TAX PLANNING

Tax planning is concerned with an arrangement of one’s financial and tax matters in a way so as
to reduce or avoid the tax burden without violation of law of the land. Such planning is
legitimated, provided it is within the provisions of law. Colorable devices cannot be part of tax
avoidance through tax planning. Tax reduction or avoidance trough proper planning is not
illegal, what constitutes a crime is tax evasion by resorting to dubious methods.

Tax planning lies in taking maximum advantage of the exemption, deductions, rebates, reliefs
etc. by the tax payer so as to achieve his goals of tax reduction or avoidance. One can and is
entitled to arrange his affairs as not to attract taxes imposed by the state. Tax planning is an
important arrangement of tax management. Following are the main points in the concept of tax
planning and management for your consideration.

(1) Compliance of tax laws by minimizing tax incidence.

(2) Taking advantage of tax concession.
(3) Keeping the incidence of tax or paying zero tax by planning location, nature of business,
form of business organization and availing maximum advantage of various exemptions ,
deductions etc.
(4) Avoiding penalties and prosecutions.
(5) Creating a cell n the organization which is entrusted with the job of tax planning.
(6) Maintenance of tax records.

Scope of tax planning:

Tax planning being before setting up of an organization .It is integral part of tax management
broadly speaking, the area of tax planning covers the following.

(1) Choice of form of organization by considering the benefit available to each type of
person.
(2) Taking advantage of location and availing exemptions and deductions under section
10A, 80 1A etc.
(3) Tax planning s exercised while raising finance through shares or debentures or other
source of finance.
(4) Planning of capital structure also depends upon tax consideration. Debt equity ratio in
an structure depends upon tax advantage
(5) Other areas tax planning includes dividend policy, M&A. Many decisions taken by
management are based on tax considerations.

Importance of Tax Planning:

1. Reduction in tax liability:

The first and foremost unction of tax planning is reduction in tax liability and tax planning helps
the tax payer to reduce his tax liability by enabling him to claim the various exemptions and all.
Since tax constitutes cash outflows therefore tax planning helps tax payer to make savings and to
feel a lesser pinch of taxation.

2. Minimization of litigation:

Taxation laws being so complicated and cumbersome have always been a cause of litigation. By
resorting to tax planning a tax payer can avoid litigation and also save a considerable amount of
money and time which otherwise get wasted in litigation cases.

3. Healthy growth of nation:

As we know that tax revenues constitute a major portion of government revenues. Any effort by
the government to provide deduction, exemption etc. to tax payer leads to the fall n the revenue
of the government. But in spite of this government deliberately provides such exemptions to the
tax payers. As most of the times these deductions or exemptions are for the socio-economic
development of the economy of the country. For example deduction for investment in
Infrastructure bonds.

4. Helps in the capital formation:

Tax Planning helps a lot in capital formation of a nation. Most of the times tax laws encourage
tax payers to invest money in government instruments. Many tax benefits can be availed by
investing money in the government owned undertakings or by depositing money in the state
sponsored saving schemes. For example deduction for Investment in NSC’s.

5. A source of working capital:

As we know cash balance is the main constituent of working capital and is regarded as life blood
of business. It is required for meeting day to day expenses purchasing assets etc. Effective tax
planning helps in conserving this important constituent of working capital. In the absence of
proper tax planning much of the cash will go out of business thus leaving lesser cash for other
important purposes.

6. Other Implications:

Boast to capital markets, coat effectiveness, employment generation etc.

Tax Avoidance
In the words of Justice Chinnapa Reddy, “Tax Avoidance is an act of dodging tax authorities
without breaking the law”

The Institution of Taxation in U.K. has defined Tax avoidance as:

-the transaction that are designed to avoid or reduce the liability of tax or

-the transaction that are brought into existence solely for tax avoidance and not to achieve a
commercial purpose and

-the transaction that are clearly outside the purview of the intentions of the law makers.

Thus tax avoidance is an attempt to manage financial affairs by using colorable devices with the
intention of reducing the tax liability. Many a time tax avoidance involves an attempt to reduce
tax burden by taking advantage of certain loopholes or weaknesses in tax laws.

In India before the decision of Supreme Court in McDowell & Co. Ltdvs. CTO, Tax avoidance
was regarded as a lawful act. But after the pronouncement of the case it was held that tax
avoidance is illegal because of following reasons:

(1) There is substantial loss of public revenue required for the economic development of the
nation
(2) It Results in the creation of black money economy which results into inflation
(3) It results into lot of litigation which results into huge amount of tax arrears busy courts
and wastage of time and money
(4) It results into injustice and inequality caused by the tax avoidance for the honest tax
payers
(5) It results into an unethical practice of transferring the incidence of tax liability from the
tax dodgers to the honest tax payers who have to pay tax at higher rates.

Till now the rules settled under above case act as guiding principle for unpinning cooked tax
planning.

Tax Evasion

It is an illegal method of saving tax and makes the person liable to penalties and prosecution.
“Tax evasion” refers to an exercise by a tax payer for not paying the tax legally becoming due. It
is the general term for efforts by assesses to evade taxes by illegal means. Tax evasion usually
involves assesses deliberately misrepresenting or concealing the true state of their economic
affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting. Tax
evasion typically involves failing to report income or improperly claiming deductions that are
not allowed or authorized. The methods of tax evasion are:-

(1) Under disclosure of income

(2) Inflating the expenses and thus reducing the real income
 (3) Manipulation of accounts to reduce the real income
(4) Violation of rules and regulations of laws with the intention to save the tax
(5) Benami transactions

Although tax evasion leads to lower cash outflow on account of taxes yet such saving of money
may not be real and absolute. In fact tax evaded remains liability of the evader. If trapped he will
have pay the tax evaded along with penalties.

Difference between Tax Planning and Tax Evasion:

Tax Planning Tax Evasion

1) It is an exercise aimed at reducing tax 1) It is an exercise of reducing tax liability
liability by availing maximum benefits of either (a) by showing lesser income than the
various deductions, exemptions, rebates, reliefs
actual or (b) by hiding the very source of any
etc. provided under tax laws. income.
2) It is completely within the framework of 2) It is willful disobedience of law and
law. involves an element of deceit.
3) It is legal and accepted by Judiciary. 3) It is illegal and is prohibited.
4) It is based on principle of disclosure. 4) It involves hiding the facts regarding
incomes and expenditures.
5) It is deliberate creation of law for wealth 5) It is a white collar crime and is seen as an
creation trough encouraged savings and offence.
investments.
6) Tax planning is an honest effort of the tax 6) It requires a dishonest nature and courage to
payer to benefit him and economy as a whole. violate the law.
7) Tax Planning lead to socio economic 7) It leads to generation and accumulation of
development of the economy. black money which is great hurdle in the
progress of an economy.
Difference between Tax Planning and Tax Avoidance:

Tax Planning Tax Avoidance

1) It is an exercise of reducing tax liability by 1) It is an exercise of reducing tax liability by
staying within the four corners of law. exploiting some loopholes of the law.
2) It involves fair obedience of law with an 2) It involves foul play with law.
honest attitude.
3) It is legal and acceptable by judiciary 3) It is unethical, illegal and is prohibited.
4) Transactions are real and natural. 4) transactions are sham and fabricated
artificially
5) It is dependable. 5) It is not dependable because as and when the
ingenuity is exposed tax avoider has to pay tax
retrospectively.

Difference between Tax Avoidance and Tax Evasion:

 Tax Avoidance Tax Evasion
1) Act of minimizing tax liability by locating 1) An act of bringing down the tax liability by
some weaknesses of law. disclosing less income than the actual or by
concealing the source of income or by claiming
deductions that are not allowed otherwise.
2) It may be within the framework of law but it 2) The evasion is gross violation and disrespect
is against the basic intent of the legislative of law.
provisions.
3) It can be curbed by introducing anti 3) It can be curbed by implementing the law
avoidance provisions or clubbing provisions. effectively.
 Tax Planning and Managerial Decision
(MAKE or BUY )
Management decision should be based on careful consideration of all the factors, including
implication as regard to tax liability. Keeping view various tax implications that are relevant
while taking some specific management decision under different provision of Income tax Act
have dealt with:

Make or Buy:

One of the vital investment subject to the influence of tax factor is “Make or buy decision”.
Most of the companies have to decide sometimes or the other whether they should buy a part
from a market and stop making it themselves or whether they should stop buying it and start
making it. There are various consideration affecting this decision, chief of which is cost. In other
words, in making this sort of decision the various cost of making the product or part component
of product is compared with its purchase price in market. A host of other consideration such as
capacity utilization, supply position of the article to be bought, terms of purchase, ill effect of
layoffs etc. are kept in view while taking such decision. Tax planning can be helpful in
decision as regards making or buying a particular product, component etc.

Broadly speaking, business can be of following three types:

(1) Trading Business

(2) Manufacturing Business
(3) Service Sector

The decision ‘to make or buy’ is a costing decision and is also influenced by many general
factors which are as follows:

 Availability of financial resources

 Investment required in fixed assets
 Availability of skilled and unskilled labour
 Availability of suppliers
 Existence of idle capacity in organization
 Price at which the product is available in the market
 Other miscellaneous factors

 Apart from costing considerations following factors also go in decision making

process:
 Utilization of Capacity
 Inadequacy of funds
 Latest Technology
  Dependence of Supplier
 Labor problem in the factory

 What are the cost involved in making of a part

 Fixed Cost
 Variable Cost

 What are the cost involved in buying of a part from outside agency:
 Buying cost
 Inventory cost
Comparision of both the cost shall determine which decision the company shall follow,
therefore tax saved in both the cases are same.

 Tax Consideration

 Establishing a new unit: If the decision to manufacture a part or a component involves

a setting up separate industrial unit than tax incentives available
 u/s 10a,10b = newly established unit for export of product

 32 = As per section 32 of the Income Tax Act, 1961, depreciation is allowed on

tangible assets and intangible assets owned, wholly or partly, by the assesse and
used for the purposes of business or profession.

 80 IA = a deduction of an amount equal to hundred per cent of the profits and

gains derived from such business for ten consecutive assessment years.

 ,80 IB = aimed at promoting construction of housing projects

 Export: If “Make or Buy” decision is taken for exporting goods then tax incentives
available under section 80 HHC (50% exemption) depends upon whether goods
manufactured by tax player himself are exported or goods manufactured by others are
exported by tax players.
 Sale of plant and machinery: If buying is cheaper than manufacturing and the assessee
decides to buy parts or components for a long period of time, he may like sell the existing
plant and machinery. Tax implications as specified by section 50 has to be considered.

If the decision is taken to produce a part, then any other industrial unit to be established. When a
separate industrial unit is established then the company may get tax benefits and also deductions
under various sections to a company which decides to produce a part, are:

1. Deduction in respect of profits and gains from newly established small scale
undertakings in rural area (Sec 80 HHA)
 A tax players deriving a profits and gains from a new small scale industries undertaking
set up in rural area will entitled to deduction of an amount equal to 20% of such profits
and gains. The deduction will be admissible for a period of 10 previous years in which
the small scale industrial undertaking commences production of any article.

2. Deduction in respect of profits and gains from industrial undertaking (Ship or Hotel
etc.): (Sec 80-1)
Under sction-80-1, a deduction will be allowed in respect of profits and gain derived
from industrial undertakings, ship or hotel established after a certain date. The deduction
will be of an amount equal to 30% of such industrial undertakings or Ship or Hotel, If its
company and 25% in categories of assesses.

3. Deduction in respect of profits and gains from newly established small scale
undertakings or Hotel business in Backward area (Sec 80 HHA)
All assesses are entitled to a deduction of 20% of the profit derived by them for new
industrial undertakings and Hotel setup in backward area. The deduction will be allowed
in respect of the ten assessment year relevant to previous year in which the industrial
undertaking begins to manufacture or produce articles.

4. Depreciation Allowance
A company which produce a part or a component will be allowed an allowance in respect
of depreciation of buildings, machinery, plant or furniture owned and used the assesee for
the purpose of business and profession.

 Two primary factors which have a decisive influence on the choice of make or buy are
the cost and availability of production capacity. Facilities are made available and other
things being equal cost consideration assumes primacy. If the cost of making an item in-
house is going to be higher than the cost of acquiring it from an outside supplier, the
choice is to buy it. On the other hand, if the cost of making the item in ones own plant is
cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy
decision, nevertheless, requires the evaluation of several less tangible factors in addition
to the two basics ones.

Considerations which favor making the parts are:

1. Cost considerations less expensive to make the part

2. Desire to integrate plan operations

3. Productive use of excess plant capacity to help absorb fixed overheads.

4. Needs to exert direct control over production and/or quality

5. Design secrecy.

6. Unreliable suppliers.

7. No suitable supplier quotation

8. Desire to maintain a stable workforce in periods of declining sales

Considerations which favor buying the part:

1. Cost considerations less expensive to buy the part

2. Suppliers research and specialized know-how

3. Small volume requirements

4. Limited production facilities

5. Desire to maintain stable workforce in periods of rising sales.

6. Desire to maintain multiple source policy.

7. Government policy favoring ancillary industries.

8. Monopoly items which are rationed by the government and on which, the buyer has no option.

Other Factors
Some companies, by tradition, prefer to make almost every component of their products. Others
prefer to buy as much as possible from outside suppliers. In general, an aggressive company in
an industry that is expanding rapidly with many technological changes (e.g. electronics), will
prefer to buy many of its components from outside suppliers. In such industries, the company has
many opportunities to employ its capital profitably through horizontal diversification, expanding
its line of finished products.
With due considerations to above factors, ‘marginal costing’ and ‘differential costing’
techniques of cost accounting help a lot in reaching at any conclusion.

Solution to ‘make or buy’ problem under cost acconting:

(A) Where idle capacity exists in the existing undertaking

Case 1: NO EXTRA FIXED COST REQUIRED

In such case, marginal cost(MC) of producing a component should be
compared with the price(P) at which it is available in the market.

Case 2:SOME EXTRA FIXED COST IS ALSO REQUIRED

In such case, the relevant cost of manufacturing[i.e variable cost+fixed cost]
should be compared with the price at which it is available in the market.

(B) Where idle capacity does not exist

In such case, the part or component can be manufactured either by setting up a new
industrial undertaking or by discontinuing the production of some other product.

Here relevant cost of manufacture[i.e Variable cost+Fixed cost+Opportunity cost] of

the part should be compared with the price at which it is available in the market.

*Tax Consideration in Make or Buy decision:

I. If a business house/company decides to make a product/part instead of buying it and

the making of product involves setting up of new industrial undertaking then a
business house should make a detailed analysis of following tax incentives available
to new industrial undertaking under Income-Tax Act:
(a)Tax holiday u/s 10 A
(b)Tax holiday u/s 10 B
(c)Tax holiday u/s 80 1A
(d)Deduction u/s 80 1B

If the decision to buy the product or component will render the plant machinery,
furniture, land and building etc; earlier used in manufacturing the product, idle then
the business house may have to sell these assets. In such a case, before taking decision
‘to buy’, the provision related to capital gain tax should also be studied.
 TAX PLANNING AND MANGERIAL
DECISIONS (DIVIDENDS)

CAPITAL STRUCTURE DECISION

Before commencing a new project a vital managerial decision regarding selecting the right type
of capital structure has to be taken. An optimum capital structure is one which maximizes
shareholders’ returns. The advantages of having an optimum capital structure are two-fold. It
maximizes the value of the assets of the company and wealth of its owners and minimizes the
cost of capital which, in turn, raises the ability to find inbuilt additional investment opportunities.
Problem of planning capital structure is of crucial importance and has its long term implications.
The tax planner should properly balance risk, cost, control and tax considerations. In capital
structure decisions, the cost of capital is an important consideration along with the risk factor.
One of the main reasons for raising finance through borrowing is to increase earning on equity
share capital. But excessive use of debt capital increases the financial risk of the company.

Under the tax laws, dividend on shares is not deductible and distributed profit is subject to
dividend tax. On the other hand, interest paid on borrowed capital is allowed as deduction under
section 36(1)(iii). Cost of raising finance through borrowing is deductable in the year in which it
is incurred. Cost of issue of shares is allowed as deduction in five years under section 35D.
because of the above provisions, corporate taxation plays an important role in determining the
choice between different sources of financing.

MEANING OF DIVIDEND:

Section 2(22) gives the definition of “deemed dividend”. However, the definition laid down by
Section 2(22) is inclusive and not exhaustive. If, therefore, a particular distribution is not
regarded as dividend within the extended meaning of the expression in section 2(22), it may still
be dividend for the purpose of the Income-tax act.

Under section 2(22), the following payments or distributions by a company to its shareholders
are deemed to the accumulated profits of the company:

a) Any distribution entailing the release of company’s assets.

b) Any distribution of debenture, debenture stock, deposit certificates and bonus to
preference shareholders.
c) Distribution on liquidation of a company.
d) Distribution on reduction of capital.
e) Any payment by the way of loan or advance by a closely held company to a shareholder
holding substantial interest provided the loan should not have been made in the ordinary
 course of business and money lending should not be a substantial part of the company’s
business.

If dividend comes under (a) to (d), then the payer company will pay dividend tax under section
115-O and in the hands of recipient shareholders, it is not chargeable to tax.

On the other hand, if dividend comes under (e), then it is taxable in the hands of shareholder. In
such a case, the payer company will not pay the dividend tax.

The following shall not be treated as “dividend”:-

a) Any payment made by a company on purchase of its own shares in accordance with the
provisions contained in section 77A of the Companies Act; or
b) Any distribution of shares made in accordance with the scheme of 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.

Any payment or distribution under the abovementioned clauses is treated as dividend.

However, the payment or distribution under the abovementioned clauses can be treated as
dividend only to the extent of accumulated profits of the company.

 It is expressly provided that it does not include capital gains arising before April 1,
1946 and after March 31, 1948 but before April 1, 1956.
 In case of a company, which is not in liquidation, it includes all profits of a company
up to the date of distribution or payment.
 In the case of a company in liquidation, it includes all profits of the company up to
the date of liquidation. Where, however, the liquidation is consequent on the
compulsory acquisition of a company’s undertaking by the Government or a
Government company, accumulated profits do not include any profits of the company
prior to the three successive years immediately preceding the previous year in which
the acquisition took place.

ACCUMULATED PROFITS:

Accumulated profits include all profits (accumulated or current) up to the date of distribution
or payment (or up to the date of liquidation in case of liquidation).
 In a number of cases it has been held that accumulated profits are computed on the basis of
accumulated profits.

Distribution of Accumulated Profits:

Under the sub- clause (a) of section 2(22), any distribution by a company of its accumulated
profits (whether capitalized or not) is dividend if it entails the release of company’s assets.
The clause provides for two conditions; first, distribution should be from accumulated profits
(not from capital) and secondly, such distribution must result in the release of the assets of
the company.

As no specific mode of distribution is prescribed by the clause, distribution may be in the

form of payment in cash or kind.

BONUS SHARES:

One of the conditions laid down in sub clause (a) of section 2(22) is that distribution must
entail the release of assets by the company to its shareholders. When, therefore, a company
distributes ordinary or equity bonus by capitalizing its profits, then there is no release of
assets and, consequently, bonus shares are not taxable as dividend. If however, bonus shares
are issued to preference shareholders, it amounts to distribution of dividend by virtue of sub-
clause (b) of section 2(22).

Under this clause the following two distributions are treated as dividend to the extent of
accumulated profits (whether capitalized or not) of the company:

a) Distribution by a company to its shareholders (whether equity shareholders or

preference shareholders) of debentures, debenture stock or deposit certificates in any
form, whether with or without interest; and
b) Distribution by a company to its preference shareholders of bonus shares.

Under the above said conditions, distribution amounts to dividend in the hands of recipient even
if there is no release of assets at the time of distribution.
Under sub-clause (c) any distribution made by a company to its shareholders on its liquidation is
treated as dividend to the extent to which such distribution is attributable to the accumulated
profits of the company immediately before its liquidation.

Under sub-clause ( c), the following are however, not treated as dividend:

a) Any distribution in respect of preference shares issued for full cash consideration; and
b) Any distribution insofar as such distribution is attributable to the capitalized profits of the
company representing bonus shares allotted to the equity shareholders after March 31,
1964, but before April 1, 1965.

Any distribution by a company to its shareholders on the reduction of capital is treated as

dividend to the extent the company possesses profits (whether capitalized or not). However, the
following are not treated as dividend under this clause:

a) Any distribution out of accumulated profits which arose up to the previous year 1932-33
or up to the previous year ending during 1932-33
b) Any distribution in respect of preference shares issued for full cash consideration; and
c) Any distribution insofar as such distribution is attributable to the capitalized profits of the
company into two companies, and there is no reduction of capital in the aggregate,
section 2(22)(d) would not apply.

Under sub-clause (e), any loan or advance to a shareholder or concern is treated as dividend in certain
cases.

CASE 1 CASE 2
1. Loan or advance is given by closely held 1. Loan or advance is given by a closely held
company company (say X Ltd.)
2. Such loan is given to a registered 2. Such loan is given to a “concern” (say Y)
shareholder [see Note 3]
3. The shareholder (getting the loan) 3. One of the shareholders beneficially holding
beneficially holds 10 percent or more of the 10 percent equity shares capital in X Ltd. has a
equity shares in the company (giving the loan) substantial interest [see Note 4] in Y
4. Such loan or advance is treated as dividend 4. Such loans or advance is treated as dividends
in the hands of the shareholder in the hands of Y
Notes :

1. Such loan or advance is treated as dividend to the extent of accumulated profits [excluding
capitalized profit]

2. Loan or advance for the above purpose may be given to a shareholder (in case 1) directly or it
may be given for the benefit of the shareholder or on the behalf of the shareholder.

3. “Concern” for this purpose may be a HUF, sole proprietorship, firm, AOP, BOI or company.

4. A person shall be deemed to have a substantial interest in a concern, if he is (at any time
during the previous year), beneficially entitled to atleast 20 percent of income of such concern (if
such concern is company). Shares held by a person in two different capacities i.e. as an
individual and as an HUF, cannot be clubbed or amalgamated for the purpose of deciding
whether a person has substantial interest in a concern.

5. Where money lending is a substantial part of business of the company giving loan the above
provisions are not applicable. For this purpose the factual position as it stands during the relevant
previous year alone is supposed to be take into consideration to decide the issue whether the
lending of money is indeed a substantial part of business of the concerned company.

6. If after giving advance to a shareholder, the company declares normal dividend and such
dividend is set off against outstanding load/advance, the amount so set off will not be taken as
“dividend”.

TAX TREATMENT OF DIVIDEND IS AS FOLLOWS :

If dividend is covered by section 2(22) [not by clause (e) of section 2(22)] and declared,
distributed or paid during April 1, 1997 and March 31, 2002 or after March 31, 2003, then it is
not taxable in the hands of shareholders by virtue of section 10(33) or 10(34).On such dividend
the company declaring dividend will pay dividend tax under section 115-O.
If a loan or advance is given after May 31, 1997 which is deemed as dividend under section
2(22)(e) then such a loan or advance is taxable under section 56 as dividend in the hands of
recipient.

TAX CONSIDERATION IS GIVEN BELOW :

The table given below highlights the tax consequences –

SITUATIONS TAX TREATMENT IN THE TAX TREATMENT IN THE

HANDS OF THE HANDS OF THE
COMPANY ISSUING SHAREHOLDERS
BONUS SHARES
1. At the time of issue of
No tax liability No tax liability
bonus shares
2. At the time of sale of
No tax liability See para A>
shares by shareholder
Out of the amount received at the
Under section 2(22)(a) or time of redemption or
3. At the time of 2(22)(c), it will be treated as liquidation, amount treated as
redemption of bonus share dividend distribution to the “dividend” under section 2(22)
or at the time of liquidation extent of accumulate profits (a)/(c) will be exempt in the
of the company and, consequently, the payer hands of shareholders. Balance
company will pay dividend tax will be safe consideration to
compute capital gains

A> Section 55 specifies that the cost of acquisition of any additional financial asset as bonus
shares or security or otherwise which is received without any payment by the assessee on the
basis of his holding any financial asset shall be taken to be NIL.

Moreover, in the case of capital asset being a share, security or unit which is allocated without
any payment on the basis of holding of any other financial asset, the period of treating such
share, security or unit as a short term capital asset shall be calculated from the date of allotment
of such share, security or unit, as the case may be.

Effect of the above provision may be summarized as follows :

COST OF ACQUISTION OF ORIGINAL

AND BONUS SHARES
1. If original shares and bonus shares are Original shares – Actual cost or fair market
acquired before April 1, 1981 value on April1, 1981, whichever is more
Bonus shares – Fair market value on April 1,
1981
2. If original shares are acquired before April 1, Original shares – Actual cost or fair market
but bonus shares are allotted after April 1, 1981 value on April 1, 1981, whichever is more
Bonus Shares – Nil
3. If original and bonus shares are acquired Original Shares – Actual cost
after April 1, 1981 Bonus Shares – Nil
4. Period of holding bonus shares The period of holding shall be determined
from the date of allotment of bonus shares (and
not from the date of acquisition of original
shares)

Notes :

1. The above rules given in the table are also applicable in respect of shares, securities,
debentures, bonds, units allotted without any payment on the basis of building of any other
financial assets.

2. If securities transaction tax is applicable at the time of transfer, long term capital gain is not
chargeable to tax and short term capital gain is taxable @ 15 percent! Plus surcharge plus
education cess plus secondary and higher education cess.
 Tax Planning & Managerial Decisions (Bonus Shares)
Tax
Planning In Respect Of Bonus Shares

The concept of bonus shares has emerged as a result of Ploughing back of profits policy often
adopted by companies. These shares are issued by a company to its existing shareholders in the
process of conversion of reserves & surpluses into capital. These shares are issued out of
accumulated profits of the company and are given to existing shareholders in proportion of their
shareholding in the company. Since nothing goes out of pocket of shareholders in getting these
shares, these are called “BONUS SHARES” or “FREE SHARES”

The process of conversion of reserves & surpluses into share capital is also called
“CAPITALIZATION OF RESERVES AND SURPLUSES” and it has following two effects:

1) It reduces accumulated reserves & surpluses of the company

2) There is a corresponding increase in the paid up capital of the company.
The issue of bonus shares enables a company to bring the amount of its paid-up capital
line with the real capital employed so as to show real earning capacity of the company
and brings down the apparent abnormal high rate of dividend.

Provisions of Companies Act 1956 In Respect Of Bonus Shares

1) Sec. 205 of the Companies Act prohibits a company to issue bonus shares in lieu of
dividend by providing that no dividend can be paid except cash.

2) The bonus shares could be issued out of the following reserves:-

I. General Reserve
II. Balance on P & L A/c or P & L Appropriation A/c
III. Reserve Fund
IV. Capital reserve or profit realised in cash
 V. Balance in Sinking fund created for redemption of debentures after the
debentures have been redeemed
VI. Dividend equalization fund
VII. Capital Redemption Reserve(CRR)
VIII. Security Premium received in cash
3) Bonus shares cannot be issued out of:-
 Reserves created for some specific purpose
 Capital Reserve appearing as a result of revaluation of assets and liabilities

In addition to above, a company is also required to follow the guidelines issued by

SEBI from time to time regarding the issue
“Tax Aspects” Of “Bonus Shares”
The tax aspects of bonus shares can be studied from the following two angles.
 Tax aspects for company issuing bonus shares
 Tax aspects for shareholders receiving bonus shares

A) Tax aspects for company issuing bonus shares

The issue of bonus shares is not regarded as distribution of the
dividend to the company. This can be drawn from clause (a) of sec.
2(22) which defines “dividend”. The said clause reads as:
“Dividend includes any distribution by the company to its shareholders
to the extent of the accumulated profits whether capitalized or not
resulting in the release of all or any part of assets of the company”
Since the issue doesn’t involve the release of any asset of the company,
hence it is not treated as distribution of dividends by company
However clause (b) of Sec. 2(23) provides that distribution will be
treated as distribution of the dividend by the company though it
doesn’t involve release of any asset of the company.

A1-If bonus shares are issued to equity shareholders

There are four occasions which necessitate the understanding of tax implications for
issuing company. These are:

1) At the time of Issue:-

Since issue of bonus shares to equity shareholders doesn’t amount to dividend, hence the
company is saved from paying dividend tax u/s 115-O in the year of distribution of such
bonus shares

2) At the time of redemption:-

 When such bonus shares are redeemed it is treated as dividend distributed by the
company to the extent of Accumulated Profits u/s 2(22) (a) because there is release of
asses from the company. In case, bonus such have been redeemed during the period

I. On or after 1-6-97 to 31-3-02

II. On or after 1-4-03,the company will be required to pay dividend tax u/s 115-O at
prescribed dates

RATES OF TAX U/S 115-0 FOR PREVIOUS YEAR

Period Rate Surcharge Education Cess Total

i. From 1-4-2007 onwards 15 % 10 % 3% = 16.995%

3) At the time of liquidation of issuing Co.:-

On such occasion any distribution made to equity shareholders, to the extent of
accumulated profits, shall be treated of dividend u/s 2(22).Then any sum
distributed to equity shareholders against bonus shares as well as other shares.
4) If the shareholder sells bonus shares:-
Then it does not involve any tax liability for the company issuing bonus shares.

IF BONUS SHARES ARE ISSUED TO PREFERENCE SHARE-HOLDERS

(1) At the time of issue: - Clause (b) of sec.2 (22) specially provides that distribution of
bonus shares to preference share-holders shall be treated as distribution of dividend by
the company. In case, such bonus shares have been issued during the period
(i) On or after 1-6-97 to 31-03-02 and
(ii) On or after 1-4-03, the company shall be required to pay dividend tax u/s 115-0. The
rates of dividend tax u/s 115-0 have already been shown earlier.
(2) At the time of redemption :- No tax liability
(3) At the time of liquidation of co. :- No tax liability
(4) If the shareholder sells bonus shares :- Then it does not involve any tax liability on
company

TREATMENT OF EXPENDITURE ON ISSUE OF BONUS SHARES

 The decision to issue bonus shares often necessitates the incurring of certain expenses by the
company. These expenses may be

i. Expenses incurred for increasing the authorized capital of the company

ii. Other expenses related to bonus issue such as printing, postage, fees etc.

TREATMENT OF EXPENSES INCURRED FOR INCREASING THE AUTHORISED

CAPITAL

As we know that the issue of bonus shares implies the issue of fresh shares to the shareholder
free of cost. Thus, if the existing company has already exhausted its authorized share capital by
issuing to the shareholders in the past, then it will have to increase its authorized share capital.
For this purpose, company may have to incur certain expenses. It is important to note that such
expenses shall be treated as capital expenditure in view of the authoritative pronouncements by
the Supreme Court.

TREATMENT OF OTHER EXPENSES SUCH AS PRINTING & STATIONERY,

POSTAGE, FEES ETC

For a long time, the treatment of these expenses remained as subject matter of judicial
controversies due to conflicting judgment by various courts. However , this controversy has been
put to rest by the Supreme Court’s judgment dated September 25 , 2006 , in the case of CIT V’s
General Insurance Corporation (2006) 205 CTR 280 , wherein it has been held that these
expenses incurred on issue of bonus shares is revenue expenditure.

TAX TREATMENT IN THE HANDS OF SHAREHOLDERS

In the hands of equity shareholder

1. At the time of receipt :- Since the receipt of bonus shares by equity shareholders-does not
amount to receipt of dividend , therefore the shareholder is not required to treat the values
of bonus shares as his income from other source.
2. At the time of redemption: - When bonus shares held by equity shareholders are
redeemed by the company at a later stage, it is treated as receipt of dividend by
shareholders. If shares are redeemed during the period.
a) On or after 1-6-97 to 31-3-02 and
b) On or after 1-4-03, then, any such amount shall be fully exempt in hands of shareholders.
3. At the time of liquidation of company: - Amount received by shareholders on bonus
shares as well as on other shares is treated as receipt of dividends. On such occasion,
occurring during the period (a) on or after 1-6-97 to 31-3-02 and: (b) on or after 1-4-03,
any amount received shall be fully exempt in the hands of shareholder.

4. At the Time of Sale

On sale of bonus shares, a shareholder is required to pay tax on any gain arising there from.
Such gain will be long term or short term depending upon the period of holding of such
bonus shares. The period of holding shall be counted from the date of issue of the bonus
shares.

For calculating capital gain, the cost of acquisition of bonus shares shall be taken as follows:-

i. If bonus shares were received before 1-4-81 :

In such a case the market value of bonus shares as on 1-4-81 shall be treated as cost of
acquisition.

ii. If bonus shares were received on or after 1-4-81:

In such a case, the cost of acquisition of bonus shares shall be taken as nil and entire amount
received on sale shall be chargeable to capital gain tax.

ILLUSTRATION: Assessed A is the investor in shares and held 1,000 shares of Rs. 10 each
in a company. On 31st March, 2007 he was allotted 1000 Bonus Shares of the face value of
Rs 10 each. The cost of acquisition of original shares was Rs. 12 each. During the previous
year ending 31st March, 2010 assessee sold 500 shares out of his Bonus Shares @14 per
share. Compute the capital gain for the assessment year 2010-11 if the cost inflation index for
1991-92 is 199 and 2009-10 is 632.

Solution:

Shares (STCA)

Sale price of 500 shares @ 14 per share 7000

Less: Cost o 500 Bonus Shares Nil

Short Term capital gain 7000

TAX TREATMENT IN THE HANDS OF PREFERENCE SHAREHOLDERS

1. At the time of receipt: - When bonus shares are received by preference shareholders
then it is treated as dividend received by them. If bonus shares are received during the
periods (a) on or after 1-6-97 to 31-3-02 and (b) on or after 1-4-03, then such
distribution shall be fully exempt in the hands of preference shareholders.

If the bonus shares were received during P.Y. 2002-2003 then preference shareholders are
required to include the market value of bonus shares in their individual income as income
under the head other sources.

2. At the time of redemption :- It shall not be treated as dividend in the hands of

preference shareholders because the market value of said bonus shares , when issued
to them , was treated as dividend received by them.
3. At the time of liquidation of company: - It shall also not be treated as dividend in the
hands of preference shareholders.
4. At the time of sale: Same as discussed for equity shareholders.
Tax planning and Managerial Decision (Continue
or Closure)

Introduction

Ups and downs are a part and parcel of business life. In an up situation, a business flourishes,
earns profits and brings cheers to businessman. A number of factors play an important role in
placing a business in such a situation. Some of these factors are as follows :

(1) High demand of product

(2) Cost effectiveness
(3) Govt. support
(4) Tax incentives available etc.

In a down situation, a business shrinks, generates losses and causes tension to owners. Such a
situation occurs when any/ some/ all of the above factors go against the business. i.e.

(i) Low demand/ falling demand of product

(ii) Falling profit margin
(iii) Withdrawl of government support
(iv)No encouraging future prospects etc.

Such situations are normally described as industrial sickness.

Generally under such a situation, a business house faces a problem whether the business should
be continued or shut down.

Meaning of ‘ Shut down’ or ‘discontinuance of business for Income tax purposes

It refers to a complete cessation or closing down of the business. It involves :-

 No buying or selling
 No manufacturing
  Assets to be sold or disposed off
 Returning capital to owners etc.

Post shutdown tax effects

Before deciding for closing a business, two aspects should be understood clearly :-

(A) various tax provisions to be complied with after deciding to shut down a business
(B) tax implications of shut down decision

(A) Tax provisions to be complied with while discontinuing a business

(1) Provisions relating to discontinued business (Sec 176) (Applicable to all)

(1)in case of any discontinued business in any assessment year, the income of the period from the
expiry of the previous year for that assessment year up to the date of such discontinuance may, at
the discretion of the Assessing Officer, be charged to tax in that assessment year.
(2) The total income of each completed previous year or part of any previous year included in
such period shall be chargeable to tax at the rate or rates in force in that assessment year, and
separate assessments shall be made.
(3) notice of discontinuing of any buisness or profession is reqiured to be given to assessing
officer within fifteen days thereof.
(3A) in case of discontinued buisness in a year, any sum received after the discontinuance shall
be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt,
if such sum would have been included in the total income of the person who carried on the
business had such sum been received before such discontinuance.
(4) Where any profession is discontinued in any year on account of the cessation of the
profession by, or the retirement or death of, the person carrying on the profession, any sum
received after the discontinuance shall be deemed to be the income of the recipient and charged
to tax accordingly in the year of receipt, if such sum would have been included in the total
income of the aforesaid person had it been received before such discontinuance.
(5) assessment made under the provisions of this section, the Assessing Officer may serve on the
person whose income is to be assessed or, in case of a firm, or any person who was a partner of
such firm at the time of its discontinuance or, in the case of a company, or the principal officer
thereof, a notice containing all or any of the requirements which may be included in a notice
under clause (i) of sub-section (1) of section 142 and the provisions of this Act shall, so far as
may be, apply accordingly as if the notice were a notice issued under clause (i) of sub-section (1)
of section 142.
(6) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under
any other provision of this Act.
(7) Where the provisions of sub-section (1) are applicable, any notice issued by the Assessing
Officer under clause (i) of sub-section (1) of section 142 or section 148 in respect of any tax
chargeable under any other provisions of this Act may, notwithstanding anything contained in
clause (i) of sub-section (1) of section 142 or section 148, as the case may be, require the
furnishing of the return by the person to whom the aforesaid notices are issued within such
period, not being less than seven days, as the Assessing Officer may think proper.

(2) Provisions relating to dissolution of association of persons (Sec 177)

(1) in case of discotinuance of buisness or profession or dissolution of association of persons

carrying a buisness , the Assessing Officer is required to make an assessment of the total income
of the association of persons as if no such discontinuance or dissolution had taken place, and all
the provisions of this Act, including the provisions relating to the levy of a penalty or any other
sum chargeable under any provisions of this Act, shall apply, so far as may be, to such
assessment.

(2) Without prejudice to the generality of the foregoing sub-section, if the Assessing Officer or
the Commissioner (Appeals) in the course of any proceeding under this Act find that association
of persons was guilty of any of the acts specified in Chapter XXI, he may impose or direct the
imposition of a penalty in accordance with the provisions of that Chapter.

(3) any person who was a member of association of persons at the time of discontinuance of
buisness or dissolution and the legal representative of any such person who is deceased, shall be
jointly and severally liable for the amount of tax, penalty or other sum payable, provisions of this
Act, or imposition of penalty or other sum.

(4) Where such discontinuance or dissolution takes place after any proceedings in respect of an
assessment year have commenced, the proceedings may be continued against the persons
referred to in sub-section (3) from the stage at which the proceedings stood at the time of such
discontinuance or dissolution, and all the provisions of this Act shall, so far as may be, apply
accordingly.

(5) Nothing in this section shall affect the provisions of sub-section (6) of section 159.

(3) Provisions relating to company in liquidation (section 178)

(1) Every person -

(a) Who is the liquidator of any company which is being wound up, whether under the orders of
a court or otherwise; or

(b) a person who has been appointed as a receiver of the assets of a company should give notice
to the assessing officer about his appointment within thirty days of his appointment (liquidator).
(2) The Assessing Officer after making required inquiries, or checking information whether it is
fit, issue notice to the liquidator within three months from the date on which he receives notice of
the appointment of the liquidator the amount which, in the opinion of the Assessing Officer,
would be sufficient to provide for any tax which is then, or is likely thereafter to become,
payable by the company.

(3) The liquidator -

(a) Shall not, without the leave of the Chief Commissioner or Commissioner, part with any of the
assets of the company or the properties in his hands until he has been notified by the Assessing
Officer within three months and

(b) On being so notified, shall set aside an amount equal to the amount notified and, until he so
sets aside such amount, shall not part with any of the assets of the company or the properties in
his hands :

Provided that nothing contained in this sub-section shall debar the liquidator from parting with
such assets or properties for the purpose of the payment of the tax payable by the company or for
making any payment to secured creditors whose debts are entitled under law to priority of
payment over debts due to Government on the date of liquidation or for meeting such costs and
expenses of the winding up of the company as are in the opinion of the Chief Commissioner or
Commissioner reasonable.

(4) If the liquidator fails to give the notice of his appointment within thirty days to assessing
officer or fails to set aside the amount as required by sub-section (3) or parts with any of the
assets of the company or the properties in his hands in contravention of the provisions of that
sub-section, he shall be personally liable for the payment of the tax which the company would be
liable to pay :

Provided that if the amount of any tax payable by the company is notified under sub-section (2),
the personal liability of the liquidator under this sub-section shall be to the extent of such
amount.
(5) in case of more than one liquidators , the obligations and liabilities attached to the liquidator
under this section shall be aplicable to all the liquidators jointly and severally.

(6) The provisions of this section shall have effect notwithstanding anything to the contrary
contained in any other law for the time being in force.

(4)Liability of directors of private company in liquidation (Section 179)

(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), directors of
the private companies are severally and jointly liable for the payment of taxes due during
their tenure in respect of any income of any previous year or from any other company in
respect of any income of any previous year during which such other company was a
private company cannot be recovered, unless he proves that the non-recovery cannot be
attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the
affairs of the company.

(2) When a private company is converted into a public company and the tax assessed in respect
of any income of any previous year when company was a private company cannot be recovered,
then,director of such private company is not liable in relation to any tax due in respect of any
income of such private company assessable for any assessment year commencing before the 1st
day of April, 1962.

(B)Tax implications on/after discontinuance of business

(1) Treatment of business losses relating to discontinued business :

W.e.f. A.Y. 2000-2001, the business losses of the discontinued business can be set off against the
future profits of the other business. The business losses of discontinuous business may relate to :-

(a) the previous year in which the business is discontinued

However, as per sec 71(3), business losses can be carried forward for upto a maximum period of
8 assessment years immediately succeeding the assessment year for which the loss was
computed.
(2)Treatment of unabsorbed depreciation relating to discontinued business :

W.e.f. assessment year 2001-2002, unabsorbed depreciation can be set off in future year against
business profit. The unabsorbed depreciation of discontinued business can also be set off against
future business profits of other business. Such unabsorbed depreciation may relate to :

(a)the previous year in which the business is discontinued ; or

(b)previous year/years prior to the previous year in which business is discontinued

(3)Profit or loss on sale of assets of discontinued business

(i) if assets sold are depreciable assets

(a) If sale proceeds > W.D.V. of block :- then such excess shall be treated as short term capital
gain.

(b) If sale proceeds< W.D.V. of block :- then such short fall shall be treated as short term capital
loss.

(ii)if assets sold are non-depriciable assets :-

(a) Sold at a profit :- Such profit shall be treated as ‘ long term ‘ capital gain or ‘short term
capital gain’ depending upon the nature of asset i.e. whether short term asset or long term
asset.
(b) Sold at a loss :- then such loss shall also be long term capital or short tterm capital loss
depending upon the nature of asset.

(iii) if stock/ goods are sold :- any profit on sale of stock is treated as business income of the
assesses of the previous year in which it is sold

(iv)Sale of assets held for scientific research

(4)Withdrawl of certain incentive deductions

Discontinuance of business may result in wthdrawl of certain incentive deductions already

claimed by business house. Such incentive deductions have been allowed to business houses
operating in certain specified business areas. A brief discussion of these incentive deductions is
given below:-

(i) Incentive-deduction to tea-coffee/rubber business (Section 33AB)

 Assesses engaged in growing and manufacturing tea, coffee and rubber have been provided
special deduction after profit. For claiming this deduction,these assesses are required to
deposit certain amount to ‘ Special Deposit Account’ namely :-

Tea Development Account- In case of coffee business

Rubber Development Account- In case of rubber business

The amount deposited in above ‘Special Accounts’ is to be used for specific business purposes
including purchase of business assets. The assets so acquired cannot be sold before the expiry
of 8 years.

How Discontinuance results in withdrawl of deduction?

Now at the time of shutting down of business the following two possibilities can be there :-

(a) Unutilised amount in special accounts :-

Assessee can withdraw such amount but such withdrawn amount shall be deemed to be
the profits of the business of the previous year in which amount is withdrawn.

(b) Sale of assets acquired before 8 years :-

The deduction allowed earlier shall be withdrawn & shall be treated as business profits of
the previous year in which such asset is sold or otherwise transferred.

(ii) Incentive deduction to petroleum or natural gas business (Sec 33ABA)

Assesses engaged in the business of prospecting for, or extraction or production of petroleum or

natural gas or both in India by entering into agreement with the Central Govt. have been allowed
deduction u/s 33ABA.

For claiming this deduction, above assesses are required to deposit certain amount with SBI in a
‘Special Account’ as per approved scheme of Govt.

Further, assets acquired by withdrawing amount from such ‘ Special Account’ are not to be
sold/transferred before the expiry of 8 years from the end of previous year in which such assets
were acquired.

How Discontinuance results in withdrawl of deduction?

(Same as discussed u/s 33AB in pt. (i)

(iii) Incentive deduction to shipping business (Sec 33AC)

This deduction is allowed to a government company or an Indian public limited company which
is engaged in the business of operation of ships. For claiming this deduction, such assesses are
required to deposit certain amount in ‘Shipping Reserve’ can be used for certain specified
business purpose including for acquiring new ship within 8 years next following the previous in
which the amount was credited to reserve.

The new ship so acquired cannot be be sold/transferred before the expiry of 3 years from the end
of year in which the ship was acquired.

How Discontinuance results in withdrawl of deduction?

(a) Unutilised amount in shipping reserve :-

(Same as discussed u/s 33AB in pt. (i)

(b) Sale new ship before 3 years :-

(Same as discussed u/s 33AB in pt. (i)

(c) Consequences in the new ship in transferred after the expiry of three years

On sale of such ship after 3 years, the sale proceeds is required to be used for requiring a
new ship within a period of one year from the end of previous year of such sale.
Otherwise the deduction will be withdrawn & amount shall be treated as the business
income of the A.Y. in which the ship in sold.

(5)Treatment of expenses incurred after discontinuance:-

Such expenses are not allowed as deduction against business income because such expenses are
not incurred for the purpose of carrying of business or profession. Thus, retrenchment
compensation paid to staff after liquidation of Co. is not allowed as deduction (P.N. Ganesan (P)
Ltd. V.C.II. (1990) 52 TAXMANN 461 Madras HC

Tax Planning for shut down or continue

(1) Decision relating to profit-earning business

(a) Profit earning business with no past losses and unabsorbed depreciation

It is never advisable to shut down or discontinue such a business.

(b) Profit earning business with past losses and unabsorbed depreciation

If possible, such a business should be continued till the past losses and unabsorbed
depreciation are not fully set off.

(2) Loss generating business

If the occurrence of loss is a temporary phenomenon and financial position of the business
allows the business house to bear such losses for some years then such a business should be
continued. The business, in this case, can be continued at reduced level of activity. Later on,
when the business restarts earning profit, then past business losses and unabsorbed
depreciation can be set off.

However, if the occurrences of losses is expected to be for a long period then business should
be discontinued at the earliest.

(3) How tea/coffee/rubber business house can avoid the withdrawl of deduction claimed
u/s 33AB ?

Following tax planning can avoid withdrawl of deduction claimed u/s 33AB:-

(i) If assets acquired by withdrawing amount from ‘Special Account’ are to be sold
before the expiry of stipulated period of 8 years then, if possible, such assets should
be sold to any of the following persons :-
(a) Government (Central or state)
(b) Local Authority
(c) A corporation established by or under a Central, State or Provincial Act
(d) A government company as defined in Sec 617 of the Companies Act, 1956

If this is done, then the incentive deduction shall not be withdrawn and hence assessee shall
not be liable to pay tax on deemed business profits.

(ii) In case of firm :- If assets acquired u/s 33AB are required to be sold before the expiry
of 8 years then such a firm is advised to sell/ transfer such assets to a company in
connections with succession of firm by company arrangement subject to fulfillment
of prescribed conditions given for this. These conditions are :
(a) All the properties of the firm relating to the business or profession immediately
before the succession become the properties of the company;
 (b) All the liabilities of the firm relating to the business or profession immediately
before the succession become the liabilities of the company;
(c) All the partners of the firm before succession become all the shareholders of
company.

(4) How petroleum or natural gas business houses can avoid the withdrawl of deduction
claimed u/s 33AB
Same as suggested for Tea/Coffee/Rubber business in pt(3)
(5) Assesses engaged in shipping business cannot avoid the withdrawl of deduction
claimed u/s 33AC by rresorting to any tax planning
(6) While discontinuing a company, the management is advised to see the possibility of its
amalgamation with some other company
(7) Whether selling business as ‘Slump sale’ is beneficial or not?
In case of slump sale, the entire business is sold/transferred for a lump sum price without
assigning values to individual assets Sec 50-B of income Tax Act provide the method of
computation of capital gain arising from slump sale.
Capital gain on slump sale = Sale proceeds-Net worth
Meaning of networth :- Networth shall be the aggregate value of total assets of the
undertaking/division as reduced by the value of liabilities of such undertaking as
appearing in the books of account.
Aggregate value of total assets :-
(a) In case of appreciable assets, the W.D.V off the block
(b) In case of other assets, the book value of such assets.Thus management of
discontinued business has two options to sell assets i.e.
(i) To sell the entire undertaking as slump sale or
(ii) To sell assets individually or otherwise

So, it is advised that tax incidence under the two options should be analysed before hand.

If undertaking is being sold after having continued for more than three years then the
entire capital gain will be long term capital gain which is put to tax@20%(concessional
rate)

NEW INDUSTRIAL UNDERTAKING E.P.Z

 SPECIAL PROVISIONS IN RESPECT OF
NEWLY ESTABLISHED UNDERTAKING IN FREE TRADE ZONE [SECTION 10A]

Sec 10A provides a deduction of such profits and gains as are derived by an undertaking
from the export of articles or things or computer software for certain consecutive assessment
years.

Such undertakings are required to be set up in FTZ, Electronic hardware Technology

Park, software Technology Park or special economic zone etc.

ESSENTIAL CONDITIONS TO BE FULFILLED

1 What to manufacture or produce? [Sec 10A (2) (i)]

The undertaking must manufacture or produce articles or things or computer software etc.

Meaning of computer software

"Computer software" means-

(a) Any computer programmed recorded on any disc, tape, perforated media
or other information storage services;
(b) Any customized electronic data or any predict or service of service of
similar nature as may be notified by the Board, which is transmitted or
exported from India to any place outside India by any means.

2. Location of undertaking. Undertaking must be located in Free Trade zone. Electronic

hardware Technology Park, software Technology Park, or special Economic zone etc.

Meaning of Free Trade Zone:-

Free trade zone means the:-

 - Kandla Free Trade Zone;
- Santacruz Electronics Exports Processing Zone;
- Falta Export Processing Zone;
- Madras Export Processing Zone;
- Cochin Export Processing Zone;
- Noida Export Processing Zone;
- Or any other Processing Zone;

Note: Out of the above, the followings have been converted into 'Special Economic
Zones:

(i) Santacruz (Mumbai) Electronic Export Processing Zone.

(ii) Kandla (Gujarat) free Trade Zone.
(iii) Cochin (Kerala) Export Processing Zone.

"Software Technology Park" means any park set up in accordance with the Software
Technology, Park Scheme notified by the Government of India in the Ministry of Commerce and
Industry.

"Special economic zone" means a zone which the Central Government may, by
notification in the Official Gazette, specify as a special economic zone for the purpose of this
section.

"Electronic hardware Technology Park" means any park set up in accordance with the
Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in
the Ministry of Commerce and Industry:

3. Commencement of operations [Sec. 10A (2) (i)]

Location of undertaking Year of starting of manufacturing or

production

(a) In any Free trade zone Previous year relevant to A.Y. 1981-82 or
thereafter

(b) In Electronic Hardware P.Y. relevant to A.Y. 1994-95 or thereafter

Technology park or software
 technology park

(c) In any special economic zone P.Y. relevant to A.Y. 2001-02 or thereafter

Note: For the purpose of this section "manufacture or produce" shall include the cutting
and polishing of precious and semi-precious stones.

4. Export out of India

Undertaking must export out of India, the articles or things or computer software
manufactured or produced.

On site development of computer software

The profits and gains derived from 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. Thus, where a unit located in the
EPZIEOUISTP develops computer software at the site of client, abroad, such unit should not be
denied the tax holiday under section 10A on the ground that it was prepared on site, as long as
software is a product of the unit.

5. Undertaking not to be formed by the splitting up or the reconstruction [Sec 10A (2)
(ii)]

Undertaking shall not be formed by the splitting up or the reconstruction of a business

already in existence.

However, this condition shall not apply in respect of any undertaking which is formed as
a result of the re-establishment, reconstruction or revival by the assesses of the business of any
such undertaking as is referred to in section 33B, in the circumstances and within the period
specified in that section.

6. Undertaking not be formed by transfer of old Machinery [Sec 10A (2) (iii)]
 Undertaking is not formed by the transfer to it the machinery or plant previously used for
any purpose.

What is not regarded as "previously used for any purpose"

Any machinery or plant which was used outside India by any person other than the
assesses shall not be regarded as machinery or plant previously used for any purpose, if the
following conditions are fulfilled:-

(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 from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been
allowed or is allowable under the provisions of this Act in computing the total income
of any person for any period prior to the date of installation of the machinery or plant
by the assessee.

Thus, if an assessee imports second hand foreign machinery then it shall be treated at par
with purchase of new plant or machinery if certain conditions given above are fulfilled.

Old P&M can be< 20% of total value of P&M of undertaking

Where old plant or machinery transferred to new undertaking is less than or equal to 20%
of total value of plant or machinery of new undertaking, the benefit of section 10A shall not be
denied to the undertaking. In other words the usage of old plant and machinery upto 20% of total
value of plant and machinery is allowed.

7. Receipt in India/ Repatriation to India of convertible foreign exchange [Sec 10A (3)]

The sale proceeds of articles or things or computer software exported out of India must
be received in India and if not received in India, then must be brought into India, in convertible
foreign exchange for the purpose of the Foreign Exchange Regulation Act 1973 and any rule
made there under or any other corresponding law for the time being in force.
 Meaning of convertible foreign exchange:- Convertible foreign exchange means
foreign exchange which is for the time being treated by the Reserve Bank of India as convertible
foreign exchange for the purpose of the Foreign Exchange Regulation Act 1973 and any rules
made there under or any other corresponding law for the time being in force.

Meaning of "competent authority: [Explanation 1 to Sec 10A (3)]

"Competent authority" means the Reserve Bank of India or such other authority as is
authorized under any law for the time being in force for regulating payments and dealings in
foreign exchange.

Crediting of sale proceeds to 'Special Account' outside India

(Explanation 2 to Sec. 10A (3))

If sale proceeds are credited to a separate account with any bank outside India with the
approval of the Reserve Bank of India, such amount shall be deemed to have been received in
India.

8. Report of Chartered Accountant [Sec 10A (5)]

W.e.f. A.Y. 2001-02, assessee claiming this deduction must furnish, in the prescribed
form No. 56F. Along with the return of income, the report of chartered accountant, as defined in
the explanation below sub-section (2) of section 288, certifying the correctness of the deduction
claimed.

Meaning of accountant [Explanation 1 to Sec 288(2)]

"Accountant' means a 'Chartered accountant within the meaning of the Chartered

Accountants Act, 1949 and includes, in relation to any Sate, any person who by virtue of the
provision of subsection (2) of section 226 of the Companies Act, 1956, is entitled to be appointed
to act as an auditor of companies registered in that State.

9. Amount of deduction
 Undertaking Rate of deduction Period of deduction

1. (a) Set up in any 100% of profit and gains The deduction is available
FTZ derived by an for a period of 10
undertaking from Export consecutive assessment
of articles Or things years beginning with the
computer Software assessment year relevant to
the previous years in which
undertaking begins to
manufacture or produce
such articles or things or
computer software

2. Undertakings (i) 100% profits by an For a period of 5

which begin undertaking from consecutive A.Y.s beginning
operations on or export. with A.Y. relevant to P.Y. in
after 1-4-05 in which the undertaking
any special begins to manufacture
economic zone articles things or computer
software.

For next 2 consecutive

A.Y.s
(ii) 50% of the profits

(iii) 50% of the profits For next 3 consecutive A.Y.

if certain conditions are
fulfilled*

Conditions for claiming extended deduction for 3 years.

(i) Credit of the amount to Special Account The deductions @ 50% of profits will be
available if equivalent amount is debited to profit and loss account and credited to a "Special
Economic Zone Reinvestment Allowance Reserve Account".
 (ii) Utilization of Reserve:- The amount credited to the above special account is to be
utilized-
(a) For the purposes of acquiring new machinery or plant which is first put to use
before the expiry of a period of three years next following the previous year in
which the reserve was created; and
(b) Until the acquisition of new machinery or plant as aforesaid, for the purposes
of the business of the undertaking other than for distribution by way of
dividend or profits or for remittance outside India as profits or for the creation
of any asset outside India.
(iii) Furnishing particulars of new Plant & Machinery:- The assessee is required to
furnish the particulars in respect of new machinery or plant 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.

Withdrawal of benefit

(i) Use of Reserve for non-specified purpose:- Where any amount credited to the
'Special Economic Zone Re-investment Allowance Reserve Account" has been used
for any purposes other than those specified above, the amount so utilized shall be
deemed to be the profits of the previous year in which the amount was so utilized.
(ii) Non Utilization of Reserve:- Where the amount transferred to Special Account has
not been used for specified purposes before the expiry of 3 years as stated above the
amount not so utilized shall be deemed to be the profits of the previous year
immediately following the previous year in which the period of 3 years expires.

10. Furnishing of return of Income on or before due date (Applicable w.e.f. A.Y. 2006-
07)

W.E.F.A.Y. 2006-07, an assessee will be allowed deduction U/S 10A only if the return of
income is filed on or before the due date specified under section 139 (1). In other words,
deduction U/S 10A shall not be available to any undertaking, which does not furnish return of
income on or before the due date.
Calculation of profit from Exports [Sec 10A (4)]

Profits of the undertaking eligible for benefit u/s 10(A) shall be:-

Profit of the business of the undertaking X Export turnover

Total turnover

“New industrial undertaking E.O.U”

SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED 100% EXPORT

ORIENTED UNDERTAKINGS [SECTION 10B]

This section was introduced with effect from A.Y 1989-90. Prior the introduction of this
section, the deduction was available only to those undertaking which were situated in certain
specified areas such as free trade zones etc.

Thus to give a boost to export, government of India introduced the scheme of 100%
export-oriented units and at the same time provided 10 years tax holiday u/s 10B to such
undertakings these 100% EOUs have also been given many other incentives as discussed below:-

a) Custom duty free import of raw material and other capital equipment required for
production or manufacturing.
b) Refund of excise duties.
c) Refund of central sales tax.
d) Assured regular supply of power, water etc.

Forum of organization:-
Deduction u/s 10B is available to a 100% EOU from export of article etc. this section does not
provide any particular form of organization for undertaking. Thus undertaking can be operated as
sole proprietorship, partnership firm, company etc.

ESSENTIAL CONDITIONS TO BE FULFILLED:-

1) What to manufacture/ produce [sec 10B (2) (i)]:- the undertaking must manufacture or
produces articles or things or computer software.
Meaning of computer software:-
Computer software means-
a) Any computer program recorded on any disc, tape, perforated media or other information
storage device etc.
b) Any customized electronic data or any product or service of similar nature as may be
notified by the board, which is transmitted or exported from India to any other place
outside India by any means.

2) 100% export-oriented units [sec 10 B (1)]:- the undertaking must be a 100%export

oriented undertaking.
Meaning of 100% export-oriented undertaking: - this means an undertaking which has
been approved as a hundred percent export oriented undertaking by the board appointed in
this behalf by the central government in exercise of the powers conferred by section14 of the
industries (development and regulation) Act, 1951 and rules made under that Act.

On site development of computer soft ware:-

The profits and gains derived from onsite development of computer soft ware
(including services for development of soft ware) outside India shall be deemed to be the
profit and gain derived from the export of computer soft ware outside India.

3) Undertaking not to be formed by the splicing up/or the reconstruction [sec 10 B (2) (i)]
Undertaking shall not be formed by the splitting up or the reconstruction of a business
already in existence.
4) Undertaking not be formed by transfer of old machinery [sec 10B (2) (iii)]
Undertaking is not formed by the transfer of machinery or plant previously used for any
purpose.

What is not regarded as previously used for any purpose:-

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 the following
conditions are fulfilled:-
i) Such machinery or plant was not, at any time previously to the date of installation by
the assessor used in India.
ii) Such machinery or plant is imported into India from any country outside India.
 iii) No deduction on account of depreciation in respect of such machinery or plant has
been allowed or is allowable under the provision of Act in computing the total income
of any person for any period to the date of installation of machinery or plant by
assesses.
Thus, if an assessee imports second hand foreign machinery then it shall be treated as
par with purchase of new plant or machinery if certain conditions given above are
fulfilled
5) Receipt in India/ repatriation to India of convertible foreign exchange [sec 10B (3)]
The sale proceeds of articles or things or computer soft ware exported out of India must be
received in India and if not received in India then must be brought into Indian convertible
foreign exchange within 6 months from the end of relevant previous year. This period can be
extended by the competent authority.

Meaning of convertible foreign exchange:-

Convertible foreign exchange means for foreign exchange which is for the time being treated
by the RBI as convertible foreign exchange for the purpose of the foreign exchange
regulation act 1973 and any rules made there under or any other corresponding law for the
time being in force.

Meaning of ‘competent authority’:-

Competent authority means the RBI or such other authority as is authorized under any law
for the time being in force for regulating payments and dealings in foreign exchange.
6) Report by chartered accountant [sec 10B(5)]
-We & AY 2001-02, assessee claiming this deduction must furnish in the prescribed form no.
56G, along with return of income, the report of chartered below sub section (2) of section
288, certifying the correctness of deduction claimed.

Meaning of accountant:-
Accountant means a chartered accountants act within the meaning of the chartered
accountants ACT, 1949 and includes in relation to any state, any person who by virtue of the
provision of sub section (2) of section 226 of the companies ACT,1956, is entitled to be
appointed to act is an auditor of companies registered in that state.

7) Furnishing of return of income on or before due date (applicable w.e.f. A.Y. 2006-07)
W.e.f. A.Y. 2006-07 an assessee will be allowed deduction U/S 10B only if the return of
income is field on or before the due date specified under section 139(1). In other words
deduction U/S 10A shall not be available to any undertaking, which does not furnish return of
income on or before the due date.

Amount of deduction (for A.Y. 2010-11)

100% of the profits and gains of the business of the undertaking.
Period of deduction:-
 The deduction is available for a period of 10 consecutive assessment years beginning with
the assessment year relevant to the previous year in which the undertaking being to
manufacture or produce such articles or things or computer software
(No deduction u/s 10B shall be allowed to an undertaking for the assessment year 1012-13
and subsequent years)

Tax Planning In Amalgamation

Amalgamation

Amalgamation is a blending of two or more existing undertakings into one undertaking. The
shareholders of each blending company become substantially the shareholders in the company
which is to carry on the business of the blended undertakings. There may be amalgamation either
by transfer of two or more undertakings to a new company, or by the transfer of one or more
undertakings to an existing company.

Meaning of Amalgamation under the Income Tax Act [Sec 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 -

a) 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;

b) 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;

c) Shareholders holding not less than three-fourths 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.

 Actual cost and written down value when assets are transferred in scheme of amalgamation
[Sec 43]:

When a capital Asset [Sec 43(1)]:

Where, in a scheme of amalgamation, any capital asset is transferred by the

amalgamating company to the amalgamated company and the amalgamated company is
an Indian company, the actual cost of the transferred capital asset to the amalgamated
company shall be taken to be the same as it would have been if the amalgamating
company had continued to hold the capital asset for the purposes of its own business.

When a Block of Asset is transferred [Sec 43(6)]:

Where in any previous year, any block of assets is transferred, by the amalgamating
company to the amalgamated company in a scheme of amalgamation, and the
amalgamated company is an Indian company, the actual cost of the block of assets in the
case of the transferee-company or the 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
the amalgamating company for the immediately preceding previous year as reduced by
the amount of depreciation actually allowed in relation to the said preceding previous
year.

The expenditure incurred in connection with the amalgamation is allowed to be written

off in 5 successive years, beginning with the previous year in which the amalgamation
takes place.

 Transfer of capital assets in amalgamation-when not treated as transfer [Sec 47]

Transfer of capital assets to amalgamated Indian company [Sec47 (vi)]:

Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company

to the amalgamated company is not taken as a transfer

a) If the amalgamated company is an Indian company;

b) The scheme of amalgamation satisfies the condition of section 2(1B).

 Transfer of shares in an Indian company held by a foreign company to another foreign

company in a scheme of amalgamation [Sec 47 (via)]
 Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in
an Indian company, by the amalgamating foreign company to the amalgamated foreign
company, if –

a) At least twenty-five per cent of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company, and

b) Such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated;

 Allotment of shares in amalgamated company to the shareholders of amalgamating company

[sec 47 and 49(2)]

Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share

or shares held by him in the amalgamating company, if -

a) The transfer is made in consideration of the allotment to him of any share or shares in the
amalgamated company, and

b) The amalgamated company is an Indian company;

In the aforesaid cases, the cost of acquisition of the asset shall be deemed to be the cost of
acquisition to him of the share or shares in the amalgamating company.

 Carry forward and set-off of losses [Sec 72A]

The accumulated loss and unabsorbed depreciation of the amalgamating company

shall be deemed to be loss/depreciation of the amalgamated company subject to
following conditions:

1. Amalgamation of a company owning industrial undertaking, public sector

company or companies engaged in the business of operation of aircraft,
shipping business, hotel business or a banking company.
2. The amalgamating company has been engaged in the business for three or
more years.

3. The amalgamating company has continuously held 75% of the book value of
fixed assets for two years prior to the date of amalgamation.

4. The amalgamated company continues to hold 75% of the book value of fixed
assets of amalgamating company for five years.

5. The amalgamated company should continue the business the business of the
amalgamating company for a period of five years.
 6. The amalgamated company fulfils such other conditions as may be prescribed
to ensure the revival of the business of the amalgamating company or to
ensure that the amalgamation is for genuine business purpose.

7. The amalgamated company should achieve level of production of at least 50%

before the end of four years.

8. The amalgamated company shall furnish certificate about particulars of

production.

The following sub-section (6A) shall be inserted after sub-section (6) of section 72A by the
Finance Act, 2010, w.e.f. 1-4-2011 :

(6A) Where there has been reorganisation of business whereby a private company or
unlisted public company is succeeded by a limited liability partnership fulfilling the
conditions laid down in the proviso to clause (xiiib) of section 47, then, notwithstanding
anything contained in any other provision of this Act, the accumulated loss and the
unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or
allowance for depreciation of the successor limited liability partnership for the purpose of
the previous year in which business reorganisation was effected and other provisions of
this Act relating to set off and carry forward of loss and allowance for depreciation shall
apply accordingly.

“Accumulated loss” means so much of the loss of the predecessor firm or the proprietary
concern or the private company or unlisted public company before conversion into
limited liability partnership or the amalgamating company or the demerged company, 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 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
reorganisation of business or conversion or amalgamation or demerger had not taken
place

“Industrial undertaking” means any undertaking which is engaged in—

(i) the manufacture or processing of goods; or
(ii) the manufacture of computer software; or
(iii) the business of generation or distribution of electricity or any other form of
power; or
(iv) mining; or
(v) the construction of ships, aircrafts or rail systems
The following clause (b) shall be substituted for the existing clause ( b) of sub-section (7) of
section 72A by the Finance Act, 2010, w.e.f. 1-4-2011 :

“Unabsorbed depreciation” means so much of the allowance for depreciation of the

predecessor firm or the proprietary concern or the private company or unlisted public
company before conversion into limited liability partnership 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 reorganisation of business or conversion or amalgamation or
demerger had not taken place

Provisions relating to carry forward and set-off of accumulated loss and unabsorbed
depreciation allowance in scheme of amalgamation of banking company in certain cases.
72AA. Notwithstanding anything contained in sub-clauses (i) to (iii) of clause (1B) of section 2
or section 72A, where there has been an amalgamation of a banking company with any other
banking institution under a scheme sanctioned and brought into force by the Central Government
under sub-section (7) of section 45 of the Banking Regulation Act, 1949 (10 of 1949) , the
accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to
be the loss or, as the case may be, allowance for depreciation of such banking institution for the
previous year in which the scheme of amalgamation was brought into force and other provisions
of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply
accordingly.
Amalgamation of shipping companies:-
115VY. Where there has been an amalgamation of a company with another company or
companies, then, subject to the other provisions of this section, the provisions relating to the
tonnage tax scheme shall, as far as may be, apply to the amalgamated company if it is a
qualifying company:
Provided that where the amalgamated company is not a tonnage tax company, it shall exercise
an option for tonnage tax scheme under sub-section (1) of section 115VP within three months
from the date of the approval of the scheme of amalgamation:
Provided further that where the amalgamating companies are tonnage tax companies, the
provisions of this Chapter shall, as far as may be, apply to the amalgamated company for such
period as the option for tonnage tax scheme which has the longest unexpired period continues to
be in force:
Provided also that where one of the amalgamating companies is a qualifying company as on the
1st day of October, 2004 and which has not exercised the option for tonnage tax scheme within
the initial period, the provisions of this Chapter shall not apply to the amalgamated company and
the income of the amalgamated company from the business of operating qualifying ships shall be
computed in accordance with the other provisions of this Act.
Qualifying company:-
115VC. For the purposes of this Chapter, a company is a qualifying company if—
(a) it is an Indian company;
(b) the place of effective management of the company is in India;
(c) it owns at least one qualifying ship; and
(d) the main object of the company is to carry on the business of operating ships
“Tonnage tax scheme” means a scheme for computation of profits and gains of business of
operating qualifying ships under the Special Provisions Relating To Income Of Shipping
Companies
115VD. For the purposes of this Chapter, a ship is a qualifying ship if—
(a) it is a sea going ship or vessel of fifteen net tonnage or more;
(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of 1958), or a ship
registered outside India in respect of which a license has been issued by the Director-
General of Shipping under section 406 or section 407 of the Merchant Shipping Act,
1958 (44 of 1958); and
(c) a valid certificate in respect of such ship indicating its net tonnage is in force

There are many tax incentives for amalgamation to the amalgamating company, shareholders as
well as to the amalgamated company which are as under.

Benefit to the amalgamating company: -

1- Exemption from capital gain: - amalgamating company has no liability of capital gain tax if
the amalgamated company is an Indian company on the transfer of the capital assets under
section 47(vi).

2- Tax concession to foreign company: - no capital gain tax on transfer of shares of an Indian
company to a foreign company to another foreign company if these conditions are fulfilled.

- 25% or more shareholders of the amalgamating foreign company become the

shareholders of the foreign amalgamated company.

- In this transfer no capital gain tax will be charged.

No tax liability on transfer of license:- no tax liability on transfer of the license in

communication, gas, power etc fields if the amalgamating as well as amalgamated company is an
Indian company

Benefits to the shareholders are as under:-

1- Time frame of holding: - the shareholder has the right of share in the amalgamated
company in the time process of amalgamation.

2- Exchange: - no brokerage as well as exchange will attract in case of amalgamation.

Benefits to the amalgamated company are several which are as under:-

1- Capital expenditure on scientific research (Section 35(5)): - if the company before claiming
full deduction on capital expenditure amalgamated, the amalgamated company can claim the
remaining part of deduction.

2- Expenditure on license (Section 35 ABB (6)): - if the company before claiming full
deduction on obtaining license of telecommunication, the amalgamated company can claim the
remaining installments on such deduction.

3- Preliminary expenses (Section 35D (5)): - if the company before claiming full deduction of
preliminary expenses amalgamated, the amalgamated company can claim the remaining part of
deduction.

4- Capital expenditure on patent and copyright (Section 35A(6)):- if the company before
claiming full deduction on capital expenditure on patent or copyright amalgamated, the
amalgamated company can claim the remaining part of deduction

5- Amalgamation expenses (Section 35DD(1)): - if an Indian company does expenses on

amalgamation, the company is allowed a deduction of 20% per year for the time frame of five
year starting from the year in which the amalgamation is done.

6- Voluntary retirement scheme expenses (Section 35DDA): - if the company before claiming
full deduction on voluntary retirement scheme expenses amalgamated, the amalgamated
company can claim the remaining part of deduction.

7- Prospecting of mineral expenses (Section 35E (7)): - if the company before claiming full
deduction on prospecting or extraction or production of such minerals amalgamated, the
amalgamated company can claim the remaining part of deduction.

8- Capital expenses on family planning(Section 36(1)(ix)):- if the company before claiming

full deduction on capital expenditure on family planning amalgamated, the amalgamated
company can claim the remaining part of deduction.

9- Bad debts: - if the amalgamating company has some bad debts, they are automatically
become the bad debts of amalgamated company and such company are entitled to claim
deduction on it.

SEZ or 100% export unit: - if a company in SEZ or 100% export unit undertaking transferred to
another Indian company, such company is entitled to claim the benefits of SEZ and 100% export
unit without any formalities and for unexpired period

Treatment of business losses and depreciation of the amalgamating company:-

If there are some losses of amalgamating company or the value of depreciation for the previous
year in the field of banking company as well as the aviation or ship, hotel etc, the amalgamated
company can treat these losses and value of depreciation of their own and can set- off and carry
forwarding accordingly. Amalgamated company has the right to carry forward and set off
business losses of amalgamating company to eight years from the year in which the
amalgamation done. These are few points which should be fulfilled for this set off and carry
forward.

- The loss should be the business loss and not the speculative losses.

- There should be regular flow of give and take in the business and not only single or

double entry of exchange of goods in which the business loss occurs.

- The loss should be notified to the central government of India.

- The amalgamated company should use at least fifty percent of the production of the

sources of amalgamating company before claiming such deduction.

- There should be a written application to the central government of India for the

deduction and carry forward.

Tax planning in the contrast of amalgamation: - these steps should keep in mind for
benefits of tax in the view of amalgamation.

1- If there are some assets or liabilities which are not taken by the merging company, these
assets should be sold and liabilities should be paid before any process of amalgamation.

2- If the shareholders holding more than 25% shares of the company not willing to be a
shareholder to the new company after merging, they should be paid off for fulfilling the
condition of 75% shares must for the amalgamation.

3- It’s always better that the loss making company merges in a good profit making company
for claiming the set off and carry forward losses and depreciation.

4- Shares of the new company should be given to the shareholder in contrast of amalgamation
for claiming the deduction 47(vii) of income tax. If shares +debentures + cash are given to the
shareholder, the deduction is not available.
TAX PLANNING IN CASE OF FOREIGN
COLLABORATIONS AND JOINT VENTURE

TAX PLANNING IN CASE OF FOREIGN

COLLABORATIONS AND JOINT VENTURE

There are two types of foreign collaborations:

a) Financial collaboration (foreign equity participation) where foreign equity alone is
involved .
b) Technical collaboration (technology transfer) involving licensing of technology by
the foreign collaborator on due compensation. -
There are two approving authorities
1) Reserve Bank of India, and
2) Department of Industrial Development in the Ministry of Industry, Government
of India.

Government Policy
The Government of India’s policy on foreign private investment is based mainly on the
Approach adopted in 1949. The basic policy is to welcome foreign private investment on a
selective basis in areas advantageous to the Indian economy. The conditions under which
foreign capital is welcome are as follows:
a) All undertakings (Indian or foreign) have to conform to the general requirements of the
Government’s Industrial Policy.
b) Foreign enterprises are to be treated at par with their Indian counterparts.
c) Foreign enterprises would have the freedom to remit profits and repatriate capital subject to
foreign exchange considerations.
The Industrial Policy 1991, is based on the view that while freeing Indian Industry from official
controls, opportunities for promoting foreign investments in India should also be fully
exploited. It is felt that foreign investment would bring attendant advantages of technology
transfer, marketing expertise, introduction of modern managerial techniques and new
possibilities for promotion of exports.

Areas of Foreign Collaboration

The Government of India issues from time to time a list of industries indicating where foreign
investments may be permitted. The lists so issued are illustrative only The Government of India
(Foreign Investment Promotion Board) also considers import of technology in Industries listed
in Annexure A & Annexure B of Schedule 1 of Foreign Exchange Management (Transfer or
issue of security by a person resident outside India) Regulations, 2000 subject to compliance
with the provisions of the Industrial Policy and Procedures as notified by Secretariat for
Industrial Assistance (SIA) in the Ministry of Commerce and Industry Government of India
from time to time.

Technical Collaboration
The Industrial Policy, 1991, also provides that equity collaboration need not necessarily be
accompanied with technical collaborations. The salient features of the Policy relating to Foreign
Technology Agreements are outlined below:

Paragraph 39C - Foreign Technology Agreements.

Standard Conditions Attached to Approvals for Foreign Investment &

Technology Agreements

1) The total non-resident shareholding in the undertaking should not exceed the
percentage(s) specified in the approval letter.
2) A) The royalty will be calculated on the basis of the net ex-factory sales price of the
product, exclusive of excise duties, minus the cost of the standard bought-out
components and the landed cost of imported components, irrespective of the source of
procurement, including ocean freight, insurance, customs duties, etc. The payment of
royalty will be restricted to the licensed capacity plus 25% in excess thereof for such
items requiring industrial licence or on such capacity as specified in the approval letter.
This restriction will not apply to items not requiring industrial licence. In case of
production in excess of this quantum, prior approval of Government would have to be
obtained regarding the terms of payment of royalty in respect of such excess production.
B) The royalty would not be payable beyond the period of the agreement if the orders
had not been executed during the period of agreement. However, where the orders
themselves took a long time to execute or were executed after the period of agreement,
then in such cases the royalty for an order booked during the period of agreement
would be payable only after a Chartered Accountant certifies that the orders in fact were
firmly booked and execution began during the period of agreement and the technical
assistance was available on a continuing basis even after the period of agreement.
C) No minimum guaranteed royalty would be allowed.
3) The lumpsum shall be paid in three instalments as detailed below, unless otherwise
stipulated in the approval letter:-
i. First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank
of India and collaboration agreement is filed with the Authorised Dealer in Foreign
Exchange.
ii. Second 1/3rd on delivery of know-how documentation.
iii. Third and final 1/3rd on commencement of commercial production, or four years after
the proposal is approved by Reserve Bank of India and agreement is filed with the
Authorized Dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paid
in more than three instalments, subject to completion of the activities as specified above.
4) All remittances to the foreign collaborator shall be made as per the exchange rates
prevailing on the date of remittance.
5) The applications for remittances may be made to the Authorised Dealer in Form A2 with
the undernoted documents:-
a) A No Objection certificate issued by the Income-tax authorities in the standard form or
a copy of the certificate issued by the designated bank regarding the payment of tax
where the tax has been paid at a flat rate of 30% to the designated bank.
b) A certificate from the Chartered Accountant in Form TCK/TCR (depending upon the
purpose of payment).
c) A declaration by the applicant to the effect that the proposed remittance is strictly in
accordance with the terms and conditions of the collaboration approved by
RBI/Government.
6) The agreement shall be subject to Indian Laws.
7) A copy of the foreign investment and technology transfer agreement signed by both the
parties may be furnished to the following authorities:-
a) Administrative Ministry/Department.
b) Department of Scientific and Industrial Research, New Delhi.
c) Concerned Regional Officer of Exchange Control Department, RBI.
d) Authorised Dealer designated to service the agreement.
8) All payments under the foreign investment and technology transfer agreement
including rupee payments (if any) to be made in connection with the
engagement/deputation of foreign technical personnel such as passage fare living
expenses, etc. of foreign technicians, would be liable for the levy of ces under the
Research and Development Cess Act, 1986 and the Indian Company while making such
payments should pay the cess prescribed under the Act.
9) A return (in duplicate) in Form TCD should be submitted to Regional Office of the
Reserve Bank of India in the first fortnight of January each year.

Depreciation and interest deductions:

Depreciation rates
ASSETS RATES (%)
Buildings 5-10
Plant and Machinery 25-100
Furniture and Fittings 15
Vehicles(other than for commercial use) 20
Pollution control Equipment 80
Energy Saving Devices 80
Ships 25
Intangible assets 25

Withholding Tax for NRIs and Foreign Companies:

Withholding Tax Rates for payments made to Non-Residents are determined by the
Finance Act passed by the Parliament for various years. The current rates are:
i) Interest 20%
ii) Dividends paid by domestic companies : Nil
iii) Royalties 10%
iv) Technical Services 10%
v) Any Other Services Individuals: 30% of the income Companies: 40% of the net
income
The above rates are general and in respect of the countries with which India does not have
a Double Taxation Avoidance Agreement (DTAA).
DOUBLE TAXATION RELIEF

Agreement with foreign countries for avoidance or relief against Double Taxation (Section
90)

Section 90 of the Income Tax Act, 1961, empowers the central government to enter into
agreements with the Government of any country for the grant of relief against double taxation or
for the avoidance of double taxation. This section also empowers the Central Government to
make such provisions as may be necessary for implementation of such agreement and such
provisions may be published in the Official Gazette. Under this section, the central government
may enter into agreement with foreign countries:

1. For the granting of relief in respect of income on which have been paid both income-tax
under this act and income-tax in that country , or
2. For the avoidance of double taxation of income under this act and under the
corresponding law in force in that country , or
3. For exchange of information for the prevention of evasion or avoidance of income-tax
chargeable under this act or under the corresponding law in force in that country, or
investigation of cases of such evasion or avoidance, or
4. For recovery of income-tax under this act and under the corresponding law in force in
that country.
The Central government has so far entered into agreements for relief against or avoidance
of double taxation with many countries and these agreements are in operation.
These agreements may be classified into two parts:
(a) Agreement for relief from Double taxation
(b) Agreement for avoidance of Double taxation

AGREEMENT FOR RELIEF FROM DOUBLE TAXATION

Under this category assessments provide for payment of tax in both the countries under the
respective laws of those countries but later on rebate of tax is given in both the countries on
doubly assessed income. In such case assessee must show that the identical income has been
doubly taxed and that he has paid tax both in India and in the foreign country.

AGREEMENTS FOR AVOIDANCE OF DOUBLE TAXATION

Under these agreements the assessee has first to pay the tax and then apply for relief in the form
of a refund. Each country recovers tax only on that portion of income which accrued within that
country and takes into account the income accruing in other country only for rate purposes. In
such cases no refund arises.

SECTION 91 provides:

(a) UNILATERAL RELIEF IN RESPECT OF FOREIGN INCOME TAXED ABROAD

(SECTION 91(1))

Subject to following conditions unilateral relief is granted in cases where section 90 is not
applicable:

(a) Assessee should be resident of India in the previous year

(b) The income , in fact , should have accrued outside India and should not be deemed under
any provision of this Act to accrue in India
(c) The income should be taxed both in India and a foreign country with hich India has no
agreement for relief against or avoidance of double taxation; and
(d) The assessee should have paid the tax in such foreign country by deduction or otherwise.
(b) RELIEF IN CASE OF AGRICULTURAL INCOME FROM PAKISTAN(SECTION
91(2))

In case a resident of India has paid any tax on agricultural income which accrued or arose to
him during that previous year in Pakistan, he shall be entitled to a deduction from the Indian
income tax payable by him of the amount of tax paid in Pakistan or sum calculated at the
Indian rate of tax whichever is less.

(c) RELIEF IN CASE OF SHARE IN THE FOREIGN INCOME OF A REGISTERED

FIRM (SECTION 91(3))
An assesse receiving share in foreign income of a registered firm shall be entitled to the
relief of tax on such share provided the firm receives income from a foreign country with
 which no agreement exists under Section 90 and assessee has paid tax in that foreign
country.
Relief will be allowed only on doubly assessed income at the rate of the said country or
Indian rate of tax, whichever is lower.

General Tax Incentives for Industries

100% deduction of profits and gains for ten years is available in respect of the following:

i) Development or operation and maintenance of ports, airports, roads, highways,

bridges, rail systems, inland waterways, inland ports, water supply projects, water
treatment systems, irrigation projects, sanitation and sewage projects, solid waste
management systems.
ii) Generation, distribution and transmission of power which commence before
31.3.2006.
iii) Development, operation and maintenance of an Industrial Park or Special Economic
Zone before 31.3.2006.

Following tax exemptions are available in different sectors:

Deduction of 100% of the profit from business of
a) Development or operation and maintenance of ports, air ports, roads, highways, bridges
etc.
b) Generation, distribution and transmission of power
c) Development, operation and maintenance of an Industrial Park or SEZ
d) By undertakings set up in certain notified areas or in certain thrust sector industries in the
North-eastern states and Sikkim.
e) By undertakings set up in certain notified areas or in certain thrust sector industries in
Uttaranchal & Himachal Pradesh
f) Derived from export of articles or software by undertakings in FTZ / EHTP / STP
g) Derived from export of articles or software by undertakings in SEZ
h) Derived from export of articles or software by 100% EOU
i) An offshore banking unit situated in a SEZ from business activities with units located in
the SEZ.
j) Derived by undertakings engaged in the business of developing and building housing
projects. Deduction of 50% of profits derived from the business of building, owning and
operation of multiplex theatres of convention centre is also available.
k) Derived by an undertaking engaged in the integrated business of handling, storage and
transportation of food grains.
l) Derived by an undertaking engaged in the commercial production or refining of mineral
oil
m) Derived by an undertaking from export of woodbased handicraft

100% deduction for seven years for undertakings producing or refining mineral oil.

100% deduction from income for first five years and 30% (for persons other than
Companies) 25% in subsequent five years is available in respect of the following:
 a) Company which starts providing telecommunication services whether basic or
cellular including radio paging, domestic satellite service, network or trunking, broad
band network and internet services before 31.3.2003.
b) Industrial undertakings located in certain specified industrially backward states and
districts.
c) Undertakings which begin to operate cold chain facilities for agricultural produce
before 31.3.2003.
d) Undertakings engaged in the business of handling, storage, transportation of food
grains.

50% deduction for a period of five years is available to undertakings engaged in the
business of building, owning and operating multiplex theatres or convention centres constructed
before 31.3.2005.

Tax exemption of 100% on export profits for ten years upto F.Y. 2009-10, for new industries
located in EHTPs and STPs and 100% Export Oriented Units. For units set up in Special
Economic Zones (SEZs), 100% deduction of export income for first five years followed by 50%
for next two years, even beyond 2009-10.

Tax exemption of 100% of Export profits for ten years for new industries located in
Integrated Infrastructure Development Centres or Industrial Growth Centres of the North Eastern
Region.

Deduction of 50% of export profits from the gross total income. The deduction would be
restricted to 30% for financial year 2003-04 and no deduction is allowable subsequently.

Deduction from the gross total income of 50% of foreign exchange earnings by hotels and
tour operators. The deduction would be restricted to 30% for financial year 2003- 04 and no
deduction is allowable subsequently.

50% deduction of export income due to export of computer software or film software,
television software, music software, from the gross total income. Deduction in respect of certain
inter-corporate dividends to the extent of dividend declared.

Exemption of any income by way of dividend, interest or long term capital gains of an
infrastructure capital fund or an infrastructure capital company from investment made by way of
shares or long term finance in any enterprises carrying on the business of developing,
maintaining and operating infrastructure facility.
 Basics of Service Tax
Service Tax
1. Service tax is a tax on service.
2. Service means value addition to a product that is intangible.
3. If there no service, there no tax.
4. Service tax is imposed by amending chapter V of finance act 1994 from time to time.
5. There is also no provision of deduction of tax at source from service tax and therefore the
service receiver does not deduct tax from the payment to service provider and deposit it to
department.
6. Service tax is payable on taxable service only.

Need for Service Tax

1. Services Constitute a very heterogeneous spectrum of economic activities
2. With the increasing role of service sector and its contribution to GDP, the government felt that
this sector should not go untaxed.
3. The growth of service sector at higher rate offers opportunities as well as challenges to bring
under tax net, hitherto uncovered services which in turn offer revenue to the government.
4. Service tax will reduce burden on the international trade (custom duty) and domestic
manufacturing sector (excise duty).
5. Service tax in India Made a humble beginning from July 1, 1994 with only three services
being covered in the organized sector, i.e. telephone, general insurance & stock broking.
6. Since, 1994 it has been amended every year to add more services into tax net.

Different approaches to service tax

There are 2 type of approaches :-
1. Comprehensive approach: - All services are taxable and a negative list is specified for services
which are not taxable.
2. Selective approach:-It includes only selective services which are subject to service tax . India
follows a selective approach of taxing selected services only. Service Tax is levied on specified
services and paid by the service provider.

Features of service Tax:-

1. Indirect Tax:- It is a source of revenue for the government in form of indirect taxes.
2. No separate Act:-Central Government has the power to make rules to carry out the provisions
of the Act.
3. Administered By CBEC: - It is administered by central board of excise and customs.
4. Uniform rate:-Currently it is 10 %.
5. No double taxation:- Services falling under two or more sub clauses cannot be taxed twice if
service is provided only once.
6. Not applicable top Jammu & Kashmir:- It is extended to whole of India except the state of
J&K.
7. Leviable on taxable services:- Service Tax is leviable on taxable services (i.e. those services
in respect of which charge of tax has been created under the act at the prescribed rates.
8. Small service providers excluded:- a threshold limit of Rs 10 lakhs has been prescribed up to
which value of all taxable services provided by a service provider during financial year is fully
exempted from tax.
9. Taxable service/value thereof:- for this purpose , the taxable service and the value of taxable
service have been specifically defined.
10. Tax is generally payable by the service provider:- The act makes the person providing the
service to pay service tax in such a manner except in the situations provided in rule
2 (1)( d) of the service tax rules.
11. Self assessment:-Provision have been made for self assessment ,rectifications, revisions
,appeals, penalties etc as well as for registration of persons liable to pay tax.
12. Exemption by notification:-power have been given to the government to grant exemptions
from service tax in appropriate cases , by means of specific notifications.
13. Voluntary exemptions:-Under service tax ,there is reliance on collection of primarly through
voluntary compliance.

Extent and application ( Sec 64)

Service Tax introduced by virtue of chapter V of the finance act 1994 extends to the whole of
India except to the state of J & K .service tax is not payable if the services are provider in the
state of J & K irrespective of the fact whether the service provider is residing in or outside J & K.
Services provided by a resident of J & K to a client residing in other parts of the country would
be liable for payment of service tax . Services provided in the state of J & K from any other state
are not subject to payment of service tax

Service liable to tax

1. Advertising agency.
2. Airport services.
3. Air travel agent.
4. Architect.
5. Asset management including portfolio management.
6. ATM operation & management.
7. Auctioneer’s service.
8. Banking & financial services.
9. Beauty treatment
10. Broadcasting.
11. Business auxiliary & support services & CS services & cost accounting services.
12. Chartered accountant services
13. Cleaning activity
14. Club or association services
15. Commercial training or coaching
16. Construction
17. Courier
18. Legal consultancy
19. Stock exchange, broking
20. Franchise, intellectual property

Procedure of service tax

Procedure includes the following:

1. Registration:-the application for the registration of is required to be made in duplicate in form
ST -1 prescribed under the rules. The following documents shall be enclosed along with
registration from :-
a. A copy of PAN
b. Proof of Address
c. Constitution of applicant [i.e AOA,MOA]

The department /applicant deposit self certified copies and department is required to issue
registration certificate within 7 days of the receipt of application. In case of failure to issue
registration certificates within 7 days the registration applied for is deemed to have been granted
& the assesse can carry on with his activities
2. Maintenance of records:-
a. Invoice:- Every person providing taxable service shall issue an invoice
/bill/challan not later than 14 days from the date of completion of taxable service or receipt of
payment whichever is earlier. Bill /invoice challan should include :-
i. Name & address & registration number of the person providing taxable services.
ii. Name & address of the person receiving taxable services.
iii. Service description & classification.
iv. Bill /invoice should be serially numbered & signed by authorized person.
3. Payment of service tax :- The assesses has to pay tax in the bank designated by CBEC in
form TR -6 or in any other manner as prescribed by CBEC. The list of Bank is available in every
commissioner ate of central excise. Some banks provide the facility of e payment or cheque can
also be deposited in the bank.
4. Filing of return:- Every person liable to pay tax needs to self assess the tax on the service
provided by him. Further a return must be furnished to superintendent of central excise . The
return is to be furnished in form ST-3 .Under rule 7(1) the return is to be filed on half year basis
& should be filed in triplicate on or before 25th of month following particulars half year. There
can be e filing of return also.

Penalty under service tax

If service tax is not paid or paid after due date penalty can be imposed :-
a) Rs 200 per day during which the failure continues.
b) 2 percent per month during which the failure continues whichever is higher.

General exemptions from service tax

The central government can grant total or partial exemptions to taxable services under section
93. The following general exemptions are available to service provider from payment of whole
amount of service tax :
a) Services provided to the united nation and any other International organization.
b) Services provided to a developer or units of special economic zones.
c) Goods & material sold by services provider to recipient of service provided value of
taxable service does not exceeds 10 lakhs.
d) Exemption of small service providers.
e) Services provided by Reserve bank of India.
f) Exemptions to technology business indicator (TBI), sciences & technology entrepreneurship
parks & incubates provided that business of incubates does not exceed Rs 50 lakhs.
g) Services provided by a digital cinema services provider.
h) Services provided by resident’s welfare associations where the monthly contribution does not
exceed Rs 3000.
i) Technical testing & analysis services including vaccines & herbal remedies on human
participants by a clinical research organization.

Updates according to Budget :- 2011 Service tax

Highlight of this budget:
a) Service tax will be payable on accrual basis from 1.04.2011. So the moment a service
provider will book any invoice in his books the tax will become payable.
b) Service tax is being levied on all services provided by a medium sized hospital (having more
than 25 beds) irrespective of whether the patient has insurance or not.
c) Service tax on Hotels have been introduced in a big way:
 i) Room rentals above a declared rate of Rs. 1000 will be chargeable to service tax – with an
optional abatement of 50%.
ii) Services provided by air-conditioned restaurants having a license to serve alcoholic
beverages – this service will get optional 70% abatement.
d) Penal provisions are made harsher with introduction of penalties even when tax is being
paid under audit.
e) Introduction of prosecution provisions wherein the assesses evading tax payments for
more than 6 months may face imprisonment of upto 3 years.

List of Amendments in existing law

1) No change in the rate of service tax – it remains at 10.30 %

2) Two new services are being brought under the tax net:
a) RESTAURANTS
Services provided by air-conditioned restaurants having a license to serve alcoholic
beverages – this service will get optional 70% abatement.
b) HOTELS
Hotels and guesthouses giving rooms for accommodation for a continuous period less
than 3 months – this service brings into the tax net only rooms having a declared
(Rack) rate of more than Rs. 1000 (chargeable rate may be less). This service will get
an optional 50% abatement.
3) Scope of certain existing services is being changed and in almost all cases the changes
are drastic :
a) CLUB OR ASSOCIATION SERVICES
EARLIER:
Services provided by a club or association to ITS MEMBERS were only taxable
NOW: Services provided to NON MEMBERS will also become taxable
b) AUTHORISED SERVICE STATION
EARLIER:Services provided by AUTHORISED SERVICE STATION were only
taxable
NOW Services provided by ANY PERSON will be taxable so all small mechanics
provided services for more than 10 lacs in a year will become taxable.
c) LAWYERS
EARLIER: Services provided by a firm of lawyers to any individual were not taxable.
Secondly legal representational services like appearing in court of law for a client
were also not taxable
NOW Services provided by a firm of lawyers to any person shall become taxable and
legal representation services provided by any person (including individuals) to any
business entity shall also become taxable. Similar change is expected to come for
chartered accountants and company secretaries. Arbitration services are also
brought into the tax net but still if the same are provided to individuals the same shall
not be taxable.
d) COMMERCIAL TRAINING OR COACHING SERVICE
The memorandum issued along-with the Budget says that “The definition of
commercial or training service is being amended to bring all unrecognised courses
 within the tax net, irrespective of the fact that such courses are conducted by an
institute.” But the consequent change in the section does not reflect the said change –
on the contrary – the amended section says that all courses offered by a coaching
centre WITH OR WITHOUT ISSUANCE of certificate will be taxable This anomaly
needs to be looked into an corrected before enactment of the Finance Act.
e) HOSPITAL SERVICES Major change has been made in this entry
EARLIER: 2 Services provided by a hospital were ONLY taxable:
• Services provided to patients wherein the payment was to be paid by thE
insurance company
• Services of health check up or preventive care provided to an employee of a
company wherein the company paid the charges to the hospital
NOW: The whole section is changed and the new entry provides that
• ALL services provided by a CENTRALLY AIR-CONDITIONED (wholly
or partially) hospital having more than 25 beds for in-patient treatment
during any part of the year. (The insurance company is completely brought
out from the picture)
• If an independent doctor (not being an employee of the hospital) provides
his services using the premises of the said hospital will also now become
taxable –so now all visiting doctors of a hospital will be taxable.
• Diagnostic services provided by the said hospital with the aid of a
laboratory or other medical equipments.

4) Full exemption is being provided under the works contract service for providing
construction or finishing of new residential complex under JNNURM and Rajiv Awaas
Yojana and within a port or airport. (Earlier this exemption was provided only under the
category of Construction of residential complex and commercial construction service.
5) Rates of Service tax on air travel are being increased as under Domestic Travel - From
flat Rs. 100 to 150 International Travel - From flat Rs. 500 to 750
6) Penal provisions are changed in big way in this budget – following is the gist of them:
A) Section 73 (1A) is deleted wherein benefit of reduced penalty of 25% even
in case of fraud, collusion etc shall not be available.
B) Instead a new section 73 (4A) is being introduced wherein it has been
provided that if during an audit, verification or investigation by the
department it is found that the assessee has short paid any tax than a
penalty of 1% per month upto a maximum of 25% shall be levied. If the
same is paid than no show cause notice shall be issued. So now penalty
will become compulsory the moment an audit party finds any short
payment of tax which was not so earlier.
C) Penalty under section 76 for delayed payment of tax has been reduced
from Rs. 200 per day or 2% per month to Rs. 100 or to 1% per month –
whichever is higher subject to a maximum penalty of 50% of the tax
amount. Earlier it was 100%.
D) Maximum penalty for non submission of records etc under section 77 has
been increased from Rs. 5000 to 10000.
E) Penalty for late filing of returns has been increased from a maximum of
Rs. 2000 to 20000.
 F) Power to authorise a Search has now been given to a Joint commissioner
(Earlier it was with Commissioner) and power to execute the search has
been given to a Superintendent (earlier it was Assistant or deputy
commissioner)
G) Certain section of the Central Excise Act which deal with prosecution are
now made applicable to Service tax.
H) Section 89 is being introduced to bring prosecution provisions:
(i) The prosecution shall apply in the following cases:
• Provision of service without invoice
• Availment and utilisation of credit without receipt of
inputs or input services
• Submitting false information
• Non-Payment of collected amount of service tax for
a period of more than 6 months
(ii) The term of the imprisonment shall be from 6 months to a maximum of 3
years.
(iii) The sanction for the prosecution will be granted at the level of
chief commissioner
7) The Board has issued 18 notifications to being some more changes which are as under:
a) New Rule 2A has been introduced in Works contract Composition rules whereby
Service providers availing the Composition scheme shall now be eligible to take only
40% of the credit of the following 3 input services availed by them:
• Erection commissioning and installation Services
• Commercial Construction Services
• Construction of Residential Complex Services
b) In the earlier budget notification nos. 28/2010, 38/2010 & 42/2010 were issued
wherein exemption to Construction of complex & Commercial construction service
was given respectively for providing services to JNNURM and Rajiv Awaas Yojana
schemes but a similar exemption was not provided to Works contract service. This
anomaly has now been corrected by introducing notification no. 6/2011, 10/2011 and
11/2011.
c) Export Rules have been tweaked a bit :
i) Preferential Location services offered by builders has been shifted from
customer location based criteria to immovable property criteria
ii) Following services have been shifted from the performance based criteria to
location based:
• Credit Rating Agency
• Goods Transport Agency
• Market Research Agency
• Opinion Poll Agency
• Technical Testing and analysis
• Transport of Goods by air
• Transport of Goods in containers by railways
iii) Following Services have been shifted from Location based criteria to
performance based:
• Rail Travel Agent
 • Health/Hospital Services
d) Import Rules have also been amended. Amendments similar to the ones made in
Export rules are made in import rules.
e) Interest on delayed payment which was 13% p.a. earlier has now been increased to
18% p.a. w.e.f. 1.04.2011.
f) New Notification no. 17/2011 is introduced which supersedes the earlier notification
no. 9/2009 which deals with SEZ refunds. It simplifies the refund rules and
procedures related to SEZ’s.
g) Point of Taxation Rules has been introduced whereby specific rules as to when a
particular transaction would become taxable have been prescribed (at the time of
invoicing or at the time of receipt of payment). A detailed note on the same is under
process and will be mailed very soon.

8) CENVAT credit rules have been amended in a big way and following changes are made
to it:
a) Definition of Capital goods has been amended. Now credit of capital goods used
outside the factory of the manufacturer for generation of electricity for captive use
within the factory will be available.
b) Major change has been brought about in the definition of exempted services. Effect of
2 changes made in the definition are as under:
• Services on which a service provider has claimed abatement will now be
considered as exempted services
• Value of trading in goods shall now be treated as exempted services.
c) Definition of Inputs (goods) has been changed and now credit of goods used for
construction of building or a civil structure or laying of foundation will not be
available except if the goods are used for providing following services:
• Port Services
• Airport Services
• Commercial Construction Services
• Residential Construction Services
• Works Contract Services
d) Definition of Input Services has been amended and following changes are
incorporated:
• Credit for setting up of an office, factory or premises of service provider shall
not be available
• The words “activities relating to business” have now been deleted from the
definition so now credit of ALL services procured for doing the activity of
business will not be available on A-la-carte basis.
• Credit of services falling in the category of Architect, Port, Other port,
Airport, Commercial Construction, Residential construction and Works
Contract (Specified services) shall not be available if the same are used for
construction of building or a civil structure or laying of foundation. If these
services are used to provide the same specified services than the service
provider can claim the credit thereof.
• Services falling in the category of General Insurance business, Cab operator,
Authorised Service Station and supply of tangible goods so far as they relate
 to motor vehicle except when used by a service provider falling in the
category of courier, Cab operator, Cargo handling, Transport of goods by road,
outdoor catering and pandal and shamiana keeper.
• Credit of services falling in the category of outdoor catering, beauty treatment,
health services, cosmetic and plastic surgery, membership of a club, health
and fitness centre, life insurance, health insurance and travel benefits extended
to employees on vacation such as Leave or Home Travel Concession, when
such services are used primarily for personal use or consumption of any
employee will not be available henceforth.

VALUE ADDED TAX (VAT)

VALUE ADDED TAX (VAT)

Value added tax means a tax on sale. It is another form of sales tax. It is collected on different
stages of transactions involving sales of goods, tax paid on purchase .VAT is applicable only in
case of sale of all taxable goods. It is a multipoint taxation system which means tax is payable at
each stage.VAT has been applicable from 1st April 2005 in the state of Punjab with view to make
it convenient for the manufacturer and seller of goods.

BASIC PROVISIONS
 Set off. (Input Credit): At present the set off is available on the goods locally purchased
within the State only. No set off would be available to the goods purchased in the course
of interstate trade and commerce. It will be necessary to produce the tax invoice to claim
set off. The tax should have been charged in the invoice.
 Exempted Goods: Goods termed as exempted by the State Government under the
proposed VAT Act. As per guide lines issued by the State Governments, no set off would
be allowed on the exempted goods. It means that the tax suffered on the raw material for
manufacture of exempted goods would not be refunded.
 Manufacturer: The manufacturer is required to purchase raw material after paying full
tax on the rate applicable on such material. Unlike the present system wherein the
manufacturer can purchase the goods at a concessional rate of tax against declaration
form no declaration form will be required to be issued by the Manufacturer. The input tax
suffered by him would be adjusted \ set off from the sale of the finished product. The tax
adjustment of input credit of the goods purchased within the State would be available on
the sales made within the State and also on the interstate sales subject to the tax payable.
No adjustment would be available of the input credit in case of branch transfer,
consignment sale.
 Trader: The trader would be required to collect tax on the sales made by him and the tax
liability would be set off \ adjusted from the purchase \ input tax credit of the goods
locally purchased in that State.
 Issue of Invoice: Under Value Added Tax Act issue of invoice is mandatory. No set off \
input credit would be allowed unless the original tax invoice is produced wherein tax is
clearly charged separately in the invoice.
 Declaration Form: Use of declaration form of purchase of goods on concessional rate of
tax or NIL rate of tax under the State Act is completely finished. There is no requirement
of declaration form under the proposed Value Added Tax. However the Road Permits like
ST 18 A and ST 18 C declaration forms would continue. Declarations forms of CST Act
would also continue.
 Accounting: The basic account books required for the purpose of VAT Act are Purchase
and Sale Register. Both the registers would be the basis on which the calculation of
payment of tax would be made. The normal practice of entering the gross value of
Purchase bill would be changed. The assesse is required to enter the value of goods in the
goods A\c and the amount of tax in the Tax A\c separately.
 Stocks: Stock statement are required to be furnished as prescribed for the quarter ending
and then monthly from January to March. Set off of tax paid stocks would be given. Tax
paid stocks as on March ending would be the basis for claiming set of under the new VAT
Act. No set off would be available for the tax paid stock purchased prior to 1.4.2005.
 Capital Goods: Set off would also be available on the tax paid goods at the time of
purchase of capital goods under the VAT Act. Basis of set off is yet to be declared.
However, it is presumed that set off would be available within a span of 3 years from the
date of commercial production.
 Export: Export would be zero rated. Tax paid on raw material used in manufacture of
goods for export would be refunded by the State Government in cash \ adjustment. The
exports would became more competitive in the world market as there would be no tax
henceforth on raw material used for manufacture of goods for export.
  Registration: All Importers, Manufacturers, Exporters and Dealers having CST
registration would be required to seek mandatory registration under the new VAT Act.
The existing registered dealers are required to fill a FACT SHEET as notified by the
department within a stipulated time which is at present 15.02.2006 and then they would
not be required to seek fresh registration. There would be two types of registration. The
first is VAT dealer’s registration and the second is composition scheme dealer
registration. The dealers opting under composition scheme would not be able to charge
tax in the invoice and he would pay lump sum fee as composition amount. It is apparently
for retail traders and the expected limit of turn over for option under composition scheme
is maximum Rs. 15 lacs.
 Security Amount: Security amount for seeking registration is likely to be increased
many fold in VAT Act. The security for registration under the present Act is Rs.10, 000
which is increased to Rs. 25,000.00 for small scale industry, Rs. 1,00,000formedium
scale industry and Rs. 5,00,000.00 for large scale industry. Apart from it, the assessing
authority would have a right to seek additional security equal to 25% of the tax liability.
 Audit of Account: Every dealer having a turnover of over Rs. 40.00 lacs would be
required to get his account audited by a Chartered Accountant and submit the audit report
within the stipulated time. Failure to do so would attract penalty proceedings.
Penalties:

Penalties have been increased many folds in the new VAT Act. As per discussion draft on VAT
Act circulated, there is more emphasis on penalties.
Works Contract and Leasing: No clarification, provision or guide lines had been issued by the
department till date on works contract and leasing transaction. The continuation of existing
composition scheme or by what method they would be taxed in future has not been informed.

Under VAT, the tax is levied at each point of sale. The tax paid on purchasepoint is allowed to be
set off, also referred to as input tax credit under VAT.

A following simple example can be considered for understanding the concept.

(i) A sells to B
(Rate of tax is assumed to be 10%)
Sales price + Tax = Total
100 + 10 = 110
Tax Payment to Govt.
A will pay tax at Rs.10
(The input credit available to A is not
considered here for simplicity).
Rs.10
(ii) B sells to C
Sales price + Tax = Total
150 + 15 + 165
B will pay tax to Govt. as under:
Tax on sale 15
Less: Tax paid on Purchase (-) 10
Net Payable 05
 Rs.5
(iii) C sells to D
Sales price + Tax = Total
200 + 20 = 220
C will pay tax to Govt. as under:
Tax on sale 20
Less: Tax paid on Purchase (-) 15
Net Payable 05
Rs.5
(iv) D sells to Consumer
Sales price + Tax = Total
250 + 25 = 275
D will pay tax to Govt. as under:
Tax on sale 25
Less: Tax paid on Purchase (-) 20
Net Payable 05
Rs.5
Total Payment Rs.25

Benefits of VAT

1) Coverage-If the tax is considered on a retail level, it offers all the economic advantages
of a tax of the entire retail price within its scope. The direct payment of tax spreads out
over a large number of firms instead of being concentrated only on particular groups,
such as wholesalers & retailers.
2) Revenue Security - Under VAT only buyers at the final stage have an interest in
undervaluing their purchases, as the deduction system ensures that buyers at earlier stages
are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will
be limited to the value added at the last stage.
3) Under VAT, if the payment of tax is avoided at one stage nothing will be lost if it is
picked up at later stage. Even if it is not picked up later, the government will at least have
collected the VAT paid at previous stages. Whereas if evasion takes place at the final/last
stage the state will lose only tax on the value added at that particular point.
4) Selectivity - VAT is selectively applied to specific goods & business entities. In addition,
VAT does not burden capital goods because of the consumption-type. VAT gives full
credit for tax included on purchases of capital goods.
5) Co-ordination of VAT with direct taxation - Most taxpayers cheat on sales not to evade
VAT but to evade their personal and corporate income taxes. Operation of VAT resembles
that of the income tax and an effective VAT greatly helps in income tax administration
and revenue collection.
Limitations of VAT

1) Impact on GDP ratio- the implementation of Vat is closely related to other indirect
tax administration and impacts the tax to GDP ratio; this is why several countries
have taken a long time to implement Vat.
2) Less Revenue to government- In some cases the VAT is collected by dealer and no
paid to government. As a result the set off of such Vat paid by the purchaser may not
be allowed to the purchasers. A strong mechanism has to be devise to tackle such
situations.
3) Complexity in refund procedure- A situation of refund would arise if no vat is
payable on the final scale. As a result the set off cannot be availed. Hence, the tax
paid becomes the cost or the same has to be claimed as refund. A suitable mechanism
has to be framed for early refund.
4) Multiple rates of tax- vat may also contain multiple rates of tax due to multiple types
of items. In countries like India wherein sales tax already covers a wide range of
commodities, replacement of those taxes by a revenue neutral vat may lead to no
inflammatory consequences.
5) Maintenance of different records- The dealers would have to maintain upto date
records of purchase and sales in order to claim set off. Many dealers prepare only
primitive accounts which may not be accepted by the department.
6) Confliction- Since central sales tax continues to remain in force, there can be conflict
between VAT and CST
 Basics of custom and excise duty

Central Excise Duty - Introduction

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.
Besides, all imports are sought to be subject to a duty with a view to affording protection to
indigenous industries as well as to keep the imports to the minimum in the interests of securing
the exchange rate of Indian currency.

Duties of customs are levied on goods imported or exported from India at the rate specified
under the customs Tariff Act, 1975 as amended from time to time or any other law for the time
being in force. For the purpose of exercising proper surveillance over imports and exports, the
Central Government has the power to notify the ports and airports for the unloading of the
imported goods and loading of the exported goods, the places for clearance of goods imported or
to be exported, the routes by which above goods may pass by land or inland water into or out of
Indian and the ports which alone shall be coastal ports

In order to give a broad guide as to classification of goods for the purpose of duty liability, the
central Board of Excises Customs (CBEC) bring out periodically a book called the "Indian
Customs Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act also
contains detailed provisions for warehousing of the imported goods and manufacture of goods is
also possible in the warehouses.

For a person who do not actually import or export goods customs has relevance in so far as they
bring any baggage
Excise duty is a tax on manufacture of goods within the country . it is a duty levied upon goods
manufactured and not upon sales or proceeds of sales of goods. Therefore the duty of excise is
levied on a manufacturer or producer in respect of the commodities produced or manufactured by
him.

Excise duties are levied under the central excise and salt act 1944 , the excise tariff act 1985 ,and
the modified value added tax scheme(MODVAT) scheme.

The rates of excise duty leviable vary depending inter alia on nature of item the item
manufactured , the nature of manufacturing concern and the place of ultimate sale.

Central excise revenue is the biggest single source of revenue for government of India. The
union government tries to achieve different socio-economic objectives by making suitable
adjustments in the scope and quantum of levy of central excise duty. The scheme of central
excise levy is suitably adapted and modified to serve different purposes of price control ,
sufficient supply of essential commodities , industrial growth and promotion of small scale
industries.

Article 265 0f constitution of India has laid down that both levy and collection of taxes shall be
under the authority of law. The excise duty is levied in pursuance of entry 45 of the central list in
the government of India act, 1935 as adopted by the entry 84of list 1 of the seventh schedule of
the constitution of India . the charging section is section 3 of the central excise and salt act,1944 .

The duty rate are either ad valorem (a fixed percentage of cost of production ) , specified (a fixed
rate depending upon the nature of manufactured item , or a combination of both.

The MODVAT scheme , introduced in 1986 , applies to certain specific items. The objective of
this scheme is to limit the cascading of duty incidence on a number of goods , subject to excise
which are further used as inputs for other excise able goods from abrod

Importance of Central Excise Duty

Central excise revenue is the biggest single source of revenue for the Government of India. The
Union Government tries to achieve different socio-economic objectives by making suitable
adjustments in the scope and quantum of levy of Central Excise duty. The scheme of Central
Excise levy is suitably adapted and modified to serve different purposes of price control,
sufficient supply of essential commodities, industrial growth, promotion of small scale industries
and like Authority for collecting the Central Excise duty.

Article 265 of the Constitution of India has laid down that both levy and collection of taxes shall
be under the authority of law. The excise duty is levied in pursuance of Entry 45 of the Central
List in Government of India Act,1935 as adopted by entry 84 of List I of the seventh Schedule of
the Constitution of India. Charging section is Section 3 of the Central Excises and Salt Act,1944.

Liability to pay Central Excise Duty

Section 3 of the Central excises and Salt Act,1944 provides that there shall be levied and
collected in such manner as may be prescribed, duties of excise on all excisable goods other than
salt which are produced or manufactured in India at the rates set forth in the schedule to the
Central excise Tariff Act,1985.it is therefore clear that as soon as the goods in question are
produced or manufactured, they will be liable to payment of Excise duty. However for
convenience duty is collected at the time of removal of the goods. While Section 3 of the Central
Excises and salt Act,1944 lays down the taxable event, Rules 9 and 49 of the Central excise
Rules,1944 provides for the collection of duty.

Types of Excise Duties

There are three types of Central Excise duties collected in India namely

1. Basic Excise Duty

This is the duty charged under section 3 of the Central Excises and Salt Act,1944 on all
excisable goods other than salt which are produced or manufactured in India at the rates
set forth in the schedule to the Central Excise tariff Act,1985.

2. Additional Duty of Excise

Section 3 of the Additional duties of Excise (goods of special importance) Act,1957

authorises the levy and collection in respect of the goods described in the Schedule to this
Act. This is levied in lieu of sales Tax and shared between Central and State
Governments. These are levied under different enactment's like medicinal and toilet
preparations, sugar etc. and other industries development etc.
3. Special Excise Duty

As per the Section 37 of the Finance Act,1978 Special excise Duty was attracted on all
excisable goods on which there is a levy of Basic excise Duty under the Central Excises
and Salt Act,1944.Since then each year the relevant provisions of the Finance Act
specifies that the Special Excise Duty shall be or shall not be levied and collected during
the relevant financial year.
Excise duties in budget 2011-2012:

Union Excise Duty: .Revised Estimate of Union Excise Duties for 2010-2011 is..`137777.52
crore as against the Budget Estimate of..`132000 crore. Budget Estimate for 2011-2012
is..`164115.66 crore...

1. Basic and Special Excise Duty :.Basic Excise Duty and Special Excise Duty are leviable under
the Central Excise Act at the rates specified in the Central Excise Tariff Act, 1985. The mean
CENVAT rate was increased from 8% to 10% w.e.f. 27.02.2010. Excise duty on Motor Spirit
(MS) and High Speed Diesel (HSD) was increased by Re.1 per litre.

2. Additional Duty of Excise on Motor Spirit:.Additional Duty of Excise on Motor Spirit is

leviable by the Finance Act (No.2), 1998. This is commonly known as road cess. Receipt Budget,
2011-2012 5 Tax Revenue

3. Additional Duty of Excise on High Speed Diesel Oil: .Additional Duty of Excise on High
Speed Diesel Oil is leviable by the Finance Act, 1999. This is commonly known as road cess.

4. National Calamity Contingent Duty (NCCD):.National Calamity Contingent Duty was levied
on pan masala and certain specified tobacco products vide the Finance Act, 2001. The Finance
Act, 2003 extended this levy to: (a) polyester filament yarn, motor car, two wheeler and multi-
utility vehicle @ 1% and (b) crude petroleum oil @..`50 per metric tonne...

5. Special Additional Duty of Excise on Motor Spirit: .Special Additional Duty of Excise on
Motor Spirit is leviable by the Finance Act, 2002. This is commonly known as surcharge.

6. Surcharge on Pan Masala and Tobacco Products: .An Additional Duty of Excise has been
imposed on cigarettes, pan masala and certain specified tobacco products, at specified rates in the
Budget 2005-06. Biris are not subjected to this levy.

7.01. Education Cess: .Education Cess is leviable @ 2% on the aggregate of duties of Excise.

7.02. Secondary and Higher Education Cess: .Secondary and Higher Education Cess is leviable
@ 1% on the aggregate of duties of Excise.

Arrear Collection: RE 2010-11 and BE 2011-12 include collection of arrears of Central Excise
Duties amounting to..`1323 crore and..`1100 crore respectively...

8. Clean Energy Cess: .Clean Energy Cess was imposed under section 83 of Finance Act 2010 on
coal, lignite and peat produced in India @..`50 per tonne. The cess has come into force w.e.f.
01.07.2010 and is to be collected as duty of excise...
Body of central excise law

Central excise law includes

1. Central excise act 1944

2. Central excise rules 2002

3. Cenvat credit rules 2004

4. Central excise (appeal) rules 2001

5. Central excise (advance ruling) rules 2002

6. Central excise(settlement of cases)rules 2001

7. Central excise valuaton(determination of prices of excisable goods)rules 2000

8. Central excise tariff act 1985

Liability to Pay Excise Duty

Goods themselves cannot pay duty so the person who create the taxable event must discharge the
liability which he had created. The liability to pay tax excise duty is always on the manufacturer
or producer if goods. There are three types of parties who can be considered as manufacturers-

 Those who personally manufacture the goods in question

 Those who get the goods manufactured by employing hired labour

 Those who get the goods manufactured by other parties

The following have been held to be real manufacturers :

 In case where the factories are leased out, duty liability is on the lessee as he is the person
who actually manufactures the said goods

 When goods are manufactured from others by supplying raw material, the duty liability
will rest on the person who actually carried out the manufacturing activity and not on the
person who supplied the material.
  In the manufacturer is a mere dummy of the customer or supplier of raw material, then
the goods are said to be manufactured on behalf of the customers / suppliers and the latter
is liable to duty.

Custom Duty in India

The Custom Duty in India is one of the most important tariffs. The custom duty in India is
regulated by the Customs Act of 1962. The main purpose of the custom duty in India is the
prevention of the illegal export and import of goods. The rates of the custom duty levied on the
imported and exported goods are assigned in the Custom Act, 1962.

The duties of custom are levied on goods that are imported or exported from India ,at the rate
specified under the custom tariff act 1975,as amended from time to time ,or by another law for
the time being in force .for the purpose of exercising proper surveillance over imports and
exports ,the central government has the power to notify the ports and airports for the unloading
of the imported goods and loading of the exported goods ,the place for clearances of goods
imported or to be exported ,the routs by which the above goods may pass by land or inland water
into or out of India , and the ports which alone should be coastal ports .

The customs duties are levied on imports at rates specified in the annual budget. the finance act
1994 has witnessed a general reduction in the duty on capital goods ,steel, chemical drugs,
pesticides and project imports.

The Acts under the custom duty in India:

 Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993
 Customs Act, 1962

The Registrars of Companies in different states chiefly manage:

 Customs Tariff Act, 1975
 Foreign Trade (Development and Regulation) Act, 1992
 Taxation Laws (Amendment) Act, 2006
 Provisional Collection of Taxes Act, 1931
 Central Excise Tariff Act, 1985
 Foreign Trade (Regulation) Rules, 1993
 Central Excise Act, 1944

The rules and regulations under the custom duty in India:

 Foreign Privileged Persons (Regulation of Customs Privileges) Rules, 1957

 Denaturing of Spirit Rules, 1972
 Customs (Attachments of Property of Defaulters for Recovery of Government Dues)
Rules, 1995
 Accessories (Condition) Rules, 1963
 Specified Goods (Prevention of Illegal Export) Rules, 1969
 Re-Export of Imported Goods (Drawback of Customs Duties) Rules, 1995
 Notice of Short-Export Rules,1963
 Customs Tariff (Identification, Assessment and Collection of Countervailing Duty on
Subsidized Articles and for Determination of Injury) Rules, 1995
 Customs and Central Excise Duties Drawback Rules,1995
 Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on
Dumped Articles and for Determination of Injury) Rules, 1995
 Customs Valuation (Determination of Price of Imported Goods) Rules, 1988
 Customs Tariff (Determination of Origin of Goods under the Agreement on SAARC
Preferential Trading Arrangement) Rules,1995
 Notified Goods (Prevention of Illegal Import) Rules, 1969
 Customs Tariff (Determination of Origin of Goods under the Bangkok Agreement)
Rules, 1976
 Customs Tariff (Determination of Origin of the U.A.R. and Yugoslavia) Rules, 1976
 Customs (Settlement of Cases) Rules, 1999
 Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable
Goods) Rules, 1996
 Customs (Publication of Names) Rules,1975
 Rules of Determination of Origin of goods under the Agreement on South Asian Free
Trade Area (SAFTA)
 Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997
 Baggage Rules, 1998 Customs Tariff (Determination of Origin of Other Preferential
Areas) Rules,1977
 Customs Tariff (Determination of Origin of Goods under the Free Trade Agreement
Between the Democratic Socialistic Republic of Sri Lanka and the Republic of India)
Rules, 2000

The different duties under custom duty in India:

 Basic Duty: This is the general kind of duty levied under the Customs Act, 62

 Additional Duty (Countervailing Duty): This duty is levied under the Custom Tariff
Act, section 3 (1)
 Anti-dumping Duty: This duty prevents the dumping of foreign goods by the
transnational companies
 Protective Duty: This duty protect the interests of the Indian industrial sector
 Export Duty: This duty is levied on the export of goods

Basics of Customs Duty

Customs duty on Customs duty is on imports into India and export out of India. Section 12 of
imports and Customs Act, often called charging section, provides that duties of customs
exports shall be levied at such rates as may be specified under ‘The Customs Tariff
 Act, 1975', or any other law for the time being in force, on goods imported
into, or exported from, India.
Similarity There are many common provisions and/or similarities in provisions Central
between excise Excise and customs Law. Administration, Settlement Commission and
and customs Tribunal are common. Provisions of Tariff, principles of valuation, refund,
demands, exemptions, appeals, search, confiscation and appeals are similar.
Taxable event in In case of imports, taxable event occurs when goods mix with landmass of
imports India - Kiran Spinning Mills v. CC 1999(113) ELT 753 = AIR 2000 SC
3448 (SC 3 member bench).
In case of warehoused goods, the goods continue to be in customs bond.
Hence, 'import' takes place only when goods are cleared from the warehouse
- confirmed in UOI v. Apar P Ltd. 112 ELT 3 = 1999(6) SCC 118 = AIR
1999 SC 2515 (SC 3 member bench).- followed in Kiran Spinning
Mills v. CC1999(113) ELT 753 = AIR 2000 SC 3448 (SC 3 member bench).
Taxable event in In case of exports, taxable event occurs when goods cross territorial waters
exports of India - UOI v. Rajindra Dyeing and Printing Mills (2005) 10 SCC 187 =
180 ELT 433 (SC).
Territorial Territorial waters of India extend upto 12 nautical miles inside sea from
waters and baseline on coast of India and include any bay, gulf, harbour, creek or tidal
exclusive river. (1 nautical mile = 1.1515 miles = 1.853 Kms). Sovereignty of India
economic zone extends to the territorial waters and to the seabed and subsoil underlying and
the air space over the waters.
‘Exclusive economic zone' extends to 200 nautical miles from the base-line.
Area beyond that is ‘high seas’.
Indian Customs Indian Customs waters extend upto 12 nautical miles beyond territorial
Waters waters. Powers of customs officers extend upto 12 nautical miles beyond
territorial waters.

Type of Customs Duties

Basic customs duty Basic customs duty levied u/s 12 of Customs

Act is generally 10% of non-agricultural
goods, w.e.f. 1-3-2007.
Countervailing Duty  CVD equal to excise duty is
(CVD) payable on imported goods u/s 3(1) of
Customs Tariff Act to counterbalance
 impact of excise duty on indigenous
manufactures, to ensure level paying
field.

 CVD is payable equal to excise

duty payable on like articles if
produced in India. It is payable at
effective rate of excise duty.

 General excise duty rate is 10.30%

w.e.f. 27-2-2010 (10% basic plus 2%
education cess and SAH Education
cess of 1%).

 CVD is payable on assessable

value plus basic customs duty. In case
of products covered under MRP
provisions, CV duty is payable on
MRP basis as per section 4A of Central
Excise.

 CVD can be levied only if there is

‘manufacture’.

 CVD is neither excise duty nor

basic customs duty. However, all
provisions of Customs Act apply to
CVD.

Special CVD Special CVD is payable @ 4% on imported

goods u/s 3(5) of Customs Tariff Act. This is
in lieu of Vat/sales tax to provide level playing
field to Indian goods. Traders importing goods
can get refund. CVD is not payable if goods
are covered under MRP valuation provisions/
Education Cess Education cess of customs @ 2% and SAH
Education cess of 1% is payable.
Total duty Total import duty considering all duties plus
education cess on non-agricultural goods is
generally 26.85%
Other duties NCCD has been imposed on a few articles. In
addition, on certain goods, anti-dumping duty,
safeguard duty, protective duty etc. can be
imposed. Cess is payable on some goods
imported/exported.
Safeguard duty Safeguard duty can be imposed if large
imports are causing serious injury to domestic
industry. In addition, product specific
safeguard duty on imports from China can be
imposed.
Anti dumping duty Antidumping duty is leviable u/s 9A of
Customs Tariff Act when foreign exporter
exports his good at low prices compared
to prices normally prevalent in the
exporting country.
Dumping is unfair trade practice and the
anti-dumping duty is levied to protect
Indian manufacturers from unfair
competition.
Margin of dumping is the difference
between normal value (i.e. his sale price
in his country) and export price( price at
which he is exporting the goods).
Price of similar products in India is not
relevant to determine ‘margin of
dumping’.
‘Injury margin’ means difference between
fair selling price of domestic industry and
landed cost of imported products.
Dumping duty will be lower of dumping
margin or injury margin.
Benefits accruing to local industry due to
availability of cheap foreign inputs is not
considered. This is a drawback.
CVD is not payable on antidumping duty.
Education cess and SAH education cess is
not payable on anti-dumping duty.
In case of imports from WTO countries,
antidumping duty can be imposed only if
it cause material injury to domestic
industry in India.
Dumping duty is decided by Designated
Authority after enquiry and imposed by
Central Government by notification.
Provisional antidumping duty can be
imposed. Appeal against antidumping
duty can be made to CESTAT.
Calculations of customs duty

General customs duty rate for non-agricultural goods s 10%. Total customs duty payable w.e.f.
27-2-2010 is 26.85% as excise duty rate is generally 10%

Assessable value = CIF Value of imported goods converted into Rupees at exchange rate
specified in notification issued by CBE&C plus landing charges 1% (plus some additions often
arbitrarily and whimsically made by customs).

Calculation of customs duty payable is as follows -

Duty
% Amount Total Duty
(A) Assessable Value Rs 10,000
(B) Basic Customs Duty 10 1,000.00 1,000.00
(C) Sub-Total for calculating CVD '(A+B)' 11,000.00
(D) CVD 'C' x excise duty rate 10 1,100.00 1,100.00
(E) Education cess of excise - 2% of 'D' 2 22.00 22.00
(F) SAH Education cess of excise - 1% of 'D' 1 11.00 11.00
(G) Sub-total for edu cess on customs 'B+D+E+F' 2,133.00
(H) Edu Cess of Customs – 2% of 'G' 2 42.66 42.66
(I) SAH Education Cess of Customs - 1% of 'G' 1 21.33 21.33
(J) Sub-total for Spl CVD 'C+D+E+F+H+I' 12,196.99
(K) Special CVD u/s 3(5) – 4% of 'J' 4 487.88 487.88
(L) Total Duty 2,684.87
(M
) Total duty rounded to Rs 2,685

Notes – Buyer who is manufacturer, is eligible to avail Cenvat Credit of D, E, F and K

above.
A buyer, who is service provider, is eligible to avail Cenvat Credit of D, E and F
above. .
A trader who sells imported goods in India after charging
Vat/sales tax can get refund of Special CVD of 4% i.e. ‘K’ above
 Features of GST

What is GST?

GST is abbreviation for Goods and Service Tax. GST is levied on all the transactions of goods
and services made for a consideration. This new levy replaces almost all of the indirect taxes. In
particular, it replaces the following indirect taxes:

At Central level
 Central Excise Duty
 Service Tax
 Additional Excise Duties
 CVD (levied on imports in lieu of Excise duty)
 SAD (levied on imports in lieu of VAT)
 Excise Duty levied on Medicinal and Toiletries preparations,
 Surcharges and cesses
 Central Sales Tax.

At State level
 VAT/Sales tax
 Entertainment tax (unless it is levied by the local bodies)
 Luxury Tax
 Taxes on lottery, betting and gambling
 Entry tax not in lieu of Octroi
 Cesses and Surcharges
Direct taxes, such as income tax, corporate tax and capital gains tax are not affected.

Various types of GST?

There are two types of GST

1. Unified or Single GST and
2. Dual GST.
In India, dual GST is implemented wherein Centre and State levy on the transactions of the
value of Goods or Service. Under dual GST, it is levied by both the centre called as Central
Goods and Service Tax (CGST) and State called as State Goods and Service tax (SGST).

GST rates
The tax will be collected in three tiers rates.
1. Goods at lower rate
2. Goods at standard rate

3. Services.

During the first and second year GST on goods will charged in two rates. i.e. Goods at lower
rate for necessary items and goods of basic importance ,Goods at standard rate for goods in
general. Rates of GST on service will remain same from the beginning.

Year Categories Central GST State GST Total Tax

Liability
2011 April Goods at lower rate 6 6 12
Goods at standard rate 10 10 20
Services 8 8 16
2012 April Goods at lower rate 6 6 12
Goods at standard rate 9 9 18
Services 8 8 16

And from third year i.e. April 2013, if everything is going according to planning, and there is not
much burden of compensation (to state govt) on central government the tax rate will be reduced
and there will be only two rates for Goods and services.
1. Goods at standard rate
2. Services

Year Categories Central GST State GST Total Tax

Liability
2013 April Goods at standard rate 8 8 16
Services 8 8 16

In GST taxable events are supply of Goods and supply of services, any economic events which
is not supply of goods is considered as supply of services. a service provider or trader has to
collect tax in two element called CGST( For cental government) SGST ( for state government)
and paid separately.

Threshold limit for GST

The exemption limit of GST has been proposed to 10 Lakh Both for services and Goods. So any
business with a turnover below 10 lakh will be exempted from levying GST. Current threshold
for excise duty is 1.5 crore, so more manufacturers liable for GST this will help to compensate
state government lose to an extent.

Working of GST
The idea of Goods and Services Tax (GST) also known as Value Added Tax (VAT) is a tax on
each financial contribute in the distribution chain. The taxable event is ‘supply of goods’ and
‘supply of services’. Any transmit of right to utilize goods will comprise supply of goods, and,
any supply not engaging goods will treat as supply of service. On the other hand, the tax is
exercised on the value-added component of the supply. This is accomplished by working tax on
the full fundamental value of the goods or service and giving set off/credit of tax undergo at
previous stage, identified as input stage, to keep away from cascading effect. Thus, the entire
supply chain up to final consumer gets taxed with in-built mechanism of input stage credit. In
this system, the final consumer ends up bearing the full burden of tax without any set off benefit.

Important things to consider:

Charging Tax:
The dealers including (Manufacturers, Wholesalers and Retailers and Service Providers)
registered under GST need to charge GST on goods and services delivered to customers at the
specified rate of tax. The GST payable is comprised in the price borne by the purchaser of the
goods and the service buyer. The supplier including Seller and service provider should deposit
this GST amount to the Government.

Getting Credit of GST:

If the recipient of goods or services belongs to a registered dealer (Manufacturers, Wholesalers
and Retailers and Service Providers) and has got an appropriate tax invoice then he can claim a
credit for the payment of GST amount. This “input tax credit” is setoff against any GST (Out
Put), charged on goods and services by the dealer to his customers.

Ultimate Burden of Tax on Last Customer:

As the last and final consumer of the goods and services obtains no credit for the GST paid to the
sellers or service providers, the ultimate burden of the tax drop to him.

Registration:
Dealers including the suppliers, manufacturers, service providers, wholesalers and retailers must
be register for GST falling which he normally unable to charge GST and claim credit for the GST
he pays. Besides he can not also issue a tax invoice.

Tax Period:
The tax period should be calculated by the respective law and normally for monthly and/or
quarterly. The concerned dealer has to deposit the tax on a particular tax period applicable to him
if his output credit is more than the input credit after considering the opening balance, if any, of
the input credit.

Refunds:
The dealer is entitled to get refund subject to the provisions of law applicable in this respect if
the input credit of a dealer is more than the output credit for a tax period. Depending on the
provision of law the excess amount need to be brought forward to next period or should be
refunded with immediate effect.

Exempted Goods and Services:

Some particular goods and services may be marked as exempted goods and services and the
input credit should not be claimed on the GST paid for purchasing the raw material in this regard
or GST paid on services used for providing such goods and services.

Zero Rated Goods and Services:

Normally, export of goods and services treated as zero-rated and the GST paid by the exporters
of these goods and services is refunded in this regard. This is the fundamental distinction
between Zero rated and exempted goods and services.
Tax Invoice:
Tax invoice is the most vital & basic document in the GST. A dealer registered under GST can
issue a tax invoice and with that invoice the credit (Input) can be claimed. Usually a tax invoice
should includes the name of supplying dealer, his tax identification nos., address and tax invoice
nos. coupled with the name and address of the purchasing dealer, his tax identification nos.,
address and description of goods sold or service provided.

Reasons behind implementation of GST

A product or service passes through many stages till it reaches the final consumer. Governments
at Central and State level have, as and when the need arose, introduced many indirect taxes on
various taxable events in this value chain (such as Excise duty on manufacture, VAT on sale etc).
As these taxes are levied on different taxable events they have their limitations. To illustrate
further, let’s take an example of Excise Duty. Excise duty is levied on ‘manufacture’ and it fails
to tax the value addition at distribution level. Additionally, at present, ‘goods’ suffer two levies
(Excise and VAT) whereas ‘taxable services’ suffer only one levy i.e. service tax. This leads to
distortion: distortion arises because the relative prices of services would be lower as compared to
goods. Even, as tax system treated goods and services differently, in certain cases there is
double taxation (software being one of such case where the industry has taken conservative stand
and both VAT and Service Tax is being currently levied). Also, there were restrictions on
availment of credit such as a service provider cannot avail credit of VAT and a trader cannot avail
credit of Service tax.
The above lacunas affect free flow of goods and services. Additionally, it brings uncertainty in
the trade which is not good for the economy as a whole. GST is therefore projected as a solution
to all these problems.

Exempt Goods and Services

There are two types of GST exclusions: tax-free and tax-exempt

“Tax-exempt” exclusions consist of goods and services that are charged with GST at the
production and distribution stages but not at the final retail stage. Manufacturers, wholesalers,
and retailers can’t claim an Input Tax Credit. As such, some GST is embedded in the final price
of the good or service; however, it is lower than it would otherwise be under the regular GST
regime. Examples of tax-exempt exclusions include residential rents, health and dental care, and
educational services.

“Tax-free” exclusions cover goods and services that are not with GST throughout the life of the
product. Final consumers are not charged GST while purchasing these products from
distributors. Moreover vendors get Input Tax Credits at the production and distribution stages. As
a result, the good or service becomes completely free from taxation relating to the GST.
Examples of tax-free exclusions include basic groceries, prescription drugs, and medical devices.

Examples of exempt goods and services include:

 Goods transported by rail.

 Supply of transport vehicles (goods carriage) to a goods transport agency (GTA) to be
used for transport of goods by road.
 Transport of essential goods such as foodgrains, fertilisers and petroleum products.
 Edible oilseeds and edible oil, foodgrains (cereals and pulses) and flour, petroleum and
petroleum products and defence and military equipment.
 Transport of parcels containing newspapers (registered with the Registrar of
Newspapers).
 Raw jute and jute textile, seeds for food crops and fruits and vegetables, seeds for cattle
feed, jute seeds, medicine/ pharmaceutical products and relief materials meant for victims
of natural or other disasters.

Features of GST

The salient features of the GST model are as follows:

 Consistent with the federal structure of the country, the GST will have two components:
one levied by the Centre (hereinafter referred to as Central GST), and the other levied by
the States (hereinafter referred to as State GST). This dual GST model would be
implemented through multiple statutes (one for CGST and SGST statute for every State).
However, the basic features of law such as chargeability, definition of taxable event and
taxable person, measure of levy including valuation provisions, basis of classification etc.
would be uniform across these statutes as far as practicable.

 The Central GST and the State GST would be levied simultaneously on every transaction
of supply of goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed threshold
limits. Further, both would be levied on the same price or value unlike State VAT which
is levied on the value of the goods inclusive of CENVAT. While the location of the
supplier and the recipient within the country is immaterial for the purpose of CGST,
SGST would be chargeable only when the supplier and the recipient are both located
within the State.

 The Central GST and State GST are to be paid to the accounts of the Centre and the
States separately.
 Since the Central GST and State GST are to be treated separately, in general, taxes paid
against the Central GST shall be allowed to be taken as input tax credit (ITC) for the
Central GST and could be utilized only against the payment of Central GST. The same
principle will be applicable for the State GST.

 Cross utilisation of ITC between the Central GST and the State GST would, in general,
not be allowed.

 To the extent feasible, uniform procedure for collection of both Central GST and State
GST would be prescribed in the respective legislation for Central GST and State GST.

 The administration of the Central GST would be with the Centre and for State GST with
the States.

 The taxpayer would need to submit periodical returns to both the Central GST authority
and to the concerned State GST authorities.

 Each taxpayer would be allotted a PAN linked taxpayer identification number with a total
of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing
PAN-based system for Income tax facilitating data exchange and taxpayer compliance.
The exact design would be worked out in consultation with the Income-Tax Department.

 Keeping in mind the need of tax payers convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is collecting
the tax, with information sharing between the Centre and the States.
 SET OFF AND CARRY FORWARD OF LOSSES

SET OFF LOSSES

1. Set off loss from one source against income from another source within the same head of
income ( sec. 70 ). However there are six exceptions to this rule that a loss can be set off
against any income under the same head:

A. Speculation loss (73(1))

B. Long term capital loss

C. Loss from owning and maintenance of horses

D. Loss from an exempted source of income

E. Loss in respect of casual income falling under section 56(2)(ib)

F. Any loss cannot be set off against casual incomes falling under section 56(2)(ib)

2.Set off losses of one head against the income of another head in same assessment year, Inter-
head setoff ( sec. 71 )

Exceptions:

A. Speculation loss

B. Expenses on maintenance of horses for race purposes

C. Loss under head capital gains

D. Business loss not to be setoff from salary income

 E. Set off of losses from casual incomes falling u/s 56(2)(ib)

F. Loss in respect of casual incomes falling under section56(2)(ib)

G. Loss from a source whose income is exempted

H. Share of loss from firm/AOP

Carry forward and set off of losses

• Provisions:

I. Carry forward of loss under the head house property (section 71 b)

a. Time limit to carry forward : 8 assessment years

b. Mode of set of: can be set off only against income under the head house property

Important points:

1.House property loss prior to assessment year 1999-2000: not allowed

2.Filing of return of house property loss on or before due date is not a necessity

II. Carry forward of non speculation “business loss” section 72(1)

a. Time limit to carry forward : 8 assessment years

b. Mode of set off: income falling under head “business and profession” (including
speculation business profit)

Important points:

1.Who can carry forward and set off business loss?

2.Continuity of loss generating business is not necessary

3.Timely filing of return of loss

4.Closure of business due to specified reasons

Carry forward of speculation business loss(section 73)

a. Time limit: 4 assessment years

b. Mode of set off: against the profits of any speculation business carried on by the assessee

Important points:
1. Who can carry forward and set off speculation business loss?

2.Continuity of loss generating speculation business not necessary

3. Timely filing of return of loss

. Carry forward and set off of loss of a specified business referred to in section 35 AD

a. Time limit to carry forward : indefinite period

b. Mode of set off : against profits and gains of any specified business

Carry forward of loss under head capital gains(section 74)

a. Time limit : 8 assessment years

b. Mode of set off:

i) B/F long term capital loss : against long term capital gain

ii) B/F short term capital loss : against any capital gain

Important points

Timely filing return of loss

Carry forward of loss from activity of owning and maintaining race horses (falling under head
other sources) section 74 A

a. Time limit to carry forward: upto 4 assessment years

b. Mode of set off : against income from activity of owning and maintaining of race horses

Important notes:

1.Timely filing of return of loss

2.Continuity of such activity is necessary

Unabsorbed depreciation

Depreciation which remains unadjusted as either there is no income or less income in relevant
prev. year, it can be carried forward till it is fully adjusted from any income during succeeding
previous years. It shall be treated as depreciation of succeeding previous years.
CAPITAL ASSET EXEMPTED PROCEDURE

Capital Gain:

A capital gain is income derived from the sale of an investment. A capital investment can be a
home, a farm, a ranch, a family business, or a work of art, for instance. In most years slightly less
than half of taxable capital gains are realized on the sale of corporate stock. The capital gain is
the difference between the money received from selling the asset and the price paid for it.

Profits or gains arising from the transfer of a capital asset made in a previous year are taxable as
capital gains under the head "Capital Gains". The important ingredients for capital gains are,
therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise
from such transfer.

Capital asset

a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business or

profession.

b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use of
the tax payer or any member of his family. However, jewellery, even if it is for personal use, is a
capital asset.

c) Agricultural land in India other than the following:

 Land situated in any area within the jurisdiction of municipality, municipal corporation,
notified area committee, town area committee, town committee, or a cantonment board
which has a population of not less than 10,000 according to the figures published before
the first day of the previous year based on the last preceding census.
 Land situated in any area around the above referred bodies upto a distance of 8
kilometers from the local limits of such bodies as notified by the Central Government
(Please see Annexure 'A' for the notification).

d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defense Gold Bonds,
1980 and Special Bearer Bonds, 1991 issued by the Central Government.

e) Gold deposit bonds issued under the Gold Deposit Scheme 1999 notified by the Central
Government.

Transfer

Transfer includes:
i) Sale, exchange or relinquishment of a capital asset.
ii) Extinguishment of any rights in a capital asset.

iii) Compulsory acquisition of the capital asset under any law.

iv) Conversion of a capital asset into stock-in-trade

v) Part performance of a contract of sale

vi) Transfer of rights in immovable properties through the medium of co-operative societies,
companies etc

vii) Transfer by a person to a firm or other or Body of a person to a Association of Persons

(AOP) Individuals (BOI)

viii) Distribution of capital assets on Dissolution.

ix) Distribution of money or other assets by a Company on liquidation

Profits or Gains
The incidence of tax on Capital Gains depends upon length for which the capital asset transferred
was held the transfer. Ordinarily a. capital asset held for 36 or less is called a 'short-term capital
asset' and if the period exceeds 36 months, the asset is known as term capital asset'. However,
shares of a Company, the of Unit Trust of India or any specified Mutual Fund or security listed in
any recognized Stock Exchange are to considered as short term capital assets if held for 12 or
less and long term capital assets if held for more 12 months.

Transfer of a short term capital asset gives rise to "Short Term Capital Gains' (STCG) and
transfer of a long capital asset gives rise to 'Long Term Capital Gains' LTCG). Identifying gains
as STCG and LTCG is a very important step in computing the income under the head Gains as
method of computation of gains and tax on the gains is different for STCG and LTCG.

Short Term Capital Gain (STCG)

Short Term Capital Gains is computed as below :

Computation of short - term Capital Gains

1. Find out full value of consideration

2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such transfer
b. cost of acquisition; and
 c. cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G
4. The balancing amount is short-term capital gain.

Long Term Capital Gains (LTCG)

Long Term Capital Gains is computed as below :

Computation of long - term Capital Gains

1. Find out full value of consideration

2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such transfer
b. indexed cost of acquisition; and
c. indexed cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC,
54ED, 54F and 54G
4. The balancing amount is long-term capital gain

The following table is all about capital gain exemption, under what section you can avail it,
Conditions to be satisfied, quantum of exemption. You can calculate capital gain tax
exemption easily with the help of following table.

Under Allowed Conditions to be satisfied Quantum of exemption

Section Assessee
54 Individual/HUF 1. Transfer should be of a residential Actual amount invested
house in new asset or the
income of which is chargeable under the capital gain whichever
is less.
head ‘Income from house property’.

2. It must be a long-term capital asset.

3. Purchase of another residential house

should be within one year before or 2

 years after, or construction should be

within three years after the date of

transfer.

54B Individual 1. Transfer should be of agricultural —do—

land.
2. It must have been used in the 2 years

immediately preceding the date of

transfer for agricultural purposes either

by the assessee or his parent.

3. Another agricultural land should be

purchased within 2 years after the date of

transfer.

See : Factor determine when an agricultural

land is capital asset or not for calculation of
capital gain tax.
54D Any assessee 1. There must be compulsory Actual amount invested
which is an acquisition. in new asset or the
industrial 2. The property compulsorily acquired capital gain whichever
undertaking is less.
should be land and building forming part

of an industrial undertaking.

3. The asset must have been used in the 2

years immediately preceding the date of

transfer of the assessee for the purpose of

 the business of the undertaking.

4. Within a period of 3 years after the date

of compulsory acquisition any other land

or building should be purchased or

constructed for the use of existing or

newly set up industrial undertaking.

54EC Any assessee 1. The asset transferred should be a long- Actual amount invested
term capital asset in new asset or the
capital gain whichever
2. Within a period of 6 months after the is less.
However, maximum
amount which can be
date of transfer, the capital gain must he invested in any
financial year cannot
invested in the specified assets i.e. bonds exceed Rs. 50,00,000

redeemable after 3 years issued by NHAl

or RECL.

54F Individual/HUF 1. The asset transferred should be a long- If the cost of the new
term capital asset, not being a residential residential house is not

house. less than the net

2. Within a period of I year before or 2 consideration then the

years after the date of transfer, a whole of the capital

gain.
residential house should be purchased or
Otherwise,
constructed within a period of 3 years
Ami. invested

ITCG x—————– :
 after the date of transfer. ——-

3. The assessee should not own more than Net consideration price

one residential house on the date of

transfer.

4. The assessee should not within a period

of one year purchase or should not

within a period of 3 years construct any

residential house other than the new

asset.

54G Any assessee 1. Machinery, plant, building, or land If the cost of the new
being an used assets and expenses
industrial for the business of an industrial incurred for shifting are
undertaking greater than the capital
undertaking situated in an urban area gain, the whole of such
capital gain. Otherwise
capital gain to the
should have been transferred. extent

2. Transfer should be due to shifting to

any

area other than an urban area.

3. Within a period of 1 year before or 3 of the cost of the new

years after the date of transfer purchased asset.
machinery, plant or acquired building or
land or constructed building and
completed shifting to the new area.
54GA Any assessee 1. Machinery, plant, building, or land used If the cost of the new
being an for the business of an industrial assets and expenses
industrial incurred for shifting are
undertaking greater than the capital
 undertaking situated in an urban area gain, the whole of such
capital gain. Otherwise
should have been transferred. capital gain to the
extent of the cost of the
new asset.
2. Transfer should be due to shifting to any

Special Economic Zone whether

developed in any urban area or any other

area.

3. Within a period of 1 year before or 3

years after the date of transfer purchased

machinery, plant or acquired building or

land or constructed building and

completed shifting to the new area.

Notes : Capital Gain Scheme.—If the new asset is not acquired under sections 54, 54B, 54D,
54F, 54G and 54GA or the full amount could not be invested upto the due date of furnishing
the return of income, the assessee can deposit the desired amount under the Capital Gain
Scheme on or before the due date of return and thus can acquire the asset within the stipulated
time out of money withdrawn from such scheme at a later date. In the case of section 54EC the
Capital Gain Scheme is not applicable.
Consequences if the new asset acquired is transferred within 3 years of its acquisition Under
sections 54, 54B, 54D, 5->G and 54GA.—For computation of new Capital Gain (which will be
short-term), the cost of acquisition of such new asset shall be reduced by the amount of Capital
Gain exempt under sections 54, 54B, 54D and 54G earlier.
Under section 54F.—Besides the new Capital Gain (which will be short-term), the Capital Gain
exempt earlier under section 54F, shall be long-term capital gain of the previous year in which
new asset is transferred.
Under section 54EC.—If such security acquired is converted into money or any loan is taken
against such securities within 3 years, the Capital Gain exempt under section 54EC for such
securities earlier shall be long-term Capital Gain of the previous year in which such conversion
takes place or the loan is taken.
Consequences if the amount deposited in Capital Gain Scheme is not utilised within the
stipulated time of 3 years (2 years in case of section 54B).—The unutilised amount shall be
Capital Gain (short-term or long-term depending upon original transfer) of the previous year in
which such period has expired. However, in case of section 54F, proportionate amount shall be
taxable.

CLUBBING OF INCOME

CLUBBING OF INCOME UNDER THE INCOME TAX ACT, 1961

Clubbing of income means Income of other person included in assessee’s total income, for
example: Income of husband which is shown to be the income of his wife is clubbed in the
income of Husband and is taxable in the hands of the husband. Under the Income Tax Act a
person has to pay taxes on his income. A person cannot transfer his income or an asset which is
his one of source of his income to some other person or in other words we can say that a person
cannot divert his income to any other person and says that it is not his income. If he do so the
income shown to be earned by any other person is included in the assessee’s total income and the
assessee has to pay tax on it.

 TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60)

Section 60 is applicable if the following conditions are satisfied:

• The taxpayer owns an asset
• The ownership of asset is not transferred by him.
• The income from the asset is transferred to any person under a settlement, or agreement.

If the above conditions are satisfied, the income from the asset would be taxable in the
hands of the transferor
 Illustration: Mr. X owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual) interest
being Rs. 100,000. On April 1, 2005, he transfers interest income to Mr. Y, his friend
without transferring the ownership of these debentures. Although during 2005-06, interest
of Rs. 100,000 is received by Mr. Y, it is taxable in the hands of Mr. X as per Section 60.

 REVOCABLE TRANSFER OF ASSETS (SEC 61)

‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or
income from such an asset, either whole or in parts at any time in future, during the
lifetime of transferee. It also includes a transfer which gives a right to 144re-assume
power of the income from asset or asset during the lifetime of transferee. If the following
conditions are satisfied section 61 will become applicable.
• An asset is transferred under a “revocable transfer”,
• The transfer for this purpose includes any settlement, or agreement

Then any income from such an asset is taxable in the hands of the transferor and not the
transferee (owner).

Illustration: If A transfers house property to his close relative B. the condition of transfer
was that B can enjoy the income of the said property for himself for any such time till he
is the owner of such property but A reserves the right to take the property back from B in
case he is in financial problem in the event of which has to surrender the income as well
as the asset to A.

 REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS

SUBSTANTIAL INTEREST [SEC 64 (1) (ii)]

If the following conditions are fulfilled this section becomes applicable.

• If spouse of an individual gets any salary, commission, fees etc (remuneration) from a
concern
• The individual has a substantial interest in such a concern
• The remuneration paid to the spouse is not due to technical or professional knowledge
of the spouse.

Then such salary, commission, fees, etc shall be considered as income of the individual
and not of the spouse.

Illustration: X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd.

without any technical or professional qualification to justify the remuneration. In this
case, salary income of Mrs. X shall be taxable in the hands of X.
 INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC. 64(1) (IV)]

Income from assets transferred to spouse becomes taxable under provisions of section 64
(1) (iv) as per following conditions:-

• The taxpayer is an individual

• He/she has transferred an asset (other than a house property)
• The asset is transferred to his/her spouse
• The asset is transferred without adequate consideration. Moreover there is no agreement
to live apart.

If the above conditions are satisfied, any income from such asset shall be deemed to be
the income of the taxpayer who has transferred the asset.

Illustration: X transfers 500 debentures of IFCI to his wife without adequate

consideration. Interest income on these debentures will be included in the income of X.

 INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)]

Income from assets transferred to son’s wife attracts the provisions of section 64 (1) (vi)
as per conditions below:-

• The taxpayer is an individual.

• He/she has transferred an asset after May 31, 1973.
• The asset is transferred to son’s wife.
• The asset is transferred without adequate consideration.

In the case of such individuals, the income from the asset is included in the income of the
taxpayer who has transferred the asset.

Illustration: Mr. X the father-in-law of transfers a bank deposit to Ms. Y the daughter-
in-law of Mr. X any income which will accrue to the said deposit would be considered as
income of Mr. X and not Ms. Y.

 INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT

OF SPOUSE [SEC. 64 (1) (VII)]

Income from assets transferred to a person for the benefit of spouse attract the provisions
of section 64 (1) (vii) on clubbing of income. If:
 • The taxpayer is an individual.
• He/she has transferred an asset to a person or an association of persons.
• Asset is transferred for the benefit of spouse.
• The transfer of asset is without adequate consideration.

In case of such individuals income from such an asset is taxable in the hands of the
taxpayer who has transferred the asset.

Illustration: If X transfers a house property to a trust formed by him with the condition
that the entire income of the house property which was been received should be given to
the wife of Mr. X. In this case the income of this house property would not be taxed in
the hands of Mrs. X but would be taxed in the hands of Mr. X.

 INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT

OF SON’S WIFE [SEC. 64 (1) (VIII)]

Income from assets transferred to a person for the benefit of son’s wife attract the
provisions of section 64 (1) (vii) on clubbing of income. If,

• The taxpayer is an individual.

• He/she has transferred an asset after May 31, 1973.
• The asset is transferred to any person or an association of persons.
• The asset is transferred for the benefit of son’s wife.
• The asset is transferred without adequate consideration.

In case of such individual, the income from the asset is included in the income of the
person who has transferred the asset.

 INCOME OF MINOR CHILD (SEC. 64 (1A) & 64(2))

Illustration: X transfers his self acquired property yielding an annual income of Rs.
100000 to his Hindu Undivided Family, consisting of X, Mrs. X, his major son Y and
minor son Z. Income of Rs. 100000 will be included in the income of X by virtue of this
section. If however the property is partitioned among the family members, income
derived from converted property by Mrs. X will be included in the income of X under
section 64(2), share of minor Z will be included in the income of X by virtue of section
64 (1A) after allowing exemptions under section 10(32) Rs. 1500 or the income clubbed,
 whichever is less on the assumption that X’s income is more than income to the
transferee also.

CLUBBED
NATURE OF IN THE CONDITIONS/EXCEPTION RELEVANT
SECTION
TRANSACTION HANDS S REFERENCE
OF

1. Income for
the purpose of
Irrespective of: Section 64
Transferor 1. Whether such transfer is includes
Transfer of revocable or not. losses.
who
60 Income without
transfers the 2. Whether the transfer is 2. Section 60
transfer of Assets.
income. effected before or after the does not apply
commencement of IT Act. if corpus itself
is transferred.

61 Revocable Transferor Clubbing not applicable if: Transfer held as

transfer of Assets. who revocable
transfers the 1. Trust/transfer irrevocable
Assets. during the lifetime of 1. If there is
beneficiaries/transferee or provision to re-
transfer directly
2. Transfer made prior to 1-4- or indirectly
1961 and not revocable for a whole/part of
period of 6 years. income/asset to
Provided the transferor derives transferor;
no direct or indirect benefit from 2. If there is a
such income in either case. right to
reassume
power, directly
or indirectly,
the transfer is
held revocable
and actual
exercise is not
necessary.
 3. Where no
absolute right is
given to
transferee and
asset
can revert to
transferor in
prescribed
circumstances,
transfer is held
revocable.

1. The
relationship of
husband and
Salary, wife must
Commission, Fees Spouse subsist at the
Clubbing not applicable
or remuneration whose total
if:Spouse possesses technical or time of accrual
paid to spouse income of the income.
professional qualification and
64(1)(ii) from a concern in (excluding
remuneration is solely 2. Income other
which an income to
attributable to application of that than salary,
individual has a be clubbed)
knowledge/qualification. commission,
substantial* is greater.
interest. fees or remune-
ration is not
clubbed under
this clause

64(1)(iv) Income from Individual Clubbing not applicable if: 1. Income

assets transferred transferring The assets are transferred; earned out of
directly or the asset. 1. With an agreement to live Income arising
indirectly to the apart. from
spouse without transferred
adequate 2. Before marriage. assets not liable
consideration. 3. Income earned when relation for clubbed.
does not exist.

4. By Karta of HUF gifting co- 2. Cash gifted

 to spouse and
he/she invests
to earn
interest.

parcenary property to his wife. 3. Capital gain

on sale of
property which
5. Property acquired out of pin was received
money. without
consideration
from
spouse

4. Transaction
must be real.

Cross transfers
Income from the Individual Condition:
are also
64(1)(vi) assets transferred transferring The transfer should be without
covered
to son’s wife. the Asset. adequate consideration.

Transfer of assets 1. Transferor

by an individual need not
to a person or necessarily
AOP for the have taxable
Individual Condition: 1. The transfer
immediate or income of his
64(1)(vii),(viii) transferring should be without adequate
deferred benefit of own.
the Asset. consideration.
his:
(vii) – Spouse. 2. Wife means
(viii) – Son’s legally wedded
wife. wife.

64(1A) Income of a minor 1. If the Clubbing not applicable for:— 1. Income out
child [Child marriage 1. Income of a minor child of property
includes step subsists, in suffering any disability specified
transferred for
child, adopted the hands of u/s. 80U. no
child and minor the parent consideration to
married daughter]. whose total 2. Income on account of manual a minor
income is work done by the minor child. married
 greater; or;

2. If the
marriage
does not
subsist, in
the hands of
the person
who
maintains
the minor
child. daughter, shall
not
3. Income
be clubbed in
once
the parents’
included in
hands.
the total
income of 2. The parent in
either of 3. Income on account of any whose hands
parents, it activity involving application of the minor’s
shall skills, talent or specialized income is
continue to knowledge and experience. clubbed is
be included entitled to an
in the hands exemption up
of some to Rs. 1,500
parent in per child.
the [Section
subsequent 10(32)]
year unless
AO is
satisfied
that it is
necessary to
do so (after
giving that
parent
opportunity
of being
heard)

64(2) Income of HUF Income is Clubbing applicable even if: Fiction under
 included in The converted property is
this section
from property the hands of subsequently partitioned;
must
converted by the individual income derived by the spouse
be extended to
individual into & not in the from such converted property
computation of
HUF property. hands of will be taxable in the hands
income also.
HUF. of individual.

* An individual shall deemed to have substantial interest in a concern for the purpose of Section 64(1)(ii)

IF THE CONCERN IS OTHER THAN A

IF THE CONCERN IS A COMPANY
COMPANY

Person’s beneficial shareholding should not be

Person either himself or jointly with his relatives
less than 20% of voting power either
is entitled in aggregate to not less than 20% of the
individually or jointly with relatives at any
profits of such concern, at any time during the
time during the Previous Year. (Shares with
previous year.
fixed rate of dividend shall not be considered)

Note: The clubbed income retains the same head under which it is earned.

Procedure for computation of Total Income

Heads of Income

Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act.

The direct tax which is paid by individual to the Central Government of India is known as
Income Tax. It is imposed on our income and plays a vital role in the economic growth &
stability of our country. For years the Government is generating revenue through this tax system.

The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax' mean
'Income Estimate,' which helps the government to know the actual economic strength of a
person. It is also a way to set up an economic standard for general people. It helps the
Government to know the distribution of money among country's people.

According to Section 14 of Income Tax Act, 1961 there are following heads of income under
which total income of a person is calculated:

» Heads of Income: Salary( 15-17)

» Heads of Income: House Property(22-27)
» Heads of Income: Profit In Business/ Profession(28-44)
» Heads of Income: Capital Gains(45-55)
» Heads of Income: Other Sources(56-59)

Salary Income Tax - Heads of Income: Salary

What is Salary:
Income under heads of salary is defined as remuneration received by an individual for services
rendered by him to undertake a contract whether it is expressed or implied. According to Income
Tax Act there are following Sec 15 conditions where all such remuneration are chargeable to
income tax:
 When due from the former employer or present employer in the previous year, whether
paid or not
 When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
 When arrears (sum unpaid) of salary is paid in the previous year by or on behalf of a
former employer or present employer, if not charged to tax in the period to which it
relates.

[For the removal of doubts, it is hereby declared that where any salary paid in advance is
included in the total income of any person for any previous year it shall not be included again in
the total income of the person when the salary becomes due.
Any salary, bonus, commission or remuneration, etc or received by, a partner of a firm from the
firm shall not be regarded as “salary” for the purposes of this section.]
What Income Comes Under Head of Salary:
Under section 17 of the Income Tax Act, 1961 there are following an income which comes under
head of salary:
*Salary (including advance salary) *Wages *Fees *Commissions *Pensions
*Annuity *Perquisite *Gratuity *Annual Bonus *Income from Provident Fund
*Leave Encashment *Allowance *Awards

What is Leave Encashment:

Leave encashment is the salary received by an individual for leave period. It is a chargeable
income whether he is a government employee or not. Under section 10(10AA) (i) there is also a
provision of exemption in case of leave encashment depending upon whether he is a government
employee or other employees

What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the
employer as voluntarily or on account of contractual agreement. It is not taxable until the right to
receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come under a
will or granted by a life insurance company or accruing as a result of contract which comes as
income under from other sources.

What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his
legal heir in the case of death of the employee.

What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under
section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few conditions
where they are entitled of deduction/ exemptions.

Under Income Tax Act following types of allowance are defined

House Rent Allowance:
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by
an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is
no exemption in tax if he is living in his own house or house for which he is not paying rent.
There are following amount which are exempt from tax:
 Actual house rent paid by that individual
 Rent paid for the accommodation over 10% of the salary
 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary
in it is placed in any other city

Other Special Allowances

 Children Education Allowance
 Tribal Area Allowance
 Hostel Expenditure Allowance
 Remote Area Allowance
 Counter Insurgency Allowance
 Border Area Allowance
Allowances for there is provisions of exempt in income tax are:
 Allowance given to a citizen of India, who is a government employee, for rendering services
outside India
 Allowances given to Judges of High Courts & Judges of Supreme Court
 Allowances received by an employee of UNO

Deductions from Salary income:

Certain deductions are available while determining the taxable salary income.

The income chargeable Sec 16 under the head “Salaries” shall be computed after making the
following deductions:
 a deduction in respect of any allowance in the nature of an entertainment allowance
specifically granted by an employer to the assessee who is in receipt of a salary from the
Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or
other perquisite) or five thousand rupees, whichever is less;]
 a deduction of any sum paid by the assessee on account of a tax on employment within
the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.

A) Standard Deduction

Income tax slabs 2010-2011 (for Senior Citizens)

in India:
Income Tax Slab (in Tax
Rs.)
0 to 2,40,000 No Tax
2,40,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

B) Professional Tax
Professional tax, which is paid, is allowed as deduction.

C) Arrears (sum unpaid, amount overdue) salary

If salary is received in arrears or in advance, it can be spread over the years to which it relates
and be taxed accordingly as per section 89(1) of the Income tax Act.

Heads of Income: House Property

What Is Heads of House Property:

According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income
under head of house property. In every section from 22-27 there are detail specification of house
property income. It is defined as income earned by a person through his house or land.

What Income Comes Under Head of House Property: sec22

Annual value of building or land owned by assessee. There is a charge on the potential of
property to generate income not on the rent received. But if property is used for making profit in
business then it will be taxable not under this head but will be taxable under head of profit in
business/ profession.

How to calculate annual value of property: sec 23

According to annual value, house property is calculated as
 Annual value of a house is zero if property is in the occupation of the owner for his
residence for the whole year & if no other benefit is availed by owner from his property.
There will be no deductions as given under section 24 except deduction interest on
borrowed capital
 If the owner lets out the house or a part thereof for any period of time during the previous
year the annual value of the property or part has to be calculated for the whole year and
the proportionate annual value of the period for which the house or any part thereof was
in the occupation of the owner for his own residence shall be deducted from the gross
annual value. The assessee in such cases cannot claim deduction under section 24 in
excess of the annual value so determined
 The assessee occupies more than one house for his residence; the above exemption is
applicable only to one such house at the option of the assessee. The annual value of the
other house or houses shall be computed as if the house or houses are let
 In case where the assessee has only one residential house but it cannot be occupied by the
owner by reason of that owing to his employment, business or profession carried out on
at any other place, he has to reside (exist) at that other place in a building not belonging
to him, the annual value of such house shall be taken to be nil if the house is not actually
let and no other benefit is derived by the owner from such house. The assessee cannot
claim any deduction in such case as allowable under section 24 of the Act except for
interest on borrowed capital subject to a maximum of Rs. 15,000/-

Deductions from income from house property sec 24

Income chargeable under the head “Income from house property” shall be computed after
making the following deductions, namely:—
 a sum equal to thirty per cent of the annual value;
 where the property has been acquired, constructed, repaired, renewed or reconstructed
with borrowed capital, the amount of any interest payable on such capital

[Explanation.—Where the property has been acquired or constructed with borrowed capital, the
interest, if any, payable on such capital borrowed for the period prior to the previous year in
which the property has been acquired or constructed, as reduced by any part thereof allowed as
deduction under any other provision of this Act, shall be deducted in equal installments for the
said previous year and for each of the four immediately succeeding previous years]

Heads of Income: Profit in Business/ Profession

According to Income Tax Act, 1961 income under this head is defined as the income earned by
assessee as a profit or gain in his business or profession. Income under this head must follow
these conditions: sec 28

 There must be a business/ profession

 Business/ profession is being carried by assessee
 Business/ profession have been carried out by assessee in assessment year for which
income tax is filling

What Income Comes Under Head of Profit in Business

 Profits and gains of assessee from any business or profession during assessment year
 Any payment or compensation due or received by a person for his services to
organization as a part of his business
 Making profit in trade Income of professional or organization against services provided
by that professional/ organization
 Cash received or due by any person against exports under government schemes
 Any benefit whether it is not in cash coming from business/ profession
 Any profit, salary, bonus or commission received by company partners

Heads of Income: Capital Gains

What is Capital Gain:

According to Income Tax Act, 1961 heads of capital gain is defined as gains derived on transfer
of capital asset. Capital Gain is the profit or gain of an assessee coming from the transfer of a
capital asset effected during the previous year or assessment year. "Capital Asset" and transfer
are predefined in income tax act.

What is Capital Asset:

Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any kind
held by assesse including property held for his business or profession. It includes all type real
property as well as all rights in property. It is also defined as gains on transfer of assets in which
there in no cost of acquisition like:
 Goodwill of business generated by assessee
 Tenancy rights

 Right to manufacture
 Processing & production of any article or things

Assets Which Don't Come Under Heads of Capital Assets

According to Income Tax Act,1961 there are few assets which don't form a part of Capital
Assets, which are as follows:
 Stock of goods and raw materials used by assessee for his business or profession
 Those properties which are movable like wearing apparel, furniture, automobile, phone,
household goods etc. held by assessee. But Jewelry which is also an movable assets
comes under heads of Capital Assets
 Agricultural property in India. But agriculture land coming under municipal limits (in
area having population more than 10,000) comes under Capital Assets. Agriculture lands
within 8 Km from municipal limit also comes under Capital Assets if it is notified by the
central government of India
 Few Gold Bonds issued by government
 Few special bonds issued by central government like Special Bearer Bonds, 1991

Transfer of Capital Assets

Under Section 2(47) of The Income Tax Act, 1961 transfer of capital assets is defined as:
 Sale, exchange and relinquishment of assets
 Extinguishment of any rights in capital assets

 Acquisition of capital assets or rights

 Conversion of capital asset by its owner as stock in trade of his business, it may also be a
term of transfer
 Any transaction by which an assessee become enable to act as a member of cooperative
society
 Any transaction by which an assessee acquire shares in cooperative society
 Heads of Income: Other Sources

Every type of income comes under a specified heads. But there are few incomes, which don't
come under any of following heads:
 Salary
 House Property

 Profit In Business/ Profession

 Capital Gains

So under Section 56(2) of Income Tax Act, 1961 all such income comes in this heads of income.
There are following incomes which are taxed under this heads
 Income coming as a dividend paid by a company to an assessee
 Income coming from winning in lottery, crossword puzzles, races, card games, gambling
or other such sports
 Income coming as an amount received by assessee from his employer as a fund for
welfare of employee
 Income as an interest on securities
 Income coming by letting on hire machinery, plant, furniture, building or other goods
Income coming from insurance policy

Income Tax Deduction

Under the scheme of computation of total income under the Income Tax Act, the income falling
under each head is to be computed as per the relevant provisions of the Act relating to
computation of income under that head (Refer Chapter IV). The aggregate of income under each
head is known as 'Gross Total Income' out of which certain deductions are permitted to arrive at
the Total Income'. These deductions are explained in this Chapter.

Deduction is the amount, which is reduced from the gross total income before computing tax.
There are other deductions such as for donations, for repayment of loans taken for educational
purposes etc.

Deductions in respect of certain payments

(a) Provident Fund, life insurance premium, pension Plans (Sec. 80C)

Premium paid upto Rs 10,000 and maximum amount of Rs. 1, 00,000/-in a year, in respect of
Savings like LIC, PF, NSCs, Tuition fee , Housing loan principals as shown below in tabular
form.

(b) Payments for medical treatment of handicapped dependents (Sec. 80DD and 80DDA)
Where an assessee being an individual or a Hindu Undivided family resident in India incurs any
expenditure for the medical treatment, nursing, training and rehabilitation of a handicapped
dependent, deduction of Rs. 40, 0007- is allowed from gross total income. The deduction
includes payment or deposit under an approved scheme of the L.I.C. or the U.T.I. providing for
payment of annuity or lump sum amount for the benefit of the handicapped dependent in the
event of assessee's death.

(c) Where an Indian resident incurs any expenditure for the medical treatment

Where an Indian resident incurs any expenditure for the medical treatment of specified disease or
ailment for himself or a dependent relative, he is allowed a deduction of an amount actually
incurred subject to maximum of Rs. 40,000/-. If he or any dependent relative is senior citizen, the
deduction can go upto Rs. 60,000. The amount of deduction is to be determined after reducing
the amount received under medical insurance (Sec. 80DDB).

(d) Repayment of loan taken as a student for pursuing higher studies (Sec. 80E)

Any repayment of the principal amount of loan taken from a financial institution or a recognized
charitable organization for higher studies and interest thereon is allowed as a deduction upto a
maximum amount of Rs. 40,000/- in a year. The relief is available to persons who have
undertaken graduate or post graduate courses in any branch of engineering, medicine or
management or post-graduate courses in any university in pure sciences, applied sciences,
mathematics or statistics. This deduction is allowed for a maximum period of 8 years beginning
with the year in which repayment starts

(e) Donations to certain Funds, Charitable Institutions etc. (Sec. 80G)

Donations/contributions made to recognized charitable trusts/institutions and certain specified

Funds are allowed as deduction. Donations/contributions to other recognized charitable trusts
and specified funds qualify for deduction of 50% of the amount donated or contributed.
Deductions in respect of certain donations, such as donations to National Minorities
Development and Finance Corporation are subject to overall qualifying limit of 10% of the
'Gross Total Income'.

(f) Rent payment (Sec. 80GG)

Expenditure in excess of 10% of total income incurred by an assessee (not in receipt of house
rent allowance) on payment of rent in respect of residential accommodation occupied by him for
his own residence is allowed deduction upto Rs. 2,0007- per month or 25% of total income,
whichever is less.
From Gross Income (I) deduct the following as Applicable:

80C Savings like LIC, PF, NSCs, Tuition fee , Housing Max of Rs. 1,00,000
loan principal, infra-structure bonds etc. alongwith Section 80CCC
80CCC Pension Fund premium paid Max of Rs. 10,000

80CCF Infra-Structure Bonds Max of Rs. 20,000

80D - Medical Insurance Premium on health for self and - Max of Rs.1 5,000
dependents - Max of Rs. 5,000
- Additional amount On dependent Senior Citizen
80DD Medical treatment of Handicapped dependent Max of Rs. 50,000

80DDB Actual Expenditure towards medical treatment for Actual Expenditure or

self and dependents Rs.40,000 and in case of
Senior Citizen it extends to
Rs.60,000/- whichever is less
80E Repayment of Loan taken for Higher Education of Max of Rs. 40,000
Self or Dependent
80GG House Rent Paid by employee 1. House rent paid @ Rs.2000
p.m.
2. 25% of (I) above
3.Actual Rent paid 10% of (I)
above
80U Employee who suffers from total blindness or Rs. 50,000
permanent physically handicapped (Medical
Certificate to be produced)

Total the above deductions = D

Total Income before 80G = (I- D)
Deduction U/s 80G is restricted to 50% or 100% of Donation amount subject to a maximum of
10% of (I - D) = E
Total Taxable Income = [(I - D) – E]
 COMPUTATION OF TOTAL INCOME

I. Income from salaries Section Rs. Rs. Rs.

Salary or (Pension) u/s17(1) ***

Perquisites excluding fringe benefits u/s 17(2) ***

Profits in lieu of salary u/s 17(3) (+) * * *

Gross salary ****

Deductions U/s 16

Entrainment Allowance ****

u/s 16 (ii)
Tax on employment (+) * * * (-) * * *
u/s 16 (iii)
Salary Income _______ _____

xxxxx

II. Income from House Property ****

Annual Rental Value ****

Less Municipal Taxes _____

Net Annual Value ****

Deductions -30% u/s24 ****

Income from house property _____

Xxxx
III. Profits and Gains of Business or Profession •

Net profit as per P &L account (+) or (-) • ****

*
Add expenses debited but not allowed under the
Act
(+) * * * * *
Add Incomes taxable but not credited
****
Less Expenses allowed but not debited

Less Incomes credited but not taxable under

this head (-) * * * *

Business profit ________

xxxxx

IV Capital Gains

Short Term Capital Gain ****

Long Term Capital Gain ****

Income under the head ‘Capital Gains ______

CIF=551 xxxxx

V. Income from other sources

General Incomes u/s 56(1) ** * *

Specific Incomes u/s 56 • ***

Family Pension (2) _______

Less: expenses allowed (-) * * * *

Income from other sources u/s 57 _______

Add : income of other persons Xxxxxx

GROSS TOTAL INCOME XXXXX

VI. DEDUCTIONS u/s 80 C (-)****

 TOTAL INCOME to 80 U XXXX

BUDGET 2011- IMPACT ON PERSONAL

TAXATION

1. Introduction

The budget proposed for the year 2011-12 is moving towards the philosophy of Direct Tax Code
(DTC) which will come into force from 1st April 2012. With DTC, there may not be a necessity
to bring frequent amendments in the tax laws as Direct Taxes Code bill aims to consolidate and
rearrange various provisions in an orderly manner to make them consistent with the general
scheme of the tax laws and bring simplified procedures. Keeping the implementation of DTC in
 mind, there is no relief for women taxpayers as the DTC proposes the maximum limit of Rs. 2,
00,000 which is same for both men and women assesses eliminating the gender discrimination. .
The budget announced slight changes in the basic exemption limit for individual men and senior
citizen but also imposes additional service tax on some items and also nominal central excise
duty of 1 per cent imposed on 130 items entering in the tax net, which will definitely affect the
purchasing power of the common man.

2. The Personal taxation proposed tax slab

The budget proposal for the year 2011-12 in respect of the tax slabs are as under:-

(Figures in rupees)

Assesses Tax Rates Existing Proposed in the budget

Individual Exempt 1,60,000 Rs. 1,80,000

10% 1,60,000 – 3,00,000 1,80,000 – 5,00,000

20% 3,00,001 – 5,00,000 5,00,001 – 8,00,000

30% 5,00,001 and above 8,00,001 and above

Women Exempt 1,90,000 Rs. 1,90,000

10% 1,90,000 – 3,00,000 1,90,000 – 5,00,000

20% 3,00,001 – 5,00,000 5,00,001 – 8,00,000

30% 5,00,001 and above 8,00,001 and above

Sr. Citizen(age Exempt 2,40,000 Rs. 2,50,000

more than 60
years)

10% 2,40,000 – 3,00,000 2,50,000 – 5,00,000

20% 3,00,001 – 5,00,000 5,00,001 – 8,00,000

30% 5,00,001 and above 8,00,001 and above

Super senior Exempt Rs. 2,50,000 Rs 5,00,000

citizen(more
 than 80 years
old)

It may be noted that lowest slab of Rs. 1, 60,000 for individual is raised to Rs. 1, 80,000, Rs.1,
90,000 for women remained unchanged and Rs. 2.40,000 for senior citizen is increased to 2,
50,000. Also, a new category of super senior citizen is framed and their exemption limit is
increased to Rs 5, 00, 000.

3.Simplification in tax returns filing

Salaried individual salary up to Rs. 5 Lacs (not yet confirmed via notification) having no other
income except salary income would be exempt from filing of return of income/ Income Tax
Returns, where the tax liability is fully deducted by their employers A new revised income tax
return form 'Sugam' to be introduced for small tax papers. Relaxation in e-filing norms for small
tax payers have been proposed in the budget. Maximum penalty for delay in filing of returns has
been increased from Rs.2, 000 to Rs 20,000.

4. The Allowable Deduction for tax rebate

Currently an assessee could avail deduction under 80C, upto an amount of Rs. 1,00,000 on
account of savings in pension scheme, housing loan principal repayment, savings in public
provident fund, payment towards life insurance premium, unit linked investment plan, national
savings certificates, national savings scheme, infrastructure bonds, equity linked savings scheme,
five year term deposit with banks, tuition fees etc. No change has been proposed on this and the
limit of Rs, 1, 00,000 is retained as it is. Contributions by the Central Government or the
employer to prescribed pension scheme excluded from the current bundled limit of Rs.1, 00,000
in computing the deductions from taxable income for employee thereby allowing additional
deduction to employees to that extent.

Under section 80 CCF, an individual assess can enjoy a deduction of an additional amount of Rs.
20,000 over and above the existing limit of Rs, 1,00,000 by investing in long term infrastructure
bonds notified by the Central Government. This provision was there in last year’s budget and the
tenure has been increased to one more year.
5. Interest subsidy for low-cost home buyers

The government proposed in the Union Budget 2011-12 that low-cost housing loans up to Rs 15
lacs will be eligible for 1% interest subsidy. The existing interest rate subsidy is on loans of Rs
10 lacs where cost of house was Rs 20 lacs. Under budget proposal, norms for cost of house have
been also raised to Rs 25 lacs. So, next year, home buyers will get 1% interest subsidy on loans
up to Rs 15 lacs where cost of house was up to Rs 25 lacs.

 1% interest sop loans up to Rs 15 lacs

 Priority sector lending: housing loan limit raised to Rs 25 lacs for vs. Rs 20 lacs.

6. Allowable deductions / rebate at a glance

The following table shows the deductions / rebate at a glance which exist viz a viz proposed in
the budget.

Figures in rupees

Section Existing Proposed Increase

80C Maximum investment limit 1,00,000 1,00,000 0

80CCF subscription to long term notified 20,000 20,000 0

infrastructure bonds

80D Medical Premium (scope widened – 15,000 15,000 0

any contribution to Central Health Scheme
is also included

80D Medical premium on the health of 15,000 15,000 0

parent / parents

80D Medical premium in case of parent / 20,000 20,000 0

parents being senior citizen

80DD Expenditure on dependent disabled 50,000 50,000 0

more than 40%

80DD Expenditure on dependent for severe 1,00,000 1,00,000 0

 disability

80DDB : expenditure for medical treatment 50,000 40,000 0

for diseases under rule 11DD for self or
dependent

80DDB expenditure for medical treatment 60,000 60,000 0

for diseases under rule 11DD for self or
dependent being senior citizen

80E Interest on education loan (for self / No limit No limit -

spouse and children)

80U Permanent disability benefit for self 50,000 50,000 0

(adhoc amount

80U disability exceeding 80% 1,00.000 1,00,000 0

80G deduction on donations made As per IT rules -

Education Cess: -

All taxes are subject to an education cess, which is 2% of the total tax payable. With effect
from assessment year 2008-09, Secondary and Higher Secondary Education Cess of 1% is
applicable on the sub total of taxable income and exists for the assessment year 2011-2012.

Note:-

- Disabilities: u/s 80DD: over 40% & also includes:- autism, cerebral palsy & multiple
disability & mental retardation under Disability Act 1995 and

- u/s 80DDB: Specified diseases are:- Neurological diseases being dementia, dystonia,
musculorum, deformans, motor neuron disease, ataxia, chorea, hemiballisums, aphasia &
Parkinsons disease, Cancer, AIDS, chronic renal failure, hemophilia & thalass aemia.

7. Rebate on account of House property

The deduction of Rs. 1, 50,000/- on home loan interest repayment in the financial year for self
0ccupied properties & the entire interest without ceiling for rented properties would qualify for
deduction under section 24 of the Income Tax. 1961.

8. Medical facilities / Medical reimbursements

The existing exemption of Rs. 15,000 towards medical treatment reimbursement subject to
production of bills and medical treatment also continues.

9. Conveyance allowance

Conveyance allowance up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as
conveyance allowance by the employer. For getting this rebate no bills are required for this
amount pursuant to section 10 of the Income Tax Act, 1961. The budget proposal for the year
2011-12 did not alter this too.

10. Leave Travel allowance

The current provision remains on this head which is as under:-

The rebate i.e. the exemption is available for the amount actually incurred on performance of
travel on leave to any place in India by the shortest route to that place. This is subject to a
maximum of the air economy fare or AC first Class fare (if journey is performed by mode other
than air) by such route, provided that the exemption shall be available only in respect of two
journeys performed in a block of 4 calendar years.

11. Children education allowance

The current provision remains on this head which is as under:-

Children education up to Rs.100 per month for two children (Rs. 2,400 per year) is tax free if
provided as children education allowance by the employer pursuant to section {10 (14(i)} of the
Income Tax Act, 1961.

Any allowance granted to an employee to meet the hostel expenditure on his child at Rs.300 per
child up to a maximum of two children is also exempt from tax.

12. Special allowance / Technical Pay

The current provision remains on this head which is as under:-

Special pay / technical pay granted by the employer for pursuit of specified purposes for which
the same is being spent, then the amount qualifies for deduction under the Income Tax Act of
1961 pursuant to section {10 (14(ii) }of the Income Tax Act, 1961. In case of Technical pay
provided by Government organization, by and large there is a Government order is issued in this
respect and the concerned employee has to claim it by getting the same certified by his higher
officials that the expenses in fact has been expended for the purpose specified.

The various allowances which are currently exempt under section 10 (14) of the Income Tax Act
of 1961 would continue such as:-

 Allowance granted to meet cost of travel on tour or transfer.

 Allowance granted on tour or journey in connection with transfer to meet the daily
charges incurred by the employee.

 Allowance granted to meet conveyance expenses incurred in performance of duty,

provided no free conveyance is provided.

 Allowance granted to meet expense incurred on a helper engaged for performance of

official duty.

 Academic, research or training allowance granted in educational or research institutions.

 Allowance granted to meet expenditure on purchase/maintenance of uniform.

13. Professional Tax deducted from salary

The current provision remain on this head which is as under

Most of the States in India collects “tax on employment” on a per-professional basis which is
known as professional tax and this is usually a slab amount based on gross income. Such
professional taxes paid are deductible from income tax pursuant to section 16(iii) of the Income
Tax Act 1961.

14. House Rent Allowance

The current provision remain on this head which is as under:-

When the employer pays house rent allowance to the employee as part of the salary and if the
same is utilized by the employee for his stay in a rental accommodation, then the income tax
rebate is available based on the criteria laid down by the Income Tax Act 1961.

The rebate on the house rent is calculated as under for rebate purposes pursuant to section 10
(13) (A) of the Income Tax Act, 1961:-

The income tax rebate on the house rent allowance received is one of the least of the following.

(a) actual house rent allowance received {section 2A(a)}, or

(b) rent paid in excess of one-tenth of salary {section 2A(b)}, or

(c) An amount equal to:-

- where such accommodation is situated at metro cities (i.e. Bombay, Calcutta, Delhi or
Madras) one half of the amount of salary due to the assessee in respect of the relevant
period, and

- where such accommodation is situated at non-metro cities (i.e. any other place than
Bombay, Calcutta, Delhi or Madras) one two- fifth of the amount of salary due to the
assessee in respect of the relevant period {Rule 2A(c)}

Salary for this purpose is basic+ dearness allowance if the terms of employment so provides (e.g.
where it is taken into account while calculating P.F and allowance etc.,) but excludes all other
allowances and perquisites.

14.1. Rebate on House Rent Allowance will not be available in the following cases

The rebate on house rent allowance would not be available in the following circumstances:-

(i) residential accommodation occupied by the assessee is owned by him; or

(ii) The assessee has not actually incurred expenditure on payment of rent (by
whatever name called) in respect of the residential accommodation occupied by him.

The assessee shall be required to produce the rent receipts in proof of actual payment. However,
for the purpose of claiming deduction of house rent allowance at source, employees drawing
house rent allowance up to Rs. 3000/- per month are exempted from production of rent receipts.
For the purpose of regular assessment, the employees shall be required to produce the rent
receipts in all cases. (the above is on the basis of circular issued by CBTD bearing no. 798 dated
30th October 2000)

15. Leave encashment while in service

The provision of Leave encashment while in service is taxable would continue to be applicable
while the same is exempted at the time of retirement subject to fulfilment of certain conditions.

16. Indirect tax- Service Tax

Service tax rate remains unchanged at 10 percent. Introduction of Two New Taxable Services
(effective from a date to be notified upon enactment of Finance Bill 2011)
• Services provided by air conditioned restaurants with licenses to serve liquor
• Services provided by hotels, guest houses, etc. with respect to providing accommodation.
Exemptions from Service Tax (effective 1 March 2011):
• Services rendered to exhibitors participating in an exhibition outside India have
been exempted from service tax
• Works contract services rendered within a port, or other port or airport have been
exempted from service tax (earlier the exemption was limited to services provided
in relation to the construction of ports)
• An abatement of 25 percent from the taxable value has been provided in respect
of services rendered in relation to the “transport of coastal goods” and goods
transported through “national waterways” or “inland water” (without claiming
Cenvat credit)
The limits for the maximum amount/ rate at which service tax can be levied on air
Travel services have been revised as follows (amounts in Rs.):
S. NO Type of Air travel Existing Revised
1 Domestic(economy) 100 150
2 International(economy) 500 750
3 Domestic(other than economy) 100 10%

17.Visa Regulations(Not required from examination point of view)

1. Employment Visa
• The Government of India has removed the cap on the number of employment
Visas that may be granted to foreign nationals. Earlier the number of employment visas that
could be granted was restricted to 1 percent of the total workforce subject to a maximum of 20
and a minimum of five.s
• The Government of India has mandated that an employment visa may be granted to a foreign
national only if his/her salary is in excess of USD 25,000 per annum. However, the threshold
salary limit is not applicable to ethnic cooks, language (other than English) teachers/translators,
and staff working for a high commission/consulate in India.
2. Business Visa
In 2009, the Government of India directed all foreign nationals in India holding a business visa
and working on a project/contract based assignment to return to their home countries. The
Government of India also clarified in detail the purpose, duration and various scenarios under
which business visas may be granted. The following additional clarifications have been issued by
the Government of India regarding business visas:
• A business visa with a multiple entry facility can be granted for a maximum period of five years
and the in case of nationals from the USA, for a maximum period of 10 years.
• MHA, State Governments, Union Territories, Foreigner Registration Offices, etc. can grant
extension of business visas on a year-to-year basis up to a total period of five years from the date
of issue of the initial visa. However, the first extension of the business visa will only be granted
by the MHA.
3. Entry (X) Visa
Generally the spouse/dependents of a foreign national are granted an entry (X) visa if they intend
to accompany the foreign national to India. The following additional clarifications have been
issued by the Government of India on entry (X) visas:
• An entry (X) visa may be granted to the spouse/dependents of foreign national who is coming
to India/already in India on any other type of visa, i.e. business, employment, etc.
• An entry (X) visa may be granted to a foreign national of Indian origin and his/her
Spouse/dependents who wish to come to India for visiting relatives, holidays, Sightseeing, etc.
• The validity of the entry (X) visa shall be concurrent with the visa of the principal visa holder
or a shorter duration but limited to five years from the date of initial issue.
• Foreign nationals holding an entry (X) visa cannot accept any employment in India or
undertake/ indulge in any business/economic activity in India.
5. Conference Visa
The Indian immigration laws provide for grant of a special type of visa known as conference visa
to foreign nationals who intend to visit India to attend a conference, seminar or workshop
(‘event’). The following additional clarifications have been issued by the Government of India
on the conference visa:
• Eligibility
The foreign national who intends to visit India with the sole objective of attending such event
must be of assured financial standing.
• Procedure
- Along with the visa application the foreign national should submit an invitation letter from the
event organizer.
- Specified foreign nationals and foreign nationals who are required to visit ‘restricted’ or
‘protected’ areas or any areas affected by terrorism, militancy, etc. should obtain a prior security
clearance from the MHA.
- If the organiser of the event is a ministry/department of the Central or State Government, the
request for security clearance needs to be submitted by the organiser at least 30 days prior to the
commencement of the event. In other cases, where the organiser is a Non-Governmental
Organisation or private institution, the request for security clearance needs to be submitted at
least 60 days in advance.
• Duration
- The ‘conference visa’ would be issued for the duration of the event and the necessary travelling
time. However, if the foreign national wishes to combine tourism with attending the event, the
participant may be granted a maximum six-month visa and the visa would be subject to such
conditions as applicable to a ‘tourist visa’.
- If security clearance is required from the MHA, the visa would not be granted for a duration
longer than that specifi ed by the Ministry of External Affairs/ MHA or the minimum period
required.
6. Tourist Visa
A tourist visa is generally granted to a foreign national whose primary objective of visiting India
is sightseeing, recreation, casual visit, etc. and does not involve any economic or business
activity. Key developments on the tourist visa front are as follows:
• The ‘visa-on-arrival’ has been extended to citizens of six more countries, namely Cambodia,
Laos, Vietnam, Philippines, Myanmar and Indonesia. This facility could earlier be availed by
citizens of fi ve countries, namely Japan, Singapore, Finland, Luxembourg and New Zealand.
• The Government of India has mandated that a foreign national holding a tourist visa, and who
intends to visit India within two months of his/her last departure, needs to obtain a specific
permission from the Indian consulate in his/her home country. On grant of permission, if the
foreign national visits India, it shall be necessary for him/her to register with the Foreigner
Registration Office within 14 days of arrival in India.

No doubt, the current budget proposal has widened the tax slab and it is a clear indication that
the Government is moving towards the Direct Tax Code bill of 2009 and this will leave more
money in the hands of the individual – in turn the higher spending would take place and
economic growth also would take place. The widened tax slab change and more avenue of saving
through infrastructure bond up to an additional amount of Rs.20,000 might cheer most of the tax
payers but leaving the basic exemption limit untouched would be a great burden to the senior
citizens.
DEDUCTIONS UNDER SECTION 80

The Deductions under section 80C are divided under two categories:

A. Deductions in respect of certain payments.

B. Deductions in respect of certain income.

DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS

1. Deductions regarding approved savings in P.F. Life Insurance Premium, etc [Section
80C]
Savings play a vital role in the fast economic development of any country. To encourage
savings, an incentive in the form of a deduction out of one`s taxable income has been
allowed. To chanelise those savings, various schemes have been framed and if the
assesses deposit those savings in these approved schemes, a deduction shall be allowed.
Deduction u/s 80C shall be allowed only to following assesses:
i) An individual
ii) A Hindu Undivided Family

RATE OF DEDUCTION
Total amount deposited in various approved ssaving schemes or Rs. 1,00,000 p.a. w.e. is
less shall be allowed as deduction. This limit of Rs. 1,00,000 also includes the amount of
deduction allowed to the assessee u/s 80CCC and 80CCD.

QUALIFYING AMOUNT FOR DEDUCTION u/s 80C

Amount saved and deposited by the employee or assessee in the following savings
schemes shall qualify for deduction u/s 80C

a) Deposits made in provident funds

i. Deposits in statutory provident Fund (S.P.F): Amount deposited by the
employee in this fund during the previous year fully qualifies for deductions.
ii. Deposits in Recognised Provident Fund (R.P.F): amount deposited during the
previous year fully qualifies the deductions.
iii. Deposits made by employee in Unrecognised Provident Fund (U.R.P.F): since
this fund is not recognised by the Commissioner if Income Tax, so any
amount deposited or saved by the employee in the fundwill not qualify for
any deduction.
iv. Deposits made in Public Provident Fund (P.P.F): The Provident Fund account
can be opened in the name of the employee (assessee), spouse and children
and amount deposited by the assessee during the previous year in any of these
accounts shall qualify upto a maximum of Rs. 70,000.

b) Payment of Life Insurance Premium

Actual amount of premium deposited by the employee or on his behalf by his
employer or 20% of su, assured w.e. is less shall qualify for deduction. Life Insurance
policies can be obtained in the name of assessee, spouse and children in case of HUF
in the name of any or all the co-partners in the HUF.
The children means all the sons and daughter of the assessee whether minor or major,
whether dependent upon the assessee or independent or may be married or unmarried.
It also includes steps or adopted children.

c) Amount deducted out of Govt employee`s salary towards deferred annuity

In case of any salary has been deducted out of salary of govt employeefor securing a
defee=rred annuity for him or making a provision for his spouse or children, the
amount so deducted but not exceeding 20% of his salary will qualify for deduction u/s
80C.

d) Payment made towards group insurance

Any amount deducted or deposited by employer towards employee`s group insurance
shall fully qualify for deduction.

e) Deposits made in approved Superannuation Fund

 Term Deposits with certain banks with not less than 5 years duration and as per
scheme framed by central government shall also qualify for deduction.

f) Amount deposited or invested in equity linked saving scheme (ELSS)

Any amount invested in equity linked saving scheme qualifies upto actual amount
invested. In case any amount was invested in ELSS notified for rebate u/s 88 shall
also qualify for deductions under this section .

g) Payment of deferred annuity

Any payment made by the assessee to effect or keep in force contract for deferred
annuity will qualify for deduction u/s 80C.

h) Deposits made in Unit Linked Insurance Plan (ULIP)

Any amount deposited by the assessee in ULIP of UTI or LIC mutual fund shall fully
qualify for deduction. Amount can be deposited in the name of assessee, spouse and
children.

i) Amount invested in National Savings Certificates-VIII issues

Amount invested in the National Savings Certificates-VIII issues fully qualifies for
the deductions u/s 80C. Interest accrued on these certificates purchased earlier is
deemed to be re-invested, hence such interest also fully qualifies for deduction every
year.

j) Amount paid to LIC under Jeevan Dhara, Jeevan Akshay Policies, etc.
Any amount paid to LIC under Jeevan Dhara, New Jeevan Dhara I, New Jeevan
Akshay, New Jeevan Akshay I, New Akshay II plans fully qualifies for this deduction.
Investment in these plans can be made in the name of assessee and in case of HUF, in
the name of any of its members.
k) Amount invested in notified Pension Fund set up by mutual funds or UTI
Any amount invested by an individual in notified funds set up by Mutual Funds or
UTI shall be shall fully qualify for the deductions u/s 80C.

l) Amount deposited in National Housing Bank

Any amount deposited as a subscription to Home Loan Account Scheme of National
Housing Bank or contribution to any notified pension fund set up by the National
Housing Bank will fully qualify for deduction u/s 80C.

m) Any subscription in deposit scheme of central government

 Any subscription to any such security to central government or any such deposit
scheme as central govt may notify in Official Gazette, specifying in this behalf will
qualify the deduction u/s 80C.

n) Repayment of House Building Loan

Any amount repaid under house building loan taken from Govt., LIC, Bank, HDFC,
HUDCO, or other housing finance institutions or employer.
OR
Amount repaid as full price or instalment of price of a house purchased from govt. or
an approved agency shall qualify up to actual amount repaid.
The amount repaid must not include interest on loan or ground rent but shall include
stamp duty and registration charges.

o) Payment of tuition fees of children

Any amount paid as tuition fees (excluding any payment towards any development
fees or donation or payment of similar nature) whether at the time of admission or
thereafter to:
a) Any school, college or university or any other educational institution situated in
India,
b) For the purpose of full time education of any two children of the individual

The amount which shall qualify under this section, shall not exceed actual amount
paid as tuition fee for two children only.

p) Subscription to bonds of NABARD

Any subscription to bonds issued by National Bank Of Agriculture and Rural
Development as Central Govt. may notify in Official Gazette, will qualify for
deductions u/s 80C.

2. Deduction in respect of contribution to Pension Fund [Section 80CCC]

a) This deduction is allowed to individual only.
b) This deduction is allowed if certain amount is paid or deposited in the relevant
previous year with LIC or any other insurer to effect a contract of annuity or pension
out of a fund set up u/s 10(23AAB)
c) The rate of deduction is actual amount paid under this scheme (excluding any interest
or bonus accrued during the year ) or Rs. 1,00,000 w.e is less. The aggregate amount
of deduction allowed u/s 80CCC and 80CCD cannot exceed Rs. 1,00,000.
 d) In case any amount is received by the assessee or his nominee under this scheme as
pension or any amount is withdrawn by surrender of this plan either in full or in part
in any previous year whole of such amount shall become taxable in the year in which
such pension is received or withdrawal is made.

3. Deduction in respect of contribution to pension scheme of central government

[ Section 80CCD ]
a) This deduction shall be allowed only to an assessee, being an individual employed by
the central government and employed by any other employer on or after 1-1-2004 if
he has in the previous year paid or deposited any amount in his account under a
pension scheme notified or as may be notified by the central government.
b) The amount to be deducted shall be
i. The whole of the amount so paid or deposited ; or
ii. 10% of his salary in the previous year
Whichever is less
c) In case central government make any contributions to his account as reffered above,
the assessee shall be allowed a deduction in the computation of his total income.
d) Where any amount standing to the credit of the assessee in his account referred above
in respect of which deduction has been allowed as per above together with the amount
accrued thereon if any, is received by the assessee, or his nominee, in whole or in part
in any previous year:
i. On account of closure or his opting out of pension scheme referred to above,
or
ii. As pension received from annuity plan purchased or taken from such closure
or opting out

The whole of the amount of which deduction has been allowed as per above shall be
deemed to be the income of the assessee or his nominee, as the case may be, in the
previous year in which such amount is received and shall accordingly be charged to
tax as income of that previous year.

e) Where any amount paid or deposited by the assessee has been allowed as a deduction
as per above such amount shall not qualify for rebate under Section 88.
f) For the purpose of this section, “salary” includes dearness allowance, if the terms of
employment so provide, but excludes all other allowances and prerequisites.

4. Restriction on total amount of deductions u/s 80C, 80CCC and 80CCD (insertion of
new section 80CCE)
The aggregate amount of deductions u/s 80C, section 80CCC and section 80CCD shall
not in any case, exceed one lakh rupees.
5. Deduction in respect of Medical Insurance Premia [Section 80D]
Any Insurance Ppremia paid by the individual or HUF by any mode other than cash for
an insurance on the health of self, spouse or any other member of the family or dependent
parents or dependent children of the assesse or Rs. 15,000 p.a. whichever is less shall be
allowed as deduction. Such insurance should be in accordance with schemes framed by
General Insurance Corporation such as Mediclaim or by any other insurer where sxheme
is approved by Insurance Regulatory Authority of India.
In case any amount is paid by an assessee to ensure the health of a person who is senior
citizen i.e who has attained the age of 65 yrs at any time during the previous year the rate
of deduction is the actual premium paid or Rs. 20,000 p.a. whichever is less.

6. Deduction in respect of maintenance including medical treatment of dependent that

is person with disability [Section 80DD]
a) The deduction is allowed to an individual who is resident of India or HUF.
b) The deduction is allowed if they have incurred.
c) Any expenditure for the medical treatment (including nursing), training and
rehabilitation of a dependent, being a person with disability, or
d) Paid or deposited ny amount under a schedule framed in this behalf by LIC or any
other insurer or administrator of UTI or the specified company for the maintenance of
the dependent being a person with disability.

RATE OF DEDUCTION
i. The assessee shall be allowed a fixed deduction of a sum of Rs. 50,000 from his
gross total income in respect of the previous year.
ii. Where such dependent is a person with severe disability the deduction shall be
allowed for Rs. 75,000.

CONDITIONS

i. The scheme as referred above provides for payment of annuity or a lumpsum

amount for the benefit of the dependent, being a person with disability, in the
event of death of the individual or a member of HUF in whose name subscription
of the scheme has been made.
ii. The assessee nominates either the dependent, being a person with disability, or
any other person or a trust to receive the payment on behalf for the benefit of the
dependent, being a person with disability.
iii. If the dependent, being a person with disability, predeceases the individual or the
member of HUF an amount equal to amount paid or deposited as per above shall
be deemed to be the income of the assessee of the previous year in which such
 amount is received by the assessee and shall accordingly be chargeable to tax as
the income of that previous year.
iv. The assessee, claiming a deduction under this section, shall furnish a copy of the
certificate issued by the medical authority in the prescribed form and manner,
along with the return of income under section 139, in respect of the assessment
year in which the deduction has been claimed.
v. In case where the condition of disability requires reassessment of its extent after a
period stipulated in the aforesaid certificate, no deduction under this section shall
be allowed for any assessment year relating to any previous year beginning after
the expiry of previous year during which the aforesaid certificate of disability had
expired, unless a new certificate is obtained from medical authority in the form
and manner, as may be prescribed and a copy thereof is furnished along with the
return of income.
vi. “Disability” shall have a meaning assigned to it in clause (i) of Section 2 of the
Persons with Disabilities(Equal Opportunities, Protection of Rights and Full
Participation) Act, 1995 and includes “autism”, “cerebral palsy”, “multiple
disabilities” referred to in clauses(a), (c) and (h) of section 2 of National Trust for
Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act 1999.
vii. “Medical Authority” means the medical authority as referred to in clause (p) of
Section 2 of the Persons with Disabilities(Equal Opportunities, Protection of
Rights and Full Participation) Act, 1995 or such other medical authority as may,
by notification, be specified by the central govt for certifying “autism”, “cerebral
palsy”, “multiple disabilities”, “person with disability” and “severe disability”
referred to in clauses(a), (c), (h), (i) and (o) of section 2 of National Trust for
Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act 1999.
viii. “Person with Disability” means a person referred to in clause (t) of section 2 the
Persons with Disabilities(Equal Opportunities, Protection of Rights and Full
Participation) Act, 1995 or clause (o) of section 2 of National Trust for Welfare of
Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act 1999.
ix. “Person with Severe Disability” means:
1) A person with 80%, or more of one or more disabilities, as referred to in
sub-section 4 of section 56 of Persons with Disabilities(Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995.
2) A person with severe disability referred to in clause (o) of section 2 of
National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental
Retardation and Multiple Disabilities Act 1999.
x. “Dependent” means :
1) In case of an individual, dependent means the spouse, children, parents,
brothers and sisters of the individual or any of them.
 2) In case of HUF, a dependent means a member of HUF.
Such person is wholly or mainly dependent upon individual or HUF for
support and maintenance. Such person does not claimed any deductions
u/s 80U in that previous year.

7. Deductions in respect of medical treatment, etc. [Section 80 DDB]

a) This deduction is allowed to an individual or HUF who is resident in India only.
b) If they have incurred during the previous year, or actually paid the amount for the
medical treatment of such disease or ailment as may be specified in the rules made in
this behalf by the board.
c) The expenditure must be incurred for himself or a dependent, in case the assessee is
an individual.
d) The expenditure may be incurred for any member of a HUF, in case the assessee is a
HUF.

8. Deduction in respect of interest on loan taken for higher education [Section 80E]
Deduction u/s 80 E regarding interest paid on a loan taken to pursue higher education
shall be allowed if following conditions are fulfilled:
a) Assessee is an individual
b) Assessee has taken a loan to pursue higher education of his own, spouse or any of
his/her child.
c) Loan has been taken from any financial institution or an approved charitable
institution.
d) Assessee has paid interest on such loan during the previous year.
e) Assessee has paid interest out of his taxable income of that year.

The deductions specified above all shall be allowed in computing the total income in
respect of initial assessment year and seven assessment years immediately succeeding the
initial assessment year or until the interest referred above is paid by the assessee in full,
whichever is earlier.[Section 80E(2)]

For the pupose of this section :

a) “Approved Charitable Institution” means an institution specified in, or, as the case
may be, an institution established for charitable purposes and notified by the central
govt under section 10(23C) or an institution referred to in section 80G(2)(a);
b) “financial institution” means 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) or any other financial institution which the central govt may, by
notification in Official Gazette, specify in this behalf;
 c) “higher education” means full time studies for any graduate or post-graduate course
in engineering, medicine, management or for post-graduate course in applied sciences
or pure sciences including mathematics and statistics;
d) “initial assessment year” means the assessment year relevant to the previous year, in
which the assessee starts paying interest on loan.

9. Deduction in respect of donations to certain Funds, charitable Institutions , etc.

[Section 80G]
Section 80G grants partial deduction in respect of amount given as charitable donations
and it is allowed to all assesses. The sum paid to following as donations during the
previous year qualify under this section:
80G(20:
a) any sum paid by the assessee in the previous year as donations to:
i. The National Defence Fund set up by central govt. Or
ii. The Prime Ministers Drought Relief Fund, or
iii. The Prime Ministers National Relief Fund, or
iv. The National Children Fund, or
v. The Indira Gandhi Memorial Trust,
vi. The National Foundational for Communal Harmony
vii. A University or any educational institution of national eminence as may be
approved by prescribed authority
viii. The Chief Minister`s Earthquake Relief Fund Maharashtra
ix. Any fund set up by the State Govt. of Gujarat exclusively for providing relief
to the victims of earthquake in Gujarat
x. The Zila Saksharta Samiti
xi. The National Blood Transfusion Council or to any State Blood Transfusion
Council which has its sole object of control, supervision, regulation or
encouragement in India of the services related to operation and requirement of
blood banks
xii. Any fund set up by the State Govt. to provide medical relief to poor
xiii. Any Central Welfare Fund, The Indian Naval Benevolent Fund or the Airfore
Central Welfare Fund established by the armed forces of the union for the
welfare of the past and present members of such forces or their dependents
xiv. The Andhra Pradesh Chief Minister`s Cyclone Relief Fund
xv. The National Illness Assistance fund
xvi. National Sports fund to be set up by the Central Govt
xvii. National Cultural Fund to be set up by the Central Govt
xviii. Technology Development and Application Fund to be set up by the Central
Govt
xix. The National Trust for Welfare of Persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities constituted under sub-sectio (1)
 of section 3 of the National Trust for Welfare of Persons with Autism,
Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999
xx. The Govt. or any local authority, to be utilised for any charitable purpose
other than the purpose of promoting family planning
xxi. Any authority referred to in clause (20A) of Sec-10, for the purpose of
satisfying the need of housing accommodation or planning, development or
cities, towns or villages or both
xxii. Any corporation referred to u/s 10 (26BB) i.e. a corporation set up to promote
the interest of the minorities
xxiii. The Govt. or any such local authority, institution or association as may be
approved in this behalf by the Central Govt. to be utilised for the purpose of
promoting family planning.
b) Any sum paid by the assessee in the previous year as donation for the renovation or
repair of any such temple, mosque, gurudwara, church or other place as notified by
the central govt in the Official Gazette to be of historic, archaeological or artistic
importance or to be a place of public worship of renown throughout any state or states
.
c) Any sum paid by assessee being a company, in the previous year as donation to the
Indian Olympic Association or any other association or institution as notified by the
central govt u/s 10(23) for:
i. The development of infrastructure for sports and games in india,
ii. The sponsorship of sports and games in india.
iii. Any sum paid by the assessee during the period beginning on the 26th day of
January 2001and ending on 30th day of September 2001

10. Deduction in respect of expenditure incurred on payment of House Rent [Section

80GG]
This deduction is allowed to individuals only for rent paid. The assessee must be living in
a rented house due to his employment, business or profession. He should not be getting
any HRA. He or his spouse should not have any self occupied house in india. He or his
spouse, minor child or HUF do not own a house at a place where the tax payer resides.

11. Deduction in respect of any payment made to certain scientific institutions or an

institution having rural development programme as its object [Section 80 GGA]
The deduction shall be available to every such assessee, who during the previous has
made any payment:
a) To the scientific research association which has as its object the undertaking of
scientific research, or to a university, college or any other institution, to be used for
scientific research and such bodies as are approved for the purpose of sec-35(i), (ii) ;
 aa) Any sum paid by the assessee in the previous to a university, college or institutions to
be used for research in Social Science or Statistical Research
b) (i) to an association or institution which has its object the undertaking of any
programme or rural development, to be used for carrying out any programme of rural
development approved for the purpose of Sec-35CCA provided he furnishes the
certificate as mentioned in sec-35CCA from such association or institution; or
(ii) to an institution or association which has its object the training of persons for
implementing programmes of rural development and any such body is approved for
the purpose of sec-35CCA (2)
bb) Any sum paid by the assessee 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 referred to in sec-35AC
c) Any sum paid by the assessee in the previous year to a rural development fund to be
set up and notified by the Central Govt. for the purpose of clause (c) of sub-section
(1) of sec-35CCA
d) National Poverty Eradication Fund (so notified)

This deduction will not be allowed in case of those assesses whose gross total income
includes income which is chargeable to tax under the head “Profits and Gains of Business
or Profession”

12. Deduction in respect of Infrastructural Projects [Section 80IA]

Section 80IA of the Income Tax Act, provides tax holiday for a certain period to an
industrial undertaking or enterprises carrying on the business of developing, maintaining
and operating any infrastructural facility, etc.

VARIOUS PROVISIONS
Where the gross income of the assessee includes any profits and gains derived by an
undertaking or an enterprise any eligible business; a deduction of an amount equal to
stated percentage of profits and gains derived from such business, shall be allowed for
statted consecutive assessment years. [80IA(1)]

ELIGIBLE BUSINESS
The deduction is allowed in undertakings engaged in:

Category I: Carrying on business of

[Section 80IA(4)(i)] a. Developing;
b. Operating and maintaining; or
c. Developing, operating and maintaining any
infrastructural facility
Category II: Providing telecommunication services (whether basic
[Section 80IA(4)(ii)] or cellular), radio, paging, domestic satellite services
& internet services, etc.

Category III; Developing, operating and maintaining an industrial

[Section 80IA (4)(iii)] park or Special Economic Zones notified by the
Central Govt.

Category IV: a. Generation,

[Section 80IA (4)(iv)]
b. Generation & distribution of power,
c. Laying of new transmission lines for power
distribution,
d. Undertakes substantial renovation and
modernisation of the existing transmission or
distribution lines

Category V: Undertaking set up for reconstruction of power

[Section 80IA (4)(v)] generating plant

Category VI: Undertaking laying and operating a cross country

[Section 80IA (4)(vi)] natural gas distribution network.

“Infrastructural Facility” means:

a) A road including toll road, a bridge or a rail system;
b) A highway project including housing or other activities being an integral part of the
highway project;
c) A water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system;
d) A port, airport, inland waterway or inland port or navigational channel in the sea.

“Telecommunication Service” means:

Any undertaking which has started or starts providing telecommunication services

whether basic or cellular, including radio paging, domestic satellite services, network of
trunking, broadband network and internet services on or after the 1st day of April, 1995,
but on before the 31st day of March, 2005.

 Transfer of Business: in case the undertaking or enterprise which is claiming this

deduction is transferred to another assessee, for transferee all the conditions shall
remain applicable in the same manner as if no transaction has taken place.
 Only Source of Income [Section 80IA (5)]: Deduction for above mentioned
business shall be allowed as if it is the only source of income for the assessee.
  Compulsory Audit [Section 80IA (7)]: For non company assesses it shall be
compulsory to get their accounts audited if they want to claim this deduction.

Deduction u/s 80IA: A new provision inserted by Taxation Laws (Amendment)

Act, 2005

An undertaking owned by Indian Company and set up for reconstruction and revival
of power generating plant if:

a) Such Indian Company is formed before 30-11-2005 with majority equity

participation by public sector companies for the purpose of enforcing the security
interests of the lenders to the company owning the power generating plant and
such Indian Companies is notified before 31-12-2005 by the Central Govt.; and
b) Such company begins to generate or transmit or distribute power before31st
March, 2007.
 Transfer of Goods [Sec 81IA (8)]: in case any goods are to be transferred
from eligible business to any other business or vice versa, it should be done at
market value. In case these are transferred at any other price the Assessing
Officer can adopt Fair Market value.
 No deduction under any other section [Sec 80IA (9)]: in case an assessee
claims deduction under this section for any profits and gains, no deduction
shall be allowed under any other section for same profits and gains.
 Higher Profits [Sec 80IA (10)]: in case any arrangement is made to have
higher profits of eligible business the Assessing Officer shall allow the
deductions only on real profits.
 Power to withdraw [Sec 80IA (11)]: the Central Govt. has the power to
withdraw this deduction at any time from a class of undertakings or
enterprises by issuing a notification in the Official Gazette.
 Amalgamation or Demerger [Sec 80IA (12)]: in case of amalgamation or
demerger all the conditions shall apply to the amalgamating company of the
resulting company as if Amalgamation or demerger has not taken place.

13. Deductions in respect of profits & gains from business of collecting and processing
of bio-degradable waste [Section 80 JJA]

Eligible Business: collecting and processing or treating of bio-degradable wastes for

generating power or producing bio-fertilizers, bio-pesticides or making pellets or
briquettes for full or organic manure.
 Form of Organisation: the deduction is available to all industrial undertakings /
enterprises whether in corporate or non-corporate sector i.e. sole proprietor, partnership
firm, etc.
Rate of deduction: 100% of profits & gains from such business as included in gross total
income
Period of deduction: the deduction is available for a period of 5 yrs beginning with the
assessment year relevant to the previous year in which such business commences.

14. Deductions in respect of wages paid for additional company jobs [Section 80 JJAA]

Eligible Business: industrial undertaking engaged in the manufacture or production of

article or thing.
Form of Organisation: the deduction is allowed to Indian company only which implies
that foreign companies and non-corporate assessees cannot claim this deduction.
Conditions to be satisfied:
a. No split up or reconstruction or amalgamation: the undertaking has not been
formed by splitting up or reconstruction of the business already in business or
amalgamation with another undertaking.
b. Employment of a specified number of new regular workmen: the industrial
undertaking should employ more than 100 new regular workmen during the
previous year. However, an existing industrial undertaking must also employ new
workers to the tune of atleast 10% of existing number of workmen employed in
such undertaking as on the last day of the preceeding year.
c. Submission of audit report: The assessee has to furnish with the return of Income
the report of accountant u/s 288(2) to claim this deduction.
d. Rate of Deduction: 30% of additional wages paid to the additional new workmen.
Additional wages means the wages paid to new regular workmen in the excess of
100 workmen employed during the previous year. However, in the existing
undertaking, the additional wages shall be Nil, if the increase in the number of
regular workmen employed during the year is less than 10% of the existing
number of workmen employed in such undertaking as on last day of previous
year.
e. Period of deduction: the deduction shall be allowed for a period of 3 previous
years including the previous year in which the employment is provided.

15. Deduction in case of person with disability [Section 80 U]

i) This deduction is allowed to an individual who is resident of India;
ii) Who, at any time during the previous year, is certified by the medical authority to
be a person with disability;
iii) Every individual claiming a deduction under this section shall furnish a copy of
the certificate issued by the medical authority along with the return of income u/s
139, on respect of the assessment year for which the deduction is claimed;
iv) If the condition for disability requires reassessment of its extent after a period
mentioned in aforesaid certificate, no deduction under this section shall be
allowed for any assessment year relating to the previous year beginning after the
expiry of the previous year during which the aforesaid certificate of disability had
expired, until a new certificate is obtained from the medical authority in the form
and manner, as may be prescribed, and a copy thereof is to be furnished along
with the return of income under section 139;
v) Rate of deduction: an individual fulfilling all above mentioned conditions shall
be eligible for a fixed deduction of Rs. 50,000. In case the individual suffers from
a severe disability (disability above 80%) then a higher deduction of Rs. 75,000
shall be allowed.
vi) “Disability”: Shall have a meaning assigned to it in clause (i) of section 2 of the
Persons with Disabilities (Equal Opportunities, Protection and Rights and Full
Participation) Act, 1995, and includes “autism”, “cerebral palsy” and “multiple
disabilities” referred to in clause(a), (c) and (h) of section 2 of the National Trust
for the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and
multiple Disabilities Act, 1999.
vii) “Medical Authority”: Means the medical authority as referred to in clause (p)
of section 2 of the Persons with Disabilities (Equal Opportunities, Protection and
Rights and Full Participation) Act, 1995, or such other medical authority as may
be, by notification, be specified by the Central Govt. for certifying “autism”,
“cerebral palsy”, “multiple disabilities”, “disabilities” and “sever disability”
referred to in clause (a), (c), (h), (i) and (o) of section 2 of the National Trust for
the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and
multiple Disabilities Act, 1999.
viii) “Person with Disability”: Means the person referred to in clause (t) of section 2
of the Persons with Disabilities (Equal Opportunities, Protection and Rights and
Full Participation) Act, 1995, or clause (O) of section 2 of the National Trust for
the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and
multiple Disabilities Act, 1999.
ix) “Person with Severe Disability”: Means
a) A person with 80%, or more of one or more disabilities, as referred to on
sub-section 4 of section 56 of the Persons with Disabilities (Equal
Opportunities, Protection and Rights and Full Participation) Act, 1995; or
b) A person with severe disability referred to in clause (o) of section 2 of the
National Trust for the Welfare of Persons With Autism, Cerebral Palsy,
Mental Retardation and multiple Disabilities Act, 1999.
 Exempted income
Exempted income: Any Income which does not form part of total income is exempted income
and are given under sections10-13B. Such incomes are either wholly exempted from tax or
exempted upto a certain limit. Therefore such incomes, either whooly or up to the exempted
limit; are not included in the Total income of an assesses while computing his Total Income.

Exempted Income Under section 10

Agricultural income[sec10(1)]- Agricultural income received by assassee during previous year

is exempted. However, iit is defined under sec 2(1A).

Income received by member of HUF[sec10(2)]

Any sum received by an individual of HUF either out of HUF’s income or income of HUF’s
estate is exempted from tax.

It is important to note that main objective of sec 10(2) is to avoid double taxation as HUF is a
taxable entity and it’s income is taxable in its hand.

Share of profit received by a partner from a partnership firm[sec10(2A)]

Share of profit received by a partner from a partnership firm is exempted from tax.

Again, main objective of sec 10(2A) is to avoid double taxation as firm is a taxable entity and it’s
income is taxable in it’s hand.
The value of any travel concession or assistance (LTC/LTA) received by,or due to an
individual[sec10(5) and Rule 2B]

The value of any travel concession or assistance received by an individual,or due to,him is
exempted in following cases:

(1)From his employer for himself and his family, in connection with his proceeding on leave to
any place in india(while in service)

(2) From his employer or former employer for himself and his family, in connection with his
proceeding to any place in india after retirement from service or after the termination of service.

Therefore journey may be perfomed while in service or after retirement.

Amounts of exemption: It depends upon the mode of Transporation

Mode of Transporation Amount of Exemption

Air
Amount of economy class air fare of national
carrier by the shortest route; or the amount
spent; whichever is less

Rail
Amount of air conditioned first class air fare by
the shortest route;or tee amount spent;
whichever is less

Any mode of transporation where; Amount of air conditioned first class air fare by
(a) place of original journey and the shortest route;or tee amount spent;
destination are connected by rail whichever is less

(b) place of original journey and destination First class or deluxe class fare by shortest
are not connected by rail: route;or the amount spent; whichever is less
(1) where a recognized public transport system
exists
Amount of air conditioned first class air fare by
(2) where no recognized public transport the shortest route(as if journey had been
system exists performed by rail);or tee amount spent;
whichever is less
Income of a foreigner in india[sec10(6)]

Following income of a person who is not citizen of india is exempted:

(a) Remuneration received by diplomats

(b) Remuneration received by foreign national who is an employee of foreign enterprise
(c) Non-resident employee of a foreign ship
(d) Remuneration of an employee of foreign govt. during his stay in india

Tax on royalty or technical fee paid on behalf of foreign companies[sec10(6A)]

Conditions: Following conditions fulfilled for claiming exemption under sec10(6A)

(a) Assessee must be a foreign company

(b) It must received income by way of royalty or technical fee
(c) Such royalty or technical fee must be paid by govt. or concern
(d) It must be paid under an agreement entered in to on or after april,1976 but before june

Tax on certain income paid on behalf of Non-resident or foreign companies[sec10(6B)

Where income other than salary, Royalty or technical fee is received by a Non-resident or a
foreign company from indian govt. and tax on such income is paid by the payer then such tax
will not be taxable in the hands of foreign company.

Conditions: Following conditions fulfilled for claiming exemption under sec10(6A)

(a) Assessee must be a foreign company

(b) It must received income other than salary, royalty or technical fee
(c) Such income must be paid by govt. or concern
(d) It must be paid under an agreement entered in to on befor june 1,2002by the center govt.
of india with the govt. of a foreign state.

Tax paid on income from leasing of aircraft[sec10(6BB)]

Conditions: Following conditions fulfilled for claiming exemption under sec10(6BB)

(a) Assessee must be foreigngovt. Company or enterprise.

(b) Must have given aircraft or an engine on lease to indian company engaged in the business
of operation of aircraft
 (c) Income must be given by indian company for lease of aircraft and not for providing
spares,facilities or services in connection with the operation of leased aircraft.
(e) It must be paid under an agreement entered in to on or after april,1997 but before april
1,1999

Income under co-operative technical assistance programmes,etc[sec10(8)]

(a) The remuneration received by him directly or indirectly from the govt of that foreign state for
such duties;and

(b) Any other income of such individual which accrues or arises outside india,and is not deemed
to accrue or arise in india, in respect of whichsuch individualis a required to pay any income or
social security tax to the govt. of that foreign state.

Remuneration or fee received by a consultant[sec10(8a)and Rule 16B]

Following incomes arising to a consultant is exempted:

(a)The remuneration received by him directly or indirectly, out of the funds made available to
an international organization under a technical assistance grant agreement between such
international and the govt. of that foreign state; and

(b) Any other income of such individual which accrues or arises outside India, and is not deemed
to accrue or arise in India, in respect of which such individuals a required to pay any income or
social security tax to the govt. of that foreign state

Remuneration or fee received by foreign employee of the consultant[sec10(8b)and Rule

16B]

(a)The remuneration received by him directly or indirectly, for such duties from any consultant
referred to in sub-section(8A);and

(b) Any other income of such individual which accrues or arises outside india,and is not deemed
to accrue or arise in india

Income of any family member of any individual mentioned under sec10(8),10(8A)and

10(8B)[sec10(9)]

The income of any family member of any individual mentioned under sec sec10 (8), 10(8A) and
10(8B) accompanying him to India, which accrues or arises outside India, and is not deemed to
accrue or arise in india, in respect of which such member is required to pay any income or social
security tax to the govt. of that foreign state or country or origine of such member is exempted.

Death-cum-retirement gratuity [sec10(10)]

Any death- cum-retirement gratuity is exempted in following cases:

(a) Received by the govt. employee.

(b) Received under the payment of gratuity Act,1972 to the extent provided under the provision
of that Act.

(c) Received by any other employee on his retirement or on his becoming in capacited prior to
such retirement or on termination of his employment, or any gratuity received by his widow,
children or dependants on his death, is exempted to the extent it does not exceed one-half
month’s salary for each year of completed service.

Tax Treatment of Gratuity : Tax treatment of gratuity depends upon the nature of employee:

(1) Government employee [Section 10(10)(i)]

(2) Non-government employee :

(a) Non –government employee covered under the payment of Gratuity Act, 1972
[Section 10(10)(ii(]

(b) Non-government employee not covered under the Payment of Gratuity Act, 1972
[Section 10(10)(iii)]

(1) Government employee [section 10(10)(i) ] : Any death –cum- retirement gratuity
received by the government employee is fully exempted. However , government
means central, state government or local authority but does not include statutory
corporations.

(2) Non- government employee :

(a) Non- government employee covered under the of payment of Gratuity Act
1972 [Section 10(10)(ii) : any death –cum-payment gratuity received the Non-
government employee covered under the payment of Gratuity Act, 1972 is
exempted to the extent of permitted limit.

Pension [Section 10(10-A) ]

Any payment in commutation of pension is exempted if it is received by :

1. Government Employee.
2. A non govt. Employee
3. From a fund under section 10(23AAB)
Type of Pension:
(a) Commuted pension
(b) Uncommuted pension
Tax Treatment of the pension:
Tax Treatment of Uncommuted Pension : Uncommuted Pension is always taxable under
section 17(1)(ii).
Tax Treatment of Commuted Pension : Tax Treatment of Commuted Pension depends upon
the nature of the employee.
(1) The government employee {Section [10(10A)(i)] Entire commuted pension received by
the government employee is exempted from the tax . It is immaterial whether assessee
has or not received any gratuity. Government means Central, state government or local
authority and statutory coporation. However, according to Government Rules full
pension can not be commuted. Therefore exemption under the law and uncommuted
pension will be taxable
(2) Non government employee [Section 10(10A)(ii) ] : The amount of exemption depends
upon whether assessee had received gratuity or not during the relevant previous year i.e.:
(a) where Non government employee receives gratuity also then one third of the
Commuted pension which he is normally entitled to recive is exempted from
tax , and
(b) where Non- government employee does not received any gratuity then one-
half Commuted Pension which he si normally entitled to receive is exempted
from tax.
(3) Any Commuted Pension received from a fund under section 10(23AAB) e.g., fund set up
by LIC of India or any other insurer and approved by the prescribed authority is fully
exempted. However, here assessee (receiver of pension ) can be any person.

Leave salary or leave encashment [Section 10 (10AA)]

Leave salary or leave encashment received government and non government employee at
the time of retirement is exempted.

Leave salary / leave encashment : An employee gets different leaves such as medical
leave, casual leave, etc. Another type of leave is earned . As name indicates employee has to
earn that leave after working for few days (depending upon services ). If earned leaves are not
utilized then depending upon the Services Rules, these may either lapse or are allowed to be
enchased every year or may be accumulated . The leaves accumulated throughout the service
period may encashed at the time of retirement or leaving the jobs. Such encashment of leaves
standing to the credit of employee is known as leaves or leave encashment.,

Tax Treatment of Leave salary or leave Encashment : Tax Treatment of Leave salary
or leave Encashment depends upon the nature of employee.

(1) Government employee [Section 10(10AA)(ii)} Any payment received by the

Government employee as leave salary or leave encashment in respect of the period of
 the earned leave standing to his credit at the time of his retirement on superannuation
or otherwise is fully exempted from tax. However Government or State Government
only and does not includes local authority statutory corporations.

(2) Non-government employee [Section 10(10AA)(ii)] : Any payment received Non-

government employee as Leave salary or leave Encashment in respect of the earned
leave standing to his credit at the time of his retirement on superannuation or is
exempted to a permitted limit.

Retrenchment Compensation [ Section 10 (10B)]

Retrenchment compensation received by the workman under following is exempted :

1. The Industrial disputes Act 1947 or

2. Any other Act or rules order of the notification issued their under
3. Any standing order or under any award, contract of service of otherwise

Retrenchment Compensation : it means :

1. Compensation received by a workman at the time of the closing down of the

undertaking in which he is employed [Explanation (a) to Section 10(10B) ]

2. Compensation received by a workman , at the time of the transfer( whether by

agreement or by operation of law) of the ownership or management of the
undertaking( in which he is employed ) by the employer to a new employer where:

(a) The service of the workman has been interrupted by the such transfer; or

(b) The term and condition of service applicable to the workman after such transfer
are in any way less favorable than those applicable to him immediately before the
transfer5; or

(c) The new employer is under the terms of such transfer or otherwise , legally not
liable to pay to the workman , in the event of his retrenchment , compensation on
the basis that his service has been continuous and has not been interrupted by the
transfer [Explanation (b) to Section 10(10B).

Retrenchment Compensation received beyond exempted limit :

Retrenchment Compensation received in excess of minimum of above mentioned

amount will be taxable under Head “Salary” Section 17(3) i.e profit in lieu of
salary. However, assessee can claim relief under section 89.
 Section 10(10B) shall not apply in respect of any compensation received by a
workman in accordance with any scheme approved by the Central Government

Compensation to victim of Bhopal Gass disaster { Section 10 (10BB)]

Any payments made under the Bhopal Gas disaster Act 1985 and any scheme frame under this
Act is exempted.

However, any payment made to any assessee in connection with the Bhopal Gas leak is disaster
to the extend such assessee has been allowed as deduction under this Act on account of any loss
of damage cause to him by such disaster shall not be exempted

Compensation of the Voluntary retirement [ Section 10 (10C) / Rule 2BA]

Any amount received by any employee of the following employer on his VRS or termination his
service in accordance with the scheme of VRS / Voluntary separation shall be exempted

1. Public Sector Company

2. Any other company
3. An authority establish under a Central , State or Provincial Act or
4. Local authority.
5. Cooperative Society.
6. University establish under Central State or provincial Act.
7. Any State Government or Central Government.

Guidelines for exemptions : Exemption can be claimed if following Guideline laid down under
rule 2BA of Income –tax rules, 1962 are fulfilled :
(a) Employee must have completed 10 years service or 40 years of age.
(b) The scheme applies to all employee including workers and executives of a company or
authority or co-operative society except directors company or co-operative society.
(c) The scheme of voluntary retirement (VRS) or voluntary separation must be resulting I
overall reduction of existing strength of the employees;
(d) The vacancy caused by voluntary retirement (VRS) or voluntary separation must not be
filled up;
(e) The retiring employee of a company shall not be employee in another company or
concern belonging to same management.
(f) The amount receivable on account of voluntary retirement (VRS)or voluntary separation
must not exceed
Meaning of Salary : For the purpose of HRA, salary means Basic last drawn by the employee
and includes dearness allowance if terms of employment so provide. However, it does not
include perquisites and any other allowance.
Exemption can be claimed only once : this exemption can be claimed only once therefore ,
where exemption has been allowed to an employee under this Section for any assessment year,
no exemption shall be allowed to him in any other assessment year.

Different schemes of voluntary retirement for different employee : the Employer can frame
different schemes of voluntary retirement for different employees. However, these schemes must
be in conformity with the guidelines prescribed by the government in Rule2BA.

Voluntary compensation received beyond exempted limit : Voluntary compensation received

in excess of minimum of above mentioned amount will be taxable under Head “Salary”.
However, assessee can claim relief under section 89 [State Bank of Travancore v CBDT (2006)
282 ITR 587 (Ker.),ITO v Chander Kant S. Dharma (2005) 149 Taxman 82 (Kar.); also see
Firturam Yadav v CIT (2007) 15 SOT 75 (Nag)]

Tax on non – monetary perquisites paid by his employer [Section 10 (10CC )]

Where assessee is individual and received non monetary perquisites with in the meaning section
17(2) and the tax on such non monetary perquisites is actually paid by his employer than tax so
paid shall be exempted in the hands of the employee.

Any sum received under LIC policy [Section10 (10D)]

Any sum including bonus received under LIC policy is excepted

Any lump sum payment from the Provident Fund [Section 10(11)]

Any lump sum payment received by assessee from a PF to which the PF Act 1925 applies or
from any other PF set up and notified by the Central government is exempted

Any lump sum payment from the Provident Fund [Section 10(12)]

The accumulated balance due any becoming payable to an employee participating in a RPF, to
the extent provided in Rule 8 Part A of the fourth schedule Is exempted.

Any payment from an approved superannuation Fund[Section 10(13)]

Any payment received by the assessee from an approved superannuation fund is exempted .
HRA[Section 10(13A) / Rule 2 A

HRA is received by an employee is exempted.

Amount of exemption : Amount of exemption :under this Section is the list of the following

 HRA actually received ; or

 Rent paid in excess of 1/10 of salary ;or

 ½ (50%) of salary where such rented residential accommodation is situated in

metropolitan cities (Delhi, Mumbai, Kolkata, Chennai); or

2/5(40%) of salary where such rented residential accommodation is situated at any other
place.

Meaning of Salary : For the purpose of HRA salary means Basic salary last drawn by the
employee and including dearness allowance if terms of employment so provide. It is also
includes commission based on fixed percentage of turnover achieved by the employee as per the
term of contract. However it does not include perquisites and any7 other allowance.

Salary to be determined on due basis : Basic salary, dearness allowance and commission are
to be calculated on due basis in respect of the period when accommodation is occupied by the
assessee. The salary of any other period is not to included even if it is received and taxed in the
relevant previous year.

Important factors for HRA exemption : HRA exemption depends upon following factors :

(a) HRA actually received

(b) Rent paid

(c) Salary

(d) Place of residence

Therefore if there is no change in these factors in the relevant previous year then
HRA will be calculated annually. However where there is change in any of these
factors in the relevant previous year then HRA will be calculated monthly.

When exemption is not allowed : No exemption is allowed in following cases :

(a) Where assessee lives in the residential accommodation which is owned by him; or
 (b) Where assessee does not pay rent ; or

(c) Where rent paid is not excess of 1/10 of salary.

Interest, Premium or Bonus on specified investment Section 10(15) ]

Interest, premium or bonus specified investment received by the following person is exempted
under section 10 (15).

1. Any assessee
2. An individual or HUF
3. NRI etc.

Rent for leasing an aircraft [Section 10(15A)]

Conditions: Following conditions fulfilled for claiming exemption under sec10(6BB)

(d) Assessee must be foreign govt. Company or enterprise.

(e) Must have given aircraft or an engine on lease to indian company engaged in the business
of operation of aircraft
(f) Income must be given by indian company for lease of aircraft and not for providing
spares,facilities or services in connection with the operation of leased aircraft.
(f) It must be paid under an agreement entered in to on or after april,1997 but before april
1,1999

Allowance to MPs / MLAs Section 10(17)

1. DA received by MP or of MLA or of any Committee

2. Any allowance received by the MP under the member of the Parliament
Rule 1986
3. Any constituency allowance received by the MLA.

Award or Reward Section 10(17A)

Any payment made whether in cash or in kind shall be exempted from tax.

Pension received by gallantry award winner of family pension by the family member
Section 10(18)

1. Pension received by individual who was employee Central and State govt. has been
awarded ParamVir Chakra of Mahavir Chakra or other gallantry award as notified by
the Central Govt.
2. Family pension received by any member of the family of the individual.
Income of the local authority Section 10(20)

1. Income from house property

2. Capital Gains
3. Income from the other sources

Income of approved scientific research association

Any income of the scientific research association from a time being approved for the purpose of
section 35(1) II is exempted

Income of specified new agency Section 10(22B)

Any news agency setup in India for collection of the distribution of news as a Central govt. may
by notification in the official gazette , specify in this behalf is exempted.

Income of the professional association and institution Section 10(23A)

Income of an association or institution establish in India where object is control, supervision,

regulation of encouragement of the profession of law, medicine , accountancy ,engineering or
architecture of other profession as Central Govt. may specify in this behalf , time to time , by the
notification in the official gazette is exempted

Income of the arm forces fund Section 10(23AA)

An income received by any person on behalf of any regimental fund or non public fund establish
by the arm forces or their dependents is exempted.

Income of the LIC pension Fund Section 10(23AA)

Any income of a fund setup by the LIC of India on or after August 1, 1996 is exempted.

Income of the European economic community section 10(23BBB)

Any income of this community derived in India by the way of the interest , dividends or capital
gains from investments made out of its fund is exempted.

Income of the IRDA Section 10(23BBE)

An income of the IRDA establish under section 3(1) of the IRDA Act 1999 is exempted .

Income of the north eastern development finical corporation Ltd Section 10(23BBF)

Income of the north eastern development finical corporation Ltd formed and registered under
the companies Act 1956 is exempted
Income of mutual fund registered under the securities and exchange board of the India Act,
Section 10(23D)

Any income of mutual funds under this Act is exempted .

Income of the investor protection fund setup by recognized stock exchange in India Section
10 (23EA)

Any contribution received, from recognized stock exchange and the member their of, by the
investor protection fund set up by recognized stock exchange in India either jointly or separately,
as notified by the Central govt. in his behalf is exempted.

Investor Protection fund set up by commodity exchange in India Section 10(23EC)

Any contribution received from commodity exchange and the members therfo, by the investor
protection fund set by commodity exchange in India either jointly or separately, as notified by
the Central govt. in his behalf is exempted

Income of venture capital fund Section 10(23F)

Any income by way or dividend or long term capital gains of venture fund is exempted.

Income of registered union Section 10(20)

Any income chargeable to tax under the heads “ Income from house property “ and “income
from other sources is exempted

Income of provident superannuation and gratuity fund Section 10(25)

Any income received by the trustees on behalf of a recognized provident fund , approved
provident fund, approved superannuation fund , gratuity fund is exempted.

Income of the Employee Sate Insurance fund Section 10(25A)

Any income of the employee state insurance fund set up under the provision of the employees
state insurance Act, 1948 is exempted

In come a member of Scheduled Tribe Section 10(26)

Any income of a member of Scheduled tribe as defined in article 366(25) of the constitution,
residing in following area is exempted.

Any income of a residential of Ladak district Section 10(26A)

Any income accruing or arising to ay person who is resident in the Ladak district from any
source in the said district of Ladak is exempted.

Income of an individual being a sikkimese

Any income of an individual who is sikkimese which accrues of arises to him in following
manner is exempted.

1. For any source in the State Sikkim.

2. By way of the dividends or security.

Income of corporation for promoting the interest of member of the SC or ST or backward

classes section 10(26B)

Income of a corporation for promoting the interest of the members of minority community
Section 10 (26 BB)

Income of cooperative society promoting the interests o the member of the SC or ST or

both Section 10(27)

Income of the some boards and authorities section 10 (29A)

Income by way of any subsidy received from the tea board section 10(30)rule 8(2)

Income by way of any subsidy received from the coffee rubber board section 10(31).

Income of minor child including in the total income of parent section 10(32)

Where income of minor child is included in the total income of a parent under section
64(1A), then assessee (parent) can claim exemption to the extent such income does not exceed
one thousand five hundred rupee in respect of each minor child child whose income is so
included.

In other words the amount of exemption under this Section, per minor child whose
income is so included.

 Income of minor child.

 Rs. 1500.

Capital gains arising from compulsory acquisition of agriculture land Section 10(37)

Long term capital gain from shares or units Section 10(38)

Specified income arising from any international sporting event Section 10(39)
Income of subsidiary company received from an Indian holding company engaged in the
business of generation or transmission , etc. power Section 10(40)

Capital gain from asset of an undertaking engaged in the business of generation or

transmission, etc. of power Section 10(41)

Specified income of some bodies and authorities section 10(42)

Loan received by an individual in a transaction of reverse mortgage Section 10(43)

New pension scheme interest Section 10(44)