Tax

SUMMARY 1. Rent of building (residential or commercial) taxable under this head. 2. Assessee must be the owner 3. If used for business or let out to employees, then PGBP head shall apply 4. Income = GAV – municipal taxes = NAV – standard deduction @ 30% - interest on borrowed capital 5. Municipal taxes on actually paid basis 6. Interest on accrual basis = RPY interest + 1/5th of preconstruction interest. 7. Section 23 – GAV = Annual Letting Value/Expected Rent (Fair Rent or Municipal Value, whichever is higher, but restricted to standard rent) or Actual rent, whichever is higher. 8. ALV shall always be of full year & actual rent shall be of period actually let out. Unrealised rent shall be subtracted from actual rent and balance actual rent shall be compared with ALV to determine GAV. 9. Self-occupied house = NAV shall be NIL. Interest deduction limited to ₹2,00,000 (inclusive of 1/5th of pre-construction interest) 10. More than one self-occupied house = except one house, all other shall be deemed to be let out. 11. Arrears of rent – standard deduction allowed. Recovery of unrealised rent – standard deduction not allowed 12. Co-ownership – in case of self-occupied house, interest deduction of ₹2,00,000 allowed to each co-owner. 13. Section 27 – Deemed owner – transferors to spouse or minor child. 140

PRACTICE QUESTIONS Question-1 Mr. Kalpesh borrowed a sum of ₹30 lakhs from the National Housing Bank towards purchase of a residential flat. The loan amount was disbursed directly to the flat promoter by the bank. Though the construction was completed in May, 2018, repayments towards principal and interest had been made during the year ended 31.3.2018. In the light of the above facts, state: (i) Whether Mr. Kalpesh can claim deduction u/s 24 in respect of interest for the assessment year 2018-19; (ii) Whether deduction u/s 80C can be claimed for the above assessment year, even though the construction was completed only after the closure of the year. Question-2 Mr. X owns one residential house in Mumbai. The house is having two units. First unit of the house is self-occupied by Mr. X and another unit is rented for ₹8,000 p.m. The rented unit was vacant for 2 months during the year. The particulars of the house for the previous year are as under: Standard rent ₹1,62,000 p.a. Municipal valuation ₹1,90,000 p.a. Fair rent ₹1,85,000 p.a. Municipal tax 15% of municipal valuation Light and water charges ₹500 p.m. Interest on borrowed capital ₹1,500 p.m. Lease money ₹1,200 p.a. Insurance charges ₹3,000 p.a. Repairs ₹12,000 p.a. Compute income from house property of Mr. X for the A.Y. Question-3 Mrs. Indu, a resident individual, owns a house in U.S.A. She receives rent @ $ 2,000 per month. She paid municipal taxes of $ 1,500 during the financial year 2017-18. She also owns a two storied house in Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of ₹10,000. Standard rent for each floor is ₹11,000 per month. Municipal taxes paid for the house amounts to ₹7,500. Mrs. Indu had constructed the house by taking a loan from a nationalised bank on 20.6.2015. She repaid the loan of ₹54,000 including interest of ₹24,000. The value of one dollar is to be taken as ₹60. Compute total income from house property of Mrs. Indu. 141

Question-4 Mr. Ramesh owns a house property which is let out. During the previous year ending 31.3.2018 he receives (i) arrears of rent of ₹30,000 and (ii) unrealised rent of ₹20,000. You are requested to (a) state, how they should be dealt with as per the provisions of the Act, and (b) compute the income chargeable under the head ―Income from house property‖. Question-5 Pritam occupied two flats for his residential purposes, particulars of which are as follows: Municipal valuation Flat 1 Flat 2 Fair rent ₹ ₹ Fair rent under Rent Control Act 90,000 45,000 Municipal taxes paid 1,20,000 40,000 Fire Insurance 80,000 Interest payable on capital borrowed for purchase of flat Not 10% available 1,000 40,000 10% 600 Nil Income of Pritam from his proprietary business - Pritam warehousing corporation is ₹6,50,000. Determine the taxable income and tax liability for the assessment year 2018-2019, on the assumption that he contributes ₹80,000 towards the public provident fund. You are informed that Pritam could not occupy Flat 2 for two months commencing from December 1, 2017 and that he has attained the age of 59 on 23rd August, 2017. Question-6 Mr. Rahul Jadav furnishes the following particulars relating to his house properties and other incomes and expenditure for the year 2017-18: (i) First House: This house is taken by him on lease for 10 years which is let to a tenant, for his residence, at a monthly rent of ₹2,400. 142

He has incurred the following expenses during this year: ₹1,000pm Lease rent ₹200pm Salary of Durban ₹200pm Interest on loan taken to pay for the acquisition of the lease (ii) Second House: This house was constructed by him in 2005, but was transferred to his wife in 2009 out of love and affection. He, however, continues to stay in this house with his wife till date. He has taken a loan for the construction of this house for which interest of ₹6,000 becomes due for the year, but had not been paid by him. He has paid repair expenses of ₹1,000 during the year. (iii) Taxable income from business for this year amounts to ₹64,000. Compute gross total income of Mr. Rahul Jadav for the assessment year 2018-2019. Question-7 Ram owned a house property at Madras which was occupied by him for the purpose of his residence. He was transferred to Bombay in June, 2017 and therefore he let out the property with effect from 1st July, 2017 on a monthly rent of ₹3,000. The corporation tax payable in respect of the property was ₹6,000 of which 50% was paid by him before 31.3.18. Interest on money borrowed for the construction of the property amounted to ₹20,000. Compute the income from house property for the assessment year 2018-19. 143

ANSWERS Answer-1 (a) Interest on borrowed capital is allowed as deduction u/s 24(b) Interest payable on loans borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of house property can be claimed as deduction u/s 24(b). Interest payable on borrowed capital for the period prior to the previous year in which the property has been acquired on constructed, can be claimed as deduction over a period of 5 years in equal annual instalments commencing from the year of acquisition or completion of construction. It is stated that the construction is completed only in May, 2018. Hence, deduction in respect of interest on housing loan cannot be claimed in the assessment year 2018-19. (b) Clause (xviii) of section 80C is attracted where there is any payment for the purpose of purchase or construction of a residential house property, the income from which is chargeable to tax under the head ‗Income from house property‘. Such payment covers repayment of any amount borrowed from the National Housing Bank. However, deduction is prima facie eligible only if the income from such property is chargeable to tax under the head ―Income from House Property‖. During the assessment year 2018-19, there is no such income chargeable under this head. Hence, deduction u/s 80C cannot be claimed for A.Y. 2018-19. Answer-2 Computation of Income from house property for A.Y. 2018-19 Particulars ( ₹) ( ₹) A. Rented unit (50% of total area – See Note 1 below) Step I - Computation of Annual letting Value Municipal valuation ( ₹1,90,000 x ½) 95,000 Fair rent ( ₹1,85,000 x ½) 92,500 Standard rent ( ₹1,62,000 x ½) 81,000 Annual letting value is higher of Municipal valuation and fair 81,000 rent, but restricted to standard rent Step II - Actual Rent 96,000 Rent receivable for the whole year ( ₹8,000 x 12) Step III – Computation of Gross Annual Value 80,000 Actual rent received owing to vacancy ( ₹96,000 – 144

₹16,000) 80,000 Since, owing to vacancy the actual rent received is lower than 14,250 the annual letting value, the actual rent received is the Gross 65,750 Annual Value 19,725 28,725 Gross annual value 9,000 37,025 Less: Municipal taxes (15% of ₹95,000) Net Annual value Nil Less: Deductions u/s 24 (i) 30% of net annual value 9,000 (9,000) (ii) Interest on borrowed capital ( ₹750 x 12) 28,025 Taxable income from let out portion B. Self-occupied unit (50% of total area – See Note 1 below) Annual value Less: Deduction u/s 24 Interest on borrowed capital ( ₹750 x 12) Income from house property Notes: (1) It is assumed that both the units are of identical size. Therefore, the rented unit would represent 50% of total area and the self-occupied unit would represent 50% of total area. (2) It is assumed that the municipal taxes have been paid by the owner during the year. (3) No deduction will be allowed separately for light and water charges, lease money paid, insurance charges and repairs. 145

Answer-3 Computation of Income from House Property of Mrs. Indu for the Assessment Year 2018-19 Particulars ( ₹) ( ₹) House property in USA GAV– Rent received (treated as fair rent) 14,40,000 ($2000 p.m. x ₹60 per USD x 12 months) Less: Municipal taxes paid ($1500 x ₹60 per USD) 90,000 Net Annual Value (NAV) 13,50,000 Less: Deduction u/s 24 30% of NAV 4,05,000 9,45,000 House property In Mumbai (Let-out portion - First Floor) 1,32,000 1,32,000 Gross Annual Value 1,20,000 3,750 Standard Rent ( ₹11,000 x 12) (taken as ALV in the absence of information relating to municipal value 1,28,250 and fair rent) Actual Rent received ( ₹10,000 x 12) 38,475 50,475 77,775 Less: Municipal taxes paid (50% of ₹7,500) 12,000 Net Annual Value (NAV) Less: Deduction u/s 24 Nil Nil 30% of NAV Nil Interest on housing loan (50% of ₹24,000) Income from House property in Mumbai Nil (12,000) (Self-occupied portion - Ground Floor) 12,000 10,10,775 Gross Annual Value Less: Municipal taxes Net Annual Value (NAV) Less: Deduction u/s 24 30% of NAV Interest on housing loan (50% of ₹24,000) Income from House property 146

Alternative Answer: If it is assumed that the rent received also represents the fair rent, the annual letting value would be ₹1,20,000. Accordingly, the Income from house property would be computed. Answer-4 As per provisions of section 25A, arrears of rent and unrealized rent will be charged to tax as income from house property in the previous year in which such rent is received, after deducting a sum equal to 30% of such amount. The taxability shall be there whether Mr. Ramesh remains as the owner of the property in the concerned year or not. In this case, it shall be taxed as income from house property in the year of receipt of such arrear rent. Computation of income from house property 30,000 Arrears of rent 9,000 Less: Deduction @ 30% of ₹30,000 21,000 14,000 Add: Unrealised rent received (20,000 – 6,000) 35,000 Income from house property Answer-5 As Pritam has occupied both for his own residential purpose, one flat (according to his own choice) will be treated as self-occupied property and the other flat will be treated as ―deemedto have been let out‖ property. Assuming that Pritam has exercised his option to treat Flat 1 as self-occupied property. Flat 2 will be treated as ―deemed to have been let out‖ property. Taxable income will, therefore, be determined as under: Gross annual value (higher of municipal value or fair rent) 45,000 Less: Municipal taxes (10% of 45000) 4,500 Net annual value 40,500 Less: Deductions u/s 24 @ 30% 12,150 Income from Flat 2 28,350 Flat 1 (self-occupied property) Annual value u/s 23 Nil Less: Interest on borrowed capital (Note) 40,000 Income from house property (11,650) 147

Computation of Taxable income 6,50,000 Income from proprietary business (11,650) Income from house property 6,38,350 Gross Total income Less: Deduction u/s 80C in respect of PPF contribution 80,000 Total income 5,58,350 Tax payable on ₹5,58,350 (12,500 + 11,670) 24,170.00 Add: Education cess @ 2% 483.40 SHEC @ 1% 241.70 Tax payable 24,895.10 Tax payable (R/o) 24,900.00 Note: It is assumed that the capital was borrowed for purchase of property after 1-4-1999. Answer-6 Computation of total income of Rahul Jadav for the assessment year 2018-19 Particulars ( ₹) ( ₹) Nil (A) Income from House property (i) First House: Not assessed under this head as Mr. Rahul Jadav is not the owner of this house – it is assessed under the head ―Income from other sources [Note-1] (ii ) Second House: Self-occupied hence ALV Nil Less: Deduction u/s 24 in respect of interest on monies 6,000 borrowed Income from house property (6,000) (B) Income from business 64,000 Taxable business income 28,800 (C) Income from other sources: 12,000 16,800 12,000 Rent received from first house ( ₹2400 X 12) 2,400 70,000 Less: Actual expenses incurred 2,400 Lease rent Salary to Durban Interest on loan borrowed ₹200pm Total income 148

Note: (1) As Mr. Jadav has taken the first house on lease, he is not treated as owner of this house for the purpose of charging income under the head income from house property. (2) As second house is transferred to his wife without adequate consideration and without any agreement to live apart, Mr. Yadav is treated as deemed owner of the property as per section 27(i) for the purpose of charging income under the head income from house property. Answer-7 Ram‘s income from house property will be computed as under:- Annual rental value ₹3,000 X 12 9,900 36,000 Less: Corporation tax paid 20,000 3,000 Annual value 33,000 Less: Deduction u/s 24 @ 30% Interest on monies borrowed 29,900 Income from house property 3,100 149

MULTIPLE CHOICE QUESTIONS 1. Mr. J has taken a house on rent and sublets the same to Mr. A. Income of Mr. J from such house property shall be taxable under the head: (a) income from house property (b) income from other sources (c) income from salary (d) shall not be taxed at all 2. Mr. J owns a house property which has fair rent of ₹1,50,000, standard rent ₹1,20,000 and actual rent of ₹1,30,000. Municipal taxes paid during the previous year for the past 7 years is ₹1,40,000. The annual value shall be: (a) ₹20,000 (b) Nil (c) ₹10,000 loss (d) None of the above 3. Deduction u/s 24(a)of statutory deduction under the head House Property is (a) 35% of NAV (b) 30% of NAV (c) 25% of NAV (d) 40% of NAV 4. Municipal tax shall not include: (b) Scavenging tax (a) House tax (d) Water tax (c) State government tax 5. A house property whose fair rent is ₹1,20,000 is vacant throughout the previous year. Municipal taxes paid for the house property are ₹20,000. Its net annual value will be: (a) ₹1,20,000 (b) Nil (c) ₹1,00,000 (d) ( ₹20,000) loss 6. Under the head of house property (a) Income from building is taxable (b) Income from land is taxable (c) Income from building and land which is attached to building is taxable (d) None of the above 7. Deduction for the Interest on Capital Borrowed in covered under: (a) 24(a) (b) 24(c) (c) 24(b) (d) None of above 8. Can there be negative NAV: (b) No (a) Yes 150

9. The maximum amount of deduction of Interest on borrowed capital in case of one house which is self-occupied shall be (loanwastakenon15/12/1999) (a) ₹50,000 (b) ₹2,00,000 (c) ₹30,000 (d) ₹1,50,000 10. Any person who has taken loan before 1/4/1999 for purchase or construction of the house which is self-occupied, maximum deduction for the interest shall be: (a) ₹1,20,000 (b) ₹30,000 (c) ₹2,00,000 (d) ₹1,50,000 11. In the above question if the loan is taken for repairs, renovation, reconstruction, addition or alteration then interest allowed shall be: (a) ₹20,00,00 (b) ₹30,000 (c) ₹45,000 (d) None of the above Solve Q12 and Q13 from the following information Mr. J borrowed ₹5,00,000 @12% p.a. on 1/4/2013 for construction of house property which was completed on2/4/2017. The amount of loan is still unpaid. 12. What will be the deduction of interest for AY2018-2019. (a) ₹30,000 (b) ₹96,000 (c) ₹1,08,000 (d) ₹2,40,000 13. What will be the deduction of interest for AY2018-2019 property is self-occupied: (a) ( ₹1,08,000) (b) ₹96,000 (c) ₹30,000 (d) ₹2,40,000 14. Treatment of unrealized rent is given under section: (a) Explanation to 23 (2) (b) Explanation to 23 (1) (c) Both (a) and (b) (d) None of the above 15. Mr. J was allowed deduction of unrealized rent to the extent of ₹40,000 in the past although the total unrealized rent was ₹60,000. He is able to recover from the tenant ₹45,000 during the AY on account of such unrealized rent. He is liable for tax on: (a) ₹45,000 (b) Nil (c) ₹24,000 (d) ₹17,500 16. Unrealized rent realized subsequently then its tax treatment is given under section: (a) section 25AC (b) section 25AB (c) section 25A (d) section 26 151

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 Solve Q25 and Q26 from the following information Mr. J gives you the following data 152

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? (a) ₹1,80,000 (b) ₹2,00,000 (c) ₹3,00,000 (d) ₹5,20,000 26. NAV of the house property will be? (a) ₹1,80,000 (b) ₹2,00,000 (c) ₹1,76,000 (d) ₹5,20,000 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? (a) ₹1,80,000 (b) ₹2,00,000 (c) ₹2,35,000 (d) ₹2,40,000 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. 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) ₹4,00,000 153

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 NA Rent (p.m.) ₹12,000 ₹17,500 ₹21,000 Period of vacancy Nil 1 month 6 months Municipal taxes Paid ₹20,000 ₹80,000 ₹30,000 Interest on loan house property ₹30,000 ₹40,000 ₹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 36. Mr. J took loan from a bank for ₹10,00,000on1/11/2014@ 8% pa for the construction of the house which is self-occupied. Construction of the house got completed on 15/3/2018. Compute interest allowed as deduction u/s24(b) for AY2018-2019. (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 1/4/2014 for the construction the house, at the rate of 20% pa. The construction of the house was completed on 15/1/2018.Computeinterest allowed as deduction under section 24(b) for AY 2018-2019. 154

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 on1/1/2014 @ 12%pa for the construction of the house which is self-occupied. Construction of the house got completed on1/1/2018 and full amount of loan was paid back on 31/1/2017. Compute interest allowed as deduction under section 24(b) for AY 2018-2019. (a) ₹19,400 (b) ₹7,400 (c) ₹12,000 (d) ₹49,000 40. J gifted his house property top his wife in 2012.Mrs. J has let 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 minors on 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. (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 155

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 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: 156

(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 section24(a)and section 24(b) (b) Neither deduction under section24(a)or section 24(b) (c) Deductions under section24(a) ie statutory deductions (d) Deductions under section24(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 (c) Ground rent/ lease rent (d) Annual charge (e) Interest on money borrowed (f ) Vacancy allowance (g) Standard deduction of 30% 157

54. In case of deemed to be let out property, which deductions shall be allowed undersection 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: (a) gross annual value (b) net 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 1/4/2013 for construction of house property which was completed on 15/3/2017.The amount is still unpaid. The deduction of interest for AY 2018-2019 be: (a) ₹60,000 (b) ₹96,000 (c) ₹1,80,000 (d) ₹2,40,000 59. Mr. A borrowed ₹5,00,000 @ 12% pa on 1/4/2013 for construction of house property which was completed on 2/4/2017. The amount is still unpaid. The deduction of interest for AY 2018-2019 shall be: 158

(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 inadequate consideration (b) Transfer to a minor child for inadequate consideration (c) Holder of an impartible estate (d) Co-owner of a property 64. Municipal tax is deducted from (b) NAV (a) GAV (d) income from house property (c) Taxable income 65. Charging Section of house property is- (b) Section 28 (a) Section 17 (d) Section 45 (c) Section 22 66. Mr. J had oneself-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 an earlier year. The house was constructed in December, 2009 with a loan of ₹12,00,000 from a bank taken in November,2008. During the AY 2018-2019, the assessee refunded ₹2,30,000 which includes ₹1,68,000 as current year 159

interest. Compute the income from house property for AY2018-2019? (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 160

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 ₹20,000 pm. On 1/4/2016 they entered into an agreement whereby Rent is increased from ₹20,000 pm to ₹25,000 pm, which is effected from 1/1/2017. 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 unit each 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. (b) ₹1,62,000 (a) ₹2,40,000 (d) ₹1,61,000 (c) ₹2,30,000 78. Calculate total income of Mr. J. (b) ₹6,18,800 (a) ₹5,32,000 161

(c) ₹6,93,800 (d) ₹6,78,000 79. Mr. X (67 years), a non-resident owns a house in India which is let out with effect from 1/10/2017. The construction of the house was completed on1/9/2017.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 2017-2018 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 1/9/2012 @12% pa for construction of this House. ₹2,00,000 was repaid on 31/3/2015.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 ₹25,000 paid (Half of it was born by tenant) Expenses on repair ₹20,000 Mr. A had borrowed a sum of ₹20,00,000 @10% pa from LIC Housing Ltd. on 1/8/2013 and the construction of the house was completed on1/1/2017. Loan is still unpaid. (a) ₹1,40,417 (b) ₹2,37,500 (c) ₹3,06,667 (d) ₹3,00,000 ANSWERS 1. (b) 2. (c) 3. (b) 4. (c) 5. (d) 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. (b) 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 2. Calculation of Net Annual Value Nature of the House Property ₹1,50,000 ₹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 GAV ₹10,000 Less: Municipal Taxes paid NAV 5. Calculation of Net Annual Value Vacant for full year Nature of the House Property NIL Municipal Value ₹1,20,000 Fair Rent NIL Standard Rent Expected Rent ₹1,20,000 Actual Rent NIL GAV NIL Less: Municipal Taxes paid NAV ₹20,000 ( ₹20,000) 12. Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2013 to 31/3/2017 Step 2: Pre construction period interest ₹5,00,000 ×12%×48/12 = ₹2,40,000/5 = ₹48,000 Step 3: Current year interest 2017 – 2018 = ₹5,00,000 × 12% = ₹60,000 Step 4: Add both interests ₹36,000 + ₹60,000 = ₹1,08,000 13. Since construction was completed within after the period of 5 years, the maximum deduction allowed for the interest shall be ₹1,08,000. 163

25 and Q26. Calculation of Net Annual Value Let out for full year Nature of the House Property ₹1,44,000 ₹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 27 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 29. 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 ₹1,95,000 Net Annual Value 164

31 and 32. Calculation of House Property income GF is Let out FF is Self occupied GAV ₹4,80,000 Less: Municipal Taxes paid ₹40,000 Nil NAV Nil Less: Deduction u/s 24 ₹4,40,000 Nil (a) Standard Deduction ₹1,32,000 Nil Less: Deduction u/s 24 ₹22,500 ₹22,500 (b) Interest on Borrowed Capital House Property income ₹2,85,500 ( ₹22,500) Net house property income ₹2,63,000 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 ₹2,40,000 Reasonable rent NIL ₹17,500 ₹1,26,000 Actual rent ₹1,20,000 ₹1,62,500 ₹1,14,000 GAV ₹1,44,000 ₹1,92,500 ₹1,26,000 Municipal taxes Paid ₹1,44,000 ₹1,92,500 ₹1,26,000 NAV Deduction u/s 24(a): Statutory deduction: ₹20,000 ₹80,000 ₹30,000 30% of NAV ₹1,24,000 ₹1,12,500 ₹96,000 Deduction u/s 24(b): Interest on loan ₹28,800 house property ₹37,200 ₹33,750 Taxable House property income ₹20,000 ₹30,000 ₹40,000 ₹47,200 ₹56,800 ₹38,750 Q36. Calculation of Interest on ₹38,667 Borrowed capital Step 1: Pre construction period 1/11/2014 to 31/3/2017 Step 2: Pre construction period ₹10,00,000 × 8% × 29/12 165

interest = ₹1,93,333/5 = ₹80,000 Step 3: Current year interest ₹1,18,667 Step 4: Add both interests = ₹10,00,000 × 8% = ₹80,000 + ₹38,667 ₹1,08,000 ₹1,80,000 Q37. ₹2,88,000 Calculation of Interest on Borrowed capital Step 1: Pre construction period 1/4/2014 to 31/3/2017 Step 2: Pre construction period ₹9,00,000 × 20% × 36/12 = interest ₹5,40,000/5 = Step 3: Current year interest = ₹9,00,000 × 20% = ₹1,80,000 Step 4: Add both interests + ₹1,08,000 = Q38. 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. 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 37/12 = ₹37,000/5 ₹7,400 ₹7,400 interest = Step 3: Current year interest NIL, since loan has been paid back Step 4: Add both interests ₹7,400 + 0 = Q58. If house is self occupied then deduction of Interest will be restricted to ₹2,00,000 since Q59. 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 = interest ₹1,80,000/5 = ₹36,000 ₹60,000 2017 – 2018 = ₹5,00,000 x 12% = ₹96,000 Step 3: Current year interest ₹36,000 + ₹60,000 = Step 4: Add both interests Calculation of Interest on Borrowed capital 166

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 = ₹48,000 = interest ₹2,40,000/5 = ₹60,000 ₹1,08,000 Step 3: Current year interest 2015 - 2015= ₹5,00,000 x 12% Step 4: Add both interests ₹36,000 + ₹60,000 = 28,000 56,000 Q66. Calculation of House Property income NA Municipal valuation 56,000 Fair rent Standard rent NA Expected rent NIL Actual rent NIL GAV NIL Less: Municipal Taxes paid NIL NAV 1,68,000 Less: Deduction u/s 24(a): Standard Deduction (1,68,000) Less: Deduction u/s 24(b): Interest on Borrowed Capital House Property income ₹1,20,000 NIL Q68. Calculation of Net Annual Value NIL Municipal Value ₹1,20,000 Fair Rent Nil Standard Rent Expected Rent ₹1,20,000 Less: Loss due to vacancy 1,50,000 Reasonable Rent Actual Rent ₹1,50,000 Gross Annual Value ₹15,000 Less: Municipal Taxes paid Net Annual Value ₹1,35,000 Q69. Calculation of Net Annual Value ₹1,80,000 ₹2,52,000 Municipal Value ₹2,16,000 Fair Rent ₹2,16,000 Standard Rent Expected Rent NIL Less: Loss due to vacancy 167

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

Q73. Calculation of Net Annual Value Let out Self Nature occupied 4,80,000 Actual Rent 4,80,000 NIL Gross Annual Value NIL Less: Municipal Taxes paid 40,000 NIL Net Annual Value 4,40,000 NIL Section 24(a) 1,32,000 NIL Section 24(b) 22,500 Income 22,500 (22,500) Net income from house property 2,85,500 2,63,000 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 Less: Deduction u/s 24(a) @ 30% of NAV ₹2,90,000 Less: Deduction u/s 24(b) Interest on borrowed capital ₹87,000 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 Q84 NAV NIL Less: Deduction u/s 24(a) 30% of NAV NIL Less: Deduction u/s 24(b) interest on borrowed ₹75,000 capital House Property income (₹75,000) Calculation of Total income Q83 169

Income from Salary Mr. J Mr. D ₹4,00,000 ₹4,00,000 Income from House Property (₹2,26,000 – ₹75,000 = ₹1,51,000/2 ) ₹75,500 ₹75,500 Gross Total Income ₹4,75,500 ₹4,75,500 ₹70,000 ₹70,000 Less: Deduction under Section 80C ₹4,05,500 ₹4,05,500 Total Income Q77. Calculation of income from House Property GAV Less: Municipal l Taxes paid ₹2,40,000 NAV ₹10,000 Less: Deduction u/s 24(a) 30% of NAV Less: Deduction u/s 24(b) interest on borrowed capital ₹2,30,000 House Property Income ₹69,000 NIL ₹1,61,000 Q78. Calculation of Total Income Income from salary Income from House Property ₹5,32,800 Gross Total income ₹1,61,000 Less: Deductions under Section 80C under Section 80G ₹6,93,800 Total Income ₹50,000 ₹25,000 ₹6,18,800 Q79. Computation of House Property income. Municipal Valuation (₹40,000 X 7) ₹2,80,000 Expected Rent ₹2,80,000 Less: loss of Rent due to vacancy Reasonable Rent ₹50,000 Actual Rent (₹50,000 x 6) ₹2,30,000 Less: unrealised Rent of 1 month ₹50,000 ₹3,00,000 Gross Annual Value ₹2,50,000 Less: Municipal Taxes paid ₹2,50,000 Net Annual Value Less: Standard Deduction (30% of ₹2,30,000) ₹20,000 Less: Interest on borrowed capital ₹2,30,000 (₹69,000) (₹1,96,400) 170

Income from House Property (₹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: 1/8/2013 to 31/3/2016 ₹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 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. 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 during the previous year. 172

(ii) Export incentives (a) profits on sale of an import license (iii) (b) cash assistance against exports (iv) (c) Custom duty or excise duty drawback the value of any benefit or perquisite arising from business or profession. (v) Compensation received: (vi) (a) For termination/modification of agreement for managing a company. (vii) (b) For termination/modification of terms of agency. (viii) (c) For vesting of management of any property or business in government (ix) 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. 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. 173

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. Rates of Depreciation Rate Nature of asset 5% Building 10% 1 Residential buildings (e.g. let out to employees) 2 Other buildings Furnitre and fittings including electrical fittings 10% Platnt & 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, licences, 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. 174

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 31/03/2018 WDV of the block as on 01/04/2017 (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 31/03/2018 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 01/04/2017 (i.e. opening WDV) WDV of the block as on 31/03/2017 Less: Depreciation actually allowed in PY 2016-17 (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 31/03/2018 (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% Bldg. A-E = ₹7,40,000 WDV as on Mach. A-D = 01/04/2017 ₹4,00,000 175

Purchases made Mach. E – ₹2,00,000, Bldg. F – ₹2,20,000, pur. – 11/06/2017, put during the year pur. – 08/05/2017, to use – 20/06/2017 put to use – Bldg. G – ₹1,60,000, pur. – 15/07/2017, put 08/05/2017 to use – 15/11/2017 Sales made Mach. C – ₹60,000 Bldg. D – ₹90,000 during the year Solution: Calculation of Depreciation u/s 32 Particulars Plant & Machinery Building WDV as on 01/04/2017 4,00,000 7,40,000 2,00,000 3,80,000 Add:- Addition During the Year 60,000 90,000 Less:- Sale During the 5,40,000 10,30000 Year 5,40,000*15% =81,000 1,60,000*10%*6/12 +(8,70,000*10%) =95,000 Value as on31/03/2018 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 10.10.2017 for ₹50,000. Building B sold for ₹1,00,000 on 04.04.2017. What will be your answer if building B sold for ₹4,50,000. 176

Case 2: Opening WDV ₹2,00,000 consisting of Building A, B & C. Rate of depreciation 10%. Building D purchased on 10.10.2017 for ₹50,000. All buildings sold for ₹1,00,000 on 04.02.2018. What will be your answer if buildings sold for ₹4,50,000. Solution: 2,00,000 Case 1 1,00,000 50,000 WDV as on 01/04/2017 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 31/03/2018 Depreciation If Building B sold for ₹4,50,000 Then 2,00,000 4,50,000 WDV as on 01/04/2017 50,000 Less Sale During the Year (2,00,000) Add Purchase During the year No Depreciation is charged Value as on 31/03/2018 Short Term Capital Gain is ₹2,00,000. Depreciation Case 2 2,00,000 1,00,000 WDV as on 01/04/2017 50,000 Less Sale During the Year 1,50,000 Add Purchase During the year No Depreciation is charged. Value as on 31/03/2018 Short Term Capital Loss ₹1,50,000. Depreciation 2,00,000 If Building Sold For ₹4,50,000 Then 4,50,000 50,000 WDV as on 01/04/2017 2,00,000 Less Sale During the Year No Depreciation is charged. Add Purchase During the year Value as on 31/03/2018 Depreciation 177

Short Term Capital Gain ₹2,00.000. 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 2018-19 from the following information assuming assessee is engaged in the business of manufacturing of goods: Opening WDV of P&M as on 01/04/2017 = ₹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 1,00,000 A 04/04/2017 11/05/2017 2,00,000 New Factory B 11/05/2017 26/07/2017 Second Factory Hand C 17/06/2017 16/08/2017 3,00,000 New Office D 18/08/2017 20/10/2017 4,00,000 New Factory 178

E 19/09/2017 26/11/2017 5,00,000 Second Factory Hand Office F 25/10/2017 24/02/2018 6,00,000 Sales made during the year from old assets: ₹4,00,000 New Solution: Calculation of Depreciation WDV as on 01/04/2017 20,00,000 Less:- Sale During the Year 4,00,000 Add:-Purchase During the Year 21,00,000 Value as on 31/03/2018 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. 179

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, 2017. The written down value of assets as on April 1, 2017 is as follows: Items Rate of Depreciation WDV as on 1st April, 16 Building 10% ₹3,50,000 Furniture 10% ₹50,000 Plant and Machinery 15% ₹2,00,000 Further, on October 15, 2017, 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 2018-19. Solution: Calculation of Depreciation Total Depreciation (For all assets held or purchase by M/s Sidhant & co) Items Depreciation 180

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 10.8.2013 for ₹3,25,000 for personal use is brought into the business of the assessee on 01.12.2017, when its market value is ₹1,50,000. Compute the actual cost of the car and the amount of depreciation for the Assessment year 2018-19 assuming the rate of depreciation to be 15%. Solution: Actual cost of car is taken ₹3,25,000 i.e Purchase cost of car on that day Depreciation on car for AY 2018-19 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 181

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. 01/04/2018), 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. 31/03/2018). 4. In case other purpose is agricultural use, then for the purpose of computing next year‘s opening WDV (e.g. 01/04/2018), 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. 31/03/2018). Illustration-5 Mr. Tenzingh is engaged in business which is taxable u/h PGBP. Relevant information pertaining to the year ended 31.3.2018 are given below: WDV of Car as on 1.4.2017 ₹ WDV of Machinery as on 31.3.2017 (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 2018-19. Show the WDV of the assets as on 31.03.2018 and 01.04.2018. What shall be your answer in case car is being used for agricultural purposes instead of personal use? Solution: Depreciation Calculation of Depreciation (3,00,000*15%*60%) =27000 -if car used for personal use (15,00,000*15%) =2,25,000 2,52,000 Items Car 182 Plant & Machinery Total Depreciation

-if used for agriculture Depreciation (3,00,000*15%*100%) =45,000 Items (15,00,000*15%) =2,25,000 Car 2,70,000 Plant & Machinery Total Depreciation  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/produ ction 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 Capital nature expenses incurred in prior 3 years prior to the date of commencement of business Land Not allowed (part of capital gains) 183

Building 100% in the year of commencement of Other e.g. furniture, P&M, etc.) business 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 1.10.2014) Building 25,00,000 31.03.2016 Plant and machinery 5,00,000 31.03.2017 Raw materials 2,20,000 31.03.2018 Raw materials and salaries 1,80,000 The business was commenced on 01-10-2017. In view of availability of better model of plant and machinery, the existing plant and machinery were sold for ₹8,00,000 on 1.03.2018. Discuss the implications of the above for the assessment year 2018-19 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. Solution: 184

Calculation of deduction under u/s 35 Year ended Item Amount (Rs) Amount ( ₹) 31.03.2015 Land 10,00,000 NIL (Incurred after 1.10.2014) Building 25,00,000 25,00,000 31.03.2016 Plant and machinery 5,00,000 NIL 31.03.2017 Raw materials 2,20,000 2,20,000 31.03.2018 Raw materials and salaries 1,80,000 3,60,000 Total 30,80,000 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) Other Donations: Purpose of donation Donee Expense u/h PGBP 100% of the donations For carrying out any eligible project or scheme - Eligible project or scheme should be for promoting the social & economic welfare of or the upliftment of the public – Section 35AC 185

Public sector company Local authority Association or institution approved by National Committee For Rural development Association/institution having 100% of the donations made programmes – Section object of undertaking of any 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 It may be noted that under Income-tax Act, 1961, preliminary expenses are allowed to every assessee including company assessee. 186

Quantum of Expenditure For Company assessee Assessee other than Company 5% of cost of 5% of cost of project project Whichever Whichever is higher is lower 5% of capital Whichever Actual employed is lower expenditure 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: 30,00,000 Cost of project 40,00,000 Capital employed What is the deduction admissible to the company u/s 35D for AY 2017-2018? 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%= 2,00,000 187

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 actual cost and will not be allowed as expense from PGBP. Livestock There shall be no depreciation on livestock. Purchase cost Bad debts shall be allowed as an expense in the year of death of the animal or in the year in which it becomes useless. Sale proceeds realised from carcasses/useless animal shall be subtracted from purchase cost, and balance shall be treated as expense. 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 It was written as irrecoverable in the books of the accounts of the assessee. Bad debts recovery shall be treated as business income of the assessee - Section 41(4). If sales made by predecessor, and bad debts are also claimed by the predecessor, then any bad debts recovered by successor shall not be taxable in the hands of successor. If sales made by predecessor, and then bad debts are claimed by the successor, then such bad debts shall be allowed to successor as business expense and any bad debts recovery shall be taxable in the hands of successor. 188

In short, assessee claiming bad debts and assessee recovering the bad debts shall be the same for taxability of such bad debts recovery. Expenditure on Allowed to company assessee only. (i.e. for other promotion of family assessees, same shall be dead loss & have no tax planning amongst treatment) employees Revenue expenses are allowed in the year itself. Capital nature expenses are allowed in 5 equal instalments. No depreciation on such assets. Securities Transaction Allowed as business expense subject to section 43B Tax / Commodities Transaction Tax Other expenses (e.g. Allowed if revenue in nature and are not personal. salary, commission, Further, incurred for the purposes of business or advertisement, carriage profession only. inward, rent, repairs, P&M insurance) Expenditure on Deduction @ 150% of the expenses (whether capital or agricultural extension revenue in nature) incurred shall be allowed as business project – Section 35CCC expense Expenditure on skill Deduction @ 150% of the expenses incurred (except on development project – land & building) shall be allowed as business expense Section 35CCD only to company assessee. 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 (a) If TDS is not deducted during the PY, or resident (b) If TDS is deducted during the PY (on or before (including salary) 31/03/2018) but is not deposited with CG on or before on which TDS is the due date of return of income u/s 139(1) deductible – 30% of the expense shall be disallowed. section 40(a)(ia) Same shall be allowed in the year in which TDS is 189