Taxable income is computed under the respective heads (para 1.2.4) after allowing from gross receipts admissible deductions for cost and expenses. The net income under each of these heads is then aggregated to arrive at the 'Gross total Income'. Computation of income under individual heads is explained in paragraphs following.
Salaries
4.2 Income from salaries is computed in accordance with the provisions of section 15 to 17 of the Act. 'Salary' means all remuneration paid or due under the contract of employment. It includes wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu of or in addition to any salary or wages, any advance of salary, leave salary encashment or any other payment by the employer for services rendered. The annual accretion to the balance at the credit of an employee participating in a recognised provident fund in excess of the prescribed limit is includible in the salary income of the employee. 'Perquisites' mean the benefits or amenities provided in kind by the employer free of cost or at a concessional rate. The value of these is regarded as part of salary. Rule 3 of the Income Tax Rules lays down the methods for determining the value of certain perquisites. For others the general rule of valuing the perquisites in the hands of the employee is to take the cost to the employer in providing the benefit or amenity. It has been clarified that securities allotted to an employee free of cost or at concessional rate under ESOP or as sweat equity shares will not be taxable as perquisite.
4.2.1 In order to be taxable under the head 'Salaries', it is necessary that there is a relationship of employer and employee between the payer and the receiver. It is for this reason remuneration received as a partner is not taxable as 'salary'.
4.2.2 In computing the salary income for the assessment year 1999-2000, a standard deduction is allowed as under:-
- Where salary income is upto Rs. one lakh - 33-1/3% or Rs. 25,000/- whichever is less.
- Where salary income exceeds Rs. one lakh but does not exceed rupees five lakh - Rs. 20,000/-.
- Where salary income exceeds rupees five lakh - NIL
Deduction for profession or employment tax levied by State Government is also allowed.
Income from house property
4.3 Income from house property is computed in the hands of the owner in accordance with the provisions of sections 22 to 27 of the Act. It is determined with reference to its 'annual value', i.e. the sum for which the property might reasonably be let from year to year. However, where any property is tenanted and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to be let from year to year, the actual annual rent received or receivable is taken as the annual value of the property.
4.3.1 From the annual value of a house property in the occupation of a tenant, taxes levied by any local authority in respect of the property to the extent such taxes are borne by the owner are deductible on actual payment basis to arrive at the 'net annual value'.
4.3.2 Where the property consists of a house or a part of a house which is in the occupation of the owner for his own residence, its annual value is taken as Nil. But if such a property is let out during any part of the previous year, its annual value is taken proportionately. Further, where the owner has only one resedential house and the house cannot be actually occupied by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, its annual value is taken to be nil provided the house is not actually let out and no other benefit is derived by the owner from it.
4.3.3 From the net annual value, determined as above deductions on account of annual repairs and collection expenses (1/4th of the net annual value irrespective of actual expenditure), insurance charges in respect of property, any annual charge, interest paid on any money borrowed for the building, ground rent, land revenue, unrealised rent are allowed. All these deductions are not allowed in respect of the house property in the occupation of the owner for his own residence, the annual value of which is taken at Nil. In such a case deduction is allowed only for interest and that too upto Rs. 1,00,000 only provided the house was constructed or acquired after 1.4.1999 but before 1.4.2003.
4.3.4 Under the circumstances mentioned in Sec. 27 of the I.T. Act, a person can be deemed to be the owner of the house property and in such a case the income .from that property is taxable in the hands of that person.
4.3.5 Where the net result of computation of income from house property is loss and the assessee has income assessable under any other head of income, he is entitled to have such loss set off against income under other heads. Any loss remaining unadjusted can be carried forward to the following assessment year for set-
off against income from house property in that years and in succeeding seven years.
Profits and gains of business or profession
4.4 Income from business or profession is computed in accordance with the provisions of sections 28 to 44D of the Act. The expression 'business or profession' includes any trade commerce or manufacture or vocation. Apart from income from any of these activities the income chargeable under this head includes the following receipts as well:-
- Compensation received for the termination or for modifications in terms and conditions of any managing agency agreement.
- Income of trade, professional and similar associations from specific services performed for its members.
- Value of any benefit or perquisite arising from any business or profession.
- Profit on sale of a replenishment license, cash assistance or refund of duty drawback granted to the exporters.
- Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from such firm.
- Any sum received under a keyman insurance policy including bonus on such policy.
4.4.1 Primarily the business or professional income is computed as per the accepted business and accounting norms and in accordance with the method of accounting regularly employed by the tax payer. Thus, whatever constitutes a legitimate outgoing of revenue nature of a business is allowed as a deduction in computing the business income. However, certain deductions are allowed in the Act as per the specific provisions made with regard to those deductions and certain deductions, though business related, are not allowed because of specific bar on their allowance under the Act.
4.4.2 Some of the specific provisions made in law for permissible deductions in computation of business or professional income relate to the following items of expenditure and outgoings:-
- rent, rates, taxes, repairs and insurance of premises used for the purpose of business or profession;
- repairs and insurance of machinery, plant and furniture used for the purpose of business of profession;
- depreciation of tangible assets viz., building, machinery, plant and furniture and intangible assets viz., know how, patents copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature owned by the tax payer and used for the purpose of business or profession;
- Expenditure in respect of scientific research:-
- On in-house research related to the business of the assessee.
- Capital expenditure (except expenditure on land) in relation to the research related to the business.
- Contribution to an approved University, college, association or institution for scientific research including research in social science or statistical research.
- For payment to a National Laboratory or a University or an Indian Institute of Technology for scientific research under an approved programme, a weighted deduction equal to one and one-fourth time the sum paid is allowable.
- Expenditure of deffered revenue nature which are amortised over a number of years. These are:-
| (a) On acquisition of patent rights and copy rights (Sec. 35A) | 14 years (upto A.Y. 1998-99) |
| (b) On acquisition of know-how (Sec.35AB) | 6 years (upto A.Y. 1998-99) |
| (c) Preliminary expenses on setting up of business (Sec. 35D) | 5 years |
| (d) On prospecting for or extraction or production of mineral deposits (Sec.35E) | 10 years |
| (e) Expenditure in the nature of capital expenditure on obtaining licence to operate telecommunication services (Sec. 35ABB) | Years during which the licence remains in force. |
- premium in respect of insurance against risk of damage or destruction of stock and stores used for business or profession;
- premium in respect of health insurance of the employees;
- bonus and commission to employees;
- interest on capital borrowed for the business or profession;
- contribution to a recognised provident fund, an approved superannuation fund or an approved gratuity fund;
- bad debts; and
- payments to notified Rural Development Fund or to National Urban Poverty Eradication Fund or to ap proved organisation/institutions enaged in activities of conservation of natural resources or afforestation or for carrying out eligible projects or schemes approved by the National Committee.
 |
4.4.3 In addition, there is a residuary provision under which the tax payer can claim deduction in respect of any expenditure incurred wholly and exclusively for the purpose of the business or profession.
This omnibus clause is not available for claiming any expenditure for which a specific provision is made or for expenses of capital or personal nature or expenditure for any purpose which is an offence or which is prohibited by law.
4.4.4 Expenses, even though business-related, which are not allowed as deduction are
- expenditure on advertisement in any souvenir etc. of a political party;
- any interest, salary, royalty, fees for technical services or other sum payable outside India from which due tax has not been deducted at source;
- any tax calculated on the basis of profits or gains of the business or profession
e.g. income tax; - Wealth tax.
4.4.5 Apart from these; the tax authorities may disallow, or restrict the deduction to a reasonable level, where the payments are made to any close relative or a business associate. Claims are also to be disallowed to the extent of 20% where payments in excess of Rs. 10,000/- are not made by a crossed cheque or a crossed bank draft.
4.4.6 The above stated principles of computation of business income apply uniformly to all forms of business activities. However, there exist certain special provisions under the Act which deal exclusively with taxation of business income from certain specific activities. These provisions make departure from the normal manner of computing income as explained above and prescribe for working out the taxable income on presumptive
basis as per the norms laid down. These are:-
| (i) Business of civil construction or supply of labour for civil construction where the total receipts do not exceed 40 lakh rupees (Sec.44AD) | Profit as declared in the return or the sum equal to 8% of the gross receipts of the previous year, whichever is higher. |
| (ii) Business of plying, hiring or leasing goods carriage, where the assessee does not own more than ten goods carriages (Sec. 44AE) | Profit as declared in the return of income or the sum calculated at Rs. 2,000/- per month or part of a month for heavy goods vehicle and Rs. 1,800/- per month or part of a month for other vehicles, whichever is higher. |
| (iii) Retail trade in goods or merchandise where the total turnover of the previous year does not exceed forty lakh rupees. | Profit as declared in the return of income or the sum equal to 5% of total turnover of the previous year, whichever is higher. |
Further there are special provisions for computing presumptive income in the case of non-residents engaged in the business of shipping, exploration, etc. of mineral oils, operation of aircraft and civil construction etc. in certain turnkey power projects. Such provisions also exist for taxation of income from certain dividends, interest and units derived by a non-resident or a foreign company and from royalty or fees for technical services derived by a foreign company. A detailed discussion about such provisions is made in Chapters VIII and X.
|
4.4.7 It is obligatory on persons engaged in certain specific professions such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representatives, film artists etc., to maintain books of accounts in a manner which may enable the assessing officer to compute their taxable income. The obligation to maintain such books of accounts is also on all other professions and business if the income in any of the preceding three years exceeded rupees 1,20,000 or the turnover/receipts in any of the preceding three years exceeded rupees ten lakhs. For the business or profession which is newly set up the obligation arises if the income or turnover/receipts is likely to exceed these amounts in the previous year. Persons engaged in activities mentioned in para 4.4.6 are exempted from such obligation.
|
4.4.8 Further, every person carrying on business or profession in India must have his accounts audited by a chartered accountant if his turnover exceeds Rs. 40 lakhs (Rs. 10 lakhs for professional receipt). A copy of the audited accounts and auditor's report are required to be furnished by the due date of filing the retrun of income. Certain other particulars are required to be filed alongwith the return of Income. The requirement to get
the accounts audited does not apply to persons enaged in activities mentioned in para 4.4.6.
4.4.9 In case of a partnership firm deducation for certain payments made to its partners like interest and remuneration is subject to ceiling laid down in sec. 40 (b) introduced by Finance Act 1992.
Capital Gains
4.5 Sections 45 to 55A deal with the provisions relating to computation of income from capital gains. Gains arising from the transfer of a capital asset are either short-term or long-term depending upon the period for which the assets giving rise to capital gains were held by the tax payer. A gain is short term if the asset was held for a period upto 36 months. In the case of share of a company, listed security, unit of Unit Trust of India or of any other specified mutual fund, this period is 12 months. All other gains i.e. those arising from assets held for more than this period are called 'Long-term capital gains'.
4.5.1 Capital gain is computed by deducting from the full value of transfer consideration the following:-
- the cost of acquisition (or the written down value) of and cost of improvement in the asset;
- the amount of expenditure incurred in connection with such transfer.
The resultant amount in case of short term capital gains is taxable in full at the normal rate of taxation applicable to the tax payer.
4.5.2 In case of the following self-generated assets where there is no cost incurred by the assessee, the law provides for the cost of acquisition to be taken as 'NIL' :-
- Goodwill or a right to manufacture produce or process any article or thing.
- Tenancy rights
- Stage carriage permit
- Loom hours
4.5.3 In case of slump sale of an undertaking or a division thereof, its net worth is to be taken as cost of acquisition. This cost of acquisition is not to be indexed as stated in para 4.5.4.
4.5.4 There are special provisions for computation of long term capital gains. In such cases, the actual cost of acquisition and the cost of improvement of the asset is adjusted to take account of inflation in terms of the Cost Inflation Index which is notified by the Central Government every year. For those assets which are
acquired prior to 1st April, 1981, the actual cost can be taken to be its fair market value as on 1st April, 1981 which is than adjusted for inflation in the same manner. The notified cost inflation index is as under:-
S.No. | Financial Year | Cost Index |
1. | 1981-82 | 100 |
2. | 1982-83 | 109 |
3. | 1983-84 | 116 |
4. | 1984-85 | 125 |
5. | 1985-86 | 133 |
6. | 1986-87 | 140 |
7. | 3987-88 | 150 |
8. | 1988-89 | 161 |
9. | 1989-90 | 172 |
10. | 1990-91 | 182 |
11. | 1991-92 | 199 |
12. | 1992-93 | 223 |
13. | 1993-94 | 244 |
14. | 1994-95 | 259 |
15. | 1995-96 | 281 |
16. | 1996-97 | 305 |
17. | 1997-98 | 331 |
18. | 1998-99 | 351 |
19. | 1999-2000 | 389 |
4.5.5 Long term capital gains computed after taking into consideration the indexed cost of acquisition and/or cost of Irnprovement is taxable for and from the assessment year 1988-89 at the flat rate of 20% irrespective of the residential status of the assessee. Exceptions are made in the case of certain categories of non-residents and NRIs (Refer para 7.3.4 and 11.3). In respect of gains arising from transfer of listed securities or unit tax so computed @.20% will be limited to 10% of capital gain worked out without indexation benefit.
No indexation benefit is available on bonds and deben tures as also in respect of Global Depository Receipts purchased by a resident employee under ESOP in foreign currency.
4.5.6 In case of non-residents, protection against loss arising from fluctuation in rupee value is provided in computation of capital gains if the share or debenture of an Indian company was acquired by utilising foreign currency. This is done to ensure that the amount of capital gains chargeable to tax is not influenced by the exchange rate fluctuation and represents only the accretion in value. The manner of granting such protection is mentioned in para 7.3.1 of Chapter VII.
4.5.7 Transfer of a capital asset in a scheme of amalgamation or demerger is not regarded as a transfer for the purpose of capital gains when the amalgamated or the resulting company is an Indian company. Further, transfer of a capital asset being shares in Indian companies from one foreign company to another, in a scheme of amalgamation or demerger would not be regarded as a transfer if certain conditions are satisfied (para 7.3.2). Exemption from tax is also provided, subject to fulfillment of certain condition, when assets are transferred as a result of succession of a sole proprietory concern or a firm by a company.
4.5.8 In case the capital gain arising from transfer of an asset is used for acquiring similar assets within a specified period, the whole or the proportionate amount of capital gain is not included in the income depending upon whether the whole of the capital gains is so used or only part of it is used for acquiring a new asset. Such cases are gains from residential house, agricultural land and from transfer of industrial undertaking (For details sections 54, 54B and 54G may be referred to). Gains from any long term asset if used for purchase or construction of residential house where the person has only one residential house is also exempt (Sec. 54F). Similarly gain arising from transfer of any long-term capital asset is exempt-wholly or proportionately as the case may be-if the net consideration in respect of such transfer is wholly or partly invested, within a period of six months, in any of the bonds, debentures, shares of a public company or units of a mutual fund specified by the Board for the purpose of Section 54EA and notified in the official gazette. The assessee has the option to invest only the amount of capital gain in assets specified by the Board for the purpose of Section 54EB in which case the gain will be wholly or proportionately exempt depending upon whether whole or part of the gain is so invested. The new assets cannot be transferred or converted into money within three years (if the net consideration was invested) and within seven years (if the capital gain only was invested). In the event of such transfer or conversion, the gains exempted on investment are brought to tax in the year of transfer or conversion of new assets and Rural Development or by the National Highways Authority of Indian which are redeemable after five years. However gains arising from transfers after 31.3.2000 will be required to be invested only in bonds issues by National Bank for Agriculture.
4.5.9 Special provisions exist for taxation of capital gains arising to offshore funds from transfer of units purchased in foreign currency, to non-residents from transfer of bonds or shares purchased in foreign currency and to Foreign Institutional Investors from transfer of listed securities purchased in foreign currency. These provisions are explained at 7.3.4 in Chapter VII.
Income from other sources
4.6 Sections 56 to 59 deal with the provisions for computation of income under the head 'income from other sources'. This is a residuary head covering all incomes which do not specifically fall .under any of the heads mentioned earliers. Some of the types of income which are assessable under this head are mentioned belows :-
- Dividends or income from units of mutual fund.
- Interest including 'interest on securities' if it is not taxable under the head 'Profits and gains of business or profession'.
- Income such as
- Ground rent or rent received or sub-letting a property.
- Winning from lotteries, cross-word puzzles, races including horse races, card games or from gambling or betting etc.
- Income from hiring of machinery, plant or furniture unless such a hiring is the business of the taxpayer.
- Family pension.
4.6.1 In computing the taxable income under this head, deduction is allowable for expenditure (other than capital expenditure) which is incurred by the tax payer wholly and exclusively for the purpose of earning such income. Besides, in assessing dividend income, any remuneration or commission paid for realising such income is allowed as deduction. In assessing income from letting the machinery, plant or furniture on hire, the depreciation on the value of such assets calculated in the same manner as in respect of assets used in a business or profession is allowable as a deduction. No deduction is, however, allowed in respect of—
- any personal expenditure of the tax payer;
- any salaries or interest payable outside India from which tax is deductible at source under the Act but has not been deducted.
4.6.2 Further, no deduction in respect of any expenditure or allowance is made in computing income from winnings referred in (iii) (b) of para 4.6 above. Such income is taxable at a flat rate of 40 per cent under the provisions of Section 115BB.
4.6.3 A standard deduction equal to 33-1/3% of the pension amount or Rs. 15,000/- whichever is less is allowed in computing income from family pension.
Set off of Losses
4.7 In case of computation of income under any of the heads of income results in a loss figure, such loss can be set off against income under any other head (including capital gains) in the same year. This, however, does not apply to losses from speculative transactions, losses from owning and maintaining race horses or to losses under the head 'Capital Gains'. Losses of these excluded categories can be set off only against income, if any, from activities in the same category in that year.
Carry Forward of Losses
4.8 Losses under the head 'Profits and Gains of business or profession' except those sustained from speculative activities which cannot be set off against income under any other head within the same year can be carried forward to the succeeding eight years and set off only against income under the same head in those years. In case of —
- amalgamation of company owning industrial undertaking or a ship with another company;
- a demerger of a company;
- a reorganisation of business resulting in succession of a firm or a proprietory concern by a company;
the accumulated losses or unabsorbed depreciation of the amalgamating company, demerged company or the predecessor concern will, subject to fulfillment of certain conditions (sec. 72A), be treated as losses or depreciation of amalgamated company, resulting company or the successor concern and will be allowed to be set off and carried forward as their own loss or depreciation Gains which would not be set off against income of respective nature in any year can be carried forward for eight succeeding years for set off against income of similar nature, if any, in those years. Losses in the activity of owning and maintaining race horses can be carried forward for set off against profits of similar activities in succeeding four years only.
4.8.2 Losses under the head income from house property which could not be set off against income under any other head can be carried forward for eight succeeding years for set off against income under this head in those years.
4.8.3 If 51% or more of the voting power changes hands in an unlisted company, the company will not be able to carry forward losses incurred before such change.
