Income tax theory for the ay 12 13

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Goodwill.
Chapter 1.
Introduction.
1. What is Direct Tax & Indirect Tax?
‘Income Tax’ is a Direct Tax law, as the
liability to pay tax and the actual payment of tax is on
the same person. Examples of Direct Taxes are ‘Income
Tax’ and ‘Wealth Tax’.
In case of Indirect tax, the tax burden is on one
person, but it is actually suffered by other person. E.g.,
in the case of Excise duty, the manufacturer is liable to
pay the duty, but ultimately, it is included in the final
bill price of the consumer. Same is the case of Sales
Tax, Customs Duty etc.
2. What do you mean by ‘Income Tax’?
‘Income Tax’ is the tax or duty on income of a
person. ‘Income Tax’ is charged when a person’s
income exceeds the specified sum during the year. On
such income, tax is levied on at the specified rate as per
the Finance Act.
Webster defines ‘Income Tax’ as “a tax upon a
person’s income, especially on income over and above a
specified sum.”
Parliament is the only authority to enact law on
‘Income Tax’. ‘Income Tax Act’ was passed in
parliament in 1961 and it came in to force with effect
from 1st April 1962.
‘Income Tax’ is one of the major revenue of
the Central Government. It tends to collect tax on
income at the specified rates applicable to the previous
year as per the ‘Finance Act’.
‘Income Tax’ is levied and administered by the
Central Government and is collected by the officers
appointed by the Central Government and the State
governments on the basis of the recommendations of the
‘Finance Commission’.
3. Explain Evolution of Income Tax law in India. State
the year in which the present income tax act was
passed. (2007 B.com)
In India ‘Income Tax’ was introduced for the
1st time in 1860 by Sir James Wilson in order to meet
the losses sustained by the Government on account of
the ‘Military Mutiny of 1857’. Thereafter several
amendments were made in it from time to time.
At last, in 1886, a separate ‘Income Tax Act’
was passed. This Act remained in force up to 1917, with
various amendments from time to time. In 1918, a new
‘Income Tax Act’ was passed & again it was replaced
by another new Act, which was passed in 1922.
The ‘Income Tax Act’ of 1922 had become
very complicated on account of innumerable
amendments. The Government of India therefore
appointed the ‘Direct Taxes Administrative Enquiry
Committee’ to suggest measures to minimize
inconveniences to assess and to prevent ‘evasion of tax.’
This committee submitted its report in 1959. In
consultation with the ministry of law finally the ‘Income
Tax Act’ - 1961 was passed.
The ‘Income Tax Act’ - 1961 has been
brought in to force with effect from 1st April 1962. It
applies to the whole of India. This Act is administered
by the board set up by the Central Government namely
CBDT (Central Board Of Direct Taxes.)
The tax rate is not specifically mentioned in
the ‘Income Tax Act’, but it is determined for each
assessment year as per the rate specified in the Annual
‘Finance Act’. (Budget)
Further for the administration & procedure
for the ‘Income Tax Act’, there is ‘Income Tax rule
1962’, which has also amended till date as per the
Annual ‘Finance Act’. Further there are a number of
judicial guidelines for the proper administration of the
Act by various courts, in decided cases. Hence the
present ‘Income Tax Act’ is the ‘Income Tax Act- 1961
as amended up to date.
‘Income Tax’ is levied and administered by the
Central Government and is collected by the officers
appointed by the Central Government and the State
governments on the basis of the recommendations of the
‘Finance commission’.
4. What are the Laws relating to Income Tax in India?
(2003 M.com)
The law of ‘Income Tax’ is contained in:
1. The ‘Income Tax Act’ 1961, as amended up to date.
2. The ‘Income Tax’ Rules 1962, as amended up to
date.
3. ‘Finance Act’ passed by the Parliament every year.
‘Income Tax Act’ of 1961 came in to force
with effect from 1-4-62 and extends to the whole of
India. It is the main enactment. It contains provisions
relating to computation of total income under different
heads, procedure of assessment, appeals, penalties,
prosecution, and rectification proceeds.
‘Income Tax - Rules 1962’ have been made to
carry out the purposes of I.T. Act. Rules are framed by
Central Board of Direct Taxes (C.B.D.T.), the top most
tax authority. Rules are equal to provisions of I.T. Act
and have full legislative backing.
‘Finance Act’ is passed by the parliament
every year. It fixes the rates of ‘Income Tax’ for a
current Assessment Year and rates for ‘Deduction of
Tax at Source’ (T.D.S.) as well as ‘Advance Payment of
Tax’ for the financial year.

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Goodwill.
5. What do you mean by Assessment?
Every person who is liable to pay ‘Income
Tax’ should file return of income on prescribed dates.
These returns are processed by the ‘Income Tax’
department Officers. This processing is called
‘Assessment’.
6. Define Assessee? (2004 B.com) (2003 M.com) (2006
B.com) (2009 B.com) ( 2011 B.com)
Assessee means a person who is liable to pay
tax or any other sum of money payable under the act.
‘Other sum of money’ includes fine, Interest, penalty
etc.
If the assessing officer takes any proceedings
against any person, he will also become an ‘Assessee.’
Some times a person may have to pay tax not
in respect of his income, but in respect of the income of
some other person. In such a case, he is known as
‘Deemed Assessee.’
A person is deemed to be an ‘Assessee In
Default’ if he does not comply with his statutory duties.
7. Who is a ‘Deemed Assessee’ or ‘Representative
assessee’? (2003 B.com) (2003 M.com) (2004 M.com)
(2003 B.com)(2007 B.com)
Sometimes a person may have to pay tax not in
respect of his income but in respect of income of some
other person. In such a case he is known as ‘Deemed
Assessee’. E.g.,
1. Legal heirs will have to pay tax for income of a
deceased person.
2. A person representing minor is treated as an
Assessee for the Income of the minor.
8. What do you mean by ‘Assessee in Default’? (M.com -
02)
A person will become Assessee in default if he
does not comply with his statutory duties.
E.g.,
1. The Assessee shall be considered to be an ‘Assessee
in default’ if he fails to pay tax within the time
allowed originally or extended & to the person &
place mentioned in the notice.
2. A person who disburses income is liable to deduct
tax there on at prescribed rate. But if he does not
deduct tax at source, he will become an ‘Assessee in
Default’.
9. What is Assessment Year? (2003 M.com)
Assessment year means the period of 12
months commencing on the first day of April every
year. In India, the Government maintains its accounts
for a period of 12 months.
i.e., 1st April to 31st March every year. It is
also known as Financial Year. The ‘Income Tax’
Department has also selected same year for its
assessment proceeds.
The Assessment year is the financial year of
the Government of India during which income of a
person relating to the relevant previous year is assessed
to tax.
Current A. Y. is 2012-2013 (1-4-2012 to 31-3-2013)
10. What is Previous Year?
(2010 B.com) & (2003 B.com) (M.com - 02) (2003
M.com)
Previous year is the Financial Year preceding
the A. year. E.g., for A. year 2008-2009, the previous
year is 2007 - 2008.
Current P. Y. is 2011-2012 (1-4-2011 to 31-3-2012)
It is the income earned during the previous
year is taxed in the Assessment year.
Previous year in the case of newly set up business (2003
M.com)
The P.Y. in the case of a newly started
business shall be the period between commencement of
business and 31st March of the following year.
E.g., in case of newly started business
commencing its operation on 1 - 8 - 2009, the previous
year is the period between 1 - 8 - 2009 to 31 - 3 – 2010.
11. What are the Situations where income earned during
a P.Y. are taxed in that year itself?
a) Income of a Non - Resident from shipping
business.
Income earned by a Non - Resident from a
shipping business at a port in India, will be taxed in the
year of earning itself.
b) Income of persons leaving India
An individual who is going to leave India in any
A.Y. with the intention of not returning to India in the
near future, the income of such individual will be
assessed in the same year itself.
c) Transfer of property to avoid tax.
If in the opinion of the Assessing officer, an
Assessee is likely to transfer his property to avoid tax, the
total income of such person will be taxed in the current
year it self
d) Discontinuance of a Business or Profession.
The income of discontinued business/ profession
will be taxed in the year in which such business or
profession is discontinued.

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12. Define ‘Person’. (Sec. 2 (31)? (2002 B.com) (M.com –
Dec 02, Dec 05) (2005 B.com)
The tern ‘Person’ includes:
1) An individual
2) A HUF
3) A company
4) A firm
5) An Association of persons (A.O.P) or Body of
Individuals (B.O.I)
6) A Local authority. (Panchayath, Municipality, Port
trust etc)
7) Every Artificial Juridical Person (LIC, University
Etc.)
13. What do you mean by ‘Association of persons’ (AOP)
Co-operative societies, NAFED etc are
examples of association of persons. When persons
combine together to carry on a joint enterprise & they
do not constitute partnership under the ambit of law,
they are assessable as AOP.
Receiving income jointly is not the only
feature of an AOP. There must be common purpose &
common action to achieve the common purpose. i.e. to
earn income.
14. What are the Differences between ‘AOP’ & ‘BOI’
An A.O.P can have Firms, Companies,
Associations and individuals as its members.
But a ‘Body of Individuals’ cannot have non-individuals
as its members. Only natural human beings
can be members of a Body of individuals.
(Whether a particular group is AOP or BOI is a
question of fact to be decided in each case separately.)
15. Define ‘Income’ (Sec.2 (24)?
It includes:
1. Profits & gains
2. Voluntary contribution received by a trust created for
charitable and religious purpose
3. Any special allowance for meeting expenses for
performance of duty
4. Allowances to the Assessee to meet the increased
cost of living
5. Dividend
6. The value of any perquisite or Profit in lieu of Salary
7. Capital gains
8. Casual income namely winnings from lotteries,
crossword puzzles, races including horse races, card
games.
9. Sum received by an employer as contribution to any
fund for the welfare of employees.
16. What is Tainted Income?
Tainted income means ‘Illegal Income’.
Income earned legally or illegally remains ‘income’ & it
will be taxed according to the provisions of the act. In
addition to being taxed, the Assessee may also be
prosecuted for the offence.
But normal Expenses incurred in earning an
illegal income are deducted in computing the taxable
illegal income.
17. What is ‘Income Deemed to be received’ or what is
deemed income? (2004 M.com) (2003 M.com)
It means that, although the income is not
already actually received by the Assessee, it is
considered to have been received by him under this Act.
Such incomes are:
1. Income of other persons which are included in the
income of the Assessee
2. Tax deducted at source
3. Annual Accretion
4. Transferred balance of any unrecognized provident
fund to a recognized provident fund
5. Transfer of income without transfer of assets will
be treated as the income of the transferor
18. What is Casual Income? (2003 B.com) (M.com - 02)
(2004 B.com) (2003 M.com)
Certain incomes are of casual nature. It arises
without any stipulation or contract & cannot be
calculated in advance. But they are taxable under the
head ‘income from other sources’. E.g.,
1. Winnings from crossword puzzles
2. Races including horse races
3. Card games and other games of any sort or
4. Betting of any nature.
Tax @ 30% is deducted at source from casual
incomes.
19. What is Total Income (Sec. 2 (45)? (2001 B.com),
(M.com - 02), (2003) (2010 B.com) (2009 B.com)
Income of a person is computed in five parts
and each part is known as ‘head of income’. These
heads are:
1. Salaries
2. Income From House Property
3. Profits & Gains Of Business Or Profession
4. Capital Gains
5. Income From Other Sources

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Goodwill.
Total of incomes computed under these heads
is called ‘GROSS TOTAL INCOME’ (G.T.I.) and Out
of this, deductions u/s 80 are allowed. The resultant
figure is called ‘TOTAL INCOME’ on which tax rates
are applied.
20. What do you mean by rounding-off of total income?
The taxable income computed shall be rounded
off to the nearest multiple of 10 rupees before applying
tax rate. E.g, Rs. 7, 80,514.99 would become Rs.
780,510 & Rs. 7, 80,515 becomes Rs. 780,520.
21. What do you mean by rounding-off of tax?
The amount of tax (including tax deductible at
source or payable in advance) shall be rounded off to
the nearest multiples of ten rupees and for this purpose
any part of a rupees consisting of paise shall be ignored.
22. What is the Tax Rate for the A.Y.12-13?
Women Senior
citizen
Others Rate
1. First Rs. 1, 90,000 of
total income 2,50,000 1,80,00
0 -
2. Next 3,10 ,000 2,40,000 3,20,00
0 10%
3. Next 3,00,000 3,00,000 3,00,00
0 20%
4. Balance total income Balance Balance 30%
23. What is Maximum Marginal Rate?
It means the rate of Income tax (including
surcharge on Income Tax, if any) applicable in relation
to the highest slab of income in the case of an
individual, association of persons or body of individuals
as specified in the Finance Act of the relevant year.
(The rate of income tax for the highest slab of
income for the assessment year 2011– 12 is 30%.
24. What is Average Rate of Tax? (M.com - 02)(2003.
M.com) (2007 B.com) (2010 B.com) (2009 B.com)
Average rate of tax is defined u/s. 2 (10) to
mean the rate arrived at by dividing the amount of tax
calculated on the total income, by such Total Income.
Average rate of
tax = Tax payable
Total income
25. What is Agricultural Income? (2003, 2005. M.com)
U/s 2(1) Agricultural income includes:
Any rent or revenue derived from land, which is situated
in India and is used for Agri. Purposes.
Any income derived from land by agriculture.
Income derived from the performance of a process
ordinarily employed by a cultivator or receiver of
rent-in-kind to make such produce or rent-in-kind
marketable
Any income from sale of produces or rent in kind.
Any income from agricultural house property which is
situated on or in the vicinity of agricultural land and
is used as own residence, tenant’s residence, go
down or shed for implements. (House property must
not be situated in city limits.)
26. What is Partly Agricultural Income?
When an Assessee performs agricultural
operations & manufacturing process simultaneously, his
total income would consist of agricultural income &
Non-agricultural income. Agricultural income is exempt
& non-agricultural income is taxable.
E.g., 60% of the income derived from the sale
of coffee grown & manufactured by the seller in India is
deemed to be an agricultural income & the remaining
40% is taken as business income.
27. How do you Integrate Agricultural Income With Non-
Agricultural Income?
Agri. Income is fully exempted from tax u/s
10(1) of the ‘income Tax Act’; but from A. Y. 1974-75
it is integrated with ‘Non-Agricultural Income’ in
certain cases only.
1. Integration is done only in the case of:
a) Individuals
b) HUF
c) Association of persons
d) Body of individuals
e) Artificial juridical persons
2. Integration is done only if non-Agricultural income
of above mentioned persons exceed Rs.1,60, 000 in
that previous year.
3. Integration is done only if Agricultural income
exceeds Rs.5, 000 in such previous year.
How To Integrate?
1. Add Agricultural income with non-Agri. Income
2. Compute tax on this total at current rates.
3. Add agricultural income with exempted limits i.e.,
Rs.1, 60,000
4. Calculate tax on this total at current rates.
5. Deduct tax at (4) out of tax at (2) above
6. Add education cess @ 2% on total of tax payable
including surcharge.
7. The total is tax payable.

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Goodwill.
Chapter 2.
Residential Status.
28. How do you determine Residential Status of an
individual? (2002 B.com), (2010 B.com), (M.com -
02), (2003 B.com), (2004 B.com), (2004 M.com) (2003
M.com), (2005 B.com)
The scope of total income is determined by the
Residential Status of the Assessee. To determine whether
an Assessee is liable to pay tax on income earned in
India, outside India or on both, we have to determine his
Residential Status.
There can be 3 Residential Status. Viz,
1. Resident & Ordinarily Resident in India
2. Resident but not Ordinarily Resident in India.
3. Non- Resident in India.
Basic conditions Additional conditions
1) He is in India in the P.Y. for
a period or periods
amounting in all to 182 days
or more;
1) He has been Resident
in India in at least 2
out of 10 P.Years
preceding the P.Y.
2) He has been in India for a
period or periods amounting
in all to 365 days or more
during the 4 years preceding
the P.Y. and has been in
India for 60 days or more in
the P.Y.
2) He has been in India
for a period or
periods amounting in
all to 730 days or
more during the 7
P.Years preceding the
P.Y.
Note: To be a ‘Resident’ in 2/10 years, an
individual should have fulfilled at least one of the basic
conditions in each of those 2 years.
a. Resident & Ordinarily R esident in India
An individual is said to be Resident &
Ordinarily Resident in India in any P.Y, if he
satisfies any one basic condition and both the
additional conditions.
b. Resident but Not ordinarily resident in India
(2005 B.com)
An individual is said to be N.O.R. when he
satisfies any one of the basic conditions or one of the
basic conditions plus one additional condition.
c. Non- Resident . (2006 B.com)
If an individual does not satisfy any of the
basic conditions, he is said to be a Non - Resident.
Summary
a) 1 basic + 2
additional
- Resident & Ordinarily Resident
in India
b) 1 basic only or
1 basic + 1
additional
-
Resident but not ordinarily
resident
c) No basic - Non- Resident
29. To whom 2nd Basic Condition for determining
Residential status is not applicable?
1. An Indian citizen who leaves India during the
Previous year as a member of the crew of an Indian
ship
2. An Indian citizen who leaves India during the
previous year for the purpose of employment outside
India.
3. An Individual, Who is citizen of India or a ‘person of
Indian origin’, who being outside India, comes on a
visit to India during the Previous year.
30. How do you determine the Residential Status of H. U.
F. U/s. Sec. 6 (2)? (M.com –02)(2007 B.com) (2010
B.com)
Basic condition Additional conditions
1) The control &
management of its
affairs is situated at
least partly in India.
1) The Kartha should be a
Resident in India in at least 2
out of 10 P.Y preceding the
P.Y.
2) The Kartha should be in
India for a period or periods
amounting in all to 730 days
or more during the 7 P.Y
preceding the P.Y.
a) Resident & Ordinarily Resident in India
An H.U.F is said to be Resident &
Ordinarily Resident in India in any P.Y, if it
satisfies the basic condition and both the
additional conditions.
b) Resident but Not ordinarily resident in India
An H.U.F is said to be N.O.R. when it
satisfies the basic condition, but does not satisfy
both the additional conditions
c) Non- Resident.

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If the HUF does not satisfy the basic
condition, it is said to be a Non - Resident.
31. How do you determine the Residential Status of Firm,
Association of Person, & Body of Individuals? (2003
B.com) (2010 B.com) (2009 B.com)
Firms, AOP, BOI may be either Resident Or Non -
Resident.
1. They are resident in India, if control and
management of their affairs are situated wholly or
partly in India.
2. They are Non - Resident in India, if control and
management of their affairs is situated wholly
outside India.
32. How do you determine the Residence of a Company
Sec. 6(3)? (2001 B.com) (M.com 2005) ( 2011 B.com)
A Company can be either Resident or Non -
Resident.
1) A company is said to be Resident in any P.Y., if:
It is an Indian company or during that year the
control and management of its affairs is situated
wholly in India.
2) If a company is neither an Indian company nor, the
control and management of its affairs is situated
wholly in India, it is said to be a Non- Resident
company.
(Control and management of affairs are situated at
the place where Director’s meetings are held)
33. How do you determine the Residence of Every other
person? Sec. 6(4)?
Every other person is ‘Resident’ in India if control &
management of his affairs is, wholly or partly, situated
within India during the relevant Previous year.
On the other hand every other person is ‘Non-
Resident’ in India if control & management of its affairs
is wholly situated outside India.
34. What is the relation ship between Residential status &
Incidence of tax? (2003 B.com) (2003 B.com) (2004
B.com) (M.com 2005) (2010 B.com) 2011 bcom
Or
‘The incidence of income tax depends upon the
residential status of the Assessee. ’ Discuss fully. (2003
M.com)
Or
Explain the relationship between residential status
and tax liability.
1) Incidence of tax in the case of a resident &
ordinarily resident:
A resident & ordinarily resident is assessable
to tax in respect of:
a) Income received or deemed to be received in India
b) Income accrued or deemed to be accrued in India
c) Income, which accrues or arises to him outside India.
2) Incidence of tax in the case of a resident but not
ordinarily resident:
A resident but not ordinarily resident is
assessable to tax in respect of:
a) Income received or deemed to be received in India
b) Income accrued or deemed to be accrued in India
c) Income from a business, which is controlled from a
place within India, or income is from a profession,
which is set up in India.
(Thus it is clear that in the case of a resident & not
ordinarily resident assessee, income is not chargeable to
tax if it satisfies all the following conditions:
a) Income is neither received or deemed to be received
in India
b) Income is neither accrued or deemed to accrued in
India
c) Income is received from a business controlled or
profession set up out side India.)
3) Incidence of tax in the case of a Non-Resident:
A non -resident is assessable to tax in respect of:
a) Income received or deemed to be received in India
b) Income accrued or deemed to be accrued in India
The Residential Status of an assessee
determines the ‘Scope of his total income’. The
incidence of tax is highest on Resident and Ordinarily
Resident, a little lower on Resident but Not Ordinarily
Resident and lowest on Non - Resident assessee.
Tax Incidence in brief.
Income
Whether tax
incidence
arises?
R
&
OR
R
but
not
OR
NR
1. Income received in India Yes Yes Yes
2. Income accrued in India Yes Yes Yes
3. Foreign income:
A. From an Indian
controlled business.
Yes Yes No
B. From any other source Yes No No

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4. Untaxed foreign Income
received or accrued outside India
In earlier years, but later on
remitted to India during the P.Y
06- 07
No No No

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Goodwill.
Computation of income for an Assessment Year.
1. Income from salary
Basic x
Allowances x
Perquisites x
Gross Salary x
(-) Deduction u/s. 16:
16 (ii) Entertainment Allowance x
16 (iii) Professional Tax x x
Income from Salary x
2. Income from house property
Gross annual value x
(-) Municipal Taxes x
Net annual value x
(-) Deduction u/s. 24: x
1. Standard deduction - 30% of net annual value. x
2. Interest on borrowed Capital x x
Income / Loss from house property x
3. Profits & gains of business
Net profit as per profit & loss a/c x
(+) Expenses debited to profit & loss a/c ; but not allowed as per income tax x
(+) Incomes which are not credited to profit & loss a/c ; but to be credited in the
x
profit & loss a/c
(-) Incomes credited to profit & loss a/c ; but to be shown under other heads x
(-) Incomes credited to profit & loss a/c ; but which are exempt from tax x
(-) Expenses not debited to profit & loss a/c; but are allowable as deduction under
x
the act
Profits & gains of business x
4. Capital gain
Full value of consideration x
(-) Expenses for sale x
Net consideration x
(-) Indexed cost of acquisition x
(-) Indexed cost of improvement x x
Capital gain/ loss x
(-) Exemption for long term capital gain u/s. 54 x
Taxable capital gain x
5. Income from other sources x
Gross total income x
(-) Deduction u/s. 80 C to 80 U x
Total income/ net income (rounded off in multiples of Rs. 10) x
Computation tax liability
Tax on total income x
(+) Surcharge x
(+) Education cess
(-) Relief u/s. 86, 89, & 91 x
x
Tax payable x
(-) Prepaid taxes x
(-) Tax paid on self assessment x
(-) Tax deducted at source x
(-) Tax paid in advance x x

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Tax liability (rounded off in multiples of Rs. 10) x

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Goodwill.
Chapter 3.
Incomes, which are exempt from Tax
35. List any 15 incomes, which are exempt from tax?
(2001 B.com, 2003 B.com) (2003 B.com) (2007 B.com)
(2006 B.com) (2004 B.com) (2005 B.com) (M.com 2005)f
Incomes Who is entitled to
exemption
1. Agricultural income - All assessees
2. Share of income from H.U.F - Member of H.U.F
3. Share of income of a partner
from his firm
- Partners
4. Payment under Bhopal Gas
leak Disaster act
- Individual
5. Life insurance policy money - All assessees
6. Educational scholarship - Individual
7. Daily allowances - Member of
parliament or
legislature
8. Awards made by the Govt. in
public interest
- All assessees
9. Annual value of 1 palace of
rulers of Indian states
- Individual
10. Income of housing authority - Housing authority
e.g. State Housing
Board
11. Income of Scientific research
association
- Scientific research
association
12. Income of news agency - News agency
13. Income of scheduled tribes - Individual
14. Income of newly established
industries in free trade zone
- All assessees
15. Profits of newly established
100% export oriented
undertakings.
- All assessees
16. Dividend from Indian
Company
- All assessees
Chapter 4.
Income from Salary.
36. Define ‘Salary’
‘Salary’ is the first head of income while
computing the taxable income of an individual .Any
remuneration paid by an employer to his employee in
consideration of his services.
U/s. 17(1) Salary includes:
Wages, Annuity, Pension, Gratuity,
commission, fee paid to employee, Profit in lieu of
Salary; leave Salary, Advance Salary and also amount
transferred to Recognized Provident Fund.
37. What are the essential requirements to treat an
income under the head ‘Salary’?
1. There must be an employer-employee relation. The
employee has to provide personal services to the
employer.
2. There may be more than one employer from whom
the Salary may be due or received. All such amount
is to be considered under this head.
3. Salary from former, present or prospective
employers is taxable.
4. ‘Gross Salary’ is taxable. I.e., tax free Salary
received + the tax paid & amount deducted by the
employer is the Gross Salary which is taxable.
38. How do you Compute Salary income?
1. Basic Salary x
2. Allowances x
3. Perquisites x
4. Profit in lieu of Salary x
Gross Salary x
Deduction u/s 16:
16 (ii) Entertainment Allowance X
16 (iii) Profession tax X x
Taxable Salary x

11. 11
Goodwill.
39. What is Profit in lieu of Salary Sec.17 (3)? (2001
B.com) (2004 B.com) (2005 B.com)
‘Salary’ includes Profits in lieu of Salary. It includes the
following
:
1. Amount of compensation received by an Assessee
from his employer or former employer in connection
with -
a) The termination of his employment; or
b) Modification of terms and conditions.
2. Any payment due to or received bay an Assessee
from an employer or former employer or from
provident fund or any other fund or any sum
received under ‘keyman insurance policy’
3. Any amount due to or received by an Assessee from
any person before joining any employment with that
person or after cessation of his employment with that
person.
40. What are the Deductions u/s. 16 From Gross Salary?
(2005 B.com)
There are 2 deductions from gross salary.
16 (ii) Entertainment Allowance
16 (iii) Employment Tax.
41. How will you treat Employment Tax paid by an
employee? 16 (iii)
Employment tax levied under any law and paid
by any employee during the P.Y. will be allowed as
deduction from gross salary.
42. Explain deduction for Entertainment Allowance.16
(ii)
This deduction is allowed only to central &
state government employees. E.A. is first included in
Gross Salary, and then deduction is allowed under this
section to the following extent:
Least is allowed as deduction:
a) Actual E.A. Received
b) 1/5 of (Basic) Salary
c) Rs.5000
43. State any 12 Allowances & explain its treatment
under the income tax act?
1) Dearness Allowance (D.A)
This allowance is given by an employer to
employee to meet the high cost of living on account of
inflation. This is included in Salary income and always
taxable.
2) City Compensatory Allowance. (C.C.A)
In big cities, the cost of living will be high. To
compensate this employer allows this allowance. This is
fully taxable.
3) Helper Allowance .
Is exempted up to actual amount spent on
engaging a helper required to perform the official duties
4) Uniform Allowance .
It is also exempted up to actual expenditure
incurred on acquiring or maintaining of the official
uniform. Excess, if any, will be taxable
5) Academic Research Allowance
It is exempted up to actual expenditure incurred
for research. Excess if any, is taxable
6) Conveyance Allowance
It is exempted up to actual expenditure incurred
in performance of official duties. In case amount received
is more than actual expenditure, excess, if any, will be
taxable
7) Traveling allowance
It is also exempted up to actual expenditure
incurred for the purposes of employment. Excess if any,
will be taxable
Any allowance (by whatever name it may be
called) granted to meet the cost of travel on tour or on
transfer shall be exempted
Any allowance granted to employee (while on
tour or for the period of journey in connection with
transfer) to meet the ordinary daily charges incurred by
such employee on account of absence from his normal
place of employment shall also be exempted (such
allowance shall include any sum paid in connection with
transfer, packing & transportation of personal effects on
such transfer.)
8) Transport allowance
Any allowance given under the name of
Transport allowance to any employee whether Govt or
private shall be exempted up to Rs. 800 p.m. excess if
any, shall be taxable (But in the case of handicapped with

12. 12
Goodwill.
disability of lower extremities or a blind employee it shall
be exempted up to Rs 1,600 p.m.)
9) House Rent Allowance. (H.R.A)
Employee will have to incur expenses relating to
housing accommodation. In big cities rents are generally
high. To compensate this, employer allows HRA to
employees. HRA is exempt u/s.10 (13 A) to some extent:
1. Employees living in rented
house:
Least is of the 3 is
exempt:
1. Actual H.R.A
Received
2. Rent paid by the
employee – 10% of
‘salary’
3. 40% of ‘salary’
(50% of ‘salary’ in the
case of Delhi, Chennai,
Mumbai & Kolkata.)
2. Employees living in their own
houses or in a house for
which they are not paying any
rent.
H.R.A received is fully
taxable
3. H.R.A received by judges of
High Court and Supreme
Court.
Fully exempted
Definition of
‘Salary’ =
1. Basic
2. D.A (which enters in to pay for
service or retirement benefits)
3. Commission as fixed % on
turnover.
10) Children Education Allowances.
If any amount is given by employer to employee
as education allowance for the education of own children
in India, it shall be exempted up to a maximum of Rs.
100 p.m. per child for 2 children only.
11) Hostel expenditure allowance.
Any allowance granted by employer to meet the
hostel expenditure of employee’s children, it shall be
exempted up to a maximum of Rs. 300 p.m. per child for
2 children only
12) Foreign Allowance .
If given by Govt to it’s employees posted
abroad, under whatsoever name, it is fully exempted
44. What is Annual Accretion?
Annual Accretion is taxable under the head ‘salary’
Annual Accretion will consist of:
1. Employer’s contribution to R.P.F in excess of 12%
of employee’s ‘Salary’
(Salary = Basic + D.A (if enters in to pay)
+commission on turnover basis)
2. Interest credited to RPF in excess of 9.5 % of the
balance standing to the credit of employee.
45. What is Transferred Balance? (2003 M.com)
An organization maintains unrecognized
provident fund. The organization has obtained
recognition to its P.F. with existing balances during the
previous year. The amount transferred from U.R.P.F to
R.P.F is ‘Transferred Balance’.
How much of the Transferred balance is taxable?
It will be assumed that U.R.P.F was R.P.F since
the time it was created. If the employer’s contribution
towards PF was in excess of 12% of salary & or interest
credited was in excess of 9.5% p.a, for all those years,
then the excess amount shall be taxable in the year in
which U.R.P.F is accorded recognition. Out of the
‘Transferred Balance’, the aforesaid amount is taxable.

13. 13
46. Explain tax treatment of Gratuity. Sec 10 (10)?
It is the lump sum amount paid by the employer to
the employee for the service rendered by the latter. It is
paid at the time of retirement or death of the employee
whichever is earlier.
Gratuity is exempt u/s. 10(10) to the extent of the
following:
For Govt.,
Semi.
Govt.
Employ
ees or
employe
es of
local
authorit
y
For employees
covered under
payment of
Gratuity Act-
1972
For other
employees
Amount of
gratuity
received is
exempt.
Least of the
following 3 is
exempt .
Least of the
following 3 is
exempt .
1. Actual gratuity
received
1. Actual gratuity
received.
2. Rs.10,00,000 2. Rs.10,00,000
3. 15/26 x ‘salary’
x years of
service
3. ½ x ‘Average
Salary’ x
completed year
of service
(months to be
ignored)
‘Salary’ means last
drawn salary
‘Salary’ includes
basic+ D.A
· If he had
worked for
more than 6
months, it
should be taken
as 1 year.
· 15 days will be
substituted by 7
days in the case
of employees
working in
seasonal
factories
a) ‘Salary’
includes basic,
D.A &
Commission on
turnover basis
b) ‘Average
Salary’ means
10 month’s
average Salary
preceding the
month of
retirement.
47. Explain treatment of leave encashment 10 (10
AA)
Govt
employee
Private sector employee
1. If
received
during
- Full
taxable
Full taxable
service
2. If
received
at the
time of
retireme
nt
- Fully
exempted
Least of the following 4
is exempt .
Actual amount received
Rs. 3,00,000
10 months x Average
salary
(1 month’s leave for
every 1 years of
service - leave
already availed of) x
Average salary
Note :
a) ‘Average Salary’
means last 10
month’s average
Salary (including the
month of retirement)
b) ‘Salary’ includes:
Basic.
D.A. (if it enters)
Commission on
turnover basis
48. How do you treat Pension received by an employee
Sec. 10 (10 A)?
Pension is the monthly payment made by the
employer after retirement. It is taxable under the head
Salary.
1. Un commuted pension (monthly pension) received
per month is fully taxable in the hands of both govt.
and non-govt. employees
2. Sometimes, the employee may commute whole or
part of his periodical pension and receive a lump
sum amount. It is called ‘commuted pension’.
Commuted pension is exempt as per Sec. 10(10 A).
Exemption of commuted pension u/s. 10 (10 A)
a) Government employees,
employees of local
authorities & employees
of statutory corporations:
b) Other employees:

14. 14
Commuted pension
received is fully
exempted.
1) Who receives
gratuity:
1/3 of the commuted
value of pension,
which he is
‘normally entitled to
receive’ is exempt
2) Who does not
receive gratuity:
1/2 of the commuted
value of pension,
which he is
‘normally entitled to
receive’ is exempt
49. Who is a Specified Employee? (M.com - 02) (M.com
2005) ( 2011 B.com)
The employees who fulfill any of the
following 3 conditions are called ‘Specified
Employee.’
1. An employee, who is also a director in the
employer Company.
2. Employee having ‘Substantial Interest’ in the
employer Company. (M.com - 02)
(An employee is said to have ‘substantial interest’
in the employer Company if he is the owner of
Equity shares carrying not less than 20% of
voting power.)
3. Any other employee whose income under the head
“salary” exceeds Rs. 50,000 p.a.
· ‘Salary’ for this purpose, shall include all
taxable monetary payments like Basic
Salary, D.A., Bonus, Commission, Taxable
Allowances etc.)
· For determining the limit of Rs. 50,000 p.a.,
the deductions which are allowable u/s. 16
will be deducted and the balance only will
be considered.
50. Define Perquisites? (M.com – 02)
Perquisite means monetary benefits, facilities
or other advantages provided by the employer to the
employee in addition to the Salary.
It may be a casual emolument, fee or profit
attached to a position or employment. It is something,
which goes in to employee’s own pocket.
Perquisites may be provided either in cash or
in kind. Examples are free accommodation, free
education of children, free car for personal use etc.
51. How do you find out the perquisite value of Rent
Free Accommodation (M.com 2005) (2007 B.com)
Or
Accommodation provided at concessional
rate.
Unfurnished
accommodation
Valuation
Accommodation
provided by
the Govt
The ‘ Annual License Fees’
determined as per Govt rules
as reduced by the rent actually
paid by the employee
Accommodation
provided by
any other
employer
1. If the accommodation is
owned by the employer:
1. if the population in
the city exceeds 25
lakhs – 15 % of
‘salary’
2. ‘’
is between 10 lakhs
& 25 lakhs – 10% of
‘salary’
3. ‘’
is below 10 lakhs 7.5
% of salary
2. If the accommodation is
taken on rent by the
employer:
Actual amount of rent
paid by the employer or
15 % of salary,
whichever is less.
If employer deducts an
amount from employee’s
salary, perquisite value
should be reduced by that
amount & balance is
called ‘accommodation
provided at concessional
rate.’
Furnished
accommodation
Determine the value as if the
accommodation is
unfurnished accommodation.
Such value shall be increased
by 10% of the cost of the
Furniture.
If the furniture is hired from a
3rd party, the hire charges shall
be added. The value shall be

15. 15
reduced by any charges paid
for the furnishing by the
employee.
(‘Furniture’ includes TV,
radio, refrigerator, air
conditioner & other
household appliances)
Hotel accommodation Least is perquisite:
1. 24% of salary or
2. Actual bill paid to that
hotel
(If the following 2 conditions
are satisfied, hotel
accommodation is not
chargeable to tax:
a) If it is provided for a
period not exceeding 15
days in aggregate &
b) Such accommodation is
provided in connection
with transfer of employee
from one place to another
place.)
‘Salary’ includes: ‘Salary’ does not
include:
a. Basic salary
b. D.A., if terms of
employment so
provide
c. Bonus
d. Commission
e. Fees
f. All other taxable
allowances
(excluding amount
not taxable)
g. Any monetary
payment which is
chargeable to tax (by
whatever name
called)
a. D.A., if not taken in
to A/c while
calculating retirement
benefits, like
provident fund,
gratuity etc or terms
of employment so
provide
b. Employer’s
contribution to P.F.
A/c of the employee
c. All allowances which
are exempt from tax
d. Value of perquisites.
e. Arrears of salary
f. Advance salary
received
52. What are the different Types of Provident Funds?
1. Statutory P.F. (2003 B.com) (2004 M.com) (2006
B.com)
It is that P.F. to which the Indian P.F. Act
– 1925 applies. Generally, this P.F. is maintained
by Govt or Semi-Govt offices, like local
authorities, universities & other recognized
educational institutions
2. Recognized P.F. (2009 B.com)
It is that P.F. which is recognized by the
chief commissioner of income tax. He recognizes
this fund only if he is satisfied that this fund fulfills
the conditions set out in Para 4 of part A of
Schedule iv of the income tax act – 1961.
It includes that P.F. also which is
established under a scheme framed under the
Employee’s P.F. act – 1952. Generally, scheduled
banks, factories & several business houses maintain
this fund.
3. Un - recognized P.F.
It is that P.F. which is neither statutory nor
recognized. Any institution or organization can
maintain this fund.
4. Public P.F.
This is a scheme, which is covered under
P.P.F act 1968. Any member of the public, whether
in employment or not, may contribute to this fund.
In other words, it is a scheme where there is
assessee's own contribution only.
The employee can deposit money under
PPF A/c in addition to his contribution to other P.F
schemes. The contributions made to the scheme
along with interest are repayable after 15 years,
unless extended.
53. Explain the tax treatment of different Types of Provident Funds.
Name of
fund
Employee’s
contributio
n
Employer’s
contributio
n
Interest
credited
to the
fund
What
qualifies
for rebate
under
section 88
1. S.P.F. Included in
the salary
income
Not
included in
the salary
income
Not
included
in the
salary
income
Own
contribution
2. R.P.F. Included in
the salary
income
Only excess
over 12% of
the salary
included in
the salary
income
Only
excess
9.5 % of
the rate
included
in the
salary
income
Own
contribution

16. 16
3. U.R.P.F Included in
the salary
income
Not
included in
the salary
income year
to year
Not
included
in the
salary
income
year to
year
Own
contribution
is taxable
nothing
qualifies for
rebate
4. P.P.F Included in
the total
income
Question
does not
arise
Not
included
in the
total
income
Own
contribution
54. List any 10 allowances, which are fully taxable.
55. List any 10 allowances, which are partially taxable.
1. Fully exempted allowances:
1. Allowance to government employees outside India
2. Foreign allowance given by govt to it’s employees
posted abroad
3. HRA given to judges of high court and supreme
court
4. Sumptuary allowance given to judges of high court
and Supreme Court.
2. Fully taxable allowances: (M.com 2005) (2004 B.com)
1. Dearness allowance
2. City compensatory allowance
3. Medical allowance
4. Lunch/Tiffin allowance
5. Overtime allowance
6. Servant allowance
7. Wardenship allowance
8. Non – practicing allowance
9. Family allowance
10. High cost of living allowance.
11. marriage allowance
12. deputation allowance
13. project allowance
14. water and electricity allowance
15. entertainment allowance (if non - govt employees)
3. partially taxable allowances:
1. HRA
2. Entertainment allowance (if govt employees)
4. Specific or special allowances – Section 10 (14)
1. When exemptions depends upon actual
expenditure by the employee:
1. Traveling allowance- to meet cost of travel on
tour
2. Transfer allowance – to meet cost of travel on
transfer
3. Daily allowance – to meet expenditure on tour
4. Conveyance allowance – to meet expenditure
on conveyance in performance of duties of an
office.
5. Helper allowance
6. Academic allowance
7. Uniform allowance
8. Research allowance
2. When exemptions does not depends upon actual
expenditure by the employee:
1. Children education allowance - 100 p.m. per
child up to a maximum of 2 children
2. Hostel expenditure allowance - 300 p.m. per
child up to a maximum of 2 children.
3. Tribal area allowance - 200 p.m.
4. Composite hill compensatory allowance or high
altitude allowance etc - Exemption varies from
Rs. 300 to Rs. 7,000 p.m.
5. Border area, remote area, disturbed area
allowance - Exemption varies from Rs. 200 to
Rs. 1,300 p.m
6. Transport allowance - If for the purpose of
commuting between the place of his residence
& the place of his duty, exempt up to Rs. 800
p.m. (If the employee is blind or orthopaedically
handicapped with disability of lower
extremities, is exempted up to Rs. 1,600)
7. Underground allowance - 800 p.m.
8. Allowance allowed to employees working in
any transport system -70% of such allowance
or Rs. 6,000 p.m. whichever is less

17. 17
56. List any 10 tax-free perquisites. (2001 B.com), (2002
B.com),( 2003 B.com) (2009 B.com)
1. Free refreshments
2. Free recreational facilities
3. Cost of refresher course attended by employee met
by employer
4. Provision of free subsidized food if given to all
employees
5. Payment of telephone bills by the employer for
telephone installed at the residence of the
employees
6. Free use of lap top/ computer
7. Free ration received by members of armed forces
8. Perquisites allowed by govt to its employees posted
abroad
9. Free conveyance provided by employer to
employees for going to or coming from place of
employment
10. Conveyance facilities to judges of Supreme Court
and high court
11. Scholarship paid by employer to the children of
employees
12. Employer’s contribution to staff group insurance
scheme or pension scheme
13. Shares or debentures issued under ‘stock option
plan’
57. List perquisites, which are taxable for all employees.
(2007 B.com) ( 2011 B.com)
1. Rent free accommodation provided by employer to
employees
2. Residential accommodation provided by employer
to employee at concessional rate.
3. Any obligation of the employee met by employer
e.g. employee’s club bill paid by employer
4. Any life insurance premium on the life of the
employee or any member of his family paid by
employer.
58. List any 10 perquisites, which are taxable for
specified employees only. (2003 M.com)
1. Domestic servants (watchman, gardener, sweeper,
personal assistant)
2. Supply of gas, electricity or water for household
consumption
3. Education facility
4. Transport facility allowed by transport
undertakings (other than railway employees)
5. Medical facility
6. Any other perquisites If bills are not issued in the
name of employee, and paid by employer
Chapter 5.
Income from House Property.
59. What are the important points to be remembered
before including an income under the head ‘income
from house property’?
1. The property should consist of any building or land
appurtenant there to.
2. The Assessee should be the owner of the property.
3. For the tax incidence actual receipt of the income
by the Assessee is not required.
4. If the House Property is used by the owner for the
purpose of his business or profession, it is not
taxable under this head.
60. When income from house property is not taxable?
1. Income from agricultural building
2. Annual Value of 1 palace of the Ex- Indian Ruler
3. Income from house property owned by:
1) Local authority
2) Development authority
3) Scientific research association
4) Games or sports association
5) Register Trade union
6) Trust wholly for Charitable & religious
purpose
7) Political party
8) Income of a statutory authority set up for
marketing of commodities, from letting of
godowns or ware houses for storage etc of the
commodities meant for sale.
9) Income from property used for assessee’s own
business or profession
10) Income from self-occupied house
11) Income from house property of a mutual
concern (club)
61. How do you treat property occupied by the owner
for his own business or profession?
Annual value of property, occupied by the owner
for the purpose of his own business or profession, is
not assessable under the head income from house
property, if profit of such business or profession is
chargeable to tax. This rule is applicable even if in a
particular year, income from business or profession is
nil or there is loss.
62. How do you treat income from a house property in a
foreign country?

18. 18
A resident & ordinarily resident Assessee is taxable
under the head income from house property in respect
of annual value of a property situated in a foreign
country.
A resident but not ordinarily resident or a non-resident
is however, chargeable to tax under this head
in respect of income of a house property situated
abroad, provided income is received in India during
the Previous year.
63. How do you treat ‘income from subletting’?
Income from subletting is not taxable as income
from house property. For instance, X owns a house
property. He lets it out to Y (rent being Rs. 10,000
p.m.). Y sublets it to Z on monthly rent of Rs. 40,000.
Rental income of X is taxable under the head ‘income
from house property.’
Since Y is not the owner of the house, his rental
income from Z is not taxable under the head ‘income
from house property,’ but is taxable as business
income u/s. 28 or as income from other sources u/s.
56.
64. Define Annual Value? (2003 B.com) (2003 B.com)
(2004 B.com) (2004 M.com) ( 2011 B.com)
The subject matter of computing income
under this head is the ‘Annual Value’ of the property.
The expression ‘Annual Value’ has been defined in
Section 23 (1) of the Income tax as:
The sum for which property might
reasonably be expected to let from year to year, or
Where the property or any part of property is
let & the actual rent received or receivable by the
owner is in excess of the reasonable rent, the amount
of rent received or receivable; or
Where the property or any part of the
property is let & was vacant during the whole or any
part of the P.Y. & Owing to such vacancy the actual
rent received or receivable by the owner in respect
there of is less than the sum referred in (a), the amount
as received or receivable
65. How do you compute Gross Annual Value?
While computing the Annual Value of a house
property, the following 4 factors are to be considered.
1. Rent received or Receivable
2. Municipal valuation of the house property.
3. Fair rental value (i.e., Rent received or
receivable for similar property in the same or
similar locality.)
4. Standard rent (i.e., Rent fixed according to rent
control act.) (2010 B.com) (2009 B.com)
Abbreviation:
1. M.R.V = Municipal Rental Value
2. F.R.V = Fair Rental Value
3. S.R. = Std Rent
4. E.R.V = Expected rental value
5. A.R.V. = Annual rental value
6. U.R. = Unrealized rent
7. G.A.V = Gross Annual Value
M.R.V F.R.V
higher S.R.
Lower
(E.R.V
)
A.R.V _
( rent for
the period
of self
occupation)
higher
(-) loss due to vacancy
= GAV
66. How do you compute income from house property?
What is the standard deduction allowed for a let out
house. (2006 B.com)
Gross annual value (GAV) xx
- Municipal tax paid xx
- Unrealized rent
Net Annual Value xx
- Deductions u/s. 24:
1. 30% of the Net Annual Value(std
deduction) xx
2. Interest on loan xx xx
Income from house property xx
67. What is unrealized rent? How is it treated for
income tax act purpose ? (2007 B.com) (M.com
2005.)
The amount of rent which the owner cannot
realise from the tenant is called unrealized rent. It is
deducted from rent receivable for determining gross
annual value.
Where the assessee cannot realise rent from a
property let to a tenant and subsequently the assessee
has realized any amount in respect of such rent, the
amount so realized shall be deemed to be income
chargeable under the head “Income from house
property” and accordingly charged to income-tax as
the income of that previous year in which such rent is
realized whether or not the assessee is the owner of
that property in that previous year.

19. 19
68. What are the deductions allowed u/s. 24 in
computing income from house property? (2001
B.com) (2002 B.com) (2003 M.com)
(a) Standard deduction
30 % of net annual value is deductible
irrespective of any expenditure incurred by the
taxpayer
(b) Interest on borrowed Capital
Interest on borrowed Capital is allowed as
deduction on accrual basis, if Capital is
borrowed for the purpose of purchase,
construction, repair, renewal or reconstruction of
the house property.
69. How do you treat Interest for Pre- Construction or
Pre- Acquisition Period? (2001 B.com) (2004 M.com)
Pre-construction period’ means the period
commencing on the date of borrowing & ending on -
1. March 31 immediately prior to the date of
completion of construction / date of acquisition or
2. Date of repayment of loan,
Whichever is earlier.
Interest for pre-construction period is
deductible in 5 equal installments. The first
installment is deductible in the year in which
construction of property is completed or in
which property is acquired.
70. What are the Deductions from net annual value in
the case of a let out house? (Sec: 24)? (2003 M.com)
1. Standard
deduction
- 30% of the net annual value
every year whether claimed or
not
2. Interest on loan
taken to
purchase,
construct or
repair or
renovation of the
house
- Interest on borrowed
Capital (Total of current year
& pre-construction period) is
deductible (there is no
maximum limit).
Interest on mortgage is
not allowed as deduction
unless purpose of loan is
connected with house.
71. What is the treatment of house property used for
own residence? And What are the Deductions from
Net Annual value in the case of a Self occupied
house: (Sec: 24)?
The net annual value of a self-occupied house is taken
as nil. Deductions are:
1. Standard
deduction
-
nil
2. Interest on
loan taken
to
purchase,
construct
or repair
or
renovation
of the
house
- Interest on borrowed Capital (Total
of current year & pre-construction
period) is deductible up to Rs.
30,000
But if the following 3 conditions
are satisfied it is deductible up to Rs.
1, 50,000
1. Capital is borrowed on or after
1.4.99
2. Construction or acquisition is
completed between 1-4-99 &
31-3-2002.
3. Capital is borrowed for
acquisition or construction only
(not for reconstruction, repairs
or renewals etc. )
72. What is Real Rental Value?
Some times the owner takes upon himself the
burden of providing certain facilities to the tenant,
e.g.,
a) Lift and pump maintenance
b) Salary of common gardener and watchman,
c) Vehicle parking
d) Lighting of common stairs and corridors
e) Payment of Water and electricity bills. (Only if it
is 0mentioned that rent includes them)
f) Swimming pool expenses
Such costs can be deducted out of actual rent
received and the balance is called ‘Real Rental
Value’. Then to find out Gross Annual Value instead
of ‘rent received’, ‘real rental value’ is considered.
But in case the cost of facilities is charged
separately by owner i.e. over & above the rent, it is
treated as a separate source of income. The expenses
incurred on such facilities are deducted out of amount
so collected & balance (income of loss) is taxable
under the head ‘Income from other sources’

20. 20
73. What are the important points to be remembered
while calculating Income from house property?
a) The assessee has only
one Self occupied
property
- The net annual
value of the self
occupied house
shall be taken as
nil if the following
conditions are full
filled:
House is used by
an individual
for the
residential
purpose only
House or any part
of the house is
not actually let
during the
P.Y. or part of
that P.Y.
No other benefit is
derived from
such a house
b) If the assessee has More
than 1 house under own
occupation
- Annual value of 1
house is taken as
nil & other house/
houses are deemed
as let out
c) House property consists
of various independent
units & 1 is under own
occupation & others are
let out
- Annual value of 1
unit is taken as nil
& other unit / units
are treated as let
out
d) If the house property is
self-occupied for a part
of the year & let out for
remaining part of the
year
- It will be deemed
to be let out for the
whole year.
e) If the House property is
used for own business or
profession
- It is not treated
under the head
house property
f) If the house property is
not actually occupied by
the owner owing to
employment or
business/profession,
carried on at any other
place
- It will be treated as
a self occupied
house & net
annual value is nil.
Only one
deduction i.e.
Interest on Capital
is allowed.
Chapter 6.
Profits & Gains of Business.
74. What are the incomes taxable under the head
‘Business Income.’?
This is the third head of income of the
Assessee. The business may be trading,
manufacturing, service-providing business. It may be
registered, unregistered, legal, illegal etc. Even
though, the profits and gains are taxable under this
head.
Here profit mans the income earned from
main activities or main object of the business. Gain
means any other revenue income generated during the
business.
Under this head, the profits and gains of any
type of business or profession and also from vocation
is taxable.
75. Why Capital & Revenue items are differentiated
while calculating business income?
The total business transactions may be
classified in to transactions of capital nature or
revenue nature according to their characteristics.
Capital transactions may be further classified in to:
· Capital expenditure
· Capital receipts (M.com 2005)
Capital expenditure means expenditure for purchasing
fixed assets and long-term securities.
Capital receipts means the amount realized on sale,
transfer etc of the capital or fixed assets.
While computing the business income of an
Assessee, the capital expenditure and capital receipts
are not to be considered.
76. What is capital expenditure? State any 4 examples of
capital expenditures: - (2002 Dec. M.com) (2005
B.com) (2007 B.com) (2006 B.com) ( 2011 B.com)
· Any expenditure incurred to acquire a fixed asset
or in connection with the installation off fixed
asset. E.g., purchase of land & amount spent for
registration are Capital expenditures.
· A payment made by a person to discharge a capital
liability. E.g, amount paid to a contractor for
cancellation of contract to construct a factory
building
· Expenditure incurred to acquire a source of income
E.g, purchase of patent to produce picture tubes of
TV sets.
· Amount spent on increasing the earning capacity of
an asset. E.g, acquisition of additional plants.

21. 21
77. What are Revenue transactions? (2003 Dec. M.com)
While computing the business income all
revenue income (i.e., the income from day to day
activities of the business) to be considered as income
and from which all revenue expenses are to be
deducted.
78. What are the Deductions Expressly Allowed While
Computing Income from Business?
1. Expenditure in respect of business premises; it’s
rent, repairs, insurance, land revenue, local taxes,
Depreciation etc.
2. Expenditure in respect of machinery, plant &
furniture: its repairs, insurance, Depreciation etc.
3. Expenditure on acquisition of patent rights
4. Expenditure on acquisition of know-how
5. Expenditure to obtain license to operate
telecommunication services
6. Payments to associations for approved rural
development programmes
7. Amortization of preliminary expenses
8. Payment to associations for carrying out
programmes of conservation of natural resources
79. What are the Deductions Expressly Disallowed
While Computing Income from Business? (2001
B.com, 2003 B.com) (2003 B.com) (2006 B.com)
1. Expenditure for advertisement in any souvenir etc
published by a political party.
2. Wealth tax
3. Tax on profits & gains e.g. income tax
4. Salaries payable outside India (if tax has not been
deducted at source)
5. Payments to P.F. (unless it is ensured that tax shall
be deducted at source from any payments from
such fund.)
80. What is ‘Block of assets’ or what is ‘block system’ of
Depreciation? (2001 B.com) (2003 M.com) (2003
M.com) (M.com 2005) (2010 B.com)
According to Income Tax rules the Depreciation is
to be computed on ‘Block of Assets’.
‘Block of assets’ means a group of assets falling
within a class of assets comprising:
1. Tangible assets, being buildings, machinery,
plant or furniture
2. Intangible assets, being patents, copy rights,
trade marks, licenses,
in respect of which the same % of
depreciation is prescribed.
81. How do you compute business income if you are
given a Profit & Loss A/c?
Net Profit As Per P & L A/C. xx
(+) Inadmissible expenses (recorded in Profit & Loss
A/c)
xx
(-) Expenses allowed (not recorded in Profit & Loss
A/c)
xx
(+) Incomes not recorded in Profit & Loss A/c xx
(-) Incomes to be shown under any other head xx
(-) Income exempted from tax xx
Profits From Business xx
82. What is the treatment of expenditure on technical
know- how?
Expenditure incurred on or before 1-4-98 for
acquisition of any know-how for the purpose of
business will be allowed as deduction in 6 equal annual
installments commencing from the year in which such
expenditure is incurred.
If such know-how is developed in a lab owned or
financed by the government or a university, deduction
will be allowed in 3 equal annual installments.
83. Explain the treatment of patent right: - (2002
M.com.)
Any expenditure, incurred in acquiring patent
rights used for the purpose of the business, is
allowable as business expenditure in equal
installments over a period of 14 years. If this
expenditure is incurred on or after April 1, 1998, then
one can claim depreciation @ 25%.
84. How do you Compute Business Income?
Net profit as per Profit & Loss A/c x
Add: Expenses debited to Profit & Loss A/c, but
not allowed:
1. All provisions & reserves except
creation of reserve by financial
corporations u/s. 36
x
2. All taxes (i.e. income tax, advance
income tax, wealth tax etc.) except
sales tax, excise duty & local taxes of
premises used for business.
x
3. Rent paid to self x
4. All Capital expenses except on
scientific research
x
5. All Capital losses x
6. All charities & donations x
7. All expenses relating to other heads of
income (e.g. taxes on house property)
x
8. Cultivation expenses x

22. 22
9. Any Interest on Capital unless the
amount is borrowed
x
10. All personal expenses (drawings etc) x
11. Any depreciation if wrongly debited x
12. Gifts & presents (non advertisement) x
13. Any type of fine or penalty x
14. Any payment to a partner (in case of
firms only by way of salary, Interest,
bonus, commission or remuneration
excess over specified limits)
x
15. Any salary or Interest payable outside
India unless tax is deducted at source or
is paid according to the law
x
16. Past losses (loss of the past years) x
17. Any other expenditure which is not
incurred according to the provisions of
law
x
18. Salary paid to self or any other member
of family for casual help
x
19. Personal life insurance premium x
20. Any amount invested in savings such as
NS, NSC, PPF etc
x
21. Rent for residential portion x
22. Speculation loss x
23. Bad debt still recoverable x
24. Legal expenses on criminal case or a
personal case of employee
x
25. Legal expenses on acquiring an asset x
26. Legal expenses on curing title of asset x
27. Loss by theft from residence x
28. Expenses on illegal business x
29. Employer’s contribution to URPF x
30. Difference in Trial Balance x
31. Difference due to under crediting of
stock
x
32. Cost of patent rights being Capital
expenditure
x
33. Cost of technical know-how being
Capital expenditure
x
34. Preliminary expenses being Capital
expenses
x x
Less: Expenses not debited to Profit & Loss A/c
but allowed:
1. Actual bad debts (not charged in Profit
& Loss A/c)
x
2. Depreciation (not charged in Profit &
Loss A/c)
x
3. Any other expenditure incurred
according to provision of law
x
4. Difference due to under debiting of
stock
x x
1. 2.
Less: Incomes credited to Profit & Loss A/c but
exempted from tax
1. Post office savings bank Interest x
2. Agricultural receipts x
3. Gifts from relatives x
4. Income tax refund x
5. Bad debts recovered – disallowed
earlier
x
6. Life insurance maturity amount x
7. Any Capital receipt x
8. Withdrawal from P.P.F x x
Less: Incomes credited to Profit & Loss A/c but
taxable under other heads
1. Part time salary x
2. Interest on securities x
3. Rent from house property let x
4. Capital gain x
5. Dividend, bank Interest, winnings from
lotteries, racings etc
x x
Income from business x
Chapter 7.
Capital Gains
85. What is a Capital Asset? (2002 B.com) (M.com -
Dec02) (2003 B.com) (2004 B.com)
Capital asset means property of any kind held
by an assessee whether or not connected with his
business or profession.
Thus any asset whether used for business or
not, whether tangible or intangible, movable or
immovable, is capital asset. For example, land,
buildings, P & M, vehicles, shares, goodwill, patents,
goodwill etc.
Following are not ‘Capital Assets’:)
1. Any stock in trade, raw materials, consumable
stores held by any assessee for the purpose of his
business or profession.
2. ‘Personal Effects’ including wearing apparel,
motor car, electrical appliances, refrigerator,
furniture etc. (Jewellery is excluded from personal
effects)
3. Agricultural land situated in rural area

23. 23
4. Gold Bonds 1977, 1980 or National Defense Gold
Bonds-1980 Issued By the Central Govt.
5. Special Bearer Bonds 1991
6. Gold Deposit Bonds Issued Under Gold Deposit
Scheme.
86. Explain the procedure for computation of Capital
gain under Income Tax act 1961: - (2002 B.com.)
87. What do you mean by Capital Gains? (2003 Dec.
M.com)
Any profits & gains arising from the transfer
of a capital asset effected in the previous year shall
be chargeable to income tax under the head ‘Capital
Gains’ & shall be deemed to be the income of the
previous year in which the transfer took place.
An income, to be charged under the head
‘Capital Gains’, should satisfy the following
conditions:
1. There should be a capital asset
2. The capital asset should be transferred
3. Transfer should result in profit or gains.
88. What are the different Types of Capital Assets?
The capital assets have been divided in to:
1. Short-term capital asset &
2. Long-term capital asset
89. What is Short-Term Capital Asset & Short-Term
Capital Gain? (2003 M.com) (2004 M.com) (2002
Dec. M.com) (2005 B.com)
Short-term capital asset means a capital asset
held by an assessee for not more than 36 months
immediately preceding the date of its transfer.
In the case of the following assets, the period
of 36 months shall be substituted by 12 months.
Shares in a Co.
Any other security listed in a recognized stock
exchange in India
A unit of the UTI
A unit of the Mutual Fund
Capital Gain arising from the transfer of
Short-term capital asset is called Short-Term Capital
Gain.
90. What is Long-Term Capital Asset & Long-Term
Capital Gain? (2001 B.com) (2003 M.com) (2004
M.com) (M.com 2005) (2006 B.com) (2010 B.com)
Long term Capital asset means a capital
asset, which is not a Short-term, capital asset. Capital
Gain arising from the transfer of long-term capital
asset is called Long-Term Capital Gain.
91. Discuss the difference in treatment of short term &
long term Capital gain? (2001 B.com) (2007
B.com)
At the time of calculation of tax liability,
long term capital gain is taxed separately at a flat rate
of 20%. Short term capital gain is taxed at normal tax
rate.
92. Define ‘Transfer’?
Capital Gain arises only when capital asset is
transferred. The term ‘transfer’ in relation to a capital
asset includes:
1. Sale, exchange, or relinquishment of a capital asset
2. Extinguishments of any rights in a capital asset
3. Compulsory acquisition of a capital asset under any
law
4. Conversion of capital asset in to stock in trade
(When the owner of an asset converts it into or
treats it as stock in trade of a business carried on by
him, such conversion is regarded as ‘Transfer’.)
93. How do you compute Long-Term Capital Gain?
STC
= Full value of
G
consideration –
(Cost of acquisition +
cost of improvement +
selling expenses)
94. How do you compute Short-term Capital Gain?
LTC
G
= Full value of
consideration –
(Indexed cost of
acquisition + indexed
cost of improvement +
selling expenses)
95. What is Cost Inflation Index?
This index is notified by central Government
having regard to average rise in the consumer price
index. It is used for the calculation of Long-term
Capital Gain.
Year C.I.I. ChapteYre a1r. C.I.I.
81-82 100 96-97 305
82-83 109 97-98 331
83-84 116 98-99 351
84-85 125 99-00 389
85-86 133 00-01 406
86-87 140 01-02 426
87-88 150 02-03 447

24. 24
88-89 161 03-04 463
89-90 172 04-05 480
90-91 182 05-06 497
91-92 199 06-07 519
92-93 223 07-08 551
93-94 244 08-09 582
94-95 259 09-10 632
95-96 281 10-11 711
INDEXING AT A GLANCE
Asset How indexed.
1. Short Term Capital
assets
No indexing
2. Bonds or debentures ’’
3. Depreciable assets ”
4. Assets acquired
before 1-4-81
Cost or F.M.V (higher) x
711100
5. Improvements made
before 1-4-81
No indexing, because not
considered
6. Assets acquired
after 1-4-81
Cost x 711
Index for the year of acquisition
7. Improvements made
after 1-4-81
Improvement cost x 711
Index for the year of
improvement
8. Inherited before 1-4-
81
Cost to the previous owner or
F.M.V (higher) x 711
Index for the year in which the
Assessee became the owner of
the property
9. Inherited after 1-4-
81
Cost to the previous owner x
711
Index for the year in which the
Assessee became the owner of
the property
96. Explain the capital gain exempt from tax: -, explain
the provisions of Income Tax relating to capital gain
exempt from tax: - (2004 M.com)(2005 B.com)
(M.com 2005)
Go through the next 4 questions.
97. What is Section: 54?
(Sale of Residential House Property.)
That part of Capital Gain of individual &
H.U.F from sale of such house property which is long-term
capital asset, is exempted which is invested in –
1. Purchase of another house within 1 year before or
2 years after the sale.
2. Construction of another house within 3 years after
the sale.
98. What is Section: 54 B?
(Sale of self-cultivated agricultural land)
That part of Capital Gain from the sale of
land is exempted which is reinvested in purchase of
another piece of land within 2 years after sale.
99. What is Section: 54 EC?
(Sale of any long-term capital asset.)
Investment of Long-term Capital Gain within
6 months from date of sale in Bonds issued:
By National bank for Agriculture & Rural
Development (NABARD) or
By National Highways Authority Of India
By Rural Electrification Corporation Ltd.
By National housing Bank or
By small industries development bank of India (SIDBI)
is exempted. The new bonds cannot be sold
or transferred for a period of 5 years.
100.What is Section: 54 F?
Capital Gain on transfer of a long-term capital asset
other than a house property.
The provisions of this section are:
The Assessee is an individual or a H.U.F
The asset transferred is any Long-term capital asset
other than a residential house.
The Assessee has purchased 1 year before or 2 years
after the date of transfer or constructed within 3
years after the date of transfer, a residential house.
The amount of exemption is the net consideration
from sale of capital asset invested in new house.
· If whole amount of net consideration is
invested, the whole amount of Capital Gain
is exempt.
· If only a part of net consideration is invested,
Capital Gain will be exempt proportionately
as follows:

25. 25
Capital Gain x Cost of new house
Net consideration
Chapter 8.
Income from Other Sources.
101.Which is Residuary Head’ of income?
The head ‘income from other sources’ is known as
residuary head of income. Because, An income which
does not come under the 1st 4 heads is to be charged
under this head.
102.List incomes chargeable under the head ‘Income
From Other Sources’: - (2001 B.com, 2003 B.com)
(2004 B.com) (2006 B.com)
1. Dividends
2. Winnings from lotteries, crossword puzzles, races
including horse races, card games, gambling etc.
3. Any sum received by the assessee from his
employees as contribution to staff welfare schemes.
4. Interest on securities.
5. Income from machinery, plant, or furniture let on
hire
6. Income from letting of plant, machinery, or
furniture along with the building
7. Income from sub-letting
8. Agricultural income from land situated outside
India
9. Examinership fees received by college teachers
10. Interest on deposit received from bank & other
financial institutions
11. Director’s fees
12. Salary received by an M.P.
13. Income from undisclosed sources
14. Insurance commission
15. Family pension received by family members of
deceased employee.
16. Ground rent received.
103.What are the Deductions permissible from ‘Income
from Other Sources’? (2003 M.com)
1. Commission paid to a banker for collecting
dividend or Interest on securities
2. In the case of income by way of letting of plant,
machinery, furniture, or buildings, the following
expenses are deductible:
· Current repairs of buildings
· Insurance premium paid in respect of
insurance against risk of damage or destruction
of the premises
· Repairs & insurance of machinery, plant &
furniture.
· Depreciation
3. In the case of income by way of family pension
(2007 B.com) (2009 B.com) ( 2011 B.com)
Rs. 15,000 or 1/3 of pension, whichever is less.
4. Any other expenditure incurred wholly &
exclusively for the purpose of earning that income.
E.g. Interest on money borrowed to purchase
104.What is Tax Deducted at Source (T.D.S) or
deduction of tax at source?. What is the object of
deduction of TDS? (2003 B.com) (2002 B.com) (2003
B.com)(2005 B.com)(2006 B.com) (2007 B.com)
(M.com 2006) (2010 B.com) 2011 bcom.
Income tax act makes it obligatory for certain
persons to deduct tax & surcharge from certain
payments at prescribed rates & to pay the tax so
deducted to the credit of Central Govt within the
prescribed time.
· Tax should be deducted at source from the
following payments:
1. Salary
2. Interest on securities
3. Winnings from lotteries
4. Winnings from horse races
5. Payment to contractors
6. Payment of insurance commission etc.
105.What is Bond-Washing Transactions? (Sec. 94)?
(2003 B.com) (2003 B.com) (2004 B.com) (2004
M.com) (2005 B.com)
A bond washing transaction is one, which
consists of selling securities to a friend or relative who
does not have any taxable income.
This transfer is done some time before the
payment of Interest. After payment of Interest, the
securities will be purchased back. This is to evade tax
because Interest income will be included in the income
of the transferee, (friend or relative) who may, not
have taxable income.
To prevent evasion of tax in this manner, section
94 provides that where a security owner transfers the
securities some time before payment of Interest &
reacquires them, the Interest received by the transferee
will be deemed as income of the transferor &
accordingly, it will be included in the total income of
the transferor & not of the transferee.
106.Explain different types of securities & treatment of
income received from those securities.
Securities can be classified in to:
1. Securities of the Central Govt or a State Govt

26. 26
2. Tax-free Commercial securities
3. Less tax Commercial securities
1. Govt. Securities .
Such securities are issued either by the Central
Govt or a state Govt. No tax is deductible on such
securities. Hence, the Interest on such securities will not
be grossed up. The amount received or declared as the
case may be, will be added in the income.
2. Tax-free Commercial Securities. (2004 M.com)
(2003 M.com)
Such securities are issued by the companies. In fact
these securities are not tax-free. These securities are
called tax-free from the point of view of the investor.
The investor is not liable to pay tax on the Interest on
such securities.
The investee Company pays Interest at a Fixed rate
as mentioned on the face of the security to the investor
& the tax to the Govt from it’s own pocket on behalf of
the investor.
While computing the income of investor the gross
amount (Interest received plus the tax paid by the
company to the Govt) is included in the income of the
investor. However, the amount of tax paid by the
company on this Interest is deducted from the total tax
payable by the Assessee & the balance of amount left is
payable by the Assessee as tax.
3. Less Tax Securities: (2003 M.com) (2007 B.com)
All securities if they are not tax free, are less-tax
securities whether the word ‘less-tax’ is mentioned on
the face of the security or not. Generally, ‘less tax’
signifies that before making the payment of Interest, the
tax at the rate in force shall be deducted at source &
deposited in the treasury on behalf of the investor.
In the case of these securities, income tax is
deducted at source on the amount of Interest calculated
at the percentage stated on the securities & the balance
of amount of Interest left after deduction of the afore
said income tax is paid to the security holder.
Where the rate percentage of Interest is given
it is not grossed up, as it is already the gross
amount of Interest & Income Tax is to be deducted
there from. If in
the case of these securities the net amount of
Interest received is given, it has got to be grossed up.
In any case, it is the gross amount of Interest that
is included in the total income of the Assessee.
107. What is Grossing-up of Interest?
If the securities are held by an assessee as a
fixed asset, Interest received on them will be taxable
under the head ‘Income From Other Sources’.
It is the ‘Gross Interest’, which is taxable. That
is net Interest + tax deducted at source Co.
If net Interest is given, it should be grossed up
by the following formula:
Net Interest x 100
100 - Rate of TDS
108.What are the rules for Grossing up of Interest on
securities?
1. Govt securities - The Interest is not
grossed up.
2. Tax-free commercial
securities
- Interest is always
grossed up
3. Less tax securities - If Interest received
is given, it is
always grossed up
4. Less tax securities
(If the rate of Interest &
amount of investment on the
basis of face value of
security are given)
- Not grossed up, as
it is already the
gross amount of
Interest.
Rate of TDS
1. Interest on security issued by
statutory bodies or local
authority
- 10. %
2. Listed debentures - 10. %
3. Unlisted debentures - 10. %
4. Casual incomes - 30. %
a) Gross Interest =
Net
Interest x 100
100 – TDS rate
Chapter 9
Assessment.
109.What is Best Judgment Assessment (BJA) u/s. Sec
144 (Ex-Parte Assessment)? (2002 B.com) (2003
M.com) (2004 M.com)
In the following cases the A.O. is under an
obligation to make an Assessment of the Total Income
of the Assessee:

27. 27
1. If the assessee has not filed the return or belated
return or revised return.
2. If the assessee fails to comply with all the terms
of a notice issued requiring the assessee to:
a) File a return or produce accounts or furnish
information called for
b) Get the accounts audited & furnish the audit
report
c) Ensure his attendance or produce evidence
supporting the return filed.
· The BJA can be made only after giving the
assessee an opportunity for being heard.
· It is known as BJA, as the A.O., in spite of non –
compliance & non – cooperation of the assessee is
expected to make the Assessment to the best of
his judgment.
· It is known as Ex-Parte assessment since the
Assessment is made without the Cooperation of
the party concerned.
110.What is Income-Escaping Assessment? (2002 B.com)
(2004 M.com)
If the A.O. has reason to believe that any income
has escaped assessment for any Assessment year, he
may reassess such income.
In the following cases it shall be deemed that
income chargeable to tax has escaped assessment.
1) Where no return of income has been furnished by
an assessee although the income is above the non –
taxable limit.
2) Where a return of income has been furnished but
no assessment has been made & the Assessee is
found to have understated hiss income or claimed
excess deduction etc., in return.
3) Where an assessment has been made but-a.
Income chargeable to tax has been under
assessed or
b. Such income has been assessed at too low
a rate; or
c. Excessive loss/ Depreciation allowance or
any other allowance under the act has
been computed.
If Re-Assessment is made the tax shall be
chargeable at the rate at which it would have been
charged had the income not escaped Assessment.
111.What is Self-Assessment? (Sec- 140 A) (2003 B.com.)
(M.com 2006)
Where any tax is payable on the basis of any
return required to be furnished, (u/s. 139, 142, 148 or
158 BC), after taking in to A/c the amount of tax, if
any, already paid (as advance tax, TDS), the assessee
shall be liable to pay such tax together with Interest
payable for any delay in furnishing the return or any
default in payment of advance tax before furnishing
the return & the return shall be accompanied by proof
of payment of such tax & Interest.
It follows that the assessee shall have to first
pay the amount of tax & Interest before furnishing the
return of income.
It means that even if amount of tax & Interest
is payable on the basis of return (after adjusting tax
already paid) is very low, that shall have to be paid
first before furnishing the return of income.
Explanation:
Where the amount paid by the assessee on
self assessment falls short of the aggregate of tax &
Interest payable, the amount so paid shall first be
adjusted towards the Interest payable & the balance, if
any, shall be adjusted towards the tax payable.
If any assessee fails to pay the whole or any
part of such tax or Interest or both he shall be deemed
to be an ‘Assessee In Default.’
112.When is a return of income regarded as defective?
What are the consequences of a defective return of
income? (M.com 2006)
A return of income can be regarded as defective
by the A.O. under the following circumstances:
a) Annexure, statements & columns in the return of
income has not been duly filled
b) Return of income has not been accompanied by –
I. Statement showing computation of tax
on returned income.
II. Proof of tax deducted at source, advance
tax paid & self-assessment tax paid
III. Tax audit report or copy of such report
together with proof of furnishing the
report on earlier date.
c) Where regular book of A/c are maintained, the
copies of manufacturing A/c or trading A/c or
Profit & Loss A/c or Income & expenditure A/c
or any other similar A/c & the B.S. has not been
furnished. Similarly where no copies of personal
A/c of the proprietor, partner or member a
A.O.P. / B.O.I has been filed;
d) If accounts are audited & copies of audited copies
of A/c & auditor’s report have not been filed.
e) Where regular books are not maintained, a
statement indicating the amount of turnover or
gross receipts, Gross profit, expenses, & net
profits & the basis there of together with the
amount of total sundry Debtors, sundry Creditors
stock in trade, & cash balance at the end of the
Previous year have not been filed.
113.What is Permanent Account Number? (PAN) Sec.
139 A. Explain the procedure for the allotment of
this number & its use? (M.com - 03) (2003 B.com)
(2003 M.com)
This is a number allotted by the Income Tax
Department to a person who files return of income. This

28. 28
helps the department to identify returns subsequently &
enables quick disposal of Assessment.
Every person:
1) Whose Total Income exceeds non taxable
limit or
2) Any other person carrying on business or
profession whose total sales or gross
receipts are likely to exceed Rs. 5,00,000 in
any Previous year & has not been allotted
any pan, is obliged to obtain PAN within
such time, as, may be prescribed.
Every person should:
a) Quote such number in all his returns or
correspondence with Income Tax
authorities,
b) Quote such number in all challans for
payment of any sum,
c) Quote such number in all documents
pertaining to such transactions as may be
prescribed by the board.
A person who has not received PAN may quote
General Index Register Number (GIR). New series
PAN contains ten alphanumeric characters & is issued
on a laminated card.
114.What is Advance Payment of Tax? ‘Pay As You
Earn’ (PAYE). (2002 B.com) (2003 B.com) (2004
B.com)) (2005 B.com)(2006 B.com) ) (2007 B.com)
(2004 M.com) (M.com 2006) (2010 B.com) (2009
B.com) ( 2011 B.com)
The scheme of advance payment of tax is also
known as ‘pay- as you earn scheme’. (PAYE). Under
this scheme, an assessee pays tax in a particular
financial year, preceding the Assessment year on the
basis of his estimated income.
Every person is liable to pay advance tax if
advance tax payable is Rs. 5,000 or more. All items of
income are liable for payment of advance tax.
An assessee who is liable to pay advance tax
is required to estimate his current income & pay
advance tax there on.
If the last day of payment of any installment
of advance tax is a day on which the receiving bank is
closed, the assessee can make the payment on the next
immediately following working day.
The date of payment of advance tax is as follows:
Corporate assessee Non-corporate
assessee
Date of payment
1. Up to 15% of
advance tax
payment
-
On or before June 15
of P.Y.
2. Up to 45% of
advance tax
payable
Up to 30% of
advance tax
payable
On or before Sept 15
of P.Y.
3. Up to 75% of Up to 60% of On or before Dec. 15
advance tax
payable
advance tax
payable
of P.Y.
4. Up to 100% of
advance tax
payable
Up to 100% of
advance tax
payable
On or before March
15 of P.Y.
115.Explain the circumstances in which a claim for
refund of tax may arise. What is the time limit for
claiming refund of tax ? (2006 B.com)
Describe in brief the procedure for claiming
refund.
Under what circumstances the A.O. can
withhold the refund? (M.com - 03) (2003 B.com)
(2004 B.com) (2005 B.com)
If the amount of tax paid by an assessee in any year
exceeds the amount, which he is properly chargeable
for that year, he is entitled to a refund of the excess tax
so paid. Thus a refund of tax arises in the following
cases:
1) Deduction of tax at source at a higher rate
2) Excess payment of advance tax
3) When relief for double taxation is due
4) Where tax liability is reduced either on A/c of
rectification of mistake or by an order passed in an
appeal.
Person entitled to claim refund:
Normally refund claim can be made only by a
person who has made excess payment of tax. How
ever, where the income of a person is included in the
total income of another person u/s. 60 to 64, the refund
can be claimed by the latter & not by the former.
For example, a minor child, whose income is
clubbed with that of the father, is not entitled to any
refund in respect of that income- it should be claimed
by the father.
If a person is unable to claim any refund due to
him because of his death, incapacity, insolvency or
any other cause, his legal representative/ trustee/
guardian/ receiver as the case may be entitled to
receive such refund.
Claim on refund should be made in form no. 30 &
verified in the prescribed manner. The refund should
be claimed within 1 year from the last day of the
Assessment year. However refund claim submitted
after the expiry of 1 year may be considered by the
A.O. if the following conditions are satisfied:
1) Amount refund does not exceed Rs. 1 lakh
2) Refund claimed is not supplementary in nature
3) Income of Assessee is not assessable in the
hands of any other person under any of the
provisions of the act.
Where refund arises as a result of any order
passed in appeal or other proceeding under the
act, the assessee need not file any formal
application.

29. 29
With holding of refund:
Where an order giving rise to a refund is the
subject matter of an appeal or where any other
proceeding under this act is pending & the A.O.
is of the opinion that grant of the refund is likely
to adversely affect the revenue, the A.O. may,
with previous approval of the commissioner,
with hold the refund till such time as the
commissioner may detain.
116.What is Tax Clearance Certificate? (2003 B.com)
(2003 B.com)(2006 B.com) (2010 B.com)
No person (a) who is not domiciled in India or (b)
who is domiciled in India at the time of his departure,
but:
1) Intends to leave India as an emigrant or
2) Intends to proceed to another country on a
work permit with the object of taking up any
employment or other occupation in that
country or
3) Any person as Income Tax authority may
deem it necessary,
Shall leave the territory of India, unless he obtains
a certificate from the duly authorized officer that he
has no liabilities under the Income Tax act.
If the owner or charterer of nay ship or air craft
carrying person from any place outside India allows
any person to travel by such ship or air craft without
satisfying himself that the person possesses the tax
clearance certificate, he shall be personally liable to
pay the amount of tax, if any, payable by such person
as the A.O. may determine.
117.What is Tax Avoidance?
Tax avoidance is the process by which the
Assessee reduces his tax liability by availing of certain
loopholes in the law. He acts legally & does not
commit any fraud, concealment & other illegal
measures.
E.g. the Assessee can avail of rebate of income
u/s. 88 by means of specified saving like LIC
premium, NSC, PF etc.
118.What is tax planning? (M.com - 03) (2004 M.com)
(2003 M.com) (2003 Dec. M.com) (M.com 2006)
Tax planning is an arrangement of one’s
financial affair in such a way that without violating in
any way the legal provisions of an Act, full advantage
is taken of all exemptions, deductions, rebates &
reliefs permitted under the act, so that the burden of
the taxation of an Assessee, as far as possible, the
least. Tax planning reduces taxability, minimizes
litigation, enables productive investment & reduces
cost.
119.What is Tax Evasion?
An assessee may show his Total Income at a
reduced figure so that his tax liability is reduced. This
is known as tax evasion. This is done by making false
claims or by withholding the information regarding his
real income.
It is an illegal, immoral, anti social & anti-national
practice. It attracts heavy penalty &
prosecution proceedings.
Examples are unrecorded sales, claiming bogus
expenses & bad debts & losses, recording personal
expenses as business expenses, non-disclosure of
incomes etc.
120.Distinguish between Tax Planning & Tax Evasion.
(M.com - 03) (2003 M.com) (2004 M.com)
Tax planning Tax Evasion
1. It is a legal right &
social responsibility
1. It is a Leal offence
coupled with penalty &
prosecution
2. It is an act within the
4 corners of the act to
achieve certain social
& economic
objectives
2. It is a deliberate attempt
on the part of tax payer by
misrepresentation of facts,
falsification of accounts,
fraud etc
3. It requires thorough
knowledge of the
relevant acts & social,
economic & political
situation of the
country
3. It requires no such
knowledge; but the
boldness to infringe the
law.
121.What are the classes of Income Tax authorities?
(2004 M.com)
Classes Income Tax authorities are:
1. The Central Board Of Direct Taxes (CBDT)
2. Directors- General of Income Tax Or Chief
Commissioners of Income Tax
3. Directors of Income Tax Or Commissioners of
Income Tax Or Commissioners Of Income Tax
(Appeals)
4. Additional Directors Of Income Tax, Additional
Commissioners Of Income Tax (Appeals)
5. Joint Directors Of Income Tax Or Joint
Commissioners Of Income Tax.
6. Deputy Directors Of Income Tax Or Deputy
Commissioners Of Income Tax Or Deputy
Commissioner Of Income Tax (Appeals)
7. Assistant Directors Of Income Tax Or Assistant
Commissioners Of Income Tax.
8. Income Tax Officers (I.T.O)
9. Tax Recovery Officers

30. 30
10. Inspectors Of Income Tax.
122.What are the general powers of Income Tax
authorities? (M.com 2006) (WRITE ANSWER OF
Questions no. 123 to )
123.What are the Powers of C.B.D.T?
CBDT is constituted under the central board of
revenue Act – 1963. It is the top most executive
authority with regard to direct taxes.
C.B.D.T is given powers to issue such orders,
instructions & directions to other Income Tax
authorities for the proper administration of the act.
But;
1. The board cannot issue any instruction to any
Income Tax authority to make a particular
assessment or to dispose of a particular case in a
particular manner.
2. The board cannot issue any instruction so as to
interfere with the discretion of deputy
commissioners (appeals) of the commissioners
(appeals) in the exercise of his appellate
functions.
124.What are the powers of Director General or
Director?
The director general is appointed by the central
Govt. he is required to perform such functions as may
be assigned by the CBDT. His powers are:
1. Giving instructions to the Income Tax officers
2. Enquiry or investigation in to concealment
3. Search & seizure
4. To requisite books of A/c
5. Power of survey
6. Power to make any enquiry
125.What are the powers of commissioners of Income
Tax (CIT)?
Commissioners of Income Tax are appointed by
the central Govt. they are appointed to administer the
Income Tax departments of a specified area. CIT
enjoys both administrative & judicial powers. Some of
his powers are:
1. Search & seizure
2. Granting registration
3. Appointment of class ii Income Tax officers &
inspectors
4. Assigning jurisdiction to inspecting assistant
commissioners & I.T.OS
5. To authorize the ITO to recover any arrear of tax
due from an assessee by sale of his moveable
property
6. Reduction or waiver of penalty in some cases
7. To award & withdraw recognition to provident
funds
8. Transfer cases from one ITO to another
9. Revision of orders passed by ITO, which is
prejudicial to the revenue
10. Reference to the high court.
126.What are the Powers of commissioners? (Appeals)
Commissioner (appeals) is an appellate
authority. He is appointed by the central Govt to head
a specified area. His judicial powers are:
1.Acceptance & disposal of appeals
2.Power to call for information or production of
evidence
3.Power to inspect registers of companies
4.Set off refunds against tax remaining payable
5.Imposition of penalty
127.What are the powers of Income Tax officers?
There are class (i) I.T.Os & class (ii) I.T.Os.
Former is appointed by central Govt & the latter by
the C.I.T. They perform their functions in respect of
such areas or of such persons or classes of incomes as
the commissioner may direct. If a question arises as to
whether I.T.O. has jurisdiction to assess any person,
the question is determined by the commissioner.
His powers & functions are:
1. Power regarding discovery, production of
evidence etc
2. Search & seizure
3. To requisition books of A/c
4. To issue notice for furnishing return & extend
time therefore
5. To allot permanent A/c numbers
6. To impose penalty for default in payment of tax
7. To make assessment
8. To Re- Assess escaped income.
9. Rectification of mistake
10. To demand advance payment of tax & to grant
refunds.
128.What are the powers of inspector?
The commissioner appoints inspectors. They are
subordinate to I.T.O. Inspectors perform such
functions as are assigned to them by the
commissioner. They have no fixed jurisdiction or
particular powers or functions. They are assist the
I.T.O. or other Income Tax authority, under whom
they are attached or placed.
129.What are the powers of assessing officer (A.O.)?
(2002 B.com)