Scdl - Pgdba - Finance - Sem 4 - Taxation

Taxation

Sem. IV

Q.1 Discuss with illustration the taxability of the following components of salary incomeAns 1. Death-Cum-Retirement Gratuity- Section 10 (10) This is the amount payable by the employer to the employee as recognition for the long-term association of the employee with the employer. The gratuity may be payable by the employer – • To the employee on his retirement • To the legal heirs of the employee on the death of the employee The amount paid by the employer to the employee on his retirement is taxed as “Income from salaries” while the amount paid by the employer on the death of the employee is taxed as “Income from other sources”. The taxability of the gratuity gets decided as per the following provisions: a. Employee of Central/State Governments or Local Authorities Death-Cum-Retirement gratuity received by the employees of central Government or state government or local authorities is totally exempt from tax and hence is not includible in the Income from Salaries. b. If the employee is covered by the provision of Payment of Gratuity Act, 1972 Death-Cum-Retirement gratuity received by the employee who is covered by the provisions of Payment of Gratuity Act, 1972 is exempt to the extent of least of the following amounts – • Amount equivalent to 15 days’ wages for every completed year of service or a part thereof in excess of six months based upon the wages last drawn. While calculating 15 days’ wages, a month is assumed to consist of 26 working days. • Actual amount of Gratuity received • Rs. 3,50,000 c. Gratuity received by other employees Death-Cum-Retirement gratuity received by the employee is exempt to the extent of least of the following amounts• Amount equivalent to half months salary for every completed year of service based upon the average salary drawn for the immediately preceding 10 months. While calculating the completed year of service, the fractions of the years are ignored totally. • Actual amount of Gratuity received. • Rs. 3,50,000 Note: Salary or wages for the above calculations will include Basic Salary Plus Dearness Allowance (if DA forms a part of salary for the calculation of retirement benefits). Illustration Mr Batra retired from Venus Remedies Ltd. After completing the service of 39 years and 9 months. His salary drawn at the time of retirement was Rs. 10,500 per month while the average salary drawn for the preceding 10 months worked out to Rs. 9,800 per month. The actual amount of gratuity received by him at the time of retirement was Rs. 2,80,000. Calculate the amount of Gratuity exempt from tax assuming that he covered by the provisions of Payment of Gratuity Act, 1972. Will the calculations be different if he not covered by the Payment of Gratuity Act, 1972? Solution If covered by Payment of Gratuity Act, 1972 Least of the following amounts will be exempt from tax a) Rs. 2,42,304 Being –

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Taxation Last Salary Drawn Daily Salary

Sem. IV Rs. 10,500.00 Rs. 403.84 i.e. Rs. 10,500/26 days

Salary for 15 days Rs. 6,057.60 Gratuity for 40 years Rs. 2,42,304 b) Rs. 2,80,000 being the gratuity received actually c) Rs. 3,50,000 At least of the above amounts is Rs. 2,42,304, the same will be exempt from tax and the balance amount received Rs. 37,696 i.e. Rs. 2,80,000 less Rs. 2,42,304 will be taxable. If not covered by Payment of Gratuity Act, 1972 Least of the following amounts will be exempt from tax a) Rs. 1,91,100 Being – Average salary for last 10 months Rs. 9,800.00 Salary for half month Rs. 4,900.00 Gratuity for 39 years Rs. 1,91,100.00 b) Rs. 2,80,000 being the gratuity received actually c) Rs. 3,50,000 At least of the above amounts is Rs. 1,91,100 the same will be exempt from tax and the balance amount received Rs. 88,900 i.e. 2,80,000 less Rs. 1,91,100 will be taxable. 2.

HOUSE RENT ALLOWANCE – SECTION 10(13A)

This include the amount paid by the employer to the employee to meet the expenditure for residential accommodation occupied by the employee. Least of the following amounts are exempt from tax – • 50% of the salary where such accommodation is situated in Mumbai, Kolkata, Chennai and Delhi and 40% of the salary when the accommodation is situated at any other place. • Actual amount of HRA received by the employee. • Excess of rent paid over 10% of the salary. Note – Salary for this purpose means Basic Salary plus Dearness allowance. Illustration Mr. Ashok is working as a faculty in a private college in Mumbai. His remuneration consisted of a consolidated salary of Rs. 25,000 per month plus an HRA of Rs. 5,000 per months. He stays in a rented accommodation and pays the rent of Rs. 6,000 per month. Calculate the taxability of HRA received by him. Solution Least of the following amounts will be exempt from taxBasic Salary Rs. 3,00,000 50% of the salary Rs. 1,50,000 …… a Actual HRA received Rs. 60,000 ………b Excess of rent paid over 10% of salary i.e. Rs. 72000 – Rs. 30000 Rs. 42,000………..c As the lowest amount is Rs. 42,000, the same will be exempt from tax and the balance amount of HRA of Rs. 18,000 i.e. Rs. 60,000 less Rs. 42,000 will be taxable in the hands of Mr. Ashok.

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Taxation 3.

Sem. IV

LEAVE ENCASHMENT – SECTION 10(10AA)

Any amount of leave encashment received by the employee during the continuance of the employment is taxable in the hands of the employee. If the employee receives the Leave encashment at the time of retirement, the taxability of the same is decided as stated below – In case of the Central or State Government employees, Leave Encashment received at the time of retirement is totally exempt from tax. In case of other employees, least of the following amounts are exempt from the tax• Entitled leave for encashment equal to not less than 30 days for every completed year of service. • Earned leave encashed must not be for more than 10 months’ Average salary • Rs. 3,00,000 • Actual amount of Leave Encashment received. Note – The term average salary means the average of the salary for the past 10 months. The term salary means basic Salary plus Dearness allowance to the extent terms of employment provides so. Illustration Mr. Ashok retired from A Ltd. A company from private sector, as Finance manager from 1 st January, 2004. He worked with A Ltd. For a total period of 20 years and 7 months. At the time of retirement, he received Rs. 50,000 as the leave encashment for 300 days. He was entitled to 40 days leave for every completed year of service. As per the terms of employment, he is paid dearness allowance @ 20% of th basic salary. He got the last increment in basic salary of Rs. 800 with effect from 1 st July 2003. Calculate the amount of leave encashment from tax for the Assessment year 2004-2005. Solution CALCULATION OF LEAVE ENCASHMENT EXEMPT FROM TAX Rs. Leave encashment received 50,000 10 months Average Salary 68,160 Calculation of Unavailed leave 800 days • Total Leave encashment (20 years * 40 days) 300 days • Unavailed Leaves 500 days • Availed leaves 600 days • Leave Encashment on the basis of 30 days 100 days • Unavailed leave on the basis of 30 days 22,720 Cash equivalent for 100 days (Rs. 6816/30 x 100) Amount Specified

3,00,000

Hence, the amount of leave encashment exempt from tax will be Rs. 22,720. Balance amount will be taxable in the hands of Mr. Ashok. Note – 10 months’ average salary is calculated as below – Salary for six months till 31.12.2003 (Basic + D.A.) Rs. 7,200 x 6 Rs. 43,200 Salary for four months from 1.3.2003 to 30.06.2003 Rs. 6240 x 4 Rs. 24,960 Rs. 68,160 Average Salary Rs. 6,816

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Taxation 4.

Sem. IV

PENSION – SECTION 10 (10A)

Pension indicates a periodical payment received by the employee from the employer after he ceases to be the employee. Pension received is taxed as salary for all practical purposes. Calculation of pension can be done in basically two forms. a) Uncommuted Pension – This indicates the periodical payment of pension b) Commuted Pension – This indicates the lump sum received in lieu of the periodical payment of pension. Taxability of Pension The amount of uncommuted pension is taxable as Income from Salaries. The Taxability of commuted pension is as below – a) In case of Government employee, the amount of commuted pension is exempt from tax as per the provision of Section 10(10A) b) In case of Non-Government Employee• If the employee receives the gratuity, 1/3rd of the commuted amount of pension is exempt from tax • In any other case, ½ of the commuted amount of pension is exempt from tax. Illustration Mr. Ashok retired from A Limited, a private sector organization, from 30th June 2003. He receives the pension of Rs. 6,000 commuted for Rs. 90,000. Calculate the amount of pension includible in the salary income for the AY 2004-2005. Assume that Mr. Ashok is not in receipt of the Gratuity. Will calculate be different if Mr. Ashok retires as a Central Government employee? Solution Taxable Pension for Mr. Ashok for the AY 2004-2005 Rs. Rs. Uncommuted Pension from 1st July, 2003 – Rs. 6000 x 6 Months 36,000 Uncommuted Pension from 1st January, 2004 till 31st March, 2004 – 40% 7,200 of Rs. 6000 x 3 Months Commuted Pension received 90,000 Less: ½ of full value of commuted pension i.e. 75,000 15,000 50% of 90,000 x10/6 Taxable Pension 58,200 If Mr. Ashok retires as the central government employee, the amount of commuted pension will be exempt from tax and he will have to pay the tax only on uncommuted pension i.e. Rs. 48,000.

Q.2 Write a detailed essay on Valuation of Perquisites. Ans PERQUISITES Perquisites indicates benefits or amenities provided by the employer to the employee, either free of cost or at the concessional rate. The value of these perquisites is taxed in the hands of the employee as the taxable salary. For the purpose of income tax, the perquisites can be classified in two categoriesa) Perquisites which are taxable in case of all types of employees – in practical circumstances, these perquisites include the rent-free accommodation provided to the employee.

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Taxation

Sem. IV

b)

Perquisites which are taxable only in the hands of specified employee – In practical circumstances, these perquisites include the following categories of perquisites – • Motor Car • Services of sweeper, gardner, watchman or personal attendant • Gas, Electricity and water provided for personal consumption • Free or concessional educational facilities For the above purpose, a specified employee means – i) The person who is a Director of a company ii) The employee who has substantial interest in the company by having 20% or more of the voting power iii) The employee whose income under the head Salaries (including all the taxable monetary payments of salary but excluding the value of any non-monetary benefits or perquisites), after allowing deductions under section 16, exceeds Rs. 50,000.

VALUATION OF PERQUISITES (A) Residential Accommodation a. If the accommodation is provided by License fees decided by the Central or State the Central or State Government to Government in respect of the said accommodation as their employees per the rules framed by that Government. If the employee pays some rent, the same will be reduced while calculating the valuation of Perquisites. b. If the employer is other than the one 10% of the salary if the accommodation is situated in stated in Clause “a” above and if the the cities having the population of more than 4 Lakh as accommodation is owned by the per 1991 census and 7.5% of the salary if the employer accommodation is situated in other cities. If the employer recovers some rent from the salary payable to the employee, the same will be reduced while calculating the valuation of Perquisites. c. If the employer is other than the one Actual amount of rent payable by the employer or 10% stated in Clause “a” above and if the of the salary whichever is less. If the employer accommodation is taken on rent by the recovers some rent from the salary the same will be employer. reduced while calculating the valuation of Perquisites. Notes – a. The term “Salary” includes basic salary, allowances, bonus, commission payable on monthly basis, but does not include – • Dearness Allowance • Employer’s contribution to Provident Fund • Allowances which are exempt from tax b. In the above calculations, if the accommodation provided by the employer is furnished, the value of Perquisites calculated as per the above calculations shall be increased by 10% of the cost of furniture or if the furniture is hired from a third party, the actual hire charges paid for hiring such furniture. If the employee pays some amount for such hire charges, the same will be reduced while calculating the valuation of Perquisites. c. If the employer provides the accommodation in a hotel (except where the employee is provided such accommodation for a period of less than 15 days on his transfer from one place to another), the Perquisites will be considered to be equal to 24% of the salary or actual charges paid to the hotel, whichever is less. If the employee pays some amount of some hotel charges, the same will be reduced while calculating the valuation of Perquisites.

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Taxation

Sem. IV

Illustration Mr. A is working as Finance Manager of M/s XYZ Ltd. in Pune. His basic salary is Rs. 28,000 per month. He is paid the dearness allowance of Rs. 12,000 per month. He is provided with the furnished accommodation for which he pays an amount of Rs. 3,000 per month from his salary. Calculate the valuation of Perquisites if a. Cost furniture is Rs. 2,00,000 b. The employer hires the furniture paying the monthly hire charges of Rs. 1,500. Solution If furniture is provided with accommodation Rs. Basic Salary Rs. 28,000 x 12 3,36,000 Valuation of residential accommodation (Being 10% of salary) 33,600 Add: 10% of cost of furniture 20,000 Less: Recovered from employee 36,000 Value of Perquisites 17,600 If furniture is taken on hire Basic Salary Rs. 28,000 x 12 3,36,000 Valuation of residential accommodation (Being 10% of salary) 33,600 Add: Hire charges for furniture 18,000 Less: Recovered from employee 36,000 Value of Perquisites 15,600 (B) MOTOR CAR

a. b.

c.

d.

e.

If cubic capacity of the If cubic capacity of the engine is less than 1.6 engine is more than 1.6 liters liters If the motor car is used owned or hired by No Perquisite No Perquisite the employer and is used entirely for official purposes If the motor car is used owned or hired by Actual amount of Actual amount of the employer and is used entirely for expenditure incurred by expenditure incurred by personal purposes the employer for running the employer for running and maintenance of the and maintenance of the car plus the car plus the remuneration paid by the remuneration paid by the employer for the chauffer employer for the chauffer plus 10% of the actual plus 10% of the actual cost of the car for normal cost of the car for normal wear and tear. wear and tear. If the motor car is used owned or hired by Rs. 1,200 per month Rs. 1,600 per month the employer and is used partly of official plus Rs. 600 if the car is plus Rs. 600 if the car is and partly for personal purposes and if chauffer driven car chauffer driven car running and maintenance expenses are borne by the employer If the motor car is used owned or hired by Rs. 400 per month plus Rs. 600 per month plus the employer and is used partly of official Rs. 600 if the car is Rs. 600 if the car is and partly for personal purposes and if chauffer driven car chauffer driven car running and maintenance expenses are borne by the employee If the motor car is owned by the No Perquisite No Perquisite employee and is used entirely for official purposes and if running and maintenance

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Taxation f.

Sem. IV

expenses are borne by the employer If the motor car is owned by the employee and is used partly for official purpose and partly for personal purposes and partly for personal purposes of the employee or any member of household and if running and maintenance expenses are borne by the employer

Note – In all the above cases, if some amount is recovered from the remuneration payable to the employee, the value of perquisite will be reduced by that amount. (C) Movable Assets transferred to the Employee In respect of any movable asset belongings to the employer transferred or sold to the employee, the value of perquisite in the hands of the employee will be calculated as below – Actual cost to the employer Less: 10% of the actual cost for each completed year for wear and tear during which the asset was put to use by the employer Less: amount of consideration paid by the employee to the employer for such transfer or sale. NoteIf the asset transferred or sold is in the form of computers and electronic items (excluding household appliances), the wear and tear will be calculated @ 50% and if the asset transferred or sold is in the form of motor car, the wear and tear will be calculated @ 20% and such wear and tear will be calculated on reducing balance method. Illustration: An employer bought an asset on 10th August 2000 for an amount of Rs. 2,00,000. the employer transferred the said asset to Mr. Ashok 15th March 2004 for a consideration of Rs. 20,000. Calculate the value of perquisite in the hands of Mr. Ashok if the asset is in the form of – • Furniture • Computer • Motor Car Solution The asset is used by the employer for a period of 3 years and 6 months say 3 years. Furniture: Actual cost of the asset Less: Wear and Tear Less: Transfer consideration Value of perquisite

Rs. 2,00,000 Rs. 60,000 Rs. 20,000 Rs. 1,20,000

Computer: Actual cost of the asset Less: Wear and Tear Less: Transfer consideration Value of perquisite

Rs. 2,00,000 Rs. 1,75,000 Rs. 20,000 Rs. 5,000

Motor Car Actual cost of the asset

Rs. 2,00,000

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Taxation Less: Wear and Tear Less: Transfer consideration Value of perquisite

Sem. IV Rs. Rs.

97,600 20,000 Rs. 82,400

(D) Interest free loans or loans at concessional rate of interest If the employer gives any interest free loans or the loans at the concessional rate of interest to the employee, the valuation of perquisite will be the sum equal to the simple interest calculated – a) At the rate of 10% per annum for the loans given for acquiring house or conveyance b) At the rate of 13% per annum for the loans given for any other purpose on the maximum outstanding monthly balance. Note – a) If the employee pays any amount of interest to the employer, the same shall be reduced from the valuation of perquisites. b) If the loans are given by the employer to the employee for the medical treatment of certain specified disease, the valuation of perquisites will be NIL. c) If the amount of loan is less than Rs. 20,000, the valuation of perquisite will be NIL. Illustration A limited has given a loan of Rs. 2,00,000 on 1 st December 2003 to Mr. Ashok at the concessional rate of interest of 4% per annum. The loan is to be repaid 25 equal monthly installments, the first installments being due on 1st January 2004. Calculate the value of perquisite in the hands of Mr. Ashok for the assessment year 2004-2005 if the loan is given for – • Purchasing the house • For marriage of daughter of Mr. Ashok Solution Valuation of Perquisite for concessional rate loan Month Opening Outstanding Interest @ 10% p.a. Closing outstanding December 02 2,00,000 1,667 1,92,000 January 03 1,92,000 1,600 1,84,000 February 03 1,84,000 1,533 1,76,000 March 03 1,76,000 1,467 1,68,000 Total interest works out to Rs. 6,267. Out of the above amount, an amount of Rs. 2,507 is recovered from the employee. (i.e. Rs. 6,267 x 10/4). The balance amount of Rs. 3,760 will be taxable in the hands of Mr. B if the loan is given for housing purposes. If the loan is given for the marriage of daughter, the calculation of interest will be made @ 13% per annum and as such, the interest will work out to Rs. 8,147 (i.e. Rs. 6,267 x10/3) and an amount of Rs. 5,640 will be taxable in the hands of Mr. B as the perquisite. (E) Sweeper, Gardener, Watchman or Personal Attendant provided to the employee The value of perquisite in the hands of an employee in respect of the services of a sweeper, a Gardner, a watchman or a personal attendant provided to the employee will be the cost incurred by the employer in the form of salary paid to such persons duly reduced by the amount paid by the employee for such services. (F) Gas, Electricity and Water supplied to the employee

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Taxation

Sem. IV

Valuation of this perquisite will be as below – a. If the facility of gas, electricity and water is supplied by the employer to the employee purchasing the same from an outside agency, the valuation of perquisite will be the charges paid by the employer to the outside agency supplying gas, electricity and water. b. If the facility in the form of gas, electricity and water is supplied by the employer out of his own resources, the valuation of perquisite will be the manufacturing cost per unit incurred by the employer. The valuation of perquisite will be reduced by the amount paid by the employee for the services provided. (G) Medical facilities provided by the employer Following shall not be treated as perquisites – a. Medical facility provided in a hospital, dispensary, clinic, or nursing home, maintained by the employer. b. Group medical insurance obtained by the employer for his employees or reimbursement of medical insurance premium to an employee in respect of policy in the name of the employee or his family members. c. Reimbursement of amount spent by the employee in respect of medical treatment for himself or his family members from any doctor, not exceeding Rs. 15,000 in a year. However, if the employee is in receipt of the fixed medical allowance, it will be taxable in the hands jof the employee. (H) Free Education Facility a. If the educational institution is maintained and owned by the employer, the perquisites shall be taken to be the cost of education in a similar institution or near the locality. If the educational facilities are provided to the children of the employee, the value of perquisite will be taken as Nil if the cost of education per child does not exceed Rs. 1,000 per month. b. In case provision of free or concessional education provided to the employee in any other case, the value of perquisite shall be taken to be the amount of expenditure incurred by the employer for this purpose. (I) Other Perquisites Tax treatment of other miscellaneous perquisites shall be as below – a. The value of any gift or voucher or token in lieu of which the gift may be received by the employee will not be taxable unless the value of such gift exceeds Rs. 5,000 in the aggregate during the previous year or the gifts are made in cash. b. The amount of expenses including membership fees and annual fees incurred by the employee on credit card and which are paid by the employer shall be added as the perquisites unless the said expenses are incurred wholly ad exclusively for official purposes. c. The value of benefit resulting from the payment made by the employer in a club for any expenditure incurred by the employee shall be taken as perquisites unless the said expenses are incurred wholly ad exclusively for official purposes. d. If the employee is allowed to use any movable asset owned or hired by the employer, 10% of the actual cost of such asset or hire charges incurred by the employer shall be considered to be the value of perquisite. However, this provision does not apply to laptops and computers. Perquisites exempt from tax Following are some of the perquisites which are generally exempt in the hands of the employees:

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Taxation

Sem. IV

a. Tea or other non-alcoholic beverages and snacks (in the form of light refreshments) provided during the official hours. b. Free meals provided by the employer during the office hours provided the value per meal does not exceed Rs. 50. c. Amount spent for training the employees and amount spent by the employer as fees for sending the employee for the refresher courses (including the lodging and barding expenses incurred by the employee). d. Annual premium paid by the employer for the accident insurance policy taken by the employer in the name of the employee. e. The amount of telephone bills(including the mobile phone bills) of the employee reimbursed by the employer. f. Any recreational facility provided by the employer to a group of employees (not being restricted to a select few employees) is exempt from tax.

Q.3 Explain step-by-step process of calculating Income from House Property. Ans Scope –Section 22 The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portion of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax under the head “Income from House Property”. The above definition reveals that an income to be treated as the Income from House Property, following conditions should be satisfied – a) The property must consist of buildings and land appurtenant thereto. If the assessee earns some income from only a vacant piece of land, it will not be taxed as Income from House Property but it will be taxed as Income from other sources. b) The assessee must be the owner of the property. If the assessee receives any income from a property which is not owned by him, it cannot be taxed as Income from House property. Eg. Mr. A takes a house on rent paying the rent of Rs. 10,000 per month to the landlord. He sublets the same to Mr. B for a rent of Rs. 12,000 per month. The rent received by Mr. A will be taxed as Income form other sources and not as Income from House property. c) The property should not be used by the assessee for any business or profession the profits of which are chargeable to income as Income from Business & Profession. ANNUAL VALUE The starting point for calculating the income from House Property is the Annual Value (AV). AV of the property is the notional amount indicating the sum at which the property might be expected to be let on year-to-year basis. While deciding the AV following four amounts have a role to play – a) Actual rent received or receivable – if the rent received or receivable consists of the rent for the premises and also for other amenities like lift, electricity, telephone etc., the amount of rent should be split. The portion for letting out the premise should be taxed as Income from house property and the remaining portion should be taxed as Income from other sources. b) Municipal Value – this indicates the amount decided by the Municipal authorities for deciding the amount of municipal taxes. c) Fair Rent of the Property – This indicates the rent which a similar property in the similar locality is expected to earn.

d) Standard Rent – this indicates the amount of Standard rent fixed under Rent Control Act. The owner is not expected to get the rent which is higher then the Standard rent fixed under the Act.

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Taxation

Sem. IV

The maximum of the four amounts stated above constitute the Gross Annual Value (GAV) of the House Property. However, the Gross Annual Value cannot be more than the standard rent unless the actual rent received/receivables is more than the standard rent. In simple words, the calculation of Gross annual value will involve the following steps – a) Compare the Municipal Valuation with Fair rent. The higher of these two amounts shall be taken as Fair rent. b) Compare the Fair rent with the standard rent. The lower of these amounts shall be taken as Fair Rent. c) Compare the Fair rent with the rent received. If the rent received is higher than the Fair rent, the same shall be taken as the Gross annual value. If the rent received is less than the Fair rent, Fair rent shall be taken as the Gross Annual Value. From the Gross Annual Value, the municipal taxes levied by the local authority are allowed as the deduction on payment basis. The year for which the municipal taxes are paid is not significant. Thus, the municipal taxes paid during the current year will be allowed as deduction even if they pertain to previous years or future years. The difference between the Gross Annual Value and the municipal taxes paid is termed as Net annual value which the basis for calculating the Income from House property. ILLUSTRATION Mr. Ashok owns six house properties in Pune. The particulars in respect of the said properties are as below – Particulars Municipal Value Fair Rental Value Standard Rent Rent Received

1. 40,000

2.

3.

4.

5.

6.

48,000

72,000

84,000

96,000

90,000

48,000

48,000

80,000

84,000

1,00,000

1,00,000

N.A. 36,000

48,000 72,000

1,00,000 96,000

60,000 72,000

N.A. 1,08,000

96,000 84,000

Calculate the Gross Annual Value of the Properties. Solution The Gross Annual Value of the Properties will be as below – Property 1 – 48,000 being the Fair Rental Value Property 2 – 72,000 being the Rent Received. Property 3 – 96,000 being the Rent Received Property 4 – 72,000 being the Rent Received as the Standard Rent is Rs. 60,000. Property 5 – 1,08,000 being the Rent Received. Property 6 – 96,000 being the Standard Rent. DEDUCTIONS FROM INCOME FROM HOUSE PROPERY (SECTION 24) a. Statutory Deduction – the amount of this deduction is 30% of the Net Annual Value. The deductions which were allowed earlier like insurance premium, ground rent, unrealized rent etc. will not be available separately.

b. Interest on borrowed capital – If the house property is constructed, purchased or repaired with the help of any loan borrowed, the amount of any interest payable is allowed as a deduction. It is immaterial whether the interest is actually paid or not. Following points should be remembered in this connection –

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Taxation

Sem. IV

•

There may be a possibility that the loan is borrowed earlier and the acquisition or completion of the property takes place later. However, as the loan is borrowed already, the amount of interest is payable on such loan. Such interest pertaining to the period prior to the acquisition or completion of the property shall be aggregated and will be allowed as deduction is five successive financial years starting from the year in which the property is acquired or completed. It should be noted in this connection, that the aggregation of interest is to be done from the date of borrowing of the loan till end of the previous year prior to the previous year in which the house is completed and till the date of completion of construction. In other words, interest pertaining to the year of completion of construction can be fully claimed as deduction in the same year irrespective of the date of completion. • In case of the self occupied property, the annual value is considered to be Nil and as such, the income from house property is zero. As per the general principles, no deduction will be available unless there is an income. However, in case of self-occupied property, the interest on borrowed capital will be allowed as a deduction, thus resulting into a negative income from house property. Such negative income from house property can be adjusted with other positive heads of income. The amount of interest which is allowed as a deduction is calculated as below – i) If the property is constructed or acquired with the borrowed capital before 1st April 1999, the deduction will be the actual amount of interest subject to the maximum of Rs. 30,000. ii) If the property is constructed or acquired with the borrowed capital after 1st April 1999 and such construction or acquisition is completed within the period of three years from the end of the financial year in which the loan was borrowed, the deduction will be the actual amount of interest subject to the maximum of Rs. 1,50,000. For the purpose of claiming the deduction on account of the interest, the assessee has to furnish a certificate from the person to whom the interest is payable specifying the amount of interest. ILLUSTRATION On 1st June 2002, Mr. Ashok borrowed an amount of Rs. 3,00,000 for the construction of his residential house on interest @ 12% per annum. During the course of construction, due to lack of funds, he borrowed a further loan of Rs. 2,00,000 on 1 st April 2003 on interest @ 14% per annum. Construction of the property was completed in the month of December 2003. Since January 2004, Mr. Ashok has been staying in the property. Municipal valuation of the property was assessed as Rs. 1,00,000. He paid the municipal taxes assessed amounting to Rs. 12,000 in the month of April 2004. Calculate the Income from House Property for the AY 2004-2005. Solution Calculation of Income from house Property Annual Value Less: Deduction u/s 24 Interest for the pre construction period Being 1/5th of Rs. 30,000 Interest for the current year Income from House Property

Rs. Nil Rs. 6,000 Rs. 64,000 (-)Rs. 70,000

Q.4 What do you mean by Capital Asset and Capital Gains. Discuss various deductions available from Capital Gains as per the provisions of Income tax Act, 1961. Ans

CAPITAL ASSET:

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Taxation

Sem. IV

Capital asset is defined to include the property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. However, following assets are excluded from the ambit of the term Capital asset. a. Any stock in trade, consumable stores or raw material held for the purpose of business. b. Movable property held by the assessee for the personal use of himself or his dependent family members. However, Jewellery held by the assessee is not excluded for this purpose. c. Agricultural land situated in India provided it is not situated within the jurisdiction of a municipality or a cantonment board having the population of more than 10,000 according to the latest preceding census before the first day of the previous year or the land situated in the area beyond eight kilometers from the local limits of such municipality or cantonment board. d. 6.5% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds, 1980 issued by Central Government. e. Special Bearer Bonds, 1991. f. Gold deposit bonds issued under Gold Deposit Scheme, 1999. Short term Capital Asset and Long term Capital Asset Short term capital asset is defined as the Capital Asset which is held by the assessee for a period of less than 36 months before the date of transfer. However, in case of the following assets, the period of 36 months is brought down to 12 months – • Equity or Preference shares of a company, whether listed or unlisted. • Securities listed in a recognized stock exchange in India (viz. Debentures, Government Securities etc.) • Units of Unit Trust of India. • Units of a Mutual fund, whether quoted or not. An asset, which is not a Short Term Capital Asset, is treated as a long term capital asset. The capital gains arising on account of short term capital assets is treated as short term capital gains and the capital gains arising on account of transfer of long term capital asset is treated as Long term capital gains. Note – if the capital asset becomes the property of the assessee by virtue of gift or will, the period for which the capital asset is held by the previous owner should be considered while deciding the holding period. CAPITAL GAINS – SECTION 48 Capital gains arising on account of excess of transfer consideration over the following amounts – • Cost of acquisition • Cost of Improvement • Expenditure incurred wholly and exclusively in connection with the transfer. Note – while calculating the Long term capital gains, in place of cost of acquisition, the indexed cost of acquisition and in place of improvement, indexed cost of improvement will be considered. The concept of indexed cost of acquisition or Indexed cost of Improvement is discussed in the following paragraphs. COST OF ACQUISITION Cost of acquisition of a capital asset is the value for which it was acquired by the assessee any capital expenditure incurred in connection with the acquisition of capital asset will be considered to be a part of cost of acquisition. However, if the property becomes the property of the assessee before 1 st April

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Taxation

Sem. IV

1981, the Fair market value of the property of the capital asset on that will be considered to be the cost of acquisition. If the assessee himself has acquired the capital asset before 1st April 1981, the assessee can consider Fair market value as on 1st April 1981, or the actual cost of acquisition to be the cost of acquisition for the calculation of capital gains. Illustration Mr. Ashok purchased the convertible debentures for Rs. 4,50,000 in the month of May 1995. the debentures converted in the equity shares in the month of April 2003 for the consideration of Rs. 10,00,000. He also paid the brokerage of 2% on the sale consideration. Calculate the capital gains for the Assessment year 2004-2005. Solution Calculation of Capital Gains for Mr. Ashok Particulars Rs. Sale Consideration Less: Brokerage on Transfer 20,000 Indexed cost of Acquisition 5,35,604 Long term Capital Gain

Rs. 10,00,000 5,55,604 4,44,396

COST OF IMPROVEMENT OR INDEXED COST OF IMPROVEMENT Cost of improvement includes any capital expenditure incurred in making any addition or alteration made to the capital asset. However, cost of improvement does not include any expenditure which is deductible form any other head of income. Similarly, while calculating the capital gains, any expenditure incurred before 1st April 1981, either by the assessee or the previous owner will be ignored. If the cost of improvement is incurred after 1 st April 1981, indexation will apply only to the cost of improvement incurred after 1st April 1981. Illustration Mr. X acquired a house on 10th November 1975 for Rs. 1,00,000 and paid Rs. 10,000 for registration. He spent an amount of Rs. 50,000 on 10th March 1980 and Rs. 80,000 on 15th June 1998 on improvement of the house. He sold the house on 28th October 2003 for Rs. 12,00,000 and paid the brokerage charges amounting to 2% on the sale price. Calculate the capital gains for AY 2004-05. Assume the Fair market value of the house as on 1st April 1981 to be Rs. 2,00,000. Solution Particulars Sale consideration Less: Brokerage on Transfer Indexed cost of Acquisition 20,000 x 463/100 Indexed cost of Improvement 80,000 x 463/351 Long Term Capital Gain

Rs.

Rs. 12,00,000

24,000 9,26,000 1,05,527

10,55,527 1,44,473

Deduction From Capital Gains From the amount of capital gains calculated as per the provisions discussed above,certain deductions are possible. We will consider some of the important deductions.

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Taxation

Sem. IV

Capital Gains from the transfer of residential house property –Section 54 This deduction is available if certain conditions are satisfied— • • •

This deduction is available to an individual or a HUF This deduction applies to long –term capital gains arising from the transfer of a residential house property , income from which is taxable under the head ‘’Income from House Property’’. The assessee must have purchased or constructed another residential property within the specified period. The term ‘’specified period’’ means— • If the new property is purchased, one year before or two years after the date on which transfer took place . • If the new property is constructed, three years after the date on which the transfer took place.

The amount of capital gains which are exempt under this section is restricted to the cost of new house purchased or constructed. Capital Gains Account Scheme, 1988 In order to claim the deduction under this section, the assessee can purchase or construct the new property during a certain period after the transfer takes place. However, the return of income is required to be submitted within the specified time in the relevant Assessment Year in which the transfer took place and the tax is required to be paid during the same year. However, the decision to invest in the new property may not be taken by the assessee immediately. In order to overcome the problems in such situations, the assessee is given the alternative. The amount of capital gains not invested by the assessee for the purchase or construction of the new property can be deposited by the assessee under the Capital Gains Account Scheme, before the date of filing his return of income. The proof of such deposit can be attached with the return of income for the purpose of claiming the deduction under this section. For the purpose of making the investment in the new property, the amount lying to the credit of this account can be utilized. Illustration Mr. Ashok purchased a residential house in 1971 for an amount of Rs. 2,50,000. During 1979-80, he spent an amount of Rs. 50,000 for improvement of the house. During 1994-95, he spent an additional amount of Rs. 75,000 for the improvement of the house. The said house was sold by him on 15th October, 2003 for the consideration of Rs. 25,00,000. Expenses in connection with this transfer amounted to Rs. 50,000. On 15th May, 2004, he deposited an amount of Rs. 4,00,000 in a deposit account under Capital Gains Account Scheme. Out of the amount so deposited, an amount of Rs. 3,50,000 was used by him to buy another residential house in his native place. Compute the taxable capital gains with respect to the various assessment years assuming that the fair market value of the house as on 1st April, 1981 was Rs. 4,00,000. Solution Calculation of Taxable Capital Gains Particulars

Rs.

Sale Consideration Less: Expenses on Transfer Indexed Cost of Acquisition 4,00,000 x 463/100 Indexed Cost of Improvement 75,000 x 463/259 Long Term Capital Gain Less: Deduction U/S 54

Rs. 25,00,000

50,000 18,52,000 1,34,073

20,36,073 4,63,927 4,00,000

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Taxation

Sem. IV

Taxable Long Term Capital Gains

63,927

The amount of balance amount of deposit in CGAS amounting to Rs. 50,000 will be taxed as long term capital gains during the assessment year 2007-08 assuming that no other residential house is purchased by him before the specified period of three years is over. Capital Gains from the transfer of Agricultural Land – Section 54 B This deduction is available if certain conditions are satisfied – • This deduction is available to an individual only. • This deduction applies to both short-term capital gains as well as long-term capital gains arising from the transfer of an agricultural land which must have been used by the individual or his parents for Agricultural purposes during the two years immediately preceding the date of transfer. • The assessee must have purchased another agricultural land (rural or urban) within the period of two years after the date of transfer of the original agricultural land. The amount of capital gains which are exempt under this section is restricted to the cost of new Agricultural land purchased. It should be noted that the provisions regarding the Capital Gain Account scheme are applicable in this case also. If the amount deposited in CGAS is not utilized for the purchase of new agricultural land within the period of two years, the amount which is not utilized shall be taxed as the short-term capital gains or long-term capital gains in the year in which the period of two years from the date of transfer of the original asset expires. Illustration Mr. Ashok was the owner of an agricultural land in Pune which was purchased by him in 1982-83 for an amount of Rs. 3,50,000. He sold the land on 13th July, 2003 for a consideration of Rs. 25,00,000. On 20th October, 2003, he bought an agricultural land in his village for an amount of Rs. 1,00,000. On 12th June 2004, he deposited an amount of Rs. 2,00,000 in the deposit account under CGAS. Calculate the amount of capital gains liability for Mr. Ashok. Solution Particulars Sale consideration Less: Indexed Cost of Acquisition Rs. 3,50,000 x 463/109 Long Term Capital Gain Less: Deduction u/s 54 Cost of land purchased Amount deposited in CGAS Taxable Long term Capital Gains

Rs.

14,86,697 1,00,000 2,00,000

Rs. 20,00,000 14,86,697 5,13,303 3,00,000 2,13,303

Capital Gains if invested in Certain bonds – Section 54 EC Sec 54 EC has been inserted from Assessment Year 2001-2002. Features of the deduction under this section are as below –

a)

This section applies to the long-term capital gains earned by any assessee by transferring the long term capital asset after 1st April 2000.

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Taxation b)

Within Six months from the date of transfer of the Long-term capital asset, the assessee should invest the whole or part of the capital gains in the specified assets. The specified assets for this purpose mean the bonds redeemable after 3 years issued by the following institutions – • • • • •

c) d) e)

Sem. IV

National Bank for Agriculture and Rural Development (NABARD) National Highway Authorities of India. National Housing Bank Small Industries Development Bank of India Rural Electrification Corporation Limited.

The quantum of exemption will be the amount invested in the specified assets or the amount of capital gains, whichever is less. If the specified asset is transferred within the period of 3 years from the date of acquisition, the amount of capital gains not charged to the tax from the transfer of original asset will be taxed as the long-term capital gain in the year in which the specified asset is transferred. The cost of specified asset which is considered for the exemption under Section 54 EC shall not be eligible for rebate under Section 88 of the Act.

Illustration Mr. Ashok provides the following details regarding the transaction for the sale of his residential house property which was bought by him in September 1989 for Rs. 2,50,000. He sold the said property on 12th March 2004 for a consideration of Rs. 12,00,000. In May 2004 he invested Rs. 5,00,000 in the notified bonds of NHB which are redeemable after 45 Months. Compute the amount of capital gains chargeable to tax. Solution Computation of Capital Gains chargeable to tax Sale Consideration 12,00,000 Less: Indexed Cost of Acquisition i.e. 2,50,000 x 6,72,965 463/172 Long Term Capital Gains 5,27,035 Less: Deduction u/s 54 EC 5,00,000 Taxable Capital Gains 27,035 Capital Gains arising from transfer of certain securities/Units – Section 54 ED Features of Exemption available as per the provision of Section 54 ED are as below – a) The section applies to the long term capital gains earned by any assessee. b) The long term capital should arise from the transfer of capital asset in the following form• A security listed in any recognized stock exchange in India. A security for this purpose means shares, debentures, bonds or Government of Securities. • A unit of Unit Trust of India or any Mutual Fund (Whether listed in a recognized stock exchange or not) c) Within six months from the date of transfer of such capital asset, the assessee should invest whole or part of the capital gains in the equity shares of an eligible issue. Equity shares of an eligible issue need to satisfy the following conditions – • The issue of equity shares is made by a public limited company. • The shares should be offered to the public for subscription. d) The quantum of exemption will be the amount invested in the specified assets or the amount of capital gains, whichever is less.

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Taxation e) f)

Sem. IV

If the specified asset is transferred within the period of 1 year from the date of acquisition, the amount of capital gains not charged to the tax from the transfer of original asset will be taxed as the long-term capital gain in the year in which the specified asset is transferred. The cost of specified equity shares which is considered for the exemption under Section 54 EC shall not be eligible for rebate under Section 88 of the Act.

Capital Gains on the transfer of a long term capital asset other than a house property – Section 54 F Following conditions need to be satisfied for claiming the exemption under Section 54 F a) The assessee is an individual or a HUF b) The long-term capital gains should arise on account of transfer of a capital asset other than a residential house property. c) The assessee should invest the net sale consideration by selling the long-term capital asset for buying a residential house property within one year before or two years after the transfer or construct a residential house property within the period of three years. Such house property is hereinafter referred to as “new house”. d) The assessee should not purchase any other residential house property (other than the “new house”) within a period of two years from the date of transfer of the original asset or construct a new residential house property within the period of three years from the date of transfer of the original asset. e) If the assessee transfer the “new house” within a period of three years from the date of the purchase/construction, following consequences will arise – • Capital Gains arising from the transfer of the “new house” will be treated as short-term capital gains. • Originally exempt capital gains under Section 54 F will be treated as Long-term capital gains in the year in which the “new house” is transferred. f) If the assessee purchases any other property (other than the “new house”) within a period of two years from the date of transfer of the original asset or constructs a new residential house property within the period of three years from the date of transfer of the original asset, originally exempt capital gains under Section 54 F will be treated as long term capital gains in the year in which the “new house” is transferred. If the above conditions are satisfied, amount of deduction will be calculated as below – a) If the cost of house purchased or constructed is more than the net consideration of the capital asset transferred, the entire capital gains arising from the transfer of the capital asset is exempt from tax. b) If the cost of house purchased or constructed is less than the net consideration of the capital asset transferred, the exemption is calculated as below – Capital Gains x

Amount Invested Net Sale Consideration It should be noted that the provisions regarding the Capital Gain Account Scheme are applicable in this case also. If the amount deposited in CGAS is not utilized for the purchase or construction of new residential house within the stipulated period, the amount which is not utilized shall be taxed as the capital gains in the year in which the period of three years from the date of transfer of the original asset expires. Deduction under more than one section It may be possible for the assessee to claim the deductions under more than one section in respect of the capital gains subject to the fact that he satisfies the conditions prescribed under the respective section. Eg.

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Taxation

Sem. IV

The assessee can earn the capital gains by selling the residential property and can get the deduction under the Section 54 EC for investment in certain bonds and also under Section 54 F for investment in another residential property. Or The assessee can earn the capital gains by selling the agricultural land and can get the deduction under Section 54 B for investment in another agricultural land and also under Section 54 EC for investment in certain specified bonds. Or The assessee can earn the capital gains by selling the various capital assets like Jewellery, land, shares etc. and can get the deduction under Section 54 and 54 F for investment in the residential house.

Q.6 Discuss any five main deductions which can be claimed by an individual assessee as per the provisions of Chapter VI –A of the Income Tax Act, 1961. Ans Some of the major deductions as per the provision of Chapter VI – A of the Act are discussed below – 1. Contribution to certain pension funds (Section 80CCC) This deduction is available if the following criterions are satisfied – • This deduction is available to the individuals only. • This deduction applies to the contribution made by the assessee to any annuity plan for receiving the pension from the insurer. The insurer can be Life Insurance Corporation of India (the plan is very popularly called as “Jeevan Suraksha”) or any other private sector insurance company. • Such contribution should be made by the assessee out of his income chargeable to tax. • The maximum amount of deduction permissible is whole of the contribution paid or Rs. 10,000 whichever is less. 2. Payment of Medical Insurance Premium (Section 80D) This deduction is available in respect of the amount of premium paid by the assessee for Mediclaim policy of General Insurance Corporation of India and its subsidiaries and other private sector insurance companies approved by Insurance Regulatory and Development Authority (IRDA). This deduction is available if the following criterions are satisfied – • This deduction is available to an individual or a HUF. • The Mediclaim policy can be bought by the assessee in his/her own name or in the name of the spouse or in the name of the dependent parents or in the name of dependent children. • The premium should be paid by cheque. • The premium should be paid by the assessee out of his income chargeable to tax. • The amount of deduction permissible is actual premium paid or Rs. 10,000 whichever is less. However, in case of the assessee who is a senior citizen, the maximum amount of Rs. 10,000 is increased to Rs. 15,000. 3. Medical Treatment of Handicapped dependent – Section 80DD This deduction is available if the following conditions are satisfied – • This deduction is available to an individual or a HUF who is Resident of India.

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Taxation

Sem. IV

•

This deduction is available in respect of any expenditure incurred for the medical treatment (including nursing), training and rehabilitation of a handicapped dependent or in respect of any amount paid or deposited under an approved scheme framed by –  Life Insurance Corporation of India.  Any private sector insurance company.  Unit Trust of India • The amount of deduction is Rs. 40,000 in respect of expenditure incurred or the amount deposited. Note – A handicapped dependent means the relative of an individual fully dependent upon him for support and maintenance and who is suffering from permanent physical disability as certified by a specialist working in the Government Hospital. 4. Deductions for Medical Treatment etc. (Section 80DDB) This deduction is available if the following conditions are satisfied – • This deduction is available to an individual or a HUF who is Resident of India. • This deduction is available in respect of any expenditure incurred for the medical treatment in respect of some specified disease or ailments. Such expenditure may be incurred by the assessee for himself or for any dependent relative. • For the purpose of claiming this deduction, the assessee will have to furnish, along with his return of income, a certification in Form No. 10-I from a specialist working in a Government Hospital. • The amount of deduction will be reduced by the amount received under an insurance policy or the amount reimbursed by the employer. • The amount of deduction available under this section is Rs. 40,000. However, if the person for whom such expenditure is incurred is a senior citizen, the said amount is increased to Rs. 60,000. Following is the list of specified disease or ailments for this section – a) Neurogical Diseases. b) Cancer c) AIDS d) Chronic Renal Failure e) Hemophilia f) Thalassaemia 5. Donation paid (Section 80G) This deduction is available if the following conditions are satisfied – • This deduction is available to all the assessees. • Donation should have been paid in terms of money (not in kind) to an approved fund/institution. • The assessee should produce a proof of payment of such donation. • The amount of deduction available depends upon the nature of donation. For this purpose, the donation may fall under the following categories – a. Donation eligible for 100% deduction without any qualifying limit. b. Donation eligible for 50% deduction without any qualifying limit. c. Donation eligible for 100% deduction subject to qualifying limit. d. Donation eligible for 50% deduction subject to qualifying limit. For calculating the qualifying limit, all the donations under category c and d above are clubbed together and the qualifying amount will be limited to 10% of the Adjusted Gross Total Income which means Gross Total Income duly reduced by –  Long Term Capital Gains.  All the deductions under Chapter VI-A except under Section 80-G.

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Taxation

Sem. IV Section II

Q.9 Write a detailed note on Set Off and Carry Forward of Losses. Ans The provisions regarding set off and carry forward of losses can be considered under the following heads – a. Inter-Source Adjustments – Section 70 b. Inter-Head Adjustments – Section 71 c. Carry Forward of losses. INTER-SOURCE ADJUSTMENTS – SECTION 70 If the result of any source under a head of income is a loss, such loss can be adjusted with income form some other source under the same head of income. Eg. If the assessee is engaged in the business of manufacturing as well as trading, loss arising out of manufacturing business can be adjusted with the profit arising out of trading business. This adjustment is called as Inter-Source Adjustment. Following exceptions apply to the rule – a. Loss from speculation business can be adjusted only against the profits from speculation business. b. Long term Capital Loss can be adjusted only against the Long Term Capital Gains. c. Loss from owning and maintaining race horses can be adjusted against only the income arising out of the same activity. d. Loss can not be set off against the winning from lotteries, cross word puzzles, races, card games, etc. This leads us to the following conclusions – i) Loss from house property can be adjusted against the income from any other house property. ii) Short term capital loss can be adjusted against any capital gains i.e. short term capital gains or long term capital gains. iii) Loss from a non-speculative business can be adjusted against income from non-speculative or speculative business. iv) Loss under the head income form other sources can be adjusted against any other income under that except winning from lotteries, card games, cross word puzzles etc. It should be remembered that if there is an income from one source and loss from the other source under the same head of income, the loss has to be set off against the income. INTER-HEAD ADJUSTMENT – SECTION 71 If the loss under one head of income cannot be adjusted against the income under the same head of income, it can be adjusted against the income under other heads of income. Eg. Loss from house property can be adjusted against the income from other sources. This is called as Inter-Head Adjustment. Following exceptions apply to this rule – a. Loss under the head capital gains cannot be adjusted against the income under any other head of income. b. Loss in a speculation business cannot be adjusted against any other income. c. Losses arising out of the business of owning and maintaining racehorses cannot be adjusted against any other head of income. d. A loss cannot be adjusted against the winning from lotteries, puzzles games, horse races, card games etc.

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Taxation

Sem. IV

This leads us to the following propositions – a. Adjustments under section 70 need to be made before making the adjustments under Section 71. b. Subject to the above exceptions, the loss under any head can be adjusted with the income under other heads of income. Illustration Mr. Ashok provides the following particulars about his income for the Assessment year 2004-2005. S.No. a. b.

c.

d. e.

Particulars Income from Salary Income from House Property House I House II House III (Self Occupied) Profits and gains from business and profession Manufacturing Business Trading Business Business A (Speculative) Business B (Speculative) Long Term Capital Gains from the transfer of house Short Term Capital Loss from the transfer of Shares Income from other sources Winning from lotteries Income from card games Interest

Rs. 1,00,000 24,000 (-) 14,000 (-) 80,000 68,000 (-) 28,000 (-) 60,000 25,000 90,000 (-) 48,000 29,000 (-) 20,000 18,000

Calculate the Gross Total Income of Mr. Ashok for the AY 2004-2005. Solution Calculation of Gross Total Income for Mr. Ashok for AY 2004-2005 S.No. Particulars a. Income from Salaries b. Income from House Property House I House II House III c. Profits from business & profession (Non Speculative) Manufacturing Trading d. Profits from business & profession (Speculative) Business A Business B e. Income from Capital Gains Long Term Capital Gains Short Term Capital Gains f. Income from other sources Winning from Lotteries Interest Gross Total Income Note: Following losses will be carried forward to the AY 2005-2006  Loss from speculative business – Rs. 35,000

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Rs.

Rs. 1,00,000 24,000 (-) 14,000 (-) 80,000

(-) 70,000

68,000 (-) 28,000

40,000

(-) 60,000 25,000

Nil

90,000 (-) 48,000

42,000

29,000 18,000

47,000 1,59,000

Taxation

Sem. IV

 Loss from card games – Rs. 20,000. Carry Forward of Losses: If the losses cannot be set off under the same heads of income or under different heads of income due to non-availability of sufficient income in the same year, such losses can be carried over to the next assessment year. According to the provisions of Income tax Act, 1961, following losses can be carried forward to the next assessment years – Loss under the head “Income from House Properties” As per the provisions of Section 71B of the act, loss under the head of income from house properties can be carried forward and set off in the subsequent assessment years against the income from house properties subject to the limit of 8 Assessment Years. Loss from Speculation Business As per the provision of section 73 of the Act, the loss from Speculative business can be carried forward and set off in the subsequent assessment years against the speculative profits subject to the time limit of 8 assessment years. Loss from Non-speculative business Loss from Non-speculative Business may arise on account of the following reasonsa. Unabsorbed Depreciation. b. Unabsorbed Business Loss. Unabsorbed depreciation can be carried forward to the subsequent Assessment years without any time limits. In the subsequent assessment years, the unabsorbed depreciation can be set off against any head of income, not necessarily against Profits from Business and profession. Unabsorbed business loss can carried forward and set off in the subsequent Assessment years against the any business profits, whether speculative or non-speculative, subject to the time limit of 8 Assessment years. Loss Under the head income from capital gains As per the provisions of section 74 of the act, loss under the head income from capital gains, to the extent it is short term capital gains or long term capital gains subject to the limit of 8 Assessment years. Loss under the head income form capital gains, to the extent it is long term capital loss can be carried forward and set off in the subsequent assessment years against the long term capital gains subject to the limit of 8 assessment years. Loss from the activity of owning and maintaining the race horses As per the provisions of Section 74A of the Act, loss from the activity of owning and maintaining the race horses can be carried forward and set off in the subsequent assessment years against the income under the same head subject to the limit of 4 assessment years.

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