee, or vice versa, and if the
consideration for such transfer does not correspond with the market value of the goods or
services then the profits and gains of the eligible business shall be computed as if the
transfer was made at market value.
However, if, in the opinion of the Assessing Officer, such computation presents exceptional
difficulties, the Assessing Officer may compute the profits on such reasonable basis as he
may deem fit [Sub-section (8)].
For this purpose, the market value, in relation to any goods or services transferred between
the eligible business and any other business carried on by the assessee, shall mean –
(i) the price that such goods or services would ordinarily fetch in the open market; or
(ii) the arm’s length price as defined under section 92F, where the transfer of such goods
or services is a specified domestic transaction referred to in section 92BA.
(5) Deduction not to exceed profits of eligible business: The deductions claimed and
allowed under this section shall not exceed the profits and gains of the eligible business.
Further, where deduction is claimed and allowed under this section for any assessment year
no deduction in respect of such profits will be allowed under any other section under this
chapter under the heading “Deductions in respect of certain incomes” [Sub-section (9)].

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(6) Assessing Officer empowered to make adjustment in case any transaction produces
excessive profits to eligible business: The Assessing Officer is empowered to make an
adjustment while computing the profit and gains of the eligible business on the basis of the
reasonable profit that can be derived from the transaction, in case due to close connection or
for any other reason the transaction between the assessee carrying on the eligible business
under section 80-IA and any other person is so arranged that the transaction produces
excessive profits to the eligible business [Sub-section (10)].
If the aforesaid arrangement between the assessee carrying on the eligible business and any
other person is a specified domestic transaction referred to in section 92BA, then, the
amount of profit of such transaction shall be determined having regard to arm’s length price
as defined under section 92F and not as per the reasonable profit from such transaction.
(7) Central Government empowered to deny deduction to any class of eligible undertaking
or enterprise: The section empowers the Central Government to declare any class of
industrial undertaking or enterprise as not being entitled to deduction under this section. The
denial of exemption shall be with effect from such date as may be specified in the notification
issued in the Official Gazette [Sub-section (11)].
(8) Deduction in case of amalgamation or demerger: In the case of any amalgamation or
demerger, by virtue of which the Indian company carrying on the eligible business is
transferred to another Indian company, deduction under this section will be available as
follows:
(a) No deduction will be available to the amalgamating company or the demerged
company, as the case may be, in the year of amalgamation/ demerger.
(b) The provisions of this section will apply to the amalgamated/ resulting company as
they would have applied to the amalgamating/ demerged company if the
amalgamation/ demerger had not taken place [Sub-section (12)].
However, such transfer of benefit of deduction to the amalgamated/ resulting company would
not be available in respect of any enterprise or undertaking which is transferred in a scheme
of amalgamation or demerger effected on or after 1.4.2007 [Sub-section (12A)].
(9) No deduction to any business carrying on specified activities in the nature of a work
contract: The tax holiday under section 80-IA would not be available in relation to a
business referred to in sub-section (4) which is in the nature of a works contract awarded by
any person (including the Central or State Government) and executed by the undertaking or
enterprise referred to in section 80-IA(1).

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(2) Deduction in respect of profits and gains by an undertaking or enterprise

engaged in development of SEZ [Section 80-IAB]
(i) Quantum of deduction:
Sub-section (1) provides for a deduction of 100% of profits and gains derived by an
undertaking or an enterprise from any business of developing a SEZ for 10 consecutive
assessment years.
(ii) Eligible assessee:
The deduction is available to an assessee, being a Developer, whose gross total income
includes any profits and gains derived by an undertaking or an enterprise from any business
of developing a SEZ, notified on or after 1st April, 2005 under the SEZ Act, 2005.

Note - No deduction would be available to an assessee, being a developer, where the

development of SEZ begins on or after 1st April, 2017.

(iii) Meaning of Developer:

(a) a person who, or
(b) a State Government which
has been granted a letter of approval by the Central Government under section 3(10) of the
SEZ Act, 2005.
A developer includes –
(a) an authority and
(b) a Co-developer.
Co-developer means -
(a) a person who, or
(b) a State Government which
has been granted a letter of approval by the Central Government under section 3(12) of the
SEZ Act, 2005.
(iv) Option to choose 10 consecutive A.Y.s out of 15 years to claim deduction:
The assessee has the option of claiming the said deduction for any ten consecutive
assessment years out of fifteen years beginning from the year in which a SEZ has been
notified by the Central Government.

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(v) Deduction to transferee in case of transfer of operation and maintenance of such SEZ:

In a case where an undertaking, being a Developer, who develops a SEZ on or after

1.4.2005 and transfers the operation and maintenance of such SEZ to another Developer,
the deduction under sub-section (1) shall be allowed to such transferee Developer for the
remaining period in the ten consecutive assessment years as if the operation and
maintenance were not so transferred to the transferee Developer.

(vi) The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to
the Special Economic Zone for the purpose of allowing deductions under 80-IAB(1).

Lease rent from letting out buildings/developed space along with other amenities in an
Industrial Park /SEZ - to be treated as business income [Circular No. 16/2017, dated
25.04.2017]

The issue whether income arising from letting out of premises/developed space along with
other amenities in an Industrial Park/SEZ is to be charged under head 'Profits and Gains of
Business' or under the head 'Income from House Property' has been subject matter of
litigation in recent years. Assessees claim the letting out as business activity, the income
arising from which to be charged to tax under the head 'Profits and Gains of Business',
whereas the Assessing Officers hold it to be chargeable under the head 'Income from House
Property'.

In the case of Velankani Information Systems Pvt Ltd (NJRS Citation [2013-LL-0402-44]), the
Karnataka High Court observed that any other interpretation would defeat the object of
section 80-IA and Government schemes for development of Industrial Parks in the country.
SLPs filed in this case by the Department have been dismissed by the Supreme Court.

In a subsequent judgment dated 30.04.2014 in ITA No. 76 & 78/2012 in the case of CIT v.
Information Technology Park Ltd. (NJRS Citation [2014-LL-0430-141], the Karnataka High
Court has reaffirmed its earlier views. It has held that, since the assessee-company was
engaged in the business of developing, operating and maintaining an Industrial Park and
providing infrastructure facilities to different companies as its business, the lease rent
received by the assessee from letting out buildings along with other amenities in a software
technology park would be chargeable to tax under the head "Profits and gains of business or
profession" and not under the head "Income from house property". The judgment has been
accepted by the CBDT.

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In view of the above, it is now a settled position that in the case of an undertaking which
develops, develops and operates or maintains and operates an industrial park/SEZ notified
in accordance with the scheme framed and notified by the Government, the income from
letting out of premises/developed space along with other facilities in an industrial park/SEZ is
to be charged to tax under the head 'Profits and Gains of Business'.

(3) Tax incentives for new start-ups [Section 80-IAC]

(i) Objective:

Section 80-IAC provides an incentive to start-ups in order to aid their growth in the early
phase of their business.

(ii) Quantum of deduction:

Accordingly, a deduction of 100% of the profits and gains derived by an eligible start-up from
an eligible business is allowed for any three consecutive assessment years out of ten
years beginning from the year in which the eligible start up is incorporated.
(iii) Meaning of eligible start-up:

Company or LLP engaged

in eligible business

Total turnover ≤ ` 100 Holds a certificate of eligible

Incorporated during the crores in the P.Y. relevant business from the notified
period 1.4.2016-31.3.2025 to the A.Y. for which IMBC
deduction is claimed

(iv) Meaning of eligible business:

A business carried out by an eligible start-up engaged in –
- Innovation, development or improvement of products or processes or services or
- a scalable business model with a high potential of employment generation or wealth
creation

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(v) Conditions to be fulfilled:

This incentive is available to an eligible start-up which fulfils the following conditions:
(1) It is not formed by splitting up, or the reconstruction, of a business already in
existence.
Exception: However, this condition shall not apply in the case of an undertaking
which is formed as a result of reconstruction, re-establishment or revival of the
business of any undertaking which has been discontinued in any previous year due to
extensive damage or destruction of any building, machinery, plant or furniture owned
by the assessee and used for the purposes of such business. Further, the reason for
damage or destruction is due to any natural calamity or other unforeseen
circumstances such as the following:
(i) Flood, typhoon, hurricane, cyclone, earthquake or other natural calamity, or
(ii) riot or civil disturbance, or

(iii) accidental fire or explosion, or

(iv) enemy action or action taken in combat,
and such business is re-established or revived within 3 years from the end of such
previous year.
(2) It is not formed by the transfer to a new business of machinery or plant previously
used for any purpose.

Exceptions: However, any machinery or plant which was used outside India by any
person other than the assessee shall not be regarded as machinery or plant
previously used for any purpose, if all the following conditions are fulfilled, namely:—

(a) such machinery or plant was not, at any time previous to the date of the
installation by the assessee, used in India;
(b) such machinery or plant is imported into India;
(c) no deduction on account of depreciation in respect of such machinery or plant
has been allowed or is allowable under the provisions of the Income-tax Act,
1961 in computing the total income of any person for any period prior to the
date of the installation of the machinery or plant by the assessee.

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Further, where in the case of a start-up, any machinery or plant or any part thereof
previously used for any purpose is transferred to a new business and the total value
of the machinery or plant or part so transferred does not exceed 20% of the total
value of the machinery or plant used in the business, then, the condition specified that
it should not be formed by transfer to a new business of plant and machinery used for
any purpose shall be deemed to have been complied with.
(vi) The provisions of sub-section (5) and sub-section (7) to (11) of section 80-IA shall apply to
the start-ups for the purpose of allowing deductions under 80-IAC(1).

(4) Deductions in respect of profits and gains from certain undertaking [Section
80-IB]
Applicability
This section will be applicable to assessees, whose gross total income includes any profits and
gains from the business of processing, preservation and packaging of fruits or vegetables or meat
and meat products or poultry or marine or dairy products or from the integrated business of
handling, storage and transportation of foodgrains [Sub-section (11A)].
Conditions to be fulfilled, amount of deduction and period of deduction
In order to claim deduction, the undertaking should fulfill the following conditions:
(i) It should be deriving profits from the business of processing, preservation and packaging of
fruits or vegetables or meat or meat products or poultry or marine or dairy products or from
the integrated business of handling, storage and transportation of foodgrains.
(ii) It should begin to operate such business on or after 1.4.2001.
(iii) It should begin operates such business on or after 1.4.2009 in case of an undertaking
deriving profit from the business of processing, preservation and packaging of meat or meat
products or poultry or marine or dairy products.
Quantum and period of deduction: The amount of deduction shall be 100% of the profits and
gains derived from such business for 5 assessment years beginning with the initial assessment year
i.e. the assessment year relevant to the previous year in which the undertaking begins such
business. Thereafter, the deduction allowable is 25%. In the case of a company, the rate of 25%
shall be substituted by 30%. The total period of deduction should not exceed 10 consecutive
assessment years.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.69

The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to the
eligible business under section 80-IB.
(5) Deductions in respect of profits and gains from housing projects/rental
housing project [Section 80-IBA]

(i) Objective:

Section 80-IBA provides impetus to affordable housing sector to achieve the larger objective
of 'Housing for All'.

(ii) Quantum of deduction:

Where the gross total income of an assessee includes any profits and gains derived from

- the business of developing and building housing projects an amount equal to 100% of
the profits and gains derived from such business is allowable as deduction under
section 80-IBA, subject to fulfilment of certain conditions [Section 80-IBA(1)].

- the business of developing and building rental housing project an amount equal to
100% of the profits and gains derived from such business is allowable as deduction
[Section 80-IBA(1A)].

(iii) Conditions to be fulfilled for claim of deduction in respect of housing project referred
under section 80-IBA(1):

(a) the project is approved by the competent authority after 1st June, 2016 but on or
before 31st March, 2022;

(b) the project is completed within a period of five years from the date of approval by the
competent authority:

However, in a case where the approval in respect of a housing project is obtained

more than once, the project shall be deemed to have been approved on the date on
which the building plant of such housing project was first approved by the competent
authority and the project shall be deemed to have been completed when a certificate
of completion of project as a whole is obtained in writing from the competent authority.

(c) the carpet area of the shops and other commercial establishments included in the
housing project does not exceed 3% of the aggregate carpet area;

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Additional conditions to be fulfilled if the project is approved by the competent

authority before 1st September, 2019

(a) where a residential unit in the housing project is allotted to an individual, no other
residential unit in the housing project shall be allotted to the individual or the spouse
or the minor children of such individual;
(b) Conditions relating to size of plot of land, residential units etc.

Location Size on plot Carpet area of Percentage of floor area

of the of land on the residential ratio to be utilised by the
housing which the unit project
project project is comprised in
located the housing
project
(1) (2) (3) (4) (5)
(i) Within the Not less than Not more than Not less than 90% of the
cities of 1,000 sq. m. 30 sq. m. floor area ratio permissible
Chennai, in respect of the plot of land
Delhi, under the rules to be made
Kolkata or by the Central Government
Mumbai or the State Government or
the local authority, as the
case may be.
(ii) In any Not less than Not more than not less than 80% of such
other place 2,000 sq. m. 60 sq. m. floor area ratio

(c) The project is the only housing project on the plot of land [referred to in column (3)].

(d) the assessee maintains separate books of account in respect of the housing project.

Additional conditions to be fulfilled if the project is approved by the competent

authority on or after 1st September, 2019

(a) where a residential unit in the housing project is allotted to an individual, no other
residential unit in the housing project shall be allotted to the individual or the spouse
or the minor children of such individual;

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(b) Conditions relating to size of plot of land, residential units etc.

Location of the Size on Carpet area of Percentage of
housing project plot of land the residential floor area ratio to
on which unit be utilised by the
the project comprised in project
is located the housing
project
(1) (2) (3) (4) (5)
(i) Within the metropolitan Not less Not more than Not less than 90%
cities of Bengaluru, than 1,000 60 sq. m. of the floor area
Chennai, Delhi sq. m. ratio permissible in
National Capital respect of the plot
Region (limited to of land under the
Delhi, Noida, Greater rules to be made
Noida, Ghaziabad, by the Central
Gurugram, Faridabad), Government or the
Hyderabad, Kolkata State Government
and Mumbai (whole of or the local
Mumbai Metropolitan authority, as the
Region) case may be.
(ii) In any other place Not less Not more than Not less than 80%
than 2,000 90 sq. m. of such floor area
sq. m. ratio

(c) The project is the only housing project on the plot of land [referred to in column (3)
above].
(d) the assessee maintains separate books of account in respect of the housing project.

(e) the stamp duty value of a residential unit in the housing project does not exceed ` 45
lakhs.
(iv) No deduction for person executing the housing project as a works contract:
An assessee who merely executes the housing project as a works-contract awarded by any
person (including the Central Government or the State Government) would not be eligible for
deduction under this section.
(v) Consequence of non-completion of housing project within 5 years:
In a case where the housing project is not completed within the period of five years from the
date of approval by the competent authority and in respect of which a deduction has been
claimed and allowed under this section, the total amount of deduction so claimed and

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allowed in one or more previous years, shall be deemed to be the income of the assessee
chargeable under the head “Profits and gains of business or profession” of the previous year
in which the period for completion so expires.
(vi) No deduction under any other provision of the Act in respect of such profits:
Where any amount of profits and gains derived from the business of developing and building
housing projects is claimed and allowed under this section for any assessment year,
deduction to the extent of such profit and gains shall not be allowed under any other
provision of this Act.
(vii) Meaning of certain terms:
Term Meaning
(a) Carpet area Net usable floor area of an apartment
Excluding –
• The area covered by the external walls,
• areas under service shafts
• exclusive balcony or verandah area and
• exclusive open terrace area
However, carpet area includes the area covered by the
internal partition walls of the apartment.
Exclusive balcony or verandah and exclusive open terrace
area means the area of the balcony or verandah and the
area of open terrace respectively, which is appurtenant to
the net usable floor area of an apartment, meant for the
exclusive use of the allottee.
(b) Competent The authority empowered by the Central Government to
authority approve the building plan by or under any law for the time
being in force.
(c) Floor area ratio The quotient obtained by dividing the total covered area of
plinth area on all the floors by the area of the plot of land
(d) Housing project A project consisting predominantly of residential units with
such other facilities and amenities as the competent
authority may approve subject to the provisions of this
section
(e) Rental housing A project which is notified by the Central Government under
project this clause on or before the 31.03.2022 and fulfils such
conditions as may be specified in the said notification.
(f) Residential unit An independent housing unit with separate facilities for
living, cooking and sanitary requirements, distinctly

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separated from other residential units within the building,

which is directly accessible from an outer door or through an
interior door in a shared hallway and not by walking through
the living space of another household.
(g) Stamp duty value Value adopted or assessed or assessable by any authority
of the Central Government or a State Government for the
purpose of payment of stamp duty in respect of an
immovable property.

(6) Tax holiday in respect of profits and gains from eligible business of certain
undertakings in North-Eastern States [Section 80-IE]
(i) Applicability:
This section provides for an incentive to an undertaking which has during the period between
1st April, 2007 and 1st April, 2017, begun or begins, in any of the North-Eastern States (i.e.,
the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim
and Tripura) -
(1) to manufacture or produce any eligible article or thing;
(2) to undertake substantial expansion to manufacture or produce any eligible article or
thing;
(3) to carry on any eligible business.
(ii) Meaning of certain terms:
Terms Meaning
(a) Eligible the article or thing other than
article or - goods falling under Chapter 24 of the First Schedule to the
thing Central Excise Tariff Act, 1985 which pertains to tobacco and
manufactured tobacco substitutes;
- pan masala as covered under Chapter 21 of the First Schedule
to the Central Excise Tariff Act, 1985;
- plastic carry bags of less than 20 microns; and
- goods falling under Chapter 27 of the First Schedule to the
Central Excise Tariff Act, 1985 produced by petroleum oil or
gas refineries
(b) Substantial Increase in the investment in the plant and machinery by at least
expansion 25% of the book value of plant and machinery (before taking
depreciation in any year), as on the first day of the previous year in
which the substantial expansion is undertaken

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(c) Eligible Business of -

business
- hotel (not below two star category);
- adventure and leisure sports including ropeways;
- providing medical and health services in the nature of nursing
home with a minimum capacity of 25 beds;
- running an old-age home;
- operating vocational training institute for hotel management,
catering and food craft, entrepreneurship development, nursing
and para-medical, civil aviation related training, fashion
designing and industrial training;
- running information technology related training centre;
- manufacturing of information technology hardware; and
- Bio-technology.

(iii) Quantum of deduction and period:

Where the gross total income of an assessee includes any profits and gains derived by such
an undertaking, a deduction of 100% of the profits and gains derived from such business for
10 consecutive assessment years commencing with the initial assessment year shall be
allowed in computing the total income of the assessee. Initial assessment year means the
assessment year relevant to the previous year in which the undertaking begins to
manufacture or produce articles or things or completes substantial expansion.

(iv) No deduction under any other section of Chapter VIA or section 10AA of the Act in
respect of such profits:

No benefit to these undertakings will be available under any of the sections in Chapter VIA or
in section 10AA in relation to the profits and gains of such undertakings.

(v) Maximum permissible deduction:

While computing the total period of 10 years the period for which the benefit under section
80-IC has already been availed, if any, shall also be included.

(vi) The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to
the eligible undertaking under this section.

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SUMMARY OF DEDUCTIONS IN RESPECT OF CERTAIN

INCOMES: SECTIONS 80-IA to 80-IE
Section Eligible Business Year of Period of Quantum of
commencement of Deduction Deduction
eligible business
80-IA (1) (i) Developing or On or after 1.4.1995 Infrastructure 100% of the
(ii) Operating and but not later than Facility of road, profits and gains
maintaining or 1.4.2017 or a bridge or a derived from
(iii) Developing, rail system or a such business
operating and highway project for 10
maintaining any or a water consecutive
infrastructure facility supply project: assessment
10 consecutive years.
(2) Industrial parks Industrial parks: assessment
Notified by the years out of 20
Central Government years beginning
for the period on or from the year in
after 1.4.1997 & which the
ending on enterprise
31.3.2011. develops or
(3) Power undertakings Generation or begins to
Generation and operate the
distribution: Set up eligible
between 1.4.1993 & business.
31.3.2017.
Transmission or Other eligible
distribution: Start businesses: 10
transmission during consecutive
the period from assessment
1.4.1999 & years out of 15
31.3.2017. years beginning
Renovation and from the year in
modernisation of which the
existing network: enterprise
Undertakes develops or
substantial begins to
renovation and operate the
modernisation eligible
during the period on business.
or after 1.4.2004 &
ending on
31.3.2017.

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(4) Undertaking owned Company formed on

by an Indian or before 30th
Company set up for November, 2005
Reconstruction or and begins to
revival of a power generate or transmit
generating plant or distribute power
before 31st March
2011 and notified
before 31.12.2005
by Central
Government
80-IAB Development of Special Develops SEZ, 10 consecutive 100% of the
Economic Zones(SEZs) notified on or after AYs out of 15 profits and gains
1st April 2005 but years beginning derived from
before 1st April from the year in such business.
2017. SEZ has been
notified.
80-IAC A business carried out by The company or 3 consecutive 100% of the
an eligible start-up LLP is incorporated AYs out of 10 profits and gains
engaged in Innovation, during the period years beginning derived from
Development or 1.4.2016 - from the year in such business.
Improvement of products 31.3.2025 which company
or processes or services or LLP,
or a scalable business incorporated.
model with a high
potential of employment
generation or wealth
creation
80-IB Processing, preservation Processing, 10 consecutive 100% of the
and packaging of fruits or preservation and AYs beginning profits and gains
vegetables or meat and packaging of meat with the initial derived from
meat products or poultry or meat products AY such business
or marine or dairy or poultry or for 5 AYs
products or from the marine or dairy beginning with
integrated business of products: On or the initial AY
handling, storage and after 1.4.2009 25% (30% in
transportation of case of
foodgrains Other eligible company) for
businesses: On or remaining 5
after 1.4.2001 years
80-IBA Developing and building Housing Project 100% of the
housing projects or referred under ---- profits and gains
rental housing project section 80-IBA(1) is derived from

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.77

approved after such housing

1st June 2016 but project.
on or before 31st
March 2022
80-IE Undertaking begun or between 1st April, 10 consecutive 100% of the
begins, in any of the 2007 and ending AYs profits and gains
North-Eastern States before 1st April, commencing derived from
(i.e., the States of 2017 with the initial such business
Arunachal Pradesh, AY
Assam, Manipur,
Meghalaya, Mizoram,
Nagaland, Sikkim and
Tripura) -
(1) to manufacture or
produce any eligible article
or thing;
(2) to undertake
substantial expansion to
manufacture or produce
any eligible article or thing;
(3) to carry on any
eligible business.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction under section 80-IA to 80-IE would be available only if such person has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). It
would not be available if such person pays concessional rates of tax under the default tax regime
u/s 115BAC.
In case of companies and co-operative societies, deduction under section 80-IA to 80-IE would not
be available if they opt for the special provisions u/s 115BAA/115BAB and section
115BAD/115BAE, respectively. In other words, deduction would be available only if companies and
co-operative societies pay tax under the normal provisions of the Act.

Admissibility of deduction under Chapter VI-A on the profits enhanced due to disallowance
of expenditure related to business activity [Circular No.37/2016, Dated 02.11.2016]
Chapter VI-A of the Income-tax Act, 1961, provides for deductions in respect of certain incomes. In
computing the profits and gains of a business activity, the Assessing Officer may make certain
disallowances, such as disallowances pertaining to sections 32, 40(a)(ia), 40A(3), 43B etc., of the
Act. At times, disallowance out of specific expenditure claimed may also be made. The effect of
such disallowances is an increase in the profits.

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The issue is whether such higher profits would also result in claim for a higher profit-linked
deduction under Chapter VI-A.
The courts have generally held that if the expenditure disallowed is related to the business activity
against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on
the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was
not allowable on account of non-deduction of TDS under law, such disallowance would
ultimately increase assessee's profits from business of developing housing project. The
ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) would qualify
for deduction under section 80-IB.
(ii) If deduction under section 40A(3) is not allowed, the same would have to be added to the
profits of the undertaking on which the assessee would be entitled for deduction under
section 80-IB.
In view of the aforesaid judgements, the CBDT has accepted the settled position that the
disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. and other specific
disallowances, related to the business activity against which the Chapter VI-A deduction has been
claimed, result in enhancement of the profits of the eligible business, and that deduction under
Chapter VI-A is admissible on the profits so enhanced by the disallowance.

(7) Deduction in respect of profits and gains from business of collecting and
processing of bio-degradable waste [Section 80JJA]
(i) Eligible business: The deduction is allowable where the gross total income of an assessee
includes any profits and gains derived from the business of collecting and processing or
treating of bio-degradable waste -
(1) for generating power, or
(2) producing bio-fertilizers, bio-pesticides or other biological agents, or
(3) for producing bio-gas, or
(4) making pellets or briquettes for fuel or organic manure.
(ii) Quantum of deduction and period: The deduction allowable under this section is an
amount equal to the whole of such profits and gains for a period of five consecutive
assessment years beginning with the assessment year relevant to the previous year in which
the business commences.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.79

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction under section 80JJA would be available only if such person has
exercised the option of shifting out of the default tax regime provided under section 115BAC(1A). It
would not be available if such person pays concessional rates of tax under the default tax regime
u/s 115BAC.
In case of companies and co-operative societies, deduction under section 80JJA would not be
available if they opt for the special provisions u/s 115BAA/115BAB and section 115BAD/115BAE,
respectively. In other words, deduction would be available only if companies and co-operative
societies pay tax under the normal provisions of the Act.

(8) Deduction in respect of employment of new employees [Section 80JJAA]

(i) Quantum and period of deduction:
Where the gross total income of an assessee to whom section 44AB applies, includes any
profits and gains derived from business, a deduction of an amount equal to 30% of additional
employee cost incurred in the course of such business in the previous year, would be
allowed for three assessment years including the assessment year relevant to the previous
year in which such employment is provided.
(ii) Conditions to be fulfilled:
The deduction would be allowed only subject to fulfilment of the following conditions:

The report of the accountant,

The business is not
giving the prescribed particulars,
The business should not be acquired by the assessee
has to be furnished before the
formed by splitting up, or the by way of transfer from any
specified date referred to in
reconstruction, of an existing other person or as a result
section 44AB i.e., the date one
business of any business
month prior to due date for filing
reorganisation
ROI u/s 139(1)

(iii) Meaning of certain terms:

Term Meaning
(a) Additional employee cost Total emoluments paid or payable to additional
employees employed during the previous year.
In the case of an The additional employee cost
existing business shall be Nil, if—
(a) there is no increase in the
number of employees from
the total number of

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 8.80 DIRECT TAX LAWS

employees employed as
on the last day of the
preceding year;
(b) emoluments are paid
otherwise than by an
account payee cheque or
account payee bank draft
or by use of electronic
clearing system through a
bank account or through
any other prescribed
electronic mode [credit
card, debit card, net
banking, IMPS (Immediate
Payment Services), UPI
(Unified Payment
Interface), RTGS (Real
Time Gross Settlement),
NEFT (National Electronic
Fund Transfer), BHIM
(Bharat Interface for
Money) Aadhar Pay].
In the first year of The emoluments paid 5 or
a new business payable to employees
employed during that previous
year shall be deemed to be the
additional employee cost.
(b) Additional employee An employee who has been employed during the
previous year and whose employment has the
effect of increasing the total number of employees
employed by the employer as on the last day of the
preceding year.
Exclusions from the definition:
(a) an employee whose total emoluments are
more than ` 25,000 per month; or
(b) an employee for whom the entire contribution
is paid by the Government under the
Employees’ Pension Scheme notified in
accordance with the provisions of the
Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952; or

5As per Form No.10DA read with Rule 19AB, the amount shall not include emoluments paid otherwise than
by way of account payee cheque/bank draft/ECS through a bank account and prescribed electronic modes

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.81

(c) an employee employed for a period of less than

240 days during the previous year. In case of an
assessee engaged in the business of
manufacturing of apparel or footwear or leather
products, an employee employed for a period of
less than 150 days during the previous year; or
(e) an employee who does not participate in the
recognised provident fund.
Note – If an employee is employed during the
previous year for less than 240 days or 150 days,
as the case may be, but is employed for a period of
240 days or 150 days, as the case may be, in the
immediately succeeding year, he shall be deemed
to have been employed in the succeeding year.
Accordingly, the employer would be entitled to
deduction of 30% of additional employee cost of such
employees for three years from the succeeding year.
(c) Emoluments any sum paid or payable to an employee in lieu of
his employment by whatever name called.
Exclusions from the definition:
(a) any contribution paid or payable by the
employer to any pension fund or provident fund
or any other fund for the benefit of the
employee under any law for the time being in
force; and
(b) any lump-sum payment paid or payable to an
employee at the time of termination of his service
or superannuation or voluntary retirement, such
as gratuity, severance pay, leave encashment,
voluntary retrenchment benefits, commutation of
pension and the like.

Note - Deduction u/s 80JJAA would be available to an assessee irrespective of the regime under
which such assessee pays tax.

ILLUSTRATION 18
Mr. Vikas has commenced the business of manufacture of computers on 1.4.2024. He employed
420 new employees during the P.Y.2024-25, the details of whom are as follows –
No. of employees Date of Regular/Casual Total monthly emoluments
employment per employee (`)
(i) 75 1.4.2024 Regular 24,000
(ii) 125 1.5.2024 Regular 26,000

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 8.82 DIRECT TAX LAWS

(iii) 120 1.7.2024 Casual 24,500

(iv) 100 1.9.2024 Regular 24,000

The regular employees participate in recognized provident fund while the casual employees do not.
Compute the deduction, if any, available to Mr. Vikas for A.Y.2025-26, if the profits and gains
derived from manufacture of computers that year is ` 90 lakhs and his total turnover is ` 11.48
crores.
What would be your answer if Mr. Vikas has commenced the business of manufacture of leather
products on 1.4.2024?
SOLUTION
Mr. Vikas is eligible for deduction under section 80JJAA since he is subject to tax audit under
section 44AB for A.Y.2025-26, and he has employed “additional employees” during the P.Y.2024-
25.
I. If Mr. Vikas is engaged in the business of manufacture of computers
Additional employee cost = ` 24,000 × 12 × 75 [See Working Note below] = ` 2,16,00,000
Deduction under section 80JJAA = 30% of ` 2,16,00,000 = ` 64,80,000.
Working Note:
Number of additional employees
Particulars No. of workmen
Total number of employees employed during the year 420
Less: Casual employees employed on 1.7.2024 who do not 120
participate in recognized provident fund
Regular employees employed on 1.5.2024, since their total 125
monthly emoluments exceed ` 25,000
Regular employees employed on 1.9.2024 since they have
been employed for less than 240 days in the P.Y.2024-25. 100 345
Number of “additional employees” 75

Notes –
(i) Since casual employees do not participate in recognized provident fund, they do not
qualify as additional employees. Further, 125 regular employees employed on
1.5.2024 also do not qualify as additional employees since their monthly emoluments
exceed ` 25,000. Also, 100 regular employees employed on 1.9.2024 do not qualify

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.83

as additional employees for the P.Y.2024-25, since they are employed for less than
240 days in that year.

Therefore, only 75 employees employed on 1.4.2024 qualify as additional employees,

and the total emoluments paid or payable to them during the P.Y.2024-25 is deemed to
be the additional employee cost.

(ii) As regards 100 regular employees employed on 1.9.2024, they would be treated as
additional employees for previous year 2025-26, if they continue to be employees in
that year for a minimum period of 240 days. Accordingly, 30% of additional employee
cost in respect of such employees would be allowable as deduction under section
80JJAA in the hands of Mr. Vikas for the A.Y. 2026-27.
II. If Mr. Vikas is engaged in the business of manufacture of leather products
If Mr. Vikas is engaged in the business of manufacture of leather products, then, he would be
entitled to deduction under section 80JJAA in respect of employee cost of regular employees
employed on 1.9.2024, since they have been employed for more than 150 days in the
previous year 2024-25.
Additional employee cost = ` 2,16,00,000 + ` 24,000 × 7 × 100 = ` 3,84,00,000
Deduction under section 80JJAA = 30% of ` 3,84,00,000 = ` 1,15,20,000

(9) Deduction in respect of certain income of Offshore Banking Units and

International Financial Services Centre [Section 80LA]
(i) Eligible assessee:
This section is applicable to the following assessees -
(a) a scheduled bank having an Offshore Banking Unit in a SEZ; or
(b) any bank, incorporated by or under the laws of a country outside India, and having an
Offshore Banking Unit in a SEZ; or
(c) a Unit of an International Financial Services Centre (IFSC).
(ii) Eligible income qualifying for deduction:

The deduction will be allowed on account of the following income included in the gross total
income of such assessees -
(a) income from an Offshore Banking Unit in a SEZ; or

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(b) income from the business referred to in section 6(1) of the Banking Regulation Act,
1949, with -
(1) an undertaking located in a SEZ or
(2) any other undertaking which develops, develops and operates or develops,
operates and maintains a SEZ; or
(c) income from any Unit of the IFSC from its business for which it has been approved for
setting up in such a Centre in a SEZ.
(d) income arising from the transfer of an asset, being an aircraft or a ship or a helicopter
or an engine of an aircraft or a helicopter, or any part thereof, which was leased by a
unit of an IFSC referred to in clause (c) to a person, subject to the condition that the
unit has commenced operation on or before 31.03.2025.
(iii) Quantum and period of deduction:

S. Eligible assessee Quantum and period of Relevant previous year from

No. deduction which deduction is allowed
(a) a scheduled bank 100% of such income for Beginning with the
having an Offshore 5 consecutive AYs. assessment year relevant to
Banking Unit in a SEZ, Thereafter, 50% of such the previous year in which
whose GTI includes any income for the next 5 (1) the permission under
income referred to in (ii) consecutive AYs. section 23(1)(a) of the
above However, w.e.f. A.Y. Banking Regulation
(b) any bank, incorporated 2023-24, such Act, 1949 was
by or under the laws of deduction of 50% obtained; or
a country outside India, available for next 5 (2) the permission or
and having an Offshore consecutive registration under the
Banking Unit in a SEZ, assessment years has SEBI Act, 1992 was
whose GTI includes any been enhanced to obtained; or
income referred to in (ii) 100% of such income.
(3) the permission or
above registration under the
(c) Unit of an International 100% of such income for International Financial
Financial Services any 10 consecutive AYs Services Centre
Centre (IFSC), whose at the option of the Authority Act, 2019 was
GTI includes any income assessee, out of 15 obtained.
referred to in (ii) above years.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.85

(iv) Conditions:
The following conditions have to be fulfilled for claiming deduction under this section-
(a) The report of a Chartered Accountant in the prescribed form certifying that the
deduction has been correctly claimed in accordance with the provisions of this
section, should be submitted along with the return of income.
(b) A copy of the permission obtained under section 23(1)(a) of the Banking Regulation
Act, 1949 or copy of permission or registration obtained under the International
Financial Services Centre Authority Act, 2019 should also be furnished along with the
return of income.

(10) Deduction in respect of inter-corporate dividends [Section 80M]

(i) Eligible assessee: Deduction under this section would be allowable to a domestic company if its
gross total income includes in any previous year, any income by way of dividends received from
any other domestic company or foreign company or a business trust.
(ii) Quantum of deduction: In computing the total income of such domestic company, a
deduction of an amount equal to the amount of dividends received from other domestic
company or foreign company or business trust as does not exceed the amount of dividend
distributed by such domestic company on or before the due date.
In simple words, deduction under this section would be amount of dividend received from
other domestic company/foreign company/business trust or dividend distributed by the
domestic company, whichever is lower.

Example: X Ltd. a domestic company received dividend of ` 10 lakhs from “Y Ltd”, a

domestic company (100% subsidiary of X Ltd.) during the previous year 2024-25. On
15th May, 2025, X Ltd. declared and distributed dividend of ` 5 lakhs.

In this case, X Ltd. would be eligible for deduction under section 80M in respect of dividend
received from Y Ltd. to the extent of ` 5 lakhs, being the amount of dividend declared and
distributed by X Ltd. Hence, the deduction under section 80M would be ` 5 lakhs.
(iii) Meaning of due date: “Due date” means the date one month prior to the date for
furnishing the return of income under section 139(1).
(iv) No deduction: Where any deduction, in respect of the amount of dividend distributed by
the domestic company, has been allowed under this section in any previous year, no
deduction shall be allowed in respect of such amount in any other previous year.

Note - Deduction u/s 80M would be available to Indian company irrespective of the regime under
which it pays tax.

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(11) Deduction in respect of income of co-operative societies [Section 80P]

(i) Applicability:
Under this section, certain specified income of a co-operative society would be allowed as a
deduction, provided such income is included in the gross total income of the society.
(ii) Eligible income for deduction and quantum of deduction:
Deduction in respect of profit attributable to certain specified activities
100% deduction shall be allowed in respect of profits and gains attributable to any one or
more of the following activities to a co-operative society engaged in -
(1) carrying on the business of banking or providing credit facilities to its members; or
(2) a cottage industry; or

(3) the marketing of the agricultural produce grown by its members; or

(4) the purchase of agricultural implements, seeds, livestock or other articles intended for
agriculture or for the purpose of supplying them to its members; or
(5) the processing without the aid of power, of the agricultural produce of its members; or
(6) the collective disposal of the labour to its member; or
(7) fishing and other allied pursuits, such as catching, curing, processing, preserving,
storing and marketing of fish or the purchase of materials and equipment in
connection therewith for the purpose of supplying them to their members.
However, the exemption in respect of income referred to in (6) or (7) will be available
only in the case of those co-operative societies which, under their rules and by-laws,
restrict the voting rights to
(i) members who contribute their labour force or who actually carry on the fishing
or other allied activities,
(ii) the co-operative credit societies which provide financial assistance to the
society and

(iii) the State Government.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.87

Deduction in respect of profit of primary co-operative societies

100% of the profits and gains of the business would be allowed as deduction from the gross
total income of the co-operative society in case of a primary co-operative society engaged in
supplying milk, oilseeds, fruits or vegetables raised or grown by its members to –
- a federal co-operative society engaged in supplying milk, oilseeds, fruits or
vegetables, as the case may be, or
- the Government or a local authority or
- a Government company as defined in section 617 6 of the Companies Act, 1956 or a
corporation established by or under a Central, State or Provincial Act (engaged in
supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),
Deduction in respect of other activities
A co-operative society which is engaged in activities other than to those mentioned above
either independently of, or in addition to, all or any of the activities so specified, is eligible for
deduction upto ` 50,000 to the extent of its business income arising from other activities.
The limit is ` 1,00,000 in the case of consumer co-operative societies.
For this purpose, consumer co-operative society means a society for the benefit of the
consumers.
Deduction in respect of Interest or dividend income
Any income arising to a co-operative society by way of any interest and dividends derived
from its investments with any other co-operative society is deductible in full under this
section.
Deduction in respect of letting-out income for certain purpose
The income derived by a co-operative society from the letting out of godowns or warehouses
for storage, processing or facilitating the marketing of commodities is fully allowable as
deduction.
Deduction in respect of interest on securities and income from house property to
certain co-operative societies
Any income arising to a co-operative society by way of ‘Interest on securities’ or ‘Income
from house property’ (chargeable under section 22) is fully deductible under this section

6 As defined in section 2(45) of the Companies Act, 2013

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where the gross total income of the co-operative society does not exceed ` 20,000 and it is
not a housing society or an urban consumer’s society or a society carrying on transport
business or a society engaged in the performance of any manufacturing operations with the
aid of power. Thus, a majority of small co-operative societies would not have to pay any
income-tax.
(iii) Meaning of urban consumers’ co-operative society:

It means a society for the benefit of the consumers within the limits of a municipal
corporation, municipality, municipal committee, notified area committee, town area or
cantonment.

(iv) Deduction under other section of Chapter VI-A of the Act:

Where the co-operative society is also entitled to the deduction available under section 80-
IA, the deduction under this section shall be allowed with reference to the gross total income
as reduced by the deduction allowable under section 80-IA.

(v) Non-eligible co-operative societies:

Co-operative banks, other than primary agricultural credit societies (i.e. as defined in Part V
of the Banking Regulation Act, 1949) and primary co-operative agricultural and rural
development banks (i.e. societies having its area of operation confined to a taluk and the
principal object of which is to provide for long-term credit for agricultural and rural
development activities) are not eligible to claim deduction under section 80P. Moreover, the
CBDT has, vide Circular No. 6/2010 dated 20.9.2010 clarified that the Regional Rural Banks
are not eligible for deduction under section 80P.

However, co-operative societies engaged in providing credit facilities solely to its members
cannot be said to be a co-operative bank. Thus, such co-operative societies are eligible for
deduction under section 80P [PCIT v. Annasaheb Patil Mathadi Kamgar Sahakari
Pathpedi Ltd. [2023] 454 ITR 117 (SC)].

Note - In case of co-operative societies, deduction under section 80P would not be available if they
opt for the special provisions u/s 115BAD/115BAE. In other words, deduction would be available
only if they pay tax under the normal provisions of the Act.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.89

(12) Deduction in respect of royalty income, etc., of authors of certain books other
than text books [Section 80QQB]
(i) Eligible assessee and Quantum of deduction: Under section 80QQB, deduction of up to a
maximum ` 3,00,000 is allowed to an individual resident in India, being an author including a
joint author in respect of income derived by him in the exercise of his profession i.e., the
deduction shall be the income derived as author or ` 3,00,000, whichever is less.

(ii) Eligible income:

(a) This income may be received either by way of a lumpsum consideration for the
assignment or grant of any of his interests in the copyright of any book.
(b) Such book should be a work of literary, artistic or scientific nature, or of royalties or
copyright fees (whether receivable in lump sum or otherwise) in respect of such book.
(c) This deduction shall not, however, be available in respect of royalty income from
brochures, commentaries, diaries, guides, journals, magazines, newspapers,
pamphlets, textbook for schools, tracts and other publications of similar nature.
Note - Where an assessee claims deduction under this section, no deduction in respect of
the same income may be claimed under any other provision of the Income-tax Act, 1961.

(iii) Manner of computation of deduction: For the purpose of calculating the deduction under
this section, the amount of eligible income (royalty or copyright fee received otherwise than
by way of lumpsum) before allowing expenses attributable to such income, shall not exceed
15% of the value of the books sold during the relevant previous year.

However, this condition is not applicable where the royalty or copyright fees is receivable in
lump sum in lieu of all rights of the author in the book.
(iv) Conditions:
(a) Furnishing of certificate in prescribed form: For claiming the deduction, the
assessee shall have to furnish a certificate in the prescribed manner in the prescribed
format, duly verified by the person responsible for making such payment, setting forth
such particulars as may be prescribed.
(b) Period for repatriation of income earned outside India: Where the assessee earns
any income from any source outside India, he should bring such income into India in
convertible foreign exchange within a period of six months from the end of the
previous year in which such income is earned or within such further period as the

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competent authority may allow in this behalf for the purpose of claiming deduction
under this section.

The competent authority shall mean the Reserve Bank of India or such other authority
as is authorised under any law for the time being in force for regulating payments and
dealings in foreign exchange.
Note - Deduction under section 80QQB would be available to an individual resident in India only if he
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

ILLUSTRATION 19
Mr. Aakash earned royalty of ` 2,88,000 from a foreign country for a book authored by him, being a
work of literary nature. The rate of royalty is 18% of value of books. The expenditure incurred by
him for earning this royalty was ` 40,000. The amount remitted to India till 30th September, 2025 is
` 2,30,000. The remaining amount was not remitted till 31st March, 2026. Compute the amount
includible in the gross total income of Mr. Aakash and the amount of deduction which he will be
eligible for under section 80QQB if he has exercised the option of shifting out of the default tax
regime provided under section 115BAC(1A).
SOLUTION
The net royalty of ` 2,48,000 (i.e., royalty of ` 2,88,000 less ` 40,000, being expenditure to earn
such income) is includible in gross total income. Deduction u/s 80QQB would be ` 1,90,000 as
calculated hereunder –
`
Deduction u/s 80QQB:
Royalty ` 2,88,000 x 15/18 = ` 2,40,000
Restricted to
Amount brought into India in convertible foreign exchange within the prescribed time 2,30,000
Less: Expenses already allowed as deduction while computing royalty income 40,000
Deduction u/s 80QQB 1,90,000

(13) Deduction in respect of royalty on patents [Section 80RRB]

(i) Eligible assessee: This deduction shall be available only to a resident individual who is
registered as the true and first inventor in respect of an invention under the Patents Act,
1970, including the co-owner of the patent and earning income by way of royalty of a patent
registered on or after 1.4.2003.

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(ii) Quantum of deduction: This section allows deduction to a resident individual in respect of
income by way of royalty of a patent registered on or after 1.4.03 up to an amount of
` 3 lakhs.
Note - No deduction in respect of such income will be allowed under any other provision of
the Income-tax Act, 1961

(iii) Eligible income: This deduction shall be restricted to the royalty income including consideration
for transfer of rights in the patent or for providing information for working or use of a patent, use of
a patent or the rendering of any services in connection with these activities.
The deduction shall not be available on any consideration for sale of product manufactured
with the use of the patented process or patented article for commercial use.
(iv) Conditions:
(a) In respect of any such income which is earned from sources outside India, the
deduction shall be restricted to such sum as is brought to India in convertible foreign
exchange within a period of 6 months or extended period as is allowed by the
competent authority (Reserve Bank of India).
(b) For claiming this deduction the assessee shall be required to furnish a certificate in the
prescribed form signed by the prescribed authority, alongwith the return of income.
(v) Rectification of assessment where patent is revoked subsequently: Where the patent is
subsequently revoked or the name of the assessee was excluded from the patents register
as patentee in respect of that patent, the deduction allowed during the period shall be
deemed to have been wrongly allowed and the assessment shall be rectified under the
provisions of section 155.
The period of 4 years for rectification shall be reckoned from the end of the previous year in
which the order of the revocation of the patent is passed.

Note - Deduction under section 80RRB would be available to an individual resident in India only if
he exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

8.4 DEDUCTIONS IN RESPECT OF OTHER INCOME

(1) Deduction in respect of interest on deposits in savings accounts
[Section 80TTA]
(i) Eligible assessee and Quantum of deduction: Section 80TTA provides that in case the
gross total income of an assessee, being an individual or a Hindu Undivided Family, includes
any income by way of an interest on deposits in a saving account (not being time deposits,

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which are deposits repayable on expiry of fixed periods), deduction upto ` 10,000 in
aggregate shall be allowed while computing the total income of such assessee. Such
deduction shall be allowed in case the saving account is maintained with:
(a) a banking company to which the Banking Regulation Act, 1949, applies (including any
bank or banking institution referred to in section 51 of that Act);
(b) a co-operative society engaged in carrying on the business of banking (including a co-
operative land mortgage bank or a co-operative land development bank); or
(c) a post office.

Note - Deduction under this section would, however, not be available to a senior citizen
eligible for deduction under section 80TTB.

(ii) Restriction: If the aforesaid income is derived from any deposit in a savings account held
by, or on behalf of, a firm, an AOP/BOI, no deduction shall be allowed in respect of such
income in computing the total income of any partner of the firm or any member of the AOP or
any individual of the BOI.
In effect, the deduction under this section shall be allowed only in respect of the income
derived in form of the interest on the saving bank deposit (other than time deposits) made by
the individual or Hindu Undivided Family directly.

Note - Deduction under section 80TTA would be available to an individual/HUF only if he/it
exercises the option of shifting out of the default tax regime provided under section 115BAC(1A).

(2) Deduction in respect of interest on deposits in case of senior citizens

[Section 80TTB]
(i) Eligible assessee: A senior citizen (a resident individual who is of the age of 60 years or
more at any time during the relevant previous year), whose gross total income includes
income by way of interest on deposits (both fixed deposits and saving accounts) with –

(a) a banking company to which Banking Regulation Act, 1949 applies

(b) a co-operative society engaged in carrying on the business of banking (including a co-
operative land mortgage bank or a co-operative land development bank)

(c) a Post Office.

(ii) Quantum of deduction: Actual amount of interest on deposits or ` 50,000, whichever is lower.

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(iii) Non-availability of deduction to partner/member, where deposit held by firm/AOP/BOI:

Where interest income is derived from any deposit held by, or on behalf of, a firm, an AOP or
a BOI, the partner of the firm or member of AOP/BOI would not be allowed deduction in
respect of such income while computing their total income.

Note - Deduction under section 80TTB would be available an individual only if he exercises the
option of shifting out of the default tax regime provided under section 115BAC(1A).

ILLUSTRATION 20

Mr. Shivpal, a resident individual aged about 64 years, has earned business income (computed) of
` 1,40,000, lottery income of ` 1,60,000 (gross) during the P.Y. 2024-25. He also has interest on
Fixed Deposit of ` 51,000 with banks. He invested an amount of ` 1,50,000 in Public Provident
Fund account. What is the total income of Mr. Shivpal for the A.Y.2025-26 if he has exercised the
option of shifting out of the default tax regime provided under section 115BAC(1A)?
SOLUTION
Computation of total income of Mr. Shivpal for A.Y.2025-26
Particulars ` `
Profits and gains of business or profession 1,40,000
Income from other sources
- Interest on Fixed Deposit with banks 51,000
- lottery income 1,60,000
Gross Total Income 3,51,000
Less: Deductions under Chapter VIA [See Note below]
Under section 80C
- Deposit in Public Provident Fund 1,50,000
Under section 80TTB
- Interest on fixed deposits with banks, allowable as 50,000
deduction to the extent of
2,00,000
Restricted to 1,91,000
Total Income 1,60,000

Note: In case of resident individuals of the age of 60 years or more, interest on bank fixed deposits
qualifies for deduction upto ` 50,000 under section 80TTB.

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Though the aggregate of deductions under Chapter VI-A is ` 2,00,000, however, the maximum
permissible deduction cannot exceed the gross total income exclusive of long term capital gains
taxable under section 112 and section 112A, short-term capital gains covered under section 111A
and winnings from lotteries of the assessee.
Therefore, the maximum permissible deduction under Chapter VI-A = ` 3,51,000 – ` 1,60,000
= ` 1,91,000.

8.5 OTHER DEDUCTIONS

Deduction in the case of a person with disability [Section 80U]
(1) Section 80U harmonizes the criteria for defining disability as existing under the Income-tax
Rules with the criteria prescribed under the Persons with Disability (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995.
(2) Eligible assessee: This section is applicable to a resident individual, who, at any time
during the previous year, is certified by the medical authority to be a person with disability.
The benefit of deduction under this section has also been extended to persons suffering from
autism, cerebral palsy and multiple disabilities.
(3) Quantum of deduction: A deduction of ` 75,000 in respect of a person with disability and
` 1,25,000 in respect of a person with severe disability (having disability over 80%) is
allowable under this section.
(4) Conditions:
(a) The assessee claiming a deduction under this section shall furnish a copy of the
certificate issued by the medical authority in the form and manner, as may be
prescribed, along with the return of income under section 139, in respect of the
assessment year for which the deduction is claimed.
(b) Where the condition of disability requires reassessment, a fresh certificate from the
medical authority shall have to be obtained after the expiry of the period mentioned on
the original certificate in order to continue to claim the deduction.

Note - Deduction under section 80U would be available to an individual only if he exercises the option of
shifting out of the default tax regime provided under section 115BAC(1A).

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8.6 DEDUCTION UNDER SECTION 10AA

A deduction of profits and gains which are derived by an assessee being an entrepreneur from the
export of articles or things or providing any service, shall be allowed from the total income of the
assessee.

Note - In case of an individual, HUF, AoP (other than a co-operative society) or BoI or an artificial
juridical person, deduction would be available only if such person has exercised the option of
shifting out of the default tax regime provided under section 115BAC(1A). The deduction would be
available only under the optional tax regime, where they pay tax under the normal provisions of the
Act.
In case of companies and co-operative societies, deduction would not be available if they opt for the
special provisions u/s 115BAA/ 115BAB and section 115BAD/ 115BAE, respectively. The deduction
would be available if they pay tax under the normal provisions of the Act.

(1) Assessees who are eligible for deduction

Deduction is available to all categories of assessees who derive any profits or gains from an
undertaking, being a unit, engaged in the manufacturing or production of articles or things or
things or provision any service. Such assessee should be an entrepreneur referred to in
section 2(j) of the SEZ Act, 2005 i.e., a person who has been granted a letter of approval by
the Development Commissioner under section 15(9) of the said Act.

(2) Essential conditions to claim deduction

The deduction would be available to an undertaking which fulfils the following conditions:
(i) It has begun to manufacture or produce articles or things or provide any service in
any SEZ during the previous year relevant to A.Y.2006-07 or any subsequent
assessment year but not later than A.Y.2020-21.

However, in case where letter of approval, required to be issued in accordance with

the provisions of the SEZ Act, 2005, has been issued on or before 31st March, 2020
and the manufacture or production of articles or things or providing services has not
begun on or before 31st March, 2020 then, the date for manufacture or production of
articles or things or providing services has been extended to 31st March, 2021 or such
other date after 31st March, 2021, as notified by the Central Government.
Example: If SEZ unit has received the necessary approval by 31.3.2020 and
begins manufacture or production of articles or things or providing services on or

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before 31st March, 2021, then it would be deemed to have begun manufacture or
production of articles or things or providing services during the A.Y. 2020-21 and
would be eligible for exemption under section 10AA. [The Taxation and Other Laws
(Relaxation and Amendment of Certain Provisions) Act, 2020]

(ii) The assessee should furnish in the prescribed form, before the date specified in
section 44AB i.e., one month prior to the due date for furnishing return of income u/s
139(1), the report of a chartered accountant certifying that the deduction has been
correctly claimed.
(iii) No deduction under section 10AA would be allowed to an assessee who does not
furnish a return of income on or before the due date specified u/s 139(1).

Example: An individual, subject to tax audit u/s 44AB, claiming deduction u/s 10AA is
required to furnish return of income on or before 31.10.2025 for A.Y. 2025-26 and the
report of a chartered accountant before 30.9.2025, certifying the deduction claimed
u/s 10AA.

(iv) Deduction under section 10AA would be available to a Unit, if the proceeds from sale
of goods or provision of services is received in, or brought into, India by the assessee
in convertible foreign exchange, within a period of 6 months from the end of the
previous year or, within such further period as the competent authority may allow in
this behalf.
The export proceeds from sale of goods or provision of services shall be deemed to
have been received in India where such export turnover is credited to a separate
account maintained for that purpose by the assessee with any bank outside India with
the approval of the Reserve Bank of India.
Meaning of Competent authority – Competent authority means RBI or such
authority as is authorized under any law for the time being in force for regulating
payments and dealings in foreign exchange.

(3) Period for which deduction is available

The unit of an entrepreneur, which begins to manufacture or produce any article or thing or
provide any service in a SEZ on or after 1.4.2005, shall be allowed a deduction of:

(i) 100% of the profits and gains derived from the export, of such articles or things or
from services for a period of 5 consecutive assessment years beginning with the

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assessment year relevant to the previous year in which the Unit begins to
manufacture or produce such articles or things or provide services, and

(ii) 50% of such profits and gains for further 5 assessment years.
(iii) so much of the amount not exceeding 50% of the profit as is debited to the profit and
loss account of the previous year in respect of which the deduction is to be allowed
and credited to a reserve account (to be called the "Special Economic Zone Re-
investment Reserve Account") to be created and utilised in the manner laid down
under section 10AA(2) for next 5 consecutive years.
However, Explanation below section 10AA(1) has been inserted to clarify that amount of
deduction under section 10AA shall be allowed from the total income of the assessee
computed in accordance with the provisions of the Act before giving effect to the provisions
of this section and the deduction under section 10AA shall not exceed such total income of
the assessee.

Example: An undertaking is set up in a SEZ and begins manufacturing on 15.10.2010. The

deduction under section 10AA shall be allowed as under:

(a) 100% of profits of such undertaking from exports from A.Y.2011-12 to A.Y.2015-16.
(b) 50% of profits of such undertaking from exports from A.Y.2016-17 to A.Y. 2020-21.
(c) 50% of profits of such undertaking from exports from A.Y.2021-22 to A.Y.2025-26
provided certain conditions are satisfied.

(4) Conditions to be satisfied for claiming deduction for further 5 years (after 10 years)
[Section 10AA(2)]
Sub-section (2) provides that the deduction under (3)(iii) above shall be allowed only if the
following conditions are fulfilled, namely:-

(i) the amount credited to the Special Economic Zone Re-investment Reserve Account is
utilized -

(1) for the purposes of acquiring machinery or plant which is first put to use before
the expiry of a period of three years following the previous year in which the
reserve was created; and

(2) until the acquisition of the machinery or plant as aforesaid, for the purposes of
the business of the undertaking. However, it should not be utilized for

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(i) distribution by way of dividends or profits; or

(ii) for remittance outside India as profits; or

(iii) for the creation of any asset outside India;

(ii) the particulars, as may be specified by the CBDT in this behalf, have been furnished
by the assessee in respect of machinery or plant. Such particulars include details of
the new plant/ machinery, name and address of the supplier of the new plant/
machinery, date of acquisition and date on which new plant/machinery was first put to
use. Such particulars have to be furnished along with the return of income for the
assessment year relevant to the previous year in which such plant or machinery was
first put to use.

(5) Consequences of mis-utilisation / non-utilisation of reserve [Section 10AA(3)]

Where any amount credited to the Special Economic Zone Re-investment Reserve Account -

(i) has been utilised for any purpose other than those referred to in sub-section (2), the
amount so utilized shall be deemed to be the profits in the year in which the amount
was so utilised and charged to tax accordingly; or

(ii) has not been utilised before the expiry of the said period of 3 years, the amount not
so utilised, shall be deemed to be the profits in the year immediately following the said
period of three years and be charged to tax accordingly.
(6) Computation of profit and gains from exports of such undertakings
The profits derived from export of articles or things or services (including computer software)
shall be the amount which bears to the profits of the business of the undertaking, being the
unit, the same proportion as the export turnover in respect of such articles or things or
computer software bears to the total turnover of the business carried on by the undertaking
i.e.
Export turnover of Unit SEZ
Profits of Unit in SEZ x
Total turnover of Unit SEZ
Clarification on issues relating to export of computer software
Section 10AA provides deduction to assessees who derive any profits and gains from export
of articles or things or services (including computer software) from the year in which the Unit

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begins to manufacture or produce such articles or things or provide services, as the case
may be, subject to fulfillment of the prescribed conditions. The profits and gains derived from
the on site development of computer software (including services for development of
software) outside India shall be deemed to be the profits and gains derived from the export
of computer software outside India.
Meaning of Export turnover: It means the consideration in respect of export by the
undertaking, being the unit of articles or things or services received in India or brought into
India by the assessee in convertible foreign exchange within 6 months from the end of the
previous year or within such further period as the competent authority may allow in this
behalf.
However, it does not include
 freight
 telecommunication charges
 insurance
attributable to the delivery of the articles or things outside India or expenses incurred in
foreign exchange in rendering of services (including computer software) outside India

Computation of admissible deduction u/s 10AA of the Income-tax Act, 1961 [Circular
No. 4/2018, Dated 14-8-2018]
As per the provisions of section 10AA(7), the profits derived from export of articles or things
or services (including computer software) shall be the amount which bears to the profits of
the business of the undertaking, being the Unit, the same proportion as the export turnover
in respect of such articles or things or services bears to the total turnover of the business
carried on by the undertaking.
Further as per clause (ia) to Explanation 1 to section 10AA, "export turnover" means the
consideration in respect of export by the undertaking, being the unit of articles or things or
services received in India or brought into India by the assessee in convertible foreign
exchange within 6 months from the end of the previous year or within such further period as
the competent authority may allow in this behalf, but does not include freight,
telecommunication charges or insurance attributable to the delivery of the articles or things
outside India or expenses, if any, incurred in foreign exchange in rendering of services
(including computer software) outside India.
The issue of whether freight, telecommunication charges and insurance expenses are to be
excluded from both "export turnover"' and "total turnover' while working out deduction

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admissible under section 10AA on the ground that they are attributable to delivery of articles
or things outside India has been highly contentious. Similarly, the issue whether charges for
rendering services outside India are to be excluded both from "export turnover" and "total
turnover" while computing deduction admissible under section 10AA on the ground that such
charges are relatable towards expenses incurred in convertible foreign exchange in
rendering services outside India has also been highly contentious.
The controversy has been finally settled by the Hon'ble Supreme Court vide its judgment
dated 24.4.2018 in the case of Commissioner of Income Tax, Central-III Vs. M/s HCL
Technologies Ltd. (CA No. 8489-8490 of 2013, NJRS Citation 2018-LL-0424-40), in relation
to section 10A.
The issue had been examined by CBDT and it is clarified, in line with the above decision of
the Supreme Court, that freight, telecommunication charges and insurance expenses
are to be excluded both from "export turnover" and "total turnover', while working out
deduction admissible under section 10AA to the extent they are attributable to the
delivery of articles or things outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India
are to be excluded from both "export turnover" and "total turnover" while computing
deduction admissible under section 10AA.
Note: Though this CBDT Circular is issued in relation to erstwhile section 10A, the same is
also relevant in the context of section 10AA. Accordingly, the reference to section 10A in the
Circular and the relevant sub-section and Explanation number thereto have been modified
and given with reference to section 10AA and the corresponding sub-sections, Explanation
number and clause of Explanation.
(7) Restriction on other tax benefits
(i) During the period of deduction, depreciation is deemed to have been allowed on the
assets. Written Down Value shall accordingly be reduced.
(iii) No deduction under section 80-IA and 80-IB shall be allowed in relation to the profits
and gains of the undertaking.
(iv) Any unabsorbed depreciation under section 32(2) or business loss under section 72(1)
or loss under the head “Capital gains” under section 74 of the undertaking, being the
Unit shall be allowed to be carried forward or set off.
(v) The conditions laid down in section 80-IA(8) (relating to inter-unit transfer) and in
section 80-IA(10) (relating to showing excess profit from such unit) shall, so far as

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may be, apply in relation to the undertaking referred to in this section as they apply for
the purposes of the undertaking referred to in section 80-IA.

Conditions laid down in section 80-IA(8): Where any goods or services held for the
purposes of eligible business are transferred to any other business carried on by the
assessee, or where any goods or service held for any other business carried on by
the assessee are transferred to the eligible business and, in either case, if the
consideration for such transfer as recorded in the accounts of the eligible business
does not correspond to the market value thereof, then the profits eligible for deduction
shall be computed by adopting market value of such goods or services on the date of
transfer.
In case of exceptional difficulty in this regard, the profits shall be computed by the
Assessing Officer on a reasonable basis as he may deem fit.
Conditions laid down in section 80-IA(10): Where due to the close connection
between the assessee and the other person or for any other reason, it appears to the
Assessing Officer that the profits of eligible business is increased to more than the
ordinary profits, the Assessing Officer shall compute the amount of profits of such
eligible business on a reasonable basis for allowing the deduction.
(vii) Where a deduction under this section is claimed and allowed in relation to any
specified business eligible for investment-linked deduction under section 35AD, no
deduction shall be allowed under section 35AD in relation to such specified business
for the same or any other assessment year.
(8) Deduction allowable in case of amalgamation and demerger
In the event of any undertaking, being the Unit which is entitled to deduction under this
section, being transferred, before the expiry of the period specified in this section, to another
undertaking, being the Unit in a scheme of amalgamation or demerger, -
(i) no deduction shall be admissible under this section to the amalgamating or the
demerged Unit for the previous year in which the amalgamation or the demerger takes
place; and
(ii) the provisions of this section would apply to the amalgamated or resulting Unit, as
they would have applied to the amalgamating or the demerged Unit had the
amalgamation or demerger had not taken place.

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Circular No. 1/2013, dated 17.01.2013 provides certain clarifications in respect of following issues
arising out of the said provisions:

Issue Clarification given by the CBDT

(1) Would “On-site” The software developed abroad at a client’s place would be
development of computer eligible for such benefit, because these would amount to
software qualify as an ‘deemed export’. However, it is necessary that there must
export activity for tax exist a direct and intimate nexus or connection of
benefit under section development of software done abroad with the eligible units
10AA? set up in India and such development of software should be
pursuant to a contract between the client and the eligible
unit.
(2) Would receipts from Explanation 2 to section 10AA clarifies that profits and gains
deputation of technical derived from ‘services for development of software’ outside
manpower for such “On- India would also be deemed as profits derived from export.
site” software development Therefore, profits earned as a result of deployment of
abroad at the client’s place technical manpower at the client’s place abroad specifically
be eligible for deduction for software development work pursuant to a contract
under section 10AA? between the client and the eligible unit should not be denied
benefit under section 10AA provided such deputation of
manpower is for the development of such software and all
the prescribed conditions are fulfilled.

(3) Is it necessary to have As per the practice prevalent in the software development
separate master service industry, generally two types of agreement are entered into
agreement (MSA) for each between the Indian software developer and the foreign
work contract? client. Master Services Agreement (MSA) is an initial
general agreement between a foreign client and the Indian
software developer setting out the broad and general terms
and conditions of business under the umbrella of which
specific and individual Statement of Works (SOW) are
formed. These SOWs, in fact, enumerate the specific scope
and nature of the particular task or project that has to be
rendered by a particular unit under the overall ambit of the
MSA. Clarification has been sought whether more than one
SOW can be executed under the ambit of a particular MSA
and whether SOW should be given precedence over MSA.
It is clarified that the tax benefits under section 10AA would
not be denied merely on the ground that a separate and
specific MSA does not exist for each SOW. The SOW would
normally prevail over the MSA in determining the eligibility
for tax benefits unless the Assessing Officer is able to
establish that there has been splitting up or reconstruction of

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an existing business or non-fulfillment of any other

prescribed condition.

(4) Would tax benefit under The answer to this issue would depend on the facts of each
section 10AA continue to case, such as how a slump-sale is made and what is its
be available in case of a nature. It will also be important to ensure that the slump sale
slump sale of a unit? would not result into any splitting or reconstruction of
existing business.
It is, however, clarified that on the sole ground of change in
ownership of an undertaking, the claim of exemption cannot
be denied to an otherwise eligible undertaking and the tax
holiday can be availed of for the unexpired period at the
rates as applicable for the remaining years, subject to
fulfillment of prescribed conditions.

(5) Can tax benefits under It is clarified that the tax holiday should not be denied merely
section 10AA be enjoyed on the ground of physical relocation of an eligible SEZ unit
by an eligible SEZ unit from one SEZ to another in accordance with Instruction No.
consequent to its transfer 59 of Department of Commerce, if all the prescribed
to another SEZ? conditions are satisfied under the Income-tax Act, 1961.
It is further clarified that the unit so relocated will be eligible
to avail of the tax benefit for the unexpired period at the
rates applicable to such years.

ILLUSTRATION 21
ABC Ltd. furnishes you the following information for the year ended 31.3.2025:

Particulars ` (in lacs)

Total turnover of Unit A located in Special Economic Zone 120
Profit of the business of Unit A 45
Export turnover of Unit A received in India in convertible foreign exchange on or 60
before 30.9.2025
Total turnover of Unit B located in Domestic Tariff Area (DTA) 225
Profit of the business of Unit B 25

Compute deduction under section 10AA for the A.Y. 2025-26, assuming that ABC Ltd. commenced
operations in SEZ and DTA in the year 2019-20.

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SOLUTION

50% of the profit derived from export of articles or things or services is eligible for deduction under
section 10AA, since F.Y.2024-25 is the sixth year commencing from the year of manufacture or
production of articles or things or provision of services by the Unit in SEZ. As per section 10AA(7),
the profit derived from export of articles or things or services shall be the amount which bears to the
profits of the business of the undertaking, being the Unit, the same proportion as the export
turnover in respect of articles or things or services bears to the total turnover of the business
carried on by the undertaking.

Deduction under section 10AA

Export Turnover of Unit A
= Profit of the business of Unit A x x 50%
Total Turnover of Unit A

`45 lakhs X ` 60 lakhs X 50% = ` 11.25 lakhs

` 120 lakhs

Note – No deduction under section 10AA is allowable in respect of profits of business of Unit B
located in DTA.

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SIGNIFICANT SELECT CASES

S. Case Law
No.
1. CIT v. Reliance Energy Ltd. (2022) 441 ITR 346 (SC)
Issue Analysis & Decision
Does profit-linked For the purpose of calculating profit-linked deduction under any
deduction under section of Chapter VI-A, loss sustained in other divisions or units
Chapter VI-A have to cannot be taken into account, as only profits from the eligible business
be restricted to income have to be taken into account as if it was the only source of income.
computed under the Profits and gains from eligible business cannot be reduced by the loss
head “Profits and gains suffered in any other business owned by the assessee for
of business or consideration of deduction, inter alia, under section 80-IA.
profession”? The deduction admissible under section 80-IA could not be limited
to income under the head “Profits and gains of business or
profession”, by setting-off losses from non-eligible business against
profits from eligible business.
Note – The issue arises in a case where loss from non-eligible
business is being set-off against profits from eligible business,
which results in income under the head “Profits and gains of
business and profession” being lower than the profits from eligible
business. In such a case, deduction under Chapter VI-A in respect
of profits from eligible business would not be restricted to income
computed under the head “Profits and gains of business and
profession”. The same would however be restricted to gross total
income as per the requirement in section 80A(2).
For example, let us take the case of XYZ Ltd., an Indian company,
for P.Y.2024-25. The following are the particulars relating to the
said company –
(i) Profits from eligible business - ` 90 lakhs,
(ii) Loss from non-eligible business - ` 20 lakhs (which is set-off
against profits from eligible business)
(iii) Income under the head “Profits and gains of business or
profession” – ` 70 lakhs [` 90 lakhs – ` 20 lakhs]
(iv) Income from Other Sources, comprising of interest income -
` 15 lakhs
(v) Gross total income – ` 85 lakhs
In this case, assuming deduction under section 80-IA is the only
deduction under Chapter VI-A for XYZ Ltd., the same would not be
restricted to ` 70 lakhs (being the income under the head “Profits
and gains of business or profession”). However, the same would be

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restricted to ` 85 lakhs, being the gross total income as per the

requirement in section 80A(2).
If, in the above example, the gross total income was ` 95 lakhs
(instead of ` 85 lakhs), then, the entire profits of ` 90 lakhs from
eligible business would be allowed as deduction u/s 80-IA.
2. CIT v. Container Corporation of India Limited (2018) 404 ITR 397 (SC)
Issue Analysis & Decision
Can Inland Container Inland Container Depots function for the benefit of exporters and
Depots (ICDs) be importers located in industrial centres which are situated at distance
treated as infrastructure from sea ports. The purpose of establishing them was to promote the
facility, for profits export and import in the country as these depots act as a facilitator
derived therefrom to be and reduce inconvenience to the exporter or importer.
eligible for deduction u/s
Section 80-IA provides for a deduction of profits derived from
80-IA?
operation of an infrastructure facility. The definition of “infrastructure
facility” in Explanation to section 80-IA(4)(i) includes an inland port.
Considering the nature of work such as custom clearance carried
out at inland container depots, it can be considered as an inland
port within the meaning of section 80-IA(4).

3. CIT v. Meghalaya Steels Ltd (2016) 383 ITR 217 (SC)

Issue Analysis & Decision
Can transport subsidy, There is a direct nexus between profits and gains of the
interest subsidy and undertaking or business, and reimbursement of such subsidies.
power subsidy Transport subsidy, interest subsidy and power subsidy from
received from the Government were revenue receipts which were reimbursed to the
Government be treated assessee for elements of cost relating to manufacture or sale of
as profits “derived their products. Thus, the subsidies were only in order to
from” business or reimburse, wholly or partially, costs actually incurred by the
undertaking to qualify assessee in the manufacturing and selling of its products.
for deduction u/s 80- Accordingly, these subsidies qualify for deduction u/s 80-IE.
IE?
Note – Though this decision was in relation to deduction under section
80-IB, presently, it is relevant in the context of section 80-IE.

4. CIT v. Orchev Pharma P. Ltd. (2013) 354 ITR 227 (SC) [Liberty India v. CIT (2009) 317
ITR 218 (SC) followed]

Issue Analysis & Decision

Can Duty Drawback be DEPB / Duty drawback are incentives which flow from the schemes
treated as profit derived framed by the Central Government or from section 75 of the
from the business of the Customs Act, 1962. Section 80-IE provides for allowing of
eligible business to be deduction in respect of profits and gains derived by undertaking

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.107

eligible for deduction u/s from business mentioned therein. However, incentive profits are
80-IE? not profits derived from eligible business u/s 80-IE. They belong to
the category of ancillary profits of such undertaking. Profits derived
by way of incentives such as DEPB/Duty drawback cannot be
credited against the cost of manufacture of goods debited in the
statement of profit and loss and they do not fall within the
expression "profits derived from undertaking from manufacturing"
u/s 80-IE. Hence, Duty drawback receipts and DEPB benefits
do not form part of the profits derived by undertaking from
manufacturing business for the purpose of the deduction u/s
80-IE.
Note – Though this decision was in relation to deduction under section
80-IB, presently, it is relevant in the context of section 80-IE.

5. CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012) 349 ITR 245 (Kar.)

Issue Analysis & Decision

Can unabsorbed The deeming provision contained in section 80-IA(5) cannot

depreciation of a override the provisions of section 70(1). The assessee had
business of an incurred loss in eligible business after claiming depreciation.
industrial undertaking Hence, section 80-IA becomes insignificant, since there is no
eligible for deduction profit from which this deduction can be claimed. It is thereafter
u/s 80-IA be set off that section 70(1) comes into play, whereby the assessee is
against income of entitled to set off the losses from one source against income from
another non-eligible another source under the same head of income. Therefore, the
business of the assessee was entitled to the benefit of set off of loss of
assessee? eligible business against the profits of non-eligible business.
However, once set-off is allowed u/s 70(1) against income from
another source under the same head, a deduction to such extent
is not possible in any subsequent assessment year i.e., the loss
(arising on account of balance depreciation of eligible business)
so set-off u/s 70(1) has to be first deducted while computing
profits eligible for deduction u/s 80-IA in the subsequent year.

6. CIT v. Sunil Vishwambharnath Tiwari (2016) 388 ITR 630 (Bom)

Issue Decision
Is the increase in The assessee is entitled to claim deduction u/s 80-IBA in respect of
gross total income the enhanced gross total income as a consequence of
consequent to disallowance of expenditure u/s 40(a)(ia).
disallowance u/s Note - The CBDT has, in its Circular No.37/2016 dated 2.11.2016,
40(a)(ia) eligible for mentioned that the courts have generally held that if the
profit-linked deduction expenditure disallowed is related to the business activity against
under Chapter VI-A? which the Chapter VI-A deduction has been claimed, the deduction
needs to be allowed on the enhanced profits. Thus, the settled

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position is that the disallowances made under sections 32,

40(a)(ia), 40A(3), 43B, etc. and other specific disallowances,
relating to the business activity against which the Chapter VI-A
deduction has been claimed, result in enhancement of the profits of
the eligible business, and that deduction under Chapter VI-A is
admissible on the profits so enhanced on account of such
disallowance.

7. CIT v. Nestor Pharmaceuticals Ltd. / Sidwal Refrigerations Ind Ltd. v. DCIT (2010) 322
ITR 631 (Delhi)

Issue Analysis & Decision

Does the period of The assessee had started trial production in March 2015 whereas
exemption u/s 80-IE commercial production started only in April, 2015. With mere trial
commence from the production, the manufacture for the purpose of marketing the
year of trial productiongoods had not started which starts only with commercial
or year of commercial production, namely, when the final product to the satisfaction of the
production? Would it manufacturer has been brought into existence and is fit for
make a difference if marketing. However, in this case, since the assessee had effected
sale was effected from sale in March 2015, it had crossed the stage of trial production and
out of the trial the final saleable product had been manufactured and sold. The
production? quantum of commercial sale and the purpose of sale (namely, to
obtain registration of excise / sales-tax) is not material. With the
sale of those articles, marketable quality was established.
Therefore, the conditions stipulated in section 80-IE were fulfilled
with the commercial sale of the two items in that assessment year,
and hence the ten year period has to be reckoned from
A.Y.2015-16.
Note – Though this decision was in relation to deduction under section
80-IA, as it stood prior to its substitution by the Finance Act, 1999 w.e.f.
1.4.2000, presently, it is relevant in the context of section 80-IE.
8. CIT v. Chetak Enterprises Pvt. Ltd. [2020] 423 ITR 267 (SC)
Issue Analysis & Decision

Can an agreement Section 80-IA(4)(i) requires that the assessee must be an enterprise
entered into by a firm carrying on business of (i) developing, (ii) maintaining and operating
with a State or (iii) developing, maintaining and operating any infrastructure
Government and work facility, which enterprise is owned by a company registered in India
done in pursuance fulfilling the conditions mentioned in sub-clauses (a) to (c)
thereof survive upon thereunder. Sub-clause (a) requires that the enterprise should be
its conversion into a owned by a company registered in India. Sub-clause (b) requires
company and be that the enterprise should have entered into an agreement with the
considered compliant Central Government or State Government or local authority or any
with sub-clauses (a) other statutory body for developing, operating and maintaining or

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.109

and (b) of section 80- developing, operating and maintaining a new infrastructure facility.
IA(4)(i), to qualify for Sub-clause (c) requires that the enterprise should start operating and
deduction thereunder? maintaining infrastructure facility on or after 1.4.1995.
The assessee-company Memorandum of Association states that its
main object was to acquire as a going concern, and continue the
business carried on by the firm. The effect of conversion of the firm
into a company was that all the properties of the firm, in law,
vested in the company and the firm ceased to exist and assumed
the status of a company after its registration as a company.
Accordingly, the assessee-company is qualified for the deduction
under section 80-IA being an enterprise carrying on the stated
business pertaining to infrastructure facility and owned by a
company registered in India on the basis of the agreement
executed with the State Government to which the assessee-
company has succeeded in law after conversion of the partnership
firm into a company.

9. Praveen Soni v. CIT (2011) 333 ITR 324 (Delhi)

Issue Analysis & Decision

Can an assessee who On this issue, the Delhi High Court held that the provisions of
has not claimed section 80-IE nowhere stipulated a condition that the claim for
deduction under deduction under this section had to be made from the first year of
section 80-IE in the qualification of deduction failing which the claim will not be allowed
initial years, start in the remaining years of eligibility. Therefore, the deduction under
claiming deduction section 80-IE should be allowed to the assessee for the remaining
thereunder for the years up to the period for which his entitlement would accrue,
remaining years during provided the conditions mentioned under section 80-IE are fulfilled.
the period of eligibility,
Note – Though this decision was in relation to deduction under section
if the conditions are
80-IB, presently, it is relevant in the context of section 80-IE.
satisfied?
10. PCIT v. Annasaheb Patil Mathadi Kamgar Sahakari Pathpedi Ltd. [2023] 454 ITR 117
(SC)
Issue Analysis & Decision
Would a co-operative Merely because a co-operative society gives credit to its members, it
society engaged in cannot be said to be a co-operative bank under the Banking
providing credit Regulation Act, 1949. Banking activities under that Act are altogether
facilities solely to its different activities. There is a vast difference between credit societies
members be eligible giving credit to their own members only and banks providing banking
for deduction under services including the credit to the public at large also.
section 80P? Considering the CBDT Circulars and the definition of bank under

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the Banking Regulation Act, the assessee cannot be said to be a

co-operative bank/bank, and, therefore, section 80P(4) denying
benefit of deduction to a co-operative bank would not be applicable
in this case.
Accordingly, the assessee could not be termed as a bank or
cooperative bank. Being a credit society, it is entitled to deduction
under section 80P.
11. CIT v. Cognizant Technology Solutions of India Pvt. Ltd. [2023] 454 ITR 1 (SC)
Issue Analysis & Decision

Is deduction under In order to avail deduction under section 10AA, benefit earned by
section 10AA available the assessee derived by virtue of export made by the assessee is
in respect of foreign considered. The exchange value based on upward or downward of
exchange gain solely the rupee value is not in the hands of the assessee. The assessee
relating to the export does not determine the exchange value of the Indian rupee. But for
business of the the fact that, the assessee is an export house, there was no
assessee? question of earning any foreign exchange.
Therefore, when the fluctuation in foreign exchange rate was solely
relatable to the export business of the assessee and the higher
rupee value was earned by virtue of such exports carried out by the
assessee, the deduction under section 10AA would be available in
respect of such foreign exchange gains.

12 CIT v. HCL Technologies Limited (2018) 404 ITR 719 (SC)

Issue Analysis & Decision

Can expenditure Deduction u/s 10AA is based on the profit from export business,
incurred in foreign thus, expenses excluded from “export turnover” must also be
exchange for provision excluded from “total turnover”, since one of the components of
of technical services “total turnover” is export turnover. Expenses incurred in foreign
outside India, which is exchange for providing the technical services outside are thus, to
deductible for be excluded from total turnover also.
computing export
If deductions in respect of freight, telecommunication charges and
turnover, be excluded
insurance attributable to delivery of articles, things etc. or
from total turnover also
expenditure incurred in foreign exchange in rendering of services
for the purpose of
outside India are allowed only against export turnover but not from
computing deduction
the total turnover for computing deduction u/s 10AA, then, it would
u/s 10AA?
give rise to inadvertent, unlawful, meaningless and illogical results
causing grave injustice, which could have never have been the
intent of the Legislature. Hence, such expenditure incurred in
foreign exchange for providing technical services outside
India is deductible from total turnover also.

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TEST YOUR KNOWLEDGE

Questions
1. Mr. Srinivasan, aged 61 years, furnishes the following particulars for the year ending
31.03.2025:

(a) Life Insurance Premium paid – ` 15,000, actual capital sum of the policy assured for
` 2,30,000. The insurance policy was taken on 31.03.2012;
(b) Contribution to Public Provident Fund – ` 40,000 in the name of father;

(e) Tuition fee payment – ` 8,000 each for 2 sons pursuing full time graduation course in
Calcutta; Tuition fee for daughter pursuing PHD in Kellogg University, USA – ` 2.50
lakhs;
(d) Housing loan principal repayment – ` 32,000 to Axis Bank. This property is under
construction at Calcutta as on 31.03.2025;
(e) Principal repayment of housing loan taken from a relative – ` 70,000. The property is
self-occupied situated at Pune;
(f) Deposit under Senior Citizens Savings Scheme – ` 15,000;
(g) Five-year deposits in an account under Post Office Time Deposit Scheme – ` 50,000;

(h) Investment in National Savings Certificate – ` 70,000;

Compute the deduction eligible under appropriate provisions of section 80C for A.Y. 2025-26
if he shifts out of the default tax regime under section 115BAC.
2. X Ltd. has two units, unit ‘N’ and unit ‘Y’. Unit ‘N’ engaged in the business of power
generation installed a windmill in March, 2025 and had a profit of ` 100 lakhs in Assessment
Year 2025-26. X Ltd. claimed depreciation of ` 120 lakhs on windmill against the profit of
` 100 lakhs from power generation business which was eligible for deduction under section
80-IA. Unit ‘Y’, engaged in manufacturing of wires, non-eligible business, had a profit of ` 70
lakhs for Assessment Year [Link] loss of ` 20 lakhs, i.e., balance depreciation not set
off pertaining to unit ‘N’ was set-off against the profits of unit ‘Y’ carrying on non-eligible
business, by the assessee, X Ltd. The Assessing Officer was of the view that depreciation
relating to a business eligible for deduction under section 80-IA cannot be set-off against
non-eligible business income. Hence, unabsorbed depreciation should be carried forward to

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the subsequent year to be set off against eligible business income of the assessee of that
year.

Examine the correctness of the action of the Assessing Officer.

3. From the following details, compute the total income of Mr. A, Mr. B and Mr. C for A.Y.2025-
26 if they shift out of the default tax regime under section 115BAC –

Particulars Mr. A Mr. B Mr. C

` ` `
(i) Salary (computed) 9,25,000 10,45,000 11,15,000
(ii) Interest income (on fixed 75,000 85,000 95,000
deposits)

The particulars of their other investments/payments made during the P.Y.2024-25 are given
hereunder –

Particulars `
(1) Deposit in Public Provident Fund (PPF) by Mr. A 1,50,000
(2) Life insurance premium paid by Mr. C, the details of which are as
follows –

Date of Person insured Actual Insurance

issue of capital sum premium paid
policy assured (`) during 2024-25
(`)
31/3/2012 Self 2,48,000 15,000
11/6/2018 Spouse 1,25,000 15,000
31/7/2019 Handicapped son 2,00,000 32,000
(Section 80U disability)

(3) Payment of medical insurance premium by the following persons

to insure their health:
Payer Amount in Mode of payment
`
Mr. A (aged 55 years) 30,000 Account payee cheque
Mr. B (aged 52 years) 15,000 Cash
Mr. C (aged 48 years) 20,000 Crossed cheque

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.113

(4) Mr. B paid interest on loan taken for the purchase of house in which he 2,20,000
currently resides. He is claiming benefit of self-occupation under
section 23(2) in respect of this house. He does not own any other
house.
Repayment of principal amount of loan taken for purchase of the said 1,70,000
house
(5) Contribution by Mr. A by cheque to National Children’s Fund during the 30,000
year.
(6) Mr. B makes the following donations during the P.Y.2024-25 -
Donation to BJP by crossed cheque 50,000
Donation to Electoral trust by cash 50,000

4. Following issues have been raised by Navi Limited in connection with its eligibility for
claiming deduction under Chapter VI-A for your consideration and advice for the assessment
year 2025-26:
(i) It operates two separate undertakings. One undertaking is eligible for deduction under
section 80-IB, while the other undertaking is not eligible for such deduction. If the
eligible undertaking has profit and the other undertaking has loss, should it claim
deduction after setting off the loss of the other undertaking against profit of the
eligible undertaking?
(ii) Its profit from one undertaking in North Eastern States which is eligible for deduction
u/s 80-IE includes sale of import entitlement, duty drawback and interest from
customers for delayed payment. Is it permissible to claim deduction u/s 80-IE on
these items of income?
5. PQR Co-operative Bank, a co-operative society, having its area of operation confined to
Gubbi Taluk and the principal object of which is to provide for long-term credit for agricultural
and rural development activities, has received the following amounts during the year ending
31.3.2025:
(i) Interest amounting to ` 1,00,000 from its members on loans advanced to them.
(ii) Interest amounting to ` 1,50,000 on deposits with other co-operative societies.
(iii) Rent amounting to ` 2,00,000 from letting out its godowns for storage of commodities.
PQR Co-operative Bank seeks your advice in the matter of eligibility for deduction, if any, in
respect thereof for the assessment year 2025-26.

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Answers
1. Computation of eligible deduction under section 80C for A.Y.2025-26

Particulars `
Life Insurance Premium (See Note 1) 15,000
Contribution to Public Provident fund (See Note 2) Nil
Tuition fee of 2 sons for graduation course (See Note 3) 16,000
Housing loan principal repayment (See Notes 4 & 5) Nil
Senior Citizen Savings Scheme deposit (See Note 6) 15,000
Post Office Time Deposit Scheme (See Note 6) 50,000
Investment in National Savings Certificate (See Note 6) 70,000
Total Investment 1,66,000
Eligible deduction under section 80C restricted to 1,50,000

Notes:
1. Any amount of life insurance premium paid in excess of the specified percentage of
actual capital sum assured shall be ignored for the purpose of deduction under
section 80C. In the given case, since the insurance policy has been issued before
1.04.2012, therefore, premium paid upto 20% of actual capital sum assured i.e.,
` 46,000 shall be allowed as deduction. Hence, the premium of ` 15,000 paid during
the year is allowable as deduction under section 80C.
2. In the case of an individual, contribution to PPF can be made in his name or in the
name of his spouse or children to qualify for deduction under section 80C. As the
contribution was made in the name of his father, deduction is not allowable.
3. Tuition fee paid is eligible for deduction under section 80C for a maximum of two
children. Therefore, ` 16,000 shall be allowed as deduction. Tuition fee paid to an
educational institution situated outside India is not eligible for deduction.
4. In order to claim the principal repayment on loan borrowed for house property as
deduction, the construction of such property should have been completed and should
be chargeable to tax under the head "Income from house property". In the given case,
since the property is under construction, principal repayment does not qualify for
deduction.

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5. Repayment of principal on housing loan is not allowed as deduction in case the loan
is borrowed from friends, relatives etc. In order to qualify for deduction, the loan
should have been obtained from Central Government / State Government / bank /
specified employer / institution.
6. The following investments are also eligible for deduction under section 80C:-

(1) five year time deposit in an account under Post Office Time Deposit Rules,
1981; and
(2) deposit in an account under the Senior Citizens Savings Scheme Rules, 2004.
(3) investment in National Savings Certificate.
2. In CIT v. Swarnagiri Wire Insulations Pvt. Ltd. (2012) 349 ITR 245, the Karnataka High Court
observed that it is a generally accepted principle that the deeming provision of a particular
section cannot be breathed into another section. Therefore, the deeming provision contained
in section 80-IA(5) cannot override the provisions of section 70(1).
In this case, X Ltd. had incurred loss in eligible business (power generation) on account of
claiming depreciation of ` 120 lakhs. Hence, section 80-IA becomes insignificant, since
there is no profit from which this deduction can be claimed.
It is, thereafter, that section 70(1) comes into play, whereby an assessee is entitled to set off
the losses from one source against income from another source under the same head of
income. Accordingly, X Ltd. is entitled to the benefit of set off of loss of ` 20 lakhs
(representing balance depreciation not set-off) pertaining to Unit N engaged in eligible
business of power generation against profit of ` 70 lakhs of Unit Y carrying on non-eligible
business. Therefore, the net profit of ` 50 lakhs would be taxable in the A.Y.2025-26.
However, once set-off is allowed under section 70(1) against income from another source
under the same head, a deduction to such extent is not possible in any subsequent
assessment year i.e., the loss (arising on account of balance depreciation of eligible
business) so set-off under section 70(1) has to be first deducted while computing profits
eligible for deduction under section 80-IA in the subsequent year. Accordingly, in the
A.Y.2026-27, the net profits of Unit N has to be reduced by ` 20 lakhs for computing the
profits eligible for deduction under section 80-IA in that year.

The action of the Assessing Officer in not permitting set-off of loss of eligible business
against profits of non-eligible business in this case is, therefore, not correct.

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3. Computation of total income for A.Y.2025-26

Particulars Mr. A Mr. B Mr. C

` ` `
Salary 9,25,000 10,45,000 11,15,000
Income from house property (2,00,000)
[See Note 4]
Income from other sources 75,000 85,000 95,000
(Interest)
(A) Gross total income 10,00,000 9,30,000 12,10,000
Less: Deductions under Chapter
VIA
Under section 80C
Deposit in PPF [See Note 3] 1,50,000
LIC premium paid [See Note 1] 57,500
Principal repayment of housing loan 1,50,000
(restricted to ` 1,50,000) [See Note
4]
Under section 80D
Medical insurance premium 25,000 Nil 20,000
[See Note 2]
Under section 80G
Contribution to National Children’s 30,000
Fund [See Note 5]
Under section 80GGC [See Note
6]
Donation to BJP by crossed cheque 50,000
Cash donation to Electoral Trust Nil
(B) Total deduction under Chapter 2,05,000 2,00,000 77,500
VIA
(C) Total Income (A) – (B) 7,95,000 7,30,000 11,32,500

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Notes:
(1) Deduction u/s 80C in respect of life insurance premium paid by Mr. C

Date of Person insured Actual Insurance Restricted Deduction

issue of capital premium to % of u/s 80C
policy sum paid during sum
assured 2024-25 assured
31/3/2012 Self 2,48,000 15,000 20% 15,000
11/6/2018 Spouse 1,25,000 15,000 10% 12,500
31/7/2019 Handicapped Son
(section 80U 2,00,000 32,000 15% 30,000
disability)
Total 57,500
(2) Medical Insurance Premium
(i) Medical insurance premium of ` 30,000 paid by account payee cheque by Mr. A
is allowed as a deduction under section 80D, subject to a maximum of ` 25,000.
(ii) Medical insurance premium paid by cash is not allowable as deduction. Hence,
Mr. B is not eligible for deduction under section 80D in respect of medical
insurance premium of ` 15,000 paid in cash.
(iii) Mr. C is eligible for deduction of ` 20,000 under section 80D in respect of
medical insurance premium paid by crossed cheque.
(3) The maximum amount eligible for deduction under section 80C shall not exceed
` 1,50,000. Mr. A would be eligible for deduction of ` 1,50,000 in respect of PPF under
section 80C.
(4) Deduction in respect of interest and principal repayment of housing loan
Mr. B is eligible for a maximum deduction of ` 2,00,000 under section 24 in respect of
interest on housing loan taken in respect of a self-occupied property, for which he is
claiming benefit of “Nil” annual value. Therefore, ` 2,00,000 would represent his loss
from house property.
Further, the maximum amount eligible for deduction under section 80C should not
exceed ` 1,50,000. Since, Mr. B has no other investment under section 80C during the
previous year 2024-25, he would be eligible for deduction of ` 1,50,000 in respect of
principal repayment of housing loan.
(5) Contribution to National Children’s Fund qualifies for 100% deduction under section
80G. Therefore, Mr. A is entitled to 100% deduction of the sum of ` 30,000 contributed
by him by way of cheque to National Children’s Fund.
(6) Mr. B is eligible for deduction under section 80GGC in respect of donation to a political
party made otherwise than by way of cash. However, cash donations to electoral trust
do not qualify for deduction under section 80GGC.

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4. (i) Section 80-IB(13) provides that the provisions contained in section 80-IA(5) shall,
so far as may be, apply to the eligible business under section 80-IB. Accordingly, for
the purpose of computing the deduction under section 80-IB, the profits and gains of
an eligible business shall be computed as if such eligible business was the only
source of income of the assessee.

Therefore, Navi Limited should claim deduction under section 80-IB on profit from
the eligible undertaking without considering the set off of losses suffered in the
other undertaking. It may be noted that the aggregate deduction under Chapter VI-
A, however, cannot exceed the gross total income of the assessee. It was held in in
case of Reliance Energy Ltd. (2022) 441 ITR 346 (SC).

(ii) Under section 80-IE, where the gross total income of an assessee includes any
profits and gains derived by an undertaking referred to in the section, there shall be
allowed, in computing the total income of the assessee, a deduction from such
profits and gains at the specified percentage and for such number of years as
specified in the section. In CIT vs. Sterling Foods (1999) 237 ITR 579 (SC) and
Liberty India vs. CIT (2009) 317 ITR 218 (SC), it was held that sale of import
entitlement and duty drawback cannot be construed as income derived from
undertaking. Therefore, such income cannot be included in computing income for
the purpose of deduction under section 80-IE.

Interest income derived by an undertaking on delayed collection of sale proceeds

shall be treated as income derived from the undertaking, and therefore, the same
would be eligible for deduction under section 80-IE. [Phatela Cotgin Industries
Private Limited vs CIT (2008) 303 ITR 411 (P & H)].

5. Sub-section (4) of section 80P provides that section 80P shall not apply to any co-
operative bank other than a primary agricultural credit society or a primary co-operative
agricultural and rural development bank.

Explanation to section 80P(4) defines a primary co-operative agricultural and rural

development bank to mean a society having its area of operation confined to a taluk and
the principal object of which is to provide for long-term credit for agricultural and rural
development activities.

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 DEDUCTIONS FROM GROSS TOTAL INCOME 8.119

PQR Co-operative Bank is a primary co-operative agricultural and rural development bank
as defined in the said Explanation since it is a co-operative society having its area of
operation confined to Gubbi Taluk and its principal object is to provide long-term credit for
agricultural and rural development activities. Therefore, it is eligible for deduction under
section 80P.

Interest of ` 1,00,000 received by the bank on loans advanced to its members is eligible
for deduction in full under section 80P(2)(a)(i).

Interest of ` 1,50,000 received by the bank from deposits with other co-operative societies
qualifies for deduction in full under section 80P(2)(d).

Rent of ` 2,00,000 received by the bank from letting out its godowns for storage of
commodities is eligible for deduction in full under section 80P(2)(e).

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
 ANNEXURE

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
 Annexure – 1

A. Income Computation and Disclosure Standard I relating to accounting policies

Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
Scope
1. This Income Computation and Disclosure Standard deals with significant accounting
policies.
Fundamental Accounting Assumptions
2. The following are fundamental accounting assumptions, namely:—
(a) Going Concern
“Going concern” refers to the assumption that the person has neither the
intention nor the necessity of liquidation or of curtailing materially the scale of
the business, profession or vocation and intends to continue his business,
profession or vocation for the foreseeable future.
(b) Consistency
“Consistency” refers to the assumption that accounting policies are consistent
from one period to another;
(c) Accrual
“Accrual” refers to the assumption that revenues and costs are accrued, that is,
recognised as they are earned or incurred (and not as money is received or paid)
and recorded in the previous year to which they relate.
Accounting Policies
3. The accounting policies refer to the specific accounting principles and the methods of
applying those principles adopted by a person.
Considerations in the Selection and Change of Accounting Policies
4. Accounting policies adopted by a person shall be such so as to represent a true and
fair view of the state of affairs and income of the business, profession or vocation. For
this purpose,

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 A.2 DIRECT TAX LAWS

(i) the treatment and presentation of transactions and events shall be governed by
their substance and not merely by the legal form; and
(ii) marked to market loss or an expected loss shall not be recognised unless the
recognition of such loss is in accordance with the provisions of any other
Income Computation and Disclosure Standard.
5. An accounting policy shall not be changed without reasonable cause.
Disclosure of Accounting Policies
6. All significant accounting policies adopted by a person shall be disclosed.
7. Any change in an accounting policy which has a material effect shall be disclosed. The
amount by which any item is affected by such change shall also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part, the
fact shall be indicated. If a change is made in the accounting policies which has no
material effect for the current previous year but which is reasonably expected to have
a material effect in later previous years, the fact of such change shall be appropriately
disclosed in the previous year in which the change is adopted and also in the previous
year in which such change has material effect for the first time.
8. Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item.
9. If the fundamental accounting assumptions of Going Concern, Consistency and
Accrual are followed, specific disclosure is not required. If a fundamental accounting
assumption is not followed, the fact shall be disclosed.
Transitional Provisions
10. All contract or transaction existing on the 1st day of April, 2016 or entered into on or after
the 1st day of April, 2016 shall be dealt with in accordance with the provisions of this
standard after taking into account the income, expense or loss, if any, recognised in
respect of the said contract or transaction for the previous year ending on or before the
31st March,2016.
B. Income Computation and Disclosure Standard II relating to valuation of inventories
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of Business or profession” or “Income from other
sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of Income Tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that
extent.

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 ANNEXURE A.3 A.3

Scope
1. This Income Computation and Disclosure Standard shall be applied for valuation of
inventories, except :
(a) Work-in-progress arising under ‘construction contract’ including directly related
service contract which is dealt with by the Income Computation and
Disclosure Standard on construction contracts;
(b) Work-in-progress which is dealt with by other Income Computation and
Disclosure Standard;
(c) Shares, debentures and other financial instruments held as stock-in-trade which
are dealt with by the Income Computation and Disclosure Standard on
securities;
(d) Producers’ inventories of livestock, agriculture and forest products, mineral oils,
ores and gases to the extent that they are measured at net realisable value;
(e) Machinery spares, which can be used only in connection with a tangible fixed
asset and their use is expected to be irregular, shall be dealt with in accordance
with the Income Computation and Disclosure Standard on tangible fixed assets.
Definitions
2 (1) The following terms are used in this Income Computation and Disclosure
Standard with the meanings specified:
(a) “Inventories” are assets:
(i) held for sale in the ordinary course of business;
(ii) in the process of production for such sale;
(iii) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
(b) “Net realisable value” is the estimated selling price in the ordinary
course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
(2) Words and expressions used and not defined in this Income Computation
and Disclosure Standard but defined in the Act shall have the meanings
assigned to them in that Act.
Measurement
3. Inventories shall be valued at cost, or net realisable value, whichever is lower.

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 A.4 DIRECT TAX LAWS

Cost of Inventories
4. Cost of inventories shall comprise of all costs of purchase, costs of services, costs of
conversion and other costs incurred in bringing the inventories to their present location
and condition.
Costs of Purchase
5. The costs of purchase shall consist of purchase price including duties and taxes,
freight inwards and other expenditure directly attributable to the acquisition. Trade
discounts, rebates and other similar items shall be deducted in determining the costs of
purchase.
Costs of Services
6. The costs of services shall consist of labour and other costs of personnel directly
engaged in providing the service including supervisory personnel and attributable
overheads.
Costs of Conversion
7. The costs of conversion of inventories shall include costs directly related to the units
of production and a systematic allocation of fixed and variable production overheads
that are incurred in converting materials into finished goods. Fixed production
overheads shall be those indirect costs of production that remain relatively constant
regardless of the volume of production. Variable production overheads shall be those
indirect costs of production that vary directly or nearly directly, with the volume of
production.
8. The allocation of fixed production overheads for the purpose of their inclusion in the
costs of conversion shall be based on the normal capacity of the production facilities.
Normal capacity shall be the production expected to be achieved on an average over a
number of periods or seasons under normal circumstances, taking into account the
loss of capacity resulting from planned maintenance. The actual level of production
shall be used when it approximates to normal capacity. The amount of fixed production
overheads allocated to each unit of production shall not be increased as a
consequence of low production or idle plant. Unallocated overheads shall be
recognised as an expense in the period in which they are incurred. In periods of
abnormally high production, the amount of fixed production overheads allocated to
each unit of production is decreased so that inventories are not measured above
the cost. Variable production overheads shall be assigned to each unit of production
on the basis of the actual use of the production facilities.
9. Where a production process results in more than one product being produced
simultaneously and the costs of conversion of each product are not separately
identifiable, the costs shall be allocated between the products on a rational and

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 ANNEXURE A.5 A.5

consistent basis. Where by-products, scrap or waste material are immaterial, they
shall be measured at net realisable value and this value shall be deducted from the
cost of the main product.
Other Costs
10. Other costs shall be included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition
11. Interest and other borrowing costs shall not be included in the costs of inventories,
unless they meet the criteria for recognition of interest as a component of the cost as
specified in the Income Computation and Disclosure Standard on borrowing costs.
Exclusions from the Cost of Inventories
12. In determining the cost of inventories in accordance with paragraphs 4 to paragraphs
11, the following costs shall be excluded and recognised as expenses of the period in
which they are incurred, namely:—
(a) Abnormal amounts of wasted materials, labour, or other production costs;
(b) Storage costs, unless those costs are necessary in the production process
prior to a further production stage;
(c) Administrative overheads that do not contribute to bringing the inventories to
their present location and condition ;
(d) Selling costs.
Cost Formulae
13. The Cost of inventories of items
(i) that are not ordinarily interchangeable; and
(ii) goods or services produced and segregated for specific projects shall be
assigned by specific identification of their individual costs.
14. ‘Specific identification of cost’ means specific costs are attributed to identified items
of inventory.
15. Where there are a large numbers of items of inventory which are ordinarily
interchangeable, specific identification of costs shall not be made.
First-in First-out and Weighted Average Cost Formula
16. Cost of inventories, other than the inventory dealt with in paragraph 13, shall be
assigned by using the First-in First-out (FIFO), or weighted average cost formula. The
formula used shall reflect the fairest possible approximation to the cost incurred in
bringing the items of inventory to their present location and condition.

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 A.6 DIRECT TAX LAWS

17. The FIFO formula assumes that the items of inventory which were purchased or
produced first are consumed or sold first, and consequently the items remaining in
inventory at the end of the period are those most recently purchased or produced.
Under the weighted average cost formula, the cost of each item is determined from the
weighted average of the cost of similar items at the beginning of a period and the cost
of similar items purchased or produced during the period. The average shall be
calculated on a periodic basis, or as each additional shipment is received, depending
upon the circumstances.
Techniques for the Measurement of Cost
18 (1) Techniques for the measurement of the cost of inventories, such as the standard
cost method or the retail method, may be used for convenience if the results
approximate the actual cost. Standard costs take into account normal levels of
consumption of materials and supplies, labour, efficiency and capacity
utilisation. They are regularly reviewed and, if necessary, revised in the light of
the current conditions.
(2) The retail method can be used in the retail trade for measuring inventories of
large number of rapidly changing items that have similar margins and for which
it is impracticable to use other costing methods. The cost of the inventory is
determined by reducing from the sales value of the inventory, the appropriate
percentage gross margin. The percentage used takes into consideration
inventory, which has been marked down to below its original selling price. An
average percentage for each retail department is to be used.
Net Realisable Value
19. Inventories shall be written down to net realisable value on an item-by-item basis.
Where ‘items of inventory' relating to the same product line having similar purposes or
end uses and are produced and marketed in the same geographical area and cannot
be practicably evaluated separately from other items in that product line, such
inventories shall be grouped together and written down to net realisable value on an
aggregate basis.
20. Net realisable value shall be based on the most reliable evidence available at the time
of valuation. The estimates of net realisable value shall also take into consideration the
purpose for which the inventory is held. The estimates shall take into
consideration fluctuations of price or cost directly relating to events occurring after the
end of previous year to the extent that such events confirm the conditions existing on
the last day of the previous year.
21. Materials and other supplies held for use in the production of inventories shall not be
written down below the cost, where the finished products in which they shall be
incorporated are expected to be sold at or above the cost. Where there has been a

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 ANNEXURE A.7 A.7

decline in the price of materials and it is estimated that the cost of finished products
will exceed the net realisable value, the value of materials shall be written down to net
realisable value which shall be the replacement cost of such materials.
Value of Opening Inventory
22. The value of the inventory as on the beginning of the previous year shall be
(i) the cost of inventory available, if any, on the day of the commencement of the
business when the business has commenced during the previous year; and
(ii) the value of the inventory as on the close of the immediately preceding
previous year, in any other case.
Change of Method of Valuation of Inventory
23. The method of valuation of inventories once adopted by a person in any previous year
shall not be changed without reasonable cause.
Valuation of Inventory in Case of Certain Dissolutions
24. In case of dissolution of a partnership firm or association of person or body of
individuals, notwithstanding whether business is discontinued or not, the inventory on
the date of dissolution shall be valued at the net realisable value.
Transitional Provisions
25. Interest and other borrowing costs, which do not meet the criteria for recognition of
interest as a component of the cost as per para 11, but included in the cost of the
opening inventory as on the 1st day of April, 2016, shall be taken into account for
determining cost of such inventory for valuation as on the close of the previous
year beginning on or after 1st day of April, 2016 if such inventory continue to remain
part of inventory as on the close of the previous year beginning on or after 1st day of
April, 2016.
Disclosure
26. The following aspects shall be disclosed, namely:—
(a) the accounting policies adopted in measuring inventories including the cost
formulae used. Where Standard Costing has been used as a measurement of
cost, details of such inventories and a confirmation of the fact that standard cost
approximates the actual cost; and
(b) the total carrying amount of inventories and its classification appropriate to a
person.

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 A.8 DIRECT TAX LAWS

C. Income Computation and Disclosure Standard III relating to construction contracts

Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from other
sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961(‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that
extent.
Scope
1. This Income Computation and Disclosure Standard should be applied in
determination of income for a construction contract of a contractor.
Definitions
2 (1) The following terms are used in this Income Computation and Disclosure
Standard with the meanings specified:
(a) “Construction contract” is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use and includes :
(i) contract for the rendering of services which are directly related to
the construction of the asset, for example, those for the
services of project managers and architects;
(ii) contract for destruction or restoration of assets, and the
restoration of the environment following the demolition of assets.
(b) “Fixed price contract” is a construction contract in which the contractor
agrees to a fixed contract price, or a fixed rate per unit of output, which
may be subject to cost escalation clauses.
(c) “Cost plus contract” is a construction contract in which the
contractor is reimbursed for allowable or otherwise defined costs, plus a
mark up on these costs or a fixed fee.
(d) “Retentions” are amounts of progress billings which are not paid until
the satisfaction of conditions specified in the contract for the payment of
such amounts or until defects have been rectified.
(e) “Progress billings” are amounts billed for work performed on a contract
whether or not they have been paid by the customer.

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 ANNEXURE A.9 A.9

(f) “Advances” are amounts received by the contractor before the related
work is performed.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meaning respectively
assigned to them in the Act.
3. A construction contract may be negotiated for the construction of a single asset. A
construction contract may also deal with the construction of a number of assets which
are closely interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use.
4. Construction contracts are formulated in a number of ways which, for the purposes of
this Income Computation and Disclosure Standard, are classified as fixed price
contracts and cost plus contracts. Some construction contracts may contain
characteristics of both a fixed price contract and a cost plus contract, for example, in
the case of a cost plus contract with an agreed maximum price.
Combining and Segmenting Construction Contracts
5. The requirements of this Income Computation and Disclosure Standard shall be
applied separately to each construction contract except as provided for in paragraphs
6, 7 and 8 herein. For reflecting the substance of a contract or a group of contracts,
where it is necessary, the Income Computation and Disclosure Standard should be
applied to the separately identifiable components of a single contract or to a group of
contracts together.
6. Where a contract covers a number of assets, the construction of each asset should be
treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and
customer have been able to accept or reject that part of the contract relating
to each asset; and
(c) the costs and revenues of each asset can be identified.
7. A group of contracts, whether with a single customer or with several customers, should
be treated as a single construction contract when:
(a) the group of contracts is negotiated as a single package;
(b) the contracts are so closely interrelated that they are, in effect, part of a single
project with an overall profit margin; and
(c) the contracts are performed concurrently or in a continuous sequence.

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 A.10 DIRECT TAX LAWS

8. Where a contract provides for the construction of an additional asset at the option of
the customer or is amended to include the construction of an additional asset, the
construction of the additional asset should be treated as a separate construction
contract when:
(a) the asset differs significantly in design, technology or function from the asset
or assets covered by the original contract; or
(b) the price of the asset is negotiated without having regard to the original
contract price.
Contract Revenue
9. Contract revenue shall be recognised when there is reasonable certainty of its
ultimate collection.
10. Contract revenue shall comprise of:
(a) the initial amount of revenue agreed in the contract, including retentions; and
(b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and
(ii) they are capable of being reliably measured.
11. Where contract revenue already recognised as income is subsequently written off in
the books of accounts as uncollectible, the same shall be recognised as an expense
and not as an adjustment of the amount of contract revenue.
Contract Costs
12. Contract costs shall comprise of :
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated
to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms
of the contract; and
(d) allocated borrowing costs in accordance with the Income Computation and
Disclosure Standard on Borrowing Costs.
These costs shall be reduced by any incidental income, not being in the nature of
interest, dividends or capital gains, that is not included in contract revenue.
13. Costs that cannot be attributed to any contract activity or cannot be allocated to a
contract shall be excluded from the costs of a construction contract.

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 ANNEXURE A.11 A.11

14. Contract costs include the costs attributable to a contract for the period from the date
of securing the contract to the final completion of the contract. Costs that are incurred
in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.
When costs incurred in securing a contract are recognised as an expense in the
period in which they are incurred, they are not included in contract costs when the
contract is obtained in a subsequent period.
15. Contract costs that relate to future activity on the contract are recognised as an asset.
Such costs represent an amount due from the customer and are classified as
contract work in progress.
Recognition of Contract Revenue and Expenses
16. Contract revenue and contract costs associated with the construction contract should
be recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity at the reporting date.
17. The recognition of revenue and expenses by reference to the stage of completion of
a contract is referred to as the percentage of completion method. Under this method,
contract revenue is matched with the contract costs incurred in reaching the stage of
completion, resulting in the reporting of revenue, expenses and profit which can be
attributed to the proportion of work completed.
18. The stage of completion of a contract shall be determined with reference to:
(a) the proportion that contract costs incurred for work performed upto the
reporting date bear to the estimated total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers are not determinative of
the stage of completion of a contract.
19. When the stage of completion is determined by reference to the contract costs incurred
upto the reporting date, only those contract costs that reflect work performed are
included in costs incurred upto the reporting date. Contract costs which are excluded
are:
(a) contract costs that relate to future activity on the contract; and
(b) payments made to subcontractors in advance of work performed under the
subcontract.

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20. During the early stages of a contract, where the outcome of the contract cannot be
estimated reliably contract revenue is recognised only to the extent of costs incurred.
The early stage of a contract shall not extend beyond 25 % of the stage of completion.
Changes in Estimates
21. The percentage of completion method is applied on a cumulative basis in each
previous year to the current estimates of contract revenue and contract costs. Where
there is change in estimates, the changed estimates shall be used in determination of
the amount of revenue and expenses in the period in which the change is made and in
subsequent periods.
Transitional Provisions
22.1 Contract revenue and contract costs associated with the construction contract, which
commenced on or after 1st day of April, 2016 shall be recognised in accordance with
the provisions of this standard.
22.2 Contract revenue and contract costs associated with the construction contract, which
commenced on or before the 31st day of March, 2016 but not completed by the said
date, shall be recognised based on the method regularly followed by the person prior to
the previous year beginning on the 1st day of April, 2016.
Disclosure
23. A person shall disclose:
(a) the amount of contract revenue recognised as revenue in the period; and
(b) the methods used to determine the stage of completion of contracts in progress.
24. A person shall disclose the following for contracts in progress at the reporting date,
namely:—
(a) amount of costs incurred and recognised profits (less recognised losses) upto
the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
D. Income Computation and Disclosure Standard IV relating to revenue recognition
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

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 ANNEXURE A.13 A.13

Scope
1 (1) This Income Computation and Disclosure Standard deals with the bases for
recognition of revenue arising in the course of the ordinary activities of a
person from
(i) the sale of goods;
(ii) the rendering of services;
(iii) the use by others of the person’s resources yielding interest, royalties or
dividends.
(2) This Income Computation and Disclosure Standard does not deal with the
aspects of revenue recognition which are dealt with by other Income
Computation and Disclosure Standards.
Definitions
2 (1) The following term is used in this Income Computation and
Disclosure Standard with the meanings specified:
(a) “Revenue” is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of a person
from the sale of goods, from the rendering of services, or from the
use by others of the person’s resources yielding interest, royalties or
dividends. In an agency relationship, the revenue is the amount of
commission and not the gross inflow of cash, receivables or other
consideration.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meanings assigned to
them in that Act.
Sale of Goods
3. In a transaction involving the sale of goods, the revenue shall be recognised when the
seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree usually
associated with ownership. In a situation, where transfer of property in goods does not
coincide with the transfer of significant risks and rewards of ownership, revenue in
such a situation shall be recognised at the time of transfer of significant risks and
rewards of ownership to the buyer.
4. Revenue shall be recognised when there is reasonable certainty of its ultimate
collection.

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5. Where the ability to assess the ultimate collection with reasonable certainty is lacking
at the time of raising any claim for escalation of price and export incentives, revenue
recognition in respect of such claim shall be postponed to the extent of uncertainty
involved.
Rendering of Services
6. Subject to Para 7, revenue from service transactions shall be recognised by the
percentage completion method. Under this method, revenue from service transactions
is matched with the service transaction costs incurred in reaching the stage of
completion, resulting in the determination of revenue, expenses and profit which can
be attributed to the proportion of work completed. Income Computation and Disclosure
Standard on construction contract also requires the recognition of revenue on this
basis. The requirements of that Standard shall mutatis mutandis apply to the
recognition of revenue and the associated expenses for a service transaction.
However, when services are provided by an indeterminate number of acts over a
specific period of time, revenue may be recognised on a straight line basis over the
specific period.
7. Revenue from service contracts with duration of not more than ninety days may be
recognised when the rendering of services under that contract is completed or
substantially completed.
The Use of Resources by Others Yielding Interest, Royalties or Dividends
8. (1) Subject to sub paragraph (2), interest shall accrue on the time basis
determined by the amount outstanding and the rate applicable.
(2) Interest on refund of any tax, duty or cess shall be deemed to be the income of
the previous year in which such interest is received.
(3) Discount or premium on debt securities held is treated as though it were
accruing over the period to maturity.
9. Royalties shall accrue in accordance with the terms of the relevant agreement and shall
be recognised on that basis unless, having regard to the substance of the transaction,
it is more appropriate to recognise revenue on some other systematic and rational
basis.
10. Dividends are recognised in accordance with the provisions of the Act.
Transitional Provisions
11. The transitional provisions of Income Computation and Disclosure Standard on
construction contract shall mutatis mutandis apply to the recognition of revenue and
the associated costs for a service transaction undertaken on or before the 31st day of
March, 2016 but not completed by the said date.

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 ANNEXURE A.15 A.15

12. Revenue for a transaction, other than a service transaction referred to in Para 10,
undertaken on or before the 31st day of March, 2016 but not completed by the said
date shall be recognised in accordance with the provisions of this standard for the
previous year commencing on the 1st day of April, 2016 and subsequent previous
year. The amount of revenue, if any, recognised for the said transaction for any
previous year commencing on or before the 1st day of April, 2015 shall be taken into
account for recognising revenue for the said transaction for the previous year
commencing on the 1st day of April, 2016and subsequent previous years.
Disclosure
13. Following disclosures shall be made in respect of revenue recognition, namely:—
(a) in a transaction involving sale of good, total amount not recognised as revenue
during the previous year due to lack of reasonably certainty of its ultimate
collection along with nature of uncertainty;
(b) the amount of revenue from service transactions recognised as revenue during
the previous year;
(c) the method used to determine the stage of completion of service transactions
in progress; and
(d) for service transactions in progress at the end of previous year:
(i) amount of costs incurred and recognised profits (less recognised losses)
upto end of previous year;
(ii) the amount of advances received; and
(iii) the amount of retentions.
E. Income Computation and Disclosure Standard V relating to tangible fixed assets
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and
this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to
that extent.
cope
1. This Income Computation and Disclosure Standard deals with the treatment of tangible
fixed assets.

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Definitions
2 (1) The following terms are used in this Income Computation and Disclosure
Standard with the meanings specified:
(a) “Tangible fixed asset” is an asset being land, building, machinery,
plant or furniture held with the intention of being used for the purpose of
producing or providing goods or services and is not held for sale in the
normal course of business.
(b) “Fair value” of an asset is the amount for which that asset could be
exchanged between knowledgeable, willing parties in an arm’s length
transaction.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meanings assigned to
them in that Act.
Identification of Tangible Fixed Assets
3. The definition in clause (a) of sub-paragraph (1) of paragraph 2 provides criteria for
determining whether an item is to be classified as a tangible fixed asset.
4. Stand-by equipment and servicing equipment are to be capitalised. Machinery spares
shall be charged to the revenue as and when consumed. When such spares can be
used only in connection with an item of tangible fixed asset and their use is expected
to be irregular, they shall be capitalised.
Components of Actual Cost
5. The actual cost of an acquired tangible fixed asset shall comprise its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and any
directly attributable expenditure on making the asset ready for its intended use. Any
trade discounts and rebates shall be deducted in arriving at the actual cost.
6. The cost of a tangible fixed asset may undergo changes subsequent to its acquisition
or construction on account of
(i) price adjustment, changes in duties or similar factors; or
(ii) exchange fluctuation as specified in Income Computation and Disclosure
Standard on the effects of changes in foreign exchange rates.
7. Administration and other general overhead expenses are to be excluded from the cost
of tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses
which are specifically attributable to construction of a project or to the acquisition of a
tangible fixed asset or bringing it to its working condition, shall be included as a part of
the cost of the project or as a part of the cost of the tangible fixed asset.

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8. The expenditure incurred on start-up and commissioning of the project, including the
expenditure incurred on test runs and experimental production, shall be capitalised.
The expenditure incurred after the plant has begun commercial production, that is,
production intended for sale or captive consumption, shall be treated as revenue
expenditure.
Self- constructed Tangible Fixed Assets
9. In arriving at the actual cost of self-constructed tangible fixed assets, the same
principles shall apply as those described in paragraphs 5 to 8. Cost of construction that
relate directly to the specific tangible fixed asset and costs that are attributable to the
construction activity in general and can be allocated to the specific tangible fixed asset
shall be included in actual cost. Any internal profits shall be eliminated in arriving at
such costs.
Non- monetary Consideration
10. When a tangible fixed asset is acquired in exchange for another asset, the fair value
of the tangible fixed asset so acquired shall be its actual cost.
11. When a tangible fixed asset is acquired in exchange for shares or other securities, the
fair value of the tangible fixed asset so acquired shall be its actual cost.
Improvements and Repairs
12. An Expenditure that increases the future benefits from the existing asset beyond its
previously assessed standard of performance is added to the actual cost.
13. The cost of an addition or extension to an existing tangible fixed asset which is of a
capital nature and which becomes an integral part of the existing tangible fixed asset
is to be added to its actual cost. Any addition or extension, which has a separate
identity and is capable of being used after the existing tangible fixed asset is
disposed of, shall be treated as separate asset.
Valuation of Tangible Fixed Assets in Special Cases
14. Where a person owns tangible fixed assets jointly with others, the proportion in the
actual cost, accumulated depreciation and written down value is grouped together with
similar fully owned tangible fixed assets.
15. Where several assets are purchased for a consolidated price, the consideration shall
be apportioned to the various assets on a fair basis.
Transitional Provisions
16. The actual cost of tangible fixed assets, acquisition or construction of which
commenced on or before the 31st day of March, 2016 but not completed by the said
date, shall be recognised in accordance with the provisions of this standard. The

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amount of actual cost, if any, recognised for the said assets for any previous year
commencing on or before the 1st day of April, 2015 shall be taken into account for
recognising actual cost of the said assets for the previous year commencing on the
1st day of April, 2016 and subsequent previous years.
Depreciation
17. Depreciation on a tangible fixed asset shall be computed in accordance with the
provisions of the Act.
Transfers
18. Income arising on transfer of a tangible fixed asset shall be computed in
accordance with the provisions of the Act.
Disclosures
19. Following disclosure shall be made in respect of tangible fixed assets, namely:—
(a) description of asset or block of assets;
(b) rate of depreciation;
(c) actual cost or written down value, as the case may be;
(d) additions or deductions during the year with dates; in the case of any addition
of an asset, date put to use; including adjustments on account of—
(i) Central Value Added Tax credit claimed and allowed under the CENVAT
Credit Rules, 2004;
(ii) change in rate of exchange of currency;
(iii) subsidy or grant or reimbursement, by whatever name called;
(e) depreciation Allowable; and
(f) written down value at the end of year.
F. Income Computation and Disclosure Standard VI relating to the effects of changes in
foreign exchange rates
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from other
sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that
extent.

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 ANNEXURE A.19 A.19

Scope
1. This Income Computation and Disclosure Standard deals with:
(a) treatment of transactions in foreign currencies;
(b) translating the financial statements of foreign operations;
(c) treatment of foreign currency transactions in the nature of forward exchange
contracts.
Definitions
2. (1) The following terms are used in this Income Computation and Disclosure
Standard with the meanings specified:
(a) “Average rate” is the mean of the exchange rates in force during a
period.
(b)“Closing rate” is the exchange rate at the last day of the previous year.
(c) “Exchange difference” is the difference resulting from reporting the
same number of units of a foreign currency in the reporting currency of a
person at different exchange rates.
(d) “Exchange rate” is the ratio for exchange of two currencies.
(e) “Foreign currency” is a currency other than the reporting currency of a
person.
(f) “Foreign operations of a person” is a branch, by whatever name
called, of that person, the activities of which are based or conducted in
a country other than India.
(g) “Foreign currency transaction” is a transaction which is denominated
in or requires settlement in a foreign currency, including transactions
arising when a person:—
(i) buys or sells goods or services whose price is denominated in a
foreign currency; or
(ii) borrows or lends funds when the amounts payable or receivable
are denominated in a foreign currency; or
(iii) becomes a party to an unperformed forward exchange contract;
or
(iv) otherwise acquires or disposes of assets, or incurs or settles
liabilities, denominated in a foreign currency.

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(h) “Forward exchange contract” means an agreement to exchange

different currencies at a forward rate, and includes a foreign currency
option contract or another financial instrument of a similar nature;
(i) “Forward rate” is the specified exchange rate for exchange of two
Currencies at a specified future date;
(j) “Indian currency” shall have the meaning as assigned to it in section 2
of the Foreign Exchange Management Act, 1999 (42 of 1999);
(k) “Monetary items” are money held and assets to be received or
liabilities to be paid in fixed or determinable amounts of money. Cash,
receivables, and payables are examples of monetary items;
(l) “Non-monetary items” are assets and liabilities other than monetary
items. Fixed assets, inventories, and investments in equity shares are
examples of non-monetary items;
(m) “Reporting currency” means Indian currency except for foreign
operations where it shall mean currency of the country where the
operations are carried out.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meaning assigned to
them in the Act.
Foreign Currency Transactions Initial Recognition
3 (1) A foreign currency transaction shall be recorded, on initial recognition in the
reporting currency, by applying to the foreign currency amount the exchange rate
between the reporting currency and the foreign currency at the date of the
transaction.
(2) An average rate for a week or a month that approximates the actual rate at the
date of the transaction may be used for all transaction in each foreign
currency occurring during that period. If the exchange rate fluctuates
significantly, the actual rate at the date of the transaction shall be used.
Conversion at Last Date of Previous Year
4. At last day of each previous year:—
(a) foreign currency monetary items shall be converted into reporting currency by
applying the closing rate;
(b) where the closing rate does not reflect with reasonable accuracy, the amount in
reporting currency that is likely to be realised from or required to disburse, a
foreign currency monetary item owing to restriction on remittances or the

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closing rate being unrealistic and it is not possible to effect an exchange of

currencies at that rate, then the relevant monetary item shall be reported in
the reporting currency at the amount which is likely to be realised from or
required to disburse such item at the last date of the previous year; and
(c) non-monetary items in a foreign currency shall be converted into reporting
currency by using the exchange rate at the date of the transaction.
(d) non-monetary item being inventory which is carried at net realisable value
denominated in a foreign currency shall be reported using the exchange rate
that existed when such value was determined.
Recognition of Exchange Differences
5. (i) In respect of monetary items, exchange differences arising on the settlement
thereof or on conversion thereof at last day of the previous year shall be
recognised as income or as expense in that previous year.
(ii) In respect of non-monetary items, exchange differences arising on conversion
thereof at the last day of the previous year shall not be recognised as income or
as expense in that previous year.
Exceptions to Paragraphs 3, 4 and 5
6. Notwithstanding anything contained in paragraph 3, 4 and 5; initial recognition,
conversion and recognition of exchange difference shall be subject to provisions of
section 43A of the Act or Rule 115 of Income-tax Rules, 1962, as the case may be.
Financial Statements of Foreign Operations
7. The financial statements of a foreign operation shall be translated using the principles
and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had
been those of the person himself.
Forward Exchange Contracts
8. (1) Any premium or discount arising at the inception of a forward exchange contract
shall be amortised as expense or income over the life of the contract. Exchange
differences on such a contract shall be recognised as income or as expense in
the previous year in which the exchange rates change. Any profit or loss arising
on cancellation or renewal shall be recognised as income or as expense for the
previous year.
(2) The provisions of sub-para (1) shall apply provided that the contract:
(a) is not intended for trading or speculation purposes; and
(b) is entered into to establish the amount of the reporting currency
required or available at the settlement date of the transaction.

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(3) The provisions of sub-para (1) shall not apply to the contract that is entered
into to hedge the foreign currency risk of a firm commitment or a highly probable
forecast transaction. For this purpose, firm commitment, shall not include
assets and liabilities existing at the end of the previous year.
(4) The premium or discount that arises on the contract is measured by the
difference between the exchange rate at the date of the inception of the contract
and the forward rate specified in the contract. Exchange difference on the
contract is the difference between:
(a) the foreign currency amount of the contract translated at the exchange
rate at the last day of the previous year, or the settlement date where the
transaction is settled during the previous year; and
(b) the same foreign currency amount translated at the date of inception of
the contract or the last day of the immediately preceding previous year,
whichever is later.
(5) Premium, discount or exchange difference on contracts that are intended for
trading or speculation purposes, or that are entered into to hedge the foreign
currency risk of a firm commitment or a highly probable forecast transaction
shall be recognised at the time of settlement.
Transitional Provisions
9. (1) All foreign currency transactions undertaken on or after 1st day of April, 2016
shall be recognised in accordance with the provisions of this standard.
(2) Exchange differences arising in respect of monetary items or non-monetary
items, on the settlement thereof during the previous year commencing on the
1st day of April, 2016 or on conversion thereof at the last day of the previous
year commencing on the 1st day of April, 2016 , shall be recognised in
accordance with the provisions of this standard after taking into account the
amount recognised on the last day of the previous year ending on the 31st
March, 2016 for an item, if any, which is carried forward from said previous
year.
(3) The financial statements of foreign operations for the previous year
commencing on the 1st day of April, 2016 shall be translated using the
principles and procedures specified in this standard after taking into account
the amount recognised on the last day of the previous year ending on the
31st March, 2016 for an item, if any, which is carried forward from said
previous year.
(4) All forward exchange contracts existing on the 1st day of April, 2016 or entered
on or after 1st day of April, 2016 shall be dealt with in accordance with the

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 ANNEXURE A.23 A.23

provisions of this standard after taking into account the income or expenses, if
any, recognised in respect of said contracts for the previous year ending on or
before the 31st March,2016.
G. Income Computation and Disclosure Standard VII relating to government grants
Preamble
This Income Computation and Disclosure Standard is applicable for computation of
income chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” and not for the purpose of maintenance of books of
account.
In case of conflict between the provisions of the Income Tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to
that extent.
Scope
1. This Income Computation and Disclosure Standard deals with the treatment of
Government grants. The Government grants are sometimes called by other names
such as subsidies, cash incentives, duty drawbacks, waiver, concessions,
reimbursements, etc.
2. This Income Computation and Disclosure Standard does not deal with:—
(a) Government assistance other than in the form of Government grants; and
(b) Government participation in the ownership of the enterprise.
Definitions
3 (1) The following terms are used in the Income Computation and Disclosure
Standard with the meanings specified:
(a) “Government” refers to the Central Government, State Governments,
agencies and similar bodies, whether local, national or international.
(b) “Government grants” are assistance by Government in cash or kind to
a person for past or future compliance with certain conditions. They
exclude those forms of Government assistance which cannot have a
value placed upon them and the transactions with Government which
cannot be distinguished from the normal trading transactions of the
person.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meaning assigned to
them in the Act.

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Recognition of Government Grants

4 (1) Government grants should not be recognised until there is reasonable assurance
that
(i) the person shall comply with the conditions attached to them, and (ii) the
grants shall be received.
(2) Recognition of Government grant shall not be postponed beyond the date of
actual receipt.
Treatment of Government Grants
5. Where the Government grant relates to a depreciable fixed asset or assets of a person,
the grant shall be deducted from the actual cost of the asset or assets concerned or
from the written down value of block of assets to which concerned asset or assets
belonged to.
6. Where the Government grant relates to a non-depreciable asset or assets of a person
requiring fulfillment of certain obligations, the grant shall be recognised as income over
the same period over which the cost of meeting such obligations is charged to income.
7. Where the Government grant is of such a nature that it cannot be directly relatable to
the asset acquired, so much of the amount which bears to the total Government grant,
the same proportion as such asset bears to all the assets in respect of or with
reference to which the Government grant is so received, shall be deducted from the
actual cost of the asset or shall be reduced from the written down value of block of
assets to which the asset or assets belonged to.
8. The Government grant that is receivable as compensation for expenses or losses
incurred in a previous financial year or for the purpose of giving immediate financial
support to the person with no further related costs, shall be recognised as income of
the period in which it is receivable.
9. The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be
recognised as income over the periods necessary to match them with the related costs
which they are intended to compensate.
10. The Government grants in the form of non-monetary assets, given at a concessional
rate, shall be accounted for on the basis of their acquisition cost.
Refund of Government Grants
11. The amount refundable in respect of a Government grant referred to in paragraphs 6,
8 and 9 shall be applied first against any unamortised deferred credit remaining in
respect of the Government grant. To the extent that the amount refundable exceeds
any such deferred credit, or where no deferred credit exists, the amount shall be
charged to profit and loss statement.

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12. The amount refundable in respect of a Government grant related to a depreciable fixed
asset or assets shall be recorded by increasing the actual cost or written down value
of block of assets by the amount refundable. Where the actual cost of the asset is
increased, depreciation on the revised actual cost or written down value shall be
provided prospectively at the prescribed rate.
Transitional Provisions
13. All the Government grants which meet the recognition criteria of para 4 on or after 1st
day of April, 2016 shall be recognised for the previous year commencing on or after 1st
day of April, 2016 in accordance with the provisions of this standard after taking into
account the amount, if any, of the said Government grant recognised for any previous
year ending on or before 31st day of March,2016.
Disclosures
14. Following disclosure shall be made in respect of Government grants, namely:—
(a) nature and extent of Government grants recognised during the previous year
by way of deduction from the actual cost of the asset or assets or from the
written down value of block of assets during the previous year;
(b) nature and extent of Government grants recognised during the previous year
as income;
(c) nature and extent of Government grants not recognised during the previous
year by way of deduction from the actual cost of the asset or assets or from the
written down value of block of assets and reasons thereof; and
(d) nature and extent of Government grants not recognised during the previous
year as income and reasons thereof.
H. Income Computation and Disclosure Standard VIII relating to securities
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of account.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income
Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
Part A
Scope
1. This part of Income Computation and Disclosure Standard deals with securities held
as stock-in-trade.

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2. This part of Income Computation and Disclosure Standard does not deal with:
(a) the bases for recognition of interest and dividends on securities which are
covered by the Income Computation and Disclosure Standard on revenue
recognition;
(b) securities held by a person engaged in the business of insurance;
(c) securities held by mutual funds, venture capital funds, banks and public
financial institutions formed under a Central or a State Act or so declared under
the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of
2013).
Definitions
3 (1) The following terms are used in this part of Income Computation and
Disclosure Standard with the meanings specified:
(a) “Fair value” is the amount for which an asset could be exchanged
between a knowledgeable, willing buyer and a knowledgeable, willing
seller in an arm’s length transaction.
(b) “Securities” shall have the meaning assigned to it in clause (h) of
Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of
1956) and shall include share of a company in which public are not
substantially interested but shall not include derivatives referred to in
sub-clause (ia) of that clause (h).
(2) Words and expressions used and not defined in this part of Income
Computation and Disclosure Standard but defined in the Act shall have the
meaning respectively assigned to them in the Act.
Recognition and Initial Measurement of Securities
4. A security on acquisition shall be recognised at actual cost.
5. The actual cost of a security shall comprise of its purchase price and include
acquisition charges such as brokerage, fees, tax, duty or cess.
6. Where a security is acquired in exchange for other securities, the fair value of the
security so acquired shall be its actual cost.
7. Where a security is acquired in exchange for another asset, the fair value of the
security so acquired shall be its actual cost.
8. Where unpaid interest has accrued before the acquisition of an interest-bearing
security and is included in the price paid for the security, the subsequent receipt of
interest is allocated between pre-acquisition and post-acquisition periods; the pre-
acquisition portion of the interest is deducted from the actual cost.

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Subsequent Measurement of Securities

9. At the end of any previous year, securities held as stock-in-trade shall be valued at
actual cost initially recognised or net realisable value at the end of that previous year,
whichever is lower.
10. For the purpose of para 9, the comparison of actual cost initially recognised and net
realisable value shall be done categorywise and not for each individual security. For
this purpose, securities shall be classified into the following categories, namely:-
(a) shares;
(b) debt securities;
(c) convertible securities; and
(d) any other securities not covered above.
11. The value of securities held as stock-in-trade of a business as on the beginning of the
previous year shall be:
(a) the cost of securities available, if any, on the day of the commencement of the
business when the business has commenced during the previous year; and
(b) the value of the securities of the business as on the close of the immediately
preceding previous year, in any other case.
12. Notwithstanding anything contained in para 9, 10 and 11, at the end of any previous
year, securities not listed on a recognised stock exchange; or listed but not quoted on a
recognised stock exchange with regularity from time to time, shall be valued at actual
cost initially recognised.
13. For the purposes of para 9, 10 and 11 where the actual cost initially recognised
cannot be ascertained by reference to specific identification, the cost of such security
shall be determined on the basis of first-in-first-out method or weighted average cost
formula.
Part B
Scope
1. This part of Income Computation and Disclosure Standard deals with securities held by a
scheduled bank or public financial institutions formed under a Central or a State Act or so
declared under the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of
2013).
Definitions
2 (1) The following terms are used in this part of Income Computation and Disclosure
Standard with the meanings specified:

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(a) “Scheduled Bank” shall have the meaning assigned to it in clause (ii) of
the Explanation to clause (viia) of sub-section (1) of section 36 of the
Act.
(b) “Securities” shall have the meaning assigned to it in clause (h) of
Section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956)
and shall include share of a company in which public are not
substantially interested;
(2) Words and expressions used and not defined in this part of Income
Computation and Disclosure Standard but defined in the Act shall have the
meaning respectively assigned to them in the Act.
Classification, Recognition and Measurement of Securities
3. Securities shall be classified, recognised and measured in accordance with the extant
guidelines issued by the Reserve Bank of India in this regard and any claim for
deduction in excess of the said guidelines shall not be taken into account. To this
extent, the provisions of Income Computation and Disclosure Standard VI on the
effect of changes in foreign exchange rates relating to forward exchange contracts
shall not apply.”
I. Income Computation and Disclosure Standard IX relating to borrowing costs Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of account.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that
extent.
Scope
1. (1) This Income Computation and Disclosure Standard deals with treatment
of borrowing costs.
(2) This Income Computation and Disclosure Standard does not deal with the
actual or imputed cost of owners’ equity and preference share capital.
Definitions
2. (1) The following terms are used in this Income Computation and Disclosure
Standard with the meanings specified:
(a) “Borrowing costs” are interest and other costs incurred by a person in
connection with the borrowing of funds and include:
(i) commitment charges on borrowings;

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(ii) amortised amount of discounts or premiums relating to

borrowings;
(iii) amortised amount of ancillary costs incurred in connection with
the arrangement of borrowings;
(iv) finance charges in respect of assets acquired under finance
leases or under other similar arrangements.
(b) “Qualifying asset” means:
(i) land, building, machinery, plant or furniture, being tangible
assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises
or any other business or commercial rights of similar nature,
being intangible assets;
(iii) inventories that require a period of twelve months or more to bring
them to a saleable condition.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meaning assigned to
them in the Act.
Recognition
3. Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset shall be capitalised as part of the cost of that asset.
The amount of borrowing costs eligible for capitalisation shall be determined in
accordance with this Income Computation and Disclosure Standard. Other borrowing
costs shall be recognised in accordance with the provisions of the Act.
4. For the purposes of this Income Computation and Disclosure Standard, “capitalisation”
in the context of inventory referred to in item (iii) of clause (b) of sub-paragraph (1)
of paragraph 2means addition of borrowing cost to the cost of inventory.
Borrowing Costs Eligible for Capitalisation
5. Subject to paragraph 8, the extent to which funds are borrowed specifically for the
purposes of acquisition, construction or production of a qualifying asset, the amount of
borrowing costs to be capitalised on that asset shall be the actual borrowing costs
incurred during the period on the funds so borrowed.
“6. Subject to Para 8, in respect of borrowing other than those referred to in Para 5, if
any, the amount of borrowing costs to be capitalised shall be computed in accordance
with the following formula namely :—

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B
Ax
C
Where
A= borrowing costs incurred during the previous year except on borrowings
referred to in Para 5 above;
B= (i) the average of costs of qualifying asset as appearing in the balance
sheet of a person on the first day and the last day of the previous year;
(ii) in case the qualifying asset does not appear in the balance sheet of a
person on the first day, half of the cost of qualifying asset; or
(iii) in case the qualifying asset does not appear in the balance sheet of a
person on the last day of the previous year, the average of the costs of
qualifying asset as appearing in the balance sheet of a person on the
first day of the previous year and on the date of put to use or
completion, as the case may be, excluding the extent to which the
qualifying assets are directly funded out of specific borrowings;
C= the average of the amount of total assets as appearing in the balance sheet of
a person on the first day and the last day of the previous year, other than
assets to the extent they are directly funded out of specific borrowings;
Explanation — For the purpose of this paragraph, a qualifying asset shall be
such asset that necessarily require a period of twelve months or more for its
acquisition, construction or production.
Commencement of Capitalisation
7. The capitalisation of borrowing costs shall commence:
(a) in a case referred to in paragraph 5, from the date on which funds were
borrowed;
(b) in a case referred to in paragraph 6, from the date on which funds were
utilised.
Cessation of Capitalisation
8. Capitalisation of borrowing costs shall cease:
(a) in case of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub-
paragraph (1) of paragraph 2, when such asset is first put to use;
(b) in case of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of
paragraph 2, when substantially all the activities necessary to prepare such
inventory for its intended sale are complete.

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9. When the construction of a qualifying asset is completed in parts and a completed part
is capable of being used while construction continues for the other parts, capitalisation
of borrowing costs in relation to a part shall cease:—
(a) in case of part of a qualifying asset referred to in item (i) and (ii) of clause (b) of
sub- paragraph (1) of paragraph 2, when such part of a qualifying asset is first
put to use;
(b) in case of part of inventory referred to in item (iii) of clause (b) of sub-
paragraph
(1) of paragraph 2, when substantially all the activities necessary to prepare such
part of inventory for its intended sale are complete.
Transitional Provisions
10. All the borrowing costs incurred on or after 1st day of April, 2016 shall be capitalised
for the previous year commencing on or after 1st day of April, 2016 in accordance with
the provisions of this standard after taking into account the amount of borrowing
costs capitalised, if any, for the same borrowing for any previous year ending on or
before 31st day of March,2016.
Disclosure
11. The following disclosure shall be made in respect of borrowing costs, namely:—
(a) the accounting policy adopted for borrowing costs; and
(b) the amount of borrowing costs capitalised during the previous year.
J. Income Computation and Disclosure Standard X relating to provisions, contingent
liabilities and contingent assets
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and
this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to
that extent.
Scope
1. This Income Computation and Disclosure Standard deals with provisions, contingent
liabilities and contingent assets, except those:
(a) resulting from financial instruments;

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(b) resulting from executory contracts;

(c) arising in insurance business from contracts with policyholders; and
(d) covered by another Income Computation and Disclosure Standard.
2. This Income Computation and Disclosure Standard does not deal with the recognition
of revenue which is dealt with by Income Computation and Disclosure Standard -
Revenue Recognition.
3. The term ‘provision’ is also used in the context of items such as depreciation,
impairment of assets and doubtful debts which are adjustments to the carrying
amounts of assets and are not addressed in this Income Computation and Disclosure
Standard.
Definitions
4 (1) The following terms are used in this Income Computation and Disclosure
Standard with the meanings specified:
(a) “Provision” is a liability which can be measured only by using a
substantial degree of estimation.
(b) “Liability” is a present obligation of the person arising from past events,
the settlement of which is expected to result in an outflow from the
person of resources embodying economic benefits.
(c) “Obligating event” is an event that creates an obligation that results in
a person having no realistic alternative to settling that obligation.
(d) “Contingent liability” is:
(i) a possible obligation that arises from past events and the
existence of which will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not wholly
within the control of the person; or
(ii) a present obligation that arises from past events but is not
recognised because:
(A) it is not reasonably certain that an outflow of resources
embodying economic benefits will be required to settle the
obligation; or
(B) a reliable estimate of the amount of the obligation cannot
be made.
(e) “Contingent asset” is a possible asset that arises from past events the
existence of which will be confirmed only by the occurrence or

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nonoccurrence of one or more uncertain future events not wholly within

the control of the person.
(f) “Executory contracts” are contracts under which neither party has
performed any of its obligations or both parties have partially performed
their obligations to an equal extent.
(g) “Present obligation” is an obligation if, based on the evidence
available, its existence at the end of the previous year is considered
reasonably certain.
(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meaning respectively
assigned to them in the Act.
Recognition Provisions
5. A provision shall be recognised when:
(a) a person has a present obligation as a result of a past event;
(b) it is reasonably certain that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these
conditions are not met, no provision shall be recognised.
6. No provision shall be recognised for costs that need to be incurred to operate in the
future.
7. It is only those obligations arising from past events existing independently of a person’s
future actions, that is the future conduct of its business, that are recognised as
provisions
8. Where details of a proposed new law have yet to be finalised, an obligation arises only
when the legislation is enacted.
Contingent Liabilities
9. A person shall not recognise a contingent liability.
Contingent Assets
10. A person shall not recognise a contingent asset.
11. Contingent assets are assessed continually and when it becomes reasonably certain
that inflow of economic benefit will arise, the asset and related income are
recognised in the previous year in which the change occurs.

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Measurement Best Estimate

12. The amount recognised as a provision shall be the best estimate of the expenditure
required to settle the present obligation at the end of the previous year. The amount of
a provision shall not be discounted to its present value.
13. The amount recognised as asset and related income shall be the best estimate of the
value of economic benefit arising at the end of the previous year. The amount and
related income shall not be discounted to its present value.
Reimbursements
14. Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when it is
reasonably certain that reimbursement will be received if the person settles the
obligation. The amount recognised for the reimbursement shall not exceed the
amount of the provision.
15. Where a person is not liable for payment of costs in case the third party fails to pay, no
provision shall be made for those costs.
16. An obligation, for which a person is jointly and severally liable, is a contingent liability
to the extent that it is expected that the obligation will be settled by the other parties.
Review
17. Provisions shall be reviewed at the end of each previous year and adjusted to reflect
the current best estimate. If it is no longer reasonably certain that an outflow of
resources embodying economic benefits will be required to settle the obligation, the
provision should be reversed.
18. An asset and related income recognised as provided in para 11 shall be reviewed at
the end of each previous year and adjusted to reflect the current best estimate. If it is
no longer reasonably certain that an inflow of economic benefits will arise, the asset
and related income shall be reversed.
Use of Provisions
19. A provision shall be used only for expenditures for which the provision was originally
recognised.
Transitional Provisions
20. All the provisions or assets and related income shall be recognised for the previous
year commencing on or after 1st day of April, 2016 in accordance with the provisions of
this standard after taking into account the amount recognised, if any, for the same for
any previous year ending on or before 31st day of March,2016.

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Disclosure
21 (1) Following disclosure shall be made in respect of each class of provision, namely:-
(a) a brief description of the nature of the obligation;
(b) the carrying amount at the beginning and end of the previous year;
(c) additional provisions made during the previous year, including increases
to existing provisions;
(d) amounts used, that is incurred and charged against the provision,
during the previous year;
(e) unused amounts reversed during the previous year; and
(f) the amount of any expected reimbursement, stating the amount of any
asset that has been recognised for that expected reimbursement.
(2) Following disclosure shall be made in respect of each class of asset and
related income recognised as provided in para 11, namely:—
(a) a brief description of the nature of the asset and related income;
(b) the carrying amount of asset at the beginning and end of the previous
year;
(c) additional amount of asset and related income recognised during the
year, including increases to assets and related income already
recognised; and
(d) amount of asset and related income reversed during the previous year.

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ANNEXURE – 2

Rule 11UAB - Determination of fair market value for inventory.

(1) For the purposes of clause (via) of section 28 of the Act, the fair market value of the inventory,—
(i) being an immovable property, being land or building or both, shall be the value adopted
or assessed or assessable by any authority of the Central Government or a State
Government for the purpose of stamp duty in respect of such immovable property on the
date on which the inventory is converted into, or treated, as a capital asset;
(ii) being jewellery, archaeological collections, drawings, paintings, sculptures, any work of
art, shares or securities referred to in rule 11UA, shall be the value determined in the
manner provided in sub-rule (1) of rule 11UA and for this purpose the reference to the
valuation date in the rule 11U and rule 11UA shall be the date on which the inventory is
converted into, or treated, as a capital asset;
(iii) being the property, other than those specified in clause (i) and clause (ii), the price that
such property would ordinarily fetch on sale in the open market on the date on which the
inventory is converted into, or treated, as a capital asset.

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ANNEXURE – 3

Rule – 11U Meaning of expressions used in determination of fair market value.

11U. For the purposes of this rule and rule 11UA,—
(b) "balance-sheet", in relation to any company, means,—
(i) for the purposes of sub-rule (2) of rule 11UA, the balance-sheet of such company
(including the notes annexed thereto and forming part of the accounts) as drawn up on
the valuation date which has been audited by the auditor of the company appointed
under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-
sheet on the valuation date is not drawn up, the balance-sheet (including the notes
annexed thereto and forming part of the accounts) drawn up as on a date immediately
preceding the valuation date which has been approved and adopted in the annual
general meeting of the shareholders of the company; and
(ii) in any other case,—
(A) in relation to an Indian company, the balance-sheet of such company (including
the notes annexed thereto and forming part of the accounts) as drawn up on the
valuation date which has been audited by the auditor of the company appointed
under the laws relating to companies in force; and
(B) in relation to a company, not being an Indian company, the balance-sheet of the
company (including the notes annexed thereto and forming part of the
accounts) as drawn up on the valuation date which has been audited by the
auditor of the company, if any, appointed under the laws in force of the country
in which the company is registered or incorporated;]
(c) "merchant banker" means category I merchant banker registered with Securities and
Exchange Board of India established under section 3 of the Securities and Exchange Board of
India Act, 1992 (15 of 1992);
(d) "quoted shares or securities" in relation to share or securities means a share or security
quoted on any recognized stock exchange with regularity from time to time, where the
quotations of such shares or securities are based on current transaction made in the ordinary
course of business;
(e) "recognized stock exchange" shall have the same meaning as assigned to it in clause (f) of
section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(f) "registered dealer" means a dealer who is registered under Central Sales Tax Act, 1956 or
General Sales Tax Law for the time being in force in any State including value added tax laws;

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(g) "registered valuer" shall have the same meaning as assigned to it in section 34AB of the
Wealth-tax Act, 1957 (27 of 1957) read with rule 8A of Wealth-tax Rules, 1957;
(h) "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(i) "unquoted shares and securities", in relation to shares or securities, means shares and
securities which is not a quoted shares or securities;
(j) "valuation date" means the date on which the property or consideration, as the case may be,
is received by the assessee.
Rule 11UA - Determination of fair market value.
(1) For the purposes of section 56 of the Act, the fair market value of a property, other than
immovable property, shall be determined in the following manner, namely,—
(a) valuation of jewellery,—
(i) the fair market value of jewellery shall be estimated to be the price which such
jewellery would fetch if sold in the open market on the valuation date;
(ii) in case the jewellery is received by the way of purchase on the valuation date,
from a registered dealer, the invoice value of the jewellery shall be the fair
market value;
(iii) in case the jewellery is received by any other mode and the value of the
jewellery exceeds rupees fifty thousand, then assessee may obtain the report of
registered valuer in respect of the price it would fetch if sold in the open market
on the valuation date;
(b) valuation of archaeological collections, drawings, paintings, sculptures or any work of
art,—
(i) the fair market value of archaeological collections, drawings, paintings,
sculptures or any work of art (hereinafter referred as artistic work) shall be
estimated to be price which it would fetch if sold in the open market on the
valuation date;
(ii) in case the artistic work is received by the way of purchase on the valuation
date, from a registered dealer, the invoice value of the artistic work shall be the
fair market value;
(iii) in case the artistic work is received by any other mode and the value of the
artistic work exceeds rupees fifty thousand, then assessee may obtain the
report of registered valuer in respect of the price it would fetch if sold in the
open market on the valuation date;

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 ANNEXURE A.39 A.39

(c) valuation of shares and securities,—

(a) the fair market value of quoted shares and securities shall be determined in the
following manner, namely,—
(i) if the quoted shares and securities are received by way of transaction
carried out through any recognized stock exchange, the fair market value
of such shares and securities shall be the transaction value as recorded
in such stock exchange;
(ii) if such quoted shares and securities are received by way of transaction
carried out other than through any recognized stock exchange, the fair
market value of such shares and securities shall be,—
(a) the lowest price of such shares and securities quoted on any
recognized stock exchange on the valuation date, and
(b) the lowest price of such shares and securities on any recognized
stock exchange on a date immediately preceding the valuation date
when such shares and securities were traded on such stock
exchange, in cases where on the valuation date there is no trading
in such shares and securities on any recognized stock exchange;
(b) the fair market value of unquoted equity shares shall be the value, on the
valuation date, of such unquoted equity shares as determined in the following
manner, namely:—
the fair market value of unquoted equity shares =(A+B+C+D - L)× (PV)/(PE),
where,
A= book value of all the assets (other than jewellery, artistic work, shares,
securities and immovable property) in the balance-sheet as reduced
by,—
(i) any amount of income-tax paid, if any, less the amount of income-
tax refund claimed, if any; and
(ii) any amount shown as asset including the unamortised amount of
deferred expenditure which does not represent the value of any
asset;
B= the price which the jewellery and artistic work would fetch if sold in the
open market on the basis of the valuation report obtained from a
registered valuer;
C= fair market value of shares and securities as determined in the manner
provided in this rule;

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 A.40 DIRECT TAX LAWS

D= the value adopted or assessed or assessable by any authority of the

Government for the purpose of payment of stamp duty in respect of the
immovable property;
L= book value of liabilities shown in the balance sheet, but not including the
following amounts, namely:—
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference
shares and equity shares where such dividends have not been
declared before the date of transfer at a general body meeting of
the company;
(iii) reserves and surplus, by whatever name called, even if the
resulting figure is negative, other than those set apart towards
depreciation;
(iv) any amount representing provision for taxation, other than amount
of income-tax paid, if any, less the amount of income-tax claimed
as refund, if any, to the extent of the excess over the tax payable
with reference to the book profits in accordance with the law
applicable thereto;
(v) any amount representing provisions made for meeting liabilities,
other than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of
dividends payable in respect of cumulative preference shares;
PV= the paid up value of such equity shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet;
(c) the fair market value of unquoted shares and securities other than equity shares
in a company which are not listed in any recognized stock exchange shall be
estimated to be price it would fetch if sold in the open market on the valuation
date and the assessee may obtain a report from a merchant banker or an
accountant in respect of which such valuation.
(2) Notwithstanding anything contained in sub-clause (b) or sub-clause (c), as the case may be, of
clause (c) of sub-rule (1):—
(A) the fair market value of unquoted equity shares for the purposes of sub-clause (i) of
clause (a) of the Explanation to clause (viib) of sub-section (2) of section 56 shall be the
value, on the valuation date, of such unquoted equity shares, as shall be determined
under sub-clause (a), sub-clause (b), sub-clause (c) or sub-clause (e), at the option of
the assessee, where the consideration received by the assessee is from a resident ; and

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 ANNEXURE A.41 A.41

under sub-clauses (a) to (e) at the option of the assessee, where the consideration
received by the assessee is from a non-resident, in the following manner:—
(a) the fair market value of unquoted equity shares =(A-L)× [PV/PE], where,
A= book value of the assets in the balance-sheet as reduced by any amount
of tax paid as deduction or collection at source or as advance tax payment
as reduced by the amount of tax claimed as refund under the Income-tax
Act and any amount shown in the balance-sheet as asset including the
unamortised amount of deferred expenditure which does not represent the
value of any asset;
L= book value of liabilities shown in the balance-sheet, but not including the
following amounts, namely:—
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference
shares and equity shares where such dividends have not been
declared before the date of transfer at a general body meeting of
the company;
(iii) reserves and surplus, by whatever name called, even if the
resulting figure is negative, other than those set apart towards
depreciation;
(iv) any amount representing provision for taxation, other than amount
of tax paid as deduction or collection at source or as advance tax
payment as reduced by the amount of tax claimed as refund under
the Income-tax Act, to the extent of the excess over the tax payable
with reference to the book profits in accordance with the law
applicable thereto;
(v) any amount representing provisions made for meeting liabilities,
other than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of
dividends payable in respect of cumulative preference shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet;
PV = the paid up value of such equity shares; or
(b) the fair market value of the unquoted equity shares determined by a merchant
banker as per the Discounted Free Cash Flow method;
(c) where any consideration is received by a venture capital undertaking for issue of
unquoted equity shares, from a venture capital fund or a venture capital company

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or a specified fund, the price of the equity shares corresponding to such

consideration may, at the option of such undertaking, be taken as the fair market
value of the equity shares to the extent the consideration from such fair market
value does not exceed the aggregate consideration that is received from a
venture capital fund or a venture capital company or a specified fund:
Provided that the consideration has been received by the undertaking from a
venture capital fund or a venture capital company or a specified fund, within a
period of ninety days before or after the date of issue of shares which are the
subject matter of valuation.
Explanation.—For the purposes of this clause,-
(i) "specified fund" shall have the same meaning as assigned to it in clause
(aa) of Explanation to clause (viib) of sub-section (2) of section 56;
(ii) "venture capital company", "venture capital fund" and "venture capital
undertaking" shall have the same meaning assigned to them in clause (b)
of Explanation to clause (viib) of sub-section (2) of section 56.
Illustration: If a venture capital undertaking receives a consideration of fifty
thousand rupees from a venture capital company for issue of one hundred
shares at the rate of five hundred rupees per share, then such an
undertaking can issue one hundred shares at this rate to any other
investor within a period of ninety days before or after the receipt of
consideration from venture capital company.
(d) the fair market value of the unquoted equity shares determined by a merchant
banker in accordance with any of the following methods:
(i) Comparable Company Multiple Method;
(ii) Probability Weighted Expected Return Method;
(iii) Option Pricing Method;
(iv) Milestone Analysis Method;
(v) Replacement Cost Methods;
(e) where any consideration is received by a company for issue of unquoted equity
shares, from any entity notified under clause (ii) of the first proviso to clause (viib)
of sub-section (2) of section 56, the price of the equity shares corresponding to
such consideration may, at the option of such company, be taken as the fair
market value of the equity shares to the extent the consideration from such fair
market value does not exceed the aggregate consideration that is received from
the notified entity:

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Provided that the consideration has been received by the company from the entity
notified under clause (ii) of the first proviso to clause (viib) of sub-section (2) of
section 56, within a period of ninety days before or after the date of issue of
shares which are the subject matter of valuation.
(B) the fair market value of compulsorily convertible preference shares for the purposes of
sub-clause (i) of clause (a) of the Explanation to clause (viib) of sub-section (2) of section
56 shall be the value, on the valuation date, as determined-
(i) in accordance with the provisions of sub-clause (b), sub-clause (c), or sub-clause
(e) of clause (A), at the option of the assessee, or based on the fair market value
of unquoted equity shares determined in accordance with sub-clause (a), sub-
clause (b), sub-clause (c), or sub-clause (e) of clause (A), at the option of the
assessee, where such consideration is received from a resident; and
(ii) in accordance with the provisions of sub-clauses (b) to (e) of clause (A), at the
option of the assessee, or based on the fair market value of unquoted equity
shares determined in accordance with sub-clauses (a) to (e) of clause (A), at the
option of the assessee, where such consideration is received from a non-resident.
(3) Where the date of valuation report by the merchant banker for the purposes of sub-rule (2) is not
more than ninety days prior to the date of issue of shares which are the subject matter of
valuation, such date may, at the option of the assessee, be deemed to be the valuation date:
Provided that where such option is exercised under this sub-rule, the provisions of clause (j) of
rule 11U shall not apply.
(4) For the purposes of clause (A) or clause (B) of sub-rule (2), where the issue price of the shares
exceeds the value of shares as determined in accordance with -
(i) sub-clause (a) or sub-clause (b) of clause (A), for consideration received from a resident,
by an amount not exceeding ten per cent. of the valuation price, the issue price shall be
deemed to be the fair market value of such shares;
(ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration
received from a non- resident, by an amount not exceeding ten per cent. of the valuation
price, the issue price shall be deemed to be the fair market value of such shares.
Explanation.—For the purposes of this sub-rule, 'issue price' means the consideration received by the
company for one share.]
Rule 11UAA - Determination of Fair Market Value for share other than quoted share.
For the purposes of section 50CA, the fair market value of the share of a company other than a quoted
share, shall be determined in the manner provided in sub-clause (b) or sub-clause (c),as the case may
be, of clause (c) of sub-rule (1) of rule 11UA and for this purpose the reference to valuation date in the
rule 11U and rule 11UA shall mean the date on which the capital asset, being share of a company other
than a quoted share, referred to in section 50CA, is transferred.

© The Institute of Chartered Accountants of India