Profits and Gains of Business or Profession [Ss.

28 to 44 DB]
Under Section 28 of the Income Tax Act, the following types of
incomes are chargeable to tax under the head Profits and
Gains of Business or Profession.
(i) Profits and gains of any business or profession which was
carried on by the assessee at any time during the previous
year;
Profession [S. 2 (36)] profession includes vocation.
(ii) Compensations due to or received:
Any compensation or other payment due to or received for
termination of an appointment or modification of its terms by
(a) A person, managing the whole or substantially the whole of
the affairs of an Indian company;
(b) a person, managing the whole or substantially the whole of
the affairs in India of a non Indian company;
(c) a person, holding an agency in India for any part of the
activities relating to the business of any other person;
(d) any compensation paid or due for or in connection with the

Income derived by a trade, professional or similar association from specific

services performed for its members;
(iv) Receipts in connection with foreign trade:
(a) Profits on sale of a licence granted under the Imports
(Control) Order, 1955 usually called as Import Entitlement
Licences;
(b) Cash assistance (by whatever name called) received or
receivable by any person against exports under any scheme of
the Government of India;
(c) Repayment of any Customs or Excise Duty to any person
against exports usually called as draw back of Customs or
Excise Duties for exports;
(d) Any profit on the transfer of the Duty Entitlement Pass Book
scheme, being duty Remission Scheme under the Export and
Import Policy;
(v) Value of any Benefit or Perquisite:
The value of any benefit or perquisite, whether convertible into
money or not, arising from business or the exercise of a
profession;
(vi) Receipts of a partner from the firm:
Any interest, salary, bonus, commission or remuneration
received by a partner from firm;

Other receipts:
(vii) Any sum whether received or receivable in cash or kind
under an agreement for not carrying out any activity in relation
to any business or not to share any know how, patent,
copyright, trademark, licence, franchise or any other business
or commercial right of similar nature; or information or
technique likely to assist in the manufacture or processing of
goods or provision for services.
(viii) Any sum received under Keyman Insurance Policy
(ix) Income from speculative transaction must be deemed
as distinct and separate from any other business. [Explanation
2]
Section 43(5) defines speculative transaction
CIT vs. Shantilal (P) Ltd., [1983] 144 ITR 57 (SC) - payment
of damages for breach of contract is not the same thing as
settlement of contract otherwise than actual delivery of
commodities.
Business [S. 2(13)]: includes any trade, commerce,
manufacture or any adventure or concern in the nature of
trade, commerce or manufacture.
Trade: State of Punjab vs. Bajaj Electricals Ltd. [1968] 70
ITR 730(SC) observed: trade in its primary sense is the
exchange of goods for goods or goods for money.

Commerce: If a person purchases goods with a view to selling

them at profit, it is an ordinary case of trade. If such transactions
are repeated on a large scale, it is called commerce.

Manufacture:
U.o.I. vs. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC
791

Adventure in the nature of Trade:

G. Venkataswami Naidu & Co. vs. C.I.T. (1959) 35 ITR 594
(SC): Tests for determination:
1. Is the purchaser a trader and are the purchases of the
commodities and its resale, allied to his usual trade or
business, incidental to it?
2. What was the nature and quantity of the commodity
purchased and resold?
3. Did the purchaser by an act subsequent to the purchase
improve the quality of the commodity to make that readily
resalable?
4. Were the transactions repeated?
5. In regard to purchase of commodity, did the element of pride
of possession come into the picture?

Incomes though appear to be business

income but not taxable under the head
Profits and Gains of Business or
Profession:
1. Rent of House property even if property
constitutes stock in trade
2. Dividends on shares in case of a dealer in shares
3. Winnings from lotteries, races etc..
4. Interests received on compensation or interest on
enhanced compensation even if it pertains to a
regular business activity
5. Sums received after discontinuance of a Business
or Profession Taxable u/s 176 (3A)

Income from letting out business asset:

C.E.P.T. vs. Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC)
Assessee doing business of manufacturing silk cloth and dyeing
silk yarn, let out his assets on monthly rent in the relevant
accounting year held business income.
Universal Plast Ltd. vs. CIT [1999] 237 ITR 454 (SC) held,
where all the assets of the business are let out, the period for
which the assets are let out is a relevant factor to find out
whether the intention of the assessee is to go out of business
altogether or to come back and restart the same. In former case
rent will be taxable under the head Income from Other Sources,
in latter case as business income.

Income from Illegal Business:

Minister of Finance vs. Smith (1927) AC 193 (PC) Assessee
may be prosecuted for the offence but income is taxable.
CIT vs. Kothari (1971) 82 ITR 794 (SC) Income is taxable and
not the gross receipt
CIT vs Piara Singh (1980)124 ITR 40 (SC) Loss sustained due
to confiscation of gold or currency in smuggling business is
deductible.

T.A. Qureshi vs. CIT [2006] 287 ITR 547

(SC) - Loss arising as a result of seizure and
confiscation of illegal stock in trade is
allowable as a business loss against income
from illegal business. In this case heroin
worth Rs. 2 Lakh was seized. Held:
Explanation to Section 37(1) has no
application to this case as the claim was of a
business loss and not business expenditure.
Explanation to S. 37 (1) says: For the
removal of doubts, it is hereby declared that
any expenditure incurred by the assessee for
any purpose which is an offence or which is
prohibited by law shall not be deemed to
have been incurred for the purpose of

profession, how computed [S. 29]:

Section 29 lays down that income referred to in Section 28
shall be computed in accordance with the provisions
contained in sections 30 to 43D.
Sections
30
to
36
lay
down
specific
deductions/allowances admissible.
Section 37(1) is a residuary section which allows
deductions of business expenditures not covered under
Sections 30 to 36. This is on the basis of accepted
commercial principles.
Section 38 lays down that where any building, plant,
machinery or furniture is not exclusively used for the
purposes of business or profession, deductions in respect
thereof under Sections 30, 31 or 32 will be restricted to a
fair proportionate part thereof which is attributable to the
use for business or profession.
Sections 37(2B), 40, 40A and 43B cover expenses
which are not deductible, e.g. expenditures on
advertisements published in souvenir, brochure etc.
published by a political party, salary, interest royalty or fee
for technical services paid outside India on which tax is

source, payments made in a day to a person over Rs.

20,000/- otherwise than by an account payee cheque or
account payee bank draft etc.
Section 41 deals with deemed profits in cases where
loss, expenditure, or trading liability was allowed as
deduction but later any amount or benefit in respect
thereof has been received by the assessee or his
successor.
Section 42 lays down special provision for deductions
in case of business for prospecting, etc. for mineral oil.
Sections 43C and 43D lay down special provisions for
computation of cost of acquisition of certain assets and
special provisions in case of income of public financial
institutions, public companies etc. respectively.
Section 44 lays down that Profits and Gains of
Insurance Business will be computed in accordance with
rules contained in the First Schedule.
Sections 44A makes special provisions for deduction in

Section 44AA casts a duty on certain persons

carrying on profession or business to maintain
accounts. For example, those whose income from
business or profession exceeds 1 lakh 20 thousand
rupees or total sales, turnover or gross receipts
exceeds ten lakh rupees in any of the three years
immediately preceding the previous year.
Sections 44AB casts a duty on certain persons
carrying on business or profession to get his
accounts audited.
Sections 44 AD to 44BD lay down special
provisions for computation of profits and gains or for
deductions in cases of certain businesses or
professions.

General Principles regarding admissibility of

Allowances and Deductions:
1. List of allowances is not exhaustive
2. Allowances are cumulative and not mutually
exclusive
3. Expenditure and losses in unlawful business:
CIT vs. Piara Singh (1980) 124 ITR 40 (SC) = AIR
1980 SC 1271;
Dr. T.A. Quereshi vs. C.I.T (2006) 157 Taxman 514
(SC)].
4. No allowance in respect of exhaustion of capital or
wasting assets
5. Expenditure claimed should have been incurred in
the previous year. Exceptions: Ss. 41 and 176.
6. Business should be carried on during the previous
year
7. Expenditure should have been incurred in
connection with assessees own business
8. No allowance in respect of a business set up after

Deductions Expressly Allowed:

1. Expenses in respect of Business Premises
[Section 30]
(i) Rent paid for premises
(ii) Repair charges incurred but not of capital
nature
(iii) Any sums paid as land revenue, local taxes
or Municipal Taxes
(iv) Premium paid in respect of any insurance
against risk of damage or destruction of
premises.
Note:
(i) Rent paid to partner by the Firm also allowed
(ii) If the assessee is a tenant and part of the
premises is used as dwelling house, deduction
will be allowed proportionately.
2. Repairs and Insurance of Machinery,

3. Depreciation Allowance [Section 32]

Reason for Allowance:
Conditions:
(i) confined to buildings, machinery, plant or
furniture being tangible assets; or Know-how,
patents, copyrights, trade marks, licences,
franchises or any other business or commercial
rights of similar nature, being intangible assets
acquired on or after 1.4.1998;
(ii) The asset must be owned by the assessee
either wholly or partly;
(iii) The asset must have been used for the purpose
of business or profession in the accounting year.
Building:
C.I.T. vs. Alps Theatre [1967] 65 ITR 377 (SC)
held cost of land should be excluded from total cost
of building.

Machinery and Plant:

CIT vs. Mir Mohammad [1964]53 ITR 165 (SC) both
words bear the same meaning.
S. 43 (3) defines plant as including ships, vehicles,
books, scientific apparatus and surgical equipments but
does not include tea bushes or live stocks (e.g. animals
and human body).
Plant in its ordinary sense includes whatever
apparatus is used by a businessman or Professional for
carrying on his business or profession not being his
stock in trade.
Thus plant has been held to include knives, loose tools,
bottles and shells used by the manufacturer of soft
drinks, gas cylinders, sanitary and pipeline fittings,
electric fittings, ceiling and pedestal fans, internal
telephone system, air conditioning equipments, wells,
fencing around a refinery etc. may be in residential
quarters or on premises of a business.
Even buildings or rooms may be plant e.g. cold storage
room in case of ice-cream manufacturer.

In deciding whether a structure is building or

plant, functional test should be applied i.e. is it an
apparatus with which the business is carried on, or
a part of the premises in which the business is
carried on. Former is a plant, latter is not.
Commissioner of Income Tax vs. Anand
Theatres [2000] 244 ITR 192 (SC)
Hotel buildings and cinema theatres are not plants.
Earlier case CIT vs. Dr. B. Venkata Rao [2000]
243 ITR 81 where building in which nursing home
was carried on was held as a plant has been
overruled.
Recently the Supreme Court in ACIT vs. Victory
Aqua Farm Ltd. decided on Sept. 4, 2015 held that
a pond designed for rearing /breeding prawns is a
plant.

(ii) Asset must be owned by the Assessee:

(a) So, if assessee is a lessee of the assets, he is not entitled.
(b) Assessee may be lessee of the land but he may be owner of the
building
(c) Assessee, a lessee of the building if makes any alteration or extension
of permanent nature, he can claim depreciation on that part. [Explanation
1 to S. 32 (1)
(d) Mysore Minerals Ltd. vs. CIT [1999] 239 ITR 775 (SC)
held if ownership has been acquired under an agreement but
legal title is not transferred because of non registration still
transferee will be owner.
(e) Depreciation in Hire Purchase agreements depends upon terms of
the agreement if effect is immediate transfer of ownership, depreciation
may be claimed as if asset purchased on installment. In such cases
lessor under the agreement can sue for arrears of installments due but
not to recover the asset back. If the agreement is that hirer will become
owner when the last installment is paid or has option to purchase, the
installments paid will be allowed as business expenditure.

(iii) Use of asset in Accounting Year:

(a)
(b)
(c)
(d)

Not necessary to be used throughout the Previous Year

Trial production as well as Commercial production both amount to use
Active use and passive use
Use of asset for less than 180 days in the year (P.Y.) of acquisition
Depreciation @ 50% of normal rate [Second Proviso to S.32]
(e) Additional Depreciation Allowance on Plant or Machinery
[S.32(1) (iia)]:

(i) If Plant or Machinery has been acquired or installed after

31.03.2005 by an assessee engaged in business of
manufacture or production of any article or thing or
generation and / or distribution of power, additional
depreciation shall be allowed @ 20% of the actual cost.
(ii) If assessee sets up an undertaking or enterprise after
31.03.2015 but before 1.4.2020 in notified backward area
of State of Andhra Pradesh, Bihar, Telengana or West
Bengal, additional depreciation will be allowed @ 35% of
actual cost.
In the aforesaid cases if asset is put to use for less than
180 days in the previous year in which it is acquired,
additional depreciation will be 50% i.e. 10% or 17.5% as

S. 38 (2) provides that in cases where any asset is used for business as
well as for some other purpose (say personal use of the assessee) the
depreciation shall be proportionately reduced.
Computation of Depreciation: Two methods:
(i) Straight Line Method: Applicable in case of assets used in
generation or generation and distribution of power w.e.f.
1.4.1998 (F.A. 1998)
(ii) Written Down Value Method: In this method Depreciation is
calculated as certain percentage of the written down value
of the block of the assets as is prescribed.
There are 13 blocks of assets (Out of which 12 blocks are for
tangible assets and one block is for intangible assets) and
for each block different percentage has been prescribed as
rate of depreciation. (e.g. 5%, 10%, 15%, 20%, 25%, 40%,
50%, 60%, 80%, and 100%)
Written Down Value: [S. 43 (6)]
Written down value of a block of assets means the depreciated
value of that block of assets on 1st day of the p.y. as increased by
actual cost of any asset acquired in that block during the said
p.y. and reduced by the sale proceeds of any assets disposed of
during the said p.y. of that block. If the sale price of the assets
exceeds the written down value of the block, the excess will be
treated as a short term capital gain u/s 50.

S.
No.

1.

BLOCKS OF ASSETS
Tangible Assets:
Buildings:
(i) Buildings which are mainly used for
residential purposes except Hotels and Boarding
Houses
(ii) Buildings other than those used mainly for
residential purposes and not covered by (i) and
(iii)
(iii) Buildings acquired after 31.08.2002 for
installing machinery and plant forming part of
water supply project or water treatment system
and which is put to use for the purpose of
business of providing infrastructure facilities
(iv) Purely temporary erections such as wooden
structure

Rate of
Depreciation

5%
10%
100%

100%

2.

3.

Furniture and Fittings:

Furniture and fittings including electrical
fittings, electric fittings include electrical
wiring, switches, sockets, other fittings and
fans, etc.
Machinery and Plant
A. General Rate: Applicable to all machinery
or plant other than certain specified machines
and plants
B. Special Rates:
(i) Motor Buses, motor lorries and motor taxies
used in a business of running them on hire
(ii) Aeroplanes and aeroengines
(iii) Motor cars (other than those used in a
business of running them on hire) acquired or
put to use on or after 1st April, 1990

10%

15%

30%
40%
15%

4.

(iv) Books for professional use:

(a) Books being annual publication
(b) Other books
(v) Computers (including computer software)
(vi) Life saving medical equipments
(vii) Ships and boats
INTANGIBLE ASSETS
Knowhow, Patents, Copyrights, Trade
Marks, licences, franchises or any other
business or commercial rights of similar
nature

100%
60%
60%
40%
20%
25%

Actual Cost: [S. 43(1)] means the actual cost of

the assets to the assessee as reduced by that
portion of the cost thereof, if any, as has been met,
directly or indirectly by any other person or
authority.
Chellapalli Sugar Mlls Ltd. vs. CIT (1975) 98 ITR
167 (SC) held actual cost includes all expenditure
necessary to bring such assets into existence and to
put them in working conditions, e.g. interest paid
before production started, Excise Duty, Sales Tax,
Octroi, railway freight, insurance, transport charge,
preliminary expenses e.g. stamp duty, registration
fee, visit of employees to foreign country in respect
to installation of plant or machinery etc.

Cases in which Actual Cost is taken at a notional figures:

Various explanations to S. 43
1. Where asset is used in business after it ceases to be used for scientific
research as reduced by the amount of any deduction allowed (e.g. u/s 35)
[Explanation 1]
2. Where an asset is acquired by Gift or inheritance Actual cost to
assessee will be actual cost to the previous owner as reduced by amount of
depreciation deemed to have been allowed on such asset. [Explanation 2]
3. Where before the date of acquisition by the assessee, the assets were
used by any other person for the purpose of his business or profession and
the A. O. is satisfied that the main purpose of transfer of such asset to the
assessee is the reduction of tax liability, the actual cost of the assets will be
such amount as the A.O. may, with previous approval of Dy. Commr.
determine having regard to all circumstances of the case. [Explanation 3]
4. Where a business asset is transferred by the assessee to another person
and is subsequently reacquired by him, the actual cost would be the actual
cost to the assessee when he first acquired it as reduced by the amount of
depreciation deemed to have been allowed in respect of such asset or
actual cost at the time of reacquisition whichever is less. [Explanation 4]

5. Where a building, previously the property of the assessee, is brought

into use for the purpose of business or profession, the actual cost of the
asset to the assessee will be actual cost of the building to the assessee
as reduced by depreciation which would have been allowable had the
building been used for business or profession since the date of its
acquisition by the assessee. [Explanation 5]
6. Where a parent company transfers any asset to its 100% subsidiary
Indian Company or vice versa, the actual cost of the asset to transferee
company will be the same as it would have been in the hands of
transferor company. [Explanation 6]
7. Where an asset is transferred in a scheme of amalgamation to an
Indian Company, the actual cost of asset to the amalgamated company
will be the same as it would have been to the amalgamating company
[Explanation 7]
8. Explanation 8 makes it clear that any interest paid or payable in
connection with acquisition of an asset which relates to a period after the
asset is first put to use shall not form part of actual cost of the asset.
[Explanation 8]

Set off and carry Forward of unabsorbed depreciation

[Section 32 (2)]
(i) The unabsorbed depreciation has to be set off against the
profits and gains (if any) of any business or profession
carried on by the assessee. If the amount yet remains
unabsorbed, it can be set off against any other income
(except income under the head Salaries) of the taxpayer
for the same year.
(ii) If the unabsorbed depreciation cannot be wholly set off, the
amount of allowance not set off shall be carried forward to
the following assessment year. No time limit is fixed for the
purpose of carrying forward of unabsorbed depreciation. It
can be carried forward for indefinite period, if necessary.
(iii) In the subsequent year(s), unabsorbed depreciation can be
set off against any income whether chargeable under the
head Profits and Gains of Business or Profession or under
any other head [Except income under the head Salaries].

In the matter of set off, the following order of

priority is followed in the subsequent year(s).
(a) Current depreciation;
(b) Brought forward business loss;
(c) Unabsorbed depreciation.

Investment Allowance: [Section 32 AC]

(i) A company engaged in the business of manufacture
or production of any article or thing acquires a new
plant or machinery (excluding ship or aircraft) and
installed after 31.3.2013 but before 1.4.2015 and
actual cost of new asset exceeds one hundred
crore rupees, Investment Allowance will be allowed at
the rate of 15% of the actual cost for A.Y. 2014 15 and
15% of the actual cost as reduced by Investment
allowance allowed (for A.Y. 2014 15) in the A.Y. 2015
16. No deduction will be allowed after A.Y. 2015 16
(i.e. from A.Y. 2016 17).
(ii) If a company acquires and installs such new assets
after 31.3.2014 but before 1.4.2017, Investment
Allowance @ 15% will be available for the A.Y. relevant
to the P.Y. in which asset is installed, if actual cost
exceeds 25 crore rupees. No deduction will be
allowed from A.Y. 2018 19.

Withdrawal of Investment Allowance:

If the assessee sells or transfers the new asset within
a period of 5 years from the date of installation, the
amount of deduction allowed shall be deemed to be
the income from business of the P.Y. in which the asset
is sold or transferred . Such income shall be taxable in
addition to taxability of Capital Gains which arises u/s
45.
However, if transfer is as a result of amalgamation or
demerger, then tax liability will not arise provided that
the Amalgamated Company or Demerged Company
should not transfer the new asset within 5 years.

(iii) Investment Allowance (for investment in new plant or

machinery) w.e.f. A.Y. 2016 17) [S. 32 AD]
Any assessee who sets up an undertaking or
enterprise for manufacture or production of any
article or thing after 31.3.2015 but before 1.4.2020 in
a notified backward area of State of Andhra Pradesh,
Bihar, Telengana or West Bengal, 15% of the actual
cost will be allowed as Investment Allowance for the
A.Y. relevant to the P.Y. in which such new asset is
installed.
The provisions relating to sale or transfer of new plant
or machinery are the same as u/s/32AC.

Deduction in respect of Deposit in Tea Development Account, Coffee

Development Account and Rubber Development Account: [S. 33 AB]
This deduction is available for assessees growing and
manufacturing tea, coffee or rubber if deposit is made in a
Special Account with the National Bank for Agriculture and Rural
Development in accordance with the scheme approved by the
Tea Board, or the Coffee Board or the Rubber Board. The amount
of deduction will be least of the following:
(i) actual amount so deposited; or
(ii) 40% of the profits of such business.
The deposit should be made within a period of 6 months from the
end of the P.Y. or before furnishing return whichever is earlier.
The amount standing to the credit of Special Account may be
withdrawn only for the purpose specified in approved scheme. If
amount withdrawn in any P.Y. is not utilized for specified purpose,
the amount not so utilized will be treated as taxable profit of the
said year.
However, if the amount is withdrawn on closure of the business
because of death of the assessee or on dissolution of the Firm or
because of partition of HUF or liquidation of the Company, the
amount will not be treated as income.

Deduction in respect of Prospecting for, or extraction or production of

Petroleum or natural gas or both in India [S. 33ABA]
If the assessee is engaged in any of the aforesaid business under
an agreement with the Central Govt. of India for such business
and deposits in the P.Y. any sum in a Special Account or in a Site
Restoration Account with SBI in accordance with the scheme
approved by the Ministry of Petroleum and Natural Gas then he
shall be allowed deduction as under:
(i) a sum equal to the amount deposited; or
(ii) 20% of the profits of such business
Whichever is less.
Thus the aforesaid amount should be deposited before the end of
the P.Y. The amount standing to the credit of such Special Account
or Site Restoration Account may be withdrawn only for the
purpose specified in the Scheme (e.g. for removal of equipments
and installations, to restore the site and to prevent hazards to life,
property or environment consequent to such removal.) else the
amount will be treated as income of the P.Y. in which it is
withdrawn.

Expenditure on Scientific Research [S. 35]

Following deductions are allowed in respect of Scientific
Research:
(i) Revenue Expenditure incurred by the assessee himself
if he carries on Scientific Research in relation to his own
business. 100% expenditure is deductible.
(ii) Contributions made to outsiders: Where assessee
contributes any sum to a Research Association, University,
College or Institution approved for scientific research, a
deduction of 175% of the amount so paid will be allowed as
deduction. It is immaterial whether the Scientific Research
is related or not to the assessees business.
(iii) Sums paid for Social or Statistical Research to a
Research Association, University, College or Institution
approved for such research: Deduction will be allowed
125% of the sum paid whether the research is related or
not with the assessees business.

(iv) Capital Expenditure on scientific Research

Capital Expenditure incurred on scientific research in the P.Y. by
the assessee himself related to his business is allowed in full as
deduction except the expenditure for acquisition of any land. If
the expenditure could not be absorbed owing to insufficiency of
profit, the unabsorbed part can be carried forward as
unabsorbed depreciation.
(v) Sums paid to a National Laboratory or a recognized
University or an Indian Institute of Technology for approved
Scientific Research Programme: 200% of the sum so paid is
allowed as deduction. National Laboratory means scientific
laboratory functioning at national level under Indian Council of
Agricultural Research or the Indian Council of Medical Research
or the Council of Scientific and Industrial Research and approved
by prescribed authority as National Laboratory.
(vi) Expenditure on in-house Research: This deduction is
available only to a company equal to 200% of expenditure
incurred provided that expenditure is not incurred on land or
building. This deduction shall not be allowed for expenditures
incurred after 31.03.2017.
(vii) Sums paid for Scientific Research to a Company registered

Capital Expenditure to obtain Licence to operate Telecommunication

Services: [S. 35ABB]
Any capital expenditure incurred on the acquisition of any right
to operate telecommunication services either before the
commencement of the business or thereafter is allowed as
deduction in equal installments over the period starting from the
year in which such payment has been actually made and ending
in the year in which licence comes to an end. If the licence fee is
actually paid before commencement of the business, amount is
deductible from the P.Y. in which the business is commenced.
Expenditure on eligible Project or Scheme: [S. 35AC]
100% deduction is allowed.
Deduction in respect of Expenditure on Specified
Business: [S.35AD]
Whole of any expenditure of capital nature excluding
expenditure incurred on acquisition of land or good will is
allowed to be deducted in the P.Y. in which the expenditure is
incurred. For example, setting up and operating warehousing
facility for storage of agricultural produce, Developing and
building a housing project, Production of fertilizer in India etc.
Payment in Rural Development Fund: [S. 35CCA] 100%
deduction.

Amortization of certain preliminary expenses: [S. 35D]

For example, expenditure in connection with
(i) Preparation of Project Report;
(ii) Conducting market survey
(iii) Legal charges for drafting of any agreement,
Memorandum of Association; Articles of Association etc.
Other Deductions: [S. 36] Examples:
(i) Insurance Premium paid:
(a) against destruction or damage to stock or stores used
for purposes of business;
(b) for cattle by a Federal Milk Cooperative Society
(c) for health of employees;
(ii) Bonus or commission paid to employee
(iii) Interest on borrowed capital
(iv) Contribution to P.F. of the employee by the employer
(v) Bad debts subject to certain conditions;
(vi) Expenditure on Family Planning

General Deduction [S.37]

S.37(1) Any expenditure (not being expenditure of the nature
described in Ss. 30 to 36 and not being in the nature of capital
expenditure or personal expenses of the assessee), laid out or
expended wholly and exclusively for the purposes of the business
or profession shall be allowed in computing the income
chargeable under the head Profits and Gains of Business or
Profession.
Further implied Conditions:
(i) Expenditure Should have been incurred in the P.Y.
(ii) Expenditure should be in respect of business or profession
carried on by the assessee.
1. Not of the nature described in Ss. 30 to 36:
(i) Rationale behind the condition is that if a particular
expenditure is covered under any of the sections 30 to 36 it
should not be claimed under residuary section because an
allowance granted under specific section may be subject to
certain express or implied conditions and those conditions should
not be nullified by claiming deduction under this section.
2. Not being in the nature of Capital Expenditure:
Points of Distinctions:
(I) Acquisition of fixed assets or routine expenditure

(iii) Improvements or Maintenance

Capital expenditure improves the earning capacity of a business.
Revenue expenditure maintains the profit making capacity of a
business.
(iv) Recurring or non recurring expenditure

Some Judicial Rulings on Capital and Revenue

Expenditures:
(i) Removal of defect in title:
In V. Jagamohan Rao vs. C.I.T. [1970] 75 ITR 373 (SC) held
where money is paid to perfect a title or remove defects in title,
the expenditure is capital expenditure.
(ii) Acquisition of Goodwill:
In Devidas Vithaldas & Co. vs. CIT [1972] 84 ITR 277 (SC)
held expenditure on acquisition of goodwill is a capital
expenditure irrespective of the fact whether payment is made in a
lump sum at one time or in installments. However, where
transaction is not one for acquisition of goodwill but the right to
use it, the expenditure will be revenue expenditure.
(iii) Mining Lease:
In R.B. Seth Moolchand Suganchand vs. CIT [1972] 86 ITR
647 (SC) held expenditure for acquiring right over or in the land

(iv) Expenditure on renovation of premises:

New
Shorrock
Spinning
and
Manufacturing
CompanyLtd. Vs. C.I.T. [1956] 30 ITR 338 (SC); in M/s.
Ballimal Naval Kishore vs. C.I.T [1997] 224 ITR 414
(SC) If the assessee is owner of the premises, renovation
of the premises will be capital expenditure.
CIT vs. Madras auto Services (P.) Ltd. [1998]233 ITR
468 (SC) - If assessee is lessee of the premises and under
the lease agreement whatever construction will be done on
the lease premises will belong to the lessor from the day of
construction, expenditure incurred by the lessee will be
revenue expenditure.
(v) Contribution made for construction of roads:
Building includes roads, bridges, culverts, wells and tubewells. Hence, construction of roads inside the factory or
surrounding the factory is capital expenditure on which
depreciation can be claimed.
Lakshmiji Sugar Mills Co. (P.) Ltd. vs. C.I.T. [1971] 82
ITR 376 (SC) Contribution made by sugar mill under a
statutory obligation towards development of Govt. owned
roads which was to facilitate supply of sugarcane to the

Travancore Cochin Chemical Ltd. vs. CIT [1977] 106 ITR

900 (SC) The assessee along with three other public
undertakings approached the Govt. of Kerala to construct new
road and under agreement to meet certain percentage of the
cost of construction paid the amount. Held that since the road to
be constructed was new and contribution was made under
the agreement and not under a statutory obligation, the
expenditure was capital in nature.
In L.H. Sugar Factory & Oils Mills (P.) Ltd. vs. CIT [1980]
125 ITR 293 (SC) The assessee made two contributions on
request of Collector, one was for construction of a dam and road
connecting to dam and another contribution was for construction
of roads around its factory. It was found that construction of dam
and road connecting the dam was nothing to do with assessees
business and not advantageous to assessees business, hence
that amount was not deductible. But construction of road in the
area around the factory of the assessee was advantageous to
the assessees business and relying on Lakshmiji Sugar Mills
case the expenditure was held revenue expenditure.
(vi) Compensation for breach of a contract to purchase

3. Not being personal expenses of assessee:

Personal expenses means to satisfy personal needs e.g;
food, cloth, shelter, medical expenditure, defending
oneself from prosecution or penalty paid for violation of
law etc.
M. Subramaniam Bros. vs. CIT [2001] 250 ITR 769
(Mad.) - Where in a partnership firm comprising father and
his three sons as partners, the father sent one of the sons
abroad for higher studies under an agreement with the
firm that on return he will serve the firm for 5 years
Expenses incurred by the firm on education of son was not
allowed as business expenditure.
However, on similar facts contrary opinion had been
expressed in CIT vs. Kohinoor Paper Products [1997]
226 ITR 220 (M.P.) relying on C.I.T. vs. Southern Leather
Industries [1987] 164 ITR 194 (Mad) wherein three
partners of a firm undertook foreign tours for attending
the International Trade Fair with intent to advance

4. Expenditure should have been laid out wholly and exclusively for
the purpose of business or profession
Guidelines:
(i) Incurred as trader or House holder
(ii) Voluntary expenditure without compelling need

CIT vs. Dhanarajgiri Raja Narasingiriji [1973] 91 ITR

544 (SC) - Assessee company lodged a complaint with
police alleging misappropriation of the companys funds
by its managing agent. Consequently Govt. instituted a
criminal case against the Managing Agent. The assessee
also employed his own lawyer to prosecute the case. Held
the expenditure was deductible although Govt. was
conducting prosecution and assessee had no need to
engage his own lawyer.
It was also held that it is not open to the department to
prescribe what expenditure an assessee should incur and
in what circumstances he should incur that expenditure.
Every businessman knows his interest better.
Similarly fixing remuneration of employee is the
businessmans concern and not of the Income tax

(iii) Direct concern and Direct purpose:

One has to look at direct purpose of expenditure and not remote or
indirect results, e.g. in Malayala Manorama Co. vs. CIT [2006] 150
Taxman 505 (Ker) assessee company engaged in business of printing
and publishing newspapers and periodicals contributed a sum of money
to a trust which undertook work of rehabilitation of victims of earthquake
held not related to business of assessee not deductible though indirectly
would have impact on readers of its journals etc.
Similarly donations to political party for non business consideration was
held not deductible. [CIT vs. Scindia Steam Navigation Co. Ltd. [1980]
125 ITR 118 (Bom).
However, such donations are now deductible under Sections 80GGB and
80GGC (inserted in 2003) if donations are made by companies or any
other persons respectively.
(iv) Unremunerative expenditure:
Expression for the purpose of business is wider in scope than expression
for the purpose of earning profit. Business or commercial expediency
may require providing facilities like schools, hospitals for employees/exemployees/their children, expenditure for protection of assets from
expropriation.

Badridas Daga vs. C.I.T. [1958] 34 ITR 10 (SC); Associated

Banking Corpn. Of India Ltd. vs CIT [1965] 56 ITR 1 (SC)
held losses arising from misappropriation of money by the
employee cannot be claimed as deduction under Section 37 (1)
but if the amount is irrecoverable, it can be claimed as loss
incidental to carrying on the business. Such loss can be claimed
of the P. Y. in which amount becomes irrecoverable.
Same will apply for losses occurred due to theft, robbery, dacoity,
loss due to non recovery of advances etc.
(vi) Other examples of Business expenditures
Legal and accountancy expenses, Fees paid for prosecuting
appeals, taking proceedings for reducing tax liabilities, legal
expenditures relating to breach of trading contract, termination
of disadvantageous trading relationship, to defend title to
business assets such as land, buildings, shares, goodwill etc.
(should be distinguished from expenses for perfecting title which
is capital expenditure).
Expenses incurred by an individual assessee in defending himself
in a criminal proceeding (even if ended in acquittal) e.g. selling
goods on excessive price are not allowable. However, legal
expenses incurred by a company to protect the good name of its
business, defending directors, officers and other employees

Explanation to S. 37 (1) says For the removal of

doubts, it is hereby declared that any expenditure
incurred by the assessee for any purpose which is an
offence or which is prohibited by law shall not be
deemed to have been incurred for the purpose of
business or profession and no deduction or allowance
shall be made in respect of such expenditure.
Section 37 (2B) Notwithstanding anything contained
in sub section (1), no allowance shall be made in
respect of expenditure incurred by an assessee on
advertisement in any souvenir, brochure, tract,
pamphlet or the like published by a political party.

Expenses Expressly Disallowed under Section 40

Section 40 expressly disallows many expenses. For
example
(a) Payment outside India of any salary, interest, royalty,
fee for technical services etc. on which tax has not been
deducted at source;
(b) Payments to residents if tax is not deducted at source
30% of such sum shall be disallowed u/s 40A.
(c) Excessive payments [S. 40A] Payments to relatives or
to an associate concern if A.O. considers it to be excessive
or unreasonable.
(d) Payment in cash: in a day made to a person over Rs.
20,000/- otherwise than by an account payee cheques or
account payee bank draft subject to certain exceptions e.g.,
payment made to a person living in rural area where no
banking facility is available; payments made to cultivator ,
grower of agricultural produce, forest produce or produce of
animal husbandry on purchase of products from them;
Payments to Bank or LIC etc.

Capital Gains {Ss. 45 to 55]

Meaning:
Any profit or gain arising from the transfer of a
capital asset is known as capital gain.
Chargeability: [S. 45 (1)]
By virtue of Section 45 (1) of the Income Tax Act any
profit or gain arising from the transfer of a capital
asset is chargeable to tax under the head Capital
Gains and is deemed to be income of the previous
year in which the transfer takes place.
Essentials for chargeability:
1. There must be a Capital Asset. 2. Capital Asset
must have been transferred in the previous year. 3.
Any Profit or Gain should arise from such transfer. 4.
The Profit or Gain should not be exempt under
Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54EC, 54F,
54G, 54GA and 54H.

Meaning of Capital Asset: [S.2 (14)]: means

property of any kind held by an assessee, whether or not
connected with his business or profession, but does not
include:
(i) any stock in trade, consumable stores or raw
materials held for the purposes of his business or
profession;
(ii) Personal effects of the assessee, that is to say,
movable property including wearing apparel and furniture,
held for personal use by the assessee or any member of
his family dependent on him but excluding jewellery,
archaeological collections, drawings, paintings, sculptures
or any work of art.
Thus jewellery etc. are treated as capital asset, even
though they are meant for personal use of the assessee.

(a) in any area within the jurisdiction of a Municipality or a

Cantonment Board having a population of 10,000 or more;
or
(b) within a distance of 2 Kms from the local limits of a
Municipality or a Cantonment Board having a population of
more than 10,000 but not more than one Lakh; or
(c) within a distance of 6 Kms from the local limits of a
Municipality or a Cantonment Board having a population of
more than one Lakh but not more than ten Lakh; or
(d) within a distance of 8 Kms from the local limits of a
Municipality or a Cantonment Board having a population of
more than ten Lakh.]
(iv) 6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or
National Defence Gold Bonds 1980 issued by the Central
Government;
(v) Special Bearer Bonds, 1991 issued by the Central Govt.
and
(vi) Gold Deposit Bonds issued under the Gold Deposit
Scheme, 1999.
Explanation: Property includes any rights in or in relation

Personal Effects:
Personal effects are not capital assets under section 2 (14), if the
following conditions are satisfied:
1. It should be movable property;
2. It should be held for personal use by the assessee or any
member of his family dependent on him;
3. it should not be jewellery, archaeological collections, drawings,
paintings, sculptures or any work of art.
Car, cycle, scooter, motor cycle owned and used by the
assessee are personal effects.
Jewellery:
Jewellery is a capital asset. Jewellery includes the following:
(i) ornaments made of silver, gold, platinum or any other precious
metal or any alloy containing one or more of such precious
metals, whether or not containing any precious or semi precious
stones and whether or not stitched in any wearing apparel.
(ii) precious or semi precious stones, whether or not set in any
furniture, utensil or wearing apparel.

Types of Capital Assets: There are two types of capital assets:

1. Long term capital asset [Section 2 (29A)]; and
2. Short term capital asset [Section 2 (42A)].

Short term Capital Asset:

According to Section 2 (42A) a short term capital asset
means capital asset held by an assessee for not more than
36 months immediately prior to its date of transfer.
However, in the case of shares held in a company, listed
securities, units of UTI or units of mutual funds specified
under Section 10 (23D), the asset is treated as short term
capital asset if the share, security or unit as the case may
be is held by the assessee for not more than 12 months
immediately prior to its transfer and not 36 months.
Long term Capital Asset:
According to Section 2 (29A) asset other than short term
capital asset is regarded as long term capital asset.

Period of Holding:
In determining the period for which any capital asset is held by the
assessee
(a) In the case of a share held in a company in liquidation, the
period subsequent to the date on which the company goes into
liquidation is excluded.
(b) In the case of a capital asset which becomes the property of
the assessee in the circumstances mentioned in Section 49 (1) of
the Act for example, by way of inheritance, gift, partition etc. the
period for which the asset was held by the previous owner
should be included.
(c) In the case of a share in an Indian Company, which becomes
the property of the assessee in a scheme of amalgamation, the
period for which the share in the amalgamating company was
held by the assessee should be included.
(d) In case of issue of shares by the resulting company in a
scheme of demerger to the shareholder of the demerged
company, the period of holding shares in demerged company
will be included in total period of holding of share in resulting
company.

Transfer of Capital Asset [Section 2 (47)]

Transfer in relation to a capital asset includes:
(i) the sale, exchange or relinquishment of the asset;
(ii) the extinguishment of any rights therein.
(iii) the compulsory acquisition thereof under any law;
(iv) the conversion of an asset into stock in trade or the
treatment of it as such;
(v) Allowing possession of an immovable property to be
taken in part performance of a contract. [Section 53A of
the Transfer of Property Act, 1882.
(vi) Any transaction (whether by way of becoming a
member of, or acquiring shares in a co operative society,
company or other association of persons or by way of
agreement or any arrangement or in any other manner
whatsoever) which has the effect of transferring or
enabling the enjoyment of any immovable property.

Capital Gains from Insurance Claim on Destruction of

Capital Asset: [S. 45 (1A)]
By virtue of Section 45 (1A) profits or gains arising from any
compensation (whether in terms of money or in kinds) received
by any person under an insurance from an insurer in the
previous year on account of damage to or destruction of any
capital asset is chargeable to Capital Gains tax, if the damage or
destruction occurs as a result of:
(i) flood, typhoon, hurricane, cyclone, earthquake or other
convulsion of nature; or
(ii) riot or civil disobedience;
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy
(whether with or without a declaration of war).
The profits or gains will be deemed to be the income of the
previous year in which the compensation is received.
In Vania Silk Mills Ltd. vs. C.I.T. (1991) 191 ITR 647 (SC) the
Supreme Court had held that insurance claim received on
account of destruction of asset is not chargeable to tax as
destruction does not amount to transfer. The effect of this
judgment has been nullified to some extent by inserting sub

Capital Gains on conversion of Capital Asset

into Stock in Trade: [S. 45 (2)]
By virtue of Section 45 (2) the notional profit arising from
transfer by way of conversion of capital asset into stock
in trade is chargeable to tax in the year in which stock
in trade is sold.
For the purpose of computing the capital gain in such
cases, the fair market value of the capital asset on the
date on which it was converted or treated as stock in
trade is deemed to be the full value of the consideration
received or accruing as a result of such transfer.
The sub-Section was earlier added by the Finance Act,
1962, then it was omitted by Finance Act, 1966 and re
inserted by the Taxation Law (Amendment) Act, 1984
w.e.f. A.Y. 1985 86
nullifies the judgment of the
Supreme Court in C.I.T vs. Bai Shirinbai Kooka (1962)
46 ITR 86 (SC).

Capital Gain on Transfer of Security by

Depository: [S. 45 (2A)]
By virtue of Section 45 (2A) where any person has
beneficial interest in the securities deposited with
a depository, profits or gains arising from transfer
of such securities will be deemed to be the
income of such person (i.e. the beneficial owner)
and not that of the depository who is deemed to
be the registered owner of such securities.
The cost of acquisition and period of holding of
such securities will be determined on the basis of
first in first out method.

Capital Gains on Transfer of Capital Asset by a

Partner to a firm etc. [S. 45 (3)]
By virtue of Section 45 (3) profits or gains arising from the
transfer of a capital asset by a person to a firm or other
association of persons or body of individuals (not being a
company or a co operative society) in which he is or
becomes a partner or member, by way of capital
contribution or other wise, shall be chargeable to tax as
his income of the pervious year in which such transfer
takes place.
For the purpose of computation of the profit or gains in
such cases the amount recorded in the Account Book of
the firm, association or body as the value of the capital
asset will be deemed to be the full value of the
consideration received or accruing on the transfer of such
capital asset.
Earlier these transactions were not regarded as transfer
because firm, co-operative society etc. were not separate
persons in eye of law. [C.I.T. vs. Mohanbhai Pamabhai

Capital Gains on distribution of Capital Assets by a firm

etc. [S. 45 (4)]
By virtue of Section 45 (4) profits or gains arising from
the transfer by way of distribution of capital assets by a
firm, or other association of persons or body of
individuals (not being a company or a co operative
society) to its partner or member on its dissolution or
otherwise will be chargeable to tax as income of the
firm, association or body as the case may be, of the
previous year in which such transfer takes place.
For the purpose of computation of profit or gains in
such cases the market value of the asset on the date of
such transfer shall be deemed to be the full
consideration received or accruing as a result of such
transfer.

Capital Gains on Compulsory acquisition of Capital Asset: [S.

45 (5)]
Where an asset is compulsorily acquired under any law the
capital gains in such a case will be determined as follow:
(i) The initial compensation will be taken as sale
consideration and capital gains will be computed
accordingly. It will be chargeable as income of the previous
year in which such compensation (or part thereof) is first
received and not of the year in which the Capital Asset is
transferred.
(ii) When the compensation is enhanced by a court,
tribunal or any authority then
(a) it will be taxable as capital gain of the previous year in
which enhanced compensation is received by the
assessee;
(b) In this case the cost of acquisition and the cost of
improvement of the capital asset will be taken as nil.

(c) Litigation expenses for getting the compensation

enhanced are deductible as expenses on transfer;
(d) If the enhanced compensation is received by any
other person (because of the death of the transferor
or for any other reason), it will be taxable as income
of the recipient.
(e) Enhanced compensation can be short term
capital gains or long term capital gains depending
upon the nature of original capital gains.
The amount of compensation received is chargeable
to capital gains tax even though it may be a subject
matter of dispute by the Govt. However, if the
compensation is subsequently reduced by the court,
tribunal or other authority, the capital gains has to
be recomputed and refund may be made.

Capital Gains on Units of UTI, Mutual Funds etc.

[S.45 (6)]
An assessee who purchases units of Mutual Fund, UTI or
Equity Linked Saving schemes and after the scheme is
over, the same is repurchased by the Mutual Fund, UTI etc.
the assessee will be liable to pay Capital Gains Tax on
Profits or Gains arising from such repurchase.

Rate of Taxation: [S. 112]

From Assessment Year 1998 99 Long Term Capital Gains
are taxable at a flat rate of 20% in hands of all kinds of
assessees.
Previously the rate was for individual 20%, companies 40%
and other assessees 30%
When liability to tax arises only because of inclusion of
long term capital gains in total income, tax will be levied
on excess over the minimum exemption limit.

Capital Gains is computed by deducting from full value of

consideration received or accruing as a result of transfer the
following amount:
(i) Expenditure incurred wholly and exclusively in connection
with such transfer (e.g. brokerage or commission for securing a
purchaser, registration fee, travelling expenses in connection
with transfer); and
(ii) the cost of acquisition of the capital asset and cost of
improvement thereto.
However, in case of transfer of a long term capital asset after
deducting the expenditure incurred wholly and exclusively in
connection with such transfer, the indexed cost of acquisition
and indexed cost of improvement has to be deducted.
Indexed Cost of Acquisition: is the amount which bears to
the cost of acquisition the same proportion as the cost inflation
index for the year in which the asset is transferred bears to the
cost inflation index for the year in which the asset was acquired
by the assessee or for the year beginning on April 1, 1981
whichever is later. Thus:
Indexed Cost of Acquisition / Cost of Acquisition = Cost Inflation
Index for the Year in which the asset is transferred / Cost
Inflation Index for the Year in which asset was acquired or for

Indexed Cost of Improvement: is the amount which

bears to the cost of improvement the same proportion
as the cost inflation index for the year in which the
asset is transferred bears to the cost inflation index for
the year in which the improvement to the asset took
place.
Thus:
Indexed Cost of Improvement / Cost of Improvement =
Cost Inflation Index for the Year in which the asset is
transferred / Cost Inflation Index for the Year in which
improvement to the asset took place.

S. 46:
By virtue of Section 46 distribution of assets in kind of
a company to its shareholders on its liquidation is not
considered as transfer for the purposes of S. 45 (1).

Financi
al Year
198182
198283
198384
198485
198586
198687
198788
198889
198990
199091
199192
1992-

Cost
Inflation
Index
100

Financial
Year

Cost Inflation
Index

1998-99

351

109

19992000
20002001
20012002
20022003
20032004
20042005
20052006
20062007
20072008
20082009
2009-

389

116
125
133
140
150
161
172
182
199
223

406
426
447
463
480
497
519
551
582
632

Capital Gains exempt from Tax

(A) Only Long Term Capital Gains:

(i) Capital Gains arising from transfer of residential

house [S.54]:
If assessee has within a period of one year before or two
years after the date of transfer purchased residential
house in India or within a period of 3 years from the date
of transfer constructed a residential house in India. The
amount of exemption will be to the extent of the cost of
new residential house purchased or constructed.
If the amount of capital gains could not be utilized for
acquisition or construction of the new house before the
date of furnishing the return, the amount not so utilized
should be deposited in Capital Gains Account Scheme,
1988 with any specified bank authorized by Central
Government.
If the new house purchased or constructed is transferred
within a period of 3 years of its purchase or construction,
the exemption given earlier will be withdrawn.

(ii) Capital Gains arising from the transfer of

Agricultural Land [S. 54B]:
If the assessee has purchased within a period of 2 years
from the date of transfer any other agricultural land for
agricultural purposes.
Provisions of deposit in Capital Gains Account Scheme,
1988 and consequence of transfer of the new acquired
agricultural land within 3 years will be the same as in S.
54.
(iii) Capital Gains on Compulsory acquisition of
Land or building used as Industrial Undertaking
by the assessee: [S. 54D]
If the assessee within a period of 3 years purchased any
land or building or constructed any building for shifting
or re - establishing the Industrial Undertaking.
Provisions of deposit in Capital Gains Account Scheme,
1988 and consequence of transfer of the new acquired
land or building within 3 years will be the same as in S.
54.

(iv) Exemption on investment of Long Term

Capital Gains in Specified Long Term Assets i.e. in
certain Bonds [S. 54EC]
If investment is made within 6 months from the date of
transfer. Maximum for investment which qualifies
exemption is 50 lakh rupees. Here deposit in Capital
Gains Account Scheme, 1988 does not apply but
consequence of transfer of the Bond within 3 years or
taking loan against such bond within 3 years is the same
i.e. exemption allowed will be withdrawn.
(v) Exemption on investment of Long Term Capital
Gains for purchase or construction of residential
house in India [S. 54F]
This exemption is available to individuals and HUFs. The
residential house should have been purchased 1 year
before or 2 years after or constructed within 3 years.
Provisions of deposit in Capital Gains Account Scheme,
1988 and consequence of transfer of the new

(B) Long Term Capital Gains or Short Term Capital

Gains:
(i) Exemption of Capital Gains arising on transfer of
assets in cases of shifting of Industrial Undertaking
from Urban Area to Rural Area [S.54G]
Capital asset transferred should be any land, building
plant or machinery. New asset in the rural area should be
purchased within 1 year before or 3 years after the date
of transfer.
Provisions of deposit in Capital Gains Account Scheme,
1988 and consequence of transfer of the new asset within
3 years will be the same as in S. 54.
(ii) Exemption of Capital Gains on transfer of
Assets in cases of shifting of Industrial Undertaking
from Urban Area to any Special Economic Zone [S.
54 GA]: Conditions are the same as in S. 54 G
Section 54H simply extends time for investment to
qualify for exemption in cases where capital asset is
compulsorily acquired in any P.Y. but payment is made not
on the date of compulsorily acquisition of the asset. In
such cases time limit for investment will be reckoned form

Income from other sources [Ss. 56 to 59]

S. 56 (1) Any income not exempted from taxation and not
chargeable under any head specified in S. 14 from A to E is
chargeable to income tax under the head Income from Other
Sources.
Without prejudice to the generality of provisions of S. 56 (1) by
virtue of S. 56 (2) following income are also chargeable under
the head Income from Other Sources:
(i) Dividends
(ii) any winnings from lotteries, crossword puzzles, races
including horse races, card games and other games of any sort
or from gambling or betting;
(iii) any sum received by assessee form his employees as
contributions to any Provident fund or Superannuation Fund or
any fund set up under Employees state Insurance Act, 1948, or
any other Fund for the welfare of such employees, if the same is
not taxable as Profits and Gains of Business or Profession.
(iv) Income by way of interest on securities if the same is not
taxable as Profits and Gains of Business or Profession.
(v) Income from letting out of machinery, plant or furniture, if
the same in not taxable as Profits and Gains of Business or

(vi) Income from letting out of machinery, plant or furniture

along with building where letting out of building is
inseparable from letting out of machinery, plant or furniture if
the same is not chargeable as Profits and Gains of Business
or Profession.
(vii) Any sum received under a Keymans Insurance Policy, if
the same in not taxable as Profits and Gains of Business or
Profession.
(viii) Money or property exceeding Rs. 50,000/- received
without consideration by an individual or HUF on or after
1.10.2009 other than money or property received from:
(a) any relative or (b) on the occasion of marriage of
individual; or (c) under
a will or inheritance; or (d) in contemplation of death of the
payer; or (e) from any fund, foundation, university,
educational institution, hospital, medical institution or
trust referred to in S. 10 (23) (c).
Relative means (i) spouse of the individual; (ii) brother or
sister of the individual (iii) brother or sister of either of
the parent of individual, (iv) brother or sister of the
spouse of individual, (v) any lineal ascendant or
descendent of the individual, (vi) any lineal ascendant or
descendant of the spouse of the individual, (vii) spouse of

Other incomes: Apart from aforesaid 8 incomes which are

specified by S. 56 (2) other incomes which do not fall under
any of the other heads of income are taxable u/s 56 (1).
Though it is not possible to enlist all such incomes, some
examples are as follow:
(i) Income from subletting of House Property;
(ii) Income from letting or subletting of vacant land;
(iii) Directors fee;
(iv) Agricultural Income received from outside India;
(v) Fee, commission, remuneration etc. received by an
employee from a person other than his employer;
(vi) Insurance Commission;
(vii) Salaries payable to M.Ps., and M.L.As.

Deductions: [S. 57] Income chargeable under the head

Income from Other Sources is computed after making
following deductions:
(i) In the case of dividend income and interest on
securities:
(a) any reasonable sum paid by way of remuneration or
commission for the purpose of realizing dividend or
interest;
(b) Interest on borrowed capital if it is used for investing in
shares or securities
(ii) In the case of income from machinery, plant or
furniture let on hire:
(a) Current repairs to building as under S. 30 (a) (ii);
(b) Current repairs to machinery, plant or furniture and
insurance premium as u/s 31;
(c) Depreciation and unabsorbed depreciation on building,
plant or furniture as u/s 32

expended wholly and exclusively for the purposes of

earning such income.
(iv) In the case of income in the nature of family pension
Rs. 15,000/- or 33 and one 3rd % of such income whichever
is less;
(v) In the case of [income specified in Section 2 (24) (x)
i.e.,] amount received as contribution from employer
towards any welfare fund if such amount is credited by the
taxpayer to the employees account in the relevant fund on
or before the due date.
Amounts not deductible: The following amounts are not
deductible while computing income under the head Income
from Other Sources: [S. 58]
(i) any personal expenses of the assessee;
(ii) any interest chargeable under the Act which is payable
outside India, on which tax has not been paid or deducted;
(iii) any amount chargeable under the head salaries, if it is
payable outside India, unless tax has been paid thereon or
deducted at source
(iv) any amount not allowable by virtue of Section 40A (For
example, excessive expenditure paid to relative, payment
exceeding Rs. 20,000/- paid otherwise than by crossed

(v) in the case of assessees being foreign companies, any

expenditure in respect of income by way of royalties and
technical service fees received under agreement made after
March 31, 1976;
(vi) any expenditure or allowance in connection with any
income by way of winnings from lotteries, crossword puzzles,
races, card games and other games of any sort or from
gambling or betting of any form.
However, disallowance is not applicable in computing the
income of an assessee being the owner of horses
maintained by him for running in horse races .
S. 59 lays down that while computing income under S. 56,
provisions of S. 41 (1) shall apply as they apply for computing
income under Profits and Gains of Business or Profession.
S. 41 lays down that where any deduction or allowance has been
made in respect of loss, expenditure and subsequently the amount
is obtained by the assessee or his successor, the same will be
treated income of the P.Y. in which it is received and will be taxable
under the head Profits and Gains of Business or Profession
irrespective of the fact as to whether in such P.Y. such business or
profession continues or not.

Set off and carry forward of losses [Ss. 70 to 80]

Meaning
Set off means adjustment of losses against income of
the same year from a different source or head of
income
Carry forward means carrying the loss which could not
be set off in the preceding year for adjusting the same
against the income of the subsequent year.
Modes of Set off and carry forward The process may
be divided into Three steps:
1. Inter-source adjustment under the same head of
income [S.70]
2. Inter head adjustment in the same A.Y. [S.71] This
is applied only when inter source adjustment is not
possible.
3. Carry forward of loss [Ss. 72 to 79] This is applied
only when inter source adjustment is not possible in
the P.Y. because of inadequacy of income.

Income [S.70]
If the assessee has incurred any loss from any source of
income in any P.Y., he can set off such loss against the
income from any other source under the same head of
income.
Exceptions:
(i) Loss from Speculation business cannot be set off against
income of other non-speculation business. [S. 73(1)]
(ii) Loss of specified business u/S. 35AD cannot be set off
against income from other business. This loss can be set off
only against income from other specified business.
(iii) Loss from the business of owning and maintaining race
horses;
(iv) Long Term Capital Loss cannot be set off against Short
Term Capital Gains;
(v) Losses from Lottery, Crossword Puzzles, gambling, card
games or betting etc. cannot be set off against such income
or any other income. [S. 58(4)]
(vi) Loss from exempted source of income cannot be set off
against any taxable income.
Speculative transaction [S.43 (5)] means a transaction in
which contracts for sale or purchase of commodities

Inter-head Adjustments in the same A.Y. [S.71]

Exceptions:
(i) Loss from speculation business [S.73(1)]
(ii) Loss of specified business u/S. 35AD
(iii) Loss from the business of owning and maintaining race
horses;
(iv) Long Term Capital Loss cannot be set off only against
income from Long Term Capital Gains;
(v) Loss under the head Profits and Gains of Business or
Profession cannot be set off against income from salary.
(vi) Losses from Lottery, Crossword Puzzles, gambling, card
games or betting etc. cannot be set off against such income
or any other income. [S. 58(4)]
(vii)Loss from exempted source of income cannot be set off
against any taxable income
Note: Unabsorbed depreciation is not treated as a loss from
business or profession. Hence, unabsorbed depreciation
can be set off against income under the head Salaries.

Carry forward of Losses:

Only following losses can be carried forward:
(i) Loss under the head Income from House Property can be
carried forward for maximum 8 following A.Ys. and can be
set off only against Income from House Property.
(ii) Loss under the head Profits and Gains of Business or
Profession whether of speculative or non speculative
Business. Loss of non-speculative business can be carried
forward for maximum 8 A. Ys. and can be set off against
income of speculative or non speculative business. Loss
of speculative business can be carried forward for 4 A. Ys.
and can be set off only against income of speculative
business.
(iii) Loss of Specified Business can be carried forward for any
number of A.Ys. without limit but it can be set off only
against income from Specified Business.
(iv) Long Term and Short Term Capital Losses can be carried
forward for 8 A. Ys. However, Long Term Capital Loss can
be set off only against Long Term Capital Gain.
(v) Losses from owning and maintaining race horses can be
carried forward for 4 A.Ys. And can be set off against such
income only.

THANKS