Tax

deposited with the CG. This provision shall be applicable whether such expense is outstanding on the last day of the PY or has been actually paid during the PY. 2. Any payment to (a) If TDS is not deducted during the PY, or non-resident (b) If TDS is deducted during the PY but is not deposited (except salary) with CG on or before due date of return of income u/s which is taxable 139(1) in the hands of 100% of the expense shall be disallowed. non-resident – Same shall be allowed in the year in which TDS is section 40(a)(i) deposited with the CG 3. Salary to non- Shall not be allowed if TDS not deducted or not deposited resident with the CG. (permanent disallowance – will not be allowed in future) 4. Advertisement 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. 5. Expenses If payment made to relatives for expenses is more than payment made to reasonable, then excess shall not be allowed as business 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 190

(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. If such contribution is not deposited by employer in Contribution to relevant fund on or before due date of deposit in relevant provident fund, 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. (a) tax, duty, cess or fee under any law (b) employer‘s contribution to approved provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees (c) bonus or commission to employees 9. Certain deductions to (d) interest on any loan from scheduled bank/public be only on actual financial institution/State financial corporation/State payment – section 43B 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 191

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 from the VRS - Section 35DDA 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 Tax itself, interest on tax, penalty, CDT/DDT (refer chart Income-tax Act, 1961, or below) Wealth-tax Act, 1957 Nature of expense Act to which expense pertains to Tax itself Service Tax, Excise Duty, Income-tax, Wealth-tax etc. X✓ Provision for tax X ✓ (Subject to Sec. 43B) Interest X ✓ X X Penalty ✓ ✓ 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 deductible on on on allowance Rent 08/07/2017 08/07/2017 11/11/2018 Interest 06/06/2017 06/06/2017 28/02/2018 192

Professional 05/10/2017 05/10/2017 05/06/2018 Fees Salary 04/07/2017 04/07/2017 20/11/2019 22/12/2017 22/12/2017 28/07/2019 Commission to sales agent 08/07/2017 12/12/2017 11/11/2018 Rent 06/06/2017 15/01/2018 28/02/2018 05/10/2017 05/04/2018 05/06/2018 Interest 04/07/2017 04/02/2018 20/11/2019 Professional 22/12/2017 25/03/2018 28/07/2019 Fees Salary Commission to sales agent Solution: TDS TDS deducted TDS deposited Year of deductible on on on allowance Nature of expense 08/07/2017 08/07/2017 11/11/2018 70% in 2017-18 30% in 2019-20 Rent 28/02/2018 05/06/2018 100% in 2018-19 Interest 06/06/2017 06/06/2017 05/10/2017 05/10/2017 100% in 2018-19 Professional Fees 04/07/2017 04/07/2017 20/11/2019 70% in 2018-19 28/07/2019 30% in 2019-20 Salary 11/11/2018 70% in 2018-19 Commission to 22/12/2017 22/12/2017 30% in 2019-20 sales agent 08/07/2017 12/12/2017 Rent 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 04/07/2017 04/02/2018 30% in 2019-20 Salary 20/11/2019 70% in 2018-19 30% in 2019-20 193

Commission to 22/12/2017 25/03/2018 28/07/2019 70% in 2018-19 30% in 2019-20 sales agent Illustration-10 Following expenses were found debited in P&L A/c for the PY 2017-18. Expense nature Amount Payment date Year of deduction Sales tax 10,000 20.3.18 Sales tax 25,000 20.4.18 Bonus 5,000 5.10.18 Interest to scheduled bank 11,000 30.9.17 Leave salary 50,000 10.4.19 Employer‘s contribution to 16,000 30.9.19 provident fund Assume due date of return to be 30.09.2018 for PY 2017-18. In which previous year deduction can be claimed? Solution: Expense nature Amount Payment date Year of deduction Sales tax 10,000 20.3.18 2017-18 Sales tax 25,000 20.4.18 2017-18 Bonus 5,000 5.10.18 2018-19 11,000 30.9.17 2016-17 Interest to scheduled bank 50,000 10.4.19 2019-20 Leave salary 16,000 30.9.19 2019-20 Employer‘s contribution to provident fund 194

Illustration-11 Mrs. Arora carries on a textile manufacturing business. Her Profit and Loss Account for the year ending 31st March, 2018 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 6,000 To Legal Expenses 750 By Bad debts recovered 4,500 5,000 To Salaries 17,000 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 Total 2,16,500 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 1.12.2017. 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 31.7.2018 (last date for filing). 195

(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 2017-18 Net Profit as per Profit & Loss a/c (Rs) 1,20,750 Add:- Depreciation as per books 4000 Excise duty disallowed 1200 Audit Fees Disallowed 9750 Sundry exp 1500 21,450 Office Exp (Furniture) 5000 Less 2700 2950 Depreciation as per IT 250 1,39,250 Depreciation on Furniture (5000*10%*6/12) Income as per Income tax Act Illustration-12 Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2018 196

Manufacturing, Trading and Profit & Loss Account for the year ended 31.03.2018 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 To Administrative charges 3,26,000 By Gross Profit 10,60,000 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 2,00,000 loan) To Depreciation To Net Profit 3,05,000 12,55,000 10,60,000 Following are the further information relating to the financial year 2017-18: (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 29.12.2017. This amount is included in manufacturing expenses. (Assume that the provisions relating to TDS are not applicable to this payment.) (iii) Bank term loan interest actually paid upto 31.03.2018 was ₹20,000 and the balance was paid in October 2018. (iv) Depreciation allowable under the Act is to be computed on the basis of following information. 197

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) Total additions during the year 2,00,000 4,00,000 Note: Ignore additional depreciation u/s 32(1)(iia). Compute the total income of Mr. Raju for the assessment year 2018-19. 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 Section 44AD Section 44AE 44ADA Profession Eligible Any business other than Business of transportation of s Business goods mentioned u/s44AA(i Eligible  business referred in ) section 44AE Resident  Specified profession u/s 44AA  Income of commission/brokerage  Agency business Resident - Individual, HUF, Any assessee 198

Assessee Firm (except LLP) Assessee For every goods vehicles 50% of Income u/h 8% of total turnover of the (whether gross PGBP equals business to heavy, medium or light) – receipt ₹7,500pm or part of a month during which vehicle is owned by the assessee  Assessee owns more than Gross exceeds receipts Not  Turnover ₹2 10 crore OR applicable in goods carriages at any exceed 50 case time lakh  Assessee claims income during the year OR  Assessee claims income from said business to be from said business to be lower Lower than 8%/ 6% 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 Applicability Sections 44AA (maintenance of books of accounts) & Section 44AB of sections (tax audit) shall not be applicable on such business (i.e. business for 44AA & 44AB which assessee opted for taxation on estimation basis). Special provision for computing profits and gains of profession on presumptive basis (Section 44ADA] [W.e.f. A.Y. 2017-18] (1) Resident assesse engaged in the profession referred to in section 44AA(1) on opt for presumptive income in certain cases [Section 44ADA(1)]: Non with standing anything contained in sections 28 to 43C, in the case of assesse, being a resident in India, who is engaged in a profession referred to in section 44AA(1) and whose total gross receipts do not exceed ₹50,00,000 in the previous year, a sum equal of 50% of the total gross receipts of the assesse in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the assesse, shall be deemed to be the profits and gains of such profession chargeable to tax under the head ―Profits and gains of business or profession‖. 199

Profession referred to in section 44AA(1): Legal, medical, engineering or architectural profession, or profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board in the Official Gazette. Authorised representatives, film artists, company secretaries and profession of information technology have been notified for this purpose. (2)Consequences if the assesse opts for presumptive income scheme: (a) Deduction under sections 30 to 38 shall be deemed to have been allowed [Section 44ADA(2)]: Any deduction allowable under the provisions to have been 30 to 38 shall, for the purposes of section 44ADA(1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. (b) Written down value of any asset for the succeeding year shall be computed as if the assesse has claimed deduction [Section 44ADA(3)]: The written down value of any asset used for the purposes of profession shall be deemed to have…… Illustration-13 Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for the year ended 31st March, 2017: Trading and Profit and Loss Account for the year ended 31.03.2017 To Opening stock ₹ ₹ To Purchases 90,000 By Sales 12,11,500 To Gross Profit 10,04,000 By Other business receipts 3,03,600 By Closing stock 6,100 13,97,600 1,80,000 13,97,600 200

To Salary ₹ ₹ To Rent and rates 60,000 By Gross profit b/d 3,03,600 To Interest on loan 36,000 To Depreciation 15,000 3,03,600 To Printing & stationery 1,05,000 To Postage & telegram 23,200 To Other general expenses 1,640 To Net Profit 7,060 55,700 3,03,600 Additional Information: (i) It was found that some stocks were omitted to be included in both the Opening and Closing Stock, the values of which were Opening stock ₹9,000 Closing stock ₹18,000 (ii) Salary includes ₹10,000 paid to his brother, which is unreasonable to the extent of ₹2,000. (iii) The whole amount of printing and stationery was paid in cash. (iv) The depreciation provided in the Profit and Loss Account ₹1,05,000 was based on the following information: The written down value of plant and machinery is ₹4,20,000.A new plant falling under the same Block of depreciation of 15% was bought on 1.7.2017 for ₹70,000. Two old plants were sold on 1.10.2017 for ₹50,000. (v) Rent and rates includes sales tax liability of ₹3,400 paid on 7.4.2017. (vi) Other business receipts include ₹2,200 received as refund of sales tax relating to 2016-17. (vii) Other general expenses include ₹2,000 paid as donation to a Public Charitable Trust. You are required to advise Mr. Sivam whether he can offer his business income u/s 44AD i.e. presumptive taxation. 201

Solution: 55,700 (9000) Net Profit 18000 - Op Stock + closing stock 2000 + salary to brother 23200 + printing & stationery 2000 + donations 1,05,000 + depreciation books (66,000) - depreciation income tax Income u/h PGBP 130900 Income u/s 44AD (8% of 12,11,500) 96,920 Illustration-14 Mr. X commenced the business of operating goods vehicles on 1.4.2017. He purchased the following vehicles during the P.Y.2017-18. Compute his income under section 44AE for A.Y.2018-19. Type of Vehicle Number Date of Purchase Light Goods Vehicle 2 10.4.2017 Medium Goods Vehicle 1 15.3.2018 3 16.7.2017 Heavy Goods Vehicle 1 2.1.2018 2 29.8.2017 1 23.2.2018 Would your answer change if the two light goods vehicles purchased in April, 2017 were put to use only in July, 2017? Solution: Number of vehicle months 2 x 12 1x1 3x9 1x3 2x8 1x2 202

= 73 x 7500 = 5,47,500 Answer will be same (2) Maintenance of accounts by certain persons carrying on profession or business – Section 44AA Nature of Conditions Satisfactio Books of accounts business or n profession Gross receipts > ₹1.5lacs Satisfied prescribed books of in all the 3 yrs. preceding accounts the RPY Specified OR such books of accounts and other documents as profession If profession newly setup Not may enable the AO to satisfied compute his total income in RPY, then gross receipts likely to exceed ₹1.5lacs for the RPY such books of accounts and other documents as Income > 2.5 lacs or Satisfied may enable the AO to turnover/ gross receipts > compute his total income 25 lacs in any of the 3 yrs. Any business or preceding the RPY profession OR other than If busi./prof. newly setup specified in RPY, then income/ Not no books of accounts are satisfied required to be maintained profession turnover/ gross receipts likely to exceed above limits for the RPY 203

Business Section 44AE followed no books of accounts are required to be maintained such books of accounts and other documents as may enable the AO to compute his total income no books of accounts are required to be maintained covered u/s Section 44AE not followed no books of accounts are 44AE required to be maintained Section 44AD/44ADA followed Business no books of accounts are covered u/s Section Total income ≤ required to be maintained 44AD/44ADA not 44AD maximum such books of accounts followed amount and other documents as may enable the AO to which is not compute his total income chargeable to tax Total income > maximum amount which is not chargeable to tax Specified Profession: Legal, medical, engineering, architectural profession, the profession of accountancy, technical consultancy, interior decoration, film artist, profession of Company Secretary, profession of Information Technology. Prescribed Books of Accounts: Cash Book, Journal in case of accrual method of accounting, Ledger, Carbon copies/counterfoil of bills (serially numbered) of amount exceeding ₹25, original bills/receipts for expenditure incurred. In case of medical profession, additionally: daily case register, inventory register. Note: Books of accounts referred above are required to be maintained at principal place of business and for 6 years from the end of the relevant assessment year. (3) Audit of accounts of certain persons carrying on business or profession – Section 44AB 204

Nature of business Conditions under which audit is required or profession Business Turnover/gross receipts > ₹2 crore Profession Gross receipts > ₹50 lacs Section 44AD followed no audit required Business covered Section 44AD Total income ≤ maximum no audit required u/s 44AD amount which is not Audit required not followed chargeable to tax Total income > maximum amount which is not chargeable to tax Business covered Section 44AE followed no audit required u/s 44AE Section 44AE not followed Audit required Notes: 1. Accounts are required to be audited by a CA in practice. 2. Audit report shall be in specified form (Form 3CA/3CB and 3CD). 3. If accounts are required to be audited under any other law, then no separate audit necessary. In that case, person shall submit such audit report and a further report under this section. 4. Such audit report shall be submitted with AO on or before due date of filing of return of income. (4) Non-resident shipping business or aircraft business – Section 44B & 44BBA Section 44B 44BBA Applicable to Income u/h PGBP Non-resident carrying on Non-resident carrying on shipping business business of operation of aircraft 7.5% 5%  Abovesaid percentage (7.5% or 5%) shall be applicable to following amounts  o Amount receivable by the assessee on account of carriage of passengers, livestock, mail or goods from any place in India.  o Amount received in India on account of carriage of passengers, livestock, mail or goods from any place outside India.  205

 No expenditure shall be allowed or disallowed from income computed above. Illustration-15 Mr. B. A. Patel, a non-resident, operates an aircraft between London to Ahmadabad. For the Financial year ended on 31st March, 2017, he received the amounts as under: (i) For carrying passengers from Ahmadabad ₹50 lacs. (ii) For carrying passengers from London ₹75 lacs received in India. (iii) For carrying of goods from Ahmadabad ₹25 lacs. The total expenditure incurred by Mr. B. A. Patel for the purposes of the business for the financial year 2016-17 was ₹1.4 crores. Compute the income of Mr. B. A. Patel under the head ―Profits and Gains from business or profession‖ for the financial year ended on 31st March 2017 relevant to assessment year 2017-18. Solution: 5% of (50lacs + 75 lacs + 25 lacs) = 7.5 lacs (5) Deemed Profits The provisions of section 41 are deeming because even though following are not incomes but still they are deemed to be incomes. Even in the case of discontinuation these provisions will apply. In other words the receipts in the following sections are taxable as business receipts even though no business is carried on by the assessee in the year of receipt.  Section 41(1) – done as part of topic 3.2.4   Section 41(3) – done as part of topic 3.2.2   Section 41(4) – done as part of topic 3.2.4 (6) Expenditure for obtaining licence to operate telecommunication services – Section 35ABB   Capital expenditure   incurred to obtain licence to operate telecommunication services  shall be allowed as an expense  in equal instalments starting from the year of actual payment or commencement of business, whichever is later and ending with the year in which licence expires. 206

Note: No depreciation shall be allowable on such expense u/s 32. Illustration-15 Swadeshi Ltd., which follows mercantile system of accounting, obtained licence on 1.4.2016 from the Department of telecommunication for a period of 10 years.The total licence fee payable is ₹18,00,000. The relevant details are: Year ended March 31st Licence fee payable Payments made for the year Date Amount ₹ ₹ 10,00,000 2017 30.03.17 3,70,000 15.05.17 6,30,000 2018 8,00,000 28.02.18 5,40,000 Balance of ₹2,60,000 is pending as on 31.3.2018. Compute the amount of deduction available to the assessee u/s 35ABB for the AY 2017-18 and AY 2018-19. Solution: AY 2017-18 = 3,70,000 / 10 = 37,000 AY 2018-19 = 37,000 + 11,70,000/9 = 1,67,000 (7) Deduction for Partnership Firms – Section 40(b) Interest Interest paid to any partner (whether working or not) shall be allowed as business expense to the partnership firm subject to maximum of 12%pa. Salary  Salary for this purpose shall include salary, fees, bonus, commission, remuneration, by whatever name called.   Salary to non-working partners shall not be allowed as expense to the partnership firm.   Salary to working partners shall be allowed as business expense to the partnership firm subject to maximum of: 207

In case of negative book-profit (i.e. loss): ₹1,50,000 (cumulative for all working partners) In case of positive book-profit: Higher of (i) 90% of book-profits upto ₹3,00,000 + 60% of balance book-profits OR (ii) ₹1,50,000. Book-profit means Income u/h PGBP of the partnership firm before allowing any deduction on account of salaries to partners (whether working or not) but after making all adjustments as required by the provisions of the head PGBP. Profit Share Profit share is not a business expense for firm, but it is appropriation of profits, and hence shall not be allowed as business expense. Taxability in the Hands of Partners:  Interest & salary to the extent allowed to the partnership firm as business expense shall be taxable in the hands of partners under head PGBP – Section 28(v).   Profit share shall be exempt in the hands of partners – Section 10(2A). Partner‘s share in profit shall be exempt whether firm is liable to pay any tax or not.  Illustration-16 Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ₹7,00,000 before deduction of the following items: Salary of ₹20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership). Depreciation on plant and machinery u/s 32 (computed) ₹1,50,000. Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest ₹5,00,000. Compute: Book-profit of the firm u/s 40(b) of the Income-tax Act, 1961. Allowable working partner salary for the assessment year as per section 40(b) of the Income-tax Act, 1961. Solution: As per the provisions of Explanation 3 to section 40(b), book profit shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the 208

remuneration paid or payable to the partners of the firm if the same has been already deducted while computing the net profit. In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest on capital of partners and salary to the working partners. Therefore, the book profits shall be as follows: Computation of Book Profit of the firm u/s 40(b) of the Income-tax Act, 1961. Particulars ₹₹ Net Profit (before deduction of depreciation, salary and interest) 7,00,000 Less: Depreciation u/s 32 1,50,000 Interest @ 12% p.a. [being the maximum allowable as per section 40(b)] (5,00,000 × 12%) 60,000 2,10,000 Book Profit 4,90,000 Salary actually paid to working partners = 20,000 × 2 × 12 = ₹4,80,000. As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits – On the first ₹3,00,000 of book ₹1,50,000 or 90% of book profit, whichever is more profit On the balance of book profit 60% of the balance book profit Therefore, the maximum allowable working partners‘ salary for the A.Y. In this case would be: Particulars ₹ On the first ₹3,00,000 of book profit [( ₹1,50,000 or 90% of ₹3,00,000) ₹2,70,000 whichever is more] ₹1,14,000 On the balance of book profit [60% of ( ₹4,90,000 - ₹3,00,000)] ₹3,84,000 Maximum allowable partners‘ salary Hence, allowable working partners‘ salary for the A.Y. as per the provisions of section 40(b)(v) is ₹3,84,000. (8) Deduction in respect of expenditure on specified business – Section 35AD Business Assessee Business commenced on & Deduction 1. Cold chain facility Any 01/04/2009 – 2. Warehousing facility for agri. Any 100% 209 01/04/2009 –

produce Ind. Com. 100% 3. Cross-country natural gas pipeline 01/04/2007 – 4. Cross-country crude/petro. oil Ind. Com. 100% pipeline Any 01/04/2009 – 5. Hotel ≥ 2 star 100% 6. Hospital ≥ 100 beds Any 01/04/2010 – 100% 7. Housing project – redevelopment Any 01/04/2010 – 8. Housing project – affordable housing Any 100% 9. Production of fertilizer Any 01/04/2010 – 100% 01/04/2011 – 100% 01/04/2011 – 100% 10. Inland container depot Any 01/04/2012 – 100% 11. Bee-keeping, production of honey Any 01/04/2012 – 12. Warehousing facility - sugar Any 100% 13. Slurry pipeline for the transportation Any 01/04/2012 – of iron ore 100% 14. Semi-conductor wafer fabrication Any 01/04/2016 – 100% manufacturing unit 01/04/2016 – 15. Developing etc. a new infrastructure facility Co 100% 01/04/2017 – 100% Deduction  100%/150% deduction of capital expenditure incurred during the previous year.  100%/150% of capital expenditure incurred prior to commencement of business shall be allowed in year of commencement of business only if same has been capitalized on the date of commencement of business.  Capital expenditure shall not include land, goodwill & financial instrument.  Any expenditure exceeding 10000 should be incurred by a/c payee cheque/draft etc. 210

Other Provisions (1) Business should be new business i.e. should not be formed by splitting/reconstruction of old business. (2) Business should not be set up by transfer of old plant & machinery. (3) Actual cost of the asset for which deduction has been allowed u/s 35AD shall be taken as NIL. Further, receipts on account of sale of these assets shall be taxable u/h PGBP only, whatever the amount may be.  If such asset is being used by the assessee for the purposes other than specified business, in that case deduction allowed u/s 35AD in excess of depreciation of the period as per section 32 shall be deemed to be income u/h PGBP of the previous year in which such asset is so used. This provision shall be applicable only if such asset is put to use for other purposes in eight years commencing with the year in which such asset is acquired. What shall be the actual cost for other purposes? There is no corresponding amendment in the law. Therefore, actual cost shall be nil for other purposes. Logically it should have been depreciated value considered above. Situation Taxable u/h PGBP Actual cost for subsequent use Sale Sale price Purchase price Use for any Deduction allowed u/s 35AD NIL (logically it should be depreciated other less depreciation u/s 32 on value) purpose deeming basis Illustration-17 Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food grains, sugar and edible oil on 1.4.2017. He incurred capital expenditure of ₹80 lakh, ₹60 lakh and ₹50 lakh, respectively, on purchase of land and building during the period January, 2017 to March, 2017 exclusively for the above businesses, and capitalized the same in its books of account as on 1st April, 2017. The cost of land included in the above figures are ₹50 lakh, ₹40 lakh and ₹30 lakh, respectively. Further, during the P.Y.2017-18, it incurred capital expenditure of ₹20 lakh, ₹15 lakh & ₹10 lakh, respectively, for extension/ reconstruction of the building purchased and used exclusively for the above businesses. Compute the income under the head ―Profits and gains of business or profession‖ for the A.Y.2018-19 and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified for claim of deduction under section 35AD. The profits from the business of setting up a warehousing facility (before claiming deduction under 211

section 35AD and section 32) for the A.Y.2018-19 is ₹16 lakhs, ₹14 lakhs and ₹31 lakhs, respectively. Solution: Computation of profits and gains of business or profession for A.Y.2018-19 Particulars ₹ (in lakhs) Profit from business of setting up of warehouse for storage of edible 31 oil (before providing for depreciation u/s 32) Less: Depreciation u/s 32 10% of ₹30 lakh, being ( ₹50 lakh – ₹30 lakh + ₹10 lakh) 3 Income chargeable under ―Profits and gains from business or 28 profession‖ Computation of income/loss from specified business u/s 35AD Particulars Food Sugar Total Grains (A) Profits from the specified business of setting 16 14 30 up a warehousing facility (before providing deduction u/s 35AD) Less: Deduction u/s 35AD (B) Capital expenditure incurred prior to 1.4.2017 30 20 50 (i.e., prior to commencement of business) and capitalized in the books of account as on 1.4.2017 (excluding the expenditure incurred on acquisition of land) = ₹30 lakh ( ₹80 lakh – ₹50 lakh) and ₹20 lakh ( ₹60 lakh – ₹40 lakh) (C) Capital expenditure incurred during the 20 15 35 P.Y.2017-18 (D) Total capital expenditure (B + C) 50 35 85 (E) Deduction u/s 35AD 150% of capital expenditure (food grains) 75 100% of capital expenditure (sugar) 35 Total deduction u/s 35AD for A.Y. 18-19 75 35 110 212

(F) Loss from the specified business of setting up and operating a warehousing facility (after providing for deduction u/s 35AD) to be carried forward as per section 73A (A-E) (59) (21) (80) Notes: (1) Weighted deduction@150% of the capital expenditure is available u/s 35AD for A.Y.2018-19 in respect of specified business of setting up and operating a warehousing facility for storage of agricultural produce which commences operation on or after 01.04.2017. Food grains constitute agricultural produce and therefore, the capital expenditure incurred for setting up a warehousing facility for storage of food grains is eligible for weighted deduction@150% u/s 35AD. (2) Deduction of 100% of the capital expenditure is available u/s 35AD for A.Y.2018-19 in respect of specified business of setting up and operating a warehousing facility for storage of sugar, where operations are commenced on or after 01.04.2017. (3) However, since setting up and operating a warehousing facility for storage of edible oils is not a specified business, Mr. A is not eligible for deduction u/s 35AD in respect of capital expenditure incurred in respect of such business. (4) However, Mr. A can claim depreciation @ 10% u/s 32 in respect of the capital expenditure incurred on buildings. It is presumed that the buildings were put to use for more than 180 days during the P.Y.2017-18. (5) Loss from a specified business can be set-off only against profits from another specified business. Therefore, the loss of ₹80 lakh from the specified businesses of setting up and operating a warehousing facility for storage of food grains and sugar cannot be set-off against the profits of ₹28 lakh from the business of setting and operating a warehousing facility for storage of edible oils, since the same is not a specified business. Such loss can, however, be carried forward indefinitely for set-off against profits of the same or any other specified business. (9) Investment in New plant or Machinery – Section 32AC 1. 2. Assessee – Company 3. Business – manufacture/production of any article or thing Acquires & installs new assets during PY 2015-14 & PY 2016-17 aggregating > ₹100 crores w.e.f. Py 16-17 : 25 crore 213

4. Deduction u/h PGBP = 15% of actual cost of new assets (one time deduction) 5. If investment in new assets in PY 2015-14 > ₹100 crores, then deduction in PY 2015-14 = 15% of investment made in PY 2015-14, and deduction in PY 2016- 17 = 15% of investment made in PY 2016-17. 6. If investment in new assets in PY 2015-14 ≤ ₹100 crores but investment in PY 2015-14 + PY 2016-17> ₹100 crores, then no deduction in PY 2015-14, but deduction in PY 2016-17 = 15% of investment in PY 2015-14 + PY 2016-17. 7. Acquires & installs new assets during the previous year aggregating > ₹25 crores, then there shall be deduction u/h PGBP = 15% of actual cost of new assets (one time deduction) in that previous year. 8. No deduction is available from PY 2017-18 onwards. i.e. point no. 7 is applicable for 3 previous years only viz.; PY 2016-17 to PY 2017-18. 9. Company claiming benefit of section 32AC in PY 2016-17 because of old provision cannot claim benefit of section 32AC under new provision in PY 2016-17, but can claim benefit in remaining two years. 10. If any asset is sold within next 5 years from the date of its installation, then deduction on account of such asset shall be deemed to be income of the PY u/h PGBP in which asset is sold. Gains, if any, on sale of such asset shall be taxable separately. 11. Deduction u/s 32AC shall be in addition to depreciation (or additional depreciation). Further this deduction shall not be counted for the purpose of computing opening WDV of next year. 12. New asset means any new plant & machinery, except: (a) second hand P&M (b) installed in office premises/residential accommodation/guest house (c) office appliances including computers or computer software (d) vehicle, ship or aircraft 2.3.4. Tax Shelter and Tax Holidays Tax Shelter After receiving much attention in the news in recent years, the term \"tax shelter\" has a negative connotation relating to deceptive and illegal schemes to evade income tax. However, this is not always the case. A tax shelter is also any legal strategy you employ to reduce the amount of income taxes you owe. 214

Sheltering your Income with Deductions Claiming deductions is a perfectly legal way to reduce the amount of income tax you pay to the Irs. You can easily accomplish this tax shelter by choosing to spend your income on expenses that can lead to a deduction. For example, it‘s perfectly legal and reasonable to pay college tuition expenses with a student loan rather than a credit card for no reason other than to take advantage of the student loan interest deduction. If you prefer to make a large number of charitable donations during the year with the sole purpose of reducing your income tax bill, the IRS (Internal / Indian Revenue Service)will never challenge your charitable deduction as long as you satisfy all requirements of the deduction. Tax Shelters using Investments In addition to claiming deductions, you can also shelter income from tax by choosing investments that provide the maximum tax savings. The IRS encourages taxpayers to save for retirement by allowing them to deduct a certain amount of contributions to a traditional IRA (Individual Retirement account). In addition, you achieve tax deferral on all investment income and gains in the IRA since the IRS will not impose an income tax on those earnings until you retire and start making withdrawals. Illegal Tax Shelters When evaluating an investment, the IRS encourages you to consider the doctrine of \"substance over form.\" What this means is that if a tax strategy is illegal, it doesn‘t become legal just because you call it something else. For example, the federal tax law prohibits you from assigning income you earn to another taxpayer who is subject to lower tax rates. If you earn $200,000 during the year as an independent contractor, you are responsible for paying all of the income tax on it. Setting up a corporation to receive your income and adding a family member to the payroll doesn‘t transform your strategy into a legal tax shelter. If you are solely responsible for earning the income, then even with a corporation, you should be solely receiving a salary. Effectively, there is no substance to adding your family member to the payroll. However, many taxpayers enter into these types of transactions only because it appears easier to hide it from the I ₹ Penalties for Illegal Tax Shelters The penalties for entering into illegal tax shelters are clear, but also severe. The IRS treats illegal tax shelters as fraudulent activity and can charge you a penalty that is 215

75 percent of the tax you underpay as a result of your illegal tax scheme. In addition, taxpayers run the risk of criminal prosecution and the possibility of a prison sentence. Tax Holidays A temporary period, during which time the government removes certain taxes (usually sales tax) on certain items, in order to encourage the consumption or purchase of these items. The most common application of this is a tax-free weekend, which most states hold shortly before school begins in the fall, during which time sales tax is removed on clothing, school supplies, and/or other similar items. Not all areas engage in tax holidays; it is up to the government of that area. Fiscal policy measure often found in developing countries. A tax holiday offers a period of exemption from income tax for new industries in order to develop or diversify domestic industries. A government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment. Used in the hopes of increasing the gross domestic product (GDP) in developing countries, tax holidays are a way in which governments attract foreign investors. Tax holidays are often put in place in particular industries to help promote growth. 216

SUMMARY Depreciation – Section 32 1. Block of assets method. 2. Depreciation on WDV. WDV = Opening WDV + purchases – actual sales price. 3. Depreciation rates – Building 10%, Furniture 10%, P&M 15%. No day to day calculations. 4. If asset put to use < 180 days, then half depreciation. 5. If assessee‘s business is of manufacturing/production, then additional depreciation @ 20% on new P&M installed in factory premises. 6. If actual sales price > opening WDV + purchases; or whole block is transferred, then STCG/STCL as per section 50. Scientific Research – Section 35 1. Revenue expenditure or capital expenditure (except land) for scientific research related to his business allowed as expense equal to 100%. 2. Donations to various research organisations allowed as expense varying from 100% to 150% of donations made. Other Expenses Allowed 1. Employees‘ health insurance premium (except in cash) 2. Bad debts (provision for bad debts not allowed. Recovery of bad debts taxable u/h PGBP. 3. Interest on borrowed capital 4. Any expense in the nature of revenue Expenses Not Allowed 1. Section 40(a)(ia) – 30% of any expense on which TDS is not deducted on or before 31/3 or after deduction not deposited on or before due date of ROI. 2. Income-tax & wealth-tax. 3. Section 40A(2) – payment of expense to relatives more than reasonable – excess shall only be disallowed 4. Section 40A(3) – payment in cash in a single day > ₹10,000. Whole expense shall be disallowed 217

5. Section 43B – Any, interest of banks, bonus or commission or leave salary to employees allowed as an expense only if paid on or before due date of ROI. Other Provisions 1. Method of accounting – mercantile or cash 2. Section 44AD – If turnover ≤ ₹1 crore, then Income u/h PGBP = 8% of turnover. 3. Section 44AE –transportation business – vehicles ≤ 10. Income u/h PGBP = ₹7,500pm per vehicle. 4. Section 44AB – audit required if business turnover > ₹2 crore, profession receipts > ₹50 lacs, or section 44AD/44AE is not followed. 5. Section 35AD – in case of specified businesses like cold chain facility, warehousing facility, deduction @ 100% or 150% of capital expenses allowed. But depreciation shall not be allowed in that case. 6. Section 32AC – if investment in new P&M in factory premises by a company doing manufacturing/production business is > ₹100 crores in PY 2015-14 + PY 2016-17 or is > ₹25 crores in a year, then 15% investment allowance is provided as business expense. 218

PRACTICE QUESTIONS Question-1 A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the following assets in his office during F.Y. 2017-18 at the cost shown against each item. Calculate the amount of depreciation that can be claimed from his professional income for A.Y. 2018-19: S. Description Date of Date when put to Amount No. acquisition use ( ₹) 1. Computer 27 Sept., 17 2 Oct., 17 35,000 2. Computer software 2 Oct., 17 4 Oct., 17 8,500 3. Computer printer 2 Oct., 17 3 Oct., 17 12,500 4. Books (of which books being annual 1 Apr., 17 1 Apr., 17 13,000 publications are of ₹12,000) 5. Officefurniture(Acquired from 1 Apr., 17 1 Apr., 17 3,00,000 practising C.A.) 6. Laptop 26 Sep., 17 4 Oct., 17 43,000 7. Fire extinguisher 1 Apr., 17 No instance arose to 2,500 use during FY 2017- 18 8. Purchased practising CA's office in April 16 who had run it for 4 years, for ₹5 lacs which includes ₹2 lacs for goodwill and ₹3 lacs for cost of furniture (included in 5 above) Note: Depreciation is to be provided at the applicable rates. Question-2 Mr. B. A. Patel, a non-resident, operates an aircraft between London to Ahmadabad. For the Financial year ended on 31st March, 2018, he received the amounts as under: (I) For carrying passengers from Ahmadabad ₹50 lacs. (ii) For carrying passengers from London ₹75 lacs received in India. (iii) For carrying of goods from Ahmadabad ₹25 lacs. The total expenditure incurred by Mr. B. A. Patel for the purposes of the business for the financial year 2017-18 was ₹1.4 crores. 219

Compute the income of Mr. B. A. Patel under the head ―Profits and Gains from business or profession‖ for the financial year ended on 31st March 2018 relevant to assessment year 2018-19. Question-3 Gopichand Industries furnishes you the following information: 01.04.2016 ( ₹) 5,00,000 Block I Plant and machinery (consisting of 10 looms) Rate of depreciation 15% WDV 12,50,000 Block II Buildings (consisting of 3 buildings) Rate of depreciation 10% WDV 4,00,000 Acquired on 5.07.17 5 looms for 10,00,000 Sold on 7-12-17 15 looms for 3,00,000 Acquired on 10-01-18 2 looms for Compute depreciation claim for the Assessment year 2018-19. Question-4 Dr. Krishna furnishes you the following information: Income and Expenditure Account for the year ended 31st March 2018 To Medicines consumed ₹ Indian ₹ To Staff salary 8,47,500 To Hospital consumables 2,42,000 By Fee receipts 1,65,000 By Rent 27,000 To Rent paid 9,000 To Administrative expenses By Dividend from To Net Income 47,500 companies 8,83,500 60,000 1,23,000 2,46,000 8,83,500 (i) Rent paid includes rent for his residential accommodation of ₹30,000 (paid by cheque). (ii) Hospital equipments (eligible for depreciation @ 15%) 01.04.2017 Opening WDV ₹5,00,000 220

07.12.2017 Acquired (Cost) ₹2,00,000 (iii) Medicines consumed include medicines (cost) ₹10,000 used for Dr. Krishna‘s family. (iv) Rent received – relates to a property situated at Mysore (Gross Annual Value).The municipal tax of ₹2,000 paid in December, 2017 has been included in the ―administrative expenses‖. (v) He received ₹5,000 per month as salary from Full Cure Hospital. This has not been included in the ―fee receipts‖ credited to income and expenditure account. (vi) He sold a vacant site in July, 2017 for ₹5,29,190. It was inherited by him from his father in January, 2009. The site was acquired by his father in December, 2008 for ₹1,63,767. Compute Dr. Krishna‘s taxable income for the year ended 31.03.2018. Question-5 From the following particulars furnished by Kiran for the previous year ending 31.03.2018 compute the taxable income for assessment year 2018-2019. (i) He owns a house property at a metro city. The FRV pa is ₹27,000 and the municipal value ₹24,000. (ii) The house was let out from 1.4.2017 to 31.8.2017 at a monthly rent of ₹2,100. From 1.9.2017 Kiran occupies for his residence (self). (iii) Expenditure incurred on property and paid: (a) Municipal tax ₹4,000 (b) Fire insurance ₹2,500 (c) Land revenue ₹4,600 (d) Repairs ₹1,000 (iv) Interest paid on borrowings for construction: (a) for the year ₹21,600 (b) Proportionate pre-construction interest ₹12,960. (v) Income from firm (PF A/c) as partner Salary 25,000 Interest on capital 20,000 Share income 35,000 221

Question-6 Kishore Industries owned six machines which were in use in its business in March, 2017. Depreciation on these machines was available as ―plant‖. The written down value of these machines at the end of previous year relevant to assessment year 2017-18 was ₹6,50,000. A new plant was bought for ₹6,50,000 on 30th November, 2017. Three of the old machines were sold on 10th June, 2017 for ₹9,00,000. Required: (i) Compute the claim to depreciation for assessment year 2018-2019; (ii) Capital gains liable to tax for the same assessment year; (iii) If Kishore Industries had sold the three machines in June, 2017 for ₹14,00,000, will there be any difference in your above working? Explain. ANSWERS Answer-1 Computation of depreciation allowable for A.Y. 2018-19 Block 1 Asset Rate Depreciation Block 2 Furniture 10% 30,000 Block 3 Block 4 Plant (Computer, computer software, laptop & 40% 29,300 Block 5 printer) Plant (Books) 40% 400 Plant (Books) 40% 4,800 Plant (Fire Extinguisher) 15% 375 Total depreciation allowable 64,875 Notes: ₹ 1. Computation of depreciation 30,000 Block of Assets 14,000 Block 1: Furniture – rate 10% Put to use for more than 180 days [ ₹3,00,000@10%] Block 2: Plant – rate 40% Computer (put to use for more than 180 days) [35,000 @ 40%] 222

Laptop (put to use for less than 180 days) [43,000 @ 20%] 8,600 Computer printer (Put to use for 180 days) [12,500 @40%] 5,000 Computer Software (put to use for less than 180 days) [8,500 @ 20%] 1,700 29,300 Block 3: Plant – Rate 40% Books (other than annual publications) (Put to use for more than 180 400 days) [1,000 @ 40%] 4,800 Block 4: Plant – Rate 40% Books (being annual publications) put to use for more than 180 days 375 [12,000 @40%] Block 5: Plant – Rate 15% Fire extinguisher [2,500 @ 15%] Answer-2 U/s 44BBA, in case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to 5% of the aggregate of the following amounts shall be deemed to be his business income: (a) the amount paid or payable, whether in or out of India, to the assessee on account of carriage of passengers, goods etc. from any place in India; and (b) the amount received or deemed to be received in India by the assessee on account of carriage of passengers, goods etc. from any place outside India. Hence, the income of Mr. B. A. Patel chargeable to tax in India under the head ―Profits and Gains of business or profession‖ is determined as under: Particulars ₹ For carrying passengers from Ahmadabad 50,00,000 For carrying passengers from London, amount received in India 75,00,000 For carrying goods from Ahmadabad 25,00,000 1,50,00,000 Total: Hence, income from business computed on presumptive basis as per section 44BBA is ₹7,50,000, being 5% of ₹1,50,00,000. Note: No deduction is allowable in respect of any expenditure incurred for the purpose of the business. 223

Answer-3 Computation of depreciation for Gopichand Industries for A.Y.2018-19 Particulars ₹ ₹ Block 1: Plant & machinery (Rate of depreciation – 15%) WDV as on 1st April (10 looms) 5,00,000 15,000 Add: Additions during the year: 5 looms acquired on 5th July 4,00,000 20,000 3,00,000 1,25,000 2 looms acquired on 10th January 12,00,000 1,60,000 10,00,000 Less: Assets sold during the year 15 looms sold on 7th December 2,00,000 W.D.V. as on 31st March (2 looms) Depreciation on ₹2 lakhs @ 15% (limited to 50%) 12,50,000 Additional depreciation (See Note 2) Block II: Buildings (Rate of depreciation – 10%) WDV as on 1st April (3 buildings) Depreciation on ₹12,50,000 @ 10% Total depreciation for the year Notes: 1. Closing balance of Block 1: Plant and machinery represents the looms acquired on 10th January. These looms have been put to use for less than 180 days during the previous year, and therefore, only 50% of normal depreciation is permissible. 2. Additional depreciation @ 20% of the cost of plant and machinery is available u/s 32(1)(iia). In this case, the assessee is eligible for additional depreciation if it is engaged in the business of manufacture or production of any article or thing and satisfies other conditions contained in the provision. The quantum of additional depreciation allowable would be: ₹2,00,000 x 20% x 50% (Put to use for less than 180 days) = ₹20,000 Answer-4 Computation of taxable income of Dr. Krishna for the previous year ended 31.03.2018. Particulars ₹₹ Income from Salaries 60,000 Salary received @ ₹5,000 per month Income from house property 27,000 Gross annual value 224

Less: Municipal tax 2,000 Net annual value 25,000 Less: Deduction u/s 24 @ 30% 7,500 17,500 Income from business or profession Net income as per income & expenditure account 2,46,000 Add: Rent paid to residence 30,000 Medicines consumed – personal use 10,000 Municipal tax relating to let out property included in 2,000 administrative expenses – disallowed 2,88,000 Depreciation (See working note 2) 90,000 Rent credited to income & expenditure account 27,000 Dividend from Indian companies [Exempt u/s.10(34)] 9,000 1,62,000 Capital Gains (Long term capital gains) Sale consideration 5,29,190 Less: Indexed cost acquisition [1,63,467 x 272/137] 3,25,144 2,04,046 Gross Total income 4,43,546 Less: Deduction under chapter VIA – Section 80GG U/s 80GG, rent paid would be allowable as a deduction to the extent of the least of the following 25% of total income = 25% of ₹2,39,500 59,875 Excess of rent paid over 10% of total income (30,000 - 23,950) 6,050 ₹5,000 per month 60,000 Least of the above 6,050 Total Income 4,37,496 Total Income (R/o) 4,37,500 Notes: 1. Deduction u/s 80GG is to be made from Gross Total Income. Gross Total Income as defined u/s 80B(5) means the total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VI-A.U/s 112(2), Long term capital gains have to be reduced from Gross Total Income and Chapter VI- A deductions should be allowed as if the Gross Total income so reduced were the 225

Gross Total Income of the assessee. Therefore, in this case, for the purpose of allowing deduction u/s 80GG, Gross Total Income = 4,43,546 – 2,04,046 = 2,39,500. 2. Depreciation on plant & machinery On opening WDV of ₹5,00,000 @ 15% ₹ 75,000 On equipment acquired ₹2,00,000 @ 15% (50% thereon, since acquired in December) 15,000 90,000 3. Since the property was acquired by Dr. Krishna through inheritance, the cost of acquisition to him will be the cost to the previous owner. However, indexation will be from the year 2008-09. 4. It is assumed that Krishna resides outside Mysore. Hence, rent paid for his residence is eligible for deduction u/s 80GG.If he remains in Mysore where he owns a property (let out) then he is not eligible for deduction u/s 80GG towards rent paid. Also, solution can be prepared without allowing deduction u/s 80GG. Answer-5 Computation of total income Income from house property (Schedule A) (18,460) Income from business (schedule B) 45,000 Total income 26,540 Schedule ‗A‘ - Income from house property: 24,000 Annual value 27,000 Municipal value 10,500 Fair rent Actual rent (2100 X 5) 27,000 Since the house property was let out for part of the year and self- 4,000 occupied for part of the year, actual rent or fair rent, whichever is higher is taken as annual value. 23,000 Less: Municipal tax paid Balance 6,900 Less: Deductions u/s 24 @ 30% 226

Interest on borrowed capital 21,600 41,460 Pre-construction period paid during the year 12,960 (18,460) Income from house property Schedule ‗B‘ - Income from business (partner in Firm) 25,000 Salary income from the firm (Taxable u/s 28 of the Act) 20,000 Interest income from the firm (Taxable u/s 28 of the Act) Share income (exempt u/s10 of the Act) Nil 45,000 Answer-6 Calculation of depreciation and capital gains in the hands of M/s. Kishore Industries: (i) Calculation of depreciation Depreciation is admissible on the basis of block of assets. Therefore to ascertain the amount of depreciation, the written down value and rate of depreciation should be ascertained. Written down value arrived at: 6,50,000 WDV as on March 31, 2017 97,500 Depreciation for AY 2017-18 @15% Opening written down value of the block as on April 1, 2016 5,52,500 Add: Additions during the year 6,50,000 Block after additions 12,02,500 Deduct: Sale consideration of 3 machines 9,00,000 Written down value of block at the end of the year 3,02,500 The asset in the given case shall fall within the block of asset ―Plant‖. Hence depreciation shall be allowed @ 15% for the assessment year 2018-19. The depreciation has to be calculated on the block of ₹3,02,500 @ ½ of 15% as the asset entered into the block was purchased in the month of November and was used for less than 180 days ( ₹3,02,500 X 15%) X 50% = ₹45,375 (ii) There is no capital gain as per the provisions of Section 50(1) of the Act, when the written down value of the block was not wiped out or not reduced to zero and there still remains value in the block on which depreciation has to be charged in the ensuing 227

assessment year. Though the acquisition of the new asset took place after the sale of the old machinery which might result in a temporary surplus, calculations are to be made only at the end of previous year. (iii) If the sale consideration of three machines were ₹14.00 lakhs, there shall arise short term capital gain as per the provisions of Section 50(2) of the Act, since the written down value of the block ceased to exist on which depreciation can be charged, and hence (a) there would be no depreciation chargeable for the year and (b) there would be short term capital gain as shown hereunder: Written down value of block, after additions as shown above 12,02,500 Less: Sale consideration 14,00,000 Short term capital gain 1,97,500 Note: The issue of additional depreciation has not been considered in the above working. 228

Sub-Section 2.4 Capital Gains Learning Objectives After studying this unit, you would be able to understand –  what is the scope of income chargeable under this head  the year in which the capital gains is chargeable to tax  which assets are ―capital assets‖ for the purposes of chargeability under this head  the meaning of short-term capital asset and long-term capital asset  how to compute the period of holding for determining whether an asset is a short-term capital asset or long-term capital asset  the meaning of transfer for the purpose of capital gains  which are the transactions not regarded as transfer  the mode of computation of capital gains  when cost to previous owner is to be taken as cost of acquisition  how to compute capital gains in case of slump sale  what are the exemptions available in respect of capital gains  what is the tax treatment of short-term and long-term capital gains in respect of sale of equity shares/ units of an equity oriented fund  what is the rate of tax on long-term capital gains 2.4.1. Nature of Capital Gain (1) Capital Gains (Charging Section) – Section 45(1) Capital Gains head shall be applicable only if following two conditions have been fulfilled: (a) There is a capital asset, and (b) There is a transfer. If above said conditions are fulfilled, then capital gains shall be taxable in the year in which transfer took place. Date of receipt of money shall have no relevance. Exceptions: This provision is subject to some exceptions, where capital gains are chargeable in the year in which consideration is actually received by the assessee. e.g. 229

(a) Compulsory acquisition (b) Insurance claim (c) Conversion of capital asset into stock-in-trade (d) Liquidation of company (2) Capital Asset – Section 2(14) ―Capital asset‖ means  property of any kind  held by an assessee,  whether or not connected with his business or profession,  but does not include – (i) stock-in-trade; (ii) personal effects, (movable property held for personal use), but excludes - (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. ANALYSIS 1. House property for personal residence is a capital asset, being immovable property. 2. Jewellery for personal use is not a personal effect and hence a capital asset. (iii) Rural agricultural land in India ANALYSIS Distance shall be measured aerially. Municipality Municipality itself – Area adjoining municipality Population urban/rural which shall be treated as urban < 10,000 Rural = 10,000 Urban 0 kms > 10,000 ≤ 1,00,000 Urban > 1,00,000 ≤ Urban 0 kms 2 kms 6 kms 230

10,00,000 Urban 8 kms > 10,00,000  or any securities held (whether as capital asset or stock-in-trade) by a Foreign Institutional Investor (also called Foreign Portfolio Investor) (3) Types of Capital Asset – Section 2(42A) Long-term Capital Asset: If a capital asset is held by the assessee for more than 36 months (excluding the date of transfer), then the same shall be long-term capital asset. (duration for which capital asset is held by the assessee is also called period of holding) In case of listed securities and units of an equity oriented fund, if period of holding is more than 12 months, then same shall become long-term capital asset. In case of unlisted shares and immovable property if period of holing is more than 24 months, it is LTCA. Short-term Capital Asset: Capital assets other than long-term capital assets are short-term capital assets. Illustration-1 Determine whether following are long-term capital assets or short-term capital assets: Asset DoP DoT PoH LTCA/STCA Land 30.08.2015 12.01.2018 02Y 03M 13D LTCA Building 15.09.2015 16.09.2017 02Y 00M 01D LTCA Building held by a 12.05.1999 03.04.2017 Not a capital asset real estate agent Listed equity 02.06.2015 11.12.2017 02Y 06M 09D LTCA shares Jewellery 20.02.2015 20.02.2018 03Y 00M 00D STCA Unlisted Shares 21.1.15 25.4.17 02Y 00M 4D LTCA 2.4.2 Computation of Capital Gains (1) Mode of Computation – Section 48 Short-term Capital Gains– taxable at normal rates of tax 231

Particulars ₹ ₹ Full Value of Consideration (i.e. Sale Consideration) xxx Less: Expenditure incurred in connection with such transfer xxx xxx Net Consideration (or Net Sale Consideration) xxx xxxx Less: Cost of Acquisition (i.e. CoA) xxxx Cost of Improvement (i.e. CoI) xxxx Short-term capital gains/loss Long-term Capital Gains– taxable at 20% flat rate of tax for all assessees Particulars ₹₹ Full Value of Consideration (i.e. Sale Consideration) xxx Less: Expenditure incurred in connection with such transfer xxx Net Consideration (or Net Sale Consideration) xxxx Less: Indexed Cost of Acquisition (i.e. ICoA) xxx Indexed Cost of Improvement (i.e. ICoI) xxx xxxx Short-term capital gains/loss xxxx ICoA = CoA x CII of the year of transfer CII of year in which asset was first held by the assessee or FY 2001-02, whichever is later ICoI = CoI x CII of the year of transfer CII of the year in which the improvement to the asset took place Note: There shall be no indexation in case of bonds or debentures, except capital indexed bonds issued by the Government. (2) Cost Inflation Index FY CII FY CII 2001-02 100 2010-11 167 2002-03 105 2011-12 184 2003-04 109 2012-13 200 2004-05 113 2013-14 220 2005-06 117 2014-15 240 2006-07 122 2015-16 254 2007-08 129 2016-17 264 2008-09 137 2017-18 272 2009-10 148 232

Illustration-2 Compute capital gains in the following cases: Asset Do CoA DoI CoI DoI CoI DoS SP Exp. on A 5,30,000 Tfr. 85,000 Land 15.6. 2,00,000 12.4. 1,00,000 - - 20.8.17 4,35,000 25,000 16 16 2,00,000 2,000 Listed 15.9. 50,000 - - - - 12.3.18 Shares 15 70,000 20,000 Building 12.3. 20,000 23.8. - 4.4. 40,000 6.11.17 5,000 05 09 15 Motor 23.3. 4,00,000 - - - 23.3.17 car of 11 induvial. Solution: Land Listed Shares Building Particulars STCA LTCA 5,30,000 85,000 LTCA LTCA/STCA 25,000 2,000 4,35,000 FVC 2,00,000 20,000 Less: Expenses 50,000 x 272 / 20,000 x 272 / Less: CoA/ICoA 1,00,000 254 - 113 Less: CoI/ICoI - 70,000 x 272 / - Less: CoI/ICoI 2,05,000 148 31,457 40,000 x 272 / LTCG/STCG/(LTCL)/(STCL) 254 1,26,898 Note: Motor Car is not a capital asset (3) Other Provisions Meaning of “cost of improvement” and “cost of acquisition” – Section 55 Asset was acquired by the assessee before 01/04/2001: 1. In this case CoA shall be actual CoA or FMV as on 01/04/2001, whichever is higher. 2. CoI incurred before 01/04/2001 shall be ignored totally. 233

Illustration-3 What shall be the CoA in the following cases for the purposes of computing capital gains, assuming asset was acquired before 01/04/2001 and even improvements were made before 01/04/2001: Case Actual CoA Actual CoI FMV – 01/04/2001 CoA A 2,00,000 --- 3,00,000 3,00,000 B 2,00,000 --- 1,60,000 2,00,000 C 2,00,000 1,00,000 3,70,000 3,70,000 D 2,00,000 1,00,000 2,60,000 2,60,000 E 2,00,000 1,00,000 1,80,000 2,00,000 Shares & other securities: CoA (subject to above PoH provision) Nature of share From date of Actual payment allotment/purchase Original share From date of allotment Nil From date of allotment Bonus share Actual payment From date of offer Right share Right offer Nil From date of allotment Right share for other than Price for offer + actual offered payment to co. Note: STT paid on sale and/or purchase of securities shall not be allowed while computing income u/h Capital Gains, neither as part of CoA nor as part of expenses on transfer. Illustration-4 Mrs. Securi applied for listed shares (face value ₹10) of M/s ABC Pvt. Ltd. On 01.01.2009 by paying application money of ₹10. She was allotted 1,200 shares on 04.04.2009. She sold the same on 15.7.2017 for ₹45/share. Compute taxable capital gains in the hands of Mrs. Securi for AY 2018-19. Solution: Particulars AY 2018-19 Nature: 04.04.2009 – 15.07.2017: LTCA FVC (1200 x 45) 54,000 234

Less: Expenses - Less: IcoA (1200 x 10 x 272 / 148) 22,054 LTCG/(LTCL) (31,946) Illustration-5 What shall be your answer in case Mrs. Securi had purchased the shares from open market on 01.01.09 instead of applying to M/s ABC Pvt. Ltd.? Solution: Particulars AY 2018-19 Nature: 01.01.2009 – 15.07.2017: LTCA FVC (1200 x 45) 54,000 Less: Expenses - Less: ICoA (1200 x 10 x 272 / 137) 23,825 LTCG (30,175) Illustration-6 Mrs. Securi applied for shares (face value ₹10) of M/s ABC Pvt. Ltd. on 01.01.09 by paying application money of ₹10. She was allotted 1,200 shares on 04.04.09. She sold 700 shares on 05.06.13 for ₹35/share and the balance on 15.7.17 for ₹45/share. Compute taxable capital gains in the hands of Mrs. Securi for various assessment years. Solution: 24,500 Particulars - AY 2014-15 Nature: 04.04.1909 – 05.06.2013: LTCA 34,674 FVC (700 x 35) (10,174) Less: Expenses Less: ICoA (700 x 10 x 220 / 148) 22,500 LTCG/(LTCL) - AY 2018-19 Nature: 04.04.2009 – 15.07.2017: LTCA FVC (500 x 45) Less: Expenses 235

Less: ICoA (500 x 10 x 272 / 148) 9,189 LTCG/(LTCL) (13,311) Illustration-7 Ms. Sweety purchased 200 shares of a Listed Company from open market on 13.3.1995 for ₹10/share. On 17.8.2010 she was allotted 1 bonus share for every 2 shares held. She sold all the shares on 12.12.17 for ₹180/share. Compute capital gains assuming FMV of shares on 01.04.01 was ₹10.30/share and brokerage on sale is 5%. (Sale prices given above are gross prices and are before deducting any brokerage). Solution: Particulars Original Bonus Shares – Shares – 200 100 AY 2018-19 Nature: 13.03.1995 – 12.12.2017; 17.08.2010 – 12.12.2017 LTCA LTCA FVC (200 x 180); (100 x 180) 36,000 18,000 Less: Expenses 1,800 900 Less: ICoA (200 x 10.30 x 272 / 100); ICoA (100 x 0 x 272 / 5,603 - 167) LTCG/(LTCL) 28,597 17,100 Illustration-8 What shall be your answer in case Ms. Sweety was allotted bonus shares on (i) 14.02.2017 (ii) 15.06.99? Solution: Particulars Original Bonus Shares – Shares – AY 2018-19 Nature: 13.03.1995 – 12.12.2017; 14.02.2017 – 12.12.2017 200 100 FVC (200 x 180); (100 x 180) LTCA STCA 36,000 18,000 Less: Expenses 1,800 900 Less: ICoA (200 x 10.30 x 272 / 100); CoA (100 x 0) 5,603 - LTCG/STCG/(LTCL)/(STCL) 28,597 17,100 Particulars Original Bonus Shares – Shares – 200 100 236

AY 2018-19 LTCA LTCA Nature: 13.03.1995 – 12.12.2017; 15.06.1999 – 12.12.2017 36,000 18,000 FVC (200 x 180); (100 x 180) Less: Expenses 1,800 900 Less: ICoA (200 x 10.30 x 272 / 100); ICoA (100 x 10.30 x 5,603 2,802 272 / 100) LTCG/(LTCL) 28,597 14,298 Illustration-9 Mr. Handsome is holding 300 shares (face value being ₹10/share) of Reliance Ltd. since 1989 which were allotted @ ₹9/share. On 22.09.08 he was offered 2 right shares for every 3 shares held @ 20/share on which date FMV was ₹50/share. He applied for all the shares on 25.09.08 and was allotted on 05.11.08. FMV of such shares on 01.04.01 was ₹8/share. He sold all the shares on 29.05.17 for ₹250/share. Compute capital gains in the hands of Mr. Handsome for various assessment years. Solution: Particulars Original Right Shares – Shares – 300 200 AY 2018-19 Nature: 1989 – 29.05.2017; 05.11.2008 – 29.05.2017 LTCA LTCA FVC (300 x 250); (200 x 250) 75,000 50,000 Less: Expenses -- Less: ICoA (300 x 9 x 272 / 100); ICoA (200 x 20 x 272 / 7,344 7,942 137) LTCG/(LTCL) 67,656 42,058 Illustration-10 Will it make any difference had Mr. Handsome not applied at all for right shares? Solution: Particulars Original Shares – 300 AY 2018-19 Nature: 1989 – 29.05.2017 LTCA FVC (300 x 250) 75,000 Less: Expenses - Less: ICoA (300 x 9 x 272 / 100) 7,347 237

LTCG/(LTCL) 67,656 Illustration-11 What shall be your answer in case Mr. Handsome, instead of applying himself for right shares, had renounced such offer in the favour of Mr. Ugly at the price of ₹11/share on 27.09.08? Solution: Particulars Original Right Shares – Offer – 300 200 Assessment Year 2018-19 2009-10 Nature: 1969 – 29.05.2017; 22.09.2008 – 27.09.2008 LTCA STCA FVC (300 x 250); (200 x 11) 75,000 2,200 Less: Expenses -- Less: ICoA (300 x 9 x 272 / 100); CoA (200 x 0) 7,344 - LTCG/STCG/(LTCL)/(STCL) 67,656 2,200 Goodwill, tenancy rights, stage carriage permits, trade mark, brand name, etc.: Purchased Self-generated CoA Purchase price Nil CoI PoH Always nil Indexation From the date of purchase From the date of commencement FMV as on of business 01.04.1981 From the year of purchase -NA- as CoA is nil Not available Advance Money Received – Section 51 Advance money received and forfeited by the assessee on or before 31/03/2014 shall be deducted from the  Actual cost of acquisition, or  Fair market value in computing the cost of acquisition. 238

ANALYSIS 1. Advance money retained shall be deducted even if retained before 01/04/1981, but in that case shall be deducted from CoA or FMV, whichever is higher. 2. Indexation of CoA shall be done only after subtracting the advance money from CoA. 3. Advance money retained in excess of CoA shall be a capital receipt and such excess shall have no tax treatment and CoA shall be Nil then. In any case it cannot be subtracted from Cost of Improvement. 4. Advance money received & forfeited on or after 01/04/2014 shall be treated as income u/h IOS of the year in which such money is forfeited, irrespective of the amount may be. Illustration-12 What shall be the CoA & CoI in the following cases for the purposes of computing capital gains: Case CoA CoI FMV – Advance CoA CoI A 01/04/20 money B C 01 forfeited D Date Amount Date Amount Date Amount 08/05/2008 2,00,000 05/06/ 1,00,000 --- 08/11 40,000 1,60,000 1,00,000 2015 /2011 08/05/2008 2,00,000 05/06/ 1,00,000 --- 08/11 2,20,000 - 1,00,000 2015 /2010 05/07/1998 2,00,000 24/02/ 1,00,000 3,30,000 25/06 40,000 2,90,000 - 1999 /2011 05/07/1998 2,00,000 24/02/ 1,00,000 1,80,000 25/06 2,20,000 - 1,00,000 2006 /2013 Illustration-13 Mr. Chacha purchased jewellery for his personal use for ₹2,00,000 on 15.11.16. He forfeited advance money of ₹30,000 from Mr. Chaudhary on 14.01.17. Later on 23/03/2017 he forfeited advance money of ₹40,000 from Mr. Gopu. On 28.11.17 he sold the jewellery to Mr. Saabu for ₹6,00,000. Compute taxable capital gains for Mr. Chacha. Solution: Particulars ₹ AY 2018-19 Nature: 15.11.2016 – 28.11.2017 STCA FVC 6,00,000 239