LL.B. (Hons.

) 7th Semester
Law of Taxation-I
Unit:3
Syllabus: Heads of Income: Income from Salaries, Income from House Property, Income from Capital Gains,
Income from Profits and Gains from Business or Profession, Income from Other Sources, Calculation of Gross Total
Income and Taxable Income, Tax Rebate and Computation of Tax Liability, Tax Collection at Source and Advanced
Tax
Long Questions
Ques.1. Define Salary under Income Tax Act, 1961 and explain the various Allowances.

Salary (Section 15 – 17) Salary is the remuneration received by or accruing to an individual, periodically, for Service
rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as
far as its taxability is concerned.
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries”, which includes:
1. Wages
2. Annuity or pension
3. Gratuity
4. Fees, Commission, allowances perquisites or profits in lieu of salary
5. Advance of Salary
6. Amount transferred from unrecognized provident fund to recognized provident fund
7. Contribution of employer to a Recognized Provident Fund in excess of the prescribed limit
8. Leave Encashment
9. Compensation as a result of variation in Service contract etc.
10. Contribution made by the Central Government to the account of an employee under a notified Pension scheme

Fully Taxable Partly Taxable Fully Exempt

Entertainment Allowance House Rent Allowance [u/s Allowance granted to Government

Dearness Allowance 10(13A)] employees outside India.
Overtime Allowance Special Allowances [u/s 10(14)] Allowance granted to High Court
Fixed Medical Allowance Judges
City Compensatory Allowance (to Sumptuary allowance granted to
meet increased cost of living in High Court or Supreme Court
cities) Judges
Interim Allowance Allowance paid by the United
Servant Allowance Nations Organization
Project Allowance Compensatory Allowance received
Tiffin/Lunch/Dinner Allowance by a judge
Any other cash allowance
Warden Allowance
Non-practicing Allowance
Ques.2. Explain Income from House Property under Income Tax Act, 1961 and throw light on Pre Construction
Interest, Self Occupied House Property? How Income from House Property calculated?

Section 22 of the Income tax Act, 1961 is the charging section for head Income from House Property. As per this section,
the assessee must be the owner of the property which is subject to income under the head House Property. Property can be
any building or land not necessarily residential.

Section 23 of the Income Tax Act, 1961 talks about the calculation and determination of annual value of the property.
Section 24 of the Income Tax Act, 1961 talks about the deductions from Annual value. As per Section 24 (a) of the said
act, a net deduction of 30% is allowed on Net Annual Value and as per Section 24(b), deduction of interest on borrowed
capital is fully allowed, in case of properties which are let out or deemed to be let out. In case of those properties, which
are self occupied, the deduction of Interest on borrowed capital under Section 24(b) is treated in two different manners.

In case of those properties, which are self occupied, the deduction of Interest on borrowed capital under Section 24(b) is
treated in two different manners.
When the loan is taken for the repair/reconstruction/renewal of the property, then the maximum deduction of Rs 30,000 is
allowed.
When the loan is taken for construction of house property or acquisition than the deduction is allowed depending on the
date on which loan was taken i. If the loan was taken before 1st April, 1999, then an maximum deduction of Rs 30,000 is
allowed.
If the loan was taken after 1st April, 1999, then again two situations arise depending on whether the
acquisition/construction was completed within 5 years from the end of the Previous Year in which the loan was taken.
In case the construction/acquisition is not completed within 5 years, then then an maximum deduction of Rs 30,000 is
allowed. However, if the construction is completed within 5 years then a deducted of Rs 2,00,000 is allowed.
PRE CONSTRUCTION INTEREST: If any interest is paid for the period before the previous year in which the
construction/acquisition was completed, then this interest is allowed to be deduced in 5 equal installments starting from
the previous year in which acquisition/construction was completed.

Self- Occupi This is the type of property that is self owned and used for own residential purposes. This may be occupied
ed House by the owner’s family or relative or self. A property that is unoccupied is considered as a self-occupied
Propert y property for the purpose of income tax. Before the Financial Year 2019-20 if taxpayer owns more than one
house property, only one is considered as self-occupied property and rest are assumed to be let out. From
2019-20 onwards two properties are considered as self-occupied properties.

Let Out House Property Any house property that is rented for complete or part of th considered as a
let out property for income tax purposes.

lue
Ques.3. Explain Capital Gains under Income Tax Act, 1961. What is meant by Capital Asset? What do you
understand by Personal effects? Explain Sale of Residential Property under Section 54. Give the Proforma of
Calculation of Capital Gain.

Capital Gains Tax in India

Did you sell any immovable property, shares, mutual funds or any other Capital Asset? You’ll be liable to Capital Gains
Tax and must disclose such income under the head “Capital Gains”.
ASSESSEE can easily save your tax by investing in schemes under Section 54, 54F, 54EC, etc. under the head of capital
gain.
Capital Gains

Section 45 of Income Tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected
in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to
be the income of the previous year in which the transfer took place. In this charging section, two terms are important. One
is “capital asset” and the other is “transfer”.

Capital Asset

According to section 2(14), a capital asset means –

property of any kind held by an assessee, whether or not connected with his business or profession;
Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the SEBI
regulations.
However, it does not include—

Any stock-in-trade [other than securities referred to in (b) above], consumable stores or raw materials held for the purpose
of the business or profession of the assessee;
Personal effects, 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 excludes –

Jewelry;
Archaeological collections;
Drawings;
Paintings;
Sculptures; or
Any work of art.
Rural agricultural land in India
6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central
Government;
Special Bearer Bonds, 1991 issued by the Central Government;
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government.
Short Term and Long Term Capital Assets

The short-term capital asset is a capital asset held by an assessee for not more than 36 months immediately preceding the
date of its transfer. Therefore, a capital asset held by an assessee for more than 36 months immediately preceding the date
of its transfer is a long-term capital asset.
However, a security (other than a unit) listed in a recognized stock exchange, or a unit of an equity oriented fund or a unit
of the Unit Trust of India or a Zero Coupon Bond will be considered as a long-term capital asset if the same is held for
more than 12 months immediately preceding the date of its transfer. In the case of Immovable Property (land or building
or both) hold for more than 24 months then it will be treated as a long-term capital asset.

This article explains in detail the following exemptions which can be claimed on the sale of a Long Term Asset i.e. on
sale of an asset which was held for more than 2 years.
Ques.4. Explain Income from Profits and Gains from Business or Profession? Define Business Income and how it is
arrived? Mention few incomes which are chargeable under the head of Profits and Gains from Business or
Profession.

Income from Profits and Gains from Business or Profession (PGBP) Covered under section 28 to 44D of Income
Tax Act, 1961
Profit and gains of Business or profession (also known as PGBP) is third head in computation of income apart from four
incomes, namely, income from salary, income from house property , income from capital gains and income from other
sources. This is one of the Major Head compassing for computing professional tax registration.
Income earned through your profession or business is charged under the head ‘profits and gains of business or profession.
‘ The income chargeable to tax is the difference between the credits received on running the business and expenses
incurred.
Business : Business means the purchase and sale or manufacture of a commodity with a view to make profit. It includes
any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce and manufacture.
Business Income is the profit that is earned from the business. It is nothing but Total Revenue/Total turnover minus Total
Expense. The profit from the business is the taxable income/business income.
There are two types of business

Speculative Business Income : When the net income form the business ,is not fixed and it changes from time to time
comes under this category .For Example : Share Trading Business
Non Speculative Business Income :When the net income form the business ,is fixed and it does not change from time to
time comes under this category .For Example : any manufacturing/trading or any business Note : It includes Income from
trading Futures and Options
Profession: Profession means the activities for earning livelihood which require intellectual skill or manual skill, e.g. the
work of a lawyer, doctor, auditor, engineer and so on are in the nature of profession. Profession includes vocation.
Vocation : Vocation implies natural ability of a person to do some particular work e.g. singing, dancing, etc.
Profits : Excess income over expenditure.
Gains : Any incidental revenue from business. As the rules for the assessment of business, profession or vocation are the
same, there is no importance of making any distinction between them for income tax purposes.
Sec. 28 : Basis of Charge

The following incomes are chargeable under this head and income will be computed with accordance with the
provisions laid in section 29 to 44DB
Profits or gains of any business or profession at any time during the previous year
Any compensation or other payments due to or received by any by whatever name, manage the whole or significant whole
of the affairs of an Indian company, at or connected to the termination of his management or the modification of the terms
and conditions
Income derived by a trade, professional or similar association from specific services performed for its members
The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a
profession
Any interest , Commission ,salary , remuneration ,or bonus due to , or received by , a partner of a firm from a firm
Any profit on the transfer of the Duty Entitlement Pass Book Scheme.
Any profit on the transfer of the Duty Free Replenishment Certificate.
Export incentives for exporters
Any sum received under Keyman Insurance Policy including Bonus
Any sum received for not carrying out any activity in relation to any business or profession or not to share any know-how,
patent, copy right, trademark etc.
Any sum received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial
instrument) being demolished, destroyed, discarded or transferred, if the whole of expenditure on such capital asset has
been allowed as a deduction under section 35AD.
Income from Speculative Transaction
Ques.5. Explain Income from Other Sources under Income Tax Act, 1961. Mention the types of receipts that fall
under Income from Other Sources. What is meant by Casual Income? What do you understand by unexplained
money? Give examples of Unexplained Income.

Section 56: Incomes Taxable Only in Income from Other Sources – Criteria Under Section 56 of the Act, the following
three conditions must be satisfied for a receipt of earning to come under the ‘income from other sources’ head –
You have an income
Such income is not tax-exempt under any other Sections of the Income Tax Act 1961
Such income cannot be categorized as salary, profits, and gains from business or profession, income from house property,
or capital gains
What does ‘Income from Other Sources’ Include?
The following types of receipts of income fall under the Income from Other Sources’ category –
Dividends
Dividend from an Indian Company
Dividend from a Foreign Company
One-time Income
One-time incomes such as winnings from lotteries, horse races, crossword puzzles, card games, gambling or betting of
any form are categorized under ‘Income from Other Sources.’
Interest on Compensation
Gifts

Then, there are the following receipts of income, which can only be classified under ‘Income from Other Sources’ if they
are not chargeable as ‘Profits and Gains of Profession or Business’ –
Employees’ contribution to any welfare scheme
Interest on securities such as debentures or government bonds
Rental income received from letting out the plant, furniture, or machinery owned by the assessee
Rental income received from letting out the plant, furniture, or machinery along with a building (here, these two cases of
letting out are inseparable)
Receipts of income under a Keyman Insurance Policy

Casual Income
Casual income means income in the nature of winning from lotteries, crossword puzzles, races including horse races, card
games and other games of any sort, gambling, betting etc. Such winnings are chargeable to tax at a flat rate of 30% under
section 115BB.
Conditions:

No expenditure or allowance can be allowed from such income.

Deduction under Chapter VI-A is not allowable from such income.

Adjustment of unexhausted basic exemption limit is also not permitted against such income.

Unexplained money

The unexplained income simply means any income for which assessee do not have valid explanation about the nature and
/ or source or the assessing officer is not satisfied with the explanation provided by the assessee.
Under the provisions of Income-tax Act, 1961 (the Act) broadly, the term ‘unexplained income’ is dealt with sections 68,
69, 69A, 69B, 69C and 69D
Section deals with 68 Cash Credits
Section 69 Unexplained investments
Section 69A Unexplained money, etc.
Section 69B Amount of investments, etc., not fully disclosed in books of account
Section 69C Unexplained expenditure, etc.
Section 69D Amount borrowed or repaid on hundi

Ques.6. Explain Gross Total Income. Differentiate between Gross Total Income and Total Income.

Gross Total Income

As the name suggests Gross Total Income is the aggregate of all the income earned by you during a specified period.
According to Section 14 of the Income Tax Act 1961, the income of a person or an assessee can be categorized under
these five heads,
Income from Salaries
Income from House Property
Profits and Gains of Business and Profession
Capital Gains
Income from Other Sources

And, Gross Total income is arrived at when your earnings from all these five heads of income is taken together.
Why Gross Total Income (GTI) needs to be calculated?

The computation of gross total income is vital because It is the amount required to be disclosed while filing Income Tax
Return
Deductions under Chapter VI A are required to be deducted from GTI to arrive at the taxable or total income
Gross Total Income shall not include:

While calculating gross total

What is the difference between Gross Total Income and Total Income
income one must sum up all of
their income without reducing
Gross Total Income is calculated foremost by adding your income under all five heads
of income. the amount for any tax saving
To arrive at the Total income you must subtract from it the deductions from GTI of investments made under
the Income Tax Act 1961. Section 80C to 80U under
The deduction ranging from section 80C to 80U. After deducting gets total income Income Tax Act 1961.

Income From Salary xx

Add: Income Under the Head House Property xx

Add: Profits and Gains of Business and Profession xx

Add: capital gains Income xx

Add: Income from Other Sources xx

Gross Total Income xxx

Less: Deductions under Section 80C to 80U xx

Total Income xxx

Ques.7. Explain Tax collected at source (TCS). Mention the buyers for whom TCS is not necessary. What is meant
by Advanced Tax? What are the important dates in Advanced Tax? What do you understand by Permanent
Account Number (PAN).
Tax collection at source (TCS) is an additional amount collected as tax by a seller of specified goods from the buyer at
the time of sale over and above the sale amount and is remitted to the government account.
As per Income Tax Act 1961 certain persons, being the sellers must collect a specified percentage of tax at the time of
receipt of amount from their buyers or at the time of debiting of the account of the buyer whichever is earlier.
Section 206C of the Income Tax Act mentions the particulars of goods, on sale of which tax needs to be collected from
the purchasers.
The person collecting tax has to obtain Tax Collection Account Number (TAN) and quote it in all challans, certificates
and returns and all other documents pertaining to the transactions.
The buyer shall furnish his Permanent Account Number (PAN) to the seller, failing which tax shall be collected
at the higher rate (twice or 5 percent whichever is higher).

TCS is not necessary for the following buyers:

Public Sector Companies

Central Government
State Government Advertisement
Embassy of High commission
Consulate and other Trade Representative of a Foreign Nation.
Clubs such as Sports clubs and Social Clubs
Local authority for the purpose of purchase of vehicle

Time of collection of TCS Earlier is earlier of the following period-

At the time of debiting the amount payable by the buyer; or

At the time of receipt of the amount from the buyer.

Advanced tax

Advance tax is the amount of income tax that is paid much in advance rather than a lump- sum payment at the year-end.
It is Also known as earn tax,
Advance tax is to be paid in installments as per the due dates decided by the income tax department.
Total Tax Liability- Relief u/s 87 A-TDS= ADVANCED TAX LIABILITY Who should pay advance tax?
As per section 208 of the Income Tax Act 1961, every person whose estimated tax liability for the year is
more than or equal to `10,000 is liable to pay advance tax.

What are the important dates in advance tax?

 Due Date Advance Tax Payable
1 On or before 15th June 15%

2. on or before 15th September 45%

3. on or before 15th December 75%

4. on or before 15th March 100%

PAN NUMBER

PAN stands for Permanent Account Number.

PAN is a ten-digit unique alphanumeric number issued by the Income Tax Department.
PAN is issued in the form of a laminated plastic card (commonly known as PAN card).
PAN enables the department to link all transactions of the assessee with the department.
These transactions include tax payments, TDS/TCS credits, returns of income, specified transactions