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Contents |
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1 |
Salaries |
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2 |
Income from house property |
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3 |
Profits and gains of business or profession |
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4 |
Capital Gains |
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5 |
Income from other sources
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6 |
Set off of Losses |
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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:-
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(a) |
On acquisition of patent rights and copy rights (Sec. 35A)
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14 years (upto A.Y. 1998-99)
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(b) |
On acquisition of know-how (Sec.35AB)
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6 years (upto A.Y. 1998-99)
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(c) |
Preliminary expenses on setting up of business (Sec. 35D)
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5 years
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(d) |
On prospecting for or extraction or production of mineral deposits (Sec.35E) |
10 years
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(e) |
Expenditure in the nature of capital expenditure on obtaining licence to operate
telecommunication services (Sec. 35ABB)
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Years during which the licence remains in force.
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- 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:-
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(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. |
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(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. |
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(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:-
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S.No.
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Financial Year
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Cost Index
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1.
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1981-82
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100
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2.
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1982-83
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109
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3.
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1983-84
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116
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4.
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1984-85
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125
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5.
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1985-86
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133
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6.
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1986-87
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140
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7.
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3987-88
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150
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8.
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1988-89
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161
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9.
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1989-90
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172
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10.
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1990-91
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182
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11.
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1991-92
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199
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12.
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1992-93
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223
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13.
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1993-94
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244
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14.
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1994-95
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259
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15.
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1995-96
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281
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16.
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1996-97
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305
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17.
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1997-98
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331
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18.
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1998-99
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351
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19.
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1999-2000
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389
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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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