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CHAPTER 1 - Introduction & Theory of Income 1 -1 2 0

Tax Act, 1961

Introduction on the nature of the topic under study

I 1-2 History of Income Tax

I 1.3
Basic concepts and Income Tax Structure

1.4 Significance of various heads of Income under Income Tax Act, 1961

1.5 Scope of the study

1.6 Tax Planning

1.7 Study of Budgets from 1997 to 2003 >

1.8 Comparative Study Of Income TaxRates & Changes From A.Y. |

1998-1999 To 2006-07 ;
1.9 Rates of Income Tax of Foreign Countries ^
FROM 1997 TO 2003”.

Introduction & Theory of Income Tax Act, 1961


The 21®' Century has touched those areas which were in the past not
touched by the said Act. One of the important areas is collection of revenues
by the Government. For the last many years this system remained stagnant
for the past many years. There has been a tremendous progress in science
and technology, which had brought about a revolution in various fields.
Therefore the world is reduced to a global village. Hence on this changing
perspective we have not seen any change in the Government’s fiscal deficit,
C'which is rapidly increasing. Income Tax is one of the major sources of
V revenue for the Central Govemment.
“Pune City itself contributes Rs. 5,000 Crores as way of Income Tax,
Still there is an element of fear in the minds of people, while filing their tax

The theory aspect of Income Tax Act is slightly easy but

“implementation” of the same is definitely though. In this act there are many
sections / sub-sections and many amendments are made every year. While at
the same time experts in this field are finding loopholes by which their clients
can save tax. There is a contradiction between the interpretation of a
provision and the intention of the legislature behind such a provision etc..
Once you enter in this jungle of sections you will not come out of it easily.
Many individual taxpayers physically, economically and mentally
suffered due to these tax system and tax rates. On the other hand during last
55 years we could have achieved much more. At the same time the Central
Govemment runs large fiscal deficit and the State Governments are almost all
bankrupt as the social and physical infrastructure is poor.
We opted for a closed model of economic reforms, between 1950-90.
There is poor performance due to corruption, bureaucracy and businessmen
who do not pay their tax.
This study was carried out by getting a feed back from various
assessee’s and tax consultants, about their experiences, opinions on the
various aspects of Income Tax Act and the lengthy procedures of filling the
returns. I have made a detailed study by going through the literature available
on Income Tax, journals and articles related to my research.
Shri. Shivkumar Sharma, The Director General of Income Tax
investigation (Maharashtra), expressed his opinion about Income Tax
collection, on 9th Dec.,2004 which appeared in the following newspapers -
Lokmat, Aaj Ka Anand and Indian Express)
According to him. Income Tax is a source of revenue, which plays an
important role in shaping the economic system of our nation. From that point
of view, every Indian Income Tax payer is an element in him structuring this
system. In this context, he found that the people of Maharashtra, being more
conscious and responsible with regard to filing their retums in time. He cited
Pune as an example in this case. “The Govemment has been collecting
Income Tax of Rs.5,000 core from Pune City alone”.
The population of our country has already crossed one billion mark.
Out of these, only three crore people are regular tax payers, making an
approximate annual financial contribution of Rs. 1,00,000 crore to the national
exchequer. This will show how narrow and feeble is the base of our tax
structure. In the orbit of tax payment procedure all sources of income are
covered, still collection of Income Tax from all persons is not possible. In
other words, the main problem which is being faced by our country is how to
widen the network of Income Tax structure and simplify the procedures and
bring it under control. After studying some cases related to Individual Income
Tax payers I was interested in doing my research on the topic. “Analytical
study of problems faced by individual Income Tax payers in Pune City and
Pimpri-Chinchwad area from 1997 to 2003”
It is mainly related to problems and opinions or approaches of Income
Tax payers about our Income Tax system. As far as possible some
suggestion are also stated which were discussed with experts in this field.
For this purpose a questionnaire was prepared and then the information was
collected from the tax payers. This study highlights the mindset of tax payers
and their approaches towards the Income Tax System.
1. Direct and indirect taxes are the important sources of raising public
finance. ‘Income tax’ is one of the major sources of revenue of the Indian
Govemment. There is no country, which does not make use of taxation for its
economic growth. Maximization of economic growth is the ultimate objective
of the economic, fiscal and monetary policy of the Govemment. While
stimulating the growth in the desired directions, it is equally necessary to see
that development percolates into all sections of the society.
2. The Government needs money to maintain law and order in the
country, to safeguard the security of the country from foreign powers and
promote the welfare of the people. Since our Govemment is wedded to
socialistic pattern of society, it is the foremost duty of the Government to bring
out such welfare and development programmes, which will bridge the gap
between the rich and poor. Thus it is an important tool in bringing about a
balanced socio-economic growth. During the last 55 years we could have
achieved much more than what we have achieved. The Central Government
has run into a large fiscal deficit and most of the State Governments are
almost bankrupt.
3. Our Social and physical infrastructure is poor. Especially during last 30
years, we were lagging far behind other nations like Japan, Singapore,
Taiwan and China. There are many causes for this situation. The collection
of revenue system is one of the major causes. Many professionals,
businessmen industrialists and politicians are not paying tax on real income,
‘salaried person’ are paying the tax regularly as it is deducted at source. The
Government plays a major role in taking decisions on economic matters.
4. The Finance Minster has a difficult task of presenting a balanced
budget, keeping in mind the manner in which he can collect revenue and
utilise the said resources for developmental work. He has to keep in mind the
various sections in our society while presenting the budget.
5. Problems and views or approaches of Income Tax payers have been
studied. Administrative procedures of Income Tax offices have also being
studied. Suggestions received from experts in this field as well as from
eminent persons in economic, industry and commercial fields are collected.
Researcher has personally met educated as well as uneducated people of
different strata of our society. The majority of them have expressed the
opinion that our tax-payment procedure is difficult, complicated and time
consuming. The procedure of paying Income Tax has remained the same
from last many decades with just a few changes. The Income Tax Act, 1961
has become outdated and also complicated. In this world of Liberalisation,
Privatisation and Globalisation all activities have totally changed.
This study is related to Pune City and Pimpri-Chinchwad area as
researcher is living in Pimpri-Chinchwad area and working in Pune City. This
has made its easy to have a direct dialogue with the people of these areas.
Pune earlier known as “Poona”, is called the “Queen of Deccan” due to
its elevated position of the Deccan Plateau, it has a salubrious climate and
surrounded by hills. The city is nicknamed variously, such as “Pensioner’s
Paradise”, “Oxford of the East”, “Detroit of India”, the cultural capital of
Maharashtra, once the “Cycle City”, and now the “Scooter City” of India and
so on. Pune is a Cosmopolitan City as its cousin city on the western Coast
Mumbai, but it is a pleasant gateway for all whose who want to escape from
the hustle and bustle of the city life. Pune has a calm atmosphere certainly
much more relaxing and peaceful than Mumbai.
Pune is famous for its educational institutions. It is also renowned for
its international educational institutions of repute like Film and Television
Institute of India, Amied Forces Medical College, National Defence Academy.

Table No. 1.1

Land usage charges at Pune Metropolitan Region

Area under each Category
Land use Category 1967 1998
Settlements 17.33 41.00
Agriculture 61.26 42.11
Watersheds 02.25 02.25
Hills and forest 07.64 07.64
Grassland & scrub 11.52 07.00
Total 100.00 100.00
R e f: Pune Website

Table No. 1.2

Land usage charges at Pune Metropolitan Region

Area (sq km)

Year Pune Urban Reason for Expansion
1817 5.0 —

1940 18.84 81.95 Establishment of Dehu Road

1950 125.75 188.86 Pune Municipal Corporation Formed
1970 138.76 266.88 PCMC Council formed
1982 146.00 314.11 PCMC fomied
1997 440.00 700.00 Merging of 38 and 18 fringe Villages
into PMC and PCMC respectively
Ref-Pune Website
Table No. 1.3

Population Growth of Pune Urban Area

(in lakhs)
1901 1.64
1911 1.72
1921 1.98
1931 2.50
1941 3.24
1951 6.00
1961 7.37
1971 11.35
1981 16.86
1991 24.94
2001 42.00
2003 45.00
R e f: Sakai dt. 09/01/2006
W ebsite:
Pimpri-Chinchwad area is the richest corporation in Asia. The total
population in PCMC is 10, 06,417, and it is situated towards south-east of
Mumbai and is about 160 km. from Mumbai, the capital city of Maharashtra
state. The total number of houses in this area is 1,68,355. The total number
slum in this area is 76. Out of this only 38 have been declared. Pimpri -
Chinchwad is predominantly an industrial area, developed during last four
decades with over 6000 industrial units comprising of large, medium and
small sectors. The Pimpri-Chinchwad industrial belt is one of the largest of
its kind in this part of the country and certainly boasts of some of the biggest
names in industry. To mention a few names that of Tata Engineering, Bajaj
Auto, Bajaj Tempo, Hindustan Antibiotic and Multinational Companies that
made this twin city their home such as SKF, Sandvik Asia and Atlas Capco.
Industrial activities in this region started in 1954 when Hindustan Antibiotics a
public sector pharmaceutical company was established here with each
coming year the landscape began to change from long stretches of fanri land
to clusters of enclosed factory campuses. The first response came in 1970 in
the form of creation of Municipal Council. Incorporating four villages-
panchayats in the area. In 1982 the civil body was upgraded to its presents
status namely “Municipal Corporation” The population of this town has
increased from 85000 to 10,00,000 (approx).
Today the total numbers of industries are about 6195.
Large Scale Industries _ 54
Medium Scale Industries „ 621
Small Scale Industries _ 5520
Table No. 1.4
Decade wise Classification

Large Scale Medium Scale Small Scale

Period Industries Industries Industries
1970 to 1980 03 09 178
1980 to 1999 24 293 743
1999 to 2003 27 319 4599
Table No. 1.5
Population and area Population Area(sq. km)
As per 1971 census 83,542 46.46
As per 1971 census 2,49,364 46.46
As per 1991 census 5,17,083 86.00
Present Population approx 10,00,000 171.00

Table No. 1.6

Literacy as per 1991 census
a) Male 2,00,003 (86.28)
b) Female 1,38,276 (70.50)
R e f: Sakai dt. 09/01/2006
W ebsite;

PCMC has played a pivotal role in developing this area into one of the
most progressive industrial centres in the country. The PCMC has spent the
last few years tackling problems like excessive industrial pollution, poor
hygiene and poor infrastructure with a grim determination. The corporation is
also working on developing a large medical herb plantation field within one of
its green belts. It has completed many slum rehabilitation projects.
The PCMC area also has the facility of providing water for 24 hours.
There are a number of historical places in PCMC area. One of them is the
Samadhi of Moraya Gosavi, located in Chinchwad, Appu Ghar is an
entertainment park at Nigdi. Many educational institutes, colleges, schools
have also been established. In the PCMC Industrial area there are a number
of professional as well as business houses.
This area is very useful in terms of having a dialogue with taxpayers
from various fields. The comparative study of different tax payers forms an
essential part of statistical methodology. This will also enables me to
conclude with my research work in a more systematic manner. The policy
implication of the study is important not only for the common people, but also
for the ‘Government’ and Tax Consultants’.
The study is mainly based upon direct dialogues with the tax payers. A
detailed questionnaire has enabled me to collect first hand information on all
the dimensions of my study. Scientific tabulation and statistical analysis of
primary data have ensured accurate and logical inferences in the area of
various aspects of the problem.



Taxation is the most important source of revenue for the Government.

It is therefore important to note that those who fall within the ambit of the
taxable slabs have to compulsorily file their tax returns on their income to the
government to meet various public expenditure.
There are two types of taxes (i) Direct taxes and (ii) Indirect taxes.
Income tax and wealth tax are the direct taxes, whereas sales tax, excise,
custom duty, service tax are the indirect taxes. Taxes are levied at
progressive rates. Tax is one of the important and major source of revenue to
the govemment. It is a contribution by individuals as well as organizations to
the Govemment to undertake various public activities. Tax payers cannot
refuse to pay taxes as refusing to pay tax is a criminal offence.
Tax helps in mobilization of resources. Its aim is to achieve economic
growth and economic development of a nation. Maximisation of economic
growth is the ultimate objective of economic, fiscal or monetary policy of the
govemment. While stimulating the growth in desired directions it is equally
necessary to see that the development is brood based, balanced and the
benefits of development percolate into all sections of the society. Hence,
government requires the resources.
Tax Structure

)irect Taxes Indirect ITaxes

Taxes on Persons/Organizations Taxes on Commodities

Income Tax Wealth Tax

Excise Duty Customs iaSales
Duty Tax (VAT)

Personal Corporate MODVAT
Inconne Tax Income Tax (Modified Excise Duty)

Direct Taxes:
Direct Taxes, which are nomrially levied on persons, are assessed or
determined on the basis of their income or property. This tax is directly paid
by persons to the Govemment treasury, thus directly contributing to the
national exchequer.
The Constitution of India provides for the division of tax powers
between the Centre and the States. The Centre is allocated income tax,
wealth tax, excise duty, customs duty & service tax, while sales tax is
allocated under the division of tax powers of the States,
b) History Of the Income Tax Act :
Taxation in Ancient India :
It is a general matter of belief that taxes on income and wealth are of
recent origin but there is enough evidence to show that taxes on income in
some form or other were levied even in primitive and ancient communities.
The origin of the word “Tax” is from “Taxation” which means an estimate.
‘ Thoughts of “Kalidas” in Raghuvansh Eulogizing King Dalip was :
“It was only for the good of his subjects that he collects taxes from them, just
as the sun draws moisture from the earth to give it back a thousand fold”.
This just shows the importance of tax.

Nearly 2000 years ago, there went out a decree from Caesar Augustus
that all the world should be taxed’ . In Greece, Germany and Roman empires,
taxes were to be also levied sometimes on the basis of tumover and
sometimes on occupation.
In India, the system of direct taxation as it is known today, has been in
force in one fonn or other even from ancient times. There are references both
in ‘Manu Smruti’ and ‘Arthashastra’ to a variety of tax measures. ‘Manu’, the
ancient sage and law-giver stated that king could levy taxes, according to
Shastras. According to him the king should arrange the collection of taxes in
such a manner that the subject did not feel the pinch of paying taxes. He laid
down that traders and artisans should pay 1/5*'’ of their profits in silver and
gold, while the agriculturists were to pay 1/6*'’, 1/8*'’ and 1/10*^ of their produce
depending upon their circumstances.
The detailed analysis given by ‘Manu’ on the subject clearly shows the
existence of a well planned taxation system, even in ancient times.

Mr. B.E.V. Sabine , A History of Income Tax Published by George Allen & Unwin Ltd.,
Gr. Bretain, (1966)(Pg. No. 42)

Origin of Income Tax :

Income Tax is a direct tax. As per history of Income Tax, it was a “War
Tax”, it had been born of the war. And it had sustained the war. But when the
war was over, it was understandable that the government should be subject to
the strongest pressure to redeem an implied promise, that war tax should not
continue in time of peace and repeal the Income Tax Act. “The opposition in
the House of Commons to its retention was led by Henry Broughom, a lawyer
with a restless talent and an all pervading energy. The Govemment was not,
however, prepared to repel it automatically and Hansord tells of a desperately
interesting struggle over the issue in the last six weeks or so of the winter of
1816” *.
The principle of the tax itself had been accepted as a necessary war­
time evil. But this was peace, and patriotism no longer provided a check to
full-blooded assaults.
“George Rose followed with a reasoned defiance of tax. It had saved
the national credit and sooner or later, if it were repealed, other taxes would
have to be raised to secure equivalent revenue. The tax bore hard on certain
classes of people. The anticipation that within a few weeks the tale would be
covered with petitions against the tax was fully realized, one of these was
from the Lord Mayor, Alderman and Commons of the city of London which
seems, by its language, to have been drafted by the same hand as that of
May 1,1815”**.

* & ** Article Published by Dr. Sunil Pathak, C.A. in 1999

c) Taxation in British India :

Income Tax has been in force in India from 1860. During British times
the deficit and sterling debt necessitated new sources of revenue. The British
Government specially sent “Mr. James Wilson” an experienced British
Treasury official to restore order in Indian finances. Mr. Wilson introduced a
tax on income of all kinds, a system of licenses of arts trades and professions
and a tobacco tax. Income Tax Act was closely modelled after British Income
Tax Law. The tax was levied on all income and profits arising from property
and professions. In short, it undenwent major changes in 1886, 1922 and
The attainment of Independence, adoption of the democratic
constitution and commencement of an era of planning necessitated a change
in India’s tax policy. The Taxation Inquiry Commission was appointed to
make a detailed study on implementation and repercussion on Taxation
policy. The main objective of the commission was the development of various
economic sections of the society both as revenue and an instrument of social
economic welfare.
After several experiments the first Income Tax Act passed in 1886.
The Act had features like the levy of taxes at a flat rate and the introduction of
the concept of agricultural income as well as its exclusion from taxation.
Though the tax levy was done with the main objective of “addition to revenue”,
after some time the objective of ‘Reduction of Economic Disparity’ also
assumed importance and hence in 1916, tax rates were made progressive.
Such changes and repealing existing laws became inevitable with changing
times. In 1918, a new Act was passed which advocated aggregating income
from all sources to determine tax rates and it also prescribed tax rates in
Income Tax Schedules. Various committees were set up to review the tax
In the light of recommendations of Mahabir Tyagi committee in 1961,
Income Tax Act 1961 was presented and passed in September 1961. It came
into force from 1®' April 1962. Since then various committees have been

appointed by the government to review the taxation structure. Thus the
present scheme of Income Tax is as amended by many such schemes. The
Income Tax Act is a direct tax enactment, which forms the fiscal scheme of
our country along with direct taxes like wealth tax. It is a Centre enactment,
the Central Govemment administers the enactment and collects its proceeds,
which are then shared by Central and State governments on the basis fixed
by the Finance Commission. The Income Tax Act, 1961 extends to the whole
of India and consists of more than 450 sections, numerous sub-sections and
twelve schedules. The administration of all direct taxes is done through an
apex body called as ‘Central Board of Direct Taxes’(CBDT) for administration
of the Act. The Board has passed various rules, which form the scheme of
Income Tax Rules,1962. In addition to these, from time to time various
circulars are issued by the Board to guide the Income Tax Department official,
assessee and the public in general.

1.3 Basic Concepts and Income Tax Structure :

The following is the version of concepts of income tax 1961.
The Indian income tax consists tax on income and surcharge on
income tax. It is tax on income of a person in relation to his income. After
independence India accepted federal Govemment system and accordingly
India has 3 tier Government, The Central, State, localGovemment and
authorities. The local Government e.g. Municipal Corporation aredirectly
under the control of the state Government to avoid any conflicts and disputes
between the Centre and the State in the matter of taxation, the powers and
functions and also the sources of revenue had been properly distributed
between them. Accordingly in India there is three tier tax system -
1. Taxes of the Central Government
2. Taxes of the State Govemment
3. Taxes of the Local Govemment ^ it?:

a| Income Tax:
Income Tax is levied on the income of different categories of persons
as per the provisions of the Income Tax Act, 1961, after computing the
income the rates of Income Tax applicable of that assessment year is applied
to find out the tax liability. The collection of Income Tax is mainly through
personal Income Tax and corporate Income Tax, the share of corporate tax
being the largest one. In other words Income Tax is one of the major source
of revenue for the Government. The responsibility for collection of Income
Tax vests with central Govemment.
The act of 1922 remained in force till 1961, meanwhile in 1956 the
govemment had referred the Act to the law commission in order to recast it on
logical lines and to make it simple with out changing the basic tax structure.
Based on the law commissions report, the income tax bill giving effect to its
recommendations was submitted in the Lok Sabha in April 1961. The bill
received the assent of the president on 13*^ Sep. 1961. The present income
tax Act is the Act 1961. According to section 1 of the income tax Act 1961,
extends to the whole of India including the state of Jammu Kashmir, it came
into force on 1®* April 1962. The liability of tax is detennined by total income in
the previous year, limits of taxation, rates, status of assessee (e.g. individuals,
HUF, fimn, company etc.)residential status and various heads of income
(salary, house property, business, capital gains and other sources). The
income tax scheme also provides for detection of offences and penalization
also justice to aggrieved assesses.

Ib| Canons of Taxations :

In the words Adam Smith given in 18**^ Century “The Wealth of Nations
pointed out that four main objectives should be bome in mind by the state in
levying taxes Different canons of Taxation have been suggested by various
economist also.
The cannon of equity : “In the words of Adam Smith the tax system should
be fomi in such way that all persons should pay the taxes according to their
capacity. The cannon of equity”.
In other words this objective is related to equal responsibility with
reference to ability of tax payers. It means higher income group should

contribute more than poor income group. Secondly, it also refers equal tax
burden for all persons.
The canon of convenience : the tax should be levied in such a
manner that it should be convenient to all tax payers. It should not be so
complicated and so cumbersome in their operation as to cause needless
inconvenience and hardship to the people. In India this objective has been
wholly overiooked by the union and by the State.
The canon of economy : This is almost important canon laid down by
Adam Smith “It means tax system should have economical object, the cost of
tax collection should be minimum. Secondly the Government must economic
and levy only the minimum tax which is necessary for the national growth.
The Fourth canon of certainty and clarity : All the taxation policies
ought to be certain and clear. To avoid confusion and hardship caused to
taxpayers and to prevent exploitation of taxpayers taxation policies should be
precise and clear.
The canons of taxation in modem times have been stated to be social
justice, consistency with economic goals easy to administration and
compliance and revenue adequacy. Although the amendments are made with
a view to attain one or all the objectives mentioned above, but every time
such objective many not have been necessarily achieved. This is because
criticizing the law maker is very easy but making a full proof law is extremely
difficult. The moment an amendment is made or a new section is introduced
in the Income Tax Act, the legal brains in the country start wori<ing on them
with a view to find out some loopholes by which their clients can save tax. It
is a natural attitude on the part of every assessee to keep his tax liability to a
minimum. After all, nobody will like to unnecessarily pay extra tax than what
is legally due from him. Naturally, such a study of the legal Pandits becomes
quite rewarding to them. So the picture which has emerged over the years in
India is that of the lawyers finding out controversies and the amendments
being made to plug the loopholes or to end the controversies. The lawyers or
the assessees applying their brains in trying to find out new loopholes in fresh
amendments with the result, again and again, the amendments are being

The author Palkhiwala stated in his book that “there have been more
than 3300 amendments in less that thirty years after the Income-Tax Act,
1961 came into force. Most of the times, the amendments are made to
simplify the law, to plug the loopholes, to end the controversies or to find out a
way to get more revenue. All these aspects have compelled the legislature so
far to make these many amendments to the Income-Tax Act. Ultimately, it is
the goal of every govemment to make an ideal taxation system. In his book
‘We, the People’ the noted jurist and authors”* Shri. N. A. Palkhiwala has
nicely mentioned about the objectives behind any tax system.

Kanga and Plakhiwala The Law and Practice of Income Tax ‘Eighth Edition-Volume I Published by N. M.
Tripathis Pvt. Ltd., Bombay (1990). N. A. Palkhiwala We, the people - India - The largest Democracy -
Published by T. N. Shanbhag. Strand Book stall, Dhannur, Sir Pherozeshah Mehta Road, Fort Bombay
(1984) (P. 89,90)


Exhaustive - These are the definitions which are definite, specific,

complete and fail. These definitions are comprehensive. There is no scope
for interpretation other than what is expressively given in the definition e.g.
definition of ‘Assessment Year’.
Inclusive - Inclusive definitions are those definitions which take into
consideration the general and natural meaning of the term and in addition to
that includes several other things as specified by law. These definitions are
not exact. They provide scope for interpretation e.g. definition of ‘Income’ is
inclusive. It is to be understood in wider sense.

Income [sec.2(24)]*

The definition of the term ‘Income’ u/s 2 (24) is inclusive and not
exhaustive. Therefore, it includes not only those terms which are included in
sec.2(24) but also includes such things which the signifies,, according to its
general and natural meaning. Thus one can say that Income Tax Act, 1961
does not want to left anything which suggest that it is income out of its
“Meaning”; Income is a periodically monetary return with some sort of
regularity. It may be recurring in nature. It may be broadly defined as the true
increase in the amount of income which comes to a person during a fixed
period of time.
Income includes all the receipts in the form of cash /any kind.
Profits & Gains,
(if) Dividends,
(iii) Voluntary contributions received by a trust,
(iv) Perquisites in the hand of employee
(v| Any special allowance or benefit
1^1 City compensatory allowance/dearness allowance

' Income Tax Act, A.Y. 2004-05 - Vinod Sighania - Page No. 4 & 5

(vii) Any benefits or perquisites to a Director
(viii) Capital Gains
(ix) Any benefits or perquisite to a representative assessee
(x) Any sum chargeable u/s 28,41 & 59
(xi) Insurance profit
(xii) Winnings fomri lottery
(xiii) Employees contribution towards provident fund

As per definition the given list is not exhaustive. All sorts of receipts
other than above mentioned comes under the meaning of income.

II) Total Income [Section 2(45)]*

The concept of “Total Income” has been defined in Section 2(45) of the
income tax act. Logically, for a resident assessee ‘Income’ means total of all
income of a person from whatever sources received or not received but
accrued in India & outside India. But the definition of Income under the
Income Tax Act sometimes, we have also to take into account the income
earned by minors or other persons, whose income is liable to be clubbed.
Certain provision under the Income Tax Act postulate, that in
computing the total income of any individual, as arises directly or indirectly to
the spouse or minor child or from assets transferred directly or indirectly to
them other wise than for adequate consideration is also required to be added
in the hand of such person. These provisions thus do not leave any doubt
that the ‘total income’ of any individual has to be computed by the considering
such income, which is also liable to be clubbed in his hands. These
provisions, thus have broadened the scope to ‘total income’ considerably and
income, which is deemed to be received by or on behalf of an assessee, is
also required to be included in his hands.

* Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 9)

Any person whose total income in the previous year exceeds the
maximum amount which not chargeable tax (i.e. Rs. 50,000) & who is
covered under the scheme of 1/6 of the IT Act, is an assessee. The income
tax is chargeable at the rate prescribed in the finance Act, for the relevant
assessment year. Following are the important temris of the income tax act.
a) Person b)Assessee c)Assessment Year d)Previous Year

Person [Sec. 2(31)]

The term “Person” Includes :

An individual;
A Hindu Undivided family(HUF);
A company;
A fimri;
An association of persons (AOP) or a body of individuals(BOI),
whether incorporated or not;
A local authority; and
Every artificial juridical person not felling within any of the
preceding sub-clauses are - An individual includes a natural
person. I.e. a human being. It includes a male, female, child or
lunatic or idiot person also. However income of a minor child is
taxed in the hands of his parents, while income of a lunatic or
idiot person is taxable in the hands of a representative assessee
in accordance with the law.
A Hindu undivided family is the normal condition of Hindu Society. The
members of Hindu Undivided Family are living in a state of union unless the
contrary is stated. A Hindu Undivided Family (H.U.F.) is a unit of assessment
under the Income-Tax Act. It consists of all the persons lineally descended
from a common ancestor. Hindu Undivided Family consists of males and
A company is an artificial person. But it has got legal independent
entity. The definition of Company has been provided in S.2(17) of the income
Tax Act. It include,
1. any Indian company, or any body corporate incorporated by or
under the laws of a country outside India, or

* Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 3)

2. any institution, association or body which is or was assessable or
was assessed as a company for any assessment year under the
Indian Income- tax Act, 1922 (11 of 1922), or which is or was
assessable or was assessed under this Act as a company for any
assessment year commencing on or before the 1®* day of April,
1970. or
3. any institution, association or body, whether incorporated or not and
whether Indian or non-Indian, which is declared by general or
special order of the Board to be a company.
4. A firm refers to a Partnership firm. Partnership means relationship
between two persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. Persons
who have entered in to a partnerships with one another are referred
as partners and the under which the business is carried on is called
the fimn’s name.
5. An association of a person means two or more persons join
together for common purpose with a view to eam income. AOP is
distinct from partnership and it is not necessary that of any contract
between the persons who have joined together.
6. The body of individual means a conglomeration of individuals who
carry on some activity with the objective of earning of some income.
It would consists of only individuals. Entities like company, fimn
cannot be a member of body of individuals.
7. A Local Authority means Panchayat as referred to in clause (d) of
article 243 of the Constitution; or Municipality as referred to in
clause (e) of article 243 of the Constitution; or Municipal committee
and District Board, legally entitled to, or entrusted by the
Govemment with, the control or management of a Municipal or local
fund; or Cantonment Board as defined in section 3 of the
Cantonments Act 1924 (2 of 1924).
8. Artificial juridical persons are not natural persons but are entities in
the eyes of law. The artificial persons include a juridical personality
and also deities.
As the given definition is inclusive any person not falling in the above

mentioned categories, may still fall in the four comers of the term “person”
and accordingly may be liable to tax u/s 4.

IV) Assessee [sec.2(7)]‘

“Assessee” means a person by whom income tax or any other sum of
money is payable under the Act. It includes every person in respect of whom
any proceeding under the Act has been taken for the assessment of his
income or loss or the amount of refund due to him or a person who Is
assessable in respect of income or loss of another person or who it deemed
to an assessee, or an assessee in default under any provision of the Act. This
term includes the following persons :
Every person in respect of whom any proceeding under this act has
been taken for the assessment of his income or of the income of any other
person in respect of which he is assessable, or of the loss sustained by him
or by such other person, or of the amount of refund due to is or to such other
Every person who is deemed to be an assessee under any provision
this Act. Every person who is deemed to be an assessee in default under any
provision of this Act. According to the above definition, it is not necessary that
the assessee must pay tax on his own income. He may also be liable to pay
tax on the income of others, e.g.
the legal representative will be treated as an assessee for assessing the
income of the deceased person.
A person, who is under a legal obligation to deduct tax at source on
payment of salary, dividend, interest etc. does not deduct tax or after
deducting tax, fails to deposit the same in the Govemment’s treasury, is
treated as an assessee in default.
A person representing a non resident minor or lunatic Is treated as an
assessee for computing the income of that person.

' Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 4)

W) Assessment Year [A.Y] [u/s.2(9)]*
Assessment Year means the period of 12 months commencing on the
1®* of April immediately after the previous year[P.Y]
Assessment is the year in which the income of the previous year is
assessed to tax. The Income earned during a particular year is assessed to
tax in the following year.
The following year in which the tax of previous year is assessed known
as Assessment Year. For e.g. Previous Year
Assessment Year
1. 31.3.2003-04 31.3.2004-05
2. 31.3.2002-03 31.3.2003-04
3. 31.3.2001 -02 31.3.2002-03
VI) Previous Year(P.Y.)[u/s 3]**
Previous Year for the purpose of Income Tax Act,1961 is financial year
In which the income is eamed. This year is known year as ‘laxed year or
Financial Year”. The Previous Year starts from 1®^April and concludes on 31®*
March, It is compulsory to follow the Financial Year as the uniform Previous
Year for all the Assessee and for all sources of income. The Previous Year
period of 12 months. According the section 3 of the Income Tax Act, 1961
Previous Year means the Financial Year immediately preceding the
Assessment Year. But in some cases Previous Year may not be of 12
months period as in the case of business or profession, newly setup or source
of income newly coming into existence. The Previous Year shall be the year
beginning the date of setting up of the business of quotation or the date on
which the new source of income comes into existence.
For e.g. Previous Year Assessment Year
1. 31.3.2003-04 31.3.2004-05
2. 31.3.2002-03 31.3.2003-04
3. 31.3.2001-02 31.3.2002-03

' & ** Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No.1 )
Generally income of the Previous Year is assessable as the income of
immediately following Assessment Year. This rule has certain exceptions
which are enumerated as follows :
(i) Income of the non-resident from shipping business;
(ii) Income of persons leaving India either permanently or for a long
period of time;
(iii) Income of the bodies formed for shot duration;
(iv)Income of a person trying to alienate his assets with a view to
avoiding payment of tax; and
Income of a discontinued business.
Thus under these provisions Income Tax Act, 1961 tries to ensure
smooth collection is income tax from the aforesaid taxpayer who may not be
traceable if tax Assessment procedure is postponed till the commencement of
the normal Assessment.
Classification of Assesses:
The Indian Income Tax is a tax on a person in relation to his income.
Assessee i.e., persons by whom the tax is payable, are classified as :
individual, Hindu Undivided family; companies; Local Authorities; Firms and
Other Association of Person. They are further divided in to three categories
with reference to their residence viz. (i) Residents and Ordinarily Residents;
(ii) Residents but not Ordinarily Residents; and (iii) Non-residents in India.
The incidence of taxation varies with the residential status of an
Assessee, while the classification according to the legal status of assessee is
necessary for the following reasons :
There are different rates of income tax for assesses of different legal
status. There are different maximum exemption limits in the case of different
classes of assesses, e.g. individuals. Hindu undivided families, finns,
companies, co-operative societies etc. There are different provisions for
allowances and investment.
There are different tests for residence. Basic conditions determining
an individual is Resident:
u/s 6(1) an individual is said to be resident in India in any Previous
Year, if he satisfies at least one of the following basic conditions :
i) he is in India in the Previous Year for a period if 182 days or more or
ii) he is in India for a period of 60 days or more during the Previous
Year and
iii) 365 days or more during 4 years immediately preceding the
Previous Year.
Basic conditions to test as to when a Resident *
Individual is ordinarily resident in India [Additional Conditions) [R-O-R]
u/s 6(6), a resident individual is treated as “Resident and ordinarily resident” in
India if he satisfies the following 2 additional conditions :
i) he has been resident in India in at least 2 out of 10 Previous
Year [according to basic conditions noted above] immediately
preceding the relevant Previous Year; and
ii) he has been in India for a period of 730 days or more during 7
years immediately preceding the relevant Previous Year.

Resident but not ordinarily resident [Section 6(1); (6)(a)] [R-NOR]:

An individual becomes resident but not ordinarily resident in India in
any of the following circumstances :
i) If he satisfies at least one of the basic conditions but none of the
additional conditions;
ii) If he satisfies at least one of the basic conditions and one of the
two additional conditions.

* Students Guide to Income Tax. A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No.17 )

Non-Resident [NR]:
An individual is a Non Resident in India if he satisfies none of the basic
conditions. Additional conditions are not applicable in this case.
Exception to basic conditions :
By virtue of explanation (a) to Section 6(1), the period of “60 days”
referred to in basic condition No. ii, has been extended to “182 days”. In
following two conditions the above exception is applicable.:
An Indian citizen who leaves Indian during the previous year for the
purpose of employnnent outside Indian or an Indian citizen who leaves India
during the previous year as a nriennber of the crew of an Indian ship.
Indian citizen or a person of Indian origin who comes on a visit to India
during the previous year.
Indian Origin : A person is of Indian Origin, if he, or either of his parents or
any of his grand parents was bom in undivided India. [Grand parent include
both maternal as well as paternal grand-parents.]

Scope Of Income Liable To Tax : (Section 5)

Persons who are resident and ordinarily resident are chargeable to tax
on all income:
a which is received or is deemed to be received in India,
b Which accrues or arises or is deemed to accme or arise in India
c Which accrues or arises outside India.

The liability of the persons who are resjdent but not ordinarily resident
^ - •
is the same as in the case of persons who are resident and ordinarily resident
except that the income which accrues or arises outside India is not includible
in their total income unless it is derived from a business controlled in or a
profession set up in India.
Non-residents are liable in respect of income received or deemed to be
received in India or which accrues or arises or is deemed to accrue or arise in
India. They are not at all liable in respect of income accruing or arising
outside India even if it is remitted to India.

Table No. 1.7

Incidence of tax for different individuals will be followed by following

I) Indian income Yes Yes Yes
I!) Foreign income:
a) If it is business income which is controlled Yes Yes No
Wholly or partly from India.
b) If it is income from profession which is set Yes Yes No
up in India.
c) Business income controlled from outside Yes No No
d) Income from profession which is a set up Yes No No
Outside India.
e) Any other foreign income(like salary, rent, Yes No No
Interest etc.)
‘No’ Not taxable in India , ‘Yes’ taxable in India.

Meaning of Indian Income : Any of the following three is an Indian

income. If income is received (or deemed to be received) in India during the
previous year and at the same time it accrues (or arises or is deemed to
accrue or arise) in India during the previous year.
If income is received in India (or deemed to be received)in India during
the previous year but it accrues (or arise) outside India during the previous
If income is received outside India during the previous year but it
accrues (or arises or is deemed to accrue or arise) in India during the
previous year.
Foreign Income : If the following two conditions are satisfied then such
income is “foreign income”.
Income is not received (or nor deemed to be received) in India and
Income does not accrue or arise (or does not deemed to accrue or arise) in
Remittances out of foreign income received in India are entirely exempt
from income-tax in the case of ‘resident’ as well as ‘non-resident’ assesses.
However, the foreign income, even though not remitted to India is liable to be
charged to tax on accrual basis in the case of every ordinarily resident
assessee, but in the case of not ordinarily resident assesses such foreign
income is chargeable on accrual basis it is arises from a business controlled
in or a profession set up in India.
1. Agricultural Income*
Exemption of Agriculture Income at once excludes nearly a half or the
national income from the tax charge, as India is an agricultural country.
Agriculture Income is exempt, however and by whom so ever it is received.
The exemption is conferred and conferred indelibly upon a particular type of
income and does not depend on the character of the recipient.
The income is said to be an Agricultural Income only if following
conditions are to be satisfied:
(i) Income should be derived from land.
(ii) Land should be situated in India.
S. 10(1) of the Income Tax Act,1961, exempts agricultural income from
income tax. The reason for keeping the agricultural income outside the
purview of IT Act, is that the constitution of India gives exclusive powers to the
state legislature to make Laws with respect to taxes on agricultural income.
Hence, the Central Government is not empowered to tax this source of
income. However, the net agricultural income is added to the total non-
agricultural income for the rate purpose. The agricultural income has been
defined under S.2(1A) of the IT Act. As per Its definition “agricultural income”
means:any rent or revenue derived from land which is situated in India and is
used for agricultural purposes;

Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 11)

a) Rent derived from the agricultural land includes rent received either in
cash or in kind. However for any payment which can be considered as rent
derived from agricultural land, one basic condition needs to be satisfied that
there must be an established relationship as a landlord and a tenant.
b) Any income derived from such land by way of carrying out agriculture
activity or by way of perfomriing the activity of processing of agricultural
Agricultural activity includes certain basic operations such as tilling of
the land, sowing of the seeds, planting. These operations are thereafter
followed by subsequent operations such as weeding, digging of the soil
around the crop, removal of the undesirable growth, use of pesticides etc.
c) Any income from farm Building.
The building in this case must be in the immediate vicinity of the land
used for agricultural purpose. The building should be owned and occupied by
the land holder if he is in receipt of rent or revenue from the land. And the
land must be assessed to land revenue or local rate.
d) Where income is derived partly from Agriculture and partly from
manufacture It has to be apportioned. The portion referable to manufacture
would be taxable income; while the balance referable to agriculture would be
non taxable.
e) Capital Receipts, expenditure and Revenue Receipts and expenditure:
For income Tax purpose income is considered to be receipts, which
are arising with certain regularity or expected regularity from a definite source.
The receipts which are of capital nature are generally not taxable on the other
hand revenue receipts are fully taxable. In the Income Tax Act does not
mention about the distinction between capital receipt and revenue receipt.
Still these temris are very important, for example, if a tree is referred as capital
income, then income by way of sale of fruit is termed as a revenue receipt. In
other words, an amount received as fixed capital or from sale of fixed asset is
capital receipt, while an amount received as circulating capital or floating
assets is revenue receipt.

Study of capital expenditure is also important Act does not define
capital and revenue expenditure but capital expenditure is not deductible u/s
37(1). In order to detemiine whether expenditure is capital or revenue in
nature, the fact that is lump sum payment or periodic payment is not
important. Surrounding circumstances of each case can be distinct. The
distinction between the two is vital because capital receipts are exempt from
tax, unless they are expressly taxable u/s 45 even if they are capital receipts
and revenue receipts are also taxable unless they are expressly exempt from
tax u/s 10.
Under Income tax Act Section 10 is very beneficial for the tax payer’s
point of views. Section 10 highlights on totally exempted incomes. The list of
income given in Section 10 of the Income Tax Act, 1961 is absolutely exempt
from tax. Certain important exempted incomes which are applicable to
Individuals are mentioned below:
Agriculture income - Income from the agriculture is totally exempted
from the tax however person having agricultural income along with non-
agricultural income is charged at a higher rate on incomes, which are non-
f) Incomes Which Do Not Form Part Of An Assessee’s Total Income*
(Exempted Income U/S 10):
U/s 10 following incomes are absolutely exempted from tax as it does
not form part of total income. The burden of proving that a particular item of
income falls within this Section is on the Assessee.
Here as per topic’s requirement only those sections are included which
are applicable to Individuals only.

Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 50-51)

Receipts by a member from a Hindu Undivided Family sec 10(2):
Any sum received by an individual out of income of HUF or out of
Income of estate belonging to the family is exempt from tax, even if tax is not
paid or payable by the family on its total income. The exemption is based
upon the principle of avoidance of double taxation. Income of HUF is taxable L'
in its own hand. Only those members of Hindu Undivided Family can claim
exemption under this clause, who are entitled to demand share on partition or
are entitled to maintenance under Hindu Law.
Shareof profit from partnership finn[Section.10(2A)]: ^
Share of profit received by partners from a firm (which is assessed as
such) is not taxable in the hand of partners. Interest to Non-
residents[Section.10(4), (4B):
The following interest income is exempt from tax:
(i) Interest on notified Govemment securities [including premium on
redemption of such bonds];
(li) Income from interest on money standing to the credit of a Non-
resident(Extend) Account in India in accordance with the foreign
Exchange Regulation Act, 1973(The exemption is available to
“person resides outside India” u/s 2(9) of the foreign Exchange
Regulation Act or a person who has been permitted by Reserve
Bank of India to maintain the aforesaid account);
(iii) In the case of an Indian citizen (or a person of Indian origin) who
is a non-resident, the interest from notified savings certificates
(i.e. NSC vi & vii lssues)if such certificates are subscribed in
convertible foreign exchange remitted from outside through
official channels.
The joint holder of Non-resident (Exchange) Account do not continue
an ‘Association of Persons’ by merely having these accounts in joint names.
The benefit of exemption u/s 10(4) will be available to such a joint account
holders, subject to fulfilment of other conditions by each of the individual joint
account holder.

Leaves Travel concession in India [Section.10(5)]:
The exemption in respect of value of leave travel concession and
passage money is available to Indian as well as foreign citizen. Following
points should be noted in this regard.
1. Journey should be performed while in service or after retirement.
Exemption cannot be more than expenditure.
The employee can claim amount of expenditure from employer with
regard to travel of his family. For this purpose “family” means:
(I) The spouse and children of the individuals:
The parents, brothers and sisters of the individual who are wholly
dependent on him. ,
Exemption as prescribed by board:
The exemption u/s 10(5) has been made subject to conditions, which
the Board may prescribe including conditions as to number of joumeys and
the amount which will be exempt per head.
Condition prescribed by Board: [confirm from mod whether to include
or not]
Remuneration received by foreign diplomats and nationals
[Section. 10(6)(ll)to(vi)]:
It is not changeable to tax.
Salary received by a ships crew [Section. 10(6)(viii)]:
If total stay in India does not exceed 90 days, then salary of a non­
resident in connection with employment on a foreign ship is not taxable.
Salary received by a foreign trainee (Remuneration) [Sec.10(6)()]:
The remuneration received by an employee of a foreign Govemment
during his stay in India in connection with his training in India is not taxable (if
a few conditions are satisfied).
Tax paid on behalf of non-residents / foreign companies in respect of
other income [Section. 10(6B)]:
The amount of tax paid by Government or an Indian concern on behalf
of a non-resident or a foreign company in respect of it’s income (other than
salary, royalty or technical fees) is not included in computing the total income
of such non-resident or foreign company.

I) Fees for technical services [Section. 10(6c)]: Only for companies.
ii) Allowance to Government employees outside lndia]Section.10(7):
iii) Any allowance paid or allowed outside India by the Govemment to an
India citizen for recurring services outside India is wholly exempt from
if) Income of a foreign Govemment employee under co-operative
technical assistance programmes[Section.10(8)]:
v) Income of an individual, sen/icing in India in connection with any co­
operative technical assistance programmes, in accordance with an
agreement entered into by a Central Government and a foreign
government. Is exempt from tax.
Remuneration on fees received by non-resident consultants and their
foreign employees [Section. 10(8a),(8b)]:
vii) Income of family members of an employee serving under co-operative
technical assistance programmes[Section.10(9)]:
viii) Gratuity[Section. 10(10)]:
Gratuity is a retirement benefit. It is generally payable at the time of
cessation of employment and on the basis of duration of service. Tax
treatment is as follows:
(i) In the case of Govemment employees:
Any death cum retirement gratuity received by Govemment
employees is wholly exempt from tax.
(ii) In case of employees covered by the payment of Gratuity Act,
It is exempt from tax to the extent of the least of the following:
(a) 15 days salary based on salary last drawn for every
completed year of service or part there of in excess of six
(b) Rs. 3,50,000;
(c) Gratuity actually received.
Gratuity in excess of the aforesaid limits is taxable in the
hands of the assessee. however the assessee can claim
u/s 89.

(iii) In the case of any other employee:
It is exempt from tax to the extent of least of the following:
(a) Rs. 3,50,000.
(b) Half months average salary for each completed year of
service: or
(c) Gratuity actually received.
vi) Pension and leave salary [Section 10(10a), (10aa)]:
Any payment received by way of commutation of pension by an
individual out of annuity plan of the LIC of India from a fund set up by that
corporation shall be exempt u/s10(10A). Pension received from
employer[Section. 17(1)(ii)]:
Uncommuted Pension:
It is periodical payment of pension C taxable as salary u/s 15 in
the hands of Government as well as non-Govemment
I) Commuted Pension:
It is a lump sum payment in lieu of periodical payment.
Any such payment received by Govemment employee is
exempted from tax.
Non-Government Employee:
In a case where the employee receives gratuity, the commuted
value of of the pension which he is normally entitled to receive;
and In any other case. The commuted value of one half of such
Such amount is exempt from tax.
^ Leave salary [Section 10(AA)]:
Encashment of leave by surrendering leave standing to one’s credit is
known as “leave salary”.
Leave encashment during continuity of employment:
If leave encashment is received during the continuity of employment, it
is chargeable to tax, irrespective of the fact whether the employee is in
Govemment service or private service. The employee can, however, claim
relief in temris of Section 89.
Leave encashment of the time of retirement or leaving the job:

(i) Government employees: Exempt from tax.
(ii) Non-Govemment employees:
Leave salary is exempt from tax to the extent of the least of the
(i) cash equivalent to leave salary; or
(ii) 10 months “Average salary”; or
(iii) Amounts specified by Govemment; or
(i) Leave encashment actually received.
xi) Retrenchment Compensation [Section 10(1 OB)]:
Compensation received by a workmen at the time of retrenchment is
exempt from tax to the extent of lower of the following:
(i) On amount calculated in accordance withprovisions of Section
25f(b) of the Industrial Dispute Act, 1947; or
(ii) Amount specified by Government (4.5,00,000); or
(iii) The amount received.
xii) Compensation received by victims of Bhopal gas leak disaster[S.10
xiii) Compensation received of the time of voluntary retirement [S.
Such compensation received is exempt if certain condition are
(i) Maximum amount exempt is Rs. 5,00,000.
(ii) Compensation is received of the time of voluntary retirement or
(iii) Compensation is received by an employee of the following
undertaking: State Government, Central Government,
University, I l l ’s, public sector companies, any co-operation
society or any company.
xiv) Tax on perquisite paid by employer [Section 10(1 OCC)]:
Clause 10(10CC)is inserted with effect from A.Y. 2003-04 to exempt
the amount of tax actually paid by an employer.
XV) Amount paid on life insurance policies [Section 10(10D)]
xvi) Payment from provident fund[Section 10(11 ),(12)]
xvii) Payment from an approved super annuation fund[Section 10(13)]

xviii) House Rent Allowance[Section 10(13A)]:
Exemption in respect of House Rent Allowance is regulated by rule 2A.
the least of the following is exempt from tax:
i) an amount equal to 50% of salary, where residential house is
situated in any of the metro cities and an amount equal to 40%
of salary where residential house is situated at any other place,
house rent allowance received by the employee in respect of the
period during which rental accommodation is occupied by
employee during the previous year; or
III) the excess of rent paid over 1 0 % of salary.
xix) Special Allowance[Section 10(14)]
Exemption depends upon actual expenditure by the employee:
In the cases given below the amount of exemption u/s 10(14) is
i) the amount of allowance; or
I1| the amount utilised for the specific purpose for whichallowance
is given whichever is less.
The cases one enumerated as follows:
Travelling allowance / transfer allowance.
Conveyance allowance.
« Daily allowance.
Helper allowance.
^ Research allowance.
Uniform allowance.
II) When exemption does not depend upon expenditure.
In these cases, regardless of the amount of expenditure, the
allowances given below are exempt to the extent of:
i) the amount of allowance; or
ii) the amount specified In rule 2BB, whichever is lower.

Table No. - 1 . 8

Allowance Amount Exempt from Tax (Rs.)

1. Special compensatory allowance(Hill Rs. 300p.m. to Rs. 7,000p.m.
2. Border Area Allowance Rs. 200p.m. to Rs. 1300p.m.
1. Tribal Area 1 scheduled Areas Rs. 200p.m.
4. Allowance for transport employees. i) 70% of such amount or ii)
Rs.eOOOp.m. whichever is less.
5. Children education allowance. Rs. 100p.m. per child upto max. of
two children.
6. Hostel expenditure allowance. Rs. 300p.m. per child upto max. of
two children.
7.Compensatory field area allowance. Rs. 2,600p.m.
8. Compensatory modified area Rs. 1,000p.m.
9. Counter insurgency allowance. Rs. 3,900p.m.
10. Transport allowance. Rs.800p.m.(Rs. 1600p.m. in case of
blind employee)
11. Underground allowance. 12. High Rs.800p.rn. Rs.1,060p.m.(for altitude
altitude allowance. 9000 to 15000) Rs.1600p.m.(above
13. Highly active field area allowance. Rs.4,200p.m.
14. Island duty allowance. Rs.3,250p.m.

III) Educational scholarship [Section 10(16)]:

Scholarship granted to meet the cost of education is exempt from tax.
In order to avail the exemption it is not necessary that scholarship should be
financed by Government.
IV) Daily allowances to members of parliament [Section 10(17)]:
Clause(17) of Section 10 provides exemption to members of
Parliament and state legislature in respect of the following allowances :
i) daily allowances (entire amount is exempt);

I) any other allowance received by Member of Parliament
under the member of Parliament (constituency allowance)
Rules, 1986; and
iii all allowances (to the extent of Rs.2000p.m.) received by
any person by reason of his membership of any state
legislature or any committee threat.
V) Awards[Section 10(17A)]:
Any award paid in cash or land by central or State Government.
ab) Pension to gallantry award winner.[Section 10(18)]:
It is exempt if following conditions are satisfied:
ij pension is received by a taxpayer;
ii) the taxpayer was an employee ofthe Central
Govemment or State Government; and
iii) the taxpayer has been awarded Param Vir Chakra or
Mahavir Chakra or any other notified gallantry award.
Exemption is also available, if family pension is received by any
member of the family of an individual (who satisfies condition (ii) & (iii)
ac) Farmer Ruler of Indian states [Section 10(19A)]:
The exemption u/s 10(19A) is limited to a portion of any one place in
occupation of a ruler & does not extend to annual value of the entire
balance of the assessee , where part of it are rented out by him.
ad) Income of member of scheduled Tribe [Section 10(26)]:
Exemption is available if following conditions are satisfied.
1) The taxpayer is a member of a scheduled Tribe .
ii) The taxpayer resides in any area in the state of
Nagaland, Manipur, Tripura, Arunachal Pradesh,
Mizoram a district of North Cacher Hills, Mikir Hills, Khasi
Hills, Jaintia Hills and Garo Hills or Ladkh region of State
of Jammu& Kashmir.
Exemption is available in respect of income which accrues or arises to
him from any source in the area or States specified above. Exemption is
available in respect of income by way of dividend/interest on securities even if
it arises from a source in the areas not specified above.

ae) Income of resident of Ladakh [Section 10(26A)]: Not applicable.
af) Subsidy received by planters [Section 10(31)]:
Subsidies received by assessee engaged in the business of growing &
manufacturing rubber, coffee, cardamom or such other commodities as the
Central Govemment may, by notification, specify is exempt.
ag) Income of minor[Section 10(32)]:
In case the income of an individual includes the income of his minor
child in terms of Section 64(1 A), such individual shall be entitled to exemption
of Rs. 1,500 or such income whichever is lower.
ah) Capital gain on transfer of Us 64 [Section 10(33)]:
Any income arising from transfer of capital asset being a unit of Us64 is
not chargeable to tax where the transfer of such assets takes place on or after
April 1, 2002.
ai) Dividends & Interest on units [Section 10(34)1(35)]:
Clauses (34) & (35) have been inserted in Section 10 from the
assessment year 2004-05. Following will not be chargeable to tax from
the A.Y 2004-05.
i) Any income by way of dividend referred to in Section 115-0[i.e.
dividend: not being covered by Section 2(22)ee), from a domestic company.
ii) Income from units received by a unit holder from the administrator of
the specified undertaking as defined in the unit Trust of India (Transfer of
Undertaking & Repeal) Act, 2002 or Mutual Fund or the specified company on
or after Aprill, 2003.
For nullifying the effect of this provision Govemment had amended
Section SOL & SOM. as. No deduction will be available in respect of dividends
and interest on units u/s SOL & SOM. The person paying dividends on shares
or interest on units will have to pay additional tax on dividqj
distributed u/s 115-0 115-R.
aj) Long term capital gains on transfer of listed equity shares
[Section 10(36)]:
Clause (36) has been inserted in Section 10 with effect from the
assessment year 2004-05. By virtue of this clause, capital gains is not
chargeable to tax if the 2004-06. Following conditions are satisfied :
i) The asset which is transferred is a long term capital asset being an

eligible equity share in company.

ii) Such shares are purchase on or after March 1, 03 but before

March 01,04.
iii) Such shares are held by the tax payer for a period of 12 months or
iv) Eligible equity shares for this purpose means :
v) any equity share in a company being a constituent of BSE - Index of
the Stock Exchange, as on March 1, 2003 and transaction of purchase
& sale of such equity share are entered into on a recognised stock
exchange in India; or
vi) any equity share in a company allotted through a public issue on or
after the March 1, 2003 and listed in a recognized stock exchange in
India before March 1, 2004 & the transaction of sale of such share is
entered into on a recognized stock exchange. )< ^5 ^3

1.4 Significance of Various Heads Of Income under Income Tax \
1961: k l
The concept of heads of income is very important under the income-t^^/N
Act. An income which is to be properly charged under one particular head
cannot be charged under any other head of income. This is because the Act
contains self-contained provisions in respect of each head of income.
Specific deductions are permissible under each head of income. Therefore if
an income is charged under a wrong head of income, the assessee will lose
the benefit of deductions available to him. For example, for the purpose of
computing salary income, standard deduction, deduction towards
entertainment allowance and deduction towards professional tax are
We have to bring various types of incomes under their specified heads
and compute the same under each head. After such computation we have to
add the income under various heads. This will constitute the gross total
income. From the gross total income we have to allow the certain deductions
permissible by the Act net figure after allowing the above deductions will
constitute the total income, which is the taxable income.

Sources of Income:
Income Tax Act, 1961 determines 5 heads / sources of income. These
are as follows:
a. Income under the head salary.
b. Income under the head House Property.
e. Profit & Gains of Business & Profession.
4 Capital Gains.
Income from other sources.
Detailed discussion of the above sources are as follows :

a. Income under the head Salary :

It is the head under which maximum number of taxpayers/assessee
are middle class people. It is the worst affected class who pays the tax.
There are very few chances where the avoidance of tax is least possible.
Under this head calculation of taxable salary is hectic & tedious job. Every
perquisite & allowances are taxed separately. Many salaried employees
never understand how salaries are being taxed? main question arises in the
minds of salaried individuals is when all other professionals & businessmen
are avoiding tax by using legal or illegal means, why only these salaried
individuals beer the heavy burden of tax ?there are a lot of questions In the
mind of salaried individuals.
Salary : The meaning of the term ‘salary’ for purpose of income tax is
much wider than what is normally understood. Ev/ery payment made by an
employer to his employee for service rendered would be chargeable to tax as
income from salaries. The term ‘salary’ for the purpose of Income-tax Act will
include both monetary payments as well as non-monetary facilities like
housing accommodation etc.
Employer-employee relationship : Before an income can become
chargeable under the head ‘salaries’, it is vital that there should exist between
the payer and the payee. The relationship of an employer and an employee.
Full - time or Part-time : It does not matter whether the employee is a full-time
employee or a part-time one. Once the relationship of employer and
employee exists, the income is to be charged under the head “salaries”.
Foregoing of salary : once salary accrues, the subsequent waiver by
the employee does not absolve him from liability to income-tax. Such wavier

is only an application and hence chargeable.
Surrender of salary : However, if an employer surrenders his salary to
the Central Government under section 2 of the Voluntary Surrender of
Salaries(Exemption from Taxation) Act, 1961, the salary so surrendered
would be exempt while computing his taxable income.
Salary paid tax-free : This, in other words, means that the employer
bears the burden of the tax on the salary of the employee. In such a case, the
income from salaries in the hands of the employee will consists of not only his
salary income but also tax paid by the employer.
Voluntary payment: Whether the payment from an employer is based
on a contract or not, it constitutes salary in the hands of the employee.
However, many employers give personal gifts and testimonials to the
employees. For example, employees who complete 20 years of service may
be given a wrist watch. The question arises whether the value of the watch
can be taxed in the hands of the employee. Courts have taken the view that
such gifts are not taxable. However in these cases it is important that such
gifts must be given to employees pursuant to a scheme applicable to
employees in general. If gifts are given purely on a selective basis they may
well become chargeable in the hands of the recipient.
Under Section 15, the following income is chargeable to income-tax
under the head ‘Salaries’.
Any salary due from an employer or a former employer to an assessee
in the previous year, whether paid or not.
Any salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer, though not due or before it becomes
due to him.
Any arrears of salary paid or allowed to him in a previous year by or on
behalf of an employer or a former employer if not charged to income tax for
any earlier previous year.
Thus salary has been made taxable on due basis, as well as on receipt
basis whether due or not, e.g. advance of salary 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 said
salary becomes due.
The word ‘employer’ would included every type of employer -

Government, a local authority, a company, any other public body or
association, a foreign Govemment, any private employer and so on. Not only
the income from present employer is taxable under the head ‘Salaries’, but all
income from former employer is also similarly taxable, provided the same
arises out of the former employment, e.g. pension, gratuity, arrears of salary,
payment of salary in lieu of notice, retrenchment compensation etc.
A) Salary as defined u/s 17(1) of the Income Tax Act, 1961, which includes^ :
any annuity or pension;
any gratuity;
any fees, commission, perquisites or profits in lieu of or in
addition to any salary or wages;
any advance of salary;
any payment received by an employee in respect of any
period of leave not availed by him;
The portion of the annual accretion in any previous year to the balance
of the credit of an employee participating in a recognised provident fund to the
extent it is taxable, and transferred balance in a recognised provident fund to
the extent it is taxable.
Basis of charge of salary income :
Basis of charge u/s 15. As per Section 15 salary consists i f :
• any salary due from on employer (or a former employer) to on
assessee in the previous year, whether actually received or not.
« Any salary paid or allowed to him in the previous year by or on
behalf of an employer (or a former employer), though not due or
before it became due; and
• Any arrears of salary paid or allowed to him in the previous year
by or on behalf of an employer (or a fomrier employer), if not
charged to income tax for an earlier previous year.
In simple words above provisions can be summarised as follows :
Salary due during the year, although it is received in a subsequent
Salary which is received during the year, but which will became due in

a subsequent year.
Any arrears of salary received during the year, although it pertains to
one of the earlier year.(and same were not taxed earlier on due basis.)
Some Important points:
Salary is taxable on “due” “receipt” basis whichever is earlier.
Accounting method of employee is not relevant. The Central Board of Direct
Taxes has at last cleared the air on tax deducted at source or TDS as it is
popularly known. Everyone who is responsible for income chargeable under
the head salaries, shall deduct income-tax on the estimated income of the
assessee under the head ‘salaries’ for every financial year.
The income-tax is required to be calculated on the basis of the rates as
per the Finance Act. and shall be deducted on monthly average at the time of
each payment. No tax will, however, be debited at source in any case unless
the estimated salary income including the value of perquisites. Thus the tax
on the salary payment to employees have to be deducted by all employers
including the individuals, fimns, companies, religious and social organizations
as well as government organizations.
In case an individual works for two employers or has changed from one
employer to another. Section 192(2) provides for deduction of tax at source by
such employer (as the tax payer may choose) from the aggregate salary of
the employee who is or has been in receipt of salary from more than one
employer. The employee is now required to fumish to the present/chosen
employer details of the income under the head ‘salary’ due, or received from
the former/other employer and also tax deducted at source therefrom, in
writing and duly verified by him and by the former/other employer. The
present employer will be required to deduct tax at source on the aggregate
amount of salary (including salary received from the former or other
employer). It is provided in the above circular that option is available with the
employer to make payment of the tax himself on non monetary perquisites
given to an employee without making TDS deduction from the salary of the
employee. However, the employer will have to pay such tax the time when
such tax was otherwise deductible. For this purpose, average of income-tax
is to be computed on the basis of rates in force for the financial year.
If an employee desire relief of tax as per Section 89(1) in respect of

arrears salary then he or she will have to submit to the employer relevant
particulars in Form No. 10E.
Allowances is defined as a fixed quantity of money or other substance
given regularly in addition to salary for the purpose of meeting some particular
requirement connected with the services rendered by the employee or as
compensation for unusual conditions of that service. Under the Act, it is
taxable under Section 15 on ‘due’ or ‘receipt’ basis, irrespective of the fact
that it is paid in addition to or in lieu of salary.
Tax Treatment is different for each allowance :
* House Rent Allowance : section 10(13a)
* City Compensatory Allowances.
* Entertainment Allowance : Section 16(ii)
Conveyance Allowance : (Special Allowance) Section 10(14)
* Dearness Allowance.
* Allowance to Govemment Employees Outside India : Section
* Fixed Medical Allowance, Tiffin Allowance, Sen/ant Allowance -
Taxable as a perquisite.
Children’s Education Allowance : Section 17(2) (iv)

The word ‘Perquisites’ in the ordinary sense means any casual
emolument attached to an office. Or position in addition to salary or wages.
It may take various fonns. It is a gain or profit which incidentally arises from
employment in addition to regular salary or wages. A perquisite is something
which arises by reason of a personal advantage. Under the general law. A
benefit which is not convertible into money is treated as a perquisite. Rent-
free accommodation and free educational facilities for children provided by the
employer are examples of benefits not convertible into money as they are not
saleable. But the income-tax law does not recognise such a distinction. For
income-tax purposes, it is immaterial whether perquisites are voluntary or

Tax Treatment of Provident Funds
Table No.-1 .9
following information is useful while computing the taxable income
under the head “Salary” :
Statutory Recognised Provident Unrecognised Public Provident
Provident Fund Provident Fund Fund
Employer’s Wholly Wholly exempt upto Exemption from No contribution
Contribution exempt from 12% of salary, any Tax is made by
to Tax excess over it, is employer
taxable under
Interest Wholly Wholly exempt upto Exempt from Tax Wholly exempt
credited to exempt from 8.5% p.a. Any excess from Tax
Provident Tax over it, is taxable
Fund under “Salaries”
Refund of Wholly Wholly exempt from Employer’s Wholly exempt
accumulated exempt from Tax Subject to certain contribution and from Tax
balance on Tax conditions. interest thereon is
retirement taxable under
Employee’s own
contribution is
exempt. Interest
thereon is taxable
under “Income
from other

b. Income under the head House Property :

Any house owner consists of two or more than two houses is liable to
pay income-tax on such property. Although one house is exempted from tax.
a) Basis of Charge [Section 22]:
Annual value of a property, consisting of any buildings of lands
appurtenant there to, of which the assessee is owner is chargeable to tax
under the head “Income how House Property”. I f , however a house property
is occupied by the assessee for the purpose of his business or profession
carried on by him, the profits of which are chargeable to income tax annual
valve of such property is not chargeable to tax under the head “Income from
House Property”.

Rental income is chargeable to tax under the head “Income from
House Property” if following three conditions are :
i) ’The Property should consist of any building or lands
appurtenant thereto;
ii) The assessee should be the owner of the property: and
iii) The property should not be used by the owner for the
purpose of any business or profession carried on by him, the
profits of which are chargeable to tax.”*
If all the aforesaid conditions are satisfied, property income is taxable
u/s 22 under the head “Income from House Property”. It makes no difference
if the assessee is a company which has been incorporated with the object of
buying or developing land properties.
Thus, any person having building or land appurtenant thereto, has to
pay tax an income from such house property.
In case the employee wants the employer to deduct tax at source in
respect of income other than salary income, then the employee must submit
the particulars of other income of the employer in the prescribed Form No.
12C. Such income should not be a loss under any such head other than the
loss under the head income from ‘House Property’ for the same financial year.
While taking into the account the loss from house property, the DDO shall
ensure that the assessee files the declaration in the said Form No. 12C
enclosing therewith a computation of such loss from house property.
The deduction in respect of interest on loan for self occupied house is
allowed upto Rs. 30,000 p.a. in case of housing loans taken on or before 1-4-
1999. If the loan is taken on or after 1-4-1999 the maximum interest on loan
allowed as a deduction is Rs. 1,50,000. Such higher deduction is not
allowable in respect of interest on capital borrowed for the purpose of repairs
or renovation of an existing residential house. To claim the higher deduction
in respect of interest up to Rs. 1,50,000, the employee should fumish a
certificate from the person to whom any interest is payable on the capital
borrowed, specifying the amount of interest payable by such employee for the
purpose of construction or acquisition of the residential house or for
conversion of a part whole of the capital borrowed, which remains to be repaid
as a new loan.

Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 225)

c. Profits & Gains of Business or Profession :
It is that source of income which ranks second after salary in terms of
assessees. It is the highest source of income to the Government in terms of
amount collected from tax payers,
a) What is the basis of charge[Section 28]:
U/s 28, the following income is chargeable to tax under the head,
“Profits & Gains of business or profession”.
i) profit & Gains of any business or profession;
II) any compensation or other payments due to orreceived by any
person specified in Section 28(ii);
iii) income derived by a trade, professional or similar association
from specific services perfomried for its members;
iv) the valve of any benefit or perquisite, whether convertible into
money or not, arising from business or the exercise of a
^ export incentive available to exporters.
vi) any interest, salary, bonus, commission or remuneration
received by a partner from firm;
vii) any sum received for not carrying out any activity in relation to
any business or not to share any know-how, patent, copy right,
trademark etc.;
viii) any sum received under a keyman insurance policy including
any bonus;
ix) profits and gain of managing agency; and
x) income from speculative transaction.
Income from the aforesaid activities is computed in accordance with
the provision laid down in section 29 to 44D.
Meaning of Business*;
U/s 2(13) business include any a)trade, b)commerce, c)manufacture, or d)any
adventure or concem in the nature of trade commerce or manufacture.
Though definition is not exhaustive, it covers every face of occupation carried
on by a person with a view earn profit.

* Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 271)

Meaning of Profession :
A professional person like a Doctor, Lawyer, Architect, Engineer,
Chartered Accountant, Musician, Film star etc. must know certain basic
concepts of Income-tax Law before trying to understand the specific
provisions relating to the determination of taxable income and income-tax
payable by him.
The most important source of income tax of a business, profession,
vocation is obviously “Profit and Gains”. Gross receipts are not chargeable to
tax but only the ‘profit’ or ‘gain’ is subject of charge. The important maxim to
be remembered in this connection is that income-tax is charged an income
not an receipt. The words ‘profit and gains’ should be understood in the
natural and proper sense as the real profits ascertained on ordinary principals
of commercial trading and commercial accounting. Out of gross receipts of
business or profession certain allowances expenditure and losses are allowed
to be deducted in order to amve at the net profits or gains of business or
profession chargeable to income-tax. .In fact the expression “profits and
gains” implies something in the nature of credit and debit account, in which
the receipts appear on one side and the costs and expenditure necessary for
eaming these receipts appear on the other side. Without such an account it
would be impossible to ascertain whether there were really any gains on
which the tax could be assessed. The profits and gains have to be computed
in accordance with the method of accounting regularly. Any loss which is
incidental to the carrying on is an admissible deduction in computing the net
chargeable profits or gains. Besides, there are certain items of business
expenditure, which are allowed as a deduction in computing taxable profits
and gains. It may be noted that the expression “paid” in relation to any
expenditure means the amount actually paid or incurred according to the
method of accounting upon the basis of which the profits or gains of a
businessman or professional person are computed. The detailed provisions
regarding the method of accounting etc are described in the act. Thus, where
a person follow the mercantile system of accounting it is not necessary that he
should have actually paid the expenditure. It would suffice if he incurs a
liability in respect of the expenditure in order to become entitled to claim a
deduction in respect thereof. However, where a professional person follows

the cash system of accounting the expenditure actually incurred or actually
paid by him alone will be allowed as a deduction.
The Act, however, contains certain provisions for determining how the
income is to be assessed. These must be followed in every case of business
or profession. The illegality of a business, profession or vocation does not
exempt its profits from tax; the revenue is not concerned with the taint of
illegality in the income or its source. Income is taxable even if the assessee is
carrying on the business, profession or vocation without any profit motive.
The liability to tax arises once income arises to the assessee; the motive or
purpose of earning the income is immaterial. Thus profit motive is not
essential for describing the income from that activity as income from business
or profession.
The profits of each distinct business must be computed separately but
the tax chargeable under this Section is not on the separate income of every,
distinct business but on the aggregate of the profits of all the business carried
on by the assessee. Profits should be computed after deducting the losses
and expenses incurred for earning the income in the regular course of the
business, profession, or vocation unless the loss or expenses is expressly or
by necessary implication, disallowed by the business.
Income arising from business assets which are temporarily out e.g., an
oil mill, cinema theatre, hotel, ginning or textile factory, rice mill or jute press
would be assessable as business income. But if the commercial asset is
permanently let the income is taxable as income from house property or
income from other sources, depending on the facts and circumstances of th e ^ _ „ ^
case. f f tr
Normally a professional person is liable to tax on the net profits a M \
gains arising out of a profession only. However, under the Act there are^-*'’ "
certain deeming provisions under which certain receipts are deemed or
considered as taxable income. For example, where an assessee has been
granted an allowance or a deduction in respect of any loss, expenditure or
any liability incurred by him in the assessment for any year and subsequently
during any previous year he receives, whether in cash or in any other manner
whatsoever, any amount of such loss or expenditure or some benefit by way
of remission and cessation of any such trading liability, the amount received

or the value of the benefit accruing is chargeable as taxable income of that
year. Similarly, where a assessee is able to recover more than the written
down value of an asset sold, etc. the excess amount recovered over the total
depreciation granted in the past is taxable under the Act as “Balancing
charge”. Similarly where any bad debt amount already allowed earlier, is
received by the assessee, the amount realised is considered as taxable
income of the year concerned.
Allowable Deductions[u/s 30 to 40 D]:
Following are the various deductions, which are specifically allowed as
deductions while computing the income from business or profession.
A. Rent, Rates, Taxes, Repairs and Insurance of Building[u/s30]:
In respect of rent, rates, taxes, repairs and insurance for premises
used for the purpose of the business or profession, the following deduction
shall be allowed:
If the assessee has occupied the premises as tenant, the rent of the
premises; and if he has undertaken to bear the cost of repairs, the amount of
repairs; If the assessee has occupied the premises, othen/vise than as a
tenant, the amount of current repairs.
Any sums on account of Land Revenue, Local Rates or Municipal
taxes. The amount of any premium paid in respect of insurance against risk
of damage or destruction of the premises.
B. Repairs and Insurance of Machinery, Plant and Fumiture[u/s31]:
The actual expenditure incurred on repairs and insurance of
machinery, plant or furniture used for the purpose of the business or
profession are pemnissible deductions.
C. Depreciation [u/s 32]:
Depreciation means loss or fall in the value of an asset. It arises due
to wear & tear of asset. Major repairs or capital expenditure is not allowed. It
is allowed only when expenditure should be related to;
0 The assessee is the owner of the asset,
ip The asset is used for the business purpose,
ill The asset is used in relevant previous year.
Depreciation rates are prescribed in the Income Tax Act, 1961
D. Expenditure on Scientific Research [u/s 35]:

The deduction in respect of scientific research is allowed for any
activities for the expansion of knowledge in the fields of natural or applied
science including agriculture, animal husbandry or fisheries. But it should be
used for the business of the assessee.
E. Expenditure on acquisition of patent rights & copyrights [u/s 35A]:
The capital expenditure incurred before 1®' April 1998; on acquisition of
patent rights and copyrights is written off in 14 equal annual installments
beginning with the previous year in which the expenditure was incurred. The
patents or copyrights are used for a business only.
F, Tea development Account:
An assessee carrying on business of growing and manufacturing tea in
India can claim deduction U/S 33AB in respect of amount deposited by him in
account with ‘NABARD’ within the period of 6 months from the end of the
previous year. This deduction is a available 20% of the profits of such
©. Insurance Premium:
The amount of Insurance premium paid in respect of insurance against
risk of damage of destruction of stocks or store, used for the purpose of
business or profession is allowable as deduction.
H. Bonus or Commission paid toEmployee[u/s 36(1 )(ii)]:
If bonus or commission is paid to an employee. Than it is allowable as
deduction but it should not been paid as profit or dividend.
I. Interest on Borrowed Capital;
If capital is borrowed for the purpose of business or profession then
interest paid on such borrowed capital is allowed.
J. Bad debts [Section 36(1)(vii)]:
The amount of bad debts or part there of isallowable as deduction
subject to the following conditions.
a| The debts must be Incidental to the business transaction, which
have been considered at the time of computation of the income
of the previous year or an earlier to the previous year.
It has been written off as irrecoverable in the accounts of the
assessee for that previous year.

K. Family planning expenditure [Section 36(v)IX]:
This deduction is allowed only to the company assessee. Such
expenses should be of revenue nature. If expenses are of capital nature then
deduction is allowed over a period or five years in equal instalments.
L Advertisement expenses [Section 37(2B)]:
Expenses incurred by assessee on advertisement in any souvenir,
brochure, track, pamphlet, etc. published by a political party is not allowed.
Other remaining expenses on advertisement are allowed.
Deductions U/S37:
This is residuary Section. It is not possible to mark full list of allowable
expenses. Hence expenses not covered by Section 30 to 36 mentioned in
Section 37. Subject to following conditions.
Any expenditure not covered U/S 30 to 36.
i. It should not be in the nature of capital expenditure.
ii. It should be incurred in the previous year.
iii. It should not be personal expenses of the assessee.
iv. Expense should be incurred for the purpose of business or
V. wholly and exclusively.
vi. It should not been incurred for any purpose which is an offence
or is
vii. prohibited by any other law.
Expenses not allowable[u/s 40]:
Following expenses are disallowed while computing the business
i) Interest, salary, royalty, fees for technical services or any other
sum payable outside India is not allowable unless tax is
deducted at source or tax is paid.
ii) Income tax and Wealth tax are not allowed.
iii) Salary paid out of India if tax has not been paid or deducted at
iv) Any amount to a provident fund or other fund established for the
benefit of employee’s of the assessee, if the assessee has not
made effective arrangement to secure that tax shall be deducted

at source from any payment made from the fund.
Following payments are disallowed [u/s 40(b)]:
i) Salary to non-working partners.
ii) Unauthorized payment to partners.
iii) payment to partner for a period preceding authorization.
iv) payment of remuneration to partner’s pemnissible limits are
mentioned in Section 44(AA).
v) expenditure exceeding Rs. 20,000 u/s 40A(3).
vi) provision for Gratuity made by the assessee to his employees
vii) by the employer to the Non-Statutory funds [U/S 40A(9)(10)].
Procedure for Computing Taxable profit from business when profit and
loss account is available :
Take Net Profit or Loss as per Profit and Loss account.
• See expenses written to the debit side of profit and loss account.
• Assessment-Disallowed expenses in the Net Profit, which are
written in the profit and loss account.
• Expenses allowed but not written in profit and loss account
deduct from Net Profit.
• Then see credit side of profit and loss account. If any item not
related to business is found then deduct this from Net Profit.
• Some adjustments may be given under the profit and loss
accounts then these items should be consider while computing
taxable income from business.
d) Capital Gains*:
Basis of charge [Section 45]:
Any profits or gains arising from the transfer of a capital asset effected
in the previous year shall, save a otherwise provided in Section 54, 54B, 54D,
54EC. 54ED, 54F & 54G be chargeable to income tax under the head “capital
gains”, and shall be deemed to be income of the previous year in which
transfer took place.

Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 408)

Capital gains tax liability arises only when the following conditions are
There should be a capital asset.
* The capital asset is transferred by the assessee.
^ Such transfer takes place during the previous year.
* Any profits or gain arises as a result of transfer.
* Such profit or gains is not exennpt from tax u/s 54, 54B,
54D, 54EC.54ED, 54f, 54G.
If the aforesaid condition are satisfied them capital gain is taxable in
the assessment year relevant to the previous year in which capital asset is
e. Income from other Sources*:
i) Basis of charge[Section 56(1)]:
This is the last & residual head of charge of income. A source of
income which does not specifically fall under any one of the other four heads
of income, is to be computed and brought to charge u/s 56 under the head,
“Income from other sources.
As per the provisions of S.56(1) income of every kind, which is
excluded in other four specific heads of income mention above, is charged to
income tax under this head of income.
Provisions of S.56(2) are more specific and enlists various incomes
which are taxable under the head of ‘Income from Other Source’.
This list includes;
Casual income such as winning from lotteries, crossword, puzzles,
horse races, etc.
Any sum received by the assessee from his employers as contributions
to any provident fund, super annuation fund or any other fund for the
welfare of the employees.
Interest on securities.
Income from letting out on hire of machinery, plant or furniture.

* Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 499)

Any sum received under the Keyman insurance policy including the
sum allocated by way of loans on such policy.
ii) Deductions Allowable [Section 57]:
The following expenditure can be claimed as deductions from gross total
income. - Collection Charges.
Interest on Loan.
Any other expenditure which is not of capital nature, but
expended wholly and exclusively for the purpose of
earning of such income.
iii) Deductions not Allowable [Section 58]:
The following expenses are not allowable as expenditure while
computing Income from Other Sources.
i) Any personal expenses of the assessee;
I) Any interest paid outside India on which tax has not been paid
or deducted at source,
ill Salaries paid outside India on which tax has not been paid or
deducted at source.
iv) Any expenditure incurred in cash above Rs.20,000/- and any
payments made to near relatives which are excessive or
unreasonable, according to the Assessing offer.
v) Income tax/Wealth tax payment.
vi) Any expenditure incurred in connection with Winning of Lottery,
crossword puzzles etc.
IV) Deemed Income Chargeable to Tax [Section 59]:
Provisions of S59 are similar to that of S.41(1) of the Income Tax Act.
These provisions are related to the recovery against any deduction. If any
deduction is allowed in respect of loss, expenditure, etc. During any previous
year while computing the income from business/profession and in subsequent
year such amount of deduction is recovered, them the amount so recovered
shall be treated as income under the head of Income from Other Source
‘Chargeable to tax’.
There is an “income”.
That income is not exempt from tax u/s 10 to 13A.

That income neither salary income, not rented income from house
property, nor income from business or profession and not capital gains.
Under direct Taxes, income from salary and income from Business or
profession are the major sources, which generate funds to the Govemment.
Individual can eam income from more than one source of income, for that
purpose total tax liability is considered by calculating all taxable income after
allowing various deduction from Gross total income, which mention under
Section 80.

Statement of computation of Income for an Assessment year.

Particulars Rs. Rs.
Income from salary Income from House Property Profits
and Gains of business or profession Capital Gains ................................

Income from other Sources Total

Less: Adjustment an account of set off and carry fonword
of losses. Gross total Income
Less; Deduction u/s 80 CCC to 80 U/s Total Income/Net
Computation of Tax liability Tax an Net Income Less:
Rebate u/s 88, 88B & 88c Balance —

Add: Surcharges Tax and Surcharges

Less:Rebate under sections 86, 69, 90, 91 Tax
Less; Prepaid Taxes i)Tax paid as self Assessment. \U .v -

ii)TDS iii)Tax paid in advance —

Tax Liability —

1.5 Scope of the study:

Present study is related to problems and difficulties of individual tax
payers. This study is related to Pune City and Pimpri - Chinchwad areas for
the period of 1997 to 2003. The scope of this study was to analyse problems
and difficulties with the help of statistical tools and methods. Finding of
present work would be useful and valuable not only for the assessees but for
the Govemment also. Basic problems and difficulties faced by the assessees

incompleting various formalities regarding Income Tax. It may be useful even
for framing the new assessee friendly policy.
1.6 Tax Planning:
There are several matters which affect the assessee’s ability to deduct
various expenses for income tax purpose some of the principal considerations
to be borne in mind while planning for tax. With help of tax planning we can
reduce the tax liability so it is an important area for every assessee. Tax
planning means we have to take maximum advantage of different section
given under section 80, 88, 89. In short with help of savings or certain
deductions we can reduce our tax liabilities.
You can plan you financial affairs with in the frame-work of law means
tax planning. But it does not mean that in the name of tax planning, you can
indulge in Tax Avoidance or Tax Evasion.
Tax planning under the different heads of income.
Tax planning in respect of residential status :
To enjoy non residential status, individuals who are visiting India on a
business trip or in some other connection, should not stay in India for more
than 181 days during one previous year and their total stay In India during any
four previous year preceding the relevant previous year should in no case
exceed 364 days.
If individuals, having been in Indian for more than 365 days during four
years preceding the relevant previous year, wish to stay in India for more 60
days, they should plan their visit to India in such manner that their total stay in
India falls under two previous year.
To illustrate, such persons can come to Indian any time in the first
week of February and stay up to May 29 without incurring any risk of losing
their non-resident status.
An Indian citizen or a person of Indian origin (whether rendering
service outside India or not) can stay for maximum period of 181 days on a
visit to India without losing his non-resident status. If, however, such persons
wish to stay in India for more than 181 days, they should plan their visit in
such a manner that their maximum stay of 362 days fall under 2 previous
year, stay in each previous year being less than 181 days.
Indian citizens going abroad for employment can stay in India for 181

days without becoming resident in that year, even if they were in India for
more than 365 days during four preceding years. This concession is available
only to those who want to leave India for employment.
A non-resident can escape tax liability in respect of income earned if he
first receives it out of India and then remits the whole or part of it to India even
though the business is controlled from India.
A person, who is not ordinarily resident, eaming income outside India
from a business controlled outside India, can avoid tax liability, if he first
receives such income in foreign country and then remits the whole or part of it
to India, either in the same year or in the following year(s).
Non ordinarily resident can claim set-off of losses sustained in the
business controlled outside India against their income taxable in India,
provided they shift the control of the business in India,
a. Tax planning in respect of salary income.
The scope for tax planning from the angle of employees is limited. The
definition of salary is very wide and includes not only monetary salary but also
benefits and perquisites in kind. The only deductions available in respect of
salary income are the standard deduction, the deduction for entertainment
allowance and deduction for professional tax. Apart from the above
deductions, deductions like depreciation for car etc. is not available for a
salaried assessee. Therefore, the scope for tax planning in respect of salary
income is severely limited. However, the following are some ideas of tax
planning in regard to salary income.
For the purpose of tax planning under the head ‘Salaries’ the following
propositions should be borne in mind. However, these propositions would
good only in the context in which they have been made :
1, It should be ensured that the terms of employment, deamess
allowance and
% dearness pay form part of basic salary. This will minimise tax
incidence on house rent allowance, gratuity and commuted
pension. Likewise, incidence of tax on employer’s contribution
to recognised provident fund will be lesser if deamess allowance
forms a part of basic salary.

“The Supreme Court held in Gestener Duplicators (p)Ltd. VCIT]1979]
Taxman 1/117ITR 1 that commission, payable as per the terms of contract of
employment at a fixed percentage of tumover achieved by an employee, falls
within the expression “salary” as defined in rule 2(h) of Part A of the Fourth
Schedule, Consequently, tax incidence on house rent allowance,
entertainment allowance, gratuity and commuted pension will be lesser if
commission is paid at a fixed percentage of tumover achieved by the
employee” *.
As Uncommuted pension is always taxable, employees should get their
pension commuted. Commuted pension is fully exempt from tax in the case
of Government employees and partly exempt from tax in the case of non-
Government employees who can claim relief under Section 89.
An employee, being a member of a recognised provident fund, who
resigns before completing five years of continuous service, should ensure that
he joins a fimn which maintains a recognised provident fund for the simple
reason that the accumulated balance of provident fund with the fomier
employer will be exempt from tax, provided the same is transferred to the new
employer who also maintain a recognised provident fund.
Since employer’s contribution towards recognised provident fund is
exempt from tax up to 12 percent of salary, employer may give extra benefit to
their employees by their contribution to 12 percent of salary without increasing
any tax liability.
While medical allowance payable in cash is taxable, provision of
ordinary medical facilities is not taxable if some conditions are satisfied.
Therefore, employees should go in for free medical facilities instead of fixed
medical allowance.
Since incidence of tax on retirement benefits like gratuity, commuted
pension, accumulated balance of unrecognised provident fund is lower if they
are paid in the beginning of the financial year, employer and employees
should mutually plan their affairs in such a way that retirement, termination or
resignation, as the case may be, takes place in the beginning of the financial

*R.N. Lakhotia - How Tax Planning for 2004, Vision Bool^s Pvt. Ltd. New Delhi, India. (Pg No. 72)

An employee should take the benefit of relief available under Section
89 wherever possible. Relief can be claimed even in the case of a sum
received from unrecognised provident fund so far as it is attributable to
employer’s contribution and interest thereon. Although gratuity received
during the employment is not exempt from tax under section 10(10), relief
under section 89 can be claimed. It should, however be ensured that the
relief is claimed only when it is beneficial.
As the perquisite in the respect of leave concession is not taxable in
the hands of the employee if certain conditions are satisfied, it should be
ensured that travel concession should be claimed to the maximum possible
extent without attracting any incidence of tax.
As the perquisite in respect of leave concession is not taxable in the
hands of the employee if certain conditions are satisfied, it should be ensured
that the travel concession should be claimed to the maximum possible extent
without attracting any incidence of tax.
As the perquisite in the respect of free refreshments during office
hours, free residential telephone, providing use of computer/laptop, gift of
movable assets (other than computer, electronic items, car) by employer after
using for 10 years or more are not taxable, employees can claim these
benefits without adding to their tax bill.
Since the term “salary” includes basic salary, bonus, commission, fees
and all other taxable allowances for the purpose of valuation of perquisite in
respect of rent free house, it would be advantageous if an employee goes in
for perquisites rather for taxable allowances. This will reduce valuation of
rent-free house, on one hand, and, on the other hand, the employee may not
fall in the category of specified employee. The effect of this ingenuity will be
that all the perquisite specified will not be taxable as the employee will be
outside the mischief of section 17(2)(iii).
b. Income under head ‘House Property’.
For the purpose of tax planning, the following broad propositions
should be borne in mind. However, these propositions would hold good in the
context in which they have been made:
1. If a person has occupied more than one house for his own
residence, only one house of his own choice is treated as self­

occupied and all other houses are deemed to be let out. The tax
exemption applies only in the case of one self-occupied house
and not in the case of deemed to be let out properties. Care
should, therefore, be taken while selecting the house to be
treated as self-occupied in order to minimise the tax liability.
2. As interest payable out of India is not deductible if tax is not
deducted at source (and in respect of which there is no person
who may be treated as an agent under section 163), care should
be taken to deduct tax at source in order to avail exemption
under section 24(b).
3. As amount of municipal tax is deductible on “payment” basis and
not on “due” or “accrual” basis, it should be ensured that
municipal tax is actually paid during the previous year if the
assessee wants to claim deduction.
As a member of co-operative society to whom a building or a part
thereof is allotted or leased under a house building scheme is the deemed
owner of the property, it should be ensured that interest payable (even if not
paid) by the assessee, on outstanding installments of the cost of the building,
is claimed as a deduction under section 24.
If in individual makes a cash gift to his wife who purchases a house
property with the gifted money, the individual will not be deemed as fictional
owner of the property under section 27(i) - K.D.Thakur vCIT[1979]
120ITR190(Guj). Taxable income of the wife from the property is. however,
including in the income of individual in terms of section 64(1 )(iv). Such
income is to computed under section 23(2) if she uses the house property for
her own residential purpose. It can therefore be advised that if an individual
transfers an asset, other than house property, even without adequate
consideration, he can escape the deeming provision of section 27(i) and
consequent hardship.
Under section 27(i), if a person transfers a house property without
consideration to his/her spouse (not being a transfer in connection with an
agreement to live apart), or to his minor child (not being a married daughter),
the transfer is deemed to be the owner of the house property. This deeming
provision was found necessary in order to bring this situation in line with the

provision of section 64. But when the scope of section 64 was extended to

cover transfer of assets without adequate consideration to son’s wife or minor

grandchild, the scope of section 27(i) was not similarly extended.

“Consequently, if a person transfers house property to his son’s wife without

adequate consideration, he will not be deemed to be owner of the property

under section 27(i), but income earned from the property by the transferee will

be included in the income of the transferor under section 64 - CIT v H.L.

Gulati [1982] 11 Taxman 167(AII)”*. For the purpose of sections 22 to 27, the

transferee will, thus, be treated as an owner of the house property and

income computed in his/her hands is included in the income of the transfer

under section 64. Such income is to be computed under section 23(2) if the

transferee uses that property for self-occupation. Therefore, in some cases it

is beneficial to transfer house property without adequate consideration to

son’s wife or son’s minor child,

c. Tax Planning for Business/Profession

Tax planning for the source of business/profession is really d

there is wide scope for tax planning.

Successful tax planning for business deductions pre-suppose^^)i^te^'

and through understanding of the various statutory provisions govemin^^e

deductions and an awareness of the statutory rights as well as various

restrictions and conditions goveming such rights.

One of the important aspects of tax planning would be to see that the

maximum deduction or allowance is obtained in the earliest possible time for

the purpose of determination of taxable income. Therefore, while deciding

about incurring of capital and revenue expenditure, the assessee should

consider the tax treatment of such expenditures and the period within which

the benefit of deduction or amortisation would be obtained so that he can

estimate and work out cash flow position over a period of time. While tax
consideration play a major role in investment decisions, the general principles
of financial management and their effect on investment decisions should not
be ignored.

* Tax Sever Monthly Journal, Feb., 2004 (Pg. No. 4) Published by Lakhotiya

The tax planner should keep in mind the advantage arising out of

minimising the expenditure, especially in the initial years of a business, so that

the profits may be maximised and the assessee may be in a position to avail

of the various tax incentives like depreciation and investment allowance as

also the tax holiday provisions. The question of expenditure being capital or

revenue and the consequences attaching to the likely treatment eventually

may also be an important part of the tax planning exercise.

Following are some the hints which can be used for tax planning.

* Investment in depreciable assets.

* The factors, which determine effective tax savings, are:

* Rate of depreciation.

* Marginal tax rate.

* Lease on purchase decision.

* Purchases by installment on hire.

* Capital structure decisions.

d. Tax planning for under the head “Capital Gain”.

For the purpose of tax planning, the following propositions should be

borne in mind. However, these propositions would hold good in the context in
which they have been made :

* Since long-temri capital gains bear lower tax, tax payers should

so plan as to transfer their capital assets normally only 36

months after acquisition. It is pertinent to note that if capital gain

asset is one, which became the property of the tax payers in any
of the manner under section 49(1), the period for which it was

held by the previous owner is also to be counted in computing

36 months.

* The assessee should take advantage of exemption under

section 54 by investing the capital gain arising from the sale of

residential house property in the purchase of another house
property (even out of India) within the specified period.
* In order to claim advantage of exemption under sections 54B
and 54D it should be ensured that the investment in new asset
is made only after effecting transfer of capital assets.
* In order to take the advantage of exemption under sections 54,

54B, 54D, 54EC, 54ED, 54F and 54G the tax payer should

ensure that the newly acquired asset is not transferred within

three years from the date acquisition. In this context, it is

interesting to note that the transfer of a newly acquired asset

according to the modes available is not regarded as “transfer”

even for this purpose.

Consequently, newly acquired assets may be transferred even within 3

years of their acquisition according to the modes specified under the

Act without attracting capital gains liability. Altematively, it will be

advisable that instead of selling or converting asset acquired under

sections 54, 54B, 54D, 54F and 54G into money, the tax payer should

obtain loan against the security of such asset(even by pledge) to meet

the exigency.

* In two cases, surplus arising on sale or transfer of capital assets

is chargeable to tax as short-term capital gain by virtue of

section 50. These cases are :

When written down value of a block of assets is reduced

to nil, though all assets falling in that block are not


When a block of assets ceases to exist.

* Tax payers desiring to avoid tax on short-term capital gains

under section 50 on sale or transfer of capital asset can acquire

another capital asset, falling in that block of assets, at any time

during the previous year.

Overview of capital gains exempt from tax :

As per section 54, long term capital asset is eligible for exemption to

individual and HUF on following Conditions :

Residential house to be transferred.
* The income from such asset is chargeable under the head
‘Income from house property’.
* Within one year before or two years after, a residential house is
purchased or within a period of three years, a residential house

is constructed.

Quantum of exemption : If the cost of new residential house is greater than

capital gain then the whole of the capital gain. Othenwise to the extent of the

cost of the new residential house.

As per section 54B, Short/long temi capital asset is eligible for exemption to

individual on following conditions :

* Agricultural land to be transferred.
* It must have been used in the two years immediatelypreceding the

date of transfer for agricultural purpose either by the assessee or his


* Within two tears from the date of transfer another agricultural land is


Quantum of exemption : If the cost of agricultural land is greater the capital

gain, then the entire capital gain. Othenwise capital gain to the extent of the
cost of the new agricultural land.

As per section 54D, Short term/long term capital asset is eligible for
exemption to any assessee on following conditions :

* There must be compulsory acquisition.

* The property acquired is land and building fomriing part of anindustrial


* The asset must have been used in the two years immediately

preceding the date of transfer of the assessee for the purpose of the

Within a period of three years any other land or building is purchased

or constructed for the industrial undertaking existing or newly set up.

Quantum of exemption: If the cost of new asset is not less than the capital

gain then the whole of the capital gain. Othenwise capital gain to the extent of
the cost of new asset.
As per section 54EC, long term capital asset is eligible for exemption to any
assessee on following conditions :
A long term capital gain asset is transferred by the assessee .

Investment within six months from date of such transfers in specified

New specified assets -Any bond redeemable after three years issued
by NABARD, National Highway Authority of India, Rural Electrification

Corporation Ltd., National Housing Banl< or Small Industries

Development Bank of India.

* Specified assets should not be transferred (or converted into money or
any loan/advance is taken on the security of specified asset) within the
period three years from the date of acquisition.
Quantum of exemption : If the cost of the specified assets is equal or more
than the capital gain, the entire capital gain should be exempt. Othenwise the
capital gain exemption shall be equal to the cost of specified assets.
As per section 54ED, long term capital asset is eligible for exemption to any
assessee on following conditions ;
* Long term capital asset transferred being listed securities or unit of a
mutual fund or the Unit Trust of India.
* Capital gains should be invested in equity shares forming part of an
eligible issue of capital, made by a public company and offered for
subscription to public, within a period of six months after the date of
such transfer.
* There will be lock-in-period of one year for such shares.

Quantum of exemption: If the cost of the specified assets is equal or more

than the capital gain, the entire capital gain should be exempt. Otherwise

proportionate exemption will be available as under:

[Capital gain] X [Cost of the specified equity share acquired/whole of long

term capital gain from original transfer.]

As per section 54F, long term capital asset not being a residential house,

capital asset is eligible for exemption to individual and HUF on following


* Within a period of one year before or two years after the date of
transfer, a residential house is purchased or a within a period of three

years a residential house is constructed.

* The assessee does not own more than one residential house of the
* The assessee does not within a period of one year purchase or does
not within a period of three years construct any residential house other
than the new asset.
Quantum of exemption: If the cost of the new residential house is not
less than the net consideration then the whole of the capital gain. Othenwise,

the capital gain in the same proportion as the cost of the new residential

house bears to net consideration.

As per section 54G, Short temi/long term capital asset is eligible for

exemption to individual and HUF on following conditions :

* Machinery, plant, building or land used for the business of an

industrial undertaking situated in an urban area is transferred.

* Transfer is due to shifting to an area other than an urban area.

* Within a period of one year before or three years after the date

of transfer purchased machinery, plant or acquired building or

land or constructed building and completed shifting to the new

Quantum of exemption: If the cost of the new assets and expenses incurred

for shifting are greater than the capital gain, the whole of such capital gain.

Otherwise capital gain to the extent of the cost of the new asset.

Clubbing of income

For the purpose of tax planning the following propositions should be

bome in mind. However, these propositions would hold good in the context
on which they have been made.

a. Under section 64(1 )(ii), salary earned by the spouse of an individual

from concem in which such individual has a substantial interest, either

individually or jointly with his relatives, is taxable in the hands of the


h To avoid this clubbing, as far as possible spouse should be employed

in a concem in which the individual does not have any interest. In such

a case this section will not be attracted, even if a close relative of the

individual has substantial interest in the concem. Alternatively, the

spouse may be employed in a concem, which is interrelated with the

concem in which the individual has substantial interest.
G. Income from property transferred to spouse is clubbed in the hands of
transferor. However, it has been held this income from savings out of
pin money(i,e. an allowance given to wife by husband for her dress and
usual household expenditure) is not included in the taxable income of

husband -T. B. N. Naidu v CIT[1956] 29ITR (Nag). Likewise, a pre­

nuptial transfer (i.e. transfer of property before marriage) is outside the

mischief of section 64(1 )(iv) even if the property is transferred subject

to subsequent condition of marriage or in consideration of a promise to

marry. Consequently, income from property transferred without

adequate consideration before marriage is not clubbed in the income of

the transferor even after marriage -Philip John Plasket Thomas v CIT

[1963] 49ITR 97(SC). Income from property transferred to spouse in

accordance within an agreement to live apart is not clubbed in hands of

transferor. It may be noted that the expression “to live apart” is of

wider connotation and covers even voluntary agreement to live apart,

d. Exchange of asset between one spouse and another is outside the

clubbing provisions if such exchange of assets is for adequate

consideration. The spouse within higher marginal tax rate can transfer

income yielding assets to the other spouse in exchange of an equal

value of asset, which does not yield any income.

Provisions of sections 64(1 )(iv) are not attracted if property is

transferred by individual to his son-in-law or daughter-in-law of his


t If trust is created for the benefit of minor child and income during

minority of the child is being accumulated and added to corpus and

income from increased corpus is given to the child after attaining

majority, the provisions of section(IA) are not applicable -

Yogindraprasad N. Mafatlal v CIT[1977] ITR 602(Bom).

g. Explanation 3 to section 64(1) lays down the method for computing

income to be clubbed on the basis of value of assets transferred to the

spouse as on the first day of the previous year.

If a trust is created by a male member to settle his separate property

thereon for the benefits of his Hindu undivided family, with a stipulation that
income shall accrue for a specified period and the corpus going to the trust
aftenwards, provisions of section 64(2) are not applicable.
If gifts are made by a Hindu undivided family to the wife, minor child, or

daughter-in-law of any of its male or female members(including Karta),

provisions of section 64 are not attracted.

If an individual transfers property without adequate consideration to
son’s wife, income from the property is always clubbed in the hands of the

transferor. If however an individual transfers property without consideration to

his Hindu Undivided Family and the transferred property is subsequently

partitioned amongst the members of the family, income derived from the

transferred property, as is received by son’s wife, is not clubbed in the hands

of the transfer. It may be noted that unequal partition of property amongst

family members is not are under the Hindu law and it does not amount to

“transfer” as generally understood in law -“C G T v N. S. Getti Chettiar[1971]

82 ITR599(SC)and consequently if, at the time of partition, greater share is

given out of the transferred property to son’s wife or son’s minor child, the

transaction would be outside the scope of section 64(1 )(vi) and section64(2)”*.

In case covered in section 64, income arising to the transferee, from

property transferred without adequate consideration, is taxable in the hands of
the transferor. However, income arising from the accretion of such
transferred assets or from accumulated income cannot be clubbed in the
hands of the transfer -Papatlal Bhikamchand v CIT[1959] 36 ITR 577(Bom.).
A loan is not a ‘Iransfer” for the purpose of section 64 -CIT v M.Vinoda
Rao [1993] 200 ITR 50 (Kar.).
Where the assessee withdrew funds lying in capital account of firm in
which he was partner and advanced the same to his HUF which deposited the
said funds back into firm, the said loan by the assessee to his HUF could not
be treated as a transfer for the purpose of section 64 and income arising from
such deposits was not assessable in the hands of the assessee -CIT v M.
Vinoda Rao [1993] 200 ITR 50(Kar.).
Other Tax Planning avenues

Exemption available individual assesses;

i. Sec. 10 (1): Agricultural Income.

ii. Sec. 10 (2): Receipt by a member of Hindu Undivided Family.

iii. Sec. 10 (2A ): Share in profits of a firm which is assessed as

such (PFAS)
iv. Sec. 10 (5) read with Rule 2 8 ; Value of leave travel concession
in India received by an individual.
V. Sec.10 (7) : Allowances or perquisites outside India paid by the
Government to India citizens employed abroad by govemment

of India.

* TaxSever Monthly Journal, Feb., 2004 Published by Lakhotiya (Pg. No. 7)

vi. Sec. 10 (10): Gratuity.
vi. Sec. 10 (10A) : Commutation of pension (Lumpsum payment in

lieu of periodic pension)

viii. Sec.10 (10A A ): Encashment of leave by retiring employee.

ix. Sec.10 (10B ): Retrenchment compensation received by a


X. Sec.10 (IOC) red with Rule 2BA : Compensation received by

employees under Voluntary retirement / separation scheme.

xi. Sec.10 (1 0 C C ): Tax on perquisite paid by employer.

xii. Sec.10 (1 0 D ): Sum received from Life Insurance Policy.

xiii. Sec.10 (11): Contribution to Statutory / Public Provident Fund .

xiv. Sec.10 (12): Contribution to recognised Provident Fund.

XV. Sec.10 (13) : Contribution to and payment from Approved

Superannuation Fund.

xvi. Sec.10 (13A) iread with Rule 2A ; House rent allowance.

xvii. Sec.10 (14): read with Rule 2BB : Special allowances or benefit

granted specifically to meet expenses wholly, necessarily and

exclusively incurred in the performance of his duties of an office

or employment of profit.

TA BLE NO. 1.10


Section Deduction For Qualifying amount Quantum of deduction

80CCC Contribution to Rs. 10,000 Least of amount paid or
Lie pension fund Rs.10,000
SOD Medical Rs.10,000 if all conditions are 100% of the premia paid or
Insurance satisfied Rs.15,000 where the Rs.10,000 (Rs.15,000 for senior
Premiunn assessee or his wife or her husband citizen) whichever is less.
or dependant parents or any
member of the family is a senior
citizen and premium is paid in
relation to him / her.
80DD Medical A fixed deduction Rs.50,000 1.Rs.50,000 for ordinary
Rule 11A treatment of irrespective of the amount incurred resident. 2.Rs.75,000 for severe
handicapped or deposited. A higher deduction of disability.
dependants s.75,000 shall be allowed. Where
such dependant is a person with
severe disability having any disability
over 80%.

80DDB Medical Rs.40,000 if all conditions are Lower of the following : Amount
treatment of satisfied or the expenditure actually paid or Rs.40,000(Rs.60,000 for
specified incurred whichever is lower. Where senior citizens). Amount
diseases or the expenditure incurred is in respect received from an insurer or
ailment of of the assessee or his dependant reimbursed by employer for the
dependant relative or any member of an HUF of medical treatment is to be
relative or an assessee and who is a senior reduced.
remember of citizen then Rs.60,000 or actual
HUF. expenditure incurred whichever is

80E Repayment of Amount paid during the year by way Aggregate of installment and
loan taken for of repayment of loan or interest interest subject to a limit of
higher education. thereon or Rs.40,000 whichever is Rs.40,000p.a.
lower. The first year in which the
deduction is available is the year in
which the person starts repaying the
loan. The deduction is available for a
maximum period of 8 years or till the
principal amount of such loan
together with interest is liquidated,
whichever is earlier.
80G Donation to Amount of donations generally not 1. 50% generally: and 2.100%
certain funds, exceeding 10% of Gross Total in cases of specified funds.
charitable Income (As reduced by other
institutions, etc. deduction).
80GG Deduction in N.A. Least of the following - i)Rs.
respect of rent 2,000 p.m. ii)25% of adjusted
paid. total income(i.e. gross Total
Income, excluding Long term
capital gain and income referred
to in Sec.115A or 115D, but
before making any deduction
under this section). iii)The
excess of actual rent paid over
10% of adjusted total income
(i.e. Gross Total Income
excluding Long term capital gain
and income referred to in
Sec.115A or 115D but before
making any deduction under this
80GGA Donations for N.A 100% of donation.
research or rural
SOL interest on General deduction : Rs. 12,000 Rs.12,000 plus additional
certain securities, Special deduction : Rs. 3000 for deduction upto Rs.3,000 for
dividends etc. interest on any security of the interest on Government security.
Central Government or a State
80QQB Royalty income Royalty paid to authors being an Lower of the following:
of authors individual resident in India or an i)Rs.3,00,000; or ii)royalty
Indian citizen or foreign citizen or he actually received.
may be a resident and ordinarily
resident or resident but not ordinarily
resident in India. But he should not
be a non-resident.
80R Remuneration Remuneration received by him 15% of such remuneration as is
received from outside India from any University or brought in India in convertible

foreign sources in other Educational Institution or other foreign exchange within the
case of Association or Body, for any services stipulated time limit(six months).
professors, rendered during his stay outside
teachers etc. India in his capacity as a professor,
teacher or research worker.
80RR Professional Income derived by an author, 15% of such remuneration as is
income of playwright, artist, musician, actor, brought in India in convertible
resident author, sportsman (including athelete) in the foreign exchange within the
playwright, artist, exercise of his profession from the stipulated time limit(six months).
musician, actor, Government of a foreign State or any
sportsman from person not resident of India.
foreign source.
80RRA Remuneration Remuneration received in foreign 15% of such remuneration as is
received by an currency from any employer (being a brought in India in convertible
Indian citizen for foreign employer or an Indian foreign exchange within the
approved Concern) for any service rendered stipulated time limit(six months).
services with an outside India by Government
employer outside employee or Technician.
80RRb Royalty on Royalty on patents received by an Lower of the following:
patents individual (maybe an Indian citizen i)Rs.3,00,000; or ii)royalty
or a foreign citizen)_____________ actually received
80u/s Deduction in 1.Rs.50,000 for ordinary
Rule 11D respect of an disability. 2.Rs.75.000for severe
individual with disability.

Rebate under section 88 available for individual assessee :

Gross qualifying amount:

a) Lie premium to effect or keep in force an insurance Policy(Life Policy

or endowment policy) on the life of the assessee or on the life of the

spouse or any child of the assessee.

b) Premium paid in respect of non-commutable deferred annuity on the

life of assessee or on the life of the spouse or any child of the


c) Contribution to statutory any recognised provident fund.

d) Contribution to 15 years Public Provident Fund in the name of the

assessee or the spouse or any child of the assessee.

e) Amount deducted on behalf of the Government from the salary of

Government employee for securing a deferred annuity or making

provisions for his wife of children.

% Assessee’s own contribution to an approved Super annuation fund.

Sum deposited in Post Office Saving Bank - 10 years, 15 years

(Cumulative Time Deposits) Rules, in the account of the assessee or

the spouse or any child of the assessee.

h) Contribution for participating in Unit Linked Insurance Plan of UTI, Plan

of Lie mutual fund (Dhanraksha Plan of LIC mutual fund), in the name

of the assessee or the spouse or any child of the assessee.

i) Purchase of National Savings Certificates VI, VII and VIII issue (VI and

VII issue new purchase is now not available).

IJ Contribution to effect or keep in force a contract for notified annuity

plan of LIC (Jeevan Dhara v/ Jeevan Akshaya).

k) Subscription towards any notified Pension Fund set up by Mutual Fund

or UTI.I) Equity linked savings scheme of a mutual fund or UTI upto

Rs,. 10,000.

m) Subscription to Home Loan Account Scheme of the National Housing

Bank or

notified Pension Fund of the National Housing Bank.

n) Payment made towards the cost or purchase/construction of house

upto Rs. 20,000.

o) Subscription towards Deposit Scheme of any Public Sector Companies

of Housing Development Corporation of India engaged in providing

long term finance for housing accommodation and eligible for

deduction under Sec.36(i)(vii).

p) Any sum paid as tuition fees (not including any payment towards
development fees / donation / payment of similar nature) whether at the

time of admission or othenwise to any university / college / educational

institution in India for full time education upto Rs. 12,000 per child per

year for a maximum of 2 children.


I Where the tax payer discontinues the policy of Life Insurance,

before premium have been paid for 2 years, no deduction will be
allowed in respect of any premium paid on that policy in the year
in which the policy is terminated. Further the amount of tax
deductions allowed in respect of premium paid in the preceeding
years will be deemed to be the tax payable by the assessee of
the year in which the policy is terminated. In case of single
premium insurance policy; if such policy is surrendered within

two years of the date of commencement of insurance, the

amount of deduction of income tax allowed earlier shall be

deemed to be the tax payable in the year of surrender.

ii. Where a member, participating in Unit Linked Insurance Plan

tenninates his participation before making the contribution for a

period of 5 years, no tax rebate will be allowed in respect of

contribution made in such year, further, the amount equal to

aggregate tax deduction allowed in respect of contributions in

the past years shall be deemed to be the tax payable by

assessee of the previous year in which he terminates as

participant in the plan.

iii. Where the house property in respect of which, the deduction has

been allowed is transferred by the tax payer at any time before

the expiry of 5 years from the end of the financial year in which

possession of such property as obtained by him, no tax

deduction in this provision shall be allowed in respect of the

previous year in which the transfer is made. Aggregate amount

of the tax deduction allowed in the earlier years shall be deemed

to be the tax payable by the assessee of the previous year in

which such house is transferred.

If* Payment should not exceed the total income chargeable to tax
during the previous year.

Amount of tax rebate :

Enhanced tax rebate under section 88 for low paid salaried

An individual shall be entitled to a rebate of an amount equal to

30 % , from the tax liability, if his Salary does not exceed

Rs. 1,00,000 during the previous year before allowing deduction
under section 16; and His “Income chargeable under the head
salaries” is not less than 90%, of his gross total income.
ii) If the gross total income does not exceed Rs. 1,50,000 and the
case does not fall within (i) above, tax rebate will be available

@ 2 0 % of the qualifying amount.

Hi) If the gross total income exceeds Rs. 1,50,000 but does not
exceed Rs. 5,00,000 tax rebate will be available @ 1 5 % of the

qualifying amount,

iv) If the gross total income exceeds Rs. 5,00,000 tax rebate will be


a. Qualifying amount cannot exceed the taxable income.

b. Maximum qualifying amount will be Rs. 1,00,000. Out of Rs. 1,00,000

a minimum investment of Rs. 30,000 is required in the infrastructure.

Other points to note :

a. A lock up period of 3 years is provided in respect of such equity shares or

debenture before three years of acquisition, the entire amount of rebate of

tax allowed earlier in any previous year shall be treated as tax payable in

the hands of subscriber in the year in which it is transferred.

b. Rebate under Sec.88 is not available from tax on Long Term Capital Gains

but it is available from tax other income including winning from lottery,

races etc. Investment in infrastructure sector:

With a view to channelise the saving of the tax payers in the infrastructural
sector, additional tax rebate is provided for the amount invested in :

i. Debentures of and equity shares in a public company engaged

in providing tele-communication sen/ices(basis or cellular)

infrastructure including power sector,

fl, Units of mutual fund referred in Sec. 10 (23D) and approved by

the board.

Section 88B : Tax rebate to senior citizens ;

- Assessee : Individual.

- Conditions:
The assessee is a resident of India has attained the age of 65 years or

more at any time during the previous year or earlier.

Tax Rebate:
i. The amount of income tax before giving any rebate under Sec.88,

Sec.88C and
Sec.89(1)relief; or

b, Rs. 15,000
whichever is less.

I, The rebate is available to all senior citizens irrespective of income

ii. Tax rebate under Sec.88B is available even from tax on long term

capital gains or tax on winning from lotteries races etc.

Sec.88C : Tax rebate in case of women.

Assessee : Individual woman.


i. The assessee being a woman, is a resident of India.

II She is below the age of 65 years at any time during the previous year.

Tax Rebate:

I The amount of income tax before giving any rebate under Sec.88,

Sec.B, Sec.88C and Sec.89(1) relief; or

ii. RS 5,000
whichever is less.


I* Tax rebate under Sec.88C is available even from tax on long term
capital gain or tax on winning from lotteries, races etc.

ii. On a literal reading of Sec.88B and Sec.88C, it appears that a woman

can avail the benefit of both these sections because the precondition

for availing the benefit of Sec.88B is that the individual should be of the

age of 65 years or more at anytime during the previous year and the

precondition for availing the benefit of Sec.88C is that woman should

be below the age of 65 years at anytime during the previous year.

1 .7 STUDY OF B U D G E T S FROM 1 9 9 7 - 2 0 0 3

Every year in the month of February citizens of the country eagerly wait

for presentation of the budget by the Government in the Loksabha. India has

a dual structure of functioning. The central govemment lays the union budget

and the respective states decide their state budgets. Income tax is a direct

tax which is collected by the central govemment. The rates and other features

of the tax are decided by the Central govemment and always declare in

budget and hence study of budget is essential. Budget is derived from a

Latin word “B OU G T T E ” which means Budget is derived from a Latin word

“B O U G TTE ” which means a small bag containing Financial Statements.

“A Budget consist essentially of systematic set of policies so designed

and interrelated as to promote stated and where possible quantitatively

measurable objects within a given period”.

Budgeting in short may be defined as conceiving initiating, regulating

and controlling economic activity by the state according to set priorities which
a view to achieving well-defined objectives within a given time.
Economic Growth of a nation depends on certain factors fiscal or
monetary policy of the government is one of the major contribution in
determining the shape of such a growth. The monetary or fiscal policy of the
govemment is nothing but controlling the inflow and outflow of money
revenue. The revenue is generated by various means and methods.
Collection of taxes Is one of the important tools available with the Govemment
for generating income.
These taxes means Direct Tax and In-direct Tax. Collection of taxes
by way of customs excise. Sales tax etc. are under the Indirect Tax. These
tax are controlled indirectly. Direct tax is another important source of revenue
some of the taxes, Income Tax, Custom Duties, Excise duties and Centrai
Sales Tax are collected by the Central Government which State Govemment
are empowered to levy state and various other local taxes like entry tax, octroi
tax. The taxes collected by the Central Government and various State
Govemment as per requirement to meet the expenditure.
Every year on 28/29*^ February Finance Minister of India presents
Union Budget before the parliament. The Budget contains a statement of
revenues and estimated expenditure of the Govemment The Budget is also a

reflection of ideas and suggestions, presented by the economics experts,
corporate sectors, financial institutions etc. The revenue collected by the
Government is utilised for meeting the expenditure of Defence developments
of different activities. Finance Act presented at the time of Union Budget
enables the government to introduce amendments in fiscal Laws along with
the Finance Act. Tax rate of taxes are also announced through Finance Bill.
Disrenders flexibility which are again due to changing needs of Government
Tax rate has been rationalised and non-compared with other countries.

In our country Annual Statement of affairs is consideredfrom 1®^ April

of every year to 31®* March of next year, the rates of all direct and Indirect

taxes which are prescribed in annual finance Act are therefore made

applicable throughout the country from 1®* April to 31®* March.


Making of a Budget is not an easy task. It is a very complicated and

laborious process however it appears to be a simple affair but actually it is

Budget requires certain techniques which are as follows :

Laying down OBJECTIVES


Determination of the growth rate

Detennining the size of Investment

Physical VS financial planing of Budget

Mobilisation of Financial resources.

Capital Budgeting

Balances in planing the Budget

Planing at the top or the bottom

Period of the plan
Core and contingent parts

Manpower Budgeting
Laying down objective:

The first thing to be done while drawing up a budget is to lay down the
broad objectives to the achieved during the given period. In context with the

prevailing economic situation prevailing in the country the objectives are
selected to be achieved.


The next thing is to do to translate the objectives in concrete

quantitative tenns by fixing the main targets of output in the various sectors.

There targets are guide posts and help in the preparation of policies to be
perused for achieving them.


As an essential part of the process of the planing the Budget, It is usual

to lay down the rate of growth of the economy for the period of the Budget.

Various considerations go in to the fixing of the growth rate. It may be filing on

the basis of what the country needs in the privileging economic situation, or it

may be field on the basis of what the country can achieve.


Having fixed the targets of production and decided on the rate of
growth to be achieved. The next important thing to be detennined is the
amount of investment that is required to sen/e the purpose.
The planners of budget have also to see whether planning of budget
should be done merely in money terms (i.e. financial) or in real terms (i.e.
physical) In other words, physical planing means planing in temris of quantities
of goods and services i.e. real resources.
Money is no problem, it can be created (i.e. deficit financing) but a lack
of real resources may prove to be a bottle neck. However for sound
budgeting we need both physical and financial planning of budget.
After the amount of investment and targets are fixed, it becomes
necessary to device ways and means to raise the necessary resources. The
resources are broadly of two types: external and internal. External resources
or resources from abroad consist of loans, grants and share capital invested
by foreign investors. The intemal resources consist of the surplus of current
resources , revenues from additional taxation, small savings, market
borrowings profit from, public undertaking savings by the private sector etc.

The capital requirement of the budget to achieve the pre-determined

growth rate must match or to the capital available or the financial resources
mobilised. It will be necessary to make projections for each year of the


The planners of the budget must carefully check up that all stages of

the budget, the demand for commodities and the supply of commodities are
in overall balance. If there is a disparity between the two, there will be either

inflation or recession. There should be a proper balance between

commodities and services.


In order to make planing of budget realistic, the planners of budget

must proceed both from the bottom and from the top. The planning of budget
the bottom takes into account the local requirement and potentialities; while

planning of budget from the top may be more precise and co-ordinated
through it may be in conformity which the local needs.


Generally the budget is prepared for a period of one year.


It is well known that the resources at the command of an under

developed economy are starkly limited. It is therefore, necessary to have

budget in two parts : the Core parts and Contingent parts.


As far as possible, rigidity in budget should be avoided and there

should be an elements of flexibility in the formation of a budget.

While assuming the resources available for the execution of the
budget, the planners of budget should not confine themselves mainly to
financial resources. They should also undertake an exercise for assessing the
manpower resources, taking into account both skilled and unskilled labour.


Superiority of the state
Equitable distribution

Terms of Trade
Adjusting to major economic changes
Co -Ordination
Optimal Resources Utilization
Capital Formation
Budgeting is advocated on the ground that the judgement of the state

is superior to that of citizen , however wise and able he may be. As Aurther

Lewis remarks “ the state now claims to know better than its citizens for how

many years they should send their children to school, between what hours
they should drink, what proportion of income should be saved, whether cheap

houses are better then cigarettes and so on. Economic development is more

serious matter and should not be left to any individual.

Budgeting is also necessary for equitable distribution of economic

power. The price mechanism which is an essential components of budget

rewards people according to their resources, they poses, but contains in itself

no mechanism for the equalization of the distribution of those resources.

There is no wonder, therefore, that there are wide gaps between the haves

and have notes which seriously offend against sense of social justice.

Budgeting is thus advocated for reducing any qualities of income, wealth and


Budgeting has also proved to be powerful instrument eliminating

instability which is a necessary concomitant of a free market economy. Private

enterprise left to itself would produce trade cycles, unemployment and misery.

It is new generally agreed that planning of economic activity which is an

important constituent of budget goes a long way in smoothing the violent
oscillations and swings in business thus preventing undeserved games and
undue hardship. It is on this ground that budgeting is advocated even for
develop and advanced economy.
Again it is budgeting which is part of planning which can insure that
tonnes of trade remain favourable to the country. The volume and direction of

foreign trade in a country admittedly plays a very important part not only in

economic development, but also in determining the level of general wellbeing

in a community. But handling of foreign trade has proved utterly inadequate.

Foreign trade must be thoroughly planned, if fruits of economic development

are not to be thrown away and this objective is achieved by proper budgeting.

Without the aid of budgeting no country can cope with major economic

changes. Such changes, example, Industrial Revolution or Rationalization

movement, are bound to tum the economy. Topsy - tamey. The market

mechanism cannot more the resources in the desired directions in quantity

and with speed, which a major change may necessitate. Only a planned

budget can eliminate bottlenecks, planned action in other words, and planned

budget to speed up the movement of resources at times of major changes is



Only a planned budget provides for coordination cum and avoids

unnecessary duplication of staff and equipments. An unplanned budget

according to leamer, “ is like an automobile without a driver but In which many

passengers keep on reaching over to the steering wheel, to give it a twist.”

It will be miracle indeed of the automobile reaches its destination

safety. A planning authority, an the other hand, can take far - sighted
decisions and produce a balanced economy.


Budgeting makes far optimum utilization of a country’s resources. A

budgeting authority is able - lay down what is essential and what is not
essential activity, encouraging the former and sharply cutting down the latter.

On the other hand, private enterprises are guided solely by the profit motive
regardless of social benefits or evils. Only a planning authority can be lipstick
and face-powder, otherwise valuable national resources will be directed
towards the production of useless luxuries far the rich and stan/e the masses

of the necessaries of life.


Budgeting also results in a higher rate of capital formation. Budgeting

will ruthlessly cut down wasteful consumption and generate savings. Besides,
private enterprises are more intent on immediate gain rather than on future

good. On the contrary, the budgeting authority as the custodian of national

interest, takes a far-sighted view. The surpluses of the public undertakings

add to the capital assets of the nation instead of going into the pockets of

private persons and get spent on consumption goods. That is why, through

budgeting, capital formation receives a great fillip.

It is said that an unplanned economy is like a ship moving rudderless

on uncharted seas with no fixed destination and unlikely to reach if there be

any. Such an economy works blindly and haphazardly. It caters for the rich

and make them still richer. It ignores the real wants of the people and fails to

promote general well being. In such an economy it is the profit motive rather

than service of the masses which is the main spring of economic activity. How
it operates is not guarantee of economic progress. The economically

advanced countries may not feel enamoured of the idea of budgeting, But for

underdeveloped economies it is a stark necessity as economic development

is new regarded as intrinsic. As Glabrith Says “ There is much that market can
usefully encourage and accomplish. But the market cannot reach forward and

take grate strides when these are called for. As it cannot put a man in space ,

So it cannot bring into existence a steel industry when there was little or no

steel marketing capacity before. To trust a market is to take an expectable risk

that nothing or too little will happen”.

TABLE NO. 1.11


[Rs. Crore]


1997- 1998- 1999- 2000- 2001-

98 99 00 01 02

A center [1+2] 778294 891806 102102 116363 131594

i 9

(as % of G D P 51.1 50.7 52.9 55.7 57.5

1 Internal abilities (a+b) 722962 834552 962592 110520 125635

7 6

(as % of GDP) 47.5 47.5 49.9 52.9 54.9

2. External debt 55332 57254 58437 58428 59593

(as % of G D P 18.5 19.4 21.8 24.1 25.9

1. Loans from Central 172729 203786 216194 230195 247030


(as % of G D P 11.3 11.6 11.2 11.0 10.8

2. Other Loans 108478 138192 203939 274052 344801

(as % GDP) 7.1 7.9 10.6 13.1 15.1

of which NSSF 26416 59229 92870

(as % of G D P 1.4 2.8 4.1

Combined Liability 886772 102999 122496 143768 166075

8 a 7 0

(as % of GDP) 58.2 58.6 63.5 68.9 72.6

Ref: India’s Tenth Five year plan 2002-2007 by Planning Comnnission Government of India published by Academic
Foundation New Delhi, India (Pg No. 53)

Note : 1. Outstanding external debt has been converted

rupees at historical exchange rate,

t. Combined liability is net of inter-govemment loan.

Source : Indian Public Finance Statistics, Ministry of Finance, G.O.I

TABLE NO. 1 .1 2


(as percent of GDP)

1997 1998 1999 2000 2001 2002

1998 1999 2000 2001 2002 2003

1. Combined Center and States

a) Gross Fiscal Deficit 6 .8 7.7 9.3 1 0.1 1 0 .2 1 0 .0

b) Net Fiscal Defllct 5.8 6.7 8.4 9.0 9.1 9.1

c) Revenue Deficit 3.6 4.1 6.4 6.3 6.4 6.3

2. Center

a) Gross Fiscal Deflict 4.1 4.8 5.1 5.4 5.7 5.9

b) Revenue Deficit 2.4 3.1 3.8 3.5 3.9 4.2

3. States

a) Gross Fiscal Deficit 2.7 2 .8 4.2 4.7 4.5 4.1

b) Revenue Deficit 1 .2 1.1 2.5 2 .8 2.5 2.1

Ref: India’s Tenth Five year plan 2002-2007 by Planning Commission Govemment of India published by Academic
Foundation New Delhi, India (Pg No, 51)

Note: Net Fiscal Deficit is Calculated by adding gross fiscal deficit of both

Center and States and subtracting there from the gross loans from center to
states and Union Territories.

- RE for States, provisional Accounts for Centre.

- BE for States and provisional Accounts for Centre.

Above Table presents different measures of fiscal deficit. Gross fiscal deficit
of both the Centre and the States have deteriorated substantially during this

period with a 3 percentage point increase in the combined fiscal deficit.

TABLE No. 1.13

Receipts Budget, 2004-2005

In crores of Rupees
! i
Actuals i Actuals ; Actuals Actuals Actuals i Actuals j? Actuals ; Accounts Revised [ Budget
i 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 1 2001-02 2002-03 2003-04 j 2004-05

A. Tax '4 1 ;
! i I
1 Gross Tax ! 111224 ' 128762 ! 139221 :1 143797 f 171752 ■
■ 188603 ' ; 187060 'I 216266 254923 317733 {
1 Revenue i ..... ......... i______ __ _ 5___ ___ _ j__ ______ t ............
1 1- ’
Corporation i 16487 I 18567 20016 24529 30692 i 35696 i 36609 46172 62986 88436
Tax !
2. Taxes on
other 15592 1 18231 17097 20240 25654 1 31764 32004 36858 40269 50929


From the above table Income Tax increased from 15592 crores to 50929









1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

R e f: Tenth five year plan 2002-07 page - 61 published by Academic foundation New Delhi.

Above Figure presents the implicit rate of interest for the Centre. For the

Centre, the rate has increased from 9.8 per cent in the year 1996-97 to

10.1 per cent in the year 1999-2000. The increasing trend in the implicit
interest rate continues for the Centre during the first four years and
crosses 10 per cent. The last two years shows a downtrend in the

implicit interest rate for the Centre.

TABLE NO. 1 .1 4


BUDG ET 1 9 9 9 - 2 0 0 0 R s. In C ro res

Sr Budgetary Position 1999-2000


1 Revenue Receipts 1,81,482

2 Revenue Expenditure 2,49.078

i Revenue Deficit 67.596

4 Capital Receipts 1,15,707

5 Recoveries of loan and other 11,855


6 Borrowing and other liabilities 1,03,852

7 Capital Expenditure 48,975

8 Total Receipts 2,97,189

9 Total Expenditure 2,98,053

10 Budgetary Deficit (9-8) 864

11 Fiscal Deficit (1+5-9 = 6+10) 1,04,716


Budgetary deficit represents borrowing through Issue of 91 days

treasury bills / draw down of cash balances. The Capital receipts, fiscal
deficits etc. on comparable basis, excludes transfer of state’s share of small
saving collections.
TABLE N O .- 1 . 1 5


R s. In C ro res

SrNo Budgetary Position 2000-01

1 Revenue Receipts 1,92,624

2 Revenue Expenditure 2,77,858

3 Revenue Deficit 85,234

4 Capital Receipts 1,31,790

5 Recoveries of loan and other 14,171


6 Borrowing and other liabilities 1,17,619

7 Capital Expenditure 47,753

8 Total Receipts 3,24,414

9 Total Expenditure 3,25,611

10 Budgetary Deficit (9-8) 1,197

11 Fiscal Deficit (1+5-9 = 6+10) 1,18,816


Foreign exchange reserve 42.3 billion dollars

Foreign trade
1. Budgetary deficit represents borrowing through issue of 91 days

treasury bills / draw down of cash balances.

% The Capital receipts, fiscal deficits etc. on comparable basis, excludes

transfer of state’s share of small saving collections

TABLE N O .- 1 . 1 6


R s. In C ro res

Sr Budgetary Position 2001-02


1 Revenue Receipts 2,12,572

2 Revenue Expenditure 3,04,305

3 Revenue Deficit 91,733

4 Capital Receipts 1,48,060

5 Recoveries of loan and other receipts 20,143

6 Borrowing and other liabilities 1,27,917

7 Capital Expenditure 60,131

8 Total Receipts 3,60,632

9 Total Expenditure 3,64,436

10 Budgetary Deficit (9-8) 3,804

11 Fiscal Deficit (1+5-9 = 6+10) 1,31,721


1, Budgetary deficit represents borrowings through of 91 days treasury

bills /draw -down of cash balances

t. The capital receipts, fiscal deficit, etc. on comparable basis, excludes

transfer of State’s share of small savings collections.

TABLE N O .-1.17


Rs. In Crores

Sr Budgetary Position 2002-03 Actual

No Budget

1 Revenue Receipts 2,45,105 2,31,748

2 Revenue Expenditure 3,40,482

3 Revenue Deficit 95,377

4 Capital Receipts 1,65,204 1,68,648

5 Recoveries of loan and other 29,680


6 Borrowing and other liabilities 1,35,524

7 Capital Expenditure 69,827

8 Total Receipts 4,10,309 4,00,396

9 Total Expenditure 4,10,309 4,00,396

10 Budgetary Deficit (9-8)

11 Fiscal Deficit (1+5-9 = 6+10) 1,35,524 1,31,306 *


1. Budgetary deficit represents borrowings tlirough of 91 days treasury

bills/draw -down of cash balances

2 The capital receipts, fiscal deficit, etc. on comparable basis, excludes

transfer of State’s share of small savings collections.

TABLE NO. 1.18


Rs. In Crores

SN 2003-04 2004-05 2004-05 2005-06

Actual Budget Revised Budget
Estimates Estimates Estimates
1 Revenue receipts 263878 309322 300904 351200
2 Tax revenue - net to 186982 233906 225804 273466
3 Non tax revenue 76896 75416 75100 77734
4 Capital receipts 5+6+7 207490 168507 204887 163144
5 Recoveries of loans 2665 27100 61565 12000
6 Other receipts 16953 4000 4091 -
7 Borrowing & other 123272 137407 139231 151144
8 Total receipts 1+4 471368 477829 505791 514344
9 Non plan expenditure 349088 332239 368404 370847
10 On revenue a/c of which 283502 29365 296396 330530
11 Interest payments 124088 129500 125905 133945
12 On capital a/c 65586 38589 72008 40317
13 Plan expenditure 122280 145590 137387 143497
14 On revenue a/c 78638 91843 89673 115982
15 On capital a/c 43642 53747 47714 27515
16 Total expenditure 9+13 71368 477829 505791 514344
17 Revenue expenditure 62140 385493 386069 446512
18 Capital expenditure 109228 92336 119722 67832
19 Revenue deficit 17-1 98262(3.6 76171 85165 95312

) (2.5) (2.7) (2.7)

20 Fiscal deficit 16-(1+5+6) 123272(4. 137407 139231 (4.5) 151144

5) (4.4) (4.3)
21 Prinnary deficit 20-11 -816 7907 13326 17199
(0.0) (0.3) (0.4) (0.5)
Ref: Based on provisional actual for 2003-04

Finance ministry had constituted a task force on tax reforms under the

chaimianship of l\/lr. Vijay Kelkar who submitted his final report to the Ministry.

This report was made public on December 27, 2002. The task force has

produced a comprehensive and far reaching report on the reforms of both

direct and indirect taxes.


I, For individuals :

Generalized exemption limit Is raised from Rs 50,000/- to Rs.

1,00,000/- for all individuals and HUF tax payers.

Senior citizens and widows would have an exemption limit of Rs.

1,50,000/- Present 3 tier income tax structure to be replaced with 2 tier.

Upto Rs. 1 Lac No tax

Rs. 1 Lac to 4 Lac 20 %

Above Rs 4 Lac 30 %

• In personal income tax relation of the present exemption for

conveyance allowance up to Rs.9,600/- has been advised.
Standard Deduction and surcharge to be eliminated

Tax incentives for savings should be withdrawn

• Proposal of doubling the exemption under 80 0 to Rs.20,000/-

from Rs. 10,000/- for encouraging investment in annuity oriented

pension scheme.

• Abolition of dividend tax and long term capital gain tax

• Tax rebate on housing interest to be reduced from Rs.

1,50,000/- to Rs. 5,00,000/-, alternative suggestion of 2 %

interest subsidy on housing loans up to Rs. 5,00,000/-

• Income tax on Agricultural income should be left to States

• income based deduction for medical insurance should be

converted into a tax rebate at the rate of 2 0 % subject to a

maximum of Rs. 3,000/-

• Tax rebate schemes u/s 88 for savings should go as well rebate

under 88 B for senior citizens and under 88 C for women below

65 years of age.

• the deductions for handicapped under 80 DD and 80 U should

• 5 % surcharge on income tax should be withdrawn

IT. For Corporates:

i Reduction of corporate tax to 3 0 % as compared to current level

of 36.75% for domestic companies

• Reduction of tax on income of foreign companies to 3 5 % as

compared to the current level of 4 0 %

• No tax on distribution of dividends by company

• General rate of depreciation for plant and machinery should be

reduced to 15% assorted concessions given for scientific

research under section 35 and benefit u/s 33 AC should go

minimum altematives tax under section 1157 B to go business

loss to be allowed to be carry fonward indefinitely.


• Custom duty to be reduced to 10% for raw material, inputs and

intermediate goods and to 2 0 % for consumer durables by 2004-05

• Custom Duty for coal, ores and other material should be

reduced to 5 % and for capital goods basic chemicals to 8 % by


• Custom Duty on crude oil should be reduced to 8 % and 1 5 % on

petroleum products by 2003-04 and further to 5 % and 1 0 % resp.
by 2004-05

• Higher duty of 150% for specified agricultural products and

demerit goods.

• Complete exemption of Custom Duty on life saving drugs,

equipments, defence related goods

• Excise Duty should be 14% for most of the items, 2 0 % for motor
vehicles, air conditioners and aerated water uniform duty of 16%
for textile fibre and yarn which should be reduced to 1 4 % by

2004-05 , 12 % duty on all fabrics till 2004-05

• Central excise duty on kerosene should be reduced by Rs. 1 per


• Duty exemption for SSI with turnover up to Rs. 50 lakhs

• Nationwide value added tax VAT, and comprehensive service

tax should be introduced from April 2003.


The union Government has a) Revenue budget that is to say the

estimates of receipts and disbursements on revenue A/c and b) A capital

budget which relates to receipts and disbursements on Capital A/c.

The estimates of receipts on Revenue A/c have been grouped under to

broad hading viz, tax revenue & non tax revenue. Tax revenue has been

divided into : Taxes on income , Taxes on property and capital transition and

taxes on commodities and services non tax revenue has been sub-divided

into : Fiscal and other service. Interest receipts and dividends and profits.

TA BLE N O .-1 .1 9




1999-2000 1,81,482

2000-2001 1,92,624

2001-2002 2,12,572

2002-2003 2,45,105

2003-2004 2,63,878

2004-2005 3,00,904

2005-2006 ( B E) 3,51,200


200000 Series2

This chart reveals that the total revenue of the central Government has
been rising quite fast partly on account of more taxes and highest rates of tax
and partly due to inflation.

The central government adopted a new classification of public

expenditure from 1987 - 88 budget under the classification all public

expenditure is classified into a) non plan expenditure b) Plan expenditure

Table No. - 1.20 -Total Expenditure of Central Government


In Crore)

1999-2000 298053

2000-2001 325611

2001-2002 364436

2002-2003 400396

2003-2004 471368

2004-2005 505791

2005-2006 ( B E) 514344



As mentioned earlier the total expenditure on 1) Interest payments 2)

Defence 3) All subsidies 4) General Services these four items alone A/c for

nearly 7 0 % of the Current non-plan revenue expenditure. Unless non-plan

expenditure is carefully monitored and controlled the central Government

would be forced to borrow to meet the revenue gap increasingly and gate into

a hopeless dept trap.


Deficit financing refers to the method by which Government meets the

excess of expenditure over income in its budget. Deficit financing could be

through 1) Borrowing from the market 2) Borrowing from RBI 3) Drawing from
Government cash Bal. with RBI.


a) Revenue deficit:

( Revenue expenditure-Revenue receipts )

b) Budget deficit:

(Total expenditure -Total receipts)

c) Fiscal deficit:
( Budget deficit + Government market borrowing and Liabilities )

d) Primary deficit:
( Fiscal deficit -Interest payment)


The fiscal deficit has been growing rapidly and dangerously from 1988-

1990 and to 2003-04 budget. The world bank and IMF objected to the high
rate of fiscal deficit ( 7 .7 % of GDP) 1990-91. and asked the Government of

India to reduce over the next few years.


The public dept of Government of India is composed of internal and external

Table No. 1.21
Debt. Position of Indian Government

( Rs. Crore)

Dept. 2004-05 ( B E ) 2003-04 2002-03 1990-91

Position ( RE)

Net Liabilities 19,85,867 17,24,199 15,58,901 3,14,258


(Rs. In Crore)

M l

.V .

1. *JE
M i i
According to table No. 1.18 page no. 93 point 11.
It shows that interest of payment have been increased though the rate of

interest is decreased (as per graph page 88) it means liabilities increased due

to increase in deficit every year.


The Finance Minister has an opportunity to play innings that will herald
us a position from where we can be counted in the arena of world economy.

Clouds of the Iraq war are looming large. He has to play on a difficult wicket.

He has compulsions of keeping his eyes on two scoreboards: one on the

fiscal health & another on the impact on the ensuing elections. There is a

threat to domestic industries from cheap imports, calling rates of small

savings are hurting the senior citizens and pensioner, unemployment is on the
rise, & there were below average monsoons. These factors are firing from all

sides. On the other hand he has a burgeoning fore reserves. Select sectors
are showing positive growth. FDI is still trickling in. Credit ratings have
improved. He has the benefit of the recommendations of experts like

“Dr. Kelkar & Shri. Naresh Chandra Above all he has the full backing of his

skipper; the PM. All -in all a challenging situation to play attacking innings”*.
He has played few strokes in the areas of the fann sector,

infrastructure and power. VAT healthcare and better tax administration. He

has shown us the direction in which he wishes to drive the economy; “India

Development Initiative”, “Healthcare Hub”, “IT Hub”, Fiscal Consolidation” and

“Gold Trading Center”. What remains to be seen is his follow-through. Will

these remain mere phrases or is there a concrete action plan to achieve all of

the above? W e have high hopes.

From given information we can conclude that:

a) The total revenues of central Governments has been rising quite fast,
partly on account of more taxes and higher rates of taxes and partly

due to inflation.
b) The total expenditure on I) interest payment; II) Defence; III) Subsides

and IV) General Services these four items alone account for nearly

7 0 % of the Current non-plan revenue expenditure.

c) The fiscal deficit has been growing rapidly.

d) The outstanding liabilities of the central Govemment’s comprising

internal and extemal liabilities as proportion of G D P have started rising.

e) Govemment must have control on their expenditure.

f) Govemment must have proper control on population & proper plans or

education & employment.

T h 1 0 5 6 3

Ref - Dalai Street Investment Journal Feb., 24 to 2 March, 2003 pg no. - 7


FROM A.Y. 1998-1999 T O 2006-07


TA BLE NO. -1.22

F O R THE A. Y. 1997-1998

Sr Particulars Tax rate

1 Where the total income does not Nil
exceed Rs. 40,000/-
2 Where the total income exceed 15% of the amount by which the total
Rs. 40,000/- but does not exceed Rs. income exceeds Rs. 40,000/-
3 Where the total income exceed Rs. 3,000 plus 30% of the amount by
Rs. 60,000/- but does not exceed Rs. which the total income exceeds Rs.
1,20,000/- 60,000/-
4 Above Rs. 1,20,000/- Rs. 21,000 plus 40% of the amount by
which the total income exceeds Rs.
Ref: Direct Taxes to Ready Recknor with 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

TABLE NO. 1. 23 - FOR THE A. Y. 1998-1999

Sr Particulars Tax rate
1 Where the total income does not Nil
exceed Rs. 40,000/-
2 Where the total income exceed Rs. 10% of the amount by which
40,000/- but does not exceed Rs. the total income exceeds Rs.
60,000/- 40,000/-
3 Where the total income exceed Rs. Rs. 2,000 plus 20% of the
60,000/- but does not exceed Rs. amount by which the total
1,50,000/- income exceeds Rs. 60,000/-
4 Where the total income exceeds Rs. Rs. 20,000 plus 30% of the
1,50,000/- amount by which the total
income exceeds Rs. 1,50,000/-
Ref: Direct Taxes to Ready Recknor with 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

Table No. 1.24

For the Period 1999-2000 To 2004-05

Sr Particulars Tax rate


1 Where the total income does not Nil

exceed Rs. 50,000/-

2 Where the total income exceed 10 % of the amount by which

Rs. 50,000/- but does not exceed the total income exceeds Rs.
Rs. 60,000/- 50,000/-

3 Where the total income exceed Rs. 1,000 plus 2 0 % of the

Rs. 60,000/- but does not exceed amount by which the total

Rs. 1,50,000/- income exceeds Rs. 60,000/-

4„ Where the total income exceeds Rs. 19,000 plus 3 0 % of the

Rs. 1,50,000/- amount by which the total

income exceeds Rs.

Ref; Direct Taxes to Ready Recknor witti 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

Table No. 1.25

For the Period -2005-06

Sr Particulars Tax rate

1 Where the total income does not Nil
exceed Rs. 50,000/-
2 Where the total income exceed 10 % of the amount by which
Rs. 50,000/- but does not exceed the total income exceeds Rs.
Rs. 60,000/- 50,000/-
3 Where the total income exceed Rs. 1,000 plus 2 0 % of the
Rs. 60,000/- but does not exceed amount by which the total
Rs. 1,50,000/- income exceeds Rs. 60,000/-
4 Where the total income exceeds Rs. 19,000 plus 3 0 % of the
Rs. 1,50,000/- amount by which the total
income exceeds Rs.

Rebate U/s 88D = Tax on Net Income minus (Net Income - Rs. 1,00,000)

TABLE NO. 1.26


I For resident woman (who is below 65 years at any time during the
previous year.

Sr Particulars Tax rate


1 Upto Rs. 1,35,000 Nil

2 Rs. 1,35,000 to Rs. 1,50,000 1 0 % of (total income minus

Rs. 1,35,000)

3 Rs. 1,50,000 to Rs. 2,50,000 Rs. 1,500+ 2 0 % of (total

income minus Rs. 1,50,000)

4 Rs. 2,50,000 to Rs. 10,00,000 Rs. 21,500+ 3 0 % (of total

income minus Rs. 2,50,000)

5 Above Rs. 10,00,000 Rs. 2,46,500 + 3 0 % (of total

income minus Rs.


For resident senior citizen (who is 65 years or more at any time during

the previous year.

Sr Particulars Tax rate


1 Upto Rs. 1,85,000 Nil

2 Rs. 1,85,000 to Rs. 2,50,000 2 0 % of (total income minus

Rs. 1,85,000)

3 Rs. 2,50,000 to Rs. 10,00,000 Rs. 13,000 + 3 0 % of (total

income minus Rs. 2,50,000)

4 Above Rs. 10,00,000 Rs. 2,38,000 + 3 0 % (of total

income minus Rs.


For any other individual, every HUF/AOP/BOI/artificial juridical person.

Sr Particulars Tax rate


1 Upto Rs. 1,00,000 Nil

2 Rs. 1,00,000 to Rs. 1,50,000 10% of (total income minus

Rs. 1,00,000)

3 Rs. 1,50,000 to Rs. 2,50,000 Rs. 5,000 + 2 0 % of (total

income minus Rs. 1,50,000)

4 Rs. 2,50,000 to Rs. 10,00,000 Rs. 25,000+ 3 0 % (of total

income minus Rs. 2,50,000)

5 Above Rs. 10,00,000 Rs. 2,50,000 + 3 0 % (of total

income minus Rs.


Direct Taxes -
10% surcharge will apply if taxable income exceeds Rs. 10 lakhs.
2 % Education Cess.
No standard deduction will be allowable.
Tax rebate u/s 88, 88B, 88C and 88D withdrawn.
Deduction u/s 80L withdrawn.
Saving upto Rs. 1 lakh will be eligible for deduction from gross total
income under proposed section 80C. the aggregate deduction under
Section 80C, 80CCC, 80C C D will not exceed Rs. 1 lakh.
Interest on account maintained by NRIs will be exempt.
Fringe Benefit Tax at 3 0 % to be levied on employers.
Domestic companies to be taxed at 3 0 % with surcharge at 10%. -
Depreciation at15% with initial depreciation at 20%.
Tax rate applicable to foreign companies remains unchanged.
Credit for MAT to be allowed.
Securities Transaction Tax marginally raised from 0.015 to 0.02%.
Trading in derivatives will not be treated as speculative transactions.
Mobile phone taken out of one-by-six criterion for filing retum.
However, a person paying electricity bill of more than Rs. 50,000 will
be covered.
Withdrawal of cash on a single day of over Rs. 50,000 from banks to
be taxed at 0.1%.

TD S certificates in Form Nos. 1 6 ,16A.16AA will continue for one more


Fast facts bulletin

Implications of Budget 2005 on

Salaried * Nil tax for income upto Rs. 1.5 Lakhs for senior

individuals citizens, Rs. 1.35 for women and Rs. 1 Lakhs

for others. Surcharge of 10% only if total taxable

income exceeds Rs. 10 Lakhs. Standard Deduction,

deductionfor interest onbank deposits, N SC etc.

removed. Investments is savings upto Rs. 1 Lac

deductible from taxable income -80C. Housing loan

deduction to continue.

TDS TD S rates remain unchanged except for payment of

royalty, technical fees to non-residents.

Surcharge on TDS changed. Small truck operators

exempted from purview of TDS. Issuing of T D S

certificate to continue for FY 2005-06. New quarterly

electronic returns of or banks paying interest

upto Rs. 5,000/- without T D S deduction.

Standard Deduction:

All Salaried employees are entitled for standard deduction. From Assessment

Year 1997-98 to the Assessment Year 2006-07 :

For the Assessment Year 1997-98 -

Provisions of Section 16 regarding standard deduction was as follows :

General Provision : Standard Deduction is equal to 1/3^*^ of the salary or

Rs. 15,000/- which ever is less

Exceptions :The aforesaid rule will be subject to the following two exceptions-

1. In the case of an employee having salary income before standard

deduction not exceeding Rs. 60,000, standard deduction will be equal

to one-third of salary or Rs. 18,000 whichever is lower.

2, In the case of an assessee (being a woman) whose total income (from

all sources including salary income) before standard deduction does

not exceed Rs. 75,000, standard deduction will be one-third or Rs.

18,000 whichever is lower.

For the Assessment Year 1998-99

For the Assessment Year 1998-99, standard deduction was one-third

of gross salary or Rs. 20,000 whichever is lower.

Table No. -1.27

For the Assessment Year 99-00 to 2001-02, standard deduction u/s 16(1)

is as under -

Salary Income before giving standard Amount of standard deduction

deduction (i.e. after giving deduction in

respect of entertainment allowance and

professional tax

Rs. 1 lakh or less One-third of gross salary or Rs.

25,000 whichever is less

More than Rs. 1 lakh but not more than Rs. 20,000
Rs. 5 lakh

More than Rs. 5 lakh Nil

From the Assessment Year 2002-03 to 2005-06 :

Table N o .-1.28

Standard deduction u/s 16(i) for the Assessment Years02-03 to 05-06 is

as under -

Salary Income before giving Amount of standard Amount of standard

standard deduction (i.e. deduction for the deduction for the
after giving deduction in Assessment Year Assessment Year 2004-
respect of entertainment 2002-03 and 2003-04 05 and 2005-06
allowance & professional tax

Rs. 1.5 lakh or less One-third of gross 4 0 % of gross salary or

salary or Rs. 30,000 Rs. 30,000 whichever is

whichever is less less

More than Rs. 1.5 lakh but Rs. 25,000 Rs. 30,000
not more than Rs. 3 lakh

More than Rs. 3 lakh but not Rs. 20,000 Rs. 25,000
more than Rs. 5 lakh

More than Rs. 5 lakh Nil Rs. 20,000

For the Assessment Year 2006-07

No standard deduction u/s 16(i) will be available from the assessment

year 2006-07 on wards

Note: There are some changes in perquisites and allowances which effected

on tax liability slightly. But major effect for salaried people is related to

standard deduction directly affected on tax liability.

Under the head Income from House Property -Deduction u/s 24

1. Repairs and collection charges u/s 24 -

1 /5*'^ of Net Adjusted Value for the A.Y. 1997-98 to 1998-99;

1/4*^ of Net Adjusted Value for the A.Y. 1999-2000 to 2001-02;
30% standard deduction declared in Budget 2001 Applicable for A.Y.
2002-03 on words and all other deductions are cancelled only

Interest on Housing loan remain i.e. Rs. 30,000 and Rs.

1,50,000 with related to the date of constructions -

Insurance premium paid, Annual charges paid, Ground Rent paid.

Interest on borrowed capital. Land Revenue, Vacancy allowance. Unrealised

Rent, there are expenses paid for that particular House allowed to deduct

u/s 24 upto A.Y. 2001-02.

The following two deductions are available u/s 24 for A.Y. 2005-06

a. standard deduction and

b. interest on borrowed capital

a. standard deduction [Section 24(a)] -

3 0 % of Net Annual Value is deductible irrespective of any

expenditure incurred by the tax payer

b. interest on borrowed capital [Section 24(b)] -

Interest on borrowed capital is allowable as deduction on

accrual basis (even if books of account are kept on cash basis), if capital is

borrowed for the purpose of purchase, construction, repaid, renewal or

reconstruction of the house property.

The following points should also kept in view :
As the deduction is available on “accrual” basis, it should be claimed as
deduction on yearly basis, even if the interest is not actually paid during the

year. Deduction is available even if neither the principal nor the interest is a

charge on property. Interest on unpaid interest is not deductible No deduction

is allowed for any brokerage or commission for arranging the loan. Interest on

a fresh loan, taken to repay the original loan raised for the aforesaid

purposes, is allowable as deduction

Any interest chargeable under the Act, in the hands of recipient and

payable out of India, on which tax has not been paid or deducted at source,

and in respect of which there is no person who may be treated as an agent, is

not deductible, by virtue of Section 25, in computing income chargeable under
the head “Income from house property”.

Interest on borrowed capital is deductible subject to a maximum ceiling

given below -

a) Maximum ceiling if capital is borrowed on or after April 1,1999 -

If the following three conditions are satisfied, interest on borrowed
capital is deductible up to Rs. 1,50,000 [for the Assessment Year 2000-01 and

for the Assessment Year 2001-02 Rs. 75,000/- and Rs. 1,00,000 respectively]

Capital is borrowed on or after April 1, 1999 for acquiring or
constructing a property;

The acquisition or construction should be completed within 3 years from the

end of financial year in which the capital was borrowed and the person

extending the loan certifies that such interest is payable in respect of the
amount advanced for acquisition or construction of the house or as re-finance

of the principal amount outstanding under as earlier loan taken for such
acquisition or construction,

b) Maximum ceiling in any other case -

If the above three conditions [(a),(b) and (c)] are not satisfied, then

interest on borrowed capital is deductible up to a maximum of Rs. 30,000 (Rs.

15,000 for the Assessment years 1997-98 and 1998-99). In other words in

the following cases, interest on borrowed capital is deductible up to Rs.

If capital is borrowed before April 1,1999 for the purchase,

construction, reconstruction, repairs or renewals of house property. If capital

is borrowed on or after April 1, 1999 for reconstruction, repairs or renewal of a

house property.


Income from long temri capital gain flat rate 2 0 % + Surcharge. No

change in tax rates for past few years.


Winnings from lotteries, cross word etc. exempted amount Rs. 5,000

u/s 10(3) upto A.Y. 2002-03 -40% , From 2003-04 on words -3 0 % -flat rate
and Sec. 10(3) omission w.e.f. 1.4.2003.

ForA.Y. 1998-1999

To A. Y. 1999-2000 NIL

ForA.Y. 2000-2001 1 0 % for the Assessee having income above

Rs. 60,000/-

ForA.Y. 2001-2002 1 2 % for the Assessee having income above

Rs. 60,000/- and 17% for the Assessee having

income above Rs. 1,50,000/-

For A.Y. 2002-2003 2 % for the Assessee having income above

Rs. 60,000/-
For A.Y. 2003-2004 5 % for the Assessee having income above

Rs. 60,000/-
ForA.Y. 2004- 2005 10 % above income of Rs. 8,50,000 and Education

Cess @ 2 % on Tax
ForA.Y. 2005-2006 1 0 % for the Assessee having income above

Rs. 8,50,000/- and 2 % Education Cess Exceed

Rs. 50,000/-
ForA.Y. 2006-2007 10 % for the Assessee having Income above Rs.
10.00.000/- and 2 % Education Cess Exceed Rs.

1 .0 0 .0 0 0 /- .
T A B L E N O .- 1 . 2 9
FOR 1998-99 TO 2000-01
Income A.Y. 1998-99 A.Y. 1999-2000 A.Y. 2000-01
Income Average Income Average Income Average
Tax (Rs) Tax (%) Tax (Rs) Tax (%) Tax (Rs) Tax (%)
50,000 1,000 2.00 — — — —

1,00,000 10,000 10.00 9,000 9.00 9,900 9.90

1,50,000 20,000 13.33 19,000 12.67 20,900 13.93
2,00,000 35,000 17.50 34,000 17.00 37,400 18.70
2,50,000 50,000 20.00 49,000 19.60 53,900 21.50
3,00,000 65,000 21.67 64,000 21.33 70,400 23.47
4,00,000 95,000 23.75 94,000 23.50 1,03,400 25.85
5,00,000 1,25,000 25.00 1,24,000 24.80 1,36,400 27.28
6,00,000 1,55,000 25.83 1,54,000 25.67 1,69,400 28.23
Ref: Direct Taxes to Ready Recknor with 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

Table No. -1.30
Table showing Average Tax Liability for 2001-02 to 2003-04

Amount A.Y. 2001-02 A.Y. 2002-03 A.Y. 2003-04

of income

Income Average Income Average Income Average

Tax (Rs) Tax (%) Tax (Rs) Tax (%) Tax (Rs) Tax (%)

50,000 — — — — — —

1,00,000 10,080 10.08 9,180 9.18 9,450 9.45

1,50,000 21,280 14.19 19,380 12.92 19,950 13.3

2,00,000 39,780 19.89 34,680 17.34 35,700 17.85

2,50,000 57,330 22.93 49,980 19.99 48,300 20.13

3,00,000 74,880 24.96 65,280 21.76 67,200 22.40

4,00,000 1,09,980 27.50 95,280 23.97 98,700 24.68

5,00,000 1,45,080 29.02 1,26,480 25.30 1,30,200 26.04

6,00,000 1,80,180 30.03 1,57,780 26.18 1,70,000 26.95

Ref: Direct Taxes to Ready Recknor with 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

TABLE NO. 1.31

FOR 2004-05 TO 2005-06
Amount of A.Y. 2004-05 A.Y. 2005-06
Income Average Income Average
Tax (Rs) Tax (%) Tax (Rs) Tax (%)
50,000 — — — —

1,00,000 09,000 9.00 — —

1,50,000 19,000 12.67 19,380 12.92

2,00,000 34,000 17.00 34,680 17.34
2,50,000 46,000 19.17 49,980 19.99
3,00,000 64,000 21.33 65,280 21.76
4,00,000 94,000 23.50 95,880 23.97
5,00,000 1,24,000 24.80 1,26,480 25.30
6,00,000 1,54,000 25.67 1,57,080 26.18
Ref: Direct Taxes to Ready Recknor with 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

TABLE NO. 1.32


FOR 2006-07

Amount Women Senior Citizen Other Individual

of income

Income Average Income Average Income Average

Tax (Rs) Tax (%) Tax (Rs) Tax (%) Tax (Rs) Tax (%)

50,000 — — — — — —

1,00,000 — — — — — —

1,50,000 1,530 1.02 — —

5,100 3.40

2,00,000 11,730 5.87 3,060 1.53 15,300 7.65

2,50,000 21,930 8.77 13,260 5.30 25,500 10.20

3,00,000 37,230 12.41 28,560 9.52 40,800 13.60
4,00,000 67,830 16.96 59,160 14.79 71,400 17.85

5,00,000 98,430 19.69 89,760 17.95 1,02,000 20.40

6,00,000 1,29,030 21.51 1,20,360 20.06 1,32,600 22.10
Ref: Direct Taxes to Ready Recknor with 10 years tax tables and yearly tax planning by Vinod K. Singhania
Published by Taxmann, New Delhi, India

TABLE NO. 1.33

TAX FROM -AY -1998-99 A N D 2005-06

Amount of income A.Y. 1998-99 A.Y. 2005-06

Income Average Income Average Tax
Tax (Rs) Tax (%) Tax (Rs) (%)
(1) (II)
50,000 1,000 2.00 — —

1,00,000 10,000 10.00 — —

1,50,000 20,000 13.33 19,380 12.92

2,00,000 35,000 17.50 34,680 17.34
2,50,000 50,000 20.00 49,980 19.99
3,00,000 65,000 21.67 65,280 21.76
4,00,000 95,000 23.75 95,880 23.97
5,00,000 1,25,000 25.00 1,26,480 25.30
6,00,000 1,55,000 25.83 1,57,080 26.18
Above table shows from the A.Y. 1998-99 onwards average Income
Tax there is a marginal changed last 6 years tax column I and II are near

about same because of the tax rates are mostly same.

There are many other new taxes introduced in the recent past years

service Tax, MAT,FBT,VAT etc. Service Tax many services brought under

Service Tax.

Finance Act 2004 brought into Service Tax net inter alia Constmction

Services, Intellectual Property Rights and Transport Services/the constnjctlon

contracts involving material and services were hitherto considered as

indivisible contract/ transactions of ‘Intellectual Property Rights’ such as

transfer of trademark etc/were held as sale of goods, receiver of transport

service in organised sector is made liable to tax/very recently. “Supreme

Court has held that “telephone rentals” can be taxed under Sales Tax Act as

right to use goods, Sen/ice Tax is required to be paid after receipt of payment

for services while accounts are maintained on accrual basis

ij. Minimum Altemative Tax (MAT) - Credit thereof Section 115JB

provides for minimum altemate tax @ 7 .5 % of book profits of companies in

case tax payable on the total income computed In accordance with provisions

of the Act is less than 7 .5 % of book profit.

“Clause 35 of F.B. 2005 proposes to amend S.115JAA and make

provision for allowance of such credit for tax paid under Section 115JB. Such

credit will be available only in respect of tax paid for A.Y. 2006-07 and

subsequent years. The amount of credit will be equal to difference between

tax paid under Section 115JB and tax payable on total income computed in

accordance with the other provisions. The tax credit will be allowed to be

utilized in the year when tax is payable on total income computed in

accordance with provisions other that Section 115JB. Set off will be to the

extent of difference between tax on total income and tax which would have
been payable under Section 115JB(1). Carry forward of the credit will be
MAR is paid in accordance with Section 115JB” **.

W ICA monthly Journal March,2004 , pg no. 38

W ICA monthly Joumal March,2005 , pg no. 23

iii. Fringe Benefit Tax (FBT)

Charge of Tax -
Clause 37 of F.B.2005 proposes to insert Chapter Xll-H (containing

Section 115WL) for levying additional income tax in respect of fringe benefits

provided or deemed to have been provided by a person to its employees with

effect from A.Y.2006-07. “Section 11 SW A proposes tax to be charged at flat

rate of 3 0 % as increased by surcharge of 10 % and education cess of 2 %

(aggregate tax of 33.66%). Section 4 of the Act has not been amended and

issue may arise whether Section 11 SW A by itself is a charging section” *.

Every person liable to FBT -Charge irrespective of liability to Income Tax -

FBT is payable irrespective of the fact, that no tax is payable by the

employer under normal provisions. Sub-section (2) of 11 S W A provides that

FBT is payable notwithstanding that no Income Tax is payable by employer

on income computed in accordance with provisions of the Act. Therefore, a

person incurring losses or having tax free income (on account of exemption or

deductions) would still be liable to FBT. A charitable trust having its entire
income exempted u/s 11 would be liable to pay FBT. The class of persons

liable to FBT is very wide and probably with exception of only Union

Government and State Government, individuals and HUFs not carrying on

business or profession. Every person employing even a single employee

would be liable to FBT, even local authorities, Govemment companies,

charitable trusts who are not carrying on any business and engaged only in

pure charity, even specific trusts formed to provide succour in time of natural
calamities, like, Tsunami or earthquake would be liable to FBT on amounts
spent by it, if it employs even one employee.

Where the benefits are usually enjoyed collectively by the employees

and cannot be attributed to individual employees, they shall be taxed in the
hands of the employer. However, transport services for workers and staff and
canteen services in an office or factory will be outside the tax net. The tax is
not a new tax. It is fringe Benefit Tax. The rate will be 30 per cent on an

appropriately defined base.

* R e f: W ICA - monthly Journal March,2005 , pg no. 28


Value Added Tax is essentially a form of sales tax only. Infect it is

nothing but a tax on retail sales collected in stages on multiple point sales
basis in different manner that the added in each stage is taxed once and only
once with a view to avoid cascading or tax on tax effects that the burden to
the final consumer is not more than what it is intended the prescribed rates of
In value added tax each seller in the chain collects the VAT from the
purchaser at the time of sale deducts from this amount of value added tax
himself has paid on his purchases and remits the balance to the Govemment.
The effect of offsetting purchases and sales is to impose the tax at each stage
of production on the sum of wages. Interest, rents and profits another factors
of production not furnished by the suppliers subject to the tax the previous
stage of production hence a tax on value added since an inputs is taxed only
VAT will encompass all facts of the business i.e., procurement,

manufacturing distribution, costing and accounting. Staffs need to be

educated on the implications of VAT and software’s need to be modified is

compatible with the VAT accounting and reporting requirements.

A sound knowledge of VAT law applicable to the individual business

model along with sound knowledge of management consultancy is required.

Planning transaction to VAT will pose significant challenges tc

VAT -Some important Aspects :

Tax Liability And Registration :

VAT is comprises of there wards value added tax. it manifests that it is

a tax on value addition. This value addition is subjected to tax at each stage
of the production distribution chain. At each stage of trade value addition is

taxed and tax paid on all purchase including on capital investment is rebated.
It is a pass through till goods reach to the ultimate consumer.
VAT will be charged in accordance with the provision of the Act on
every sale of taxable goods within the state made by a taxable person whose

gross turnover in a year exceeds the taxable quantum.

R e f : PCAAS - monthly Journal March,2005, pg no. 13

Registration under the VAT Act may be obligatory for the following

categories of dealers:
Importers, who import goods into the state


C S T dealers
Dealers with turnover greater that the general threshold which may be at Rs.

5 lakhs.

There is planning to issue TIN (Tax payer Identification Number) to all

the registered dealers on the line of PAN which is being issued by the Income

Tax Department. It is a code to identify a taxpayer. Each tax payer will have
a single unique TIN following are the main objects of the TIN.

to facilitate computer applications

to help cross - check infomnation on tax payer compliance for

example the selective cross checking of sale and purchase

among VAT taxpayers.

1.9 Rates of Income Tax of Foreign Countries :


Individual Income Tax rates in Srilanka started from only 5 % to 3 5 % for

this A. Y. 2006-07 and upto Rs. 3,00,000/-. Income Tax rate Is only 5% .

There is no tax liability imposed on individuals and wholly owned

Kuwaiti business.
1. Saudi Arabia
2. UAE
3. Quatar
4. Kuwait
5. Oman
6. Bahrain
Personal incomes, including all forms of salary and capital gains
wherever arising, are not subject to taxation in any of the Emirates.

T a b le N o. 1 .3 4

T a b le s h o w in g In c o m e T ax R a te s o f d iffere n t C o u n tr ie s

A.Y. 2 0 0 3 - 0 4 (A v era g e)

Name of the Maximum Minimum

country Income Tax Rate Income Tax Rate

France 48% 10%

China 45% 5%

Thiwan 40% 6%

U K 40% 0%

Thiland 37% 5%

Japan 37% 5%

Argentina 35% 5%

U SA 35% 0%

India 33% 0%

Canada 30% 17%

Brazil 28% 15%

Singapore 22% 3%

Russia 13% 13%

40 --
30 -

liit i
2 0 --
1 0 --

From the above table Indian Income Tax rate is high as compared to

Canada, Brazil, Singapore, Russia and Gulf-Countries.


In India from 1997-98 to A. Y. 1998-1999 the lower limit was Rs.

40,000/- and A.Y. 1999-2000 to 2004-05 this was Rs. 50,000/-.

Table No. 30, page 120 shows average taxes from A.Y. - 1998-99 to

A.Y. 2004-05. It means tax liability is not much changed in last 5 to 6 years,
but new taxes are introduced and hence, tax burden is highly increased.

Income Tax has remained stable for last 6 to 7 years slabs and income
tax rates have not changed from the A.Y. 1998-99. The point is appreciated

that the lower limit is increased in budget 2004 i.e. there is no Income Tax up

to Rs. 1,00,000/- but after 6 years this limit is increased. This demand was

there from last 5 to 6 years. They have changed the slabs in budget 2005 for
the A.Y. 2006-07but at the same time they have withdrawn many tax rebates

u/s 88, 88B, 880, 88D e.g. important for all tax payer - u/s 80L deduction

withdrawn (Rs. 15,000/-). Secondly most important to salaried people

standard deduction is withdrawn. Income upto Rs. 1,00,000 tax free no doubt

this is appreciated, but Rebate u/s 88 is cancelled and Rs. 1 lakh only allowed

to deduct u/s 800 from the Gross Total Income. This is including Section

800, 8 0 0 0 0 , 8 0 0 0 D that is -

Deduction in respect of insurance premia, deferred annuity,

contributions to provident fund subscription to certain equity

shares or debentures, etc. [Section 800, applicable from the

assessment year 2006-07]

Deduction in respect of contribution to pension fund [Section

Deduction in respect of contribution to pension scheme of

Oentral Government [Section 8000D]

It means the total amount cannot exceed Rs. 1,00,000/- u/s 800,

8 0 0 0 0 and 8000D .
Previously u/s 88 there was rebate upto Rs. 1,00,000/- (including
Infrastructure) 800, 8 0 0 0 0 , 8 0 0 0 D were also allowed to be deducted.
For the senior citizens income upto Rs. 1,85,000/- is tax free and for

women Rs. 1,35,000/- is tax free.

Women were getting Rs. 5,000/- deductions from tax liability now Rs.

35,000/- amount more tax free means Rs. 3,500/- only.

For the middle class salaried people were getting Rs. 30,000/-

standard deduction from the gross salary and this is cancelled. It means, they

have got only Rs. 20,000/- (i.e. Rs. 1,00,000 - Rs. 50,000.00 tax NIL & Rs.

30,000.00 standard deduction) tax free amount package but at the same time
SOL removed, this Section was very useful to common middle class people

upto Rs. 12,000/-. Again if you consider this amount their only Rs. 8,000/-

amount is tax free (i.e. Income Rs. 1,00,000 minus 50,000 tax free, minus

30,000 standard deduction, minus 12,000 u/s 80L)

At the same time businessmen and professional got the benefit of

these slab rates and for higher income group also u/s 80C they have got the

benefit previously u/s 88 this was not allowed for higher income group that is

above Rs. 5,00,000/-. Secondly this is appreciated that after six years slab

rates have changed upto Rs. 1,50,000/- -10 % and upto Rs. 2,50,000/- -2 0 %
above this 30% , but if you consider last six years inflation rates and then

divide this rate to tax liability then really speaking to tax payers’ point of view
they got zero benefit.

Whatever change in income tax rates these suggestions were given in

the year 2002 by Dr, Kelkar Committee it means this was expected in that

year but Government has given in 2005. When we compare the inflation rate
1997 — with 2005 Government has not given much more to the tax payers.

Sections 88, 88B, 88C, 88D withdrawn made easy for the computation
of tax liability. This change is very good change.