j.h.bhalodia women's...

J.H.Bhalodia Women's College-Rajkot

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TAXATION

INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION

Introduction

The provisions regarding the Income from business or profession have been included in Section 28

to 44 of the Act. This head is perhaps the most important one as more than two-third of the total income

from direct taxes is derived from this head.

Meaning of Business and Profession

Business:

Under Section 2(13) of Income Tax Act Business includes any trade, commerce or

manufacture or any adventure of concern in the nature of trade, commerce or manufacture. Business

connotes some activity which is carried on by devoting time, attention and labour of a person either by

himself or through others with an intention to make profits

The definition is not exhaustive, yet it is clear that business covers any activity in the form of

an occupation carried on with a view to earn profits. Business connotes something which occupies attention

and labour of a person for the purpose of profit.

Profession:

Profession is any human activity which requires an intellectual skill, e.g. activities carried on

by a doctor, a lawyer, an architect, an accountant, a painter etc. are called profession. The Act does not

define either profession or vocation. It only says profession includes vocation.

However, from the viewpoint of Income-Tax Act, it is not necessary to distinguish between

income from business and that from profession. Incomes from all these sources are charged under one head

only, viz. profits and gains of business or profession. They are charged to tax under Section 28 of the Act.

In the commercial sense, the term Business implies continuity of economic activities. But

the Income Tax law does not require continuity. Even a single transaction would be construed as business.

Incomes from different businesses

If an assesses carried on more than one business during the previous year, profits and losses from all

of them have to be assessed under this head. It means that if a loss is incurred in any one business, it will be

set-off against profit of the other business, and only the net income will be charged to tax under this head.

However, speculative business is an exception. Income derived from speculative business is

chargeable to tax under this head. But such income is treated separate from income from other business.

Hence, any loss from such speculative activities is not allowed to be set off against income from other

business. It can, however, be carried forward up to a maximum of 8 years and be set-off against future

income from speculative business only.

Provision for Depreciation:

Depreciation can only be allowed, if:

The asset is of the ownership of the assesses. In case of asset is purchased on installment basis, depreciation can be allowed. In case of hire purchase, depreciation is allowed on the principal

amount included in amount of installment comprising principal and interest. No depreciation is

allowed on assets acquired on lease.


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The asset should be used for the purpose of the business or profession. It should be used during relevant previous year. Depreciation is allowed on building. No depreciation is allowed on land. Depreciation is allowed only on prescribed rate of depreciation. Law assumes that the depreciation has been claimed every year by the assessee if there is enough

profit.

Amount of depreciation for deduction should be computed as per the provisions of the law : In case of power industries, depreciation should be computed at prescribed rate on straight line

method and of in case of other industries. It should be on written down value of assets.

Written down value is the balance of the particular asset remained after deducting the depreciation.

Depreciation should be claimed on whole of the block of assets. Block of Assets means the group of Assets classified first on basis of Rates of depreciation and

thereafter on nature of the Assets.

The value of Block of Assets for purpose of Depreciation should be calculated as follows :

Balance at beginning of the year xxxxx

Add: Assets purchased during the year xxxxx

Less: Assets sold or discarded during the year (xxxxx)

Value of the Block of Assets xxxxx

Depreciation will be claimed at prescribed rate on the value of the block of assets. If, in the block of

assets, any asset purchased during the year and is used for less than 180 days, depreciation should be

claimed at half the rate of depreciation on the purchase price of that asset. If the asset, purchased during the

year is used for 180 or more days during the year of purchase, depreciation can be claimed at full prescribed

rate.

If there is not sufficient profit which can be absorb the full amount of depreciation, the remaining amount of depreciation can be carried forward as unabsorbed depreciation in future and can be

written off against future profit.

Rates of Depreciation for some assets :

Building : Mainly used for residential purposes 5% Mainly not used for residential purposes 10%

For Temporary Structure 100%

Furniture & Fittings : Including electric fittings 10% Plant & Machinery : Normal rate is 15% but for certain industries rate

of depreciation on machinery are 30%; 40% or

even 50%. On Plant & Machinery required for

pollution control @ 100% , on computers and its

software 60% on Flour Mill, Iron & Steel

Industry, Energy saving devices etc. @ 80% and

on Glass and Plastic equipment used as refill @ 50%

Intangible Assets : Patents, Know-how etc. 25%

If an asset is sold during the year, then the sale price (including proceeds from sale of scrap) is deducted from the opening balance of that block of assets before deducting depreciation. If the

amount to be so deducted (sale price, scrap realisation, claim for insurance co.) is more than the

opening value of such block of assets, the difference will be shown as short term capital gain under

the heading Capital Gains and no deduction will be allowed from such capital gain.

Provision of Section 50 Whenever one or more items of assets belonging to the same block of assets are sold during

the previous year, following procedure is to be considered :


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W.D.V. of Block of Assets as on 1st April of the P.Y. xxxx

Add: Cost of new assets bought during the P.Y. xxxx

Add: Expenses incurred in respect of asset bought during the P.Y. xxxx

Less: Total Sale proceeds of assets sold during the P.Y. (xxxx)

Adjusted W.D.V. for P.Y. ( Base for depreciation) xxxx

Less: Depreciation at prescribed rate on the above adjusted W.D.V. (xxxx)

W.D.V. at the end of the P.Y. xxxx

Computation of Income from Business or Profession

(A) When Profit & Loss A/c. OR Income & Expenditure A/c. is given

Record the Net Profit shown on the debit side of P & L A/c. , Loss to be shown as Negative Figure

Observe the Credit Side of P & L A/c. and consider the items not assessable under this head but which are to be shown under other heads of income e.g. income from house property,

income from capital gains, salary income, or income from other sources as well as non

business income to be deducted from net profit

Observe the Debit Side of P & L A/c. and consider the non business expenses and inadmissible expenses which is to be added to net profit.

Adjustment entry should considered accordingly. The amount of depreciation should be added back to the Net Profit. Then the depreciation

admissible under the Act should only be deducted.

Now the items of business income not yet taken into account should be added to the Net Profit.

The final figure obtained will be the taxable profit of the business or profession.

(B) When Receipt & Payment Account is Given

Check the debit side (income side) of Receipt & Payment A/c. and consider the Business income received during the year of revenue nature.

check the credit side (Expenditure side) of Receipt & Payment A/c. and consider the Business expenses paid during the year of revenue nature.

Deduct the aggregate amount of expenses from aggregate amount of income additional information treated accordingly The resultant figure would be the income from business/profession.

A. PROFITS AND GAINS FROM BUSINESS OR PROFESSION (List of Section) 28 Profits and gains of business or profession

29 Income from profits and gains of business or profession, how computed

30 Rent, rates, taxes, repairs and insurance for buildings

31 Repairs and insurance of machinery, plant and furniture

32 Depreciation

32A Investment allowance

32AB Investment deposit account

33 Development rebate


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33A Development allowance

33AB Tea development account, coffee development account and rubber development account

33ABA Site Restoration Fund

33AC Reserves for shipping business

33B Rehabilitation allowance

34 Conditions for depreciation allowance and development rebate

34A Restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain

domestic companies

35 Expenditure on scientific research

35A Expenditure on acquisition of patent rights or copyrights

35AB Expenditure on know-how

35ABB Expenditure for obtaining licence to operate telecommunication services

35AC Expenditure on eligible projects or schemes

35CCA Expenditure by way of payment to associations and institutions for carrying out rural development programmes

35CCB Expenditure by way of payment to associations and institutions for carrying out programmes of

conservation of natural resources

35D Amortisation of certain preliminary expenses

35DD Amortisation of expenditure in case of amalgamation or demerger

35DDA Amortisation of expenditure incurred under voluntary retirement scheme

35E Deduction for expenditure on prospecting, etc., for certain minerals

36 Other deductions

37 General

38 Building, etc., partly used for business, etc., or not exclusively so used

40 Amounts not deductible

40A Expenses or payments not deductible in certain circumstances

41 Profits chargeable to tax

42 Special provision for deductions in the case of business for prospecting, etc., for mineral oil

43 Definitions of certain terms relevant to income from profits and gains of business or profession

43A Special provisions consequential to changes in rate of exchange of currency

43B Certain deductions to be only on actual payment

43C Special provision for computation of cost of acquisition of certain assets

43D Special provision in case of income of public financial institutions, public companies, etc.


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44 Insurance business

44A Special provision for deduction in the case of trade, professional or similar association

44AA Maintenance of accounts by certain persons carrying on profession or business

44AB Audit of accounts of certain persons carrying on business or profession

44AD Special provision for computing profits and gains of business of civil construction, etc.

44AE Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages

44AF Special provisions for computing profits and gains of retail business

44B Special provision for computing profits and gains of shipping business in the case of non-residents

44BB Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils

44BBA Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents

44BBB Special provision for computing profits and gains of foreign companies, engaged in the business

of civil construction, etc., in certain turnkey power projects

44C Deduction of head office expenditure in the case of non-residents

44D Special provisions for computing income by way of royalties, etc., in the case of foreign companies

44DA Special provision for computing income by way of royalties, etc., in case of non-residents

44DB Special provision for computing deductions in the case of business reorganization of co-operative banks

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(1) Shree Omesh is the owner of a factory. He requests you to determine his total taxable business

income for the A.Y. 2013-14 on the basis of the following P & L A/c. for the year ended on 31-03-

2013.

Particular Rs. Particular Rs.

To By

Opening Stock 50,000 Sales 8,00,000

Purchases 5,00,000 Rent Received 30,000

Wages 2,00,000 Closing Stock 70,000

Audit fees 2,000 Bad debt recovery

Building Repairs (let out) 2,800 (of which Rs. 1,000 was

Rent collection charges 1,200 not allowed in earlier year) 2,500

General Expenses 3,000

Commission on loan 1,000

Bad debt Reserve 4,000

Bad Debt 5,000

Interest on capital 14,000 Contribution to staff welfare

fund 5,000

Income tax provision 15,000

Depreciation (approved) 6,500

Reserve for future contingency 3,000

Net Profit 90,000

Total 9,02,500 Total 9,02,500

[Taxable business Income Rs. 99,000]

(2) Following is the profit & Loss A/c. of Sachin for the year ended on 31-03-2013:


To By

Salaries 1,20,000 Gross Profit 5,10,000

Bad debt 5,000 Discount 2,000

+Prov. for B.D. 5,000 10,000 Bad debt recovered

General expenses 15,000 (50% of which was not

Insurance premium 6,000 allowed in the past) 5,000

Sales tax 5,000 Interest and Dividend 8,000

Interest on capital 12,000 Interest on post office

Advance Income tax 7,000 saving A/c. 2,000

Advertisement expenses 11,000

Donation 4,000

Motor car expenses 24,000

Telephone expenses 5,000

Depreciation 8,000

Net Profit 3,00,000

Total 5,27,000 Total 5,27,000

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Practical Sum


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Additional information :

(i) Salaries include Rs. 20,000 paid to the proprietor Mr. Sachin

(ii) Depreciation permissible as per Income Tax Act is Rs. 7,000

(iii) Insurance Premium include Rs. 3,000 paid towards life insurance premium

(iv) Motor car expenses include Rs. 12,000 spent toward personal purposes.

(v) Advertisement expenses include Rs. 3,000 spent on purchase of new permanent signboard.

(vi) Income tax refund of Rs. 5,000 received during the year in respect of earlier year is not

credited to above mentioned profit & Loss A/c.

Compute taxable income from business for A.Y. 2013-14of Sachin.

[Taxable Business Profit Rs. 3,51,500]

(3) Trading and profit & Loss A/c. for the year ended as on 31-03-2013 of shree Harish is as under :


To By

Opening Stock 99,000 Sales 4,51,500

Purchases 3,00,000 Closing Stock 1,98,000

Salary 56,000 Bad debt recovery 10,000

Bad debts 2,000 Rent of let-out building 15,500

Bad debts reserve 3,000 Dividend 25,500

Insurance premium 1,000 Interest on capital 6,000

Income-tax 9,000

Outstanding income tax 1,000 Provision for taxation 2,000

Sales tax 21,000

Net Profit 2,00,000

Total 7,00,000 Total 7,00,000

Additional information :

(i) He has not taken any steps to recover the bad debts written of in the books.

(ii) Interest on capital is outstanding Rs. 1,000, which is not included in the above interest on

capital.

(iii) Sales tax shown above in profit and loss account includes :

(i) Unpaid sales tax Rs. 5,000 for the current year.

(ii) Rs. 6,000 paid during the current year which was outstanding for the last year.

(iv) Opening stock is valued 10% more than the cost and closing stock is valued 10% less than the cost.

(v) Out of bad-debt recovery 70% was disallowed in the past.

(vi) Opening written down value of motor was Rs. 53,333, on which 15% depreciation is allowed

according to income tax act. There is Rs. 20,000 as motor expenses. The motor-car is being

used for personal purposes.

Find out the Taxable income from business-profession for the A.Y. 2013-14.

[ Taxable Business profit Rs. 1,90,500]

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(4) Following is the Trading and P& L A/c. for the year ending 31st March,2013 of shree Hasmukhbhai:


To By

Opening Stock 2,20,000 Sales 20,00,000

Purchases 8,00,000 Goods destroyed by fire 30,000

Purchase expenses 50,000 Closing stock 1,35,000

Factory expenses 1,30,000

Gross profit 9,65,000

Total 21,65,000 Total 21,65,000

Salaries 50,000 Gross profit 9,65,000

Office expenses 60,000 Sundry Income 35,000

Taxes 5,000 Bad-debt recovered 10,000

Fire insurance: Share dividend 6,000

Let out house 1,500 Commission 4,000

Stock and stores 3,500 5,000 Rent of let out house 30,000

LIC Premium 7,500

Loss on sale of investment 10,000

Depreciation on plant 40,000

Motor car expenses 15,000

Diwali-puja expenses 1,000

Loss by fire (goods) 8,000

Donation (approved) 11,000

Drawings 12,500

Net Profit 8,25,000

Total 10,50,000 Total 10,50,000

Other Information:

(i) Valuation of opening stock is 10% more than its cost price.

(ii) Valuation of closing stock is 10% less than its cost price.

(iii) Purchase include Rs. 40,000 of a purchase bill paid by using a credit card.

(iv) 25% amount of Bad-debts recovery was allowed as deduction in earlier year.

(v) Admissible depreciation on plants is Rs. 30,000

(vi) Admissible depreciation on Motor-car is Rs. 21,000, 1/3 use of motor-car is for personal purposes.

(vii) Interest on capital Rs. 5,000 and admissible advertisement expenses of Rs. 21,410 have not

been recorded in the books.

(viii) Discount received from the creditors Rs. 2,000 has not been credited in the above P & L A/c.

(ix) Taxes include Rs. 1,500 of local tax paid for Let-out house.

(x) Office expenses include Rs. 25,000 of Lap-Top purchased for business.

Calculate the taxable income of business for the A.Y. 2013-14.

[Taxable Business Profits Rs. 8,69,090]

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(5) Shree Dev Vyas is practicing as a C.A. and keeps the accounts on cash basis. He furnishes the

following information for the year ended on 31-03-2013.

Profit & Loss A/c.


To Salaries 1,10,000 By Professional incomes:

Stipend 12,000 2011-12 20,000

Rent 6,000 2012-13 3,30,000 3,50,000

Subscription 2,000 Salary from College 18,000

Drawings 20,000 Rent income from let-out

Motor-car expenses 15,000 house 12,000

Office expenses 10,000 Bank Interest & Dividend 12,000

Taxes (including taxes of 8,000 Short term capital gain from

house given on rent) sale of shares 20,000

Travelling expenses 15,000

Insurance expenses 12,000

Income-Tax 5,000

Net Profit 2,00,000

Total 4,15,000 Total 4,15,000

Additional Information:

(i) He owns a house which is let-out on a monthly rent of Rs. 1,000. He has paid Rs. 3,000 as its municipal taxes.

(ii) The 1/3rd use of motor-car is personal. The W.D.V. of the car as on 1-4-2012 is Rs. 2,00,000. The rate

of depreciation is 15%. The depreciation has not been debited to P & L A/c. (iii) He has purchased N.S.C. worth Rs. 20,000 on 1.3.2013

(iv) Insurance Premium includes Rs. 8,000 for Life Insurance.

Calculate the taxable income from business for the A.Y. 2013-14.

[Taxable business income Rs. 1,59,000]

(6) Following details provided to you of Prashant Trading Co. for the year ended on 31-03-2013.

Particular Rs. Particular Rs. To Salary & Allowances 70,000 By Gross Profit 6,00,000

Postage & Telephone 10,000 Interest & Dividend 80,000

Office Rent 15,000 Rent (includes Rs. 10,000 from 30,000

Local Taxes for Building 8,000 employees staff quarters) (Rs. 2,000 for staff quarters) Interest charged to debtors for

Bad Debt Reserve 7,000 late payment 5,000

Bad Debts (includes Rs. 2,000 Profit on sale of investments 25,000 for debt due for more than 2 yrs.) 8,000 Sundry Income 2,000

Donation 5,000

Interest (includes Rs. 7,000 on 15,000 capital)

Motor-Car Expenses 20,000

Provision for Tax 50,000

Depreciation on machinery 20,000 Depreciation on motor car 15,000

Depreciation on furniture 12,000

Sales Tax 35,000 Insurance Premium 18,000

Misc. Exp. 30,000

Net Profit 4,04,000 Total 7,42,000 Total 7,42,000


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(i) Salary includes Rs. 15,000 paid to the owner of the business.

(ii) Sales Tax includes Rs. 6,000 remaining unpaid at the end of the year, while Rs. 10,000 paid

during the year in respect of previous year has not been included.

(iii) 40% of the use of motor-car is meat for personal purposes.

(iv) Insurance premium includes Rs. 6,000 for life insurance policy of the son of the owner.

(v) W.D.V. of assets as on 1.4.2012 were as follows : Machinery Rs.80,000, furniture Rs.

40,000, Rates of Depreciation allowable are 15% and 10% respectively. a new machine was

purchased on 1-12-2012 for Rs. 40,000 on which depreciation allowable is 15%

(vi) Miscellaneous Expenses includes instruments purchased for Rs. 10,000.

Calculate taxable income under the head Income from Business and Profession for A.Y.

2013-14.

[Taxable Business Profit Rs. 4,08,000]

(7) Shree Prakash has prepared the following P & L A/c. for the year ended on 31-03-2013.


To By

Salaries and allowances 60,000 Gross profit 2,25,000

Local taxes (of rented house) 3,000 Agriculture income 20,000

Postage-telegram 3,000 Rent of house 25,000

Building repairs expenses. 6,000 Profit on sale of machine 21,000

Sales tax 25,000 Sundry Income 1,000

Bad debts 8,000 Bad debts recovered 8,000

Bad debts reserve 8,000 Net Loss 76,000

Depreciation on machines 17,500

Advertisement expenses 6,000

Depreciation on car 22,500

Shop expenses 22,000

Provision for taxation 25,000 Daughters marriage expenses 1,00,000 House hold expenses 70,000

Total 3,76,000 Total 3,76,000


(i) Salaries & allowances include Rs. 5,000 paid to son as salary, who is staying in hostel.

(ii) Of sales-tax debited Rs. 6,000 is still unpaid. Sales tax pertaining to earlier year Rs. 12,000 paid

during the year has not been debited to profit and loss account.

(iii) Out of bad debts recovery 30% of the amount is in respect of bad debts not allowed as deduction

in earlier year.

(iv) The opening written down value of the Block of Machines was Rs. 1,00,000. the permissible

rate of depreciation ( for the financial year 2012-13) as per income tax provision is 15%. The

machine which was sold during the year out of the said block was purchased in 2010-11. In

books of accounts the depreciation is calculated at the rate of 20% on reducing balance method

on the entire opening balance.

(v) 60% use of car is for personal purpose; Shop expenses include Rs. 10,000 of car expenses.

Admissible rate of depreciation on car is 15%, which has been fully charged to P & L A/c.

Compute the taxable income from business for the A.Y. 2013-14.

[Taxable Business Profit Rs. 99,430]


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(8) The Profit & Loss A/c. of the firm Shri Jankant Parikh for the year ending on 31-03-2013 is as follows :


To By

Sales tax 40,000 Gross Profit 4,75,000

Salaries & Allowances 90,000 Rent of House property

Postage & Telegram 3,600 (of which Rs. 6,000 is for

Office Rent expenses 18,000 residential quarters allotted

Local taxes on house property 6,000 to employees) 30,000

(including Rs. 1,200 for Interest & Allowances:

for staff quarters) Int. debited to debtors 3,600

Repairs for house property +Allowance debited

(Rs. 1,000 for staff quarters) 12,000 to creditors 2,400 6,000

Bad debts written off Interest & dividend on

(of which Rs. 2,000 is in investments 52,000

regards to debt which was Profit on sale of machinery

2 years old.) 8,000 (Calculated on book value

Discount & Allowances 12,000 of Rs. 15,000 on 1.4.2009

Bad debt Reserve 6,400 after charging 6 months

Depreciation on Assets: depreciation of Rs. 4,500) 6,500

On machinery Sundry Income 500

(including Rs. 4,500 on

machinery sold) 69,000

On House Property

(including Rs. 2,000 for

staff quarters) 10,000

On Motor-Car 20,000

Sundry Expenses (motor) 10,000

Provision for Income tax 63,200

Net Profit 1,94,800

Total 5,70,000 Total 5,70,000

Additional information:

(i) Of sales-tax debited to profit & loss account, Rs. 8,000 is still unpaid, while sales-tax of Rs.

17,000 outstanding for last year has not been shown therein.

(ii) The book values of assets on 1.4.2012, calculated at reducing balance are as follows:

Rs.

Machine Block-I (Rate of Depreciation 15%) 3,70,000

Machine Block-II (Computers etc. : Rate of Depreciation 60%) 45,000 Furniture (Rate of Depreciation 10%) 70,000

House Property (Rate of Depreciation 5%) 2,00,000

Motor Car (Rate of Depreciation 15%) 1,33,333

On inquiry it was found that house properties, except staff quarters, are let out for residential

purposes.

A Machine of Rs. 80,000 was purchased on 1.1.2013 (Rate of Depreciation 60%) on which no

depreciation has been charged.

(iii) Motor Car is used equally for both the purposes.

(iv) Shri Jankant has earned a profit of Rs. 60,000 in speculation on Stock Exchange, which is not

shown in the above account.

(v) Unabsorbed depreciation of Rs. 21,000 of the financial year 2011-12 has been brought forward.

In addition, the speculation loss of Rs. 40,000 of the financial year 2010-11 has also been brought

forward to the current year.

From the above information, compute the taxable income from business or profession of Shri

Jankant Parikh for A.Y. 2013-14.


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[Taxable Business Profit Rs. 1,83,400 (including Speculation profit of Rs. 20,000 after deducting

Speculation Loss]

(9) Dr. Chandaranas Receipt and Payment Account for the year ended on 31-03-2013 is as under :

Receipt Rs. Payment Rs.

To By

Balance b/f 50,000 Clinic rent 2,20,000

Visit fee 3,10,000 Electricity Expenses 1,00,000

Consultation fee 3,70,000 Purchase of Medical Books 10,000

Sales of Medicine 30,000 Purchase of Surgical Equipment

Operation theatre rent 90,000 through bank loan (1.2.2013) 1,30,000

Sales of Surgical Equipment Motor Expenses 12,000

(1-10-2012) 11,000 Purchase of Medicine 45,000

Income of house rent 16,000 Lion club membership fees 1,000

Salary from medical college 34,000 Medical association

Royalty (net) 9,000 membership fees 2,000

Profit in Card Game 20,000 Insurance 13,000

Interest 23,000 Municipal Taxes 4,000

Gift from patients 37,000 Staff Salaries 2,80,000

Payment of Bank Loan

Installments

(Rs. 12,000 + Interest) 13,000

Travelling Expenses 20,000

Balance c/d 1,50,000

Total 10,00,000 Total 10,00,000


(i) Opening balance of surgical equipments was Rs. 60,000. Depreciation allowed is 40%.

(ii) Loss in card games amounted to Rs. 2,323.

(iii) Municipal tax of Rs. 1,500 of let-out house is included in the municipal taxes shown above.

(iv) Travelling expenses includes Rs. 6,000 for family pilgrimage and Rs. 14,000 towards his

exclusive business promotion tour.

(v) Opening W.D.V. of motor was Rs. 2,00,000. Depreciation allowable is 15%. The 1/5 use of

motor car is for personal purpose.

(vi) Opening stock of medicine is Rs. 35,000 and closing stock is Rs. 10,000.

From the above details find out the total taxable income under the head of Business Profession

for the A.Y. 2013-14.

[Taxable income under the head Profit and Gains of Business or Profession Rs. 45,300]

(10) Jayson & Sons has purchased a factory machine (which was the only machine owned by the firm) for Rs.

1,20,000 in May 2009 and sold it for Rs. 14,600 in December 2012. Rate of Depreciation on this type of

machine is 15%. What would be its effect on the taxable business profit for the A.Y. 2013-14?

[W.D.V. as on 1.4.2012 of sold machine Rs. 73,695 and amount realised by sale of machine Rs. 14,600

deducted from opening W.D.V. hence balancing figure Rs. 59,095 is to be assessed as a short-term

capital loss for the A.Y. 2013-14.]

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(11) Sachin & Bros. has sold all his factory machines for Rs. 4,00,000 in May, 2012. From the following

additional information for the A.Y. 2013-14, you are required to state the effect of the sale of machinery

on his taxable income:

Rs.

(i) Cost of machinery purchased in July, 2007 3,00,000

(ii) Additions to Machinery in January, 2008 50,000

(iii) Total repair charges incurred in respect of the above machinery 50,000

up to the date of sale (sold in 2012-13)

(iv) Total depreciation allowed (from the date of acquisition to 31/3/2012) 1,00,000

Other Business Income (after allowing current years depreciation and repair

charges but without taking into account profit on sale of machinery) of Shri A

for the P.Y. 2012-13 amounts to Rs. 40,000.

[Taxable business profit Rs. 40,000; Short Term Capital Gain Rs. 1,50,000.]

(12) Shri Hemani is a manufacturer, who has furnished the following details for the purpose of calculation of

admissible depreciation on plant & machinery for the P.Y. 2012-13.

(i) Total purchase price of plant & Machinery : Rs. 40 Lacs. for which a special subsidy of Rs. 8

Lacs. was received from the government.

(ii) Accumulated interest upto 30-06-2012 on the loan taken from approved financial institution for

the purchase of plant & machinery Rs. 1,50,000

(iii) Transport charges incurred for the purchase of plant & machinery were Rs. 50,000 and

installation charges amounted to Rs. 60,000.

(iv) Date of Commencement of business use of New Plant & Machinery 1.7.2012.

(v) General Rate of Depreciation as per the Income Tax law is 15%; but a higher rate of 100% is

allowablein respect of some part of these plant and machines installed for the purpose of

Pollution Control ( having final actual cost of Rs. 1,10,000).

Calculate the total admissible depreciation for the A.Y. 2013-14.

[Total admissible depreciation Rs. 6,12,500 (which includes Rs. 1,10,000 calculated @ 100% of

final actual cost of plant installed for pollution control and Rs. 5,02,500 calculated @ 15% of

final actual cost of Rs. 33,50,000 of other items.]

(13) Following particular are furnished by Vikram Engineering relating to its year ending on 31/03/2012:

Assets W.D.V. as on Addition during Rate of

1.4.2012 the year Depreciation

Rs. Rs.

Furniture 16,250 - 10%

Machinery 2,71,250 60,000 15%

Buildings 5,13,825 - 10%

Motor Trucks 51,600 - 15%

New Machine (for office use) was installed on 1.10.2012.

A canteen building costing Rs. 50,000 was destroyed by fire on 30th June, 2012. It was

constructed in September, 2010. The Insurance company admitted a claim of Rs. 26,000. The W.D.V. of

Rs. 26,125 of canteen building was also included in the total W.D.V. (Rs. 5,13,825) of buildings.

Calculate the amount of depreciation allowable for the A.Y. 2013-14.

[Total admissible depreciation Rs. 1,07,911; Depreciation of Building Rs. 48.783; Depreciation on

Furniture Rs. 1,625; Depreciation on Machinery Rs. 49,763; Depreciation on Motor trucks Rs. 7,740.]


14

(14) There are two types of machinery in a factory owned by Mr. Sanjay. Type A machinery was bought on

1.1.2012 at a cost of Rs. 12,00,000. Installation, carriage and custom duty paid in this regard amounted to

Rs. 2,00,000, Rs. 75,000 and Rs. 1,20,000 respectively. A similar machine costing Rs. 5,00,000 was

bought on 1.11.2012 , while a part of old machinery was sold for Rs. 10,00,000 resulting in a profit of Rs.

3,00,000. The applicable rate of depreciation is 15%. Type B machinery was bought on 1.5.2012 at a cost

of Rs. 50,00,000 but its use started only from 1.9.2012. Interest paid for this period on this machinery

was Rs. 2,50,000. carriage and installation expenses amounted to Rs. 75,000 and Rs. 1,25,000. A

government subsidy of Rs. 12,00,000 was received in this regard. The machinery is subject to 30% rate

of depreciation. Calculate the admissible depreciation for both the type of machinery for the A.Y.2013-

14. What would be the treatment of unabsorbed depreciation in case of a loss-making firm?

[Admissible Depreciation for A.Y. 2013-14 : Type A Rs. 1,08,806; Type B Rs. 12,75,000; Total

Depreciation Rs. 13,83,806.]

(15) From the following particulars furnished by Shri Ramkishan determine his total taxable income for A.Y.

2013-14.

(A) Cloth Business :

(i) Loss of Rs. 25,000 for the P.Y. 2012-13 (business is discontinued from 31.10.2012)

(ii) Brought forward loss of Rs. 80,000 of P.Y. 2008-09.

(B) Chemical Business :

(i) No profit / loss for the P.Y. 2012-13 (as the business was closed on 1.3.2012)

(ii) Recovery of bad debts of Rs. 30,000 during P.Y. 2012-13, which was fully allowed in

earlier previous year.

(iii) Brought forward loss of Rs. 20,000 of P.Y. 2011-12.

(C) Stationery Business :

Taxable profit of P.Y. 2012-13 Rs. 70,000.

[Taxable Business Income Nil]

. . . . . . . . . ? . . ? , " ." , . , . : / !


15

Income under the Head Capital Gain

Introduction : A profit earned on sale or transfer of a capital asset is treated as capital gain and is assessed to

income-tax in the year during which asset is sold or transferred, whether the consideration is actually

received during the year or not. Thus the date of receipt and the method of accounting are irrelevant for

transfer purpose. Profit arising from the conversion of a capital asset into stock-in-trade of a business carried

on by an assessee will be chargeable to tax in the year in which such stock is sold by him. Profit arising on

sale of assets including goodwill by an individual to a firm or by a firm to an individual is also made taxable

by an individual to a firm or by a firm to an individualis also made taxable.

Profits or gains arising from the receipt of any money or other assets from an insurance company on

account of destruction or damage to any capital asset, shall be deemed to be capital gains of the previous

year in which money is received and is taxed as capital gains.

Following points keep in mind for taxing capital gain

(i) There must exist capital asset owned by an assessee;

(ii) Such capital asset much have been transferred by the assessee;

(iii) Such transfer much have taken place during the previous year;

(iv) Such transfer must have resulted in to a capital profit/loss;

(v) Such capital profit must not be exempted in U/s 54 to 54 G/ 54 GA

Definition

Capital Gains :-

It refers to gain on transfer of capital assets. Thus, capital gain arises, when two conditions are

satisfied: (a) There is a capital asset (b) There is a transfer.

Capital Asset - 2(14) :- capital asset is defined to include property of any kind held by an assessee, whether connected with

his business/profession or not. Capital Asset includes all kinds of property, movable or immovable,

tangible or intangible, fixed or circulating.

Types of Capital Assets

CA = Capital Assets ; STCA = Short Term Capital Assets ; LTCA = Long Term Capital Assets

Capital Assets Nature of Capital Assets

1. Financial Assets Shares, listed debentures /

government securities, units of UTI /

mutual funds, and zero coupon bonds.

1. If CA is held for < 1 Year = it is a STCA 2. If CA is held for > 1 Year = It is a LTCA

2. Depreciable assets Always treated as STCA

3. Other Assets 1. If CA is held for < 3 Years = it is a STCA 2. If CA is held for > 3 Years = it is a LTCA


16

Types of Capital Gain

[A] Short term Capital Gain :

Any profit or gain arising from the sale or transfer of short term capital asset is known as

Short term Capital Gain.

[B] Long term Capital Gain :

Any profit or gain arising from sale or transfer of long term capital asset is known as

long term Capital Gain

THE FOLLOWING ASSETS OR TRANSFER IS NOT INCLUDED IN CAPITAL GAIN

Gift, Will, revocable transfer other than ESOP. Distribution of capital assets of HUF. Sale of stock-in-trade. Transfer of asset from holding company to subsidiary company and vice versa. But the transferee

company must be Indian.

Membership right of any stock exchange. 6.5% and 7% Gold bond issued by Central Govt. Conversion of debentures into equity shares or new debentures . Agriculture land in India if such land :-

Not in the municipal area of 10000 or more population.

Not in the specified area.

Capital gain Exempted u/s 10

Transfer of units US-64. Sec.10(33) LTCG on transfer of BSE-500 equity shares. Sec.10(36) Compulsory acquisition of urban land. Sec. 10(37)

Allowed only to individual and HUF. Such land must be used for at least two years for agriculture purpose. Compensation received after 31 march 04.

LTCG on transfer of securities on which STT paid : Capital asset should be equity shares or units of equity oriented mutual fund. Such transfer made on or after 01 oct.2004.

Loan received under a scheme of reverse mortgage u/s 10(43) - Any amount received by an individual under a scheme of reverse mortgage, either in lump sum or in installment, in a

transaction of reverse mortgage referred to in section 47(xvi).

TRANSFER EXPENSES These expenses are deductible in calculation of Net SalesConsideration. e.g. Brokerage, commission, cost of

stamp, registration fees on sales etc.

Cost of Acquisition (COA).

It includes brokerage, fees, stamp duty paid at the time of purchase of capital asset.


17

PROVISIONS OF SEC.49(1) Cost to the previous owner will be deemed to be the cost of acquisition in the following cases :- Distribution of HUF`s capital asset. Capital asset acquired under will or gift. Distribution of assets on liquidation of companies. If the cost to previous owner is not identified then the Market value as on the date of assets

acquired by previous owner will be deemed as cost of acquisition. For calculation of Short term/Long term capital gain the holding period of previous owner also

included.

Acquisition before 1st April, 1981

Market Value or the cost of acquisition (improvement cost incurred before Apr.1981 - ignored) whichever

is higher on 1st April, 1981 will be deemed as cost of acquisition. This rule is not applicable on depreciable

assets.

Amount forfeited paid as advance to vendor due to non-fulfillment of terms and condition, such forfeited

amount will be deducted from the cost of acquisition before indexation.

Cost of Acquisition for Bonus Shares Acquired on or after 1 Apr.1981 is NIL Acquired before 1 Apr.1981 is Fair Market Value.

Cost of Acquisition for Right shares Amount paid to the company for such shares. For transfer of right entitlement - NIL.

Cost of Acquisition for Conversion of debentures Conversion of debentures, debenture stock, deposit certificate into equity shares or debentures

of a company will not generate capital gain. On transfer of these converted equity shares or debentures , cost of acquisition will be equal to

the cost of old debentures converted into shares etc.

Cost of Improvement Cost of Improvement for (a) Goodwill of Business (b) Right to manufacture, produce or process any

article or thing. (c) Right to carry on any business shall be taken as NIL

Indexed Cost of Acquisition If any long term capital assets sold during the previous year benefit of Indexed Cost of Acquisition

is given except the following situation : Depreciable asset - always STCG. Bonds, debentures other than issued by you. Shares and debentures purchased by non-resident in foreign currency.


18

Computation of capital gain on transfer of self-generated assets 1. Cost of acquisition as NIL 2. Transfer expenses is allowed. 3. Improvement cost is considered for tenancy right, route permit, loom hours but NIL in case of goodwill of business and right used for mfg. or processing or for running business.

4. Transfer of self- generated assets like goodwill of profession, patent of technique etc. are not taxable.

Exemption from Capital Gain Income

Section Allowed Assessee Condition to be satisfied Quantum of Exemption

54 Individual/HUF 1. Transfer should be of a residential house income of which is chargeable under thehead Income from house property. 2 It must be a long-term capital asset. 3. Purchase of another residential house should be within one year before or 2years after, or construction should be within three years after the date of transfer.

Actual amount invested in new asset or the capital gain whichever is less.

54 B Individual 1 Transfer should be of agricultural land. 2. It must have been used in the 2 years immediately preceding the date oftransfer for agricultural purposes eitherby the assessee or his parent. 3 Another agricultural land should be purchased within 2 years after the date of transfer.


54D Any assessee which is an industrial undertaking

1 There must be compulsory acquisition. 2. The property compulsorily acquired should be land and building forming part of an industrial undertaking. 3. The asset must have been used in the 2years immediately preceding the date of transfer of the assessee for the purpose of the business of the undertaking. 4. Within a period of 3 years after the date of compulsory acquisition any other land or building should be purchased or constructed for the use of existing or newly set up industrial undertaking.


54 EC Any Assessee 1. The asset transferred should Actual amount invested in


19

be a long- term capital asset 2.Within a period of 6 months after the date of transfer, the capital gain must he invested in the specified assets i.e. bonds redeemable after 3 years issued by NHAl or RECL.

new asset or the capital gain whichever is less. However, maximum amount which can be invested in any financial year cannot exceed Rs. 50,00,000

54F Individual/HUF 1. The asset transferred should be a long- term capital asset, not being a residential house. 2. Within a period of I year before or 2 years after the date of transfer, a residential house should be purchased or constructed within a period of 3 years after the date of transfer. 3. The assessee should not own more than one residential house on the date of transfer. 4. The assessee should not within a period of one year purchase or should not within a period of 3 years construct any residential house other than the new asset.

If the cost of the new residential house is not less than the net consideration then the whole of the capital gain . Otherwise, Ami. invested : ITCG x ------- Net consideration price

54G Any assessee which is an industrial undertaking

1 Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred. 2.Transfer should be due to shifting to any area other than an urban area. 3. Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.

If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.

54GA Any assessee which is an industrial undertaking

1. Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred. 2.Transfer should be due to shifting to any Special Economic Zone whether developed in any urban area or any other area. 3. Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.

If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.


20

Notes : Capital Gain Scheme.If the new asset is not acquired under sections 54, 54B, 54D, 54F, 54G and

54GA or the full amount could not be invested upto the due date of furnishing the return of income, the

assessee can deposit the desired amount under the Capital Gain Scheme on or before the due date of return

and thus can acquire the asset within the stipulated time out of money withdrawn from such scheme at a

later date. In the case of section 54EC the Capital Gain Scheme is not applicable. Consequences if the new

asset acquired is transferred within 3 years of its acquisition Under sections 54, 54B, 54D, 54G and

54GA.For computation of new Capital Gain (which will be short-term), the cost of acquisition of such

new asset shall be reduced by the amount of Capital Gain exempt under sections 54, 54B, 54D and 54G

earlier.

UNDER 54F.Besides the new Capital Gain (which will be short-term), the Capital Gain exempt earlier

under section 54F, shall be long-term capital gain of the previous year in which new asset is transferred.

Under section 54EC.If such security acquired is converted into money or any loan is taken against such

securities within 3 years, the Capital Gain exempt under section 54EC for such securities earlier shall be

long-term Capital Gain of the previous year in which such conversion takes place or the loan is taken.

Consequences if the amount deposited in Capital Gain Scheme is not utilised within the stipulated time of

3 years (2 years in case of section 54B).The unutilised amount shall be Capital Gain (short-term or long-

term depending upon original transfer) of the previous year in which such period has expired. However, in

case of section 54F, proportionate amount shall be taxable.

Tax on short term capital gain Sec. 111A

Any STCG arising from the transfer of an equity share in a company or a unit of an equity oriented fund

shall be liable to tax @15% if the following conditions are satisfied:

1. The transaction of sale should take place through a recognized stock exchange. 2. Such transaction is chargeable to STT. 3. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of STCG

u/s 111A.

4. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income

then STCG u/s 111A shall be reduced by the unexhausted basic exemption limit and only the balance

STCG shall be chargeable to tax @15%.

Tax on Long Term Capital Gain sec.112

1. Where the transferred long term asset is in the nature of listed securities or units of UTI or mutual fund or zero coupon bonds.

2. The gain arising from the transfer of such securities or units shall be liable to tax - @10% on such LTCG computed without the benefit of indexation, OR @ 20% on such LTCG computed availing the benefit of indexation

Whichever is more beneficial to the assessee.

3. In the case of resident an Individual or a HUF, if the basic exemption not exhausted by any other income then LTCG shall be reduced by the unexhausted basic exemption limit and only the balance

LTCG shall be chargeable to tax.

4. Assessee is not entitled to claim any deductions provided under chapter VI-A in respect of LTCG.

Please note that the possibility of applying 10% or 20% tax rate shall arise only in

a case where the listed shares are not traded through a recognized stock exchange and

not chargeable to STT. Otherwise, the transfer of listed shares is covered by the

exemption provided u/s 10(38).


21

Special provisions for computation of capital gains in case of slump sale - Sec.50B

1. Slump sale Meaning

The transfer of one or more undertakings as a result of the sale for a lump sum consideration without values

being assigned to the individual assets and liabilities in such sales.

2. If assets transferred under the slump sale is owned and held for more than 36 months, the capital gain shall be treated as LTCG.

3. The net worth of the undertaking or division so transferred shall be deemed to be the cost of acquisition and the cost of improvement in computing the capital gain.

4. The benefit of indexation not allowed on slump sale. 5. Net worth shall be the aggregate of value of total assets of the undertaking or division as reduced by the value of such liabilities of such undertaking or division as appearing in its books of account

Any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of

Net worth.

Table for Cost Inflation Index

Financial Year C.I.I. Financial Year C.I.I.

1981-82 100 1997-98 331

1982-83 109 1998-99 351

1983-84 116 1999-2000 389

1984-85 125 2000-01 406

1985-86 133 2001-02 426

1986-87 140 2002-03 447

1987-88 150 2003-04 463

1988-89 161 2004-05 480

1989-90 172 2005-06 497

1990-91 182 2006-07 519

1991-92 199 2007-08 551

1992-93 223 2008-09 582

1993-94 244 2009-10 632

1994-95 259 2010-11 711

1995-96 281 2011-12 785

1996-97 305 2012-13 852

2013-14 939

A. CAPITAL GAINS (List of Important Sections) 45 Capital gains

46 Capital gains on distribution of assets by companies in liquidation

46A Capital gains on purchase by company of its own shares or other specified securities

47 Transactions not regarded as transfer

47A Withdrawal of exemption in certain cases

48 Mode of computation

49 Cost with reference to certain modes of acquisition


22

50 Special provision for computation of capital gains in case of depreciable assets

50A Special provision for cost of acquisition in case of depreciable asset

50B Special provision for computation of capital gains in case of slump sale

50C Special provision for full value of consideration in certain cases

51 Advance money received

54 Profit on sale of property used for residence

54B Capital gain on transfer of land used for agricultural purposes not to be charged in certain

cases

54D Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases

54E Capital gain on transfer of capital assets not to be charged in certain cases

54EA Capital gain on transfer of long-term capital assets not to be charged in the

case of investment in specified securities

54EB Capital gain on transfer of long-term capital assets not to be charged in certain cases

54EC Capital gain not to be charged on investment in certain bonds

54ED Capital gain on transfer of certain listed securities or unit, not to be charged in certain cases

54F Capital gain on transfer of certain capital assets not to be charged in case of

investment in residential house

54G Exemption of capital gains on transfer of assets in cases of shifting of

industrial undertaking from urban area

54GA Exemption of capital gains on transfer of assets in cases of shifting of

industrial undertaking from urban area to any Special Economic Zone

54H Extension of time for acquiring new asset or depositing or investing

amount of capital gain

55 Meaning of adjusted, cost of improvement and cost of acquisition

55A Reference to Valuation Officer


23

(1) On 30.6.2012 Shri divyesh has sold some of his assets (other than land and Building) for Rs.

6,87,540 which were bought in December, 1973 for Rs. 35,000. The fair market value of these assets

on 1.4.1981 was Rs.42,000. Ascertain the taxability of capital gain arising on sale of assets for teh

assessment year 2012-13 taking into consideration the cost inflation index as for 1981-82 - [100]

and for 2012-13 [852]

[Taxable long term capital gain Rs. 3,29,700]

(2) Hiral had purchased a residential house for Rs. 5,00,000 during the year 1984-85. She had also paid

Rs. 1,76,250 as additional construction expenses during the year 1987-88. On 7.7.2012 she sold the

above house for Rs. 50,50,725 and paid 2% brokerage. On 1.1.2013 she purchased another house for

Rs. 8,02,825. Relevant cost inflation numbers are as under :

P.Y. 1984-85 : 125; P.Y. 1987-88 : 150; P.Y. 2012-13 : 852

Find out the Tax free capital gain according to Section 54 for the A.Y. 2012-13.

[Long Term Capital Gain 6,41,625 is fully exempt U/s 54 (As the assessee has invested the entire capital profit in another residential house within the prescribed time limit, it is fully exempt u/s 54)]

(3) Shri A Purchased a residential property in November,1975 for Rs. 60,000. In March,1979 he

remodelled the property spending Rs. 20,000. On 1st April,1981, he concluded an agreement to sell

the property to B for Rs. 92,500 but the sale could not go through, since B did not pay the

consideration by the time fixed. Shri A therefore, forfeited the advance money of Rs. 7,500 received

from B. In April 1984 Shri A spent a further Sum of Rs. 25,000 to construct an additional room on

the second floor. The entire property was sold for Rs. 10,00,140 on 30th June,2012 and paid a

brokerage of Rs. 3,000. He did not own any other house on 30.6.2012. Work out the taxable capital

gain and indicate whether any provisions of the Income Tax Act would enable A to avoide payment

of Tax on Capital Gains.

(The relevant cost inflation index are 1981-82 :100; 1984-85 : 125; and 2011-12 :852)

[Long term capital gain Rs. 1,28,100]

(4) Shri Ashok Parikh gives following particulars of his investments :

Particular Date of

Purchase

Cost Rs. Date of

Sale

Sales Price

Rs.

Fair Market

Value as

on 1.4.1981

Rs.

[A] Share in Companies

(i) A Ltd. 01.01.1979 7,000 30.06.2012 86,200 10,000

(ii) B Ltd. 01.04.1980 10,000 31.10.2012 1,99,400 15,000

(iii) C Ltd. 31.01.2012 20,000 30.12.2012 26,000 -

(iv) D Ltd. 28.02.2012 18,000 31.01.2013 14,000 -

[B] House Properties

(i) Ownership Flat at

Marine Drive {S/O}

01.01.1989 2,41,500 30.06.2012 14,25,500 -

(ii) House Property at

Poona {L/O}

30.06.1988 48,300 30.09.2012 2,75,200 -

Practical Sum


24

He has purchased a flat for his personal residence in Mumbai on 31.10.2012 for Rs.

2,50,000. He has incurred an expenditure of Rs. 5,000 on registration and brokerage on sale of house

property at Poona. Securities Transaction Tax was charged on sale of shares of B Ltd.; C Ltd. and D

Ltd. You are required to compute the taxable capital gain for the A.Y.2013-14. Cost inflation Index of various years are :F.Y. 1981-82 : 100; 1988-89 : 161 and for 2011-12 : 852

[Taxable Income Under the head Capital Gain : LTCG Rs. 15,600 + STCG Rs. 2,000 = Rs. 17,600]

(5) Shri Abhay Shah has sold a residential house for Rs. 23,57,500 on 15.11.2012. This house was

bought on 1.5.1976 at a cost of Rs. 1,20,000, but its fair market value on 1.4.1981 was estimated at

Rs. 2,00,000. During 1989-90 additional construction cost incurred was Rs. 86,000. On 15.2.2013 he

has paid Rs. 1,00,000 towards the construction cost of a new residential house and on 30.6.2013 has

also deposited Rs. 1,00,000 in a scheduled Bank under the Capital Gain Account Scheme notified by

the Central Government. On 30.6.2012, 1000 equity shares of Vijay Ltd.(not listed) were sold @

Rs.485 (net) per share. Of the above shares 500 shares were bought during 1985-86 @ Rs.133 and

remaining 500 shares were received by him as bonus during 1989-90.

Relevant cost-inflation index nos. are as under:

Financial Year 1981-82 : 100; Financial Year 1985-86 : 133; Financial Year 1989-90 : 172;

Financial Year 2012-13 : 852 Compute taxable capital gain for A.Y. 2013-14.

[Taxable Capital Gain Rs. 86,500 ( (i) on house property Rs. 27,500 + (ii) On sale of share 59,000]

(6) Shri Dhansukh Pattani of Jamnagar had purchased 160 shares (unlisted) in Raghuvansi Ltd. at Rs.

700 per share during 1980-81. All these shares were sold during financial year 2012-13 at Rs. 7,740

per share. During this year he purchased a residential house for Rs.6,19,200. cost Inflation Index for

2012-13 was 785 and for 1981-82 was 100. Compute the taxable capital profit for A.Y. 2013-14.

[Long Term Capital Gain Rs. 1,42,080]

(7) Information regarding certain transactions of Shri Appu Dada is as under :

(a) Jewellery purchased on 25.3.1995 for Rs. 1,02,000 for personal use was sold on 2.12.2012

for Rs. 4,20,476.

(b) He had to pay brokerage of Rs. 1,600 on purchase and Rs. 4,000 on sale of the said Jewellery.

(c) On 1.3.2013 he has invested Rs. 60,000 (out of sales consideration received) in the Bonds of

NHAI. Cost inflation index of 1994-95 was 259 and that of 2012-13 was 852.

Compute taxable Capital Gain.

[Long Term Capital Gain Rs. 15676 after deduction exemption allowable U/s 54EC for

investment in NHAIwithin 6 months Rs. 60,000]

(8) Following details have been provided by shri Gaurang :

(a) Purchassed 500 equity shares of A Ltd. on 1st October,1997 for Rs. 50,000. He had paid Rs.

1,305 brokerage on purchase of these shares.

(b) A Ltd. issued one Right Share for every two shares held by him at Rs. 162.4 per shares on 1st

July,2000.

(c) The company has issued one Bonus shares for every one share held by him on 1st November,

2012.

(d) He sold all the shares on 27th February, 2013 at Rs. 364 per share.

(e) Cost inflation index numbers are as under :

1997-1998 331 2000-2001 406 2012-2013 852

Compute the taxable Capital Gain for A.Y. 2013-14.

[Long Term Capital Gain on sale of Original Equity Shares Rs. 49,940; + On Right Shares Rs.

5,800 and Short Term Capital Gain on Sale of Bonus Share Rs. 2,73,000]


25

(9) Shri Ujjval furnishes the following details in respect of residential building sold during the Previous

Year 2012-13. at Rs.32,03,830.

(a) Building was purchase in 1967-68 for Rs. 80,000

(b) The first floor was constructed in 1978-79 for Rs. 1,00,000

(c) The second floor was constructed in 1988-89 for Rs. 2,00,000

(d) Fair Market Value of the building on 1.4.1981 was Rs. 1,70,000.

(e) He purchased a new residential building immediately after the sale of above building for Rs.

20 Lacs. (f) Cost inflation index numbers are as under :

Year C.I.I.

1981-1982 100

1988-1989 161 2012-2013 852

Compute the taxable Capital Gain for A.Y. 2013-14.

If he sells the new building in P.Y. 2011-12 for Rs. 21,00,000, compute taxable capital gain for A.Y. 2013-14.

[ Long Term Capital Gain on sale of House property Rs. 6,11,845 ; Taxable Capital Gain Nil But if

House property sold within a period of 3 years in such case Taxable STCG Rs. 1,00,000 + 6,11,845 =

7,11,845]

(10) Find out the taxable capital gain and exemption u/s 54F for the A.Y. 2013-14 from the details given below by Anamika :

Assets Date of Purchase Purchase Price Rs. Sales Price Rs. Selling Expenses

Rs.

Land In Surat City 01.01.1982 25,000 5,13,500 500

Jewellery 01.01.1986 1,33,000 9,55,000 -

Share of Bardoli

Sugar Factory

01.01.1991 54,600 8,56,500 900

Listed Debenture of

Company

01.01.2001 1,26,650 2,27,000 350

Unlisted Debenture

of a Company

01.01.2002 3,03,000 4,00,000 -

Residential Flat 02.11.2012 23,60,200 - -

On 1.11.2012 all the above assets (excluding residential flat) were sold. Security Transaction tax has not

been charged on sales of securities. The cost Inflation Index numbers are as under :

1981-82 100 1985-86 133 1990-91 182

2000-01 406 2001-02 426 2012-13 852

[Long Term Capital Gain on Land of Surat Rs. 3 Lacs + On Jewellery Rs. 1,03,000 + On Shares Rs.

6,00,000 + On Listed Debenture Rs. 1,00,000 + On unlisted Debentures Rs. 97,000 = Rs. 12,00,000 Less

Exemption u/s 54F Rs. 9,60,000 Hence Taxable LTCG Rs. 2,40,000]

!

!


26

INCOME FROM OTHER SOURCES

"Income from Other Source" is the one of the last head of Income Tax Act-1961. As per the provision of the

Income Tax Act if any income which is not a part of other four head Income are taxable under "Income from Other

Sources" which provides U/S 56 to 59.

As per the provision of Section 56 (1) Income of every kind which is not to be excluded from the total income

under the Act, shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to

income tax under any of the other four heads, Any income which satisfied the condition specified under the Act is

considered taxable under the head "Income from the other sources"

Which Income is chargeable under this head ?

An income which defied and explained U/S 56(2) are chargeable for tax under this head of Income.

For the purpose of making the calculation for chargeability of tax under this head Interest and Dividend on

securities are key point for calculation. Hence it is explained in brief as follows :

Kinds of Securities

[A] Government Securities

(a) Taxable (b) Tax Free

[B] Commercial Securities

(a) Less-Tax (b) Tax-Free

Important point About Chargeability

(a) Basis of Charges on due basis (immaterial whether it is received or not

(b) Receipt of Past Income- Is considered only if not considered in (a)

Some of Person mentioned in Section 10, 11, 13 A of the Income Tax Act, are exempt from paying Tax on Income

from Interest on Securities They are :

(a) Local Authority Like Municipal corporation

(b) An Institution Or Authority formed for the development of khadi and village industries

(c) Scientific Research Association, whose income is solely applied for the purpose of that association

(d) University or other educational institution existing solely for educational purpose

(e) Hospital or other institution for medical treatment fwhich exist for such purposes and not for profit

(f) Any regimental Fund or Non-Public fund, statutory or Recognised Providend fund or Superannuation fund

(g) Registered Trade Union

(h) The Prime Ministers National Relief Fund or any such similar fund

(i) Member of Schedule Tribe

(j) Public charitable or religious trust or institution

(k) Political Party Regd. With election Commissioner of India

Wholly Tax Free Security U/s 10(15)

1. Any Gold Deposit Bond Issued by C.G.

2. National Defence Gold Bond -1980; Special Bearer Bond-1991

3. 10.5% Tax free Bond of HUDCO

4. 9.25% Tax free Bonds of RECL

5. 10.5% Tax free Bond of NHPCL


27

6. Treasury Savings deposit certificates-10 years

7. Post office cash certificate 5 years

8. 12 year national saving annuity certificate

9. National plan certificate 10year

10. Post office cummulative time deposit scheme 1981

11. Interest on P.O. saving A/c.

12. Post office NSC 7 yr /12 yr

13. Special deposit scheme 1981

14. national plan savings certificate 12 year

15. Interest on 7% capital Investment Bond

16. Int. on NRI bond of SBI

17. Interest on 9% relief Bond etc..

Dividend Income is exempted from tax subject to if

(a) Dividend paid by Indian companies and

(b) Dividend etc. paid by U.T.I. and other approved Mutual Funds.

(c) Dividend received from foreign companies is fully taxable in the hands of shareholders.

Dividend paid by Indian company only is exempt in the hands of shareholders but the company will

have to pay dividend-tax at prescribed rate.

Interest on Secrities

Following interest due to an assessee in the previous year are chargeable to income tax :

(a) Interest on any security of the Central or State Governments (excluding interest payable on annuity

deposits but including interest on P.O. National Saving Certificates)

(b) Interest on Debentures or other securities for money issued by a local authority.

(c) Interest on debentures or other securities issued by a company.

(d) Interest on debentures or other securities issued by a corporation established by a Central or State Act.

Tax is not deductible at source from any interest on debentures,

provided the following conditions are satisfied :

(1) The recipient is a resident individual.

(2) The debentures have been issued by a company in which public is substantially interested and the

debentures are listed on a recognised stock exchange

(3) The interest is paid by an account-payee-cheque.

(4) The total amount of interest payable by the company to the investor does not exceed Rs. 2,500.

If the annual interest on time deposits in a bank or a co-operative society engaged in the banking

business or housing finance company or notified deposit scheme with post office (i.e. senior citizen

saving scheme, 2004) does not exceed Rs. 10,000 per annum per branch, then no tax is deducted at

source.

B. INCOME FROM OTHER SOURCES (Important Sections)

56 Income from other sources

57 Deductions

58 Amounts not deductible

59 Profits chargeable to tax


28

(1) Kishan Thakkar is a resident individual receives the following incomes during the previous year 2012-13. You

are required to calculate the Income chargeable under the head 'Income from Other Sources':

Rs.

(a) Interest on redeemable listed debentures (T.D.S. @ 10.30%) 4,485

(b) Dividend on Cumulative preference shares 2,400

(c) Interest on securities of Foreign Company 2,000

(d) Gross Interest on Bonds of AMC (T.D.S. @ 10.30%) 3,300

(e) Interest on securities of a Foreign Government 4,500

(f) Dividend from the Unit Trust of India 600

[Taxable income from other source Rs. 14,800]

(2) Mr Jayesh Joshi held the following securities and shares on 31st Mach,2013:

Rs.

(a) 15% debentures of X Co. Ltd. 1,50,000

(b) 12% Tax free Debentures (listed) of A Ltd. Company (T.D.S.@ 10.30%) 50,000

(c) 14% Preference Shares of X Co. Ltd. 50,000

(d) 10% Tax free Government Securities 30,000

(e) 7% Municipal Debentures 50,000

Rs. 389 were paid to the bank as commission for collecting the interest and Rs. 50 for preference

share dividend and Rs. 13,500 as interest on a loan taken to purchase 15% debentures.

Calculate Jayesh Joshi's taxable income under the head income from other sources for A.Y.2013-14.

[Total income under the head income from other sources Rs. 35,689; Taxable income Rs. 21,800]

(3) From the following information, Calculate the income from other sources of Shri X for the year ended on

31.3.2012 ; following were the investment on 1.4.2012 :

(a) 8% Municipal Corporation Bonds (first series) of Rs. 10,000

(b) 10% Tax-free Listed Debentures of Rs. 27,000 (T.D.S. @ 10.30%)

(c) 6% Tax-free Government Securities of Rs. 10,000.

(d) 12% Preference Shares of Rs.80,000

(e) 10% Tax-free (Unlisted) debentures of Rs. 22,000 (T.D.S. @ 20.60%)

Interest on the above was always paid on 31st December each year. On 31.8.2012 he had sold Rs. 10,000 6%

Tax-free Government Securities for Rs. 7,500 and on the same day purchased Rs. 10,000 8% Municipal

Corporation Bonds (second series) for Rs. 9,500. The required balance of amount for such purchase was

borrowed at 15% interest p.a. He had paid Rs. 60 for brokerage on the purchase and sale of securities and Rs.

50 for collection of interest. Dividend on preference shares was declared in March,2013.

[Gross income from other sources Rs. 7,341; Taxable Income Rs. 7,116]

(4) From the following information about income of Mr.Nilesh for A.Y. 2013-14; You are required to calculate

his taxable income under the head "Income from other sources" :

Rs.

(a) Family Pension received 60,000

(b) Dividend received on Equity Shares of an Indian company 12,000

(c) Interest received on bank fixed deposit 2,100

(d) Rent received form Sub-tenant of a house property 9,000

(e) Interest received on debentures of RP Ltd. (TDS @ 10.30%) 26,910

(f) Income from Card Game (T.D.S. @ 30.90%) 17,275

Practical Sum


29

(g) Sitting fees received for attending board meeting as director of a company. 4,000

(h) Composite rent received of Machinery & Building (Gross) 32,000

(i) Income from unexplained source 12,000

(j) Interest from wholly tax free Government Securities covered U/S 10(15) 8,000

Shri Nilesh claims following deductions in respect of above incomes:

(i) Interest paid on loan taken to invest inequity Shares of Indian Company 3,000

(ii) Interest paid on loan taken to invest in Debentures of RP Ltd 6,000

(iii) Expenses incurred in respect of card games income 3,000

[Taxable Gross income under the head of income from other sources Rs. 1,59,100 Rs. 6,000 = 1,53,100]

(5) Shri Jagdish Mathur is an Indian citizen and ordinary resident. Prepare a statement showing his taxable

income from other sources from the details of his income for the year 2012-13 given below:

(a) He has received on 15.4.2012, the total accumulated amount of Rs.2,40,000 from unrecognized

provident fund, of which the employer's contribution was Rs. 90,000 and interest there on was Rs.

30,000. (He has retired on 31.3.2012 and the employer and the employee were contributing equally to

unrecognized P.F.) Rs.

(b) Agriculture income from land in U.P. 60,000

(c) Prize from cross-word puzzles 5,000

(d) Interest received on Government Securities 1,800

(e) Interest received on tax-free commercial securities (Rate of T.D.S. @ 10,30%) 3,588

(f) Amount of third prize received for participating in Motor race 50,000

(g) Loss in card games 2,000

(h) Interest on deposits in foreign companies (in dollars) and its rupee value was 3,500

(i) Remuneration received for working as a judge in a beauty contest 25,000

(j) Interest due on Kishan Vikash Patra and Indira Vikas Patra during the previous year

was Rs. 16,425 and Rs. 8,640 respectively.

(k) Remuneration received for working as an examiner in University examination 2,400

(l) Interest due on post office National Saving Certificate during the previous year. 1,480

(m) Interest on 7% Capital Investment Bonds 7,000

(n) Debentures Interest received from Indian Companies (T.D.S. @ 10.30%) 13,455

(o) Income from Royalty (after deducting expenses) 7,200

(p) Gift received from his uncle 81,000

He has paid interest of Rs. 1,500 on bank loan taken for making investments in debentures of Indian

companies. He has paid interest of Rs. 3,000 on bank loan taken for making investment in shares of

companies from whom no dividend income is received.

Bank commission paid from transferring interest on deposits in foreign companies to India Rs. 350.

[Gross Income from other sources Rs. 1,70,445 and taxable income Rs. 1,68,595.]

(6) Shri Jhaverilal is an author.You are required to compute his taxable income under the head 'Income from other

sources' from the following details of income of financial year 2012-13 furnished by him:

(a) Royalty from the publication of novels and children story books Rs. 1,08,800; Expenses incurred in

this respect are: Typing Rs. 3,500 and Proof-reading charges Rs. 2,850.

(b) First prize of Rs. 5,000 received from 'Story competition' organised by "Nav-Sarjan" magazine.

(c) Share dividend Rs. 6,250; Bank interest Rs. 9,300; Income from investment in U.T.I. (Gross) Rs. 13,600.

(d) Remuneration of Rs. 10,000 earned on translation of a Marathi Novel in Gujrati.

(e) Interest received on Rs. 89,700 15% listed tax-free debentures of Kautilya Ltd. (T.D.S. 10.30%).

[Taxable income Rs. 1,41,750]


30

(7) Shri Robert's Investment on 1.4.2012 were as under :

(a) Rs. 60,000 12% Madhya Pradesh Government Loan.

(b) Rs. 19,850 10% tax free debentures of Nayan Ltd. (T.D.S. @ 20.60%)

On 31.7.2011 Madhya Pradesh Government Loan of Rs. 40,000 was sold and purchased @ Rs. 102

additional 10% tax free debentures of Rs. 39,700 face value of Nayan Ltd. for this purpose he had

borrowed Rs. 40,000 from bank at 12% per annum interest.

(c) Rs. 2,691 as interest received on listed debentures (T.D.S. @ 10.30%)

(d) Rs. 1,34,550 10% tax free debentures of Ashok Ltd. (T.D.S. @ 10.30%)

(e) Winning from lottery (Net) Rs. 1,55,475 (T.D.S. 30.90%)

(f) Rs. 64,000, 10% less tax debentures of Sanjay Ltd. (T.D.S. @ 10.30%)

(g) Unexplained cash Rs. 80,000.

(h) Interest of Rs. 3,826 on fixed deposits at bank.

(i) Rs. 6,174 as interest on 7 % capital investment bond.

Interest on all above securities was paid on 30th June and 31

st December

Find out the taxable "Income from Other Source" for the assessment year 2013-14.

[Total taxable income from other sources Rs. 3,39,826]

(8) Investments of Shri Manmohanji as on 1.4.2011 and the income and expenditure during 1.4.2012 to 31.3.2013

were as under. Find out the taxable income under the head "Income from Other Sources" for the A.Y. 2013-14.

(a) Rs. 80,000, 12% Maharashtra Government Loan

(b) Rs. 20,000, 9% Gujarat Government Loan

(c) Rs. 39,700 15% tax-free debentures of Himson Pvt. Ltd. (T.D.S. @ 20.60%)

(d) Rs. 50,000 12% less-tax debentures of 'B' Ltd., (T.D.S. @ 10.30%)

(e) Interest of Rs.1,345.50 received on 12% 'C' Ltd's less-tax debentures (T.D.S. @ 10.30%)

(f) Interest of Rs. 4,485 received on tax-free debentures of 'D' Ltd. (T.D.S. @ 10.30%)

(g) Interest received on Capital Investments Bonds Rs. 4,000

(h) 9% preference shares of Rs. 10,000 of Malhotra Ltd.

(i) Rent of Rs. 38,770 from sub-tenant.

Interest on all these securities becomes due on 30th

June and 31st December. On 1.7.2012 Maharashtra

Government's Loan of Rs. 50,000 was sold at Rs. 51,000, and on the same day 15% Bihar

Government's Loan of Rs. 53,000 was bought at par. The required balance of amount for such

purchase was borrowed at 6 % p.a. rate from a friend On 1.8.2012 9% Gujarat Government's Loan of

Rs. 20,000 was sold.

On 1.1.2013 15% tax free debentures (T.D.S. @ 20.60%) of Himson Pvt. Ltd. of Rs. 39,700 were sold

and 10% less-tax debentures of Reliance Pvt. Ltd. of Rs. 60,000 (T.D.S. @ 10.30 % ) were purchased.

Expenses of Rs. 155 were incurred for collection of interest on taxable securities.

[Gross Income under the head Income from other source Rs. 1,00,245 Less Specific deduction Rs. 245]

(9) From the details of Shri Sanyasee's income given below find out the taxable income under the head "Income

from other sources" for the A.Y. 2013-14.

(a) Rs. 9,000 as interest earned on Gold Deposit Bonds, 1999.

(b) Rs. 10,000 as dividend received on shares of Reliance Co. Ltd.

(c) Rs. 8,734 as interest received on less-tax debentures of "A" Ltd. (T.D.S. 20.60%)

(d) Rs. 10,764 as interest received on less-tax debentures of 'B' Co. Ltd., (T.D.S. @ 10.30%)

(e) 10% Rs. 2,60,000 less-tax debentures of 'C' Co. Ltd. (T.D.S. @ 10.30%); On 1.7.2011 these

debentures were sold and settled the bank loan taken to purchase debentures of E Ltd.

(f) Royalty received as an author Rs. 14,000 (net after deduction of Rs. 3,500 of expenses)

(g) 10% Rs. 1,35,000 Tax-Free debentures of 'D' Ltd. (T.D.S. @ 10.30%)

(h) Net income from horse race Rs. 11,056 (T.D.S. @ 30.90%)

(i) Interest on Bank Deposits (Gross) Rs. 17,000.

(j) On 1.6.2012 he purchased Rs. 1,20,000 12% Tax-free debentures of 'E' Ltd. (T.D.S. @ 20.60%)


31

for this purpose he borrowed from the bank Rs. 1,00,000 @ 12% p.a. interest rate.

(k) Rs. 6,270 received as ground rent.

Interest on all securities was received on 30th June and 31

st December every year. Rs. 345 paid for

collection of taxable interest.

[Gross Income under the head 'Income from other source' Rs. 1,22,456 Specific Deduction Rs.

1,345 = Rs. 1,21,111 Taxable Income].

(10) During the P.Y. 2012-13 Mr. G had the following securities :

(a) Rs. 56,000 10% tax-free unlisted debentures of M Ltd. (TDS @ 20.6%)

(b) Rs. 36,000 10% tax-free listed debentures of S Ltd. (TDS @ 10.3%)

(c) Rs. 50,000 8% taxable saving bonds.

(d) Rs. 22,500 6% tax-free bonds issued by notified public sector company.

The interest is paid on 31st December annually. He paid Rs. 66 as commission to his bank for

collection of interest.

His other income were as under:

Rs.

(i) Director's fees received from Y Ltd. 3,000

(ii) Agricultural income from land situated in India 10,000

(iii) Agricultural income from Nepal 15,000

(iv) Winning from lottery (net after TDS @ 30.9%) 27,640

(v) Ground Rent 1,000

Calculate his taxable income from other sources for A.Y. 2012-13.

[Gross Income Rs. 74,066 Deduction Rs. 66 = Rs. 74,000]

(11) From the following information of Mr. Sehwag, calculate income from other sources for A.Y. 2013-14.

Rs.

(a) 10% port Trust Bonds 2,50,000

(b) 12% Preference shares of Atul Ltd. 2,00,000

(c) 10% Tax Free Debentures of reliance Energy Ltd. (T.D.S. @ 20.60%) 1,98,500

(d) 8% Debentures of Calico Ltd. 4,00,000

(e) Income from Lottery (T.D.S. @ 30.90%) 2,07,300

(f) Pension from former employer 48,000

On 30.11.2012 he sold Debentures of Calico Ltd. of Rs. 1,00,000. He paid brokerage Rs. 100 and

collection charges of Rs. 150. He received interest on above investment on 30th June and 31

st

December every year.

[Gross Income Rs. 3,78,000]

!!!

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