Tax

17. Unrealized rent is allowed as a deduction from: (a) gross annual value (b) net annual value (c) income from the head house property (d) actual rent 18. The concept of Deemed Ownership is given: (a) under section 24 (b) under section 25 (c) under section 29 (d) under section 27 19. Deduction of unrealized rent is given if certain conditions are satisfied which are given under: (a) section 27 (b) rule 4 (c) section 29 (d) rule 2B 20. Annual value of HP let out throughout the year / partly let out / partly vacant / vacant throughout the year is given under section: (a) section 23 (2) (b) section 23 (1) (c) section 27 (d) section 25 21. Annual value of HP which is self-occupied is given: (a) under section 23 (2) (b) under section 24 (c) under section 25 (d) None of the above 22. Meaning and chargeability of House Property is given: (a) under section 15 (b) under section 22 (c) under section 20 (d) None of the above 23. Interest of borrowed capital from outside India is deductible while calculating Income from HP if condition given under section. (a) 25B is satisfied (b) 22 is satisfied (c) 25 is satisfied (d) 25A is satisfied 24. In case the property is owned by co-owners and it is let out, income from such property shall be computed: (a) separately for each co-owner (b) It will be first computed ignoring the co-ownership and then distributed amongst co- owners. (c) Shall not be calculated at all 151

Solve Q25 and Q26 from the following information Mr. J gives you the following data 1) Municipal value ₹12,000 pm 2) Fair rent ₹14,000 pm 3) Standard rent ₹13,000 pm 4) Actual rent received and receivable ₹15,000 pm 5) Municipal taxes paid ₹4,000 pa. 25. GAV of the house property will be? (b) ₹2,00,000 (a) ₹1,80,000 (d) ₹5,20,000 (c) ₹3,00,000 26. NAV of the house property will be? (b) ₹2,00,000 (a) ₹1,80,000 (d) ₹5,20,000 (c) ₹1,76,000 Solve Q27 and Q28 from the following information Mr. J is owners of a big house which is let out at the rent of ₹20,000pm. Municipal Value of the house ₹15,000pm,Fair rent ₹21,000pm,Standard rent ₹18,000pmandMunicipal Tax paid are ₹5,000pa 27. GAV of the house property will be? (a) ₹1,80,000 (b) ₹2,00,000 (c) ₹3,00,000 (d) ₹2,40,000 28. NAV of the house property will be? (b) ₹2,00,000 (a) ₹1,80,000 (d) ₹2,40,000 (c) ₹2,35,000 29. AssumeinQ28 the property was vacant for 2 months. What will be NAV of the house property? (a) ₹1,95,000 (b) ₹2,00,000 (c) ₹2,35,000 (d) ₹2,40,000 Solve Q30 to Q32 from the following information Mr. J is owner the house which has two floors. The ground floor is let out at ₹40,000 pm and first floor is self-occupied. Municipal taxes paid are ₹80,000 pa & interest on borrowed capital payable is ₹45,000 pa. 152

30. GAV of the let out area of the house property will be? (a) ₹4,40,000 (b) Nil (c) ₹4,80,000 (d) ₹4,00,000 31. NAV of the let out area of the house property will be? (a) ₹4,40,000 (b) Nil (c) ₹4,80,000 (d) ₹4,00,000 32. Income under the head of house property will be? (a) ₹3,95,000 (b) ₹2,85,500 (c) ₹2,63,000 (d) ₹22,500 Solve Q33 to Q35 from the following information Compute the income under the head house property from the following data Particulars House 1 House 2 House 3 Municipal value ₹1,00,000 ₹1,50,000 ₹2,00,000 Fair rent ₹1,40,000 ₹1,80,000 ₹2,40,000 Standard rent ₹1,20,000 ₹2,00,000 Rent (p.m.) ₹12,000 ₹17,500 NA Period of vacancy 1 month ₹21,000 Municipal taxes Paid Nil ₹80,000 6 months Interest on loan house property ₹20,000 ₹40,000 ₹30,000 ₹30,000 ₹20,000 33. Income from house property from house1 will be? (a) ₹1,94,000 (b) ₹1,24,000 (c) ₹1,44,000 (d) ₹56,800 34. Income from house property from house2 will be? (a) ₹35,750 (b) ₹38,750 (c) ₹38,570 (d) ₹37,850 35. Income from house property from house3 will be? (a) ₹47,200 (b) ₹42,700 (c) ₹44,700 (d) ₹56,800 153

36. Mr. J took loan from a bank for ₹10,00,000on 1/11/2016@ 8% pa for the construction of the house which is self-occupied. Construction of the house got completed on 15/3/2020. Compute interest allowed as deduction u/s 24(b) for AY2020-2021. (a) ₹1,18,667 (b) ₹1,50,000 (c) ₹30,000 (d) ₹80,000 Solve Q37 and Q38 from the following information Mr. J had taken the loan of ₹9,00,000 on 1/4/2016 for the construction the house, at the rate of 20% pa. The construction of the house was completed on 15/1/2020.Computeinterest allowed as deduction under section 24(b) for AY 2020-2021. 37. Deduction u/s 24(b), if the house is self-occupied will be? (a) ₹1,50,000 (b) ₹2,00,000 (c) ₹2,88,000 (d) ₹30,000 38. Deduction u/s24(b), if the house is let out will be? (a) ₹1,50,000 (b) ₹30,000 (c) ₹2,88,000 (d) ₹1,20,000 39. Mr. J took loan from a bank for ₹1,00,000 on 1/1/2016@ 12%pa for the construction of the house which is self-occupied. Construction of the house got completed on1/1/2020 and full amount of loan was paid back on 31/1/2019. Compute interest allowed as deduction under section 24(b) for AY 2020-2021. (a) ₹19,400 (b) ₹6,800 (c) ₹12,000 (d) ₹49,000 40. J gifted his house property top his wife in 2012.Mrs. J haslet out the house property ₹5,000 pm. The Income from such house property will be taxable in the hands of: (a) Mrs. J (b) It will be first computed as Mrs. J’s income and thereafter clubbed in the income of Mr. J u/s 64. (c) Mr. J will be treated as deemed owner of the house property and is liable to tax on income. (d) None of the above 41. Mr. J gifted the house property to his minor son which was let out @ ₹5,000pm. Income from such house property shall be taxable in the hands of: (a) Minor son (b) It will be first computed as son’s income and thereafter clubbed in the income of Mr. J u/s64. 154

(c) Mr. J will be treated as deemed owner of the house property and is liable to tax on income. (d) None of the above 42. Mr. J transferred his house property to his wife under an agreement to live apart. Income from such house property shall be taxable in the hands of: (a) Mrs. J (b) It will be first computed as Mrs. J’s income and thereafter clubbed in the income of Mr. J u/s 64. (c) Mr. J will be treated as deemed owner of the house property and is liable to tax on income. (d) None of the above Solve Q43 and Q44 from the following information Mr. J has taken a house property on lease from Mr. D and let out the same to Mr. S. 43. If the lease period is of 15 years Income from such house earned by Mr. J shall be Taxable as (a) Income under the head other sources (b) income under the head house property, since Mr. J is the deemed owner. 44. If the lease period is of 12 years, Income from such house earned by Mr. J shall be Taxable as (a) income under the head other sources (b) income under the head house property, since Mr. J is the deemed owner. 45. Mr. J gifted his house property to his married minor daughter. The income from such house property shall be taxable in the hands of: (a) Mr. J as deemed owner (b) It will be first computed as daughter’s income and thereafter clubbed in the income of Mr. J u/s 64. (c) Married minor daughter (d) None of the above 46. Mr. J is a member of house building cooperative society who is the owner of flats constructed by it. One of the flats is allotted to Mr. J. The income from such house property shall be taxable in the hands of: (a) Co-operative society (b) Mr. J as deemed owner 47. Mr. J is owner of superstructure although the land was taken by him on lease. The income from such house property shall be taxable under the head: (a) Income from other sources (b) Income from house property 155

48. Mr. J has taken a house on rent and sublets the same to Mr. A. Income from such house property shall be taxable under the head: (a) Income from house property (b) Income from other sources 49. A has two house properties. Both are self- occupied: (a) The annual value of both houses shall be NIL (b) The annual value one house shall be NIL (c) The annual value of no house shall be NIL 50. Which deduction shall be allowed in the case of oneself occupied house property whose annual value is Nil: (a) 30% of net annual value (b) Insurance premium (c) Ground net (d) Lease rent (e) Interest on money borrowed in full (f ) Interest on money borrowed subject to limit of ₹30,000 or ₹2,00,000 (g) Annual change 51. Tick, from the under mentioned, the cases where annual value can be negative: (a) Let out property (b) Oneself occupied property (c) Deemed let property (d) One property which could not be occupied due to employment elsewhere (e) Partly let out & party self-occupied property 52. If annual value of the house property which his let-out is negative. Which deductions shall be allowed u/s 24? (a) Both deductions under section 24 (a)and section 24(b) (b) Neither deduction under section 24 (a)or section 24(b) (c) Deductions under section 24 (a) ie statutory deductions (d) Deductions under section 24 (b) ie interest on borrowed capital 53. In case of deemed to be let out property, which deductions shall be allowed under section 24(a). (a) Actual Repairs and collection charges (b) Insurance premium 156

(c) Ground rent/ lease rent (d) Annual charge (e) Interest on money borrowed (f ) Vacancy allowance (g) Standard deduction of 30% 54. In case of deemed to be let out property, which deductions shall be allowed under section 24? (a) Actual Repairs and collection charges (b) Insurance premium (c) Ground rent/ lease rent (d) Annual charge (e) Interest on money borrowed (f) Vacancy allowance (g) Standard deduction of 30% 55. In which cases the income from house property can be negative due to deductions undersection24. (a) Let out property (b) Self occupied property (c) Deemed to be let out property (d) Party let out and party self-occupied property (e) One property which could not be occupied due to employment elsewhere (f) none of the above (g) all of the above 56. Municipal tax is a deducted from: (b) net annual value (a) gross annual value 57. In case the property is owned by co-owners and it is let-out, Income from such property shall be computed: (a) Separately for each co-owner (b) it will be first computed ignoring the co- ownership and then distributed amongst co- owners. 58. Mr. A borrowed ₹5,00,000 @ 12% pa on 1/4/2015 for construction of house property which was completed on 15/3/2019.The amount is still unpaid. The deduction of interest for AY 2020- 2021 be: 157

(a) ₹60,000 (b) ₹96,000 (c) ₹1,80,000 (d) ₹2,40,000 59. Mr. A borrowed ₹5,00,000 @ 12% pa on 1/4/2015 for construction of house property which was completed on 2/4/2019.The amount is still unpaid. The deduction of interest for AY 2020- 2021 shall be: (a) ₹60,000 (b) ₹96,000 (c) ₹240,000 (d) ₹1,08,000 60. Unrealized rent is allowed as a deduction from: (a) gross annual value (b) net annual value (c) income from the house property (d) actual rent 61. An assessee has borrowed money for purchase of a house & interest is payable outside India. Such interest shall: (a) be allowed as deduction (b) not be allowed on deduction (c) be allowed as deduction if the tax is deducted at source (d) none of the above 62. The basis of chargeability under the head income from house property is — (a) Annual Value; (b) Municipal Value; (c) Standard Rent; (d) Fair Rent 63. Which out of the following is not a case of deemed ownership of house property? (a) Transfer to a spouse for in adequate consideration (b) Transfer to a minor child for in adequate consideration (c) Holder of an impartible estate (d) Co-owner of a property 64. Municipal tax is deducted from (a) GAV (b) NAV (c) Taxable income (d) income from house property 65. Charging Section of house property is- (b) Section 28 (a) Section 17 (d) Section 45 (c) Section 22 158

66. Mr. J had one self-occupied house property in Mumbai. Fair rent of that property is ₹56,000 per annum. Municipal valuation is ₹28,000. Municipal taxes paid are ₹5,000 including ₹1,000 for a near lier year. The house was constructed in December, 2011 with a loan of ₹12,00,000 from a bank taken in November,2010. During the AY 2020-2021, the assessee refunded ₹2,30,000 which includes ₹1,68,000 as current year interest. Compute the income from house property for AY2020-2021? (a) Loss of ₹30,000 (b) Loss of ₹1,68,000 (c) Nil (d) Loss of ₹1,50,000 67. Where Standard Rent is not available then GAV shall be higher of (a) fair rent and municipal value (b) Municipal value and actual rent (c) Fair rent and municipal value and actual rent 68. The annual rental value of a house determined by the municipal authority is ₹1,20,000 whereas its annual rent received/receivable is ₹1,50,000. Municipal taxes of the house property are ₹20,000 out of which ₹15,000 has been paid during the PY. The NAV of the house property in this case shall be (a) ₹1,20,000 (b) ₹1,50,000 (c) ₹1,30,000 (d) ₹1,35,000 69. Mr. J is owner of a big house which is let out at the Rent of ₹20,000 pm. Municipal Value of the House ₹15,000 pm, Fair Rent ₹21,000 pm, Standard Rent ₹18,000 pm and Municipal Tax paid are ₹5,000 pa. Calculate NAV of the House. (a) ₹2,38,000 (b) ₹2,16,000 (c) ₹2,40,000 (d) ₹2,35,000 70. Assume in question 69, the Property was vacant for 2 months. Calculate NAV (a) ₹1,95,000 (b) ₹2,35,000 (c) ₹2,00,000 (d) ₹1,76,000 71. Assume that in question 69 House Property is self-occupied for the entire year, calculate NAV. (a) ₹2,00,000 (b) ₹2,16,000 (c) Nil (d) None of the above 72. Assume that in question 69 the House Property was vacant for the entire year NAV would be. (a) ₹1,76,000 (b) ₹5,000 (c) Nil (d) None of the above 159

73. Mr. J is owner the House which has two floors. The ground floor is let out at ₹40,000 pm and first floor is self-occupied. Municipal Taxes paid for full house are ₹80,000 pa and interest on borrowed capital for full house payable is ₹45,000 pa. Calculate income from House Property. (a) ₹2,63,000 (b) ₹2,85,000 (c) ₹22500 (d) ₹22,500 74. Mr. J has given his house on Rent to Mr. D at ₹20,000pm.On1/4/2018 they entered into an agreement whereby Rent is increased from ₹20,000pmto ₹25,000pm, which is effected from 1/1/2019. Municipal Taxes paid are ₹10,000. Calculate his House Property Income. (a) ₹2,03,000 (b) ₹2,15,000 (c) ₹2,13,500 (d) ₹2,90,000 75. Mr. J and Mr. D are brother and Co-owners of the house which has four identical units. Both brothers have self-occupied one unit each and one uniteach is let out at ₹20,000 pm each. Municipal taxes paid by brothers for full house property are ₹1,00,000 and interest on borrowed capital is ₹1,50,000. Both of them have a salary income of ₹4,00,000 each. Calculate total income for Mr. J. (a) ₹2,30,000 (b) ₹2,10,000 (c) ₹4,75,000 (d) ₹4,05,500 76. In Q 83, Calculate total income for Mr. D (a) ₹4,05,500 (b) ₹2,10,000 (c) ₹4,70,000 (d) ₹4,05,000 Solve Q 77 and Q80 from the following information: Mr. J is owner of a flat at Delhi which is let out to ABC Ltd. at ₹20,000pm. He has paid Municipal Taxes of ₹10,000 for the House Property. He is working in ABC Ltd. getting basic salary of ₹25,000 pm, DA ₹5,000 pm(forming part of the salary for the Retirement benefits), various allowances of ₹6,000 pm and various Perquisites which have money value of ₹3,000 pm. The company has given him the above mentioned flat as Rent Free Accommodation. Mr. J has deposited ₹50,000 in PPF account and has donated ₹25,000 to PMNRF. 77. Calculate income from house property. (a) ₹2,40,000 (b) ₹1,62,000 (c) ₹2,30,000 (d) ₹1,61,000 78. Calculate total income of Mr. J. (b) ₹6,18,800 (a) ₹5,32,000 (d) ₹6,78,000 (c) ₹6,93,800 160

79. Mr. X (67 years), a non-resident owns a house in India which is let out with effect from 1/10/2019. The construction of the house was completed on1/9/2019.The house is let out a monthly Rent of ₹50,000. Rent of one month could not be realized. Municipal valuation of the House is ₹40,000 pm. Municipal Taxes due for PY 2019-2020 are ₹40,000 out of which Taxes paid during the year are ₹30,000. Out of this ₹30,000, ₹20,000 is paid by the owner and ₹10,000 is paid by the tenant. Mr. X took a loan of ₹10,00,000 from LIC on 1/9/2014 @12% pa for construction of this House. ₹2,00,000 was repaid on 31/3/2017.Remainingamount is unpaid so far, calculate the income from house property. (a) ₹35,400 (b) ₹1,61,000 (c) ₹35,400 (d) ₹67,800 80. Mr. A owns a house at Delhi. From the particulars given below, compute income from house property. Municipal valuation ₹2,50,000 Fair Rent ₹2,80,000 Standard Rent ₹2,60,000 Annual Rent ( ₹25,000 x 12) ₹3,00,000 Vacancy period1 month UnrealisedRent1 month Municipal Taxes paid (Half of it was born by tenant) ₹25,000 Expenses on repair ₹20,000 Mr. A had borrowed a sum of ₹20,00,000 @10% pa from LIC Housing Ltd. on 1/8/2015andthe construction of the house was completed on1/1/2019. Loan is still unpaid. (a) ₹1,40,417 (b) ₹2,37,500 (c) ₹3,06,667 (d) ₹3,00,000 161

ANSWERS 1. (b) 2. (c) 3. (b) 4. (c) 5. (c) 6. (c) 7. (c) 8. (a) 9. (b) 10. (b) 11. (b) 12. (c) 13. (a) 14. (b) 17. (d) 18. (d) 19. (b) 20. (b) 21. (a) 22. (b) 23. (c) 15. (d) 16. (c) 26. (c) 27. (d) 28. (c) 29. (a) 30. (c) 31. (a) 32. (c) 35. (a) 36. (a) 37. (b) 38. (c) 39. (b) 40. (c) 41. (c) 24. (b) 25. (a) 44. (a) 45. (a) 46. (b) 47. (b) 48. (b) 49. (a) 50. (f ) 52. (d) 53. (g) 54. (e),(g) 55. (g) 56. (a) 57. (b) 58. (b) 33. (d) 34. (b) 61. (c) 62. (a) 63. (d) 64. (a) 65. (c) 66. (b) 67. (c) 70. (a) 71. (c) 72. (b) 73. (a) 74. (c) 75. (d) 76. (a) 42. (a) 43. (b) 79. (c) 80. (a) 51. (a),(c),(e) 59. (d) 60. (d) 68. (d) 69. (d) 77. (d) 78. (b) 162

SOLUTIONS Let out for full year Nil Q2. Calculation of Net Annual Value ₹1,50,000 Nature of the House Property ₹1,20,000 Municipal Value ₹1,20,000 Fair Rent ₹1,30,000 Standard Rent ₹1,30,000 Expected Rent ₹1,40,000 Actual Rent ₹10,000 GAV Less: Municipal Taxes paid NAV Q5. Calculation of Net Annual Value Vacant for full year NIL Nature of the House Property Municipal Value ₹1,20,000 Fair Rent NIL Standard Rent Expected Rent ₹1,20,000 Actual Rent NIL GAV Less: Municipal Taxes paid ₹1,20,000 NAV ₹20,000 ( ₹1,00,000) Q12. Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2015 to 31/3/2019 Step 2: Pre construction period interest ₹5,00,000 ×12%×48/12 = ₹2,40,000/5 = ₹48,000 Step 3: Current year interest 2019 – 2020 = ₹5, 00,000 × 12% = ₹60,000 Step 4: Add both interests ₹36,000 + ₹60,000 = ₹1, 08,000 Q15. Calculation of tax liability on unrealized rent Unrealized rent recovered in Financial year : ₹ 45,000 Less: Adjustment of unrealized Rent : ₹ 20,000 NAV : ₹ 25,000 Less Deduction 24(a) 30% : ₹ 7,500 Income from House Property : ₹ 17,500 163

Q13. Since construction was completed within the period of 5 years, the maximum deduction allowed for the interest shall be ₹1,08,000. Q25 and Q26. Calculation of Net Annual Value Let out for full year ₹1,44,000 Nature of the House Property ₹1,68,000 Municipal Value ₹1,56,000 Fair Rent ₹1,56,000 Standard Rent ₹1,80,000 Expected Rent ₹1,80,000 Actual Rent ₹4,000 GAV ₹1,76,000 Less: Municipal Taxes paid NAV Q27 and Q28. Calculation of Net Annual Value ₹15,000 x 12 Let out for full year ₹21,000 x 12 ₹1,80,000 Nature of the House Property ₹18,000 x 12 ₹2,52,000 Municipal Value ₹2,16,000 Fair Rent ₹20,000 x 12 ₹2,16,000 Standard Rent ₹2,40,000 Expected Rent ₹2,40,000 Actual Rent ₹5,000 GAV ₹2,35,000 Less: Municipal Taxes paid NAV Q29. Calculation of net Annual Value Partly let out, partly Nature of the House Property self-occupied ₹2,16,000 Expected Rent ( ₹40,000) Less: Loss due to Vacancy ( ₹20,000x2) ₹1,76,000 Reasonable Rent ₹2,00,000 Actual Value ( ₹20,000 x 10) ₹2,00,000 Gross Annual Value ₹5,000 Less: Municipal Taxes paid 164

Net Annual Value ₹1,95,000 Q31 and Q32. Calculation of House Property income FF is Self- GF is Let out occupied GAV ₹4,80,000 Nil ₹40,000 Nil Less: Municipal Taxes paid ₹4,40,000 Nil NAV ₹1,32,000 Nil ₹22,500 ₹22,500 Less: Deduction u/s 24 (a) Standard Deduction ₹2,85,500 ( ₹22,500) ₹2,63,000 Less: Deduction u/s 24 (b) Interest on Borrowed Capital House Property income Net house property income Q33, Q34 and Q35. Calculation of house property income Particulars House 1 House 2 House 3 Municipal value ₹1,00,000 ₹1,50,000 ₹2,00,000 Fair rent ₹1,40,000 ₹1,80,000 ₹2,40,000 Standard rent ₹1,20,000 ₹2,00,000 Expected rent ₹1,20,000 ₹1,80,000 NA Loss of rent due to vacancy ₹17,500 ₹2,40,000 Reasonable rent NIL ₹1,62,500 ₹1,26,000 Actual rent ₹1,20,000 ₹1,92,500 ₹1,14,000 GAV ₹1,44,000 ₹1,92,500 ₹1,26,000 Municipal taxes Paid ₹1,44,000 ₹80,000 ₹1,26,000 NAV ₹20,000 ₹1,12,500 ₹30,000 Deduction u/s 24(a): Statutory deduction: ₹1,24,000 ₹33,750 ₹96,000 30% of NAV ₹37,200 ₹28,800 Deduction u/s 24(b): Interest on loan ₹40,000 house property ₹30,000 ₹20,000 Taxable House property income ₹38,750 ₹56,800 ₹47,200 165

Q36. Calculation of Interest on Borrowed 1/11/2014 to 31/3/2017 ₹38,667 Q37. capital ₹80,000 Step 1: Pre construction period ₹10,00,000 × 8% × ₹1,18,667 29/12 = ₹1,93,333/5 = Step 2: Pre construction period interest Step 3: Current year interest = ₹10,00,000 × 8% = Step 4: Add both interests ₹80,000 + ₹38,667 Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2014 to 31/3/2017 ₹1,08,000 Step 2: Pre construction period interest ₹9,00,000 × 20% × 36/12 = ₹1,80,000 ₹5,40,000/5 = ₹2,88,000 Step 3: Current year interest = ₹9,00,000 × 20% = Step 4: Add both interests ₹1,80,000 + ₹1,08,000 = If house is self-occupied then deduction of Interest will be restricted to ₹2,00,000 since construction was completed within 5 years from the end of the year in which loan was taken. Q38. If house is let out then deduction of Interest shall be ₹2,88,000. Q39. Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/1/2014 to 31/1/2017 Step 2: Pre construction period ₹1,00,000 x 12% x 34/12 = ₹6,800 ₹6,800 interest ₹34,000/5 = Step 3: Current year interest NIL, since loan has been paid back Step 4: Add both interests ₹6,800 + 0 = Q58. If house is self-occupied then deduction of Interest will be restricted to ₹2,00,000 since construction was not completed within 5 years from the end of the year in which loan was taken. Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2013 to 31/3/2016 = Step 2: Pre construction period ₹5,00,000 x 12% x 36/12 ₹36,000 interest ₹1,80,000/5 = ₹60,000 2017– 2018 = ₹5,00,000 x 12% = 166

Step 3: Current year interest ₹36,000 + ₹60,000 = ₹96,000 Step 4: Add both interests ₹48,000 Q59. ₹60,000 ₹1,08,000 Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2013 to 31/3/2016 Step 2: Pre construction period ₹5,00,000 x 12% x 48/12 = interest ₹2,40,000/5 = Step 3: Current year interest 2015 - 2015= ₹5,00,000 x 12% = Step 4: Add both interests ₹36,000 + ₹60,000 = Q66. Calculation of House Property income Municipal valuation 28,000 Fair rent 56,000 Standard rent NA Expected rent 56,000 Actual rent NA GAV NIL Less: Municipal Taxes paid NIL NAV NIL Less: Deduction u/s 24(a): Standard Deduction NIL Less: Deduction u/s 24(b): Interest on Borrowed Capital 1,68,000 House Property income (1,68,000) Q68. Calculation of Net Annual Value ₹1,20,000 NIL Municipal Value NIL Fair Rent Standard Rent ₹1,20,000 Expected Rent Nil Less: Loss due to vacancy Reasonable Rent ₹1,20,000 Actual Rent 1,50,000 Gross Annual Value Less: Municipal Taxes paid ₹1,50,000 Net Annual Value ₹15,000 ₹1,35,000 167

Q69. Calculation of Net Annual Value Municipal Value ₹1,80,000 Fair Rent ₹2,52,000 Standard Rent ₹2,16,000 Expected Rent ₹2,16,000 Less: Loss due to vacancy NIL Reasonable Rent ₹2,16,000 Actual Rent ₹2,40,000 Gross Annual Value ₹2,40,000 Less: Municipal Taxes paid 5,000 Net Annual Value ₹2,35,000 Q70. Calculation of Net Annual Value ₹1,80,000 ₹2,52,000 Municipal Value ₹2,16,000 Fair Rent ₹2,16,000 Standard Rent ₹20,000 Expected Rent ₹1,76,000 Less: Loss due to vacancy ₹2,00,000 Reasonable Rent ₹2,00,000 Actual Rent 5,000 Gross Annual Value ₹1,95,000 Less: Municipal Taxes paid Net Annual Value ₹1,80,000 ₹2,52,000 Q71. Calculation of Net Annual Value ₹2,16,000 ₹2,16,000 Municipal Value NIL Fair Rent ₹2,16,000 Standard Rent NIL Expected Rent NIL Less: Loss due to vacancy NIL Reasonable Rent NIL Actual Rent Gross Annual Value ₹2,16,000 Less: Municipal Taxes paid NIL Net Annual Value ₹2,16,000 Q72. Calculation of Net Annual Value Expected Rent Less: Loss due to vacancy Reasonable Rent 168

Actual Rent NIL Gross Annual Value NIL Less: Municipal Taxes paid 5,000 Net Annual Value (5,000) Q73. Calculation of Net Annual Value Let out Self- Nature occupied 4,80,000 Actual Rent 4,80,000 NIL Gross Annual Value 40,000 NIL Less: Municipal Taxes paid 4,40,000 NIL Net Annual Value 1,32,000 NIL Section 24(a) 22,500 NIL Section 24(b) 2,85,500 22,500 Income 2,63,000 (22,500) Net income from house property Q74. Calculation of income from House Property Gross Annual Value ₹25,000 x 12 ₹3,00,000 Less: Municipal Taxes paid ₹10,000 Net Annual Value ₹2,90,000 Less: Deduction u/s 24(a) @ 30% of NAV ₹87,000 Less: Deduction u/s 24(b) Interest on borrowed capital Add: Recovery of arrear of Rent ₹5,000 x 3 ₹15,000 NIL Less: Deduction of 30% ₹4,500 Taxable House Property Income ₹10,500 ₹2,13,500 Q75 and Q76. Calculation of income from House Property 2 Floors SO 2 Floors LO GAV NIL Less: Municipal Taxes paid NIL NAV NIL Less: Deduction u/s 24(a) 30% of NAV NIL 169

Less: Deduction u/s 24(b) interest on borrowed capital ₹75,000 House Property income ( ₹75,000) Calculation of Total income Q83 Mr. J Income from Salary ₹4,00,000 Q84 ₹75,500 Mr. D Income from House Property ( ₹2,26,000 – ₹75,000 = ₹4,00,000 ₹1,51,000/2 ) ₹4,75,500 ₹75,500 ₹70,000 Gross Total Income ₹4,05,500 ₹4,75,500 ₹70,000 Less: Deduction under Section 80C ₹4,05,500 Total Income ₹2,40,000 ₹10,000 Q77. Calculation of income from House Property ₹2,30,000 GAV ₹69,000 Less: Municipal l Taxes paid NAV NIL Less: Deduction u/s 24(a) 30% of NAV ₹1,61,000 Less: Deduction u/s 24(b) interest on borrowed capital House Property Income ₹5,32,800 ₹1,61,000 Q78. Calculation of Total Income ₹6,93,800 Income from salary ₹50,000 Income from House Property ₹25,000 Gross Total income ₹6,18,800 Less: Deductions under Section 80C under Section 80G ₹2,80,000 Total Income ₹2,80,000 Q79. Computation of House Property income. ₹50,000 ₹2,30,000 Municipal Valuation ( ₹40,000 X 7) ₹3,00,000 Expected Rent Less: loss of Rent due to vacancy Reasonable Rent Actual Rent ( ₹50,000 x 6) 170

Less: unrealised Rent of 1 month ₹50,000 ₹2,50,000 Gross Annual Value ₹2,50,000 Less: Municipal Taxes paid Net Annual Value ₹20,000 Less: Standard Deduction (30% of ₹2,30,000) ₹2,30,000 Less: Interest on borrowed capital ( ₹69,000) Income from House Property ( ₹1,96,400) ( ₹35,400) Calculation of Interest on borrowed capital Step 1: Pre-construction period: 1/9/2012 to 31/3/2017 = 55 months Step 2: Pre-construction interest: ₹10,00,000 X 12% X 31/12 ₹3,10,000 ₹8,00,000 X 12% X 24/12 ₹1,92,000 Total ₹5,02,000 Amortization ₹5,02,000 / 5 ₹1,00,400 Step 3: Current period interest: ₹8,00,000 X 12% ₹96,000 Step 4: total interest: ₹1,00,400 + ₹96,000 ₹1,96,400 Q80. Computation of Income from House Property. Municipal Value Fair Rent ₹2,50,000 Standard Rent ₹2,80,000 Expected Rent ₹2,60,000 Less: Loss on account of vacancy ₹2,60,000 Reasonable Rent Actual Rent less unrealised Rent ₹25,000 Gross Annual Value ₹2,35,000 Less: Municipal Tax paid by land lord ( ₹25,000/2) ₹2,50,000 Net Annual Value (NAV) ₹2,50,000 Less: Deduction u/s 24(a) Standard deduction @ 30% of NAV Less: Deduction u/s 24(b) Interest on loan for construction ₹12,500 Income from House Property ₹2,37,500 ₹71,250 ₹3,06,667 ( ₹1,40,417) Working Notes for interest calculation 32 months 1) Pre construction period: 1/8/2015 to 31/3/2018 ₹5,33,333 2) Pre construction interest: ₹20,00,000 X 10% X 32/12 ₹1,33,333 3) Amortization ₹5,33,333 / 5: ₹2,00,000 4) Interest for the current FY ₹20,00,000 X 10% ₹2,00,000 5) Total interest: Post period interest ₹1,06,667 ₹3,06,667 Pre period interest Total interest 171

Sub-Section 2.3 Profits &Gains of Business or Profession Section 28 to 44DB Learning Objectives After studying this unit, you would be able to understand -  the meaning of “business” and “profession”  when income is chargeable under this head  what are the admissible deductions while computing income under this head  what are the inadmissible deductions while computing income under this head  when certain receipts are deemed to be income chargeable to tax under this head  which are the deductions allowable only on actual payment  who are the assessees required to compulsorily maintain books of account  when audit of accounts is compulsory  who are the assessees to whom presumptive tax provisions apply  how income is computed on presumptive basis in case of such assessees 2.3.0. General Business [Section 2(13)] - \"business\" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Business connotes some activity, which is carried on by devoting time, attention, and labour of person with the motive to make profits. Even an isolated transaction may be considered as business under certain circumstances. Profession [Section 2(36)] - \"profession\" includes vocation. Profession is when person acquires knowledge, skill, on qualifying some degree/diploma course. Vocation is the activity, which is not done on the basis of knowledge acquired but on account of inborn talent, skill and attributes. 172

2.3.1. Scope of Income &Its Computation Profits and Gains of Business or Profession – Section 28 (Basis of Charge) The following incomes shall be chargeable to income-tax under the head “Profits and gains of business or profession”, - (i) the profits and gains of any business or profession which was carried on by the assessee (ii) during the previous year. Export incentives (iii) (a) profits on sale of an import license (iv) (b) cash assistance against exports (c) Custom duty or excise duty drawback (v) the value of any benefit or perquisite arising from business or profession. (vi) Compensation received: (vii) (a) For termination/modification of agreement for managing a company. (viii) (b) For termination/modification of terms of agency. (ix) (c) For vesting of management of any property or business in government under any law. Income from specific services performed for its members by a trade, professional or similar association. Value of any benefit or perquisite arising during the course of carrying on of any business or profession. Interest, salary, bonus, commission or remuneration due or received by a partner of a firm in which he is a partner. Any sum received under Key man Insurance Policy including bonus on such policy. (viii) Income from speculation business. Any sum received in cash or in kind under an agreement of not carrying out any activity in relation to any business. Amendment Made under Section 28 [W.e.f. A.y. 2019-20] Clause (via) inserted under Section 28 It says that any inventory or stock trade converted into capital asset determined in the prescribed manner then the fair market value of inventory as on the date of conversion shall be chargeable to tax as business income. Determination of FMV for inventory under Rule 11UAB (i) being an immovable property, being land or building or both, shall be the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of such immovable property on the date on which the inventory is converted into, or treated, as a capital asset; (ii) being jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, shares or securities referred to in rule 1 lUA, shall be the value determined in the manner 173

provided in sub-rule (1) of rule 11UA and for this purpose the reference to the valuation date in the rule 11U and rule 1 lUA shall be the date on which the inventory is converted into, or treated, as a capital asset; (iii) being the property, other than those specified in clause (i) and clause (ii), the price that such property would ordinarily fetch on sale in the open market on the date on which the inventory is converted into, or treated, as a capital asset.”. Method of Computation – Section 29 Read with Section 145 The income under head PGBP shall be computed in accordance with the Sections 30 to 43D. Method of computing profit under the head PGBP Profit as per Profit & Loss Account Step 1: Add: Incomes of business not recorded in Profit & Loss Account. Step 2: Less: Income credited to Profit & Loss Account but which are not business incomes. Step 3: Add: Expenditure debited to Profit & Loss Account, which are not allowed to be debited. Step 4: Less: Expenditure relating to business but not debited to Profit & Loss Account= Balance amount is the income under head PGBP Assessee may follow either mercantile system of accounting or may follow cash basis of accounting. Further, assessee must follow Income Computation & Disclosure Standards while computing income u/h PGBP. Till date, 10 ICDS have been notified which needs to be followed w.e.f. FY 2017-18. 2.3.2. Deductible & Inadmissible Expenses Depreciation – Section 32(1)(ii) Conditions Required to be Fulfilled before Claiming Depreciation: 1. The asset should be actually used by the assessee. Use includes passive use also (e.g. fire extinguisher installed in business premises). 2. The asset should be used by the assessee for the purposes of his business or profession. 3. The assessee must be the owner of the asset. 174

Rates of Depreciation Nature of asset Rate Building 5% 1 Residential buildings (e.g. let out to employees) 10% 2 Other buildings Furniture and fittings including electrical fittings 10% Plant &Machinery 1 P&M other than those covered below 15% 2 Motor cars, buses – running them on hire (e.g. taxi) 30% 3 Other motor cars 15% 4 Computers including computer software 40% 5 Books owned by assessees carrying on a profession - (a) Books, being annual publications 40% (b) Books, other than those covered by entry (a) above 40% Intangible Assets - patents, copyrights, trademarks, licenses, franchises, etc. 25% Points to be considered: 1. Depreciation rates are fixed by Income-tax Act, 1961 read with Income-tax Rules, 1962. These are mandatory in nature and are not minimum or maximum rates of depreciation. 2. In Income-tax Act, instead of calculating depreciation on each & every asset separately, concept of block of asset is being applied. 3. In block of assets concept, block is created for assets for which depreciation rate is prescribed separately. E.g. in case of building, there will be 2 blocks, for furniture & fittings – single block, P&M – 6 blocks, intangible assets – single block. 4. Depreciation rate prescribed above is applied to Written Down Value (WDV) of the concerned block existing on the last day of the relevant previous year (i.e. 31/03/2018). 5. Computation of WDV of the block as on 31/03/2020 WDV of the block as on 01/04/2019 (i.e. opening WDV) Add: Actual cost of assets acquired & put to use during the previous year belonging to this block Less: Sale price of assets sold during the year, insurance claim, scrap value, etc. (on accrual basis) = WDV of the block as on 31/03/2020 175

Note: It may be noted that first of all whole year purchases need to be added, and then whole year sales need to be subtracted. It may be further noted that actual sale price has to be subtracted irrespective of its actual cost, book value, WDV, etc. 6. Computation of WDV of the block as on 01/04/2019 (i.e. opening WDV) WDV of the block as on 31/03/2019 Less: Depreciation actually allowed in PY 2018-19 (i.e. in preceding year) 7. Same exercise needs to be done for each & every block separately 8. Depreciation rates prescribed above are not rates per annum but absolute rates. There shall be no calculation of depreciation day to day basis. Depreciation rate shall be applied on WDV as on 31/03/2020 (i.e. last day of the previous year) irrespective of the date of acquisition or date of put to use of the asset, except in following situation: If asset is acquired & put to use in the same PY and is put to use for less than 180 days during that PY, then depreciation rate on that particular asset shall be half of the normal rate of depreciation. Illustration-1 Compute depreciation u/s 32 in the following cases: Particulars P&M – 15% Building – 10% WDV as on Mach. A-D = Bldg. A-E = ₹7,40,000 01/04/2019 ₹4,00,000 Purchases made Mach. E – ₹2,00,000, Bldg. F – ₹2,20,000, pur. – 11/06/2019, put during the year pur. – 08/05/2019, to use – 20/06/2019 put to use – Bldg. G – ₹1,60,000, pur. – 15/07/2019, put 08/05/2019 to use – 15/11/2019 Sales made Mach. C – ₹60,000 Bldg. D – ₹90,000 during the year 176

Solution: Calculation of Depreciation u/s 32 Particulars Plant & Machinery Building WDV as on 01/04/2019 4,00,000 2,00,000 7,40,000 Add:- Addition During 3,80,000 the Year 60,000 90,000 Less:- Sale During the Year 5,40,000 10,30000 5,40,000*15% =81,000 Value as on31/03/2020 1,60,000*10%*6/12 +(8,70,000*10%) =95,000 Depreciation Capital Gains on sale of depreciable assets – Section 50 Situation Part of the block is Full block is transferred transferred Sale price > opening WDV WDV = Nil, Depreciation = WDV = NA, Depreciation + purchases made during Nil, excess shall be STCG = NA, excess shall be STCG the year u/h Capital Gains u/h Capital Gains Sale price < opening WDV WDV = positive, WDV = NA, Depreciation + purchases made during depreciation = positive, no = NA, deficiency shall be the year impact u/h Capital Gains STCL u/h Capital Gains Illustration-2 Compute depreciation u/s 32 and/or capital gains in the following situations: Case 1: Opening WDV ₹2,00,000 consisting of Building A, B & C. Rate of depreciation 10%. Building D purchased on 10.10.2019 for ₹50,000. Building B sold for ₹1,00,000 on 04.04.2019. What will be your answer if building B sold for ₹4,50,000. Case 2: Opening WDV ₹2,00,000 consisting of Building A, B & C. Rate of depreciation 10%. Building D purchased on 10.10.2019 for ₹50,000. All buildings sold for ₹1,00,000 on 04.02.2020. What will be your answer if buildings sold for ₹4,50,000. 177

Solution: 2,00,000 Case 1 1,00,000 50,000 WDV as on 01/04/2019 1,50,000 Less Sale During the Year (50000*10% *6/12)+(1,00,000*10%) =12,500 Add Purchase During the year Value as on 31/03/2020 Depreciation If Building B sold for ₹4,50,000 Then WDV as on 01/04/2019 2,00,000 Less Sale During the Year 4,50,000 Add Purchase During the year 50,000 Value as on 31/03/2020 (2,00,000) Depreciation No Depreciation is charged Short Term Capital Gain is ₹2,00,000. Case 2 WDV as on 01/04/2019 2,00,000 Less Sale During the Year (all units) 1,00,000 Add Purchase During the year 50,000 Value as on 31/03/2020 1,50,000 Depreciation No Depreciation is charged. If Building Sold For ₹4,50,000 Then Short Term Capital Loss ₹1,50,000. WDV as on 01/04/2019 2,00,000 Less Sale During the Year 4,50,000 Add Purchase During the year 50,000 Value as on 31/03/2018 2,00,000 Depreciation No Depreciation is charged. Short Term Capital Gain ₹2,00.000. 178

Additional Depreciation – Section 32(1)(iia) In case following conditions are fulfilled, then additional depreciation @ 20% of actual cost is allowed in the first year of use of asset in addition to depreciation calculated above: 1. Assessee’s business must be of manufacturing/production of articles/things, or business of generation or generation & distribution of power. 2. Assessee may be any assessee. 3. Additional depreciation is allowed only on plant & machinery, except: a) Second hand P&M b) Installed in office premises, residential accommodation, or guest house (i.e. additional depreciation is allowed only if P&M is installed in factory premises) c) Office appliances, road transport vehicles, ships, aircraft 4. Additional depreciation is allowable only in the first year of installation of asset. In other words, additional depreciation can be claimed for every year in respect of an assessee but in respect of an asset, only in first year of installation. 5. If less than 180 days condition is being fulfilled (as stated above), the additional depreciation shall be 10% only. Balance 10% is not allowable in next year. 6. Additional depreciation shall also be subtracted from WDV of the block at the end of the PY to compute next year’s opening WDV. 7. Add amount of depreciation provided i.e. 50% that will be provided ………… Illustration-3 Compute depreciation allowable u/s 32 for AY 2020-21 from the following information assuming assessee is engaged in the business of manufacturing of goods: Opening WDV of P&M as on 01/04/2019 = ₹20,00,000 Purchases made during the year: Name of Date of Date of put Amount New/Second Installed at asset acquisition to use Hand A 1,00,000 B 04/04/2019 11/05/2019 2,00,000 New Factory C 11/05/2019 26/07/2019 Second Factory D Hand 17/06/2019 16/08/2019 3,00,000 New Office 18/08/2019 20/10/2019 4,00,000 New Factory 179

E 19/09/2019 26/11/2019 5,00,000 Second Factory Hand Office F 25/10/2019 24/02/2020 6,00,000 Sales made during the year from old assets: ₹4,00,000 New Solution: Calculation of Depreciation WDV as on 01/04/2019 20,00,000 Less:- Sale During the Year 4,00,000 Add:-Purchase During the Year 21,00,000 Value as on 31/03/2020 37,00,000 Normal Depreciation (15,00,000*15%*6/12) + (22,00,000*15%) Additional Depreciation =4,42,500 (1,00,000*20%)+ (4,00,000*20%*6/12) =60,000 Total Depreciation 5,02,500 Unabsorbed Depreciation – Section 32(2) 1. Depreciation calculated as above (i.e. normal depreciation + additional depreciation, if any) can’t exceed Income u/h PGBP before depreciation. If it exceeds the Income u/h PGBP before depreciation, then excess shall be called unabsorbed depreciation. 2. If there is already loss (i.e. Income u/h PGBP before depreciation is already negative), then whole of the depreciation shall be called unabsorbed depreciation. In that case there shall be two things viz., unabsorbed depreciation (governed by section 32(2)) & unabsorbed business losses (governed by section 72). 3. Unabsorbed depreciation, calculated as above shall be set off with other incomes of the assessee under any of the heads, and balance if any, shall be carried forward to next year. 4. In next year it shall be merged with next year’s depreciation, and can be set off with any income of the assessee in next year. 5. In this manner it can be carried forward indefinitely. 180

6. Even if business, to which unabsorbed depreciation pertains, is discontinued, still assessee can carry forward & set off such unabsorbed depreciation from other incomes of the assessee. Proportionate Depreciation In case of  (i) succession u/s 47(xiii) – succession of partnership firm by a company, or  (ii) succession u/s 47(xiv) – succession of proprietary concern by a company, or  (iii)succession u/s 47(xiiib) – succession of company by a LLP, or  (iv) succession as referred u/s 170 e.g. transfer by HUF to a member, or  (v) amalgamation, or demerger Section 32 states that first of all depreciation shall be calculated on assets transferred assuming that there was no such transaction. After that such depreciation shall be apportioned between predecessor & successor in the ratio of number of days for which the assets were used by them. It may be noted that depreciation on assets purchased by successor before or after such transaction shall be allowed to successor only. Illustration-4 M/s Sidhant & Co., a sole proprietary concern is converted into a company, Sidhant Co. Ltd. with effect from November 29, 2019. The written down value of assets as on April 1, 2019 is as follows: Items Rate of Depreciation WDV as on 1st April, 18 Building 10% ₹3,50,000 Furniture 10% ₹50,000 Plant and Machinery 15% ₹2,00,000 Further, on October 15, 2019, M/s Sidhant & Co. purchased a plant for ₹1,00,000 (rate of depreciation 15%). After conversion, the company added another plant worth ₹50,000 (rate of depreciation 15%). Compute the depreciation available to (i) M/s Sidhant & Co. and (ii) Sidhant Co. Ltd. for AY 2020-21. 181

Solution: Calculation of Depreciation Total Depreciation (For all assets held or purchase by M/s Sidhant & co) Items Depreciation Building 3,50,000*10% = 35,000 Furniture 50,000 *10% =5000 P & M (2,00,000+1,00,000) (2,00,000*15%) +(1,00,000*15%*6/12) =37500 Total 77500 Depreciation for Sidhant & co 77500*242/366 =51,243 Depreciation for Sidhant co Ltd 77500*124/366 =26,257 Depreciation on Plant purchased by company =50,000*15*6/12 =3750 Total Depreciation for Sidhant co Ltd 3750+26257 =30007 Actual Cost – Section 43(1) 1. In case building is being used by assessee for any other purpose, and then introduced in his business/profession, actual cost for depreciation purposes shall be actual cost of building less notional depreciation till date. It may be noted that this provision is not applicable for other assets. 2. In case asset cost includes Excise Duty and/or VAT, and of such Excise Duty and/or VAT, input tax credit (also called CENVAT Credit) is taken, then amount of such input tax credit shall be reduced from total cost of such asset, and on balance amount depreciation shall be allowed. Illustration-4 A car purchased by S on 10.8.2015 for ₹3,25,000 for personal use is brought into the business of the assessee on 01.12.2019, when its market value is ₹1,50,000. Compute the actual cost of the car and the amount of depreciation for the Assessment year 2020-21 assuming the rate of depreciation to be 15%. Solution: 182

Actual cost of car is taken ₹3,25,000 i.e Purchase cost of car on that day Depreciation on car for AY 2020-21 is 32500*15% =48,750 Asset used partly for business purposes and partly for other purposes – Section 38 1. In case asset is being used for business purposes (say 60%) as well as for other purposes (i.e. 40%), then depreciation calculated above shall be treated as business expense to the extent the asset was used for business purposes. It may be noted that actual cost of the asset shall not be apportioned in this case while adding the same to the block of assets. 2. Examples of other purposes may be personal use of motor car, agricultural use of vehicle, etc. 3. In case other purpose is personal use, then for the purpose of computing next year’s opening WDV (e.g. 01/04/2020), depreciation actually allowed (i.e. 60%) is to be subtracted from WDV of the block as on the last day of the previous year (i.e. 31/03/2019). 4. In case other purpose is agricultural use, then for the purpose of computing next year’s opening WDV (e.g. 01/04/2020), whole of the depreciation (i.e. business use + agricultural use = 100%) shall be subtracted from WDV of the block as on the last day of the previous year (i.e. 31/03/2020). Illustration-5 Mr. Tenzingh is engaged in business which is taxable u/h PGBP. Relevant information pertaining to the year ended 31.3.2020 are given below: WDV of Car as on 1.4.2017 ₹ WDV of Machinery as on 31.3.2019 (15% rate) 3,00,000 15,00,000 Besides being used for business purposes, the car is also used for personal use; disallowance for personal use may be taken at 20%. The machines were used in business operations. Compute the depreciation allowable u/s 32 for the assessment year 2020-21. Show the WDV of the assets as on 31.03.2020 and 01.04.2020. What shall be your answer in case car is being used for agricultural purposes instead of personal use? Solution: Calculation of Depreciation -if car used for personal use 183

Items Depreciation Car (3,00,000*15%*60%) =27000 Plant & Machinery (15,00,000*15%) =2,25,000 Total Depreciation 2,52,000 -if used for agriculture Items Depreciation Car (3,00,000*15%*100%) =45,000 Plant & Machinery (15,00,000*15%) =2,25,000 Total Depreciation 2,70,000  Expenditure on scientific research – Section 35  Research by assessee himself: Nature of expense Percentage of expense allowed Other assessee Company engaged in business of bio- technology Or manufacturing/production Revenue nature expenses (any 100% in the year of 150% in the year of type) incurred while business is incurrence only incurrence only going on Revenue nature expenses incurred in prior 3 years prior to the date of commencement of business Salary to research employees and 100% in the year of commencement of purchase of materials used in business research Other revenue expenses (e.g. Not allowed (dead loss) electricity, travelling, etc.) Capital nature expenses incurred while business is going on Land Not allowed (part of capital gains) Building 100% in the year of incurrence only Other (e.g. furniture, P&M, etc.) 100% in the 150% in the year of year of incurrence only incurrence only 184

Capital nature expenses incurred in prior 3 years prior to the date of commencement of business Land Not allowed (part of capital gains) Building 100% in the year of commencement of business Other e.g. furniture, P&M, etc.) 100% in the year of commencement of business Points to be noted: 1. No depreciation shall be allowed on capital nature expenses referred above. 2. If an asset, on which section 35 deduction has been allowed, is sold, then sale proceeds upto cost of such asset shall be taxable u/h PGBP and balance, if any, shall be taxable u/h Capital Gains – Section 41(3). 3. If such asset is used for the purposes of business, then same shall be added to relevant block of asset, but its actual cost shall be NIL. If later on, same is being sold, then sale proceeds shall be subtracted from block of assets (in terms of section 32 read with section 50). Illustration-6 Vivitha Bio-medicals Ltd. is engaged in the business of manufacture of bio-medical items. The following expenses were incurred in respect of activities connected with scientific research: Year ended Item Amount (₹) 31.03.2015 Land 10,00,000 (Incurred after 1.10.2016) Building 25,00,000 31.03.2018 Plant and machinery 5,00,000 31.03.2019 Raw materials 2,20,000 31.03.2020 Raw materials and salaries 1,80,000 The business was commenced on 01-10-2019. In view of availability of better model of plant and machinery, the existing plant and machinery were sold for ₹8,00,000 on 1.03.2020. Discuss the implications of the above for the assessment year 2020-21 along with brief computation of deduction permissible u/s 35 assuming that necessary conditions have been fulfilled. You are informed that the assessee’s line of business is eligible for claiming deduction u/s 35 at 200% on eligible items. 185

Solution: Calculation of deduction under u/s 35 Year ended Item Amount (Rs) Amount ( ₹) NIL 31.03.2015 Land 10,00,000 25,00,000 (Incurred after 1.10.2014) Building 25,00,000 NIL 31.03.2018 Plant and machinery 5,00,000 2,20,000 3,60,000 31.03.2019 Raw materials 2,20,000 30,80,000 31.03.2020 Raw materials and salaries 1,80,000 Total Donations to third parties: Purpose of Donee Expense u/h donation PGBP Scientific National Laboratory, University, IIT, specified Research person for approved scientific research 150% of the programme donations made Scientific Research Research association having object of scientific 150% of the research, university, college, other approved donations made Scientific institution Research 100% of the Research in Company having main object of scientific donations made social science research 100% of the or statistical donations made research Research association having object of such research, university, college, other approved institution If donation is being made for research other than above, or donation is being made to donee other than specified above, then nothing shall be allowed as a business expenses (i.e. shall be a dead loss) 186

Other Donations: Purpose of donation Donee company Expense u/h PGBP authority For carrying out any Public sector institution 100% of the eligible project or scheme Local National donations - Eligible project or Association or scheme should be for approved by promoting the social & Committee economic welfare of or the upliftment of the public – Section 35AC For Rural development Association/institution having 100% of the programmes – Section object of undertaking of any donations made 35CCA rural development programme. Association/institution engaged in training of persons for implementing rural development programmes. Rural Development Fund set up by the CG. National Urban Poverty Eradication Fund set up and notified by the CG. (3) Amortisation of Certain Preliminary Expenses – Section 35D Nature of expenditure (i) Feasibility report, project report, market survey, engineering services (ii) Legal charges for drafting of agreements (iii) In case of company, following expenses shall also qualify for deduction a) Drafting & printing of MoA, AoA b) Registration fees c) Underwriting commission, brokerage d) Drafting, typing, printing and advertisement of prospectus 187

It may be noted that under Income-tax Act, 1961, preliminary expenses are allowed to every assessee including company assessee. Quantum of Expenditure Assessee other than Company For Company assessee 5% of cost of project 5% of cost of project Whichever is lower Whichever is higher Actual expenditure 5% of capital Whichever employed is lower Actual expenditure Quantum of Deduction in a year Quantum of expenditure calculated above shall be allowed in 5 equal instalments starting from the year of commencement of business. Illustration-7 Jardine Ltd. is a newly incorporated Indian Company. It incurs the following expenditure in connection with the incorporation: Preparation of project report ₹ Market survey 4,00,000 Legal and other charges for issue of additional capital required for the 5,00,000 new unit 2,00,000 Total 11,00,000 The following further data is given: Cost of project 30,00,000 Capital employed 40,00,000 188

What is the deduction admissible to the company u/s 35D for AY 2020-2021? Solution: Calculation of deduction u/s 35D Higher of 5% Cost of project= 30,00,000*5% =1,50,000 5% Capital Employed= 40,00,000*5%= 2,00,000 Lower of 2,00,000 of actual expense (4) Other Expenses Allowed Nature of expense Conditions/remarks Employee’s health If paid in cash, then shall not be allowed as business insurance premium expense (i.e. dead loss) Interest on money If money is borrowed for the purposes of acquisition of borrowed asset, then interest of the period prior to put to use shall Interest on expansion of be added to the actual cost of the asset and then existing units till the depreciation shall be allowed on such interest amount additional assets are put to use will be added to There shall be no depreciation on livestock. Purchase cost actual cost and will not shall be allowed as an expense in the year of death of the be allowed as expense animal or in the year in which it becomes useless. Sale from PGBP. proceeds realised from carcasses/useless animal shall be Livestock subtracted from purchase cost, and balance shall be treated as expense. Bad debts Provision for bad & doubtful debts shall not be allowed as an expense. Bad debts shall be allowed as an expense only if following two conditions are being fulfilled: It was treated as income of the assessee of any PY 189

Expenditure on It was written as irrecoverable in the books of the accounts of the assessee. promotion of family Bad debts recovery shall be treated as business income of the assessee - Section 41(4). planning amongst If sales made by predecessor, and bad debts are also claimed by the predecessor, then any bad debts recovered employees by successor shall not be taxable in the hands of successor. Securities Transaction If sales made by predecessor, and then bad debts are Tax / Commodities claimed by the successor, then such bad debts shall be Transaction Tax allowed to successor as business expense and any bad debts recovery shall be taxable in the hands of successor. Other expenses (e.g. In short, assessee claiming bad debts and assessee salary, commission, recovering the bad debts shall be the same for taxability of advertisement, carriage such bad debts recovery. inward, rent, repairs, P&M insurance) Allowed to company assessee only. (i.e. for other assessees, same shall be dead loss & have no tax Expenditure on treatment) agricultural extension Revenue expenses are allowed in the year itself. project – Section 35CCC Capital nature expenses are allowed in 5 equal instalments. No depreciation on such assets. Expenditure on skill development project – Allowed as business expense subject to section 43B Section 35CCD Allowed if revenue in nature and are not personal. Further, incurred for the purposes of business or profession only. Deduction @ 150% of the expenses (whether capital or revenue in nature) incurred shall be allowed as business Expense Deduction @ 150% of the expenses incurred (except on land & building) shall be allowed as business expense only to company assessee. 190

Note: If any expense (other than bad debts) is allowed in any year, and subsequently any benefit is being received by the assessee (e.g. recovery of amount, cessation of liability), then such benefit shall be taxable in the hands of assessee and taxable even in the hands of successor if benefit received by the successor of business – section 41(1). (5) Expenses not Allowed/Expenses Disallowed Nature of expense Conditions/remarks 1. Any payment to resident (a) If TDS is not deducted during the PY, or (including salary) (b) If TDS is deducted during the PY (on or before 31/03/2018) but is not deposited with CG on or before on which TDS is deductible – the due date of return of income u/s 139(1) section 40(a)(ia) 30% of the expense shall be disallowed. 2. Any payment to Same shall be allowed in the year in which TDS is non-resident deposited with the CG. (except salary) This provision shall be applicable whether such expense is which is taxable outstanding on the last day of the PY or has been actually in the hands of paid during the PY. non-resident – section 40(a)(i) (a) If TDS is not deducted during the PY, or (b) If TDS is deducted during the PY but is not deposited 3. Salary to non- resident with CG on or before due date of return of income u/s 139(1) 4. Advertisement 100% of the expense shall be disallowed. Same shall be allowed in the year in which TDS is 5. Expenses payment made to deposited with the CG Shall not be allowed if TDS not deducted or not deposited with the CG. (permanent disallowance – will not be allowed in future) Advertisement in any souvenir, brochure, pamphlet, etc. published by a political party (because it’s way to give donations to political party). Donations to political party are not allowed as business expense. But donations to political party or electoral trust are allowed as deduction u/s 80GGB or 80GGC from GTI. ¤ If payment made to relatives for expenses is more than reasonable, then excess shall not be allowed as business 191

relatives – section expense. But full payment shall be treated as business 40A(2) revenue for such relative. 6. Payment made in In respect of an expense, if payment is made exceeding cash – section ₹10,000 in a single day, then whole of the expense shall be 40A(3) disallowed. If expense is incurred in a particular previous year, & payment is being made in any subsequent year exceeding ₹10,000 in a single day, then such expense shall be allowed in year of incurrence, but shall be treated as income of that subsequent year. Expense shall be allowed in following cases although made in excess of ₹10,000: i) Payment mad made by account payee cheque or account payee bank draft (ii) Payment made to any bank, LIC, Govt. (iii) Payment made by electronic clearing, credit card, debit card (iv) Payment made to cultivator, etc. for purchases of agricultural produce, animal husbandry, poultry farming, fish products v) Payment made in a town or village not served by a bank vi) Payment on which date bank is closed Note: In case of payment to transporter, limit of payment shall be ₹35,000. w.e.f. AY 18-19 Depreciation under Section 32 shall be disallowed if payment exceeding Rs.10,000 has been made in respected any depreciable asset. Also deduction U/s 35AD shall be disallowed. 7. Employer’s contribution to unapproved funds for welfare of employees (e.g. unapproved gratuity fund, unapproved provident fund) Such contribution is deducted by employer from 8. Employee’s employee’s salary and thereafter employer deposits the same in relevant fund. Contribution to If such contribution is not deposited by employer in relevant provident fund, fund on or before due date of deposit in relevant fund (i.e. 20th of next month), same shall be treated as income of the employer. Superannuation If later on same is being deposited by employer in the relevant fund, still same shall not be allowed to employer as an expense in any year (i.e. permanent difference). Fund, etc. 9. Certain deductions to (a) tax, duty, cess or fee under any law 192

be only on actual (b) employer’s contribution to approved provident fund or superannuation fund or gratuity fund or any other fund for the payment – section 43B welfare of employees (c) bonus or commission to employees (d) interest on any loan from scheduled bank/public financial institution/State financial corporation/State industrial investment corporation (e) leave salary (f) any amount payable to Indian Railways. These expenses are allowed in the year in which they are incurred only if actual payment is being made on or before due date of return of income u/s 139(1). Otherwise these 10. CSR Expenditure Expenditure incurred on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2016 shall not be allowed u/s 37. But if such expenditures get covered by other sections viz., sections. 11. Payment to employees on Allowed as expense over the five years starting VRS - Section 35DDA from the year in which it is actually paid. 12. Any expenditure incurred for any purpose which is an offence or which is a Pharmaceutical company distributing freebies to Doctors, etc. shall not be allowed as an expense as the same is prohibited by Medical Council Act, 1956. 13. Any sum paid under Income- Tax itself, interest on tax, penalty, CDT/DDT (refer tax Act, 1961, or Wealth-tax Act, chart below) 1957 Nature of expense Act to which expense pertains to Tax itself Income-tax, Wealth-tax Service Tax, Excise Duty, etc. Provision for tax X✓ Interest Penalty X ✓ (Subject to Sec. 43B) X✓ XX 193

Fees to professional for ✓ ✓ advise, etc. Illustration-9 Assessee incurred following expenses during the PY 2017-18, but he made some violations in deduction of TDS for these payments made to residents. You are required to inform the assessee that in which PY following expenses shall be allowed assuming the due date of filing of return of income for him is 31/07 for every year: Nature of TDS TDS deducted TDS deposited Year of expense allowance Rent deductible on on on Interest 08/07/2017 08/07/2017 11/11/2018 Professional Fees 06/06/2017 06/06/2017 28/02/2018 Salary 05/10/2017 05/10/2017 05/06/2018 Commission to 04/07/2017 04/07/2017 20/11/2019 sales agent Rent 22/12/2017 22/12/2017 28/07/2019 Interest 08/07/2017 12/12/2017 11/11/2018 06/06/2017 15/01/2018 28/02/2018 Professional Fees 05/10/2017 05/04/2018 05/06/2018 Salary 04/07/2017 04/02/2018 20/11/2019 22/12/2017 25/03/2018 28/07/2019 Commission to sales agent Solution: TDS TDS deducted TDS deposited Year of Nature of allowance expense deductible on on on Rent 08/07/2017 08/07/2017 11/11/2018 70% in 2017-18 Interest 30% in 2019-20 Professional Fees 06/06/2017 06/06/2017 28/02/2018 100% in 2018-19 05/10/2017 05/10/2017 05/06/2018 100% in 2018-19 194

Salary 04/07/2017 04/07/2017 20/11/2019 70% in 2018-19 22/12/2017 22/12/2017 28/07/2019 30% in 2019-20 Commission to 08/07/2017 12/12/2017 11/11/2018 sales agent 70% in 2018-19 Rent 30% in 2019-20 70% in 2018-19 30% in 2019-20 Interest 06/06/2017 15/01/2018 28/02/2018 100% in 2018-19 Professional 05/10/2017 05/04/2018 05/06/2018 70% in 2018-19 Fees 30% in 2019-20 Salary 04/07/2017 04/02/2018 20/11/2019 70% in 2018-19 30% in 2019-20 Commission to 22/12/2017 25/03/2018 28/07/2019 70% in 2018-19 sales agent 30% in 2019-20 Illustration-10 Following expenses were found debited in P&L A/c for the PY 2019-20. Expense nature Amount Payment date Year of deduction Sales tax 10,000 20.3.20 Sales tax Bonus 25,000 20.4.20 Interest to scheduled bank 5,000 5.10.20 Leave salary Employer’s contribution to 11,000 30.9.19 provident fund 50,000 10.4.20 16,000 30.9.20 Assume due date of return to be 30.09.2018 for PY 2017-18. In which previous year deduction can be claimed? 195

Solution: Amount Payment date Year of deduction 10,000 20.3.20 2019-20 Expense nature 25,000 20.4.20 2019-20 Sales tax 5,000 5.10.19 2019-20 Sales tax 11,000 30.9.19 2019-20 Bonus 50,000 10.4.19 2019-20 Interest to scheduled bank 16,000 30.9.20 2020-21 Leave salary Employer’s contribution to provident fund Illustration-11 Mrs. Arora carries on a textile manufacturing business. Her Profit and Loss Account for the year ending 31st March, 2020 is as follows: Particulars ₹ Particulars ₹ To Office Expenses 8,500 By Gross Profit 2,06,000 To Sundry Expenses 7,500 By Misc. Receipts To Staff Welfare Expenses 750 By Bad debts recovered 6,000 To Legal Expenses 5,000 4,500 Total To Salaries 17,000 2,16,500 To O/s liability for Excise 7,500 duty 6,000 To Bonus to staff To Depreciation 4,000 To Contribution to Approved 7,000 provident fund 32,500 To Audit fees To Net profit 1,20,750 Total 2,16,500 196

Notes: (i) Depreciation as per Income-tax Act comes to ₹2,700. (ii) Bonus payable under the Payment of Bonus Act, 1965 amounts to ₹2,500. (iii) Sundry expenses include ₹1,500 paid as donation to her son’s school for their annual function. (iv) Office expenses include a capital expenditure of ₹5,000 on additional furniture purchased on 1.12.2019. No depreciation has been provided for in the books. (v) Liability for excise duty was paid as follows: On 13.4.2018 ₹3,500 On 2.5.2018 ₹1,000 On 30.7.2018 ₹1,800 (vi) The return was filed on 31.7.2020 (last date for filing). (vii) No tax has been deducted at source on the audit fees of ₹32,500. (viii) Bad debts recovered were allowed as deduction in an earlier assessment. You are required to compute Mrs. Arora’s business income. Solution: Calculation of income under head PGBP for PY 2019-20 Net Profit as per Profit & Loss a/c (Rs) 1,20,750 Add:- 4000 Depreciation as per books Excise duty disallowed 1200 Audit Fees Disallowed 9750 21,450 Sundry exp 1500 Office Exp (Furniture) 5000 2950 Less 1,39,250 Depreciation as per IT 2700 Depreciation on Furniture (5000*10%*6/12) 250 Income as per Income tax Act 197

Illustration-12 Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2020 Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2020 Particulars ₹ Particulars ₹ 71,000 By Sales 32,00,000 To Opening Stock 16,99,000 By Closing stock 2,00,000 To purchase of Raw 5,70,000 materials 10,60,000 To Manufacturing Wages & Expenses To Gross Profit 34,00,000 34,00,000 10,60,000 To Administrative charges 3,26,000 By Gross Profit To State VAT penalty paid 5,000 To State VAT paid 1,10,000 To General Expenses 54,000 To Interest to Bank 60,000 (On machinery term loan) 2,00,000 To Depreciation To Net Profit 3,05,000 12,55,000 10,60,000 Following are the further information relating to the financial year 2019-20: (i) Administrative charges include ₹46,000 paid as commission to brother of the assessee. The commission amount at the market rate is ₹36, 000. (ii) The assessee paid ₹33,000 in cash to a transport carrier on 29.12.2019. This amount is included in manufacturing expenses. (Assume that the provisions relating to TDS are not applicable to this payment.) 198

(iii) Bank term loan interest actually paid upto 31.03.2020 was ₹20,000 and the balance was paid in October 2020. (iv) Depreciation allowable under the Act is to be computed on the basis of following information. Plant & Machinery (Depreciation rate @ 15%) ₹ Opening WDV (as on 01.04.2017) 12,00,000 Additions during the year (used for more than 180 days) 2,00,000 Total additions during the year 4,00,000 Note: Ignore additional depreciation u/s 32(1)(iia). Compute the total income of Mr. Raju for the assessment year 2020-21. Solution: 2,00,000 3,05,000 Calculation of income from PGBP 10,000 2,55,000 Profit As Per Books 40,000 5000 Add Depreciation as per books Administration charges Bank Interest disallowed Penalty on VAT Less 2,25,000 2,25,000 Depreciation as per income tax 3,35,000 Income From PGBP 2.3.3. Deemed Income & Special Provisions (1) Special provision for computing profits and gains of business on presumptive basis - Section 44AD & Section 44AE Eligible Section 44AD Section 44AE 44ADA Any business other than Business of transportation Professions 199

of goods mentioned u/s44AA(i) Business  business referred in section 44AE  Specified profession u/s 44AA  Income of commission/brokerage Eligible  Agency business Resident Assessee Assessee Resident - Individual, HUF, Any assessee Firm (except LLP) For every goods vehicles 50% of Income u/h 8% of total turnover of the (whether gross PGBP equals Business. 6% in receipt case payment is received in cheque , DD or electronic heavy, medium or light) – ₹7,500pm or mode[W.e.f. A.y part of a month during which vehicle 2020-21 is owned by the assessee to excee  Assessee owns more Gross ds receipts Not  Turnover ₹2 than 10 goods carriages at exceed 50 lakh applicable in crore OR any time case  Assessee claims income during the year OR  Assessee claims income from said business to be from said business to be Lower than 8%/ 6% lower than computed as above computed as above Deduction or All deduction or disallowance u/s 30-38 shall be deemed to be disallowance allowed. i.e. no separate deduction or allowance shall be allowed for u/s 30-38 any expense incurred for earning such income Depreciation Depreciation shall be deemed to have been allowed & accordingly WDV of next year shall be calculated 200