| Contents |
| 1 |
Salaries |
| 2 |
Income from house
property |
| 3 |
Profits and gains of
business or profession |
| 4 |
Capital Gains |
| 5 |
Income from other
sources
|
| 6 |
Set off of Losses |
| 7 |
Carry Forward of
Losses |
Taxable income is computed under the
respective heads (para 1.2.4) after allowing from gross receipts admissible
deductions for cost and expenses. The net income under each of these heads is
then aggregated to arrive at the 'Gross total Income'. Computation of income
under individual heads is explained in paragraphs following.
Salaries
4.2 Income from
salaries is computed in accordance with the provisions of section 15 to 17 of
the Act. 'Salary' means all remuneration paid or due under the contract of
employment. It includes wages, annuity, pension, gratuity, fees, commission,
perquisites, profits in lieu of or in addition to any salary or wages, any
advance of salary, leave salary encashment or any other payment by the employer
for services rendered. The annual accretion to the balance at the credit of an
employee participating in a recognised provident fund in excess of the
prescribed limit is includible in the salary income of the employee.
'Perquisites' mean the benefits or amenities provided in kind by the employer
free of cost or at a concessional rate. The value of these is regarded as part
of salary. Rule 3 of the Income Tax Rules lays down the methods for determining
the value of certain perquisites. For others the general rule of valuing the
perquisites in the hands of the employee is to take the cost to the employer in
providing the benefit or amenity. It has been clarified that securities
allotted to an employee free of cost or at concessional rate under ESOP or as
sweat equity shares will not be taxable as perquisite.
4.2.1 In order
to be taxable under the head 'Salaries', it is necessary that there is a
relationship of employer and employee between the payer and the receiver. It is
for this reason remuneration received as a partner is not taxable as 'salary'.
4.2.2 In
computing the salary income for the assessment year 1999-2000, a standard
deduction is allowed as under:-
-
Where salary income is upto Rs. one lakh - 33-1/3% or Rs. 25,000/- whichever is
less.
-
Where salary income exceeds Rs. one lakh but does not exceed rupees five lakh -
Rs. 20,000/-.
-
Where salary income exceeds rupees five lakh - NIL
Deduction for profession or employment
tax levied by State Government is also allowed.
Income from house property
4.3 Income from
house property is computed in the hands of the owner in accordance with the
provisions of sections 22 to 27 of the Act. It is determined with reference to
its 'annual value', i.e. the sum for which the property might reasonably be let
from year to year. However, where any property is tenanted and the annual rent
received or receivable by the owner is in excess of the sum for which the
property might reasonably be expected to be let from year to year, the actual
annual rent received or receivable is taken as the annual value of the
property.
4.3.1 From
the annual value of a house property in the
occupation of a tenant, taxes levied by any local authority in respect of the
property to the extent such taxes are borne by the owner are deductible on
actual payment basis to arrive at the 'net annual value'.
4.3.2 Where the
property consists of a house or a part of a house which is in the occupation of
the owner for his own residence, its annual value is taken as Nil. But if
such a property is let out during any part of the previous year, its annual
value is taken proportionately. Further, where the owner has only one
resedential house and the house cannot be actually occupied by reason of the
fact that owing to his employment, business or profession carried on at any
other place, he has to reside at that other place in a building not belonging
to him, its annual value is taken to be nil provided the house is not actually
let out and no other benefit is derived by the owner from it.
4.3.3 From the
net annual value, determined as above deductions on account of annual repairs
and collection expenses (1/4th of the net annual value irrespective of actual
expenditure), insurance charges in respect of property, any annual charge,
interest paid on any money borrowed for the building, ground rent,
land revenue, unrealised rent are allowed. All
these deductions are not allowed in respect of the house property in the
occupation of the owner for his own residence, the annual value of which is
taken at Nil. In such a case deduction is allowed only for interest and that
too upto Rs. 1,00,000 only provided the house was constructed or acquired after
1.4.1999 but before 1.4.2003.
4.3.4 Under the
circumstances mentioned in Sec. 27 of the I.T. Act, a person can be deemed to
be the owner of the house property and in such a case the income .from that
property is taxable in the hands of that person.
4.3.5 Where the
net result of computation of income from house property is loss and the
assessee has income assessable under any other head of income, he is entitled
to have such loss set off against income under other heads. Any loss remaining
unadjusted can be carried forward to the following assessment year for set-
off against income from house property in that years and in succeeding seven
years.
Profits and gains of business or
profession
4.4 Income from
business or profession is computed in accordance with the provisions of
sections 28 to 44D of the Act. The expression 'business or profession' includes
any trade commerce or manufacture or vocation. Apart from income from any of
these activities the income chargeable under this head includes the following
receipts as well:-
-
Compensation received for the termination or for modifications in terms and
conditions of any managing agency agreement.
-
Income of trade, professional and similar associations from specific services
performed for its members.
-
Value of any benefit or perquisite arising from any business or profession.
-
Profit on sale of a replenishment license, cash assistance or refund of duty
drawback granted to the exporters.
-
Any interest, salary, bonus, commission or remuneration due to or received by a
partner of a firm from such firm.
-
Any sum received under a keyman insurance policy including bonus on such
policy.
4.4.1 Primarily
the business or professional income is computed as per the accepted business
and accounting norms and in accordance with the method of accounting regularly
employed by the tax payer. Thus, whatever constitutes a legitimate outgoing of
revenue nature of a business is allowed as a deduction in computing the
business income. However, certain deductions are allowed in the Act as per the
specific provisions made with regard to those deductions and certain
deductions, though business related, are not allowed because
of specific bar on their allowance under the Act.
4.4.2 Some of
the specific provisions made in law for permissible deductions in computation
of business or professional income relate to the following items of expenditure
and outgoings:-
-
rent, rates, taxes, repairs and insurance of premises used for the purpose of
business or profession;
-
repairs and insurance of machinery, plant and furniture used for the purpose of
business of profession;
-
depreciation of tangible assets viz., building, machinery, plant and furniture
and intangible assets viz., know how, patents copy rights, trade marks,
licences, franchises or any other business or commercial rights of similar
nature owned by the tax payer and used for the purpose of business or
profession;
-
Expenditure in respect of scientific research:-
-
On in-house research related to the business of the assessee.
-
Capital expenditure (except expenditure on land) in relation to the research
related to the business.
-
Contribution to an approved University, college, association or institution for
scientific research including research in social science or statistical
research.
-
For payment to a National Laboratory or a University or an Indian Institute of
Technology for scientific research under an approved programme, a weighted
deduction equal to one and one-fourth time the sum paid is allowable.
-
Expenditure of deffered revenue nature which are amortised over a number of
years. These are:-
| |
|
|
| (a) |
On acquisition of
patent rights and copy rights (Sec. 35A) |
14 years (upto A.Y. 1998-99) |
| (b) |
On acquisition of
know-how (Sec.35AB) |
6 years (upto A.Y. 1998-99) |
| (c) |
Preliminary expenses
on setting up of business (Sec. 35D) |
5 years |
| (d) |
On prospecting for or extraction or production
of mineral deposits (Sec.35E) |
10 years |
| (e) |
Expenditure in the
nature of capital expenditure on obtaining licence to operate telecommunication
services (Sec. 35ABB) |
Years during which the licence remains
in force. |
| |
|
|
-
premium in respect of insurance against risk of damage or destruction of stock
and stores used for business or profession;
-
premium in respect of health insurance of the employees;
-
bonus and commission to employees;
-
interest on capital borrowed for the business or profession;
-
contribution to a recognised provident fund, an approved superannuation fund or
an approved gratuity fund;
-
bad debts; and
-
payments to notified Rural Development Fund or to National Urban Poverty
Eradication Fund or to approved organisation/institutions enaged in
activities of conservation of natural resources or afforestation or for
carrying out eligible projects or schemes approved by the National Committee.
4.4.3 In
addition, there is a residuary provision under which the tax payer can claim
deduction in respect of any expenditure incurred wholly and exclusively for the
purpose of the business or profession.
This omnibus clause is not available
for claiming any expenditure for which a specific provision is made or for
expenses of capital or personal nature or expenditure for any purpose which is
an offence or which is prohibited by law.
4.4.4
Expenses, even though business-related, which are not allowed as deduction
are
-
expenditure on advertisement in any souvenir etc. of a political party;
-
any interest, salary, royalty, fees for technical services or other sum payable
outside India from which due tax has not been deducted at source;
-
any tax calculated on the basis of profits or gains of the business or
profession
e.g. income tax;
-
Wealth tax.
4.4.5
Apart from these; the tax
authorities may disallow, or restrict the deduction to a reasonable level,
where the payments are made to any close relative or a business associate.
Claims are also to be disallowed to the extent of 20% where payments in excess
of Rs. 10,000/- are not made by a crossed cheque or a crossed bank draft.
4.4.6
The above stated principles of computation of business income apply
uniformly to all forms of business activities. However, there exist certain
special provisions under the Act which deal exclusively with taxation of
business income from certain specific activities. These provisions make
departure from the normal manner of computing income as explained above and
prescribe for working out the taxable income on presumptive
basis as per the norms laid down. These are:-
| (i) Business of civil construction or supply
of labour for civil construction where the total receipts do not exceed 40 lakh
rupees (Sec.44AD) |
Profit as declared in the return or the sum equal to
8% of the gross receipts of the previous year, whichever is higher. |
| (ii) Business of plying, hiring or leasing goods
carriage, where the assessee does not own more than ten goods carriages (Sec.
44AE) |
Profit as declared in the return of income or the
sum calculated at Rs. 2,000/- per month or part of a month for heavy goods
vehicle and Rs. 1,800/- per month or part of a month for other vehicles,
whichever is higher. |
| (iii) Retail trade in goods or merchandise where the
total turnover of the previous year does not exceed forty lakh rupees. |
Profit as declared in the return of income or the
sum equal to 5% of total turnover of the previous year, whichever is higher. |
Further there are special provisions for computing presumptive income in the
case of non-residents engaged in the business of shipping, exploration, etc. of
mineral oils, operation of aircraft and civil construction etc. in certain
turnkey power projects. Such provisions also exist for taxation of income from
certain dividends, interest and units derived by a non-resident or a foreign
company and from royalty or fees for technical services derived by a foreign
company. A detailed discussion about such provisions is made in Chapters VIII
and X.
4.4.7 It is
obligatory on persons engaged in certain specific professions such as legal,
medical, engineering, architectural, accountancy, technical consultancy,
interior decoration, authorised representatives, film artists etc., to maintain
books of accounts in a manner which may enable the assessing officer to compute
their taxable income. The obligation to maintain such books of accounts is also
on all other professions and business if the income in any of the preceding
three years exceeded rupees 1,20,000 or the turnover/receipts in any of the
preceding three years exceeded rupees ten lakhs. For the business or profession
which is newly set up the obligation arises if the income or turnover/receipts
is likely to exceed these amounts in the previous year. Persons engaged in
activities mentioned in para 4.4.6 are exempted from such obligation.
4.4.8 Further,
every person carrying on business or profession in India
must have his accounts audited by a
chartered accountant if his turnover exceeds Rs. 40 lakhs (Rs. 10 lakhs for
professional receipt). A copy of the audited accounts and
auditor's report are required to be furnished by the due date of filing the
retrun of income. Certain other particulars are required to be filed alongwith
the return of Income. The requirement to get
the accounts audited does not apply to persons enaged in activities mentioned
in para 4.4.6.
4.4.9 In
case of a partnership firm deducation for certain payments made to its partners
like interest and remuneration is subject to ceiling laid down in sec. 40 (b)
introduced by Finance Act 1992.
Capital Gains
4.5 Sections 45
to 55A deal with the provisions relating to computation of income from capital
gains. Gains arising from the transfer of a capital asset are either short-term
or long-term depending upon the period for which the assets giving rise to
capital gains were held by the tax payer. A gain is short term if the asset was
held for a period upto 36 months. In the case of share of a company, listed
security, unit of Unit Trust of India or of any other specified mutual fund,
this period is 12 months. All other gains i.e. those arising from assets held
for more than this period are called 'Long-term capital gains'.
4.5.1
Capital gain is computed by deducting from the full value of transfer
consideration the following:-
-
the cost of acquisition (or the written down value) of and cost of improvement
in the asset;
-
the amount of expenditure incurred in connection with such transfer.
The resultant amount in case of short
term capital gains is taxable in full at the normal rate of taxation applicable
to the tax payer.
4.5.2
In case of the following self-generated assets where there is no cost
incurred by the assessee, the law provides for the cost of acquisition to be
taken as 'NIL' :-
-
Goodwill or a right to manufacture produce or process any article or thing.
-
Tenancy rights
-
Stage carriage permit
-
Loom hours
4.5.3 In
case of slump sale of an undertaking or a division thereof, its net worth is to
be taken as cost of acquisition. This cost of acquisition is not to be indexed
as stated in para 4.5.4.
4.5.4 There are
special provisions for computation of long term capital gains. In such cases,
the actual cost of acquisition and the cost of improvement of the asset is
adjusted to take account of inflation in terms of the Cost Inflation Index
which is notified by the Central Government every year. For those assets which
are
acquired prior to 1st April, 1981, the actual cost can be taken to be its fair
market value as on 1st April, 1981 which is than adjusted for inflation in the
same manner. The notified cost inflation index is as under:-
| S.No.
|
Financial Year
|
Cost Index
|
1.
|
1981-82
|
100
|
2.
|
1982-83
|
109
|
3.
|
1983-84
|
116
|
4.
|
1984-85
|
125
|
5.
|
1985-86
|
133
|
6.
|
1986-87
|
140
|
7.
|
3987-88
|
150
|
8.
|
1988-89
|
161
|
9.
|
1989-90
|
172
|
10.
|
1990-91
|
182
|
11.
|
1991-92
|
199
|
12.
|
1992-93
|
223
|
13.
|
1993-94
|
244
|
14.
|
1994-95
|
259
|
15.
|
1995-96
|
281
|
16.
|
1996-97
|
305
|
17.
|
1997-98
|
331
|
18.
|
1998-99
|
351
|
19.
|
1999-2000
|
389
|
4.5.5 Long term
capital gains computed after taking into consideration the indexed cost of
acquisition and/or cost of Irnprovement is taxable for and from the
assessment year 1988-89 at the flat rate of 20% irrespective of the residential
status of the assessee. Exceptions are made in the case of certain categories
of non-residents and NRIs (Refer para 7.3.4 and 11.3). In respect of gains
arising from transfer of listed securities or unit tax so computed @.20% will
be limited to 10% of capital gain worked out without indexation benefit.
No indexation benefit is available on
bonds and debentures as also in respect of Global Depository Receipts
purchased by a resident employee under ESOP in foreign currency.
4.5.6 In case of
non-residents, protection against loss arising from fluctuation in rupee value
is provided in computation of capital gains if the share or debenture of an
Indian company was acquired by utilising foreign currency. This is done to
ensure that the amount of capital gains chargeable to tax is not influenced by
the exchange rate fluctuation and represents only the accretion in value. The
manner of granting such protection is mentioned in para 7.3.1 of Chapter VII.
4.5.7 Transfer
of a capital asset in a scheme of amalgamation or demerger is not regarded as a
transfer for the purpose of capital gains when the amalgamated or the resulting
company is an Indian company. Further, transfer of a capital asset being shares
in Indian companies from one foreign company to another, in a scheme of
amalgamation or demerger would not be regarded as a transfer if certain
conditions are satisfied (para 7.3.2). Exemption from tax is also provided,
subject to fulfillment of certain condition, when assets are transferred as a
result of succession of a sole proprietory concern or a firm by a company.
4.5.8 In case
the capital gain arising from transfer of an asset is used for acquiring
similar assets within a specified period, the whole or the proportionate amount
of capital gain is not included in the income depending upon whether the whole
of the capital gains is so used or only part of it is used for acquiring a new
asset. Such cases are gains from residential house, agricultural land and from
transfer of industrial undertaking (For details sections 54, 54B and 54G may be
referred to). Gains from any long term asset if used for purchase or
construction of residential house where the person has only one residential
house is also exempt (Sec. 54F). Similarly gain arising from transfer of any
long-term capital asset is exempt-wholly or proportionately as the case may
be-if the net consideration in respect of such transfer is wholly or partly
invested, within a period of six months, in any of the bonds, debentures,
shares of a public company or units of a mutual fund specified by the Board for
the purpose of Section 54EA and notified in the official gazette. The assessee
has the option to invest only the amount of capital gain in assets specified by
the Board for the purpose of Section 54EB in which case the gain will be wholly
or proportionately exempt depending upon whether whole or part of the gain is
so invested. The new assets cannot be transferred or converted into money
within three years (if the net consideration was invested) and within seven
years (if the capital gain only was invested). In the event of such transfer or
conversion, the gains exempted on investment are brought to tax in the year of
transfer or conversion of new assets and Rural Development or by the National
Highways Authority of Indian which are redeemable after five years. However
gains arising from transfers after 31.3.2000 will be required to be invested
only in bonds issues by National Bank for Agriculture.
4.5.9 Special
provisions exist for taxation of capital gains arising to offshore funds from
transfer of units purchased in foreign currency, to non-residents from transfer
of bonds or shares purchased in foreign currency and to Foreign Institutional
Investors from transfer of listed securities purchased in foreign currency.
These provisions are explained at 7.3.4 in Chapter VII.
Income from other sources
4.6 Sections 56
to 59 deal with the provisions for computation of income under the head 'income
from other sources'. This is a residuary head covering all incomes which do not
specifically fall .under any of the heads mentioned earliers. Some of the types
of income which are assessable under this head are mentioned belows :-
-
Dividends or income from units of mutual fund.
-
Interest including 'interest on securities' if it is not taxable under the head
'Profits and gains of business or profession'.
-
Income such as
-
Ground rent or rent received or sub-letting a property.
-
Winning from lotteries, cross-word puzzles, races including horse
races, card games or from gambling or betting etc.
-
Income from hiring of machinery, plant or furniture unless such a hiring is the
business of the taxpayer.
-
Family pension.
4.6.1 In
computing the taxable income under this head, deduction is allowable for
expenditure (other than capital expenditure) which is incurred by the tax payer
wholly and exclusively for the purpose of earning such income. Besides, in
assessing dividend income, any remuneration or commission paid for realising
such income is allowed as deduction. In assessing income from letting the
machinery, plant or furniture on hire, the depreciation on the value of such
assets calculated in the same manner as in respect of assets used in a business
or profession is allowable as a deduction. No deduction is, however, allowed in
respect of-
-
any personal expenditure of the tax payer;
-
any salaries or interest payable outside India from which tax is deductible at
source under the Act but has not been deducted.
4.6.2 Further,
no deduction in respect of any expenditure or allowance is made in computing
income from winnings referred in (iii) (b) of para 4.6 above. Such income is
taxable at a flat rate of 40 per cent under the provisions of Section 115BB.
4.6.3 A standard
deduction equal to 33-1/3% of the pension amount or Rs. 15,000/- whichever is
less is allowed in computing income from family pension.
Set off of Losses
4.7 In case of
computation of income under any of the heads of income results in a loss
figure, such loss can be set off against income under any other head (including
capital gains) in the same year. This, however, does not apply to
losses from speculative transactions, losses from owning and maintaining race
horses or to losses under the head 'Capital Gains'. Losses of these excluded
categories can be set off only against income, if any, from activities in the
same category in that year.
Carry Forward of Losses
4.8 Losses under
the head 'Profits and Gains of business or profession' except those sustained
from speculative activities which cannot be set off against income under any
other head within the same year can be carried forward to the succeeding eight
years and set off only against income under the same head in those years. In
case of -
-
amalgamation of company owning
industrial undertaking or a ship with another company;
-
a demerger of a company;
-
a reorganisation of business resulting in succession of a firm or a proprietory
concern by a company;
the accumulated losses or unabsorbed
depreciation of the amalgamating company, demerged company or the predecessor
concern will, subject to fulfillment of certain conditions (sec. 72A), be
treated as losses or depreciation of amalgamated company, resulting company or
the successor concern and will be allowed to be set off and carried forward as
their own loss or depreciation Gains which would not be set off against income
of respective nature in any year can be carried forward for eight succeeding
years for set off against income of similar nature, if any, in those years.
Losses in the activity of owning and maintaining race horses can be carried
forward for set off against profits of similar activities in succeeding four
years only.
4.8.2 Losses
under the head income from house property which could not be set off against
income under any other head can be carried forward for eight succeeding years
for set off against income under this head in those years.
4.8.3 If 51% or
more of the voting power changes hands in an unlisted company, the company will
not be able to carry forward losses incurred before such change.
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