Taxation Module v & VI
Short Description
module...
Description
Profts and Gains o Business or Proession [Ss. 28 to 44 DB] Under Section 28 of the Income Tax Act, the followin t!"es of incomes are charea#le to tax $nder the head %&ro'ts and (ains of B$siness or &rofession). *i+ &ro'ts &ro'ts and and ains ains of an! an! #$siness #$siness or or "rofessi "rofession on which which was carried on #! the assessee at an! time d$rin the "reio$s !earProession [S. 2 */+] 0 "rofession incl$des ocation. (ii) Compensations due to or received: An! com"ensation or other "a!ment d$e to or receied for termination of an a""ointment or modi'cation of its terms #! 0 *a+ A "erson, manain the whole or s$#stantiall! the whole of the a1airs of an Indian com"an!*#+ a "erson, manain the whole or s$#stantiall! the whole of the a1airs in India of a non 0 Indian com"an!*c+ a "erson, holdin an aenc! in India for an! "art of the actiities relatin to the #$siness of an! other "erson*d+ an! com"ensation "aid or d$e for or in connection with the
Income derived by a trade, professional or similar association from specific services performed for its members;
(iv) Receipts in connection with oreign trade: *a+ &ro'ts on sale of a licence ranted $nder the Imports (Control) Order, 1955 $s$all! 1955 $s$all! called as Im"ort ntitlement 3icences*#+ ash assistance *#! whateer name called+ receied or receia#le #! an! "erson aainst ex"orts $nder an! scheme of the (oernment of India*c+ 5e"a!ment of an! $stoms or xcise D$t! to an! "erson aainst ex"orts $s$all! called as draw #ac6 of $stoms or xcise D$ties for ex"orts*d+ An! "ro't on the transfer of the D$t! ntitlement &ass Boo6 scheme, #ein d$t! 5emission 5emission Scheme $nder the x"ort and Im"ort &olic!(v) Value o any Beneft or Peruisite: The al$e of an! #ene't #ene't or "er7$isite, "er7$isite, whether conerti#le into mone! or not, arisin from #$siness or the exercise of a "rofession(vi) Receipts o a partner rom the frm: An! interest, salar!, #on$s, commission or rem$neration receied #! a "artner from 'rm
Income derived by a trade, professional or similar association from specific services performed for its members;
(iv) Receipts in connection with oreign trade: *a+ &ro'ts on sale of a licence ranted $nder the Imports (Control) Order, 1955 $s$all! 1955 $s$all! called as Im"ort ntitlement 3icences*#+ ash assistance *#! whateer name called+ receied or receia#le #! an! "erson aainst ex"orts $nder an! scheme of the (oernment of India*c+ 5e"a!ment of an! $stoms or xcise D$t! to an! "erson aainst ex"orts $s$all! called as draw #ac6 of $stoms or xcise D$ties for ex"orts*d+ An! "ro't on the transfer of the D$t! ntitlement &ass Boo6 scheme, #ein d$t! 5emission 5emission Scheme $nder the x"ort and Im"ort &olic!(v) Value o any Beneft or Peruisite: The al$e of an! #ene't #ene't or "er7$isite, "er7$isite, whether conerti#le into mone! or not, arisin from #$siness or the exercise of a "rofession(vi) Receipts o a partner rom the frm: An! interest, salar!, #on$s, commission or rem$neration receied #! a "artner from 'rm
(vii) An! s$m whether receied or receia#le in cash or 6ind $nder an areement for not carr!in o$t an! actiit! in relation to an! #$siness or not to share an! 6now how, "atent, co"!riht, trademar6, licence, franchise or an! other #$siness or commercial riht of similar nat$re- or information or techni7$e li6el! to assist in the man$fact$re or "rocessin of oods or "roision for serices. (viii) An! s$m receied $nder "eyman #nsurance Policy (i$) Income from speculative transaction m$st #e deemed as distinct and se"arate from an! other #$siness. [x"lanation 2] %ection &'() de'nes s"ec$latie transaction CIT vs. Shantilal (P) Ltd., [98] 44 IT5 :; *S+ < "a!ment of damaes for #reach of contract is not the same thin as settlement of contract otherwise than act$al delier! of commodities. Business %* +(,')-: incl$des an! trade, commerce, man$fact$re or an! adent$re or concern in the nat$re of trade, commerce or man$fact$re. .rade: State of Punjab vs. Bajaj Electricals Ltd. [9/8] ;= IT5 ;=*S+ o#sered> trade in its "rimar! sense is the
Commerce: If a "erson "$rchases oods with a iew to sellin them at "ro't, it is an ordinar! case of trade. If s$ch transactions are re"eated on a lare scale, it is called commerce.
/anuacture: U.o.I. vs. elhi Cloth ! "eneral #ills Co. Ltd. AI5 9/ S ;9
0dventure in the nature o .rade: ". $en%atas&a'i aidu ! Co. vs. C.I.T. *9:9+ : IT5 :94 *S+> .ests for determination> . Is the "$rchaser a trader and are the "$rchases of the commodities and its resale, allied to his $s$al trade or #$siness, incidental to it? 2. @hat was the nat$re and 7$antit! of the commodit! "$rchased and resold? . Did the "$rchaser #! an act s$#se7$ent to the "$rchase im"roe the 7$alit! of the commodit! to ma6e that readil! resala#le? 4. @ere the transactions re"eated? :. In reard to "$rchase of commodit!, did the element of "ride
#ncomes though appear to 1e 1usiness income 1ut not ta$a1le under the head 2Profts and Gains o Business or Proession3: . 5ent of o$se "ro"ert! een if "ro"ert! constit$tes stoc6 0 in 0 trade 2. Diidends on shares in case of a dealer in shares . @innins from lotteries, races etc.. 4. Interests receied on com"ensation or interest on enhanced com"ensation een if it "ertains to a re$lar #$siness actiit! :. S$ms receied after discontin$ance of a B$siness or &rofession 0 Taxa#le $Cs ;/ *A+
#ncome rom letting out 1usiness asset: C.E.P.T. vs. La%sh'i Sil% #ills Ltd. *9:+ 2= IT5 4: *S+ 0 Assessee doin #$siness of man$fact$rin sil6 cloth and d!ein sil6 !arn, let o$t his assets on monthl! rent in the releant acco$ntin !ear 0 held #$siness income. Universal Plast Ltd. vs. CIT [999] 2; IT5 4:4 *S+ 0 held, where all the assets of the #$siness are let o$t, the "eriod for which the assets are let o$t is a releant factor to 'nd o$t whether the intention of the assessee is to o o$t of #$siness altoether or to come #ac6 and restart the same. In former case rent will #e taxa#le $nder the head Income from ther So$rces, in latter case as #$siness income.
#ncome rom #llegal Business: #inister of inance vs. S'ith *92;+ A 9 *&+ 0 Assessee ma! #e "rosec$ted for the o1ence #$t income is taxa#le. CIT vs. *othari *9;+ 82 IT5 ;94 *S+ 0 Income is taxa#le and not the ross recei"t CIT vs Piara Sin+h *98=+24 IT5 4= *S+ 0 3oss s$stained d$e to con'scation of old or c$rrenc! in sm$lin #$siness is ded$cti#le.
T.. -ureshi vs. CIT [2==/] 28; IT5 :4; *S+ < 3oss arisin as a res$lt of seiE$re and con'scation of illeal stoc6 0 in 0 trade is allowa#le as a #$siness loss aainst income from illeal #$siness. In this case heroin worth 5s. 2 3a6h was seiEed. eld> x"lanation to Section ;*+ has no a""lication to this case as the claim was of a #$siness loss and not #$siness ex"endit$re. x"lanation to S. ; *+ 0 sa!s> %For the remoal of do$#ts, it is here#! declared that an! ex"endit$re inc$rred #! the assessee for an! "$r"ose which is an ofence or which is prohibited by law shall not #e deemed to hae #een inc$rred for the "$r"ose of
4
.
Section 29 la!s down that income referred to in Section 28 shall #e com"$ted in accordance with the "roisions contained in sections = to 4D. %ections '5 to '6 la! down s"eci'c ded$ctionsCallowances admissi#le. %ection '7(,) is a resid$ar! section which allows ded$ctions of #$siness ex"endit$res not coered $nder Sections = to /. This is on the #asis of acce"ted commercial "rinci"les. %ection '8 la!s down that where an! #$ildin, "lant, machiner! or f$rnit$re is not excl$siel! $sed for the "$r"oses of #$siness or "rofession, ded$ctions in res"ect thereof $nder Sections =, or 2 will #e restricted to a fair "ro"ortionate "art thereof which is attri#$ta#le to the $se for #$siness or "rofession. %ections '7(+B)4 &54 &50 and &'B coer ex"enses which are not deducti1le, e.. ex"endit$res on adertisements "$#lished in so$enir, #roch$re etc. "$#lished #! a "olitical "art!, salar!, interest ro!alt! or fee
so$rce, "a!ments made in a da! to a "erson oer 5s. 2=,===C< otherwise than #! an acco$nt "a!ee che7$e or acco$nt "a!ee #an6 draft etc. %ection &, deals with deemed "ro'ts in cases where loss, ex"endit$re, or tradin lia#ilit! was allowed as ded$ction #$t later an! amo$nt or #ene't in res"ect thereof has #een receied #! the assessee or his s$ccessor. %ection &+ la!s down s"ecial "roision for ded$ctions in case of #$siness for "ros"ectin, etc. for mineral oil. %ections &'C and &'9 la! down s"ecial "roisions for com"$tation of cost of ac7$isition of certain assets and s"ecial "roisions in case of income of "$#lic 'nancial instit$tions, "$#lic com"anies etc. res"ectiel!. %ection && la!s down that &ro'ts and (ains of Ins$rance B$siness will #e com"$ted in accordance with r$les contained in the irst %chedule. %ections &&0 ma6es s"ecial "roisions for ded$ction in
%ection &&00 casts a d$t! on certain "ersons carr!in on "rofession or #$siness to maintain acco$nts. For exam"le, those whose income from #$siness or "rofession exceeds la6h 2= tho$sand r$"ees or total sales, t$rnoer or ross recei"ts exceeds ten la6h r$"ees in an! of the three !ears immediatel! "recedin the "reio$s !ear. %ections &&0B casts a d$t! on certain "ersons carr!in on #$siness or "rofession to et his acco$nts a$dited. %ections && 09 to &&B9 la! down s"ecial "roisions for com"$tation of "ro'ts and ains or for ded$ctions in cases of certain #$sinesses or "rofessions.
General Principles regarding admissi1ility o 0llowances and 9eductions: . 3ist of allowances is not exha$stie 2. Allowances are c$m$latie and not m$t$all! excl$sie . x"endit$re and losses in $nlawf$l #$siness> CIT vs. Piara Sin+h *98=+ 24 IT5 4= *S+ H AI5 98= S 2;r. T.. -uereshi vs. C.I.T *2==/+ :; Taxman :4 *S+]. 4. o allowance in res"ect of exha$stion of ca"ital or wastin assets :. x"endit$re claimed sho$ld hae #een inc$rred in the "reio$s !ear. xce"tions> Ss. 4 and ;/. /. B$siness sho$ld #e carried on d$rin the "reio$s !ear ;. x"endit$re sho$ld hae #een inc$rred in connection with assesseeJs own #$siness 8. o allo nce i ect of a #$sin et $" after
9eductions ;$pressly 0llowed: ,* ;$penses in respect o Business Premises [Section =] *i+ 5ent "aid for "remises *ii+ 5e"air chares inc$rred #$t not of ca"ital nat$re *iii+ An! s$ms "aid as land reen$e, local taxes or K$nici"al Taxes *i+ &remi$m "aid in res"ect of an! ins$rance aainst ris6 of damae or destr$ction of "remises. In this method De"reciation is calc$lated as certain "ercentae of the written down al$e of the #loc6 of the assets as is "rescri#ed. There are #loc6s of assets *$t of which 2 #loc6s are for tani#le assets and one #loc6 is for intani#le assets+ and for each #loc6 di1erent "ercentae has #een "rescri#ed as rate of de"reciation. *e.. :N, =N, :N, 2=N, 2:N, 4=N, :=N, /=N, 8=N, and ==N+ =ritten 9own Value: [S. 4 */+] @ritten down al$e of a #loc6 of assets means the de"reciated al$e of that #loc6 of assets on st da! of the ".!. as increased #! act$al cost of an! asset ac7$ired in that #loc6 d$rin the said ".!. and red$ced #! the sale "roceeds of an! assets dis"osed of d$rin the said ".!. of that #loc6. If the sale "rice of the assets exceeds the written down al$e of the #loc6, the excess will #e
S. No.
BLOCKS OF ASSETS
Rate of Dereciation
Tan!i"#e Assets: $. B%i#din!s: (i) Buildings which are mainly used for 5 residential purposes except Hotels and Boarding Houses (ii) Buildings other than those used mainly for !" residential purposes and not covered by (i) and (iii) (iii) Buildings ac#uired after $!%"&%'""' for !"" installing machinery and plant forming part of water supply proect or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities
(iv) urely temporary erections such as wooden !"" structure
&.
F%rnit%re and Fittin!s: *urniture and fittings including electrical !" fittings, electric fittings include electrical wiring, switches, soc+ets, other fittings and fans, etc%
'.
aciner* and +#ant A. ,enera# Rate: pplicable to all machinery !5 or plant other than certain specified machines and plants B. Secia# Rates: (i) -otor Buses, motor lorries and motor taxies $" used in a business of running them on hire (ii) eroplanes and aeroengines ." (iii) -otor cars (other than those used in a !5 business of running them on hire) ac#uired or put to use on or after ! st pril, !//"
(iv) Boo-s for rofessiona# %se: (a) Boo+s being annual publication (b) 0ther boo+s (v) 2omputers (including computer software) (vi) 3ife saving medical e#uipments (vii) 4hips and boats .% INTAN,IBLE ASSETS now6how, atents, 2opyrights, 7rade6 -ar+s, licences, franchises or any other business or commercial rights of similar nature
!"" 1" 1" ." '" '5
0ctual Cost: [S. 4*+] 0 means the act$al cost of the assets to the assessee as red$ced #! that "ortion of the cost thereof, if an!, as has #een met, directl! or indirectl! #! an! other "erson or a$thorit!. Chellaalli Su+ar #lls Ltd. vs. CIT *9;:+ 98 IT5 /; *S+ 0 held act$al cost incl$des all ex"endit$re necessar! to #rin s$ch assets into existence and to "$t them in wor6in conditions, e.. interest "aid #efore "rod$ction started, xcise D$t!, Sales Tax, ctroi, railwa! freiht, ins$rance, trans"ort chare, "reliminar! ex"enses e.. stam" d$t!, reistration fee, isit of em"lo!ees to forein co$ntr! in res"ect to installation of "lant or machiner! etc.
&ases in which Actual &ost is ta'en at a notional figures: 5arious explanations to S. 6! & $! 7here asset is used in business after it ceases to be used for scientific research & as reduced by the amount of any deduction allowed (e.g. u8s !2) [planation $4 #! 7here an asset is ac0uired by 9ift or inheritance & Actual cost to assessee will be actual cost to the preious owner as reduced by amount of depreciation deemed to hae been allowed on such asset. [ planation #4 "! 7here before the date of ac0uisition by the assessee, the assets were used by any other person for the purpose of his business or profession and the A. :. is satisfied that the main purpose of transfer of such asset to the assessee is the reduction of tax liability, the actual cost of the assets will be such amount as the A.:. may, with preious approal of #y. ommr. determine haing regard to all circumstances of the case. [ planation "4 *! 7here a business asset is transferred by the assessee to another person and is subse0uently reac0uired by him, the actual cost would be the actual cost to the assessee when he first ac0uired it as reduced by the amount of depreciation deemed to hae been allowed in respect of such asset or actual cost at the time of reac0uisition whicheer is less. [ planation *4
+! 7here a building, preiously the property of the assessee, is brought into use for the purpose of business or profession, the actual cost of the asset to the assessee will be actual cost of the building to the assessee as reduced by depreciation which would hae been allowable had the building been used for business or profession since the date of its ac0uisition by the assessee. [planation +% ,! 7here a parent company transfers any asset to its //3 subsidiary 'ndian ompany or ice ersa, the actual cost of the asset to transferee company will be the same as it would hae been in the hands of transferor company. [planation ,4 -! 7here an asset is transferred in a scheme of amalgamation to an 'ndian ompany, the actual cost of asset to the amalgamated company will be the same as it would hae been to the amalgamating company [planation -4 .! Explanation makes it clear that any interest paid or payable in connection with ac0uisition of an asset which relates to a period after the asset is first put to use shall not form part of actual cost of the asset. [planation .4
et off and carry /orward of unabsorbed depreciation [ection "# (#)% *i+ The $na#sor#ed de"reciation has to #e set o1 aainst the "ro'ts and ains *if an!+ of an! #$siness or "rofession carried on #! the assessee. If the amo$nt !et remains $na#sor#ed, it can #e set o1 aainst an! other income *exce"t income $nder the head %Salaries)+ of the tax"a!er for the same !ear. *ii+ If the $na#sor#ed de"reciation cannot #e wholl! set o1, the amo$nt of allowance not set o1 shall #e carried forward to the followin assessment !ear. o time limit is 'xed for the "$r"ose of carr!in forward of $na#sor#ed de"reciation. It can #e carried forward for inde'nite "eriod, if necessar!. *iii+ In the s$#se7$ent !ear*s+, $na#sor#ed de"reciation can #e set o1 aainst an! income whether charea#le $nder the head %&ro'ts and (ains of B$siness or &rofession) or $nder an! other head [xce"t income $nder the head %Salaries)].
#n the matter o set o>4 the ollowing order o priority is ollowed in the su1seuent year(s)* *a+ $rrent de"reciation*#+ Bro$ht forward #$siness loss*c+ Una#sor#ed de"reciation.
(i) A com"an! enaed in the #$siness of man$fact$re or "rod$ction of an! article or thin ac7$ires a new "lant or machiner! *excl$din shi" or aircraft+ and installed after ..2= #$t #efore .4.2=: and actual cost of new asset e$ceeds one hundred crore r$"ees, Inestment Allowance will #e allowed at the rate of :N of the act$al cost for A.P. 2=4 0 : and :N of the act$al cost as red$ced #! Inestment allowance allowed *for A.P. 2=4 0 :+ in the A.P. 2=: 0 /. o ded$ction will #e allowed after A.P. 2=: 0 / *i.e. from A.P. 2=/ 0 ;+. (ii) If a com"an! ac7$ires and installs s$ch new assets after ..2=4 #$t #efore .4.2=;, Inestment Allowance M :N will #e aaila#le for the A.P. releant to the &.P. in which asset is installed, if act$al cost e$ceeds + crore rupees . o ded$ction will #e allowed from A.P. 2=8 0 9.
2ithdrawal of 0n1estment Allowance: If the assessee sells or transfers the new asset within a "eriod of years from the date of installation, the amo$nt of ded$ction allowed shall #e deemed to #e the income from #$siness of the &.P. in which the asset is sold or transferred . S$ch income shall #e taxa#le in addition to taxa#ilit! of a"ital (ains which arises $Cs 4:.
oweer, if transfer is as a res$lt of amalamation or demerer, then tax lia#ilit! will not arise "roided that the Amalamated om"an! or Demered om"an! sho$ld not transfer the new asset within : !ears.
(iii) 0n1estment Allowance (for inestment in new plant or machinery) w.e.f. A.*. "/; & Ded$ction will #e allowed 2:N of the s$m "aid whether the research is related or not with the assesseeJs #$siness.
(iv) a"ital x"endit$re on scienti'c 5esearch a"ital x"endit$re inc$rred on scienti'c research in the &.P. #! the assessee himself related to his #$siness is allowed in f$ll as ded$ction exce"t the ex"endit$re for ac7$isition of an! land. If the ex"endit$re co$ld not #e a#sor#ed owin to ins$Qcienc! of "ro't, the $na#sor#ed "art can #e carried forward as $na#sor#ed de"reciation. (v) S$ms "aid to a ational 3a#orator! or a reconiEed Uniersit! or an Indian Instit$te of Technolo! for a""roed Scienti'c 5esearch &roramme> 2==N of the s$m so "aid is allowed as ded$ction. ational 3a#orator! means scienti'c la#orator! f$nctionin at national leel $nder Indian o$ncil of Aric$lt$ral 5esearch or the Indian o$ncil of Kedical 5esearch or the o$ncil of Scienti'c and Ind$strial 5esearch and a""roed #! "rescri#ed a$thorit! as ational 3a#orator!. (vi) x"endit$re on in This ded$ction is aaila#le onl! to a com"an! e7$al to 2==N of ex"endit$re inc$rred "roided that ex"endit$re is not inc$rred on land or #$ildin. This ded$ction shall not #e allowed for ex"endit$res inc$rred after .=.2=;.
er1ices: [! "+A66% An! ca"ital ex"endit$re inc$rred on the ac7$isition of an! riht to o"erate telecomm$nication serices either #efore the commencement of the #$siness or thereafter is allowed as ded$ction in e7$al installments oer the "eriod startin from the !ear in which s$ch "a!ment has #een act$all! made and endin in the !ear in which licence comes to an end. If the licence fee is act$all! "aid #efore commencement of the #$siness, amo$nt is ded$cti#le from the &.P. in which the #$siness is commenced. ;$penditure on eligi1le Pro?ect or %cheme: %* '0C==N ded$ction is allowed. 9eduction in respect o ;$penditure on %pecifed Business: %*'09@hole of an! ex"endit$re of ca"ital nat$re excl$din ex"endit$re inc$rred on ac7$isition of land or ood will is allowed to #e ded$cted in the &.P. in which the ex"endit$re is inc$rred. For exam"le, settin $" and o"eratin wareho$sin facilit! for storae of aric$lt$ral "rod$ce, Deelo"in and #$ildin a ho$sin "roect, &rod$ction of fertiliEer in India etc. Payment in Rural 9evelopment und: %* 'CC0- ==N ded$ction.
Amorti8ation of certain preliminary epenses: [! "+D% For exam"le, ex"endit$re in connection with 0 *i+ &re"aration of &roect 5e"ort*ii+ ond$ctin mar6et s$re! *iii+ 3eal chares for draftin of an! areement, Kemorand$m of Association- Articles of Association etc. !ther 9eductions: %* '6- 0 xam"les> *i+ Ins$rance &remi$m "aid> *a+ aainst destr$ction or damae to stoc6 or stores $sed for "$r"oses of #$siness*#+ for cattle #! a Federal Kil6 oo"eratie Societ! *c+ for health of em"lo!ees*ii+ Bon$s or commission "aid to em"lo!ee *iii+ Interest on #orrowed ca"ital *i+ ontri#$tion to &.F. of the em"lo!ee #! the em"lo!er *+ Bad de#ts s$#ect to certain conditions*i+ x"endit$re on Famil! &lannin
9eneral Deduction [S.! *i+ x"endit$re Sho$ld hae #een inc$rred in the &.P. *ii+ x"endit$re sho$ld #e in res"ect of #$siness or "rofession carried on #! the assessee. ,* ot of the nat$re descri#ed in Ss. = to /> *i+ 5ationale #ehind the condition is that if a "artic$lar ex"endit$re is coered $nder an! of the sections = to / it sho$ld not #e claimed $nder resid$ar! section #eca$se an allowance ranted $nder s"eci'c section ma! #e s$#ect to certain ex"ress or im"lied conditions and those conditions sho$ld not #e n$lli'ed #! claimin ded$ction $nder this section. +* ot #ein in the nat$re of a"ital x"endit$re> &oints of Distinctions> *I+ Ac7$isition of 'xed assets or ro$tine ex"endit$re
(iii) 'mproements or >aintenance apital expenditure improes the earning capacity of a business. ?eenue expenditure maintains the profit making capacity of a business. (i) ?ecurring or non recurring expenditure
%ome @udicial Rulings on Capital and Revenue ;$penditures: (i) Removal o deect in title: In $. 3a+a'ohan 0ao vs. C.I.T. [9;=] ;: IT5 ; *S+ 0 held where mone! is "aid to "erfect a title or remoe defects in title, the ex"endit$re is ca"ital ex"endit$re. (ii) 0cuisition o Goodwill: In evidas $ithaldas ! Co. vs. CIT [9;2] 84 IT5 2;; *S+ 0 held ex"endit$re on ac7$isition of oodwill is a ca"ital ex"endit$re irres"ectie of the fact whether "a!ment is made in a l$m" s$m at one time or in installments. oweer, where transaction is not one for ac7$isition of oodwill #$t the riht to $se it, the ex"endit$re will #e reen$e ex"endit$re. (iii) /ining Aease: In 0.B. Seth #oolchand Su+anchand vs. CIT [9;2] 8/ IT5 /4; *S+ 0 held ex"endit$re for ac7$irin riht oer or in the land
e& Shorroc% Sinnin+ and #anufacturin+ Co'an1Ltd. $s. C.I.T. [9:/] = IT5 8 *S+- in #4s. Balli'al aval *ishore vs. C.I.T [99;] 224 IT5 44 *S+ 0 If the assessee is owner of the "remises, renoation of the "remises will #e ca"ital ex"endit$re. CIT vs. #adras auto Services (P.) Ltd. [998]2 IT5 4/8 *S+ < If assessee is lessee of the "remises and $nder the lease areement whateer constr$ction will #e done on the lease "remises will #elon to the lessor from the da! of constr$ction, ex"endit$re inc$rred #! the lessee will #e reen$e ex"endit$re. (v) Contri1ution made or construction o roads: B$ildin incl$des roads, #rides, c$lerts, wells and t$#e< wells. ence, constr$ction of roads inside the factor! or s$rro$ndin the factor! is ca"ital ex"endit$re on which de"reciation can #e claimed. La%sh'iji Su+ar #ills Co. (P.) Ltd. vs. C.I.T. [9;] 82 IT5 ;/ *S+ 0 ontri#$tion made #! s$ar mill $nder a stat$tor! o#liation towards deelo"ment of (ot. owned
Travancore 5 Cochin Che'ical Ltd. vs. CIT [9;;] =/ IT5 9== *S+ 0 The assessee alon with three other "$#lic $nderta6ins a""roached the (ot. of Lerala to constr$ct new road and $nder areement to meet certain "ercentae of the cost of constr$ction "aid the amo$nt. eld that since the road to #e constr$cted was new and contri1ution was made under the agreement and not under a statutory o1ligation4 the ex"endit$re was ca"ital in nat$re. In L.6. Su+ar actor1 ! 7ils #ills (P.) Ltd. vs. CIT [98=] 2: IT5 29 *S+ 0 The assessee made two contri#$tions on re7$est of ollector, one was for constr$ction of a dam and road connectin to dam and another contri#$tion was for constr$ction of roads aro$nd its factor!. It was fo$nd that constr$ction of dam and road connectin the dam was nothin to do with assesseeJs #$siness and not adantaeo$s to assesseeJs #$siness, hence that amo$nt was not ded$cti#le. B$t constr$ction of road in the area aro$nd the factor! of the assessee was adantaeo$s to the assesseeJs #$siness and rel!in on La%sh'iji Su+ar #ills case the ex"endit$re was held reen$e ex"endit$re.
'* in a da! made to a "erson oer 5s. 2=,===C< otherwise than #! an acco$nt "a!ee che7$es or acco$nt "a!ee #an6 draft s$#ect to certain exce"tions e.., "a!ment made to a "erson liin in r$ral area where no #an6in facilit! is aaila#le- "a!ments made to c$ltiator , rower of aric$lt$ral "rod$ce, forest "rod$ce or "rod$ce of animal h$s#andr! on "$rchase of "rod$cts from them&a!ments to Ban6 or 3I etc.
Capital Gains RSs. 4: to ::] /eaning: An! "ro't or ain arisin from the transfer of a ca"ital asset is 6nown as ca"ital ain. Chargea1ility: [S. 4: *+] B! irt$e of Section 4: *+ of the Income Tax Act an! "ro't or ain arisin from the transfer of a ca"ital asset is charea#le to tax $nder the head %a"ital (ains) and is deemed to #e income of the "reio$s !ear in which the transfer ta6es "lace. ;ssentials or chargea1ility: . There m$st #e a a"ital Asset. 2. a"ital Asset m$st hae #een transferred in the "reio$s !ear. . An! &ro't or (ain sho$ld arise from s$ch transfer. 4. The &ro't or (ain sho$ld not #e exem"t $nder Sections :4, :4B, :4D, :4, :4A, :4B, :4, :4F, :4(, :4(A and :4.
ean ng o
ap a
sse :
.
@ means &
"ro"ert! of an! 6ind held #! an assessee, whether or not connected with his #$siness or "rofession, #$t does not incl$de> *i+ an! stoc6 0 in 0 trade, cons$ma#le stores or raw materials held for the "$r"oses of his #$siness or "rofession*ii+ &ersonal e1ects of the assessee, that is to sa!, moa#le "ro"ert! incl$din wearin a""arel and f$rnit$re, held for "ersonal $se #! the assessee or an! mem#er of his famil! de"endent on him #$t excl$din eweller!, archaeoloical collections, drawins, "aintins, sc$l"t$res or an! wor6 of art. Th$s eweller! etc. are treated as ca"ital asset, een tho$h the! are meant for "ersonal $se of the assessee.
a n an! area w n e $r s c on o a $n c "a ! or a antonment Board hain a "o"$lation of =,=== or moreor *#+ within a distance of 2 Lms from the local limits of a K$nici"alit! or a antonment Board hain a "o"$lation of more than =,=== #$t not more than one 3a6h- or *c+ within a distance of / Lms from the local limits of a K$nici"alit! or a antonment Board hain a "o"$lation of more than one 3a6h #$t not more than ten 3a6h- or *d+ within a distance of 8 Lms from the local limits of a K$nici"alit! or a antonment Board hain a "o"$lation of more than ten 3a6h.] (iv) /N (old Bonds, 9;; or ;N (old Bonds, 98= or ational Defence (old Bonds 98= iss$ed #! the entral (oernment(v) S"ecial Bearer Bonds, 99 iss$ed #! the entral (ot. and (vi) (old De"osit Bonds iss$ed $nder the (old De"osit Scheme, 999. ;$planation: &ro"ert! incl$des an! rihts in or in relation
Personal ffects: &ersonal e1ects are not ca"ital assets $nder section 2 *4+, if the followin conditions are satis'ed> . It sho$ld #e moa#le "ro"ert!2. It sho$ld #e held for "ersonal $se #! the assessee or an! mem#er of his famil! de"endent on him. it sho$ld not #e eweller!, archaeoloical collections, drawins, "aintins, sc$l"t$res or an! wor6 of art. ar, c!cle, scooter, motor 0 c!cle owned and $sed #! the assessee are "ersonal e1ects. @ewellery: eweller! is a ca"ital asset. eweller! incl$des the followin> *i+ ornaments made of siler, old, "latin$m or an! other "recio$s metal or an! allo! containin one or more of s$ch "recio$s metals, whether or not containin an! "recio$s or semi "recio$s stones and whether or not stitched in an! wearin a""arel. *ii+ "recio$s or semi "recio$s stones, whether or not set in an! f$rnit$re, $tensil or wearin a""arel.
3ypes of &apital Assets: +here are two types of capital assets@ . Gong & term capital asset [Section " ("CA)4H and ". Short & term capital asset [Section " (6"A)4.
%hort term Capital 0sset: Accordin to Section 2 *42A+ a short 0 term ca"ital asset means ca"ital asset held #! an assessee for not more than / months immediatel! "rior to its date of transfer. oweer, in the case of shares held in a com"an!, listed sec$rities, $nits of UTI or $nits of m$t$al f$nds s"eci'ed $nder Section = *2D+, the asset is treated as short term ca"ital asset if the share, sec$rit! or $nit as the case ma! #e is held #! the assessee for not more than 2 months immediatel! "rior to its transfer and not / months. Aong term Capital 0sset: Accordin to Section 2 *29A+ asset other than short 0 term ca"ital asset is rearded as lon 0 term ca"ital asset.
'n determining the period for which any capital asset is held by the assessee & *a+ In the case of a share held in a com"an! in li7$idation, the "eriod s$#se7$ent to the date on which the com"an! oes into li7$idation is excl$ded. *#+ In the case of a ca"ital asset which #ecomes the "ro"ert! of the assessee in the circ$mstances mentioned in Section 49 *+ of the Act for exam"le, #! wa! of inheritance, ift, "artition etc. the "eriod for which the asset was held #! the "reio$s owner sho$ld #e incl$ded. *c+ In the case of a share in an Indian om"an!, which #ecomes the "ro"ert! of the assessee in a scheme of amalamation, the "eriod for which the share in the amalamatin com"an! was held #! the assessee sho$ld #e incl$ded. *d+ In case of iss$e of shares #! the res$ltin com"an! in a scheme of demerer to the shareholder of the demered com"an!, the "eriod of holdin shares in demered com"an! will #e incl$ded in total "eriod of holdin of share in res$ltin com"an!.
3ransfer of &apital Asset [ection # (*-)% Transfer in relation to a ca"ital asset incl$des> *i+ the sale, exchane or relin7$ishment of the asset*ii+ the extin$ishment of an! rihts therein. *iii+ the com"$lsor! ac7$isition thereof $nder an! law*i+ the conersion of an asset into stoc6 0 in 0 trade or the treatment of it as s$ch*+ Allowin "ossession of an immoa#le "ro"ert! to #e ta6en in "art "erformance of a contract. [Section :A of the Transfer of &ro"ert! Act, 882. *i+ An! transaction *whether #! wa! of #ecomin a mem#er of, or ac7$irin shares in a co 0 o"eratie societ!, com"an! or other association of "ersons or #! wa! of areement or an! arranement or in an! other manner whatsoeer+ which has the e1ect of transferrin or ena#lin the eno!ment of an! immoa#le "ro"ert!.
Capital Gains rom #nsurance Claim on 9estruction o Capital 0sset: [S. 4: *A+] B! irt$e of Section 4: *A+ "ro'ts or ains arisin from an! com"ensation *whether in terms of mone! or in 6inds+ receied #! an! "erson $nder an ins$rance from an ins$rer in the "reio$s !ear on acco$nt of damae to or destr$ction of an! ca"ital asset is charea#le to a"ital (ains tax, if the damae or destr$ction occ$rs as a res$lt of> *i+ ood, t!"hoon, h$rricane, c!clone, earth7$a6e or other con$lsion of nat$re- or *ii+ riot or ciil diso#edience*iii+ accidental 're or ex"losion- or *i+ action #! an enem! or action ta6en in com#atin an enem! *whether with or witho$t a declaration of war+. The "ro'ts or ains will #e deemed to #e the income of the "reio$s !ear in which the com"ensation is receied. In $ania Sil% #ills Ltd. vs. C.I.T. *99+ 9 IT5 /4; *S+ the S$"reme o$rt had held that ins$rance claim receied on acco$nt of destr$ction of asset is not charea#le to tax as destr$ction does not amo$nt to transfer. The e1ect of this $dment has #een n$lli'ed to some extent #! insertin s$#
into %tocD in .rade: [S. 4: *2+] B! irt$e of Section 4: *2+ the notional "ro't arisin from transfer #! wa! of conersion of ca"ital asset into stoc6 0 in 0 trade is charea#le to tax in the !ear in which stoc6 0 in 0 trade is sold. For the "$r"ose of com"$tin the ca"ital ain in s$ch cases, the fair mar6et al$e of the ca"ital asset on the date on which it was conerted or treated as stoc6 0 in 0 trade is deemed to #e the f$ll al$e of the consideration receied or accr$in as a res$lt of s$ch transfer. The s$# *i+ x"endit$re inc$rred wholl! and excl$siel! in connection with s$ch transfer *e.. #ro6erae or commission for sec$rin a "$rchaser, reistration fee, traellin ex"enses in connection with transfer+- and *ii+ the cost of ac7$isition of the ca"ital asset and cost of im"roement thereto. oweer, in case of transfer of a lon term ca"ital asset after ded$ctin the ex"endit$re inc$rred wholl! and excl$siel! in connection with s$ch transfer, the indexed cost of ac7$isition and indexed cost of im"roement has to #e ded$cted. #nde$ed Cost o 0cuisition: is the amo$nt which #ears to the cost of ac7$isition the same "ro"ortion as the cost ination index for the !ear in which the asset is transferred #ears to the cost ination index for the !ear in which the asset was ac7$ired #! the assessee or for the !ear #einnin on A"ril , 98 whicheer is later. Th$s> Indexed ost of Ac7$isition F ost of Ac7$isition ost Ination Index for the Pear in which the asset is transferred F ost Ination Index for the Pear in which asset was ac7$ired or for
#nde$ed Cost o #mprovement: is the amo$nt which #ears to the cost of im"roement the same "ro"ortion as the cost ination index for the !ear in which the asset is transferred #ears to the cost ination index for the !ear in which the im"roement to the asset too6 "lace. Th$s> Indexed ost of Im"roement F ost of Im"roement ost Ination Index for the Pear in which the asset is transferred F ost Ination Index for the Pear in which im"roement to the asset too6 "lace.
%* &6: B! irt$e of Section 4/ distri#$tion of assets in 6ind of a com"an! to its shareholders on its li7$idation is not considered as transfer for the "$r"oses of S. 4: *+.
Financi al Pear 98< 82 982< 8 98< 84 984< 8: 98:< 8/ 98/< 8; 98;< 88 988< 89 989< 9= 99=< 9 99< 92
ost Ination Index ==
Financial Pear
ost Ination Index
998 *a+ an! relatie or (1) on the occasion of marriae of indiid$al- or (c) $nder a will or inheritance- or (d) in contem"lation of death of the "a!er- or (e) from an! f$nd, fo$ndation, $niersit!, ed$cational instit$tion, hos"ital, medical instit$tion or tr$st referred to in S. = *2+ *c+. 5elatie means *i+ s"o$se of the indiid$al- *ii+ #rother or sister of the indiid$al *iii+ #rother or sister of either of the "arent of indiid$al, *i+ #rother or sister of the s"o$se of indiid$al, *+ an! lineal ascendant or descendent of the indiid$al, *i+ an! lineal ascendant or
!ther incomes: A"art from aforesaid 8 incomes which are s"eci'ed #! S. :/ *2+ other incomes which do not fall $nder an! of the other heads of income are taxa#le $Cs :/ *+. Tho$h it is not "ossi#le to enlist all s$ch incomes, some exam"les are as follow> *i+ Income from s$#lettin of o$se &ro"ert!*ii+ Income from lettin or s$#lettin of acant land*iii+ DirectorJs fee*i+ Aric$lt$ral Income receied from o$tside India*+ Fee, commission, rem$neration etc. receied #! an em"lo!ee from a "erson other than his em"lo!er*i+ Ins$rance ommission*ii+ Salaries "a!a#le to K.&s., and K.3.As.
9eductions: [S. :;] 0 Income charea#le $nder the head Income from ther So$rces is com"$ted after ma6in followin ded$ctions> (i) In the case of diidend income and interest on sec$rities> (a) an! reasona#le s$m "aid #! wa! of rem$neration or commission for the "$r"ose of realiEin diidend or interest(1) Interest on #orrowed ca"ital if it is $sed for inestin in shares or sec$rities (ii) In the case of income from machiner!, "lant or f$rnit$re let on hire> (a) $rrent re"airs to #$ildin as $nder S. = *a+ *ii+(1) $rrent re"airs to machiner!, "lant or f$rnit$re and ins$rance "remi$m as $Cs (c) De"reciation and $na#sor#ed de"reciation on #$ildin, "lant or f$rnit$re as $Cs 2
ex"ended wholl! and excl$siel! for the "$r"oses of earnin s$ch income. (iv) In the case of income in the nat$re of famil! "ension 0 5s. :,===C< or and one rd N of s$ch income whicheer is less(v) In the case of [income s"eci'ed in Section 2 *24+ *x+ i.e.,] amo$nt receied as contri#$tion from em"lo!er towards an! welfare f$nd if s$ch amo$nt is credited #! the tax"a!er to the em"lo!eeJs acco$nt in the releant f$nd on or #efore the d$e date. 0mounts not deducti1le: The followin amo$nts are not ded$cti#le while com"$tin income $nder the head %Income from ther So$rces> [S. :8] *i+ an! "ersonal ex"enses of the assessee*ii+ an! interest charea#le $nder the Act which is "a!a#le o$tside India, on which tax has not #een "aid or ded$cted*iii+ an! amo$nt charea#le $nder the head VsalariesJ, if it is "a!a#le o$tside India, $nless tax has #een "aid thereon or ded$cted at so$rce *i+ an! amo$nt not allowa#le #! irt$e of Section 4=A *For exam"le, excessie ex"endit$re "aid to relatie, "a!ment exceedin 5s. 2=,===C< "aid otherwise than #! crossed
*+ in the case of assessees #ein forein com"anies, an! ex"endit$re in res"ect of income #! wa! of ro!alties and technical serice fees receied $nder areement made after Karch , 9;/*i+ an! ex"endit$re or allowance in connection with an! income #! wa! of winnins from lotteries, crossword crossword "$EEles, races, card ames and other ames of an! sort or from am#lin or #ettin of an! form. f orm. oweer, disallowance is not a""lica#le in com"$tin the income of an assessee #ein the owner of horses maintained #! him for r$nnin in horse races . %* J la!s J la!s down that t hat while com"$tin income $nder S. :/, "roisions "roisions of S. 4 *+ shall a""l! as the! a""l! for com"$tin income $nder &ro'ts and (ains of B$siness or &rofession. S. 4 la!s down that where an! ded$ction or allowance has #een made in res"ect of loss, ex"endit$re and s$#se7$entl! the amo$nt is o#tained #! the assessee or his s$ccessor, the same will #e treated income of the &.P &.P.. in which wh ich it is receied and an d will #e taxa#le $nder the head &ro'ts and (ains of B$siness or &rofession irres"ectie of the fact as to whether in i n s$ch &.P. .P. s$ch #$siness or "rofession contin$es or not.
%et o> and carry orward o losses %s* 75 to 85/eaning Set o1 means ad$stment of losses aainst income of the same !ear from a di1erent so$rce or head of income arr! forward means carr!in the loss which co$ld not #e set o1 in the "recedin !ear for ad$stin the same aainst the income of the s$#se7$ent !ear. /odes of Set o1 and carr! forward 0 The "rocess ma! #e diided into .hree steps> . Inter Una#sor#ed de"reciation is not treated as a loss from #$siness or "rofession. ence, $na#sor#ed de"reciation can #e set o1 aainst income $nder the head %Salaries).
Carry orward o Aosses: !nly ollowing losses can 1e carried orward: *i+ 3oss $nder the head %Income from o$se &ro"ert!) can #e carried forward for maxim$m 8 followin A.Ps. and can #e set o1 onl! aainst Income from o$se &ro"ert!. *ii+ 3oss $nder the head %&ro'ts and (ains of B$siness or &rofession) whether of s"ec$latie or non s"ec$latie B$siness. 3oss of non
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