Taxation Laws2

COM633 : TAXATION LAWS - II
Objective:
1. To familiarize and educate the student with the concept of Income Tax in India,
as regards Capital Gains, Clubbing of Income, Set Off and Carry Forward of Losses,
Deductions from Gross Total Income, Computation of Total Income and Tax
Liability, Assessment procedure and Income Tax Authorities
2. To familiarize and educate the student on certain important indirect tax
legislations- Central Excise Act, Service Tax, Central Sales Tax and VAT.
(The paper is divided in to two parts)
PART- A
Unit: - 1 Capital Gains: (Individual Assessee,

in respect of landed property & Securities only) Sec.45, 47, 48,49. 51, 54, 54B, 54D,
54E, 54EA, 54EB, 54EC, 54ED, 54F, 54H and 55.Capital Asset - Transfer of Capital
assets - Transactions not regarded as transfer - Deductions – Exemptions - Computation
of income from Capital Gain.
Unit: - 2 Clubbing of Income: Income of Other

Persons - Included In Assessee’s Total Income (Theory only)
Unit: - 3 Set Off and Carry Forward of Losses: Different sources under
the same head of income - Sources from different heads of income-special provisions
regarding income from House property. (Theory only)
Unit: - 4 Computation of Total Income and Tax Liability: Deduction from

Gross Total Income u/s 80C– 80CCC – 80CCD – 80D – 80DD – 80DDB – 80E – 80G –
80GG – 80GGA – 80U – Computation of Total Income and Tax Liability of individual
assessees only.
Unit: - 5 Procedure for Assessment:
Self Assessment- Assessment-Best Judgment Assessment- Income escaping

Assessment-Notice- Rectification of mistakes-time limit for completion.
Unit: - 6 Income Tax Authorities:
Income Tax Authorities: A brief discussion on - Income Tax Officer and Powers and
Functions - Central Board of Direct Taxes, Functions - Commissioner of Income Tax,
Functions.
Books for Reference:
1. Dr. Vinod K. Singhania: Direct Taxes – Law and Practice, Taxman publication.
2. T.N.Manoharan: Students Handbook on Income Tax Law. Snow white
publications.
3. Bhagwathi Prasad: Direct Taxes – Law and Practice, Vishwa Prakashana.
4. Gaur & Narang: Income Tax.
PART- B
Unit: - 7 The Central Excise Act:
Introduction; Definitions: Central Excise Officer, Excisable Goods, Manufacture, and

Wholesale Dealer, and Assessee (Rule-2); Duty to be levied; CENVAT; Valuation of
excisable goods for levying duty and with reference to retail price; remission of duty on
deficient goods; registration of persons; restriction on possession of excisable goods.
Rules regarding removal of goods, Assessment and payment of duty, filing of returns.
(CENVAT Credit Rules excluded); Powers of Central Excise Officers
Unit: - 8 Service Tax:
Introduction; Meaning and classification of taxable service (Sec.65A); Charge of

service tax (Sec.66 & 66A); valuation of taxable services for the purpose of charging
(Sec.67); payment of service tax (Sec.68); registration (Sec.69); furnishing of returns
(Sec.70) Service Tax to be deposited with the Central Govt. (Sec.73A); Penalty for
failure to pay (Sec.76)(*Taxable service pertaining to (Definitions in Sec.65) a)
Clearing and Forwarding, (b) Courier Agency, (c) Manpower recruitment or supply
agency, (d) Practicing Chartered Accountant and (e) Security Agency only)(Theory
only)
Unit: - 10 Value Added Tax:
(Karnataka VAT Act 2003 as amended by Act of 2005)
Introduction- meaning of the terms –Agricultural Produce, Business, Capital Goods,

Dealer, Goods, Prescribed Authority, Taxable Turnover, Total Turnover, Turnover and
Works Contract. (Sec.2), Levy of Tax (Sec.3), Liability to Tax and Rates (Sec.4),
Exemptions (Sec.5), Collection of Tax (Sec.9) Deduction at Source (Sec.9A), Output
Tax, Input Tax, and Net Tax (Sec.10), Input Tax restrictions (Sec.11), Deduction of
Input Tax on Capital Goods (Sec.12), Special Rebates (Sec.14). (Theory only)
UNIT- I
CAPITAL GAINS
INTRODUCTION
When we buy any kind of property for a lower price and then subsequently sell it at a
higher price, we make a gain. The gain on sale of a capital asset is called capital gain.
This gain is not a regular income like salary, or house rent. It is a One-time gain; in
other words the capital gain is not recurring, i.e., not occur again and again periodically.
Whenever there is a loss on sale of any capital asset it will be termed as loss under the
head capital gain.
BASIS OF CHARGE
The capital gain is chargeable to income tax if the following conditions are
satisfied:
1. There is a capital asset.
2. Assessee should transfer the capital asset.
3. Transfer of capital assets should take place during the previous year.
4. There should be gain or loss on account of such transfer of capital asset.
5. Such profits or gains is not exempt from tax under sections
54,54B,54D,54EC,54F,54G & 54GA
CAPITAL ASSET
Any income profit or gains arising from the transfer of a capital asset is
chargeable as capital gains.
Capital Asset means property of any kind, whether fixed or circulating, movable or
immovable, tangible or intangible, held by the assesses, whether or not connected with
his business or profession, but does not include,
a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business or
profession.
b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal
use of the tax payer or any member of his family. However, jewellery, even if it is for
personal use, is a capital asset.
c) Agricultural land in India other than the following:
• Land situated in any area within the jurisdiction of muni-cipality, municipal

corporation, notified area committee, town area committee, town committee, or a
cantonment board which has a population of not less than 10,000 according to the
figures published before the first day of the previous year based on the last preceding
census.
• Land situated in any area around the above referred bodies upto a distance of 8
kilometers from the local limits of such bodies as notified by the Central Government
(Please see Annexure 'A' for the notification).
d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defence
Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government.
e) Gold deposit bonds issued under the Gold Deposit Scheme 1999 notified by the
Central Government.
Though there is no definition of "property" in the Income-tax Act, it has been judicially
held that a property is a bundle of rights which the owner can lawfully exercise to the
exclusion of all others and is entitled to use and enjoy as he pleases provided he does not
infringe any law of the State. It can be either corporeal or incorporeal. Once something
is determined as property it becomes a capital asset unless it figures in the exceptions
mentioned above. Something is determined as property it becomes a capital asset unless
it figures in the exceptions mentioned above.
TYPES OF CAPITAL ASSET

There are two types of Capital Assets:
1. Short Term Capital Assets (STCA): An asset, which is held by an assessee
for less than 36 months, immediately before its transfer, is called short
Term Capital Assets. In other words, an asset, which is transferred within
36 months of its acquisition by assessee, is called Short Term Capital
Assets.
2. Long Term Capital Assets (LTCA): An asset, which is held by an assessee
for 36 months or more, immediately before its transfer, is called long
Term Capital Assets. In other words, an asset, which is transferred on or

after 36 months of its acquisition by assessee, is called Long Term Capital
Assets.
The period of 36 months is taken as 12 months under following cases:
Equity or Preference shares,
Securities like debentures, government securities, which are
listed in recognised stock exchange,
Units of UTI
Units of Mutual Funds
Zero Coupon Bonds
TYPES OF CAPITAL GAIN

Capital gain arising on transfer of a short term capital asset is short term capital gain,
whereas transfer of long term capital asset generates long term capital gain. The tax
incidence is generally higher in the case of short-term capital gain as compared to long
term capital gain.
TRANSFER
Capital gain arises on transfer of capital asset.
The word transfer under income tax act is defined under section 2(47). As per section 2
(47) Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of
the asset or extinguishments of any right therein or the compulsory acquisition thereof
under any law.
In simple words Transfer includes:
Sale of asset
Exchange of asset
Relinquishment of asset (means surrender of asset)
Extinguishments of any right on asset (means reducing any right
on asset)
Compulsory acquisition of asset.
i) Sale, exchange or relinquishement of a capital asset
A sale takes place when title in the property is transferred for a price. The sale need not
be voluntary. An involuntary sale like that by a Court of a property of judgement debtor
at the instance of a decree holder is also transfer of a capital asset.
An exchange of capital asset takes place when the title in one property is passed in
consideration of the title in another property. Relinquishment of a capital asset arises
when the owner surrenders his rights in property in favour of another person. For
example, the transfer of rights to Subscribe the shares in a company under a 'Right Issue'
to a third person.
ii) Extinguishment of any rights in a capital asset
This covers every possible transaction which results in destruction, extinction,

termination, Cessation or cancellation of all or any bundle of rights in a capital asset.
For example, termination of a lease or and of a mortgagee interest in a property.
iii) Compulsory acquisition of the capital asset under any law
Acquisition of immovable properties under the Land acquisition Act, acquisition of

industrial undertaking under the Industries (Development and Regulation) Act or
preemptive purchase of immovable properties by the Income-tax Department are some
of the examples of compulsory acquisition of a capital asset.
iv) Conversion of a capital asset into stock-in-trade
Normally, there can be no transfer if the ownership in an asset remains with the same
person. However the Income-tax Act provides an exception for the purpose of capital
gains. When a person converts any capital asset owned by him into stock-in-trade of a
business carried on by him, it is regarded as a transfer. For example, where an investor
in shares starts a business of dealing in shares and treats his existing investments as the
stock-in-trade of 6 new business, such conversion arises and is regarded as a transfer.
v) Part performance of a contract of sale
Normally transfer of an immovable property worth Rs.100/- or more is not complete

without execution and registration of a conveyance deed. However, section 53A of the
Transfer of Property Act envisages situations where under a contract for transfer of an
immovable property, the purchaser has paid the price and has taken possession of the
property, but the conveyance is either not executed or if executed is not registered. In
such cases the transferor is debarred from agitating his title to the property against the
purchaser.
The act of giving possession of an immovable property in part performance of a contract

is treated as "transfer" for the purposes of capital gains. This extended meaning of
transfer applies also to cases where possession is already with the purchaser and he is
allowed to retain it in part performance of the contract.
vi) Transfer of rights in immovable properties through the medium of co-operative

societies, companies etc.
Usually flats in multi-storeyed building and other dwelling units in group housing
schemes are registered in the name of a co-operative society formed by the individual
allottees. Sometimes companies are floated for his purpose and allottees take shares in
such companies. In such cases transfer of rights to use and enjoy the flat is effected by
changing the membership of co-operative society or by transferring the shares in the
company. Possession and enjoyment of immovable property is also made by what is
commonly known as Tower of Attorney' transfers.
All these transactions are regarded as transfer.
vii) Transfer by a person to a firm or other or Body of a person to a Association of

Persons (AOP) Individuals (BOI)
Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or
members and so transfer of a capital asset from the partners to the firm/AOP/BOI is not
considered as 'Transfer'. However, under the Capital Gains, it is specifically provided
that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of capital
contribution or otherwise, the same would be construed as transfer.
viii) Distribution of capital assets on Dissolution
Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not

considered as transfer for file same reasons as mentioned in (vii) above. However, folder
the capital gains, this is considered as transfer by the firm/AOP/BOI and therefore gives
rise to capital gains .| the case of the firm/AOP/BOI.
ix) Distribution of money or other assets by a Company on liquidation
(i) If a shareholder receives any money or other assets from a Company in liquidation,
the shareholder is liable to pay capital gains as the same would have been received in
lieu of the shares held by him in the company. However, if the assets of a company are
distributed to the shareholders on its liquidation, such distribution shall not be regarded
as transfer by the company.
(ii)Transactions not regarded as Transfer
The following, though may fall under the above definition of transfer are to be treated as
not transfer for the purpose of computing Capital Gains:
Distribution of capital assets on the total or partial, partition of a Hindu Undivided
Family; of a capital asset under a gift or will or an irrevocable trust except transfer under
a gift or an irrevocable trust, of shares, debentures or warrants allotted by a company to
its employees under Employees' Stock Option Plan or Scheme;
iii) transfer of a capital asset by a company to its subsidiary company, if:
a) the parent company or its nominees hold the whole of the share capital of a subsidiary
company,
b) the subsidiary company is an Indian company,
c) the capital asset is not transferred as stock-in- trade,
d) the subsidiary company does not convert such capital asset into stock-in-trade for a
period of 8 years from the date of transfer, and
e) the parent company or its nominees continue to hold the whole of the share capital of
the subsidiary company for 8 years from the date of transfer.
iv) transfer of a capital asset by a subsidiary company to the holding company, if:
a) the whole of the share capital of the subsidiary company is held by the holding
company,
b) the holding company is an Indian Company,
c) the capital asset is not transferred as stock-in-trade,
d) the holding company does not convert such capital asset into stock-in-trade for a
period of 8 years from the date of transfer, and
e) the holding company or its nominees continue or hold the whole of the share capital
of the subsidiary company for 8 years from the date of transfer.
v) In a scheme of amalgamation, transfer of a capital asset by the amalgamating
company to the amalgamated company if the amalgamated company is an Indian
company.
vi) transfer of shares of an amalgamating company, if:
a) the transfer is made in consideration of the allotment of share or shares in the

amalgamated company, and
b) the amalgamated company is an Indian company.
vii) transfer of shares of an Indian Company by an amalgamating foreign company to

the amalgamated foreign company, if:
a) at least twenty-five per cent of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company and
b) such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated.
viii) in a demerger :
a) transfer of a capital asset by the demerged company to the resulting company, if the
resulting company is an Indian company;
b) transfer of share or shares held in an Indian company by the demerged foreign

company to the resulting foreign company if: i) the shareholders holding not less than
three-fourths in value of the shares of the demerged foreign company continue to remain
shareholders of the resulting foreign company; and
ii) such transfer does not attract tax on capital gains in the country, in which the
demerged foreign company is incorporated.
c) Transfer or issue of shares, in consideration of demerger of the undertaking by,the

resulting company to the shareholders of the demerged company.
ix) Transfer of bonds or Global Depository Receipts, purchased in foreign currency, by

a non-resident to another non-resident outside India.
x) Transfer of agricultural land in India effected before first of March,'70.
xi) transfer of any work of art, archaeological, scientific or art collection, book,
manuscript, drawing, painting, photograph or print, to the Government or a University
or the National Museum, National Art Gallery, National Archives or any such other
public museum or institution notified by the Central Government in the Official Gazette
to be of national importance or to be of renown throughout any State or States.
xii) transfer by way of conversion of bonds or debentures, debenture stock or deposit
certificate in any form, of a company into shares or debentures of that company.
xiii) transfer of membership of a recognised stock exchange made by a person (other

than a company) on or before 31.12.1998, to a company in exchange of shares allotted
by that company. However, if the shares of the company are transferred within 3 years
of their acquisition, the gains not charged to tax by treating their acquisition as not
transfer would be taxed as capital gains in the year of transfer of the shares.
xiv) transfer of land of a sick industrial company, made under a scheme prepared and
sanction under section 18 of the Sick Industrial Companies (Special Provisions) Act,
1985 (1 of 1986) where such sick industrial company is being managed by its workers'
co-operative and such transfer is made during the period commencing from the previous
year in which the said company has become a sick industrial company under section
17(1) of that Act and ending with the previous year during which the entire net worth of
such company becomes equal to or exceeds the accumulated losses.
xv) Transfer of a capital asset to a company in the course of corporitisation of a

recognised stock exchange in India as a result of which an Association of Persons
(AOP) or Body of Individuals (BOI) is succeeded by such company,if:
a) all the liabilities of the AOP or BOI relating to the business immediately before the
succession become the assets and liabilities of the company,
b) corporitisation is carried out in accordance with a scheme which is approved by

Securities and Exchanges Board of India (SEBI).
(xvi) Where a firm is succeeded by a company in the business carried on by it as a result

of which the firm sells or otherwise transfers any capital asset or intangible asset to the
company, if:
a) all the assets and liabilities of the firm relating to the business immediately before the
succession become the assets and liabilities of the company,
b) all the partners of the firm immediately before the succession become the
shareholders of the company in the same proportion in which their capital accounts
stood in the books of the firm on the date of succession,
c) the partners of the firm do not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in the
Company and
d) the aggregate of the shareholding in the company of the partners of the firm is not
less than fifty percent of the total voting power in the company and their shareholding
continues to be as such for a period of five years from the date of the succession.
If the conditions laid down above are not complied with, then the amount of profits or
gains arising from the above transfer would be deemed to be the profits and gains of the
successor company for the previous year during which the above conditions are not
complied with.
xvii) Where a sole proprietary concern is succeeded by a company in the business

carried on by it as a result of which the sole proprietary concern sells or otherwise
transfers any capital asset or intangible asset to the company, if:
a) all the assets and liabilities of the sole proprietary concern relating to the business
immediately before the succession become the assets and liabilities of the company.
b) the shareholding of the sole proprietor in the company is not less than fifty percent of
the total voting power in the company and his shareholding continues to so remain as
such for a period of five years from the date of the succession and
c) the sole proprietor does not receive any consideration or benefit, directly or indirectly,
in any form or manner, other than by way of allotment of shares in the company.
If the conditions laid down above are not complied with, then the amount of profits or
gains arising from the above transfer would be deemed to be the profits and gains of the
successor company for the previous year during which the above conditions are not
complied with.
xviii) transfer in a scheme of lending of any securities under an arrangement subject to

the guidelines of Securities and Exchanges Board of India (SEBI).
COMPUTATION OF CAPITAL GAINS (section 48)
PARTICULARS AMOUNT
Full Value of Consideration
Less: Cost of Acquisition*(COA)
Cost of Improvement*(COI)
Expenditure on transfer
Capital Gains
Less: Exemptions U/S 54
Taxable Capital Gains
• To be indexed in case of LTCA
Short Term Capital Gains (STCG)
Short Term Capital Gains is computed as below :
Computation of short - term Capital Gains
1. Find out full value of consideration

2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such transfer
b. cost of acquisition; and
c. cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54B, 54D,
54G
4. The balancing amount is short-term capital gain
Long Term Capital Gains (LTCG)
Long Term Capital Gains is computed as below:
Computation of long - term Capital Gains
1. Find out full value of consideration

2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such
transfer
b. indexed cost of acquisition; and
c. indexed cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54, 54B, 54D,
54EC, 54ED, 54F and 54G
4. The balancing amount is long-term capital gain
FULL VALUE OF CONSIDERATION

Full value of consideration means & includes the whole/complete sale price or exchange
value or compensation including enhanced compensation received in respect of capital
asset in transfer. The following points are important to note in relation to full value of
consideration.
The consideration may be in cash or kind.
The consideration received in kind is valued at its fair market
value.
It may be received or receivable.
The consideration must be actual irrespective of its adequacy.
COST OF ACQUISITION
Cost of Acquisition (COA) means any capital expenses incurred at the time of acquiring
capital asset under transfer, i.e., the purchase price, expenses incurred in the form of
registration, storage etc.
In other words, cost of acquisition of an asset is the value for which it was
acquired by the assessee. Expenses of capital nature for completing or acquiring the title
are included in the cost of acquisition.
For computing LTCG, the Cost of Acquisition should be indexed as follows:
Indexed Cost of Acquisition = COA X CII of Year of transfer
CII of Year of acquisition
The indices for the various previous years are given below:
Financial Cost Inflation Financial Cost Inflation
Year Index Year Index
2008-2009 582 1993-1994 244
2007-2008 551 1992-1993 223
2006-2007 519 1991-1992 199
2005-2006 497 1990-1991 182
2004-2005 480 1989-1990 172
2003-2004 463 1988-1989 161
2002-2003 447 1987-1988 150
2001-2002 426 1986-1987 140
2000-2001 406 1985-1986 133
1999-2000 389 1984-1985 125
1998-1999 351 1983-1984 116
1997-1998 331 1982-1983 109
1996-1997 305 1981-1982 100
1995-1996 281
1994-1995 259
Example:
1. Cost of acquisition in 1982-83 rs 120000. Find out the indexed cost if sold in
2008-09.
Solution:
Indexed cost = 120000X582/109
= 640734.
If capital assets were acquired before 1.4.81, the assesses has the option to have either
actual cost of acquisition or fair market value as on 1.4.81 as the cost of acquisition. If
assesses chooses the value as on 1.4.81 then the indexation will also be done as per the
CII of 1981 and not as per the year of acquisition.
Cost of acquisition with reference to certain modes or acquisition
Where the capital asset became the property of the assessee:
a) on any distribution of assets on the total or partial partition of a Hindu undivided

family;
b) under a gift or will
c) by succession, inheritance or devolution;
d) on any distribution of assets on the dissolution of a 'firm, body of individuals, or other

association of persons, where such dissolution had taken place at any time before
01.04.1987;
e) on any distribution of assets on the liquidation of a company;
f) under a transfer to a revocable or an irrevocable trust;
g) by transfer in a scheme of amalgamation;
h) by an individual member of a Hindu Undivided Family living his separate property to

the assessee HUF anytime after 31.12.1969.
The cost of acquisition of the asset shall be the cost for which the previous owner of the
property acquired it, as increased by the cost of any improvement of the asset incurred
or borne by the previous owner or the assessee, as the case may be, till the date of
acquisition of the asset by the assessee.
If the previous owner had also acquired the capital asset by any of the modes above,
then the cost to that previous owner who had acquired it by mode of acquisition other
than the above, should be taken as cost of acquisition.
Where shares in an amalgamated Indian company became the property of the assessee in
a scheme of amalgamation the cost of acquisition of the shares of the amalgamated
company shall be the cost of acquisition of the shares in the amalgamating company.
Where a share or debenture in a company, became the property of the assessee on
conversion of bonds on debentures the cost of acquisition of the asset shall be the part of
the cost of debenture, debenture stock or deposit certificates in relation to which such
asset is acquired by the assessee.
Where shares, debentures or warrants are acquired by the assessee under Employee
Stock Option Plan or Scheme and they are taken as perquisites under section 17(2) the
cost of acquisition would be the valuation done under section 17(2).
Cost of Acquisition of shares in the resulting company, in a demerger. Net book value of
the assets transferred in a demerger Net worth of the demerged company immediately
before demerger Cost of acquisition of shares of the demerged company.
The cost of acquisition of the original shares held by the shareholder in the demerged
company will be reduced by the above amount.
Where the capital asset is goodwill of a business or a mark or brand name associated
with a business, fit to manufacture, produce or process any article or tenancy rights,
stage carriage permits or loom hours, cost of acquisition is the purchase price paid by
the and in case no such purchase price is paid it is nil.
Where the cost for which the previous owner acquired the property cannot be
ascertained the cost of acquisition to ,the previous owner means the fair market value on
the on which the capital asset became the property of the owner.
Where share or a stock of a company became the property of the assessee on :
a) the consolidation and division of all or any of the share capital of the company in to
shares of larger amount than its existing shares;
b) the conversion of any shares of the company into stock;
c) the reconversion of any stock of the company into shares;
d) the sub-division of any of the shares of the company into shares of smaller amount; or
e) the conversion of one kind of shares of the company into another kind.Cost of
acquisition of the share or stock is as calculated from the cost of acquisition of the
shares or stock from which it is derived.
The cost of acquisition of rights shares is the amount which is paid by the subscriber to
get them. In case a subscriber purchases the right shares on renunciation by an existing
share holder, the cost of acquisition would include the amount paid by him to the person
who has renounced the rights in his favour and also the amount which he pays to the
company for subscribing to the shares. The person who has renounced the rights is liable
for capital gains on the rights renounced by him and the cost of acquisition of such
rights renounced is nil.
The cost of acquisition of bonus shares is nil.
Where equity share(s) are allotted to a shareholder of a recognised stock exchange in

India under a scheme of corporitisation approved by SEBI, the cost of acquisition of the
original membership of the exchange is the cost of acquisition of the equity share(s).
COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an assessee for
making any addition or improvement in the capital asset. It also includes any
expenditure incurred in protecting or curing the title. In other words, cost of
improvement includes all those expenditures, which are incurred to increase the value of
the capital asset.
Indexed Cost of improvement = COA X CII of Year of transfer
CII of Year of improvement
Any cost of improvement incurred before 1st April 1981 is not considered or it is
ignored. The reason behind it is that for carrying any improvement in asset before 1st
April 1981, asset should have been purchased before 1st April 1981.
If asset is purchased before 1st April we consider the fair market value. The fair market
value of asset on 1st April 1981 will certainly include the improvement made in the
asset.
EXPEDITURE ON TRANSFER
Expenditure incurred wholly and exclusively for transfer of capital asset is called
expenditure on transfer. It is fully deductible from the full value of consideration while
calculating the capital gain. Examples of expenditure on transfer are the commission or
brokerage paid by seller, any fees like registration fees, and cost of stamp papers etc.,
travelling expenses, and litigation expenses incurred for transferring the capital assets
are expenditure on transfer.
Note: Expenditure incurred by buyer at the time of buying the capital assets like
brokerage, commission, registration fees, cost of stamp paper etc. are to be added in the
cost of acquisition before indexation.
EXEMPTIONS FROM CAPITAL GAINS
Long Term Capital Gain from the Transfer of Residential House Property
(Section 54)
The exemption under the Section 54 is available only to an individual or a HUF who
transfers (or sells) a residential house/property that results in a long-term capital gain,
and then invests the amount of gain in acquiring a new residential house. This
exemption is available subject to fulfillment of the following requirements:
(i) The transferor shall be an individual or the HUF,
(ii) The asset to be transferred must be of long-term capital asset, being buildings or
lands appurtenant thereto, being a residential house,
(iii) The income from such residential house shall be assessable under the head "Income
from House Property",
(iv) The transferor assessee should purchase a residential house in India within a period
of one year before or two years from the date of transfer or construct a residential house
within three years from the date of the transfer of the original house. (Construction must
be completed within these 3 years.), and
(v) The new house property purchased or constructed has not been transferred within a
period of three years from the date of purchase or construction.
Amount of Exemption
The amount of exemption under section 54 is
• Equal to the amount of the capital gain if cost of new house property is more than
the capital gain, or
• Equal to the cost of the new house property if the cost is less than the capital gain.
Deposit Scheme under Section 54

Where the amount of capital gain is not so utilized for the purchase or construction of a
new residential house before the due date of furnishing of the return of income, it shall
be deposited by him on or before the due date in an account with a public sector bank in
accordance with the Capital Gain Account Scheme, 1988. The amount already utilized
on the new house together with the amount deposited shall be deemed to be the amount
utilized for the purchase of new house under section 54. If the amount deposited is not
utilised for the purpose of purchase or construction of new house within the stipulated
period, then the amount not so utilised will be treated as long term capital gain of the
previous year in which the period of three years expires. In such case the assessee is
entitled to withdraw the amount from the bank.
Consequences of Selling the New House Before 3-years

If the new house property is transferred within a period of three years from the date of
the purchase or construction, the amount of capital gains arising therefrom, together
with the amount of gains exempted earlier, will be chargeable to tax in the year of sale
of the house property. To attain this, the amount of exemption under section 54 shall be
reduced from the cost of acquisition to the new house, while calculating short-term
capital gains on the transfer of the new asset.
Capital Gain on the Transfer of Agricultural Land (Section 54B)

Capital gains arising on the transfer of land used by an individual or his parents for
agricultural purposes for a period of two years immediately preceding the date of
transfer is exempt form the tax if the individual assessee has purchased another
agricultural land within a period of two years from the date of such transfer
Quantum of Exemption
Lower of the following: -
• Cost of new lands.

• Capital Gains.
Withdrawal of Exemption
If the new capital asset is transferred within three years from the date of
acquisition, then the cost of new asset claimed as exempt shall be reduced by the
capital gains.
Capital Gain on Compulsory Acquisition of Land and Building of an Industrial

Undertaking (Section 54D)
Capital gains arising on the compulsory acquisition of any land or building forming a
part of an industrial undertaking is exempt subject to the following requirements:
• Such land or building was used by the assessee for the purpose of industrial
undertaking for two years preceding the date of compulsory acquisition,
• The assessee has purchased any land or building or constructed a building within
3 years from the date of the receipt of the compensation, and
• Newly acquired land or building should be used for the purpose of shifting or
reestablishing the said undertaking or setting up another industrial undertaking.
• Cost of new assets.

• Capital Gains.
If the new asset is transferred within three years from the date of acquisition, then
the cost of acquisition of new asset shall be reduced by the capital gains already
exempt.
Long Term Capital Gain Exemption for Investment in Certain Bonds (Section
54EC)
This exemption is is available an individual, HUF, company or any other person who
invests the long term capital gain, within 6 months of a the transfer of the capital asset,
in any of the specified bond (issued on or after April 1, 2006) redeemable after 3 years:
• National Highway Authority of India (NHAI), or

• Rural Electrification Corporation Ltd. (REC)
Note: -
Maximum Limit for Investment in a New Asset is Rs.50 Lakhs
If exemption is availed here, then rebate under section 80C is not available.
• Cost of new assets.

• Capital Gains.
If, within a period of three years: -
• New asset is transferred or converted (otherwise than by transfer)

into money.
• Loan or advance is acquired on the specified asset.
Then the amount which was exempt from Capital Gains, will be chargeable in the
year of such event.
Long Term Capital Gain from the Transfer of a Capital Asset other than
Residential House Property (Section 54F)
The following conditions are to be fulfilled by the assessee: -
• He does not own more than one residential house, other than new
asset, on the date of transfer of original asset.
• He does not purchase more than one residential house within a year
or constructs within three years after the date of transfer of the asset.
• The income from such residential house is chargeable under the head
"Income from House Property", other than the one owned at the time of
transfer.
The exemption is available only an individual or a HUF who transfers (or sells) a capital
asset that results in a long-term capital gain, and then invests the amount of gain in
acquiring a new residential house. This exemption is available subject to fulfillment of
the following requirements:
(i) The transferor assessee should purchase or a residential house in India within a
period of one year before or two years from the date of transfer or construct a residential
house within three years from the date of the transfer of the original house.
(Construction must be completed within these 3 years.), and
(ii) The new house property purchased or constructed has not been transferred within a
period of three years from the date of purchase or construction.
If the cost of new asset is less than the net consideration, then
Capital Gains * Cost of New Residential House
Amount of Net consideration
If the assessee
• Transfers the new asset within three years from the date of
acquisition or construction, then the cost of new asset claimed as exempt
shall be reduced by the capital gains.
• Purchases or Constructs a residential house (other than the new
asset) with in 2 years after the date of transfer then any amount claimed as
exempt shall be reduced by the capital gains.
Capital Gain on Transfer of Capital assets in Case of Shifting of Industrial

Undertaking from Urban Area (Section 54G)
transfers the capital assets (being plant, machinery, land or building or any right in the
land or building) being used for the purpose of industrial undertaking situated in an
urban area to any area other than urban area. The assessee purchases within one year
before or 3 years after the date of transfer:
(i) Purchases plant or machinery for the purpose of business of industrial undertaking in
the area to which the said undertaking has shifted,
(ii) Acquires building or land or constructed building for the purpose of his business in
the said area,
(iii) Shifts the original asset and transferred the establishment in the said area, and
(iv) Incurs expenses on such other purpose as may be specified in a scheme framed by
Central Government for the purpose of this section.
Quantum of Capital gains tax Exemption
• Cost of new assets and expenditure

• Capital Gains.
exempt.
Capital Gain on Transfer of Capital assets in Case of Shifting of Industrial

Undertaking from Urban Area to any SEZ (Section 54GA)
transfers the capital assets (being plant, machinery, land or building or any right in the
land or building) being used for the purpose of industrial undertaking situated in an
urban area to a special economic zone (SEZ). The assessee purchases within one year
before or 3 years after the date of transfer:
(i) Purchases plant or machinery for the purpose of business of industrial undertaking in
the area to which the said undertaking has shifted,
(ii) Acquires building or land or constructed building for the purpose of his business in
the said area,
(iii) Shifts the original asset and transferred the establishment in the said area, and
(iv) Incurs expenses on such other purpose as may be specified in a scheme framed by
Central Government for the purpose of this section.
Quantum of Capital Gains Tax Exemption
Least of the following: -
• Cost of new assets and expenditure

• Capital Gains.
exempt.
Tax on Short Term Capital Gains:
• Under Section 111A:
Short term capital gains arising on transfer of Equity Share or Units of an

Equity Oriented Mutual Fund on satisfaction of the following conditions
would be taxable @ 15% from AY 2009-10 onwards, whereas Income other
than Short term Capital Gains of the assessee shall be taxed as per the Normal
prevailing Slab Rates for specific assesses. The conditions whereof are:
i. The Transaction of sale of such equity share/ unit is entered into

on or after October 1st’ 2004;
ii. Such transaction is chargeable to Securities Transaction tax;
iii. Such Equity shares are transferred through a Recognized Stock

Exchange or sold to a Mutual Fund.
• In any Other Case:
The Short term capital gains shall be computed after including same in Total
Income and charging Tax as per assessee specific Slab Rates.
Tax on Long Term Capital Gains:
• Under Section 112:
Any Long term Capital Gains made by an assessee other than on transfer of
listed securities on any recognized stock exchange or units of UTI/ Mutual
funds covered u/s 10(23D)/ Zero Coupon Bonds shall be taxed under this
section at a flat rate of 20% in case of any assessee. However in case of Long
term capital gains u/s 115AB, 115AC, 115AD and 115AE the rate of tax shall
be specified @ 10%.
• In case of transfer of listed securities on any recognized stock

exchange or units of UTI/ Mutual funds covered u/s 10(23D)/ Zero
Coupon Bonds:
The Long term capital gains shall be computed as minimum of the following:
1. Tax @ 20% on Long term capital gains computed after indexation

of cost of such shares, securities or units;
OR
2. Tax @ 10% on Long term capital gains computed without

indexation of cost of such shares, securities or units.
• Long Term Capital gains in case of transfer of Listed equity shares or
units of equity oriented mutual funds on or after October 1st’ 2004 is exempt
u/s 10(38).
PLEASE NOTE:
• Deductions from Section 80C to 80U shall not be available in case of

long term & short term capital gains both.
• Listed securities means securities as defined in Sec 2(h) of The

Securities Contracts (Regulation) Act’ 1956 and listed in any recognized
stock exchange in India.
SOLVED PROBLEMS:
1. Mr. A Ghosh sold a house on 1.9.2008 for Rs. 7,00,000. This house was inherited
by him during 1981-82 from his father who had constructed it in 1971-72 for
Rs.50,000. Mr. Ghosh spent Rs 50,000 on renovation of the house in 1986-87. Fair
market value of the house as on 1.4.1981 was Rs.1,50,000.
This house was under negotiations for sale in May 1990 and he received Rs.80,
000 as advance money. The contract could not materialise and the advance money
was forfeited. Compute the amount of capital gain assuming that he does not
qualify for any exemption.
[C.I.I for 1981- 82: 100; 1986-87: 140; 1990-91 : 182 and 2008-09 : 582].
Sol: Computation of Capital Gain (Assessment year 2009- 2010):
PARTICULARS AMOUNT AMOUNT
Sale Price on 1.9.2008 7,00,000.
Less: Cost of Acquisition 1,50,000
Less: Advance money forfeited 80,000.
Net Cost 70,000.
Indexed Cost [70,000 * 582/100] 4,07,400.
Indexed Cost of improvement [50,000 * 2,07,857. 6,15,257.
582/140]
84, 743.
Long term Capital Gain
2. Compute the taxable capital gain from particulars given below:

a. Net consideration of a residential house Rs. 15,00,000. (2.6.2008) [C.I.I :
582].
b. Cost of acquisition of this house Rs 3,00,000 (1.5.87) [ C.I.I : 150]
c. New house acquired on 1.9.2008 for Rs 2,50,000.
Sol: Computation of capital gain:
Net consideration 15, 00,000.

Less: Cost (indexed 3,00,000 *583/150) 11, 64, 000.
Long term capital gain
3,36,000.
Less: Exempted u/s 54 (1)- cost of New house 2, 50, 000.
Taxable Capital Gain 86, 000.
3. S, an owner of three houses, sells a residential house in Chennai for Rs 11,90,000

on May 23, 2008. This house was purchased by him on 1.4. 1987 for Rs 2, 90, 000.
On May 30, 2008, he purchased a flat in Mumbai for Rs 8, 70, 000 for the purpose
of the residence of his son- in- law. On March 1, 2009, S sells the house in Mumbai
for Rs 12, 10, 000.
Compute the capital gain on the two transactions. Is S eligible for
exemption u/s 54 in respect of the second sale?
Cost inflation index for the financial year 1987-88 and 2008 – 09 are 150
and 582.
Sol: Computation of capital gain and exemption u /s 54 for the Assessment year
2009- 2010.
Sale price of house at Chennai 11,90,000
Less: Indexed cost of the house [2,90,000 * 582/150] 11,25,200
Long term capital gain 64,800
Exemption u/s 54:
Investment of Rs 8,70,000 made to purchase flat in Mumbai
within 2 years of the sale of the Chennai house. Since the amount
invested in the new house is more than the amount of long term
capital gain, so it is fully exempted. 64, 800
NIL
Sale of Bombay flat:

Sale price 12,10,000
Less: Cost price of the flat (Purchased on May 30, 2008) 8,70,000
Short term capital gain 3,40,000
Long term capital gain of Chennai house got exempted by investing the same
in Mumbai flat. Since Mumbai flat was transferred within one year of purchase, so
new capital gain and Capital gain got exempted earlier, both will be taxed. Total
capital gain to be taxed shall be Rs 3,40,000 + 64,800 = Rs 4,04,800.
Mr. S is not eligible for any exemption u/s 54 at the time of sale of Mumbai flat
within one year of its purchase. Exemption u/s 54 is allowed only if it is sold after 3
years of its acquisition and the amount of long term capital gain is re-invested to
purchase or construct a residential house within specified time limit.
4. Mr. Raj Singh sold a plot of land at Jaipur on 1.6.2008 [C.I.I = 582] for Rs 12,
40,000. He paid Rs 40,000 as selling expenses. The plot was received by him on
death of his Father on 15.3.85 [C.I.I = 125]. His father had acquired it on 1.4.1980
for Rs 1,00,000 and its FMV on 1.4.1981 was Rs 1,40,000.
On 1.10.2008, he invested Rs 3,00,000 in bonds issued by Rural Electrification

Corp. Limited notified u/s 54 EC and Rs 2,00,000 on 1.3.2009 in Bonds of
National Highway Authority of India.
Compute his taxable capital gain.
Sol: Computation of taxable Capital gain:
Long term capital asset:
Sale price of plot as on 1.6.2008 12,40,000
Less: Expenses on sale 40,000
Net consideration 12,00,000
Less : Indexed cost [ 1,40,000 * 582/125] 6,51,840
Long term Capital Gain 5,48,160
Less: Exemption u/s 54 EC
Amount invested in bonds of Rural Electrification Corp Ltd 3,00,000
Less: Exemption u/s 54 EC
Investment in bonds of National Highway Authority
Not allowed as investment was made after a period of more
than 6 months ie., on 1.3.2009 NIL.
Taxable Long Term Capital Gain 2,48,160
Note: The FMV has been indexed with the index of the year in which son
inherited the house.
Assessee is not allowed to transfer the Bonds of Rural Electrification Corp
or take a loan against these bonds or is not allowed to convert these bonds into money
upto 3 years from the date of investment in these bonds.
5. Mr. H submits the following particulars about sale of assets during the year 2008-09.
Jewellery Plot Gold
Rs Rs Rs
Sale price 4,00,000 12,24,000 3,00,000
Expenses on sale NIL 24,000 NIL
Cost of Acquisition 70,000 2,50,000 1,00,000
Year of Acquisition 1987-88 1984-85 1999- 2000
CII 150 125 389
He has purchase a house for Rs 12, 00,000 on 1.3.2009.Calculate the amount

of taxable capital gain if C.I.I for 2008- 09 is 582.
Sol: Calculation of taxable capital gain
Jewellery Plot Gold
Rs Rs Rs
Sale price 4,00,000 12,24,000 3,00,000
Less expenses on sale NIL 24,000 NIL
NET CONSIDERATION 4,00,000 12,00,000 3,00,000
Less: Indexed Cost

[70,000 * 582/150] 2,71600
[2,50,000 * 582/125] 11,64,000
[1,00,000 * 582/389] 1,49614

Long Term Capital Gain 1,28,400 36,000 1,50,386
Percentage of LTCG to Net

Consideration
Jewellery Plot Gold
32.1% 3% 50.13%
As it will be beneficial for
Him to claim exemption
u/s 54 by claiming it
first from Gold, then from
Jewellery and finally from
Plot.
Gold:Investment 3,00,000
Net consideration 3,00,000 1,50,386
Jewellery: Investment 4,00,000 1,28,400
Plot: Investment 5,00,000
[36,000 *5,00,000/12,00,000] 15,000
Taxable long term capital gain NIL 21,000 NIL

5. i) Mr.Yash sold an asset on 15.8.2008 (C.I.I 582) for Rs 1,24,000. The cost price of
the asset purchased on 11.2.76 is Rs. 20,000. The fair market value of the same on
1.4.81 [C.I.I 100] was Rs 20,000. The income of Mr.Yash from other sources
during the previous year was Rs 22,700.
ii) Sh.Dewan, who inherited building properties consisting of a residential house
and a shop worth Rs 1,38,000; sold on 1.11.2008 residential property for Rs
2,90,000 [C.I.I 582]. The fair market value of the property sold was Rs 40,000 on
1.4.81 [ C.I.I 100]. His income from all other sources was Rs 12,000.
In the above problem, how will the capital gain be treated?
Sol: Computation of taxable capital gain
i) Sales price 1,24,000
Less: FMV on 1.4.81 (indexed 20,000*582/100) 1,16,400
Capital gains full taxable 7600
ii) Sale price 2,90,000

Less: FMV on 1.4.81 (40,000 *582/100) 2,32,800
Capital Gain – fully taxable 57,200
6. Mr. James is a film producer. During the previous year, he sold a film projector of
Rs 1,70,000 which had cost him Rs 1,50,000 and in respect of which Rs 40,000 had
been allowed as depreciation during the last two years. Besides, his total income
from business was Rs 75,000. Expenses on sale amounts to Rs 5000.
Sol: Computation of capital gains

Sale price of projector (an item of P &M) 1,70,000
Less: Expenses on sale 5000
Less: WDV (1,50,000 – 40,000) 1,10,000
Short term Capital Gain 55,000
(Under the new method of depreciation any amount realised over and above the WDV
of asset and cost of transfer is short term capital gain as block of asset has ceased to
exist).
Statement of Total Income
Profits and Gains

Business Income 75,000
Capital Gains
Short Term Capital Gain 55,000
Total Income 1,30,000
7. During the year ended 31st March, 2009, Mr. David sold the following assets:
Particulars Sale Proceeds

i) Shop purchased in 1985- 86 (C.I.I- 133) for
Rs 18,000 90,000
ii) Machinery purchased in 1983- 84 ( C.I.I – 125)for
Rs 50,000 (WDV on 1.4.2008 Rs 35,000) 60,000
iii) Furniture purchased on 1.5 2008 for Rs 1,000 1,300
iv) Agricultural land in Agra purchased in 1979 – 80 for
Rs 10,000 [FMV on 1.4.81 (C.I.I – 100) being
Rs 15,000] 1,00,000
v) One residential house purchased in 1987- 88
(C.I.I- 100) costing Rs 30,000 1,50,000
During the year he bought another house for his residence for Rs 2,50,000.
Work out the amount of Capital Gains to be included in the Gross Total Income and
also compute his total income, if his other business income during the year was Rs
10,000. Cost Inflation Index for 2008- 09 is 582.
Sol: Computation of Capital Gain (Assessment Year 2009- 2010)
Short term Capital Gains: Rs Rs Rs

Furniture [Purchased on 1.5.2008]
(1300 – 1000) 300
Machinery : Sale Price (ii) 60,000
Sale Price (iv) 12,000
Total sale price: 72,000

Less: WDV (10,000 + 35,000) 45,000
27,000
Short term Capital Gain 27,300
Long term Capital assets:

i) Residential house : S.P 1,50,000
Less: Cost (30,000 * 582/150) 1,16,400
Capital Gain 33,600
Less: Exempted u/s 54 : For purchase of new house 33,600 NIL
ii) Agricultural land : S.P 1,00,000
Less:FMV on 1.4.81 (15,000* 582/100) 87,300 12,700
iii) Shop : S.P 90,000
Less: Cost (18,000 * 582/133) 78,767 11,233
23,933
Total long term Capital Gain

Less: Exempted u/s 54 F- Fully as he has invested
Rs 2,50,000 – 33,600 (exemption u/s 54) = Rs 2,16.400
in purchase of another house within prescribed period
which is more than net consideration of Agri. Land and
shop [1,00,000 + 90,000 =1,90,000] 23,933 NIL
Taxable Capital Gain 27,300
Statement of Total Income
Profits and Gains:

Business Profit 10,000
Capital Gains:
Short Term Capital Gain 27,300
Long Term Capital Gain NIL 27,300
GTI being Total Income 37,300
8. Mr. X purchased shares of various companies worth Rs 1,00,000 during 2000-01.

[CII – 406]. On 1.11.2006 [CII – 519] he became dealer in shares and securities and
converted his shares into stock in trade. The FMV on the date of conversion was Rs
3,00,000. These shares were sold during 2008-09 [CII- 582] at Rs 4,00,000. Compute
his Capital Gain and business profit.
Sol: Computation of Capital gain and Business Profit
Previous year 2006 -07:

Conversion of asset shall be deemed as
transfer of the year in which converted
FMV on the date of conversion 3,00,000
Less: Indexed Cost (1,00,000 * 519/406) 1,27,833
Long term Capital Gain 1,72,167
Previous year 2008 – 09:

Sale price of stock in trade 4,00,000
Less cost: FMV on date of conversion 3,00,000
Business profit 1,00,000
Note: Although Capital Gain is computed in the year in which asset was converted into
stock in trade but both capital gain and business profit on sale of stock in trade are
taxable in the year in which stock- in- trade is actually sold. However, Long Term
Capital Gain on sale of shares is exempt from tax u/s 10(38).
9. Mr. X owns a residential house at Bangalore. From the following information,

Compute the amount of Capital Gain.
Cost of construction (during 88-89) 4,00,000

Cost of Additions and improvements (during 97-98) 2,00,000
Sale Consideration (sale made on 10.10.2008) 28,00,000
Expenses on transfer 20,000
Cost of new house purchase in Hyderabad (on 15.1.2009) 5,00,000
(House is half finished)
Amount deposited in Capital Gain deposit scheme in SBI
on 25.7.2009 4,00,000
An amount of Rs 3,00,000 withdrawn from capital gain
deposit scheme on 12th May 2011 and utilized for the
completion of the house.
Cost inflation index for 1988-89 is 161, for 1997-98 is 331 and for 2008-09 is 582.
Sol: Computation of Capital Gain for the Assessment Year 2009- 10.
Sale consideration received (10.10.08) 28,00,000

Less: Selling Expenses 20,000
Indexed cost of construction (1988- 89)
[4,00,000 * 582/ 161] 14,45,963
Indexed cost of additions (1997- 98)
[2,00,000 * 582/ 331] 3,51,662 18,17,625
Long Term capital gain 9,82,375
Exemption u/s 54
Amount invested to purchase a new house at
Hyderabad
(on 15.1.2009 i.e., within specified period) 5,00,000
Amount deposited in capital gains account
Scheme (on 25.7.2009 i.e., before the prescribed
date of filing of return of income) 4,00,000 9,00,000
Capital gain chargeable to tax 82, 375
Assessment Year 2012- 13:

Amount deposited in capital gain account
Scheme 4,00,000
Less: Amount utilized for the completion of the
House within specified period of 3 years. 3,00,000
Unutilized amount is long term capital gain taxable
in the Accounting year 2012-13 1,00,000
10.Following assets are sold by Mr. A during the previous year 2008-09:
Particulars Personal Car Shop Agricultural land in Jewellery

Hyderabad city
Year of purchase 2002-02 2002-03 June, 1972 May 1970
Date of Sale April 2008 May 2008 Oct 2008 Dec 2008
Purchase Price 2,00,000 88,000 50,000 60,000
Sale proceeds 80,000 4,20,000 24,50,000 9,80,000
Selling expenses 1000 1200 50,000 1800
FMV on 1.1. 1981 - - 1,00,000 90,000
Mr. A purchased agricultural land worth Rs 6,00,000 on 10th Dec, 2008 outside the
municipal limits of Hyderabad and on 15th March 2009, he deposits another Rs 8,00,000
in a schedule bank in a Capital Gain deposit account scheme to buy another piece of
agricultural land. He bought a residential house in Hyderabad city and invested Rs
16,00,000. This house was bought in April 2009. CII for 1981-82 is 100, for 2001- 02 is
426, for 2002- 03 is 447 and for 2008- 09 it is 582. Find out taxable Capital Gain.
Sol: Computation of capital gains for the Assessment Year 2009-10.
1. Personal Car:
Personal car is not a capital asset and hence there cannot be a capital gain on
the sale of such a car.
2. Shop:
Sale proceeds 4,20,000
Less: Selling expenses 1200
Net sale consideration 4,18,800

Less: Indexed cost of shop [88,000 * 582/447] 1, 14,577
Long term Capital Gain 3, 04,223 3, 04,223
3. Agricultural Land:
Less: Selling expenses 50, 000
Less indexed cost of acquisition
Cost (1972) 50,000
FMV (1.4. 1981) 1,00,000
FMV is adopted and indexed [1,00,000 *582/100] 5,82,000
Long term capital gain 18,18,000
Less exemption u/s 54 B
Amount invested to purchase agricultural land 6,00,000
Amount deposited in Deposit Account (within
Stipulated time) 8,00,000 14,00,000
4. Jewellery:
Less: Selling expenses 1800
Less cost of acquisition:
Cost(1970) 60,000
FMV (1.4.1981) 90,000
Whichever is higher is taken as cost indexing
of FMV [90,000 * 582/100] 5,23,800
Long term capital Gain 4,54,400
Net sale consideration of long term Long term capital gain
Capital assets
o Shop 4,18,800 3,04,223
o Agricultural
Land 24,00,000 4,18,000
o Jewellery 9,78,200 4,54,400
37,97,000 L.T Capital gain 11,76,623
Less exemption u/s 54F
11,76,623 * 16,00,000 4,96,727
37,90,000 6,79,896
11. Mr. X owns 2 acres of agricultural land in an urban area of Ludhiana which he
sold on 30th Nov, 2008 at Rs 50 lakhs per acre. Other particulars are:
i) Cost of 2 acres of land purchased in 1977 is Rs 6 lakhs.

ii)FMV as on 1.4.1981 is Rs 10 lakhs.
iii)Selling expenses Rs 1 lakh.
iv)He owns one residential house on 30.11.2008.
v)Date of filing of return of income is 31st July, 2009.
vi)He purchased 10 acres of agricultural land in a rural area for Rs 20 lakhs on 10th
June, 2009.
vii)Mr.X purchased a piece of plot to construct a residential building for Rs 6
lakhs at Ludhiana.
viii)He deposits Rs 15 lakhs in a scheduled bank in a Capital gain deposit account
scheme on 30th July, 2009.
ix)Amount invested in Bonds of National Highway Authority of India Rs 10 lakhs
on 31st March, 2009.
Assume that he actually withdraws Rs 12 lakhs from the deposit account

to complete his residential house.
Sol: Computation of capital gain for the Assessment year 2009- 10:
Selling price of 2 acres of agricultural land 1,00,00,000

Less: Selling expenses 1,00,000
Less: Indexed cost of agricultural land
FMV as on 1.4.1981 is taken into account
[10,00,000 * 582/100] 58,20,000
Less exemption u/s 54 B amount invested to buy

Agricultural land within stipulated period 20,00,000
Balance long term capital gain 20,80,000
Less exemption u/s 54 EC

Amount invested to buy bonds of NHAI within
stipulated 6 months 10,00,000
Balance long term capital gain 10,80,000
Less exemption u/s 54F

Amount invested to purchase plot to construct
residential house 6,00,000
Amount deposited in deposit account to
construct residential house 15,00,000
21,00,000
Proportional exemption=40,80,000 * 21,00,000 8,65.455

99,00,000
Long term capital gain to be taxed 2,14,545
Assessment year 2012- 13:

Date of sale of original asset 30.11.2008
Amount deposited in Capital gain deposit account
scheme is to be utilized to construct a new house
upto 29.11.2011 (ie., completed within 3 years of sale)
Amount deposited in deposit account scheme 15,00,000

Less amount actually withdrawn and utilized to construct
a new house upto 29.11.2011 12,00,000
Unutilized amount 3,00,000
Exemption availed on unutilized amount will be deemed long term capital gain
is taxable in Assessment Year 2012- 13.
Deemed LTC/g = Exemption u/s 54F * Amount utilized

Amount deposited
= 6,18,182 * 3,00,000 = 1,23,636

15,00,000
Notes: 1. Unutilized amount is allowed to be withdrawn after 29.11.2011 and Rs

1,23,636 will be taxable in the Assessment year 2012- 13 as deemed long term
capital gains.
2. Exemption u/s 54F regarding deposit in capital gain deposit scheme of Rs
15,00,000 has been allowed as Rs 6,18,182 and therefore, exemption allowed on
unutilised amount of Rs 3,00,000 shall be only Rs 1,23,636 which will be taxed
in Assessment year 2012-13.
Exercise questions:
1. Mr. Joshi sold his residential house on 1.11.2008 for Rs 9,25,000 which he had
purchased for Rs 1,10,000 on 1 .2 1982. He spent Rs 16,100 for its improvement in
1988-89. In 1990-91, he had agreed to sell the house to K. Rajashekhar for Rs
6,50,000 and had received an advance of Rs10,000 for the same. However, since
Mr. Rajashekhar did not get the sale registered within the agreed time, the
agreement was cancelled and the advance money was forfeited by Mr. Joshi.
Compute the taxable capital gain for the Assessment year 2009-10 assuming that
Mr. Joshi bought a new residential house on 1.11.2008 for Rs 2,50,000 and invested
on 1.3. 2009 Rs 1,50,000 in the capital gains bonds of National Highway Authority
of India (notified u/s 54EC) (The cost inflation index for the financial years 1981-
82, 1988-89, 1990-91 and 2008-09 were 101, 161, 182 and 582 respectively.
2. Siddhartha converts his plot of land purchased in the year 1981-82 for Rs 30,000
into stock-in-trade on 31st March, 2008. The fair market value on 31st March, 2008
is Rs 1,80,000. The Stock-in-trade is sold for Rs 2,20,000 in the month of January
2009. Find out the taxable income, if any, and so under which head of income and
for which assessment year? The cost of inflation index in 1981-82 was 100, in 2007-
08 it was 551 and in 2008-09 it was 582.
3. A Joint family purchased a house on 1.5.1985 (CII – 133) in Bombay for Rs 3.5
lakhs. It sold the house on 10.6.2008 (CII – 582) for Rs 19 lakhs. On 14.7.2008, it
purchased another house at Hardwar at a total cost of Rs 4 lakhs. It did not own any
other house property. Compute the income chargeable under the head ‘Capital
Gains’.
4. Mr. X provides the following information regarding his transaction for the sale of
residential house during the assessment year 2009-10:
• House purchased in 1978 for 1,50,000

• Fair Market Value on 1.4.81(CII – 100) 3,50,000
• Sold in Oct 2008 (CII – 582) 23,00,000
• Amount invested in purchase of another
house in April 2008 2,00,000
Compute the amount of taxable capital gain.
5. From the following particulars given by Ramesh, compute the taxable capital gain
for the assessment year 2009- 10:
Name of asset Date of Cost Date of Sale Price Exp

Purchase Rs sale Rs Rs
Government
Securities 1.10.2007 10,000 30.6.2008 15,000 200
Furniture 15.2.91 5,000 20.2.2009 3,000 -
(WDV on 1.4.2008
Rs 4000)
Land (Fair market value
on 1.4.81 Rs 20,000) 10.1.72 20,000 6.1.2009 1,00,000 1,000
Residential House 1.12.85 60,000 5.5.2008 3,00,000 2,000
The assessee has no other residential house on 5.5.2008. He purchased another house
for residential purposes on 20.3.2009 for Rs 90,000. CII for 2008-09 is 582, 1994-95 is
259, 1990-91 is 182 and for 1985-86 is 133.
UNIT -II
CLUBBING OF INCOME
Income of Other Persons - Included In Assessee’s Total
Income (Theory only)
After going through this Chapter you should be able to understand the:
Circumstances when income of some other person is included in the Income of
Assessee
Provisions when these sections will be applicable
Under what head and in whose income it will be included.
Generally an assessee is taxed in respect of his own income. But sometimes in some
exceptional circumstances this basic principle is deviated and the assessee may be taxed in
respect of income which legally belongs to somebody else.
Earlier the taxpayers made an attempt to reduce their tax liability by transferring their
assets in favour of their family members or by arranging their sources of income in such a
way that tax incidence falls on others, whereas benefits of income is derived by them . So
to counteract such practices of tax avoidance, necessary provisions have been incorporated
in sections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax on his own
income as well as income belonging to others on fulfilment of certain conditions.
Inclusion of other’s Incomes in the income of the assessee is called Clubbing of Income
and the income which is so included is called Deemed Income. It is as per the provisions
contained in Sections 60 to 64 of the Income Tax Act.
1. TRANSFER OF INCOME WITHOUT TRANSFER

OF ASSET (SEC. 60)
Section 60 is applicable if the following conditions are satisfied:
The taxpayer owns an asset
The ownership of asset is not transferred by him.
The income from the asset is transferred to any person under a settlement,
or agreement.
If the above conditions are satisfied, the income from the asset would be taxable in the
hands of the transferor
NOTE ON TRANSFER: "Transfer" includes any settlement, trust, covenant, agreement or

arrangement.
Illustration: Mr X owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual) interest
being Rs. 100,000. On April 1, 2009, he transfers interest income to Mr Y, his friend
without transferring the ownership of these debentures. Although during 2009-10,
interest of Rs. 100,000 is received by Mr Y, it is taxable in the hands of Mr X as per
Section 60.
2. REVOCABLE TRANSFER OF ASSETS (SEC 61)

‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or
income from such an asset, either whole or in parts at any time in future, during the
lifetime of transferee. It also includes a transfer which gives a right to re-assume power
of the income from asset or asset during the lifetime of transferee.
If the following conditions are satisfied section 61 will become applicable.
An asset is transferred under a “revocable transfer”,
The transfer for this purpose includes any settlement, or agreement
Then any income from such an asset is taxable in the hands of the transferor and not the
transferee (owner).
Note:-In the case of irrevocable transfer of asset , the income from such assets will be
deemed to be the income of the transferee (To whom the asset has been transferred),
provided that the transfer is not for the benefit of the spouse of the transferor.
3. INCOME OF SPOUSE
The following incomes of the spouse of an individual shall be included in the total
income of the individual:
3.a REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS

SUBSTANTIAL INTEREST [SEC 64 (1) (ii)]
Concern – Concern could be any form of business or professional concern. It
could be a sole proprietor, partnership, company, etc.
Substantial interest - An individual is deemed to have substantial interest, if he /she
(individually or along with his relatives) beneficially holds equity shares carrying not
less than 20 per cent voting power in the case of a company or is entitled to not less than
20 percent of the profits in the case of a concern other than a company at any time
during the previous year.
If the following conditions are fulfilled this section becomes applicable.
If spouse of an individual gets any salary, commission, fees etc
(Remuneration) from a concern
The individual has a substantial interest in such a concern
The remuneration paid to the spouse is not due to technical or
Professional knowledge of the spouse. Then such salary, commission, fees, etc shall be
considered as income of the Individual and not of the spouse.
Illustration - X has a substantial interest in A Ltd. and Mrs. X is employed

by A Ltd. without any technical or professional qualification to justify the
Remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X.
When both husband and wife have substantial interest
Where both the husband and wife have a substantial interest in a concern and
Both are in receipt of the remuneration from such concern both the remunerations will
be included in the total income of husband or wife whose total income, excluding such
remuneration, is greater.
3.b INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC. 64(1)

(IV)]
Income from assets transferred to spouse becomes taxable under provisions of section
64 (1) (iv) as per following conditions:-
The taxpayer is an individual
He/she has transferred an asset (other than a house property)
The asset is transferred to his/her spouse
The asset is transferred without adequate consideration. Moreover there is
no agreement to live apart.
If the above conditions are satisfied, any income from such asset shall be deemed to be
the income of the taxpayer who has transferred the asset.
Illustration - X transfers 500 debentures of IFCI to his wife without
adequate consideration. Interest income on these debentures will be included in the
income of X.
When Section 64(i) (iv) is not applicable
On this basis of the aforesaid discussion and judicial pronouncements, section 64 is not
applicable in the following cases:
* If assets are transferred before marriage.
* If assets are transferred for adequate consideration.
* If assets are transferred in connection with an agreement to live apart.
* If on the date of accrual of income, transferee is not spouse of the
transferor.
* If property is acquired by the spouse out of pin money (i.e. an allowance
given to the wife by her husband for her dress and usual household expenses).
In the aforesaid five cases, income arising from the transferred asset cannot be clubbed
in the hands of the transferor
3.c INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64

(1) (VI)]
Income from assets transferred to son’s wife attract the provisions of section 64 (1) (vi)
as per conditions below:-
The taxpayer is an individual.
He/she has transferred an asset after May 31, 1973.
The asset is transferred to son’s wife.
The asset is transferred without adequate consideration.
In the case of such individuals, the income from the asset is included in the
Income of the taxpayer who has transferred the asset.
3.d INCOME FROM ASSETS TRANSFERRED TO A

PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1)
(VII)]
Income from assets transferred to a person for the benefit of spouse attract the
provisions of section 64 (1) (vii) on clubbing of income. If:
He/she has transferred an asset to a person or an association of persons.
Asset is transferred for the benefit of spouse.
The transfer of asset is without adequate consideration.
In case of such individuals income from such an asset is taxable in the hands of the
taxpayer who has transferred the asset.
3.e INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE

BENEFIT OF SON’S WIFE [SEC. 64
(1) (VIII)]
Income from assets transferred to a person for the benefit of son’s wife attract the
provisions of section 64 (1) (vii) on clubbing of income. If,
He/she has transferred an asset after May 31, 1973.
The asset is transferred to any person or an association of persons.

The asset is transferred for the benefit of son’s wife.
The asset is transferred without adequate consideration.
In case of such individual, the income from the asset is included in the income of the
person who has transferred the asset.
4. INCOME OF MINOR CHILD (SEC. 64 (1A)

All income which arises or accrues to the minor child shall be clubbed in the
Income of his parent (Sec. 64(1A), whose total income (excluding Minor’s
Income) is greater. However, in case parents are separated, the income of minor will be
included in the income of that parent who maintains the minor child in the relevant
previous year.
Exemption to parent [Sec10 (32)]
An individual shall be entitled to exemption of Rs. 1,500 per annum(p.a.) in
respect of each minor child if the income of such minor as included under section 64
(1A) exceeds that amount. However if the income of any minor child is less than Rs.
1,500 p.a. the aforesaid exemption shall be restricted to the income so included in the
total income of the individual.
When Section 64(1A) is not applicable

In case of income of minor child from following sources, the income of minor child is
not clubbed with the income of his parent.
Income of minor child on account of any manual work.
Income of minor child on account of any activity involving application of
his skill, talent or specialized knowledge and experience.
Income of minor child (from all sources) suffering from any disability of
the nature specified under section 80U
QUESTIONS:
SECTION—A
1. What is clubbing of income?
2. In what circumstances is the income of one person treated as the income of
another?
3. State the circumstances in which the income of wife of an assessee are included
in the assessee’s total income.
4. State the treatment of Income of a minor in clubbing of incomes.
SECTION—B
1. Briefly explain under what circumstances income of other persons can be

included in the income of assessee under Income tax Act, 1961?
2. What are the provisions of law regarding the clubbing of income of spouse and
other family member in the income of individual?
UNIT -III
SET OFF AND CARRY FORWARD OF LOSSES
Different sources under the same head of income - Sources from different
heads of income-special provisions regarding income from House property.
(Theory only)
This chapter helps one to understand:
If there is a loss sustained by the assessee, whether such a loss can be
Set off against income from any other source/head and the restrictions for
the same.
If it cannot be set off, can that loss be carried forward and,
What are the provisions/restrictions for the above and for how many years
it can be carried forward.
INTRODUCTION:
Income-tax is a composite tax on the total income of a person earned during a Period of
one previous year. There might be cases where an assessee has different sources of
income under the same head of income. Similarly, he may have income under different
heads of income. It might also happen that the net result from a particular source/head
may be a loss. This loss can be set off against other sources/head in a particular manner.
For example, where a person carries on two businesses and one business gives him a
loss and the other a profit, then the income under the head ‘Profits and gains of business
or profession’ will be the net income i.e. after the adjustment of the loss. Similarly, if
there is a loss under one head of income, it should normally be adjusted against the
income from another head of income while computing the Gross Total Income, of
course subject to certain restrictions. These provisions for set off or carry forward and
set off of loss are contained in sections 70 to 80 of Income-tax Act.
STEPS IN SET OFF AND CARRY FORWARDS

Step1:
Inter-source adjustment under the same head of income
Step 2:
Inter head adjustment in the same assessment year. Step 2 is only
applied if it is not possible to set off a particular loss under Step1
Step3:
Carry forward of a loss. This step is only applicable if a loss is not set
Off under Step 1 and 2.
INTER SOURCE ADJUSTMENT (SEC.70)

Where the net result for any assessment year in respect of any source is a loss, the
assessee shall be entitled to have the amount of such loss set off against his income from
any other source under the same head. This may also be referred to as inter source
adjustment.
For example, if the assessee has two houses and the net income from one house is Rs.
84,000 while from the other house there is a loss of Rs. 60,000 the loss shall be adjusted
against the income (as both fall under the same head i.e. ‘Income from house property)
and after set off, the income under the head ‘income from house property’ shall be Rs.
24,000.This is Inter source adjustment.
On the other hand, if an assessee has two houses and there is a net Income of
Rs.80,000 from one house and loss of Rs.1,20,000 from another, the net loss
under this head will be (-) 40,000. Such a loss can be set off against any kind of income
under any other head which is termed as Inter-head adjustment.
However, there are certain exceptions to this general rule of inter source
adjustment. In the following cases loss from one source cannot be adjusted
against income from another source of income although it falls under the same head:
LOSS FROM SPECULATION BUSINESS

“Speculation business” means a business in which contracts for the purchase or sale of
any commodity including stocks and shares is periodically or ultimately settled without
the actual delivery or transfer of the commodity or scrips .
As per section 73 any loss arising from a speculation business carried on by an assessee
shall be set off only against income of any another speculation business run by the
assessee. It cannot be set off from a non-speculative business income, although income
from both kinds of businesses are taxable under the head ‘profits and gains of business
or profession’. However, a loss from a non-speculative business can be set off against
income from speculation business but vice versa is not possible.
LOSS FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE HORSES

As per section 74A, the loss incurred by an assessee, in the activity of owning and
maintaining race horses, shall only be set off against the income from such an activity. It
cannot be set off against the income from any other sources.
LONG TERM CAPITAL LOSS

Long term capital loss can be set off only against long-term capital gain.
However, short-term capital loss can be set off from any capital gain (long-term or
short-term)
INTER HEAD ADJUSTMENT (SECTION 71)

As explained above, any loss from one source of income is firstly set off against any
gain from another source within the same head. Any remaining loss can then be set off
against Income from any other Head. This is known as Inter-Head adjustment. However,
there are exceptions to this rule also as discussed below.
As already discussed above, in the following cases no inter source adjustment is
permitted, hence, the question does not arise of any inter-head adjustment. In other
words following are the exceptions to inter-head adjustment also.
No loss of whatsoever nature can be set off against winnings from
lotteries, crossword puzzles, card games etc.
Loss from a speculation business;
Loss from the activity of owning and maintaining race horses;

Loss from a source which is exempt.
Long-term capital loss
Besides the above mentioned exceptions which are applicable both in inter source
adjustment and inter head adjustment, there are two more exceptions to inter head
adjustment. They are;
Loss under the head capital gain
Loss under the head business and profession
LOSS UNDER THE HEAD ‘CAPITAL GAINS’
In case of an Inter-head adjustment of losses, any capital loss, whether short-term or

long-term, shall not be allowed to be set off against income under any other head. It
shall however be allowed to be carried forward
LOSS UNDER THE HEAD BUSINESS OR PROFESSION [SECTION 7 (2A)]

From the Assessment Year 2005-06, any loss under the head ‘Business and
Profession’ cannot be set off against income from ‘Salaries’. However, it can be set off
against the Income from any other head.
CARRY FORWARD AND SET OFF OF LOSSES:

If the losses could not be set off under the same head or under different heads in the
same assessment year, such losses are allowed to be carried forward to be claimed as set
off from the income of the subsequent assessment years.
Only the following losses are allowed to be carried forward and set off in the
subsequent years.
a) House property loss;
b) Business loss;
c) Speculation loss;
d) Capital loss;
e) Loss on account of owning and maintaining race horses.
Another very important aspect is that in case of carry forward, losses can be only set off
under the same head of income only. Inter head adjustment is not allowed.
Compulsory filing of loss of return (Section 80):

Although the above losses are allowed to be carried forward, it is allowed only when
such loss has been determined in pursuance of a return of loss submitted by the assessee
on or before the due date for filing of the returns prescribed under section 139(1).
However loss under the head income from
house property can be carried forward even if the return is not filed within the due date
mentioned under section 139(1).
CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE PROPERTY

(SECTION 71B)
A loss under the head house property will be allowed to be carried forward for 8
assessment years to claim it as a set off in the subsequent years under the head ‘Income
from house property’. Therefore, if the loss of house property of the previous year 2008-
2009 which could not be set off because of absence or inadequacy of the income of
previous year 2008-2009, it may be carried forward for 8 succeeding assessment to be
set off from income under the head house property.
CARRY FORWARD AND SET OFF OF BUSINESS LOSSES (SECTION 72)

Where the loss under the head ‘profits and gains of business or profession’ other than
loss from speculation business, could not be set off in the same assessment year because
either the assessee had no income under any other head or the income was less than the
loss, such loss which could not be set off in the same assessment year, can be carried
forward to the following 8 assessment years, However it is subject to following
conditions.
I) Business losses can be adjusted only against business income: Business Income may
be from the same business in which the loss was incurred, or may be any other business.
II) Business in respect of which a loss is incurred may or may not be continued.
III) Losses can be set off only by the assessee who has incurred loss with a
few exceptions like when a partnership firm is converted into a company,
amalgamation of companies, etc.
IV) Period of carry forward: Each year’s loss is a separate loss and no loss
shall be carried forward for more than eight assessment years immediately
succeeding the assessment year for which the loss was first computed.
SET OFF AND CARRY FORWARD OF SPECULATION LOSS (SECTION 73).

As stated earlier, the loss of a speculation business of any assessment year is
allowed to be set off only against the profits and gains of another speculation
business in the same assessment year.
If a speculation loss could not be set off from the income of another speculation
business in the same assessment year, it is allowed to be carried forward for 8
assessment years immediately succeeding the assessment year for which the loss was
first computed. Also, it can only be set off against the income of only a speculation
business. It may be observed that it is not necessary that the same speculation business
must continue in the assessment year in which the loss is set off. However, filing of
return before the due date is necessary for carry forward of such a loss.
LOSS UNDER THE HEAD CAPITAL GAIN

Loss on short term capital asset
Any loss on short-term capital asset is allowed to be carried forward to be set-off in
subsequent years against capital gains (short-term as well as long-term). The period of
carry forward is 8 years.
Loss on Long-term capital asset

Any loss from long-term capital assets can also be carried forward to be set-off in
subsequent years but against only long-term capital gains. The period of carry forward is
8 years.
LOSS ON OWNING AND MAINTAINING RACE HORSES SECTION 74 A (3)
Any loss suffered by the assessee in respect of maintaining of race horses can be set-off
against the income from the activity of owning and maintaining race horses in
subsequent years .The period for carry forward of such a loss is only four years
immediately succeeding the assessment year in which the loss was computed for the
first time.
SET AND CARRY FORWARD AT A GLANCE
Carried forward No of Years

Set off in Same to Subsequent for which it
Income Head Nature of Loss Assessment Assessment can be
Year Year To be set carried
off forward
Income from House Property Income from Only against
House Any Head of Income from
Property • Let Out Income. House Property.
Property 8
• Self Occupied
Property
Speculation Speculation Loss Only against Only against
Business Speculation Speculation 4
Profit. Profit.
Other Any Loss from Any Income Only against
Business or Business or except Salary. Profit or Gains
Profession Profession other from business or
than Speculation Profession. 8
Loss and
Unabsorbed
Depreciation
Capital Gains Long Term Capital Only against Only against
Gains Long term Long term 8
Capital Gains. Capital Gains.
Capital Gains Short Term Capital Only against Only against
Gains Capital Gains Capital Gains
(Both Short (Both Short Term 8
Term & Long & Long Term).
Term).
Other Sources Income from Only against Only against 4
owning and Income from Income from
maintaining Race owning and owning and
Horses maintaining Race maintaining Race
Horses. Horses.
Other Sources Income from Other Any Income. No Carry
NA
Sources Forward
QUESTIONS:
SECTION - A
1. What are Long term capital losses?
2. What is speculation loss?
3. What is set off of losses?
4. What is carry forward of losses?
5. What is Inter head set off?
6. State the provisions for set off of losses from casual incomes?
7. State the provisions regarding loss from maintenance of horses?
SECTION—B
1. Explain the provisions of Income tax act, 1961 regarding carry forward and set
off of losses.
2. What are the provisions regarding the set off of the following losses:
Short term capital losses, speculation losses, Long term capital losses, Losses of
lottery and card games.
3. Explain the provisions regarding set off and carry forward of losses under the
head income from other sources.
UNIT - IV
COMPUTATION OF TOTAL INCOME & TAX LIABILITY
Deduction from Gross Total Income u/s 80C– 80CCC – 80CCD – 80D –
80DD – 80DDB – 80E – 80G – 80GG – 80GGA – 80U – Computation of
Total Income and Tax Liability of individual assessees only.
Taxable income shall be computed as follows:
Step 1: Find out income under the five heads of income.
Step 2: Adjustment of losses of the current year & earlier years. Losses should be set off
according to the provisions of sections 70 to 80. The income after adjustment of losses is
gross total income.
Step 3: Deductions fro gross total income: from the gross total income, the following
deductions are available
Sectio Nature of deduction

n
80C Payment of insurance premia, contribution to provident fund
80CC Contribution to certain pension fund
C
80CC Contribution to pension scheme of central government
D
80D Payment for medical insurance premia
80DD Maintenance including medical treatment of a dependant
being a person with disability
80DD Medical treatment expenditure
B
80E Repayment of loan taken for higher studies
80G Donations to charitable institutions & funds
80GG Rent paid
80GG Donations for scientific research or rural development
A
80GG Contributions given to political parties
C
80-IA Profits & gains from industrial undertakings or enterprises engaged
in infrastructure development
80-IAB Profits & gains by an undertakings or enterprises engaged in
development of special economic zone
80-IB Profits & gains from certain industrial undertakings other than
infrastructure development undertakings
80-IC Profits & gains of certain undertakings in certain special category
of states
80-ID Profits from the business of hotel & convention centre
80-IE Profits from certain undertakings in north eastern states
80JJA Profits from the business of collecting & processing of bio-
degradable waste
80QQ Royalty income of authors
B
80RRB Royalty on patents
80U Income of a person with disability
Step 4: Rounding off – The balance should be rounded off to the nearest Rs.10. it is
known as net income or total income or taxable income.
STEP 5: Computation of tax liability
Net income of an individual is chargeable to tax at rates given below:
Tax rates in India for Resident Individual being Senior Citizen
When total Income Educational Cess

Income Tax in
(Chargeable at Surcharge ( On Income tax +
Rs.
normal rate) Surcharge)
Does not exceed Rs.

Nil Nil Nil
2,25,000
Is greater than Rs. (TI - Rs.

2,25,000 & less than 2,25,000) x Nil 3%
Rs. 3,00,000 10%
Is greater than Rs. [(TI - Rs.

3,00,000 & less than 3,00,000) x Nil 3%
Rs. 5,00,000 20%] + 7,500
If TI is more than Rs.

[(TI - Rs.
Is greater than Rs. 10,00,000 then 10% of
5,00,000) x 3%
5,00,000 Income tax shall be paid as
30%] + 47,500
Surcharge.
Income Tax Rates for Resident Individual being Women
Income Tax in
Rs.
Does not exceed Rs.

Nil Nil Nil
1,80,000

1,80,000 & less than 1,80,000) x Nil 3%
Rs. 3,00,000 10%

3,00,000 & less than 3,00,000) x Nil 3%
Rs. 5,00,000 20%] + 12,000
If TI is more than Rs.

[(TI - Rs.
Is greater than Rs. 10,00,000 then 10% of
5,00,000) x 3%
5,00,000 Income tax shall be paid as
30%] + 52,000
Surcharge.
Tax rates in India for Other Individuals

Income Tax in
Rs.
Does not exceed Rs.

Nil Nil Nil
1,50,000

1,50,000 & less than 1,50,000) x Nil 3%
Rs. 3,00,000 10%

3,00,000 & less than 3,00,000) x Nil 3%
Rs. 5,00,000 20%] + 15,000
Is greater than Rs. [(TI - Rs. If TI is more than Rs. 3%

5,00,000 5,00,000) x 10,00,000 then 10% of
30%] + 55,000 Income tax shall be paid as
Surcharge.
Final tax liability shall be determined as under:
Amou
nt
Tax on net income
Add surcharge
Tax & surcharge
Add education cess
Add secondary & higher education cess(1% of tax
& surcharge
Total tax
Less tax rebate
Tax
DEDUCTIONS UNDER CHAPTER VI-A (Sections 80C -80U)
Section 80C
While calculating the Income Tax, Deductions from Income under section 80C can be
availed by Individual or HUF, for certain contributions or payments made.
Nature of payments are as follows:
1. By way of deduction from the Salary payable, in accordance with the

conditions of his service, by or on behalf of the Government, for the purpose of
securing a Deferred Annuity or making provision to his spouse or children. This is
restricted to 1/5th of the Salary or actual deduction w.e.less
2. As contribution to Provident Fund under Provident Funds Act, 1925
(Statutory Provident Fund
3. As contribution to Recognised Provident Fund
4. As contribution to Approved Superannuation Fund
5. As contribution to Pension Fund set up by Mutual Funds notified under

section 10(23D) or UTI
6. Tuition Fees (not including Development Fees, Donation, etc.) at the time of
admission or thereafter to any University, College, School or Other
Educational Institution situated in India for the purpose of Full Time
Education for two children.
7. To effect or to keep in force a Contract of Deferred Annuity (not being a
plan with a option to receive the sum in cash by Insured and not covered by
other clauses below) on life of self, spouse or children.
8. life insurance premium paid to assure life of individual, spouse or children,
restricted to actual amount or 20% of the sum assured.
9. As contribution to Provident Fund set up by the Central Government and
notified by the Central Government (Public Provident Fund)
10. As contribution for participation in (ULIP) Unit Linked Insurance Plan of
UTI
11. As contribution for participation in Unit Linked Insurance Plan of 'LIC
Mutual Fund' notified under section 10(23D
12. As subscription to Central Government Security or National Savings
Scheme Deposits
13.As subscription to notified savings certificate(NSC VIII Issue)
14. To effect or keep in force a contract for Annuity Plan of LIC or any other
Insurer
15. As subscription to Notified Deposit or Pension Fund of National Housing
Bank
Deductions from Income is available for subscription to any Deposit Scheme of -
• Public Sector Company, engaged in providing long term finance for

construction or purchase of houses in India for residential purposes
• Statutory Authority constituted in India, for dealing with and satisfying the need
for -
o Housing accommodation or
Planning, development or improvement of cities, towns and villages, or

both
16. Deductions from Income is available for subscription to

• Equity Shares or Debentures forming part of any Eligible Issue of Capital
approved by a Public Company
• Eligible Issue of Capital by any Public Financial Institution in the prescribed
form
• Units of any Mutual Fund notified under section 10(23D), approved on an
application by such Mutual Fund to Board, which is applied for Eligible issue of
Capital
The qualifying amount FOR ALL THE ABOVE ITEMS shall not exceed Rs.1,00,000
SECTION 80CCC
Eligible Assessee – Individual
Nature of Payment
Contribution paid or deposited to certain pension funds to effect or keep in force a

contract for any annuity plan of Life Insurance Corporation of India or any other insurer
for receiving pension from the fund referred to in clause 10(23AAB).
Any amount standing to the credit of the assessee in a fund including interest, bonus,
etc., is received by the assessee or his nominee, whether on surrender of plan or as
pension shall be treated as income in his hands.
If deduction is claimed under this section, deduction under section 80C is not available.
QUANTUM OF DEDUCTION
Lower of the following:
• Actual Contribution.
• RS 100000
SECTION 80CCD
Eligible assessee – employee of central government
Nature of Payment
Contribution made by such employee or Central Government to a pension Scheme

notified by Central Government of India.
Where any amount standing to the credit of the assessee in such Pension scheme,
together with the amount received by the assessee -
• On account of closure or his opting out of the pension scheme

• Pension received from the annuity plan purchased or taken on such closure or
opting out is chargeable as income of the previous year in which such sum is
received.
If deduction is claimed under this section, deduction under section 80C is not available.
Quantum of deduction:
Lower of the following:
• Actual Contribution.
• 10% of the salary
Note: -
In each case of contribution by employee and Central Govt. Hence, a total of 20% of
salary can be claimed as deduction
Section 80CCE
This section restricts the total deduction under sections 80C (individual limit of
Rs.1,00,000), 80CCC (Individual Limit of Rs.1,00,000) & 80CCD (Individual Limit of
20% of the Salary of the Employee) to Rs.1,00,000
Section 80D
Deduction in respect of Medical Insurance Premia
Deduction is allowed for any medical insurance premium under an approved scheme of
General Insurance. corporation of India, (popularly known as MEDICLAIM) or of any
other insurance company, paid by any mode except cash, out of assessee’s taxable
income during the previous year, in respect of the following:
Feature
This is an additional deduction after deduction u/s 80C because overall limit on
deductions u/s 80C, 80CCC and 80CCD is Rs. 1,00,000. (Sec.80CCE). See below
example.
ELIGIBLE ASSESSE
(a) In case of an individual- Insurance on the health of the assessee, or wife or husband,
or [dependent] parents or dependent children.
(b) In case of an H.U.F.- Insurance on the health of any member of the family.
Amount of Deduction
For A.Y. 2009-10:(1) In case of an individual assessee : Actual amount or Rs 15000
(senior citizen 20000)
An additional deduction upto Rs. 15000 (Rs. 20,000 in case of the person insured is
senior citizen) shall be allowable in respect of medical insurance premium for parent(s)
whether or not dependent on the assessee.
SECTION -80DD/ Rule 11A
Deduction in respect of maintenance including medical treatment of person with

physical disability Individual or HUF resident in India:
• With disability - Rs. 50,000
• With severe disability - Rs. 75,000
SECTION 80DDB –
Expenditure incurred on treatment of self, dependant who is suffering from a notified

disease.
Actual amount or Rs40000 w.e.is less
SECTION -80E
Deduction for interest paid on loan taken for pursuing his higher education or for the
purpose of higher education of his relative. W.e.f. A.Y. 2010-11 meaning of higher
education has been enlarged to cover all post schooling courses “Relative” means the
spouse and children of the individual.
ELIGIBLE ASSESSE - Individual whether resident or not.
Actual amount paid qualifies for deduction.
SECTION 80G
Under Section 80G of the Income Tax Act, donations have been segregated as follows:
• Those eligible for 100% deduction,

• Those eligible for 50% deduction,
• Those eligible for 100% or 50% deduction, subject to maximum of the 10% of
the gross total income.
For the purpose of claiming deduction, the assets are classified into four categories: -
Category A
Donations that qualify for 100% deduction.
Category B
Donations that qualify for 50% deduction.
Category C
Donations (to be restricted to 10% of Total Income) that qualify for 100%
deduction.
Category D
Donations (to be restricted to 10% of Total Income) that qualify for 50%
deduction.
Note: -
Total Income = Gross Total Income - Chapter VI-A Deductions (except 80G)
Category C & Category D donations cannot cumulatively exceed 10% of the Total
Income.
Deductions for Donations - Category A
The following list of Items qualify for deductions to the extent of 100% of Total
Income.
1. Technology: -
Fund for Technology Department and Application set up by the Central

Government of India.
2. Security: -
Fund donated for any of the following funds established by the armed forces of
the Union for the welfare of the past and present members of such forces or their
dependants is eligible for deduction u/s 80G.
• The Army Central Welfare Fund, or

• The Indian Naval Benevolent Fund, or
• The Air Force Central Welfare Fund
• National Defence Fund.
3. Education: -
Donations for any of the following Education funds is eligible for deduction u/s
80G.
• A university or any educational institution of national eminence.

• Any Zila Saksharta Samiti constituted in any district for the purposes
of improvement of primary education in villages and towns in such district
and for literacy and post-literacy activities.
4. Medical: -
Donations for any of the following Medical funds is eligible for deduction u/s
80G.
• The National Illness Assistance Fund

• The National Blood Transfusion Council or to any State Blood
Transfusion Council
• Any fund set up by a State Government to provide medical relief to
the poor
• The National Trust for Welfare of Persons with Autism, Cerebral
Palsy, Mental Retardation and Multiple Disabilities.
5. Relief: -
Fund donated for any of the following Relief funds is eligible for deduction u/s
80G.
• The Prime Minister's National Relief Fund.

• The Prime Minister's Armenia Earthquake Relief Fund.
• The Africa (Public Contributions India) Fund.
• The Chief Minister's Relief Fund or the Lieutenant Governor's Relief
Fund in respect of any State or the Union Territory.
6. Others Donations: -
Fund donated for any of the following funds is eligible for deduction u/s 80G.
• The National Sports Fund.

• The National Cultural Fund.
• The National Foundation for Communal Harmony.
Quantum of Deductions for category A:
100% of donations.
Deductions for Donations - Category B
Any donations made for the following funds are eligible for deductions under 80G.
• The Prime Minister's Drought Relief Fund.

• The National Children's Fund.
• The Jawaharlal Memorial Fund.
• The Indira Gandhi Memorial Trust.
• The Rajiv Gandhi Foundation.
Quantum of Deductions for category B:
50% of donations.
Deductions for Donations - Category C
Any donations made for the following purpose are eligible for deductions under 80G.
Family Planning: -
• Donations made to the Government or to any such local authority,

institution or association approved by the Central Government of India, for
the purpose of promoting family planning.
Sports Development: -
• Any sum paid by a company to the Indian Olympic Association or

to any other association or institution established in India notified by the
Central Government for
a. The development of infrastructure for sports and games; or
b. The sponsorship of sports and games; in India
Quantum of Deductions for category C:
100% of donations. But the Donations should be restricted to 10% of Total

Income.
Note: -
Income.
Deductions for Donations - Category D
Any donations made for the following purpose are eligible for deductions under 80G.
Renovation of any Places of Public Worship: -
• Donations for the renovation or repair of any temple, mosque,

gurdwara, church or other place notified by Central Government to be of
historic, archaeological or artistic importance or to be a place of public
worship or renown throughout any State(s).
Government Charity: -
• Donations to the Government or Local Authority, to be utilised for

charitable purpose.(Other than family planning)
General Charity: -
• Donations to any other funds or any Institutions approved under

Section 80G.
For promoting Housing accommodation: -
• Donations to any authority constituted in India by or under any law

for the purpose of dealing with and satisfying the need for housing
accommodation for the purpose of planning, development or improvement
of cities, towns and villages, or for both.
Minority community: -
• Donations to any Corporation established by the Central

Government or any State Government for promoting the interests of the
members of the minority community.
Quantum of Deductions for category D:
50% of donations. But the Donations should be restricted to 10% of Total Income.
Note: -
Income.
SECTION 80GG
Payment of house rent if an individual is living in a rented house & does not have a self
occupied house.
The amount of deduction is
2000p.m or
Rent paid-10% of adjusted GTI OR
25% OF adjusted GTI
WHICHEVER IS LESS
Deductions for Donations Research and Rural area Development u/s 80GGA
Any assessee not having "Profit and Gains of Business or Profession" is eligible for
deductions for donations made under 80GGA.
The whole amount contributed to any of the following Payee are eligible for deduction.
Scientific Research: -
• Scientific Research Association

• University
• Colleges
• Any other institution approved u/s 35(1)(ii)
Research in Social Science or Statistical Research: -
• University
• Colleges
• Any other institution approved u/s 35(1)(ii)
Rural Area Development Programme: -
• Association or Institution, approved under section 35CCA(2) or

35CCA(2A)
Training of persons for Rural Area Development Programme: -
• Association or Institution, approved under section 35CCA(2) or

35CCA(2A)
Carrying out Eligible Project or Scheme [notified u/s 35AC]: -
• Public Sector Company

• Local Authority
• Association or Institution
Fund for Rural Area Development Programme: -
• Rural Development Fund notified by Central Government of India

under section 35CCA(1)(c)
Urban Poverty Eradication Fund: -
• National Urban Poverty Eradication Fund notified by Central

Government of India under section 35CCA(1)(c)
Quantum of Deductions:
Whole Amount contributed is deductible.
Note: -
Where deduction is claimed under this section, no deduction can be claimed under any
other section.
Deductions for Donations For Political Parties u/s 80GGB & 80GGC
Contribution by an Indian Company: -
Any contribution made by an Indian Company to any political party is deductible

u/s 80GGB.
Contribution by any other Person: -
Any contribution made by any other person Except
• Local Authority
• Artificial Juridical Person, wholly or partly funded by Govt.
is deductible u/s 80GGC.
Quantum of Deductions:
Whole Amount contributed is deductible.
SECTION 80U –
Medically handicapped or mentally retarded persons
Rs 50000
In case of severe disability Rs75000
SOLVED PROBLEMS:
1. The following are particulars of income of Mr.Behl for the Assessment year 2009-
10:
1. Income from House property (computed) 61,200

2. Business income 80,000
3. Dividends (Gross) from a Co-op Society 500
4. Long term Capital Gain: Long Term
a)from Land 1000
b)from Jewellery 800
5. He paid Rs 28,000 as Life Insurance Premium on his own life on a policy of
Rs 2,00,000.
6. He gave Rs 20,000 as donation to a charitable institution approved under section
80 G.
7. During the year he deposited Rs 20,000 in an equity linked saving scheme (Dhan
80) notified u/s 80C.
8. He deposited Rs 12,500 in National Saving Scheme 1992.
9. Interest accrued on NS certificates VIII issue purchased in November 2007 for Rs
30,000 is Rs 2260.
Compute his Total Income.
Sol: Computation of Total Income of Mr. Behl
Income from House Property(computed) 61,200

Business Income 80,000
Capital Gain: Land 1000
Jewellery 800 1800
Total Long Term Capital Gain
Other sources: NSC VIII issue Interest 2260
Dividend from Co-operative society 500 2760
Gross Total Income 1,45,760
Deductions u/s 80:

i) u/s 80 C: (Note 1) 52,760
ii) u/s 80 G: Donations
QA Actual Donation Rs 20,000 or
10% of G.Tax I w.e. is less
10% of [1,45,760 – (52,760 + 1800) = 9120
Rate 50% of Rs 9120 4560 57, 320
Total Income 88,440
Note 1:QA for deduction u/s 80C:

a. Life insurance premium 28,000
b. Interest on NSC VIII issue 2,260
c. Amount deposited in NSS 1992 12,500
d. Amount invested in Dhan 88 (scheme notified
u/s 80C) 10,000
Total qualifying amount 52,760
2. You are required to compute total taxable income of Mr. Kapoor of the financial
year ending 31st March, 2009 from the following particulars:
a. Salary per month Rs 24,000. He spent 3 months in Australia on leave on full

pay. On 31st Dec, he was discharged on payment of a compensation of Rs
90,000. Salary accrues on the last date of the month.
b. He contributed towards Provident Fund (Recognised) at 15% of his salary.
Similar amount was contributed by his employer. He paid Rs 4000 on the
assurance of his own life.
c. He held Rs 1,00,000, 10% Govt of India Bonds. He paid an interest of Rs 7000
on a loan which he took for the purchase of such investement.
d. He owns several properties in Calcutta the rental value of which amounts to Rs
86,800 per annum including Rs 11,800 for a cottage where he resides. He has
incurred the following expenses: Vacancy allowance Rs 2400; Repairs
Rs14,000; Collection charges Rs 6000; Legal Expenses for acquisition of land
Rs 20,000.
e. He had also come agricultural land in Nepal and he derived an income of Rs
10,000
f. He also received 1/5th share from Hindu Undivided Family Rs15,000.
g. He is medically handicapped person and has been duly certified by the Govt
doctor.
h. He paid by cheque Rs 12,000 as premium under the scheme of Mediclaim for
insurance of his health and Rs 24,000 paid by cheque for the medical insurance
of his aged parents.
Sol: Computation of total income of Mr. Kapoor for the Assessment year 2009-10:
Income from salary:
Salary at Rs 24,000 pm (1.4.2008 to 31.12.2008)

(9 months including leave salary) 21,16,000
Compensation on termination of service 90,000
Employer’s contribution in employee`s RPF
over 12% of salary (32,400 – 25,920) 6480
Salary Income 3,12,480
Income from House property:

Let out house propery:
Rental value ( 86,800 – 11,800) 75,000
Less vacancy 2400
Annual rental value 72,600
Less: Municipal taxes NIL
Net annual value 72,600
Deductions u/s 24:
Standard Deduction : 30% of NAV 21,780
50,820
Self-occupied house : Annual value is taken as NIL 50,820
Income from other sources:

Agricultural income from Nepal 10,000
Interest on Govt Bonds 10,000
Less: Interest on loan paid 7000 3000 13,000
Gross total income 3,76,300

Deductions u/s 80:
a. u/s 80C: Qualifying savings (Note 1) 36,400
b. u/s 80D: Premium paid regarding
Mediclaim (self) 12,000
Premium paid for medical
Insurance of aged parents (senior
Citizens) 20,000 32,000
c. u/s 80U: Medically handicapped
assessee 50,000 1,18,400
Note 1 . QA for deduction u/s 80C

Contribution to RPF 32,400
LIC premium 4,000
QA 36,400
Note: Share of income received from HUF is exempted from tax u/s 10 (2).
3. From the particulars given below, determine total income of Mr.Rohit Sharma for
the assessment year 2009-10:
Salary income (computed) 4,50,000

House property income (computed) 30,000
Business loss (-) 80,000
Capital Gain: Short term 20,000
Long term 12,000

Winnings from lottery 50,000
Winnings from card games 16,000
Interest on Securities 10,000
Mr. Rohit’s savings are:

a. RPF Rs 1000 pm.
b. Life Insurance premium Rs 20,000 pa
c. Life Insurance premium of Major son Rs 10,000 pa
d. Life Insurance premium of Father Rs 10,000 pa
e. Contribution towards pension Fund of LIC Rs12,000.
Mr. Rohit paid medical insurance as under:
a. Own medical insurance premium paid by cheque Rs 16,000
b. Medi claim insurance premium of his old father (paid by cheque) Rs 8000.
c. Medi claim insurance premium of his mother paid in cash Rs 5000.
Mr. Rohit’s old father is handicapped and he spent Rs 30,000 on his treatment
during the previous year 2008-09.
Mr. Rohit is suffering from a specified disease and during the year he spent Rs
60,000 on the treatment.
Mr. Rohit’s son is studying in a reputed management college and doing MBA and
he took a loan of Rs 2,00,000 at 12% from a Nationalized bank in 2006. During the
previous year 2008-09, Mr. Rohit re-paid to the Bank Rs 48,000 which includes interest
of Rs 24,000.
Sol: Computation of Total income of Mr. Rohit for the assessment year 2009-10:
Salary income (computed) 4,50,000

House property income (computed) 30,000
Capital gain short term 20,000
Income from other sources : Interest on securities 10,000
60,000
Set- off loss from business (-) 80,000
Business loss to be C/f (Note 1) (-) 20,000
Long term capital gains 12,000

Winnings from lotteries 50,000
Winnings from card games 16,000 66,000
Gross total income 5,28,000

Deductions u/s 80:
U/s 80C:
Contribution to RPF 12,000
Life insurance premium 20,000
Life insurance premium of Major son 10,000
QA 42,000 100% 42,000
U/s 80 CCC:
Contribution in pension fund of LIC 12,000
U/s 80 D:
Medical insurance premium of self
Rs 16,000 but restricted to 15,000
Medical claim insurance of father
(additional deduction allowed) 8,000 23,000
U/s 80 DD:
Medical treatment of handicapped
dependent relative (fixed) 50,000
U/s 80 DDB:
Expenses incurred on medical treatment
of notified disease Rs 60,000 or 40,000
whichever is lesser is allowed as deduction 40,000
U/s 80 E:
Interest paid on loan taken for higher
education Rs 2,00,000 at 12% 24, 000 1,83,000
Total income 3,37,000
Notes: 1.Business loss is not allowed to be set off out of total income under the head
salary and winnings from lottery and races. He can set off business loss out of long
term capital gain but he should not set off his business loss out of long term capital
gain as he is to pay tax at a lower rate of 20% on long term capital gain. So, business
loss should be C/F.
2. Life insurance premium of father does not qualify for 80 C deduction.
3. 80 CCC deduction is allowed for the full amount of premium paid but the total of
all deductions u/s 80C, 80CCC and 80 CCD should not exceed Rs 1,00,000.
4. Medical insurance premium of mother paid in cash does not qualify for deduction
u/s 80 D.
5. Rohit’s son is studying in higher degree education which is a post graduate degree in
management (MBA) and it is a full time course.
4. From the following particulars given below, compute the total income and tax
payable of Mr. Deb, a central Govt employee working at Chandigarh:
I. 1. Salary 7000 pm.

2. TA Bill 5000 pa.
Actual expenditure 6000 pa.
3. His contribution to SPF 700 pm.
4. Employer’s contribution to SPF 10% of salary.
5. Interest on accumulated Balance of SPF at 13% 2000
6. Entertainment Allowance 5000 pa.
II. He owns two houses, one of which is let out at a rent of Rs 400 pm and other (whose
annual value is Rs 1000) remained vacant throughout the year on account of his
employment at Ambala where he has taken a house on rent. The two houses are subject
to Municipal Taxes of Rs 600 and 100 respectively.
III. He received Rs 11,500 as interest from the Government securities and Rs 1600 as
bank interest. He pays Life Insurance premium of Rs 5000 on his life policy of Rs
40,000. He deposited Rs 3000 in Home Deposit Account.
Sol: Computation of Total income of Mr. Deb for the current assessment year:
I. Income from salary:

a. Salary @ Rs 7000 pm 84,000
b. Travelling allowance – exempted -
c. Entertainment Allowance 5,000
Gross Salary 89,000
Deduction u/s 16:

U/s 16 (ii) Entertainment Allowance [Note 2] 5,000
II. Income from house property:

Rent of let out house 4,800
Less: Municipal Taxes 600
Net Annual value 4,200
Deduction u/s 24:

Standard deduction : 30% of NAV 1,260
2,940
The other house is exempted u/s 23 (2) NIL 2,940
III. Income from other sources

Bank Interest 1,600
Interest on Govt securities 11, 500 13,100
Deduction u/s 80C:

1. a. Contribution to SPF 8,400
b. Premium of Life Insurance 5,000
c. Contribution to Home Deposit Account 3,000
QA 16,400 at 100%
16,400
Total Income 83, 640
Note: 1. Tax liability shall be nil as total income does not exceed exempted limit.
2. Deduction u/s 16 (ii) Entertainment Allowance Govt Employee : No
precondition. Least of 3 items shall be the deduction.
Limits:
1. Statutory Limit 5000
th
2. 1/5 of 84,000 16,800
3. Actual E.A. received 5000
Least is Rs 5000
5. The following particulars are given by MD Mathur, Madras, in respect of his annual
income for the year ended 31.3.2009:
a. Consolidated salary till 30.9.2008 at Rs 13,500 pm and from 1.10.2008 Rs

14,000 pm.
b. House rent allowance at 20% of salary.
c. Actual house rent paid Rs 3,500 pm
d. Contribution to recognised PF by self and by employer each 12% of salary.
e. Life insurance premium paid Rs 1,200 (Sum assured Rs 10,000)
f. Leave travel allowance received Rs 22,700, Rs 20,000 was spent on travel to
home district under LTC.
g. Interest and dividend income:
Interest on Term Deposits with Punjab National Bank 29,000
Income from units of UTI 3,000
Interest on debentures of Ponds India Ltd 21,750
Dividend from a co-op society 15,000
Interest on Govt securities 13,000
h. Long term capital gains 30,000
Short term capital gains on sale of shares (STT paid) 20,000
i. Medical expenses incurred in treatment of self and family Rs 5000. His
employer reimbursed Rs 2,500.
j. Rent received from tenant of own house property Rs 9,600. Municipal taxes
paid Rs 600.
Prepare Mathur`s statement of income showing computation of taxable
income giving such explanation as necessary and tax liability. Salary is due on
the last date of the month.
Sol: Computation of total income of Mr. MD Mathur for the assessment year 2009-10.
I. Salaries:
Salary (1.4.2008 to 30.9.2008 at 13,500 pm
1.10.2008 to 31.3.2009 at 14,000 pm) 1,65,000
House Rent Allowance received 33,000
Less exempted u/s 10 (13A)
Actual HRA received 33,000
Rent Paid – 10% of salary
[42,000 – 16,500] 25,500
50% of salary 82,500
Least exempted 25,500
Taxable HRA 7,500
Employer`s contribution exempted as it is
upto 12% of salary NIL
Excess of Leave Travel Allowance over
actual expenditure
[22,700 – 20,000] 2,700
Reimbursement of Medical Expenses
(Exempted) NIL
Gross Salary 1,75,200
Deductions u/s 16 NIL
Salary income 1,75,200
II. House property ARV 9,600

Less : Taxes 600
Net AV 9,000
Standard Deduction : 30% of NAV 2,700 6,300
III. Capital Gains:

Long term capital gain 30,000
Short term capital gain on shares (STT paid) 20,000 50,000
IV. Income from other sources:

Interest on Bank deposit 29,000
Income from units of UTI – exempted NIL
Dividend from a Co-op society 15,000
Interest on debentures 21,750
Interest on Govt securities 13,000 78,730
Deduction u/s 80C

Own contribution to RPF at 12% 19,800
Life Insurance Premium 1,200

21,000 at 100%
21,000
1. Computation of tax liability:

On Long term capital gain Rs 30,000 at 20% 6,000
On Short term capital gain (STT paid)
Rs 20,000 * 15% 3,000
On balance income i.e., 2,89,250- 30,000- 20,000
= 2,39,250.
On first Rs 1,50,000 NIL
On balance Rs 89,250 at 10% 8,925 8,925
17,925
TAX:
Add: Education cess at 2% of tax 359
Secondary and Higher education cess at 1% of tax 179 358
Tax Payable 18,463
Tax payable rounded off Rs 18,460.
6. The following are particulars of the income of the GND University teacher during
the year ending 31st March 2009:
a. Salary Rs 14,200 per month from which 10% is deducted for statutory
provident fund to which the University contributes 12%.
b. Rent free bungalow of the annual letting value of Rs 18,000.
c. Wardenship allowance Rs 7,200 pa
d. 12% interest on Govt loan of Rs 65,000.
e. Income from house property (computed) Rs 29,560.
f. He received Rs 3,500 for writing articles in a journal.
g. He paid Rs 2,000 (by cheque) to GIC under mediclaim.
h. Interest on postal saving bank deposit Rs 300.
i. Interest (gross) Rs 2,500.
j. Examinership remuneration Rs 3,500.
During the year he paid Rs 2,400 as life insurance premium on his own
policies and spent Rs 600 on books purchased for his own use.
Find out his total income, tax and exempted income. Population of Amritsar is
12 lakhs.
Sol:
Salary income
Pay @ Rs 14,200 pm 1,70,400
Wardenship allowance @ 100 pm 7,200
Value of Rent free accommodation at Amritsar:
10% of salary i.e., (1,70,400 + 7,200) 17,760
Employer’s contribution to SPF – exempted NIL
Gross salary 1,95,360
Deductions u/s 16 NIL
Salary income 1,95,360
Income from house property (computed) 29,560

Interest (gross) 2,500
Examinership remuneration 3,500
Interest on Govt loan 7,800
Remuneration for writing articles 3,500 17,300
Deductions u/s 80:

U/s 80C: Own contribution to SPF 17,040
Life Insurance Premium 2,400 19,440
U/s 80D: Mediclaim 2,000 21,440
Computation of tax on total income of Rs 2,20,780:

On first Rs 1,50,000 of total income NIL
On next Rs 70,780 of total income 10% 7078
7078
Tax:
Add: Education cess at 2% of tax 142
Secondary and higher education cess @ 1% of tax 71 213
Total tax 7291
Tax payable rounded off to 7,290 .
7. Dr. Singh is a practitioner. Besides his own practice, he works as a part time
physician in a private hospital for which he receives a monthly remuneration. He is
also Consultant- Physician of ABC Co. Ltd on a monthly retainer fee.
The doctor maintains a record of his receipts and payments and for the year
ended 31st March, 2009, the following information is abstracted therefrom:
Receipts:
Consultation fee receipts 1,70,000
Gross Remuneration from the private hospital 1,30,000
Retainer fee from ABC Co. Ltd 24,000
Interest on bank deposits (nationalised bank) 18,000
Payments:
Rent and electricity charges for the clinic 17,000
Telephone charges 7,400
Printing and stationery 500
Car maintenance expenses 9,000
Wages of clinical assistant 6,600
Driver’s salary 3,600
Life Insurance Premium 12, 400
The written down value of the car purchased in January 1990 and the furniture at
the clinic as on 1.4.2008 are noted to be Rs 40,000 and Rs 2000 respectively. 30% of
the use of the car and the telephone is attributable to personal and private purposes.
Prepare a statement showing the total income and tax payable of the doctor for the
assessment year 2009-10:
Sol: Computation of Total Income of Dr.Singh:
I. Salary:
Salary from private hospital 1,30,000
Retainer fee 24,000
1,54,000
Less: Deductions u/s 16 NIL
Salary Income 1,54,000
II. Professional Gain

Receipts
Consultation fee 1,70,000
Less expenses:
Rent and electricity 17,000

Telephone (7,400 less 30% for personal
use 2,220) 5,180
Printing & Stationary 500
Wages of clinical Assistant 6,600
Car maintenance (9000 less 30% for
personal use: 2700) 6,300
Driver’s salary (3,600 less 30% for
personal use 1080) 2,520
Depreciation of car ( 40,000 * 15%) 6,000
Less: 30% for personal use 1,800 4,200
Depreciation on furniture (10% of Rs 2,000) 200 42,500 1,27,500
III. Other sources:

Interest on Bank Deposit 18,000
Deductions:
U/s 80C: Life Insurance Premium 12,400
Note:
Computation of tax on total income of Rs 2,87,100
On first Rs 1,50,000 of total income NIL
On next Rs 1,37,100 of total income 10% 13,710
13,710
Tax:
Add: Education cess @ 2% of tax 274
Secondary and Higher education cess @ 1% of tax 137 411
Total Tax 14,121

Tax payable rounded off Rs 14, 120.
8. From the following Receipts and Payments Account for the year ended 31st March,
2009 of Dr. Deb and from further particulars given below, compute his total income
and tax payable.
RECEIPTS PAYMENTS
To opening cash balance 8478 By consulting room exp 12,000

To consultation fees 90,000 By cost of X- Ray machine 60,000
To salary from Medical college 1,66,000 By car expenses 6,000
To sale of shares 21,522 By Life Insurance Premium 22,000
To interest from bank 3,200 By son’s marriage Exp 5,000
To loan from Bank 10,000 By advance income tax 3,000
To cash gifts on Son’s marriage 10,000 By household expenses 1,72,000
By closing cash balance 29,200
3,09,200 3,09,200
Particulars:
a. ½ of Car expenses are treated as personal.
b. Cost of shares acquired in 1988-89 was Rs 5000 and CII for 1988-89 is 161 and for
2008-09 is 582.
c. He deposited Rs 17,000 in PPF on 30.3.2008 and Rs 20,000 in NSC VIII issue.
d. Includes interest on loan of Rs 5000 for purchase of office computer. Household
expenses include.
e. He has insured himself for Rs 1,00,000.
Sol: Computation of total income of Dr. Deb for the assessment year 2009-10.
I. Income from salary:
Salary from medical college 1,66,000
Less: deductions u/s 16 NIL 1,66,000
II. Professional income:

Professional Receipts:
Consultation fees 90,000
Less: Professional expenses
Consultation room expenses 12,000
Depreciation on X-Ray
machine at 15% of 60,000 9,000
Car expenses (1/2 allowable) 3,000
Interest on loan for office
computer 5,000 29,000 61,000
III. Capital gains: Long term

Sale price 21,522
Cost (5000* 582/161) 18,075
Taxable capital gain 3,447
IV. Other sources:

Interest from bank 3,200
Deduction:
U/s 80C :[ See Note 1] 57,000 @ 100% 57,000
Total income rounded off Rs 1,76,650
Tax liability:
On long term capital gain on shares NIL
Balance income = 1,76,650 - 3,450
= 1,73,200
On first Rs 1,50,000 NIL NIL
On balance Rs 23,200 10% 2320
Tax 2320
Add: Education cess @ 2% 46
Secondary and higher education
cess @ 1% 23 69
2389
Total tax liability rounded off Rs 2390
Note: 1. QA for deduction u/s 80C

Life insurance premium [Actual 22,000 or 20% of sum
Assured; Rs 1,00,000 or 20,000 whichever is less 20,000
Amount deposited in PPF 17,000
NSC (VIII issue) 20,000
Total QA 57,000
Exercise questions:
1. Mr RD Rane has made the following payments during the year 2008-09. Discuss
whether he can claim any benefit u/s 80 or not:
a.Rs 14,000 (Rs 8000 by cheque and Rs 6000 by cash) to General Insurance
Corporation under Mediclaim. He also paid by cheque Rs 18,000 for medical
insurance of his parents.
b.Rs 20,000 to ICICIPRU Insurance Pension Fund.
c.Rs 40,000 to a hospital for treatment of his minor son who is suffering from a
notified chronic ailment.
d.Rs 6000 pm paid as rent of a house at Delhi. He does not own any other house.
e.Rs 10,000 to a sports association notified u/s 80 G.
f. Rs 8000 to Ganga Development Board (notified u/s 35A)
2. Mr. Mahapatra, a physically handicapped assessee submits the following particulars

of income for the year ended 31.3.2009:
a. Rent from house at Calcutta Rs 24,000 pa Municipal taxes paid by tenant Rs

1200 which is 50% of total taxes.
b. Poultry farming business income Rs 71,000
c. Speculation gain from shares Rs 20,000
Speculation loss from Gold Rs 30,000
d. Other sources:
• Dividend from Indian company 9000
• Interest on units from Mutual fund 2000
• Bank interest 7000
• Interest on debentures 33,000
• Interest on Govt securities 5000
e. He paid Rs 10,000 to a veterinary college of Bengal Govt engaged in research in

poultry farming.
f. He gave Rs 6000 to Calcutta Municipal Corporation for carrying out a project
approved by National Committee.
Calculate his total income.
3. An assessee, who is an individual received the following incomes during the

financial year 2008-09:
a. Insurance commission received from LIC 10,656

b.Cloth business profits 75,000
c.He made the following payments during the year:
• Deposit of Rs 10,000 in National Saving
Scheme 1992.
• Payment of Rs 500 pm to Jeevan Dhara

Policy.
• Investment of Rs 10,000 in units of mutual funds
Notified u/s 80C as equity linked saving scheme.
• Donation given to:
 National Children Welfare Fund 5000
 PM National Relief Fund 5000
 Gujarat Relief Fund 2000
 PM Folks Art Fund 1000
 PM Students’ Aid Fund 2000
 Maharashtra CM’s Earthquake
Relief Fund 2000
 Local authority to promote Family

Planning 2000
 Public Charitable Trust (Approved) 10,000
d.He paid Rs 6000 by cheque to General Insurance Company under Mediclaim.

Compute his total income.
UNIT – V
PROCEDURE FOR ASSESSMENT
Assessment- Assessment-Best Judgment Assessment- Income escaping

Assessment-Notice- Rectification of mistakes-time limit for completion.
INTRODUCTION:
After the end of financial year i.e., the previous year (the year in which an
Assessee earns income), an assessee is required to compute his exact amount of income
and tax thereon. The income so computed and tax on it has to be filled in a form
(generally form No. 2D “SARAL”), and tax is deposited in bank, a copy of the income
tax form and the proof of the income tax deposited in the bank is prepared in duplicate.
A copy is submitted with income tax office and the assessee himself retains the other
copy.
At present for the Assessment Year 2009-10, Return of income is required to be filed by
the following persons:
Person If Gross total income Exceeds
1. Senior Citizen Rs. 2, 25,000 p.a.
i.e., person age 65 years or more
2. Woman Rs. 1, 80,000 p.a.
3. Ay other person not covered above
i.e., Man below 65 years of age Rs. 1, 50,000 p.a.
Last date of filing income tax return

The last date to submit the income tax return is 31st October of the Assessment Year for
assessee whose accounts are required to be audited under any law.
If Assessee does not file his return of income even after the due date then the
Assessing Officer (AO) can issue a notice to the assessee asking for filing his return of
income. This notice is issued under section 142(1) of the income tax Act.
If the Assessee does not comply with this notice also then the AO can complete the
assessment i.e., compute his income and the tax liability under section 144 called “Best
Judgment Assessment”.
TYPES OF INCOME TAX RETURN

In income tax Act there are various types of income tax returns such as Regular Return,
Loss Return, Belated Return, Revised Return, and Regular Return:
Regular return is the income tax return filed by assessee on or before the due date it is
covered u/s 139(1) of the income tax Act. Thus, if an assessee submits his return of
income before due date of filing of return of income, then the return of income is called
Regular return.
Loss Return:
A return filed by an assessee indicating the amount of loss incurred is called Loss return.
It is covered u/s 139(3) of the income Tax Act. Thus, if an assessee submits his return of
income in which assessee declares the loss incurred by him during the previous year,
and then the return of income is called Loss return. It important to note here, that if the
loss return is submitted before the before due date of filing of return of income, then
only the loss can be carried forward.
(NOTE: losses can be carried forward up to 8 years if the return of income is filed
before due date.)
If loss return is not filed on or before due date then the losses incurred cannot be carried
forward for set-off in coming year.
Belated Return:
Belated return is the return filed by the assessee after the due date; it is covered u/s
139(4) of the income tax Act. Thus, if an assessee submits his return of income after the
due date of filing of return of income, then the return of income is called Belated return.
Revised Return:
Revised return is a new return filed by income tax assesses which corrects the
information filed earlier in the regular return is called Revised return. It is covered u/s
139(5). A return can be revised any number of times by an assessee. A belated return
however, cannot be revised.
Time period for revising a return and for filing a belated return is the earlier of the
following two dates:
End of one year from the end of relevant Assessment year
Date of Completion of Assessment.
Permanent Account Number (PAN) Sec 139A

Income tax department issues Permanent Account Number called PAN to all
those persons who apply for it. The application is made in from no. 49A along with a
prescribed fee and documents. Computer allots the PAN randomly. Therefore, it is
unique for every person. PAN is a 10 digit alphanumeric code the first 5 digits are the
alphabets, next 4 digits are the numbers and the last one digit is also an alphabet, e.g.,
ADMPM7588C is an example of PAN. It is mandatory to mention the PAN on income
tax return. Wrong quoting of PAN is an offence, which is punishable with a fine of Rs.
10,000.
PAN is actually used by income tax department as our account number on which all the
details relating to persons income are stored. It helps income tax department in keeping
track of incomes of a person.
TYPES OF ASSESSMENT:
Assessment can be of the following types:
1. Self assessment.
2. Assessment on the basis of return.
3. Regular Assessment by Assessing Officer.
4. Re - Assignment.
1. SELF ASSESSMENT:
Before filing the return of income, an assessee has to do the following himself:
1.Compute his total income.
2.Compute the tax on the total income.
3.Compute interest on delay or shortfall in payment of any instalment of advance
tax (u/s 234C).
4.Compute interest on delay in filing the return. (u/s 234A).
5.Deposit the amount of tax and interest through a challan in a notified bank.
He will file the return of income along with a photocopy of challan.
Such assessment is known Self – Assessment because in this case the assessee
computes his total income, tax payable on it and deposits the tax and interest himself.
2. SUMMARY ASSESSMENT OR ASSESSMENT ON THE BASIS OF

RETURN:
In such an assessment neither the assessee is called in the department nor he is
required to produce his books of account or other documents. If in the opinion of
the Assessing Authority the return, prima facie, is correct and complete he will
assess the assessee summarily.
Where a return has been filed u/s 139 or in response to a notice u/s 142(1).
i) If any tax or interest is found due on the basis of such return, an intimation shall
be sent to the assessee specifying the sum so payable and such intimation shall
be deemed to be a notice of demand issued u/s 156;
ii) If any refund is due on the basis of such return, it shall be granted to the assessee
and an intimation to this effect shall be sent to the assessee; and
iii) In any other case, acknowledgement of the return shall be deemed to be
intimation u/s 143 (1).
Where the assessment is made u/s 143 (1) on the basis of return, an intimation
shall not be sent after the expiry of one year from the end of the financial year in
which the return is made.
3. REGULAR ASSESSMENT:
‘Regular Assessment’ means the assessment made on the basis of evidence u/s
143 (3) or best judgement assessment u/s 144.
i) Assessment on the basis of evidence or Scrutiny Assessment:
Notice u/s 143 (2). When the Assessing Officer considers it necessary to verify
the correctness or completeness of the return, to ensure that the income has not been
understated or the loss declared is not excessive, or the tax has not been underpaid, he
shall serve on the assessee a notice either to attend his officer or to produce on a date
specified any evidence in support of his return.
However, such a notice can be served on the assessee only within 12 months from
the end of the month in which the return is filed. [Sec 143(2)]
Inquiry before Assessment: For the purpose of making an assessment, the

Assessing Officer may serve on any person who has made a return or in whose case the
time allowed u/s 139(1) for furnishing the return has expired, a notice requiring him, or
a date to be specified therein:
• Where such person has not made a return before the end of the relevant
assessment year, to furnish a return of his income assessable under this Act, in
the prescribed form, or
• To produce such accounts or documents as the Assessing Officer may require, or
• To furnish in writing and verified in the prescribed manner information in such
form and on such points or matters as the Assessing Officer may require.
He can also call for a statement of all assets and liabilities of the assessee but for
doing so he has to take the previous approval of the Joint Commissioner.
Assessment after evidence: Where the notice is issued to the assessee [u/s 143 (2)
(ii)], he will pass on an order after hearing such evidence as the assessee may produce
in response notice u/s 143 (2) and such other evidence as the Assessing Officer may
require on specified points and after taking into account all relevant material which the
Assessing Officer has gathered, he shall pass an order in writing determining the total
income or loss of the assessee and the sun payable by him or refund of any amount due
to him on the basis of such assessment.
ii) Best Judgement Assessment:

In a Best Judgment Assessment, the Assessing Officer should really base the
assessment on his best assessment i.e., he must not act dishonestly or vindicatively or
capriciously. He must make a fair estimate of the proper figure of assessment and for
this purpose, he must be able to take into consideration local knowledge and repute in
regard to the assessee`s circumstances and his own knowledge of previous returns and
assessment of the assessee and all other matters which he thinks will assist him in
arriving at a fair and proper estimate. Although there must necessarily be guess- work in
the matter but it must be honest guess-work. If an appeal is filed against such an
assessment the Assessment Officer shall have to disclose the basis of judgment before
the appellate authority. The aforesaid assessment is also called an ‘ex-parte assessment.’
Best Judgement Assessment can be compulsory or discretionary.
Compulsory Best Judgement Assessment: The Assessing Officer shall make the
assessment to the best of his judgment compulsorily in any of the following three
cases:
i) Where the assessee has failed to make the voluntary return or fails to file the return
after receiving a notice from Assessing Officer, or
ii) Where there has been a failure to comply with all the terms of a notice [under
section 142 (1) requiring the assessee to produce accounts or other documents or
information specified therein or fails to get the accounts audited [under section 142
(2A)]; or
iii) Where the return has been made, but the Assessing Officer considers it to be
incorrect or incomplete and serves a notice [under section 143 (2) upon the assessee
requiring his appearance or the production by him of evidence in support of his return,
but the assessee does not comply with the terms of notice.
Consequences of Best Judgment Assessment: The following are the consequences of a

Best Judgement Assessment:
i) The assessee becomes liable to penalties (under section 271).
ii) The assessee becomes liable to prosecution (u/s 276 CC and 276D).
iii) The assessee is prevented is from bringing on record any new facts before the
appellate authorities if an appeal is preferred against a Best Judgement
Assessment regarding the quantum of assessment.
iv) A refund may not be granted under this section.
Remedy against Best Judgement Assessment:

Filing an appeal: If in the opinion of the assessee, excessive tax has been imposed on
him under Best Judgement Assessment, the assessee is entitled to:
i) Appeal to the Commissioner (Appeals) against such assessment;
ii) Appeal to the Appellate Tribunal against the order of the Commissioner
(Appeals);
iv) He may go to the High Court or any question of law involved in the case;
v) He may apply to the Commisioner for revision.
Discretionary Best Judgment Assessment: Where the Assessing Officer is not satisfied
about the correctness of the accounts of the assessee or where no method of accounting
has been regularly employed by the assessee, the Assessing Officer may, in his
discretion make the Best Judgment Assessment under section 144. The Assessee can file
an appeal against such an assessment as under compulsory Best Judgement Assessment.
4. RE-ASSESSMENT (INCOME ESCAPING ASSESSMENT):
Income Escaping Assessment: If the Assessing Officer has reason to believe that any
income chargeable to tax has escaped assessment for any assessment year, he may
assess or re-assess such income.
The following shall be deemed to be cases of income escaping assessment:
i) Where no return of income has been furnished by an assessee, although his total
income is above the non- taxable limit;
ii) Where a return of income has been furnished but no assessment has been made
and the assessee is found to have understated his income or claimed excessive
loss, deduction etc., in the return; and
iii) Where an assessment has been made, but income chargeable to tax has been
under-assessed or assessed at too low a rate or any excessive loss or relief or
depreciation allowance or any other allowance under the Act has been allowed.
Once an assessment is re- opened, any other income which has escaped assessment
and which comes to the notice of the Assessing Officer subsequently in the course of
the proceeding under this section, can also be included in the assessment.
Issue of notice where income has escaped assessment:

Before making the assessment, re- assessment or recomputation u/s 147, the
Assessing Officer shall serve on the assessee a notice requiring him to furnish the
return of income within such period as may be specified as may be specified in the
notice.
However, before issuing any notice under this section the Assessing Officer shall
record his reasons for doing so.
RECTIFICATION OF MISTAKE
Who can rectify a mistake The rectification can be done by:
i) The authority concerned of its own; or
ii) On an application being made by the assessee in this connection; or
iii) Where the authority concerned is the Commissioner (Appeals), the mistake is
brought to his notice by the Assessing Officer.
The order of rectification shall be passed in writing by the authority concerned. Thus,
the only authority which can rectify an order is the authority which passed the order and
not any higher and lower authority. However, the person holding that office may change
and the rectification may be made by his successor.
Which mistake can be rectified Any mistake apparent from record in the order passed
by the authority can be rectified.
Limitations:
i) Normally, where an application for rectification is made by the assessee, the authority
shall pass an order within a period of six months from the end of the month in which the
application is received by it:
a) Making the amendment; or
b) Refusing to allow the claim.
ii) Within four years from the end of the financial year in which the order
sought to be rectified was passed.
Notice for Rectification:

If the rectification enhances the liability of the assessee or reduces the refund, the
authority concerned shall give notice to the assessee of its intention so to do and shall
give him a reasonable opportunity of being heard before such an order is passed.
Where any such rectification has the effect of reducing the assessment the Assessing
Officer shall make any refund which may be due to such assessee.
QUESTIONS :
Section---A
1. What is self Assessment?

2. What is Re-Assessment?
3. What is Best Judgment Assessment?
4. What is Regular Assessment?
5. What is Remedy against Best Judgment Assessment?
6. What is income escaping assessment?
7. What are Rectification of Mistakes?
SECTION---B
1. What is meant by Best Judgment Assessment? Under what circumstances can

recourse be had to this method of Assessment?
2. What is Rectification of mistake? Explain its provisions?
SECTION—C
1. Explain briefly the different types of assessment?

2. Write short notes on:
i. Best Judgment Assessment

ii. Regular Assessment
iii. Self Assessment
iv. Rectification of Mistakes
UNIT – VI
INCOME TAX AUTHORITIES:
Income Tax Authorities: A brief discussion on - Income Tax Officer

and Powers and Functions - Central Board of Direct Taxes, Functions -
Commissioner of Income Tax, Functions.
The Income Tax Department functions under supervision and control of the Central
Board of Direct Taxes (CBDT). It has around 60,000 personnel located in more than
500 cities and towns across the country. The field offices are divided into regions, and
each region is headed by a Chief Commissioner of Income Tax. Every region is
assigned annual performance targets, such as revenue collections, and is provided with
necessary expenditure budget to meet with its operating expenses. The Income Tax Act
1961 lays down the frame work or the basis of charge and the computation of total
income of a person. It also stipulates the manner in which it is to be brought to tax,
defining in detail the exemptions, deductions, rebates and beliefs. The Act defines
Income Tax Authorities, their jurisdiction and powers. It also lays down the manner of
enforcement of the Act by such authorities through an integrated process of
assessments, collection and recovery, appeals and revisions, penalties and prosecutions.
The Act is fast changing and dynamic in nature and undergoes amendments annually
through the Finance Act. In exercise of the powers conferred by section 295 of the
Income Tax Act 1961 and Rule 15 of Part A, Rule 11 of Part B and Rule 9 of Part C of
the Fourth Schedule to the Act, the CBDT has notified Income Tax Rules 1962. These
Rules lay down limits, conditions, definitions, explanations, and forms of applications
and procedures for the uniform application of the Income Tax Act.
The Income tax authorities, for administering the IT Act, may be classified into three
levels:
·Top level comprising Chief Commissioners and Commissioners,
·Middle level comprising Additional, Joint, Deputy and Assistant Commissioners of

Income Tax;
·Lower level comprising Income Tax Officers and Tax Recovery Officers (‘TRO’).
The CBDT has the power to issue circulars, notifications, instructions etc. for
administration of the IT Act (which are binding on the tax authorities). Further, certain
powers like issuing orders, granting waiver of applicability of certain provisions of the
IT Act to the taxpayer, etc. have been vested with Chief Commissioners and
Commissioners.
There are Commissioner (Appeals) and the Income Tax Appellate Tribunal (‘ITAT’) for
resolving the disputes between the tax payers and the Income Tax Authorities.
Further, a National Tax Tribunal (‘NTT’) has also been set up (though non operational
till date) which will adjudicate the cases pending in and replace the High Courts as
forum for resolving the tax issues.
There shall be the following classes of income-tax authorities for the purposes of the
Act, namely:-
(a) The Central Board of Direct Taxes constituted under the Central Boards of Revenue
Act, 1963 (54 of 1963),
(b) Directors-General of Income-tax or Chief Commissioners of Income-tax,
(c) Directors of Income-tax or Commissioners of Income-tax or Commissioners of
Income-tax (Appeals),
(cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or
Additional Commissioners of Income-tax (Appeals),
(cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax,
(d) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy
Commissioners of Income-tax (Appeals),
(e) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
(f) Income-tax Officers,
(g) Tax Recovery Officers,
(h) Inspectors of Income-tax.
Appointment of income-tax authorities:
(1) The Central Government may appoint such persons as it thinks fit to be income-tax
authorities.
(2) Without prejudice to the provisions of sub-section (1), and subject to the rules and
orders of the Central Government regulating the conditions of service of persons in
public services and posts, the Central Government may authorize the Board, or a
Director-General, a Chief Commissioner or a Director or a Commissioner to appoint
income-tax authorities below the rank of an Assistant Commissioner [or Deputy

Commissioner].
(3) Subject to the rules and orders of the Central Government regulating the conditions
of service of persons in public services and posts, an income- tax authority authorised in
this behalf by the Board may appoint such executive or ministerial staff as may be
necessary to assist it in the execution of its functions.
Powers of the authorities:
1. Income-tax authorities shall exercise all or any of the powers and perform all or any
of the functions conferred on, or, as the case may be, assigned to such authorities by or
under this Act in accordance with such directions as the Board may issue for the
exercise of the powers and performance of the functions by all or any of those
authorities.
2. The directions of the Board under sub-section (1) may authorise any other income-
tax authority to issue orders in writing for the exercise of the powers and performance of
the functions by all or any of the other income-tax authorities who are subordinate to it.
3. In issuing the directions or orders referred to in sub-sections (1) and (2), the Board or
other income-tax authority authorised by it may have regard to any one or more of the
following criteria, namely:
(a) Territorial area;
(b) Persons or classes of persons;
(c) Incomes or classes of income; and
(d) Cases or classes of cases
4. The Director General or Chief Commissioner or Commissioner may, after giving the
assessee a reasonable opportunity of being heard in the matter, wherever it is possible to
do so, and after recording his reasons for doing so, transfer any case from one or more
Assessing Officers subordinate to him (whether with or without concurrent jurisdiction)
to any other Assessing Officer or Assessing Officers (whether with or without
concurrent jurisdiction) also subordinate to him.
5. The [Assessing] Officer, [Deputy Commissioner (Appeals)], [Joint Commissioner[,

Commissioner (Appeals)] [, Chief Commissioner or Commissioner and the Dispute
Resolution Panel referred to in clause (a) of sub-section (15) of section 144C] shall, for
the purposes of this Act, have the same powers as are vested in a court under the Code
of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following
matters, namely :
(a) Discovery and inspection;

(b) Enforcing the attendance of any person, including any officer of a banking company
and examining him on oath;
(c) Compelling the production of books of account and other documents; and
(d) Issuing commissions.
CBDT
1. Organization and Functions

The Central Board of Direct Taxes in a statutory authority functioning under the Central
Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also
function as a Division of the Ministry dealing with matters relating to levy and
collection of direct taxes and formulation of policy concerning administrative reforms
and changes for the effective functioning of Income-tax Department.
2. Historical Background of C.B.D.T.
The Central Board of Revenue as the Department apex body charged with the
administration of taxes came into existence as a result of the Central Board of Revenue
Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However,
when the administration of taxes become too unwieldy for one Board to handle, the
Board was split up into two, namely the Central Board of Direct Taxes and Central
Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought
about by constitution of the two Boards u/s 3 of the Central Boards of Revenue Act,
1963.
3. Composition and Functions of C.B.D.T.
The Central Board of Direct Taxes consists of a Chairman and following Members: -
1. Chairman
2. Member (income-tax)
3. Member (investigation)
4. Member (audit & judicial)
5. Member (legislation)
6. Member (personnel)
7. Member (revenue & audit)
The Chairman and Members of Central Board of Direct Taxes are assisted by Joint
Secretaries, Directors, Deputy Secretaries, Under Secretaries and ministerial staff to
carry out their day-to-day functions. The CBDT monitors the functioning of field
offices/field formations which comprises of following:
1. Chief Commissioners/Commissioners of Income-tax

2. Director General (Inv.)/Directors of Income-tax (Inv.)
3. Director General (Exemp.)/Director of Income-tax (Exemp.)
4. Director General (Foreign Tax)/Director of Income-tax (Foreign Tax)
5. Commissioners of Income-tax (Appeals)
6. Commissioners of Income-tax (Judicial)
7. Commissioner of Income Tax (Computer Operations)
8. Commissioner of Income Tax (Audit).
9. Commissioner of Income Tax (Judicial).
10. Commissioner of Income Tax (CIB).
11. Commissioner of Income Tax (Departmental Representative), Income Tax
Settlement Commission.
12. Commissioner of Income Tax (Departmental Representative), Income Tax
Appellate Tribunal.
To monitor the day-today functioning of field formations, the CBDT is assisted by the
following attached offices /Directorates:
1. Directorate of Income-tax (IT)
This Directorate has two wings i.e.
(A) Inspection- Board exercises efficient control and inspection of the work of the
Income-tax officers throughout the country.
(B) Examination - Centralised Conduct of departmental examinations for departmental
promotions
2. Directorate of Inspection (Audit)
Ensures expeditious disposal and settlement of receipt audit objections and also review
the work done in the different Commissioner Charges.
3. Directorate of Inspection (Research, Statistics and Public Relation)
The main functions of this Directorate are research study on tax matters, printing of All
India Revenue Statistics, preparation of taxpayers Information series, Departmental
publications, publicity and public relations.
4. Directorate of Organisation & Management Services
This Directorate has been assigned the job of Administrative Planning, Organisational
Development, Management Information Systems and Work Measurement.
5. Directorate of Inspection (Vigilance)
The main functions of this Directorate are conducting departmental enquiries, drafting
of charge sheets, presenting the cases on behalf of the Department, preparing the
enquiry reports against charged officials extra and passing of final orders.
6. Directorate of Income-tax (Systems)

This Directorate performs the functions of Management Information System,
Computerization in the Department and Designing of uniform system of
computerisation for Income Tax Department.
7. Directorate of Income-tax (Infrastructure)
This Directorate will assist CBDT in attending to infrastructure matters.
8. Director General (Vigilance)/Director of Income Tax (Vigilance)
The main function of this Directorate are conducting departmental enquiries, drafting of
charge sheets, presenting the cases on behalf of the Department, preparing the enquiry
reports against charges officials extra and passing of final orders.
9. Director General of Income-tax (Training)
The National Academy of Direct Taxes, Nagpur is the premier training institution in the
country for the officers and the staff of the Income-tax Department. Its primary task is
to impart inductions training to the directly recruited Indian Revenue Service Officers
The Academy imparts training to officers and staff of the Income-tax Department in
coordination with its 5 Regional Training Institutes located at Bangalore, Calcutta,
Hazari Bagh, Lucknow and Mumbai.
QUESTIONS:
SECTION---A
1. State any four Income tax authorities.

2. State any two powers of CBDT.]
3. Who is Assessing officer?
4. Expand: CBDT, ITO, AO, TRO
5. State functions of tax recovery officer?
SECTION---B
1. Describe the organisation of Income tax department?
2. Discuss the powers of Income Tax Authorities.
SECTION---C
1. What are the various authorities envisaged in the Indian Income Tax law and
what are their functions?
2. Discuss the powers of Central Board of Direct taxes or Commissioner of Income
tax.
3. Write short notes on: Director General, Chief Commissioner, Commissioner,
Joint Commissioner, Deputy Commissioner, Assessing Officer, and Commissioner
(appeals)
UNIT -VII
CENTRAL EXCISE
Introduction; Definitions: Central Excise Officer, Excisable Goods,

Manufacture, and Wholesale Dealer, and Assessee (Rule-2); Duty to be
levied; CENVAT; Valuation of excisable goods for levying duty and with
reference to retail price; remission of duty on deficient goods; registration of
persons; restriction on possession of excisable goods. Rules regarding
removal of goods, Assessment and payment of duty, filing of returns.
(CENVAT Credit Rules excluded); Powers of Central Excise Officers
INTRODUCTION:
Central excise is duty charged on goods manufactured in India. The levy and collection is
governed by Central Excise Act, 1944 & Central Excise Rules, 2002, Central Excise Tariff
Act, 1985. Central excise levied under entry 84 of union list to the constitution. Excise duty is
levied on all goods and tobacco manufactured or produced in India except
- alcoholic liquor for human consumption

- opium,
- Indian hemp,
- narcotics and narcotic drugs, but including medicinal and toilet preparations containing
alcohol
Difference between Central Excise & Income Tax
Income Tax Central Excise

- Levied on person and corporate - Levied on commodities
- Related on income - Related to commodity
- Tax burden cannot be shifted - Tax burden can be shifted
- Administrative cost of collection is more- Administrative cost of collection is
less
Definitions – Section 2 & Rule 2
Sec 2(a) ‘Adjudicating Authority’ means any authority competent to pass any order or
decision under this act, but does not include Central Board of Excise & Customs (CBEC),
Commissioner of Central Excise (Appeals) or the Appellate Tribunal.
Sec 2(b) – Central Excise Officer : means Chief Commissioner, Commissioner, Joint
Commissioner, Deputy Commissioner or Assistant Commissioner of Central Excise or any
other officer of the Central Excise department or any person (including an officer of the State
Government) invested by the CBEC with any of the powers of a Central Excise officer under
this Act.
Sec 2(d) – Excisable Goods are those specified in the first and second schedule of the Central
Excise Tariff Act, 1985 as being subject to levy of Central Excise duty
Sec 2(e) – Factory means any premises including the precincts thereof, wherein or in any part
of which, excisable goods are manufactured or wherein any manufacturing process connected
with production of these goods is carried on
Sec 2(f) – Manufacture includes any process
(i) incidental or ancillary to the completion of a manufactured product and

(ii) which is specified in relation to any goods in the section or chapter notes of first
schedule to Central Excise Tariff Act, 1985 as ‘amounting to manufacture’ or
(iii) which in relation to the goods specified in the Third Schedule, of the Central Excise
Act, 1944 involves packing or repacking of such goods in a unit container or labeling or
rebelling of containers including the declaration or alteration of retail sale price on it or
adoption of any other treatment on the goods to render the product marketable to the
consumer,
and the word ‘manufacturer’ shall be constructed accordingly and shall include not only
a person who employs hired labour in the production or manufacture of excisable goods
but also any person who engages in their production or manufacture on his own
account.
Rule 2(c) – Assessee means any person who is liable for payment of duty assessed or a
producer or manufacturer of excisable goods or a registered person of a private warehouse in
which excisable goods are stored and includes an authorized agent of such person.
LEVY OF CENTRAL EXCISE
Conditions:
a) There must be goods

b) Goods must be movable and marketable
c) They should be excisable and
d) They should have been produced and manufacture in India.
Charging Section
Sec 3 –
(1) There shall be levied and collected in such manner as may be prescribed
(a) a duty of central Excise called the Cenvat on all excisable goods, (excluding goods
produced or manufactured in Special Economic Zones) which are produced or manufactured
in India as and at the rates set forth in the first schedule to the Central Excise Tariff Act, 1985
and
(b) a special duty of excise in addition to the duty of excise specified in clause (a) on
excisable goods specified in second schedule to C.E.T. Act, 1985 which are produced or
manufactured in India, as and at the rates set forth in the said second schedule thereto.
However, the duties of excise which shall be levied and collected on any excisable
goods produced or manufactured in Free Trade Zone and brought to any other place in
India or by a 100% EOU and brought to any other place in India shall be an amount
equal to the aggregate of the duties of customs leviable under the Customs Act or any
other law in force as if they are imported into India. Where the said duties of Customs
are chargeable on advalorem basis, the value thereof shall be determined in accordance
with the provisions of the Customs Act, 1962 and the Customs Tarrif Act, 1975
- Explanation 1 : If such customs duties for like goods are attracted at different rates, then
such duty is deemed to be leviable at the highest of those rages
- Explanation 2 : FTZ means a Zone which the Central Government may by notification
in the official gazette specify in this behalf. 100% EOU means an undertaking approved so by
the CBEC and appointed as such undertaking by the Government. SEZ means a zone which
the Central Government may, by notification in the official gazette, specify in this behalf
(1A) Goods produced/manufactured in a factory in India by or on behalf of Government are
also subject to the provisions of section 3(1)
(2) The central Government may by notification in the Official Gazette, fix tariff values of
any articles chargeable to duty advalorem for the purpose of levying Central Excise duty either
specifically or under general headings in the I & II schedule of the Central Excise Tariff Act,
1985 and may also alter them for the time being in force
(3) Different Tariff values may be fixed, taking into account the trade practice
(a) for different classes or description of same excisable goods; or
(b) for excisable goods of the same class or description
(i) produced/manufactured by different classes of produces or manufacturers or
(ii) sold to different classes of buyers
provided in fixing Tariff values in respect of excisable goods falling under sub clause (i) or
sub clause (ii), regard shall be had to the sale prices charged by the different classes of
producers/manufacturers or as the case may be, the normal practice of the wholesale trade in
such goods.
Central Excise Tariff Act, 1985
Excise duty is levied only on the goods specified in Central Excise Tariff Act, 1985.
The Act consists of following schedules:
- Schedule I : Cenvat Duty

- Schedule II : Special Excise duty
- Schedule III : Goods liable for duty based on MRP
The goods are classified on the basis of Harmonized System Nomenclature, in schedule I & II
on which duty is payable at the rates specified in respective schedules. SED is payable only
on the goods specified in second schedule and at the rates specified therein. The tariff also
contains notes and explanations under each section/chapter for ascertaining the classification
of goods and defining certain processes as manufacture.
The following forms of levy are followed in Central Excise Tariff:
a) Specific Rate: Duty is levied based on unit of measurement i.e., based on

quantity. Eg. Tea, Molasses, Cement other than white cement etc.,
b) Advalorem: Duty is levied as a percentage on the value of goods called assessable
value determined u/s 4, Sec 4A or Tariff value fixed by Government of C.E. Act. Eg.
Cosmetics, Motor vehicles, chemicals, machineries, computers, fabrics, etc.
c) Slab rate: In either case of specific or advalorem duties may be fixed at different
rates depending on slab. Eg. Cigarettes
d) Compound levy: Duty is levied at a fixed amount based on the equipment used to
produce the goods. The manufacturer has the option to pay compounded duty in lieu of
duty payable based on specific or advalorem rate. Eg. Marble slab, Stainless steel
patties/pattas.
Types of Duties
CENVAT Duty: This is the basic duty levied on excisable goods of Central Excise Act. It is
levied at the rates prescribed in first schedule of C.E. Tariff Act. If any exemption notification
is issued under the Act, the rate as per the notification shall be the effective rate. The rate of
duty is 16% for all goods specified in First Schedule.
Special Excise Duty: It is levied on the goods specified in second schedule of Central Excise
Tariff Act. The rate of duty is 8% and 16%. Eg Tyres & tubes of cars and bus, Air
conditioners, Motor spirit, Pan masala, aerated soft drinks, motor cars etc.,
Additional Duties of Excise (AED): It is levied under several acts on certain excisable goods
for specified purpose and the net receipt is used for the said purpose.
Other types of duties:
a) National calamity duty

b) ADE under Sugar Export promotion Act 1953
c) Additional duty of excise and customs on HSD Oil and motor spirit
d) ADE (Textile and Textile Articles) Act 1978
Education Cess:
Education Cess is levied in accordance with chapter VI of Finance Act 2004 as to fulfill the
commitment of the Government to provide and finance universalized quality basic education.
It is levied @ 2% on the aggregate of all duties of excise including the Special Excise duty.
VALUATION
Excise duty is payable on value of goods manufactured and cleared. Generally the duty is
payable on the transaction value between the buyer and manufacturer, except when the
manufacturer and buyer related and price is not the sole consideration. The value of the goods
on which duty is payable is determined under Section 4
4(1) Where under this act, the duty of excise is chargeable on any excisable goods with
reference to their value, then, on each removal of the goods, such value shall –
a) in case where the goods are sold by the assessee, for delivery at the time and
place of removal, the assessee and the buyer of the goods are not related and the price is
sole consideration for the sale, be the transaction value;
b) in any other case, including the case where the goods are not sold, be the value
determined in such manner as may be prescribed
Explanation : It is declared that the price-cum-duty of the excisable goods sold by the assessee
shall be the price actually paid to him for the goods sold. In case, any additional money
consideration flows directly or indirectly from the buyer to the assessee in connection with the
sale of such goods, such price-cum-duty (excluding sales tax and other taxes) paid shall be
deemed to include the duty payable on such goods.
4(2) The provision of this section shall not apply in respect of any excisable goods for which a
tariff value has been fixed under section 3(2)
4(3) Definitions : The following are defined for the purpose of section 4 relevant to valuation:
a) Assessee – means the person who is liable to pay the duty of excise under this Act and
includes his agent
b) Persons shall be deemed to be related if
(i) they are inter collected undertakings
(ii) they are relatives
(iii) amongst them the buyer is a relative and distributor of the assessee, or sub distributor
of such distributor
(iv) they are so associated that they have interest, directly or indirectly in the business of
each other
c) Place of removal : means
(i) a factory or any other place or premises of production or manufacture of the

excisable goods from where they are removed
(ii) a warehouse or any other place or premises wherein the excisable goods have been
permitted to be deposited without payment of duty, from where such goods are removed on
payment of duty
(iii) a depot, premises of a consignment agent or any other place or premises from where
excisable goods are to be sold after their clearance from the factory
d) time of removal : in respect of excisable goods removed from the place of removal shall
be the time at which such goods are cleared from factory
e) transaction value – 4(3)(d) : means the price actually paid or payable for the goods
when sold. In addition to the amount charged the following shall be included
(i) any amount that the buyer is liable to pay to or on behalf of the assessee by reason of
or in connection with the sale whether payable at the time of sale or at the any other time
(ii) any amount charged for or to make provision for advertising, publicity, marketing,
selling, organization expenses, servicing, storage, outward handling, warranty, commission or
any other matter.
The following shall not be included in transaction value
(i) Excise duty

(ii)Sales tax
(iii) Other taxes if any actually paid or payable of such goods
If any of the conditions specified for assessing the duty based on transaction value is not
fulfilled, the value shall be ascertained on the basis of ‘Central Excise Valuation
(Determination of Price of Excisable Goods), Rules 2000
1) Delivery at place other than place of removal Rule 5 : If the goods are delivered at a
place other the place of removal(factory), the transaction value shall be reduced by the cost of
transportation from the place of removal to the place of delivery.
Ex. B ltd clears goods from a factory at Bangalore to a customer at Chennai to be
delivered at the customer’s place in Chennai free of cost. The transaction value shall be
reduced by the transportation cost between Bangalore to Chennai to arrive at the
assessable value.
2) Additional consideration received, Rule 6: If the price charged is not the sole
consideration, then the money value of additional consideration flowing directly or indirectly
from the buyer shall be included to transaction value for levy of duty. The value of following
goods and services whether supplied free of cost or at reduced price for use in connection with
the production and sale of such goods shall be included
(i) value of materials and components, parts and similar items relating to such goods
(ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and
similar items
(iii) value of materials consumed, including packing materials and
(iv) value of engineering, development, art work, design work, and plans and sketches
undertake elsewhere than in the factory of production and necessary for production of such
goods.
Ex. N manufactures and sells cycles to M. M supplies tyres and tubes required for the
cycles free of cost to N. The cost of such tyres and tubes shall be included in
transaction value at the time of clearance
3) Goods removed to depot etc., Rule 7: The value of the goods sold from the depot,
consignment agent’s premises or any other place shall be the transaction value of the goods
sold from such other place at or about the same time. The buyer and the assessee should not
be related and the price shall be the sole consideration. If the goods are not sold at or about the
same time the normal transaction value nearest to the time of removal of goods shall be
adopted. The normal transaction value is based on the greatest aggregate quantity of goods
sold to unrelated buyers.
X Ltd clears goods from its factory in Bangalore to its depot in cochin to be sold from
there. The transaction value prevailing at the same time in cochin shall be adopted as
the assessable value at factory in Bangalore.
4) Captive consumption, Rule 8: The value of excisable goods consumed by assessee for
manufacture of other article shall be 110% of cost of such goods manufactured. CAS-4 (Cost
Accounting standard) issued by ICWAI shall be applied for calculating the cost of goods
manufactured. As per CAS-4 material consumed, direct wages, salaries, direct expenses,
works overheads, research and development cost, packing cost, administrative cost relating to
production would be taken into account for arriving at cost of production. The material cost
shall be net of discounts, sales tax and cenvat credit if any.
Ex.
5) Sale only through related persons not being ICU’s, Rule 9: Where the assessee so
arranges that goods are not sold, except to or through a person who is related other than ICU,
then the value shall be of the goods shall be the normal transaction value at which these goods
are sold by the related person to unrelated buyers
6) Sale through interconnected undertakings, Rule 10: If the ICU’s are so connected that
they are relatives, or distributor, sub distributor or have mutual interest, the value shall be
ascertained as per Rule 9. In other case the value shall be computed as if the parties are not
related
7) Residuary Rule, Rule 11: If the value of excisable goods cannot be ascertained as per
the specified rules, the value shall be determined using reasonable means consistent with the
principles and general provisions of Central Excise Act.
VALUATION BASED ON MRP – SECTION 4A:
The Central Government may specify, by issue of a notification, any goods for assessment
under this section in relation to which the manufacturers are required to declare the retail
sale price on the package of such goods.
The assessable value in case of such notified goods shall be the Retail sale price less such
percentage/amount of abatement as may be notified
Where more than one retail price is declared on the package, the maximum of such retail
sale prices shall be deemed to be the retail price for levy of duty
Where different retail sale prices are declared on different packages for sale in different
areas, each such retail price shall be the assessable value of excisable goods intended to be
sold in the area to which retail sale price relates
If the RSP declared on the package is altered to increase, then such altered RSP shall be
deemed to be the retail sale price
Government has notified 99 categories for the purpose of section 4A with abatements, the
list of which include
a) Clocks with abatement of 45%

b) Glazed tiles with abatement of 45%
c) Chocolates with abatement of 35%
d) Aerated waters with abatement of 42.5%
e) Icecream with abatement of 45%
f) Refrigerators with abatement of 40%
g) Air conditioners with abatement of 30%
Exemption from Excise duty, Sec 5A
Section 5A empowers the central government to give exemption from duty of excise, in public
interest, by issue of notification from the whole or part of duty, either absolutely or with
conditions. Any exemption unless specifically provide shall not apply to goods manufactured
in FTZ, 100% EOU and brought in to India.
MISCELLANEOUS PROVISIONS
REGISTRATION
The following persons are required to be registered under Central Excise Act
1. Manufacturer/Producer of excisable goods
2. Persons who intend to issue cenvatable invoices as First stage dealer & Second
stage dealer
3. Persons holding warehouses for storage of non duty paid goods
4. Exporters who intend to avail cenvat credit
5. persons who obtain excisable goods for availing end use exemption
Registration is separately required for every premises like depot, godown etc., unless
when the premises of part of same factory but are segregated by public road, canal or
railway line.
Payment of Duty:
- The duty on goods removed from a factory or warehouse during a month shall be paid
th
by 5 of following month.
- If duty is paid electronically, it shall be paid by 6th of following month
- In respect of assessee availing exemption based on value (SSI), the duty shall be paid by
15 of following and if paid electronically by 16th of following month
th
- Duty for the month of march shall be paid with 31st March in all cases
- When the duty is deposited by cheque, the date of presentation of cheque shall be
deemed to be the date of payment
- Failure to payment of duty by due date, will attract interest @13% P.A. Failure to pay
duty beyond 30 days required assessee to clear goods without availing cenvat credit until the
duty is paid.
ASSESSMENT, RETURNS ETC.,
Self Assessment:
Assessment under central excise is a self assessment based on invoice. The assessee
should assess the duty payable on excisable goods except in case of cigarettes.
Provisional assessment:
- where the assessee is unable to determine the value of excisable goods or the rate of
duty applicable, he may request the Assistant commissioner or Deputy commissioner for
provisional assessment stating the reasons and period of coverage
- The authority by order may allow payment of duty on provisional basis upon which the
assessee is required to execute a bond
- The final assessment shall be made after receipt of information, but a period not
exceeding 6 months for the date of order of provisional assessment.
Demand Assessment – Scrutiny assessment

The Central excise officer can issue notice within one year from relevant date requiring
assessee to pay duty, when such excise duty
- has not been levied or
- has not been paid or
- has been short levied or
- is short paid or
- is erroneously refunded,
The notice can be issued within 5 years if the non payment, short payment, short levy etc is
on account of fraud, collusion, willful misstatement, suppression of facts, or contravention
of any provisions.
Relevant date means
- date of filing return if return is filed
- if return not filed the last date on which the return is to be filed
- where the duty is provisionally assessed, date of adjustment after final assessment
- where the duty is refunded, the date of refund
- in any other case, the date on which duty is to be paid.
The officer considering the representation if any, made by the person on whom notice is
served, shall determine the amount of duty which shall not be in excess of amount
specified in the notice.
Returns:
Assessee shall file monthly return in form ER-1 within 10 days from the end of month to
which it relates.
In case assessee avails exemption based on value (SSI), a quarterly return has to be filed
within 20 days of end of the quarter.
The return provides details such as excisable goods manufactured for the month or quarter,
quantity removed, with or without duty, value, rate of duty, payment etc.,
The return also contains a self assessment memorandum, which provides for a declaration
with reference to correctness of particulars stated, determination of duty and genuineness
of payment of duty
The assessee is also required to furnish annual return by 30th of November furnishing the
prescribed particulars
SSI
Manufacturers whose aggregate value of clearances in the preceding financial year had not
exceeded 4 crores, are entitled to concession to a SSI.
SSI unit is a unit where the aggregate value of clearances of all excisable goods for home
consumption
a) by a manufacturer from one or more factories or
b) from a factory by one or more manufacturers
does not exceed 4 crores in the preceding financial year
Quantum of exemption:
SSI unit is entitled to exemption of duty for clearances or captive consumption up to an
aggregate value not exceeding Rs.1 Crores. (increased to 1.5 crores from 1.4.2007).
Clearances above 1 crores are liable for normal rate of duty.
The manufacturer shall not avail the cenvat credit on inputs & Capital goods, used in
manufacture of goods for clearance up to 1 crores.
The manufacturer has option not to avail exemption and pay duty at normal rates.
POWERS OF CENTRAL EXCISE OFFICERS
1. Visit and Inspection by Central Excise Officers
As per rule 22(1) of Central Excise Rules, an officer empowered by Commissioner shall
have access to any premises registered under CE Rules for purpose of carrying out any
scrutiny, verification and checks as may be necessary to safeguard the interest of
revenue. All officers in the rank of Inspector and above are authorised for this purpose.
All officers of rank of an Inspector and above have been authorised under rule 22(1)
within their jurisdiction.
They should be in uniform or carry their identity card. The officers should carry their
identity cards and should produce them on demand. The officers can check the records
and verify the stock under these rules. Under rule 22(2) of CE Rules; the assessee is
required to produce account books and returns (whether maintained under Central
Excise rules or otherwise) for scrutiny of excise officers or audit purposes. The
inspection can be done of registered premises only.
Visit Book of Excise Officers - Each factory is required to maintain a visit book in
prescribed form. Inspector and Superintendent visiting the factory are required to fill in
the book. The visit book should contain name and address of the factory, excisable
items manufactured, Central Excise Commissionerate, division and range at the top. -
[CBE&C Circular No 3/90-CX dated 24-1-1990].
Restricted visits to SSI Units - Excise Officers and departmental audit parties can visit
small scale industries (SSI units) for specific purposes only and on specific written
permission of Assistant / Deputy Commissioner. Assessee can ask for the written
permission. The visiting officer should make entry in visit book. However, these
restrictions are not applicable to visits of audit parties of Comptroller and Auditor
General of India (CAG). This audit, called CERA audit (Central Revenue Audit), is
under Constitutional authority and hence obviously, their powers cannot be curtailed by
any executive instructions.
2. Power to Stop conveyance, search and seize
Excise officers are empowered under Rule 23 of Central Excise Rules [earlier rules 199]
to search any conveyance carrying excisable goods in respect of which he has reason to
believe that the goods are being carried with the intention of evading duty.
POWER TO DETAIN OR SEIZE THE GOODS – If Central Excise Officer has reason
to believe that any goods, which are liable to excise duty but no duty is paid thereon or
the said goods are removed with intention of evading the duty payable theron, the
Central Excise Officer may detain or seize the goods - Rule 24 of Central Excise Rules
[earlier rule 200].
Vehicle carrying the goods can also be seized under section 110 of Customs Act as
made applicable to Excise.
For a registered premises or for stopping and searching any conveyance in transit, no
search warrant is required. - Chapter 17 Part I Para 2.3 of CBE&C’s CE Manual, 2001.
[Visit to registered premises is permissible, but search without warrant ?]
3. Power to Summons
Section 14 of CEA authorises Excise Officers to issue summons. The term 'summons'
means asking a person to appear before the named authority and give evidence and
produce documents or other things. Person summoned is bound to attend and state the
truth upon any subject respecting which they are examined. [section 14(2) of CEA -
similar section 108(3) of Customs Act]. The enquiry are ‘judicial proceedings’.
These power of 'summons' are different than powers of Courts to issue summons under
CPC or CrPC. The power of 'summons' to investigating officer only means ‘demand
presence of’ or ‘call upon a person to appear’. The investigation officer cannot
administer oath to person being interrogated.
As per section 174 of Indian Penal Code, non-attendance in obedience of an order from
public servant is an offense punishable with imprisonment upto 6 months and fine upto
Rs 1,000/-
Summons for documents should specify the documents called - Summons for
producing documents should specify which documents are required. Authority issuing
summons should apply his mind with regard to necessity to obtain and examine
documents mentioned in the order. - Barium Chemicals v. A J Rana - AIR 1972 SC 591
- in this case, summons was set aside on ground of vagueness. All documents pertaining
to appellant were called, which were in custody of Registrar of Court and also those
which had no bearing on the matter.
4. Power to arrest
An Excise Officer not below the rank of Inspector, to arrest a person whom they have
‘reason to believe’ to be liable to be punished under provisions of the Act. Such arrest
can be only with prior approval of Commissioner of Central Excise. [section 13]. - -
There is no specific provision that the approval letter should be shown to the person
being arrested.
Forward to magistrate or Police custody - The person arrested has to be forwarded to

the Central Excise Officer who is empowered to send the arrested person to a
Magistrate. If such empowered excise officer is not available within reasonable
distance, the person may be sent to Officer-in-Charge of nearest Police Station [section
19 of CEA]. Superintendent of CE has been empowered for this purpose.
Arrested person must be produced before Judicial Magistrate within 24 hours of arrest.
Power to grant bail is normally exercised by a Judicial Magistrate.
Enquiry after arrest - The Excise Officer can also make enquiry after arrest (section 21
of CEA). The procedures as prescribed under Criminal Procedure Code have to be
followed after the arrest.
Offences non-cognizable - Offences under section 9 of CEA are non-cognizable. As per

section 155 of Criminal Procedure Code, a police officer cannot investigate a non-
cognizable case without the order of a Magistrate. A police officer cannot arrest a
person who has committed a non cognizable offence, without a warrant, as per
section2(1) of Code of Criminal Procedure.
5. Powers of Search
Search and seizure are coercive measures designed to be enforced forcibly against
persons unwilling to be subjected to these operations.
SOME PROVISIONS OF CUSTOMS ACT APPLICABLE - Section 12 of CEA

authorises Central Government to apply provisions of Customs Act regarding levy,
exemption, drawback, warehousing, offences, penalties, confiscation and procedure
relating to offences and appeal to Central Excise, making suitable modifications and
alterations to adapt them to circumstances. Under these powers, notification dated 4th
May, 1963 has been issued making some provisions of Customs Act applicable to
Central Excise subject to some modifications. These are (a) section 105(1) - Powers of
search (b) section 110 - seizure of goods, documents and things (c) section 115 -
confiscation of conveyances (d) section 118(a) - confiscation of packages containing
goods (e) section 119 - confiscation of goods used for concealing goods (f) section 120 -
confiscation of goods even if form changes (g) section 121 - confiscation of sale
proceeds of contravening goods (h) section 124 - issue of show cause notice before
confiscation of goods (i) section 142(1)(b) - Recovery of duty (j) section 150 -
procedure for sale of goods.
- Section 18 of CEA provides that all searches and seizures must be as per provisions of
Code of Criminal Procedure. Under section 165 of CrPC, the requirements are : (a) The
officer making investigation should have reason to believe that anything necessary for
investigation may be found in a place within his jurisdiction (b) such thing cannot be
otherwise obtained without undue delay (c) grounds of such belief should be recorded in
writing and specifying the things for which search is to be made (d) the officer should
search himself, if practicable or require any officer subordinate to him to make the
search (e) authority to subordinate officer should be in writing, specifying the place to
be searched and things for which search is to be made (f) copy of record made should be
sent to Magistrate and should be furnished to the owner or occupier of the place
searched, if he applies for the copies. The copies should be supplied free of cost.
Power to Search - Under section 105 of Customs Act (as modified to Excise), Assistant
/ Deputy Commissioner of Central Excise, who has reasons to believe that any goods
liable to confiscation or any document or thing relevant to any proceeding under CEA
are secreted in any place, can authorise any Central Excise Officer upto rank of
Inspector to search or he may himself search for such goods, documents or things ( in
common discussions ‘search’ is called ‘raid’ ). Such authority will be by way of a
search warrant signed by him under his seal. However, in urgent necessity, search can
be carried out without a search warrant. Search warrant should be shown to the person
in charge of the premises and his signature should be obtained. Search warrant should
indicate the place to be searched, but name of person need not be mentioned as the
search warrant is in respect of place and not person.
.
6. Powers of Seizure
If, during search, some goods are found, which are liable for confiscation, the same can
be seized by excise officers. Seizure means to take possession of goods in pursuance of
demand under legal right. Seizure is only taking goods in custody or detention.
Ownership of goods remains with the owner even after seizure and he can get the goods
released under bond. [Confiscation means the goods become property of Central
Government].
Seizure under the Act - Vide section 110 of Customs Act, as made applicable to Central
Excise, Excise Officer is empowered to seize the goods if he has reasons to believe that
such goods are liable for confiscation under Central Excises Act, 1944. Vehicle carrying
the contraband goods can also be seized. Goods can be seized by officer of rank of
Superintendent and above.
List of seized goods must be prepared. These should be signed by independent

witnesses (called panch in Hindi. The document prepared after seizure is called
panchanama). Copy of panchanama must be handed over on the spot to the person
from whom goods were seized.
Seized goods should be carried away and handed over to Police Station. If police station
does not have enough space, these can be kept in the custody of officer of Central
Excise department. If they are bulky, they can be kept in possession of the owner
himself on obtaining guarantee from him regarding safe custody. In such cases, at least
4 samples should be taken.
SEIZURE OF HEAVY GOODS - If it is not practicable to seize the goods, Excise

Officer can order that the goods should not be removed or dealt with; without previous
permission of the officer.
Provisional Release of seized goods - Seized goods and vehicles can be released by the
Excise Officer on such conditions as he may deem fit. Normally cash security of about
25% of value of goods may be asked for release of goods under bond. However, this
percentage can vary widely depending on gravity of offence. Bond in form B-4 (earlier
B-11) should be executed. Bond amount is to be decided by adjudicating authority,
while bond can be accepted by Superintendent. Vehicle can be released by Assistant /
Deputy Commissioner while goods can be released on bond by the Adjudicating
Authority (depending on value - it may be Assistant / Deputy Commissioner, Additional
Commissioner or Commissioner).
In case of conveyance, as per departmental instructions, bond amount should be equal to

estimated value of vehicle and security deposit will depend on gravity of offence.
Department has clarified that u/s 112 of Customs Act, penalty can be heavy. Hence,
security deposit should depend upon gravity of the offence. - MF(DR) letter No.
591/40/98-Cus (AS) dated 1-9-1999.
Return goods within 6 months if no SCN - If goods are felt to be liable for confiscation,
a show cause notice has to be served giving him grounds for confiscation, asking his
representation and giving him opportunity of personal hearing as per section 124 of
Customs Act, as made applicable to Central Excise. Vide section 110(2) of Customs
Act, as made applicable to excise, if no show cause notice is issued within six months,
the goods shall be returned to person from whose possession they were seized. This
period can be further extended by six months on sufficient cause, by Commissioner of
Central Excise. Since the words used are ‘shall be returned’, it has been held that it is a
mandatory requirement. The owner of goods gets a civil right and goods must be
returned even if no application is made. In Overseas Paints Linkers v. UOI 2001(127)
ELT 42 (All HC DB), it was held that notice must be given i.e. ‘served’. Mere ‘issue’ of
notice is not enough. If not so served, goods must be returned, unless time is extended
by Commissioner.
This period of 6 months can be further extended by six months on sufficient cause by
Commissioner of Customs.
7. Departmental Adjudication
Excise authorities are empowered to determine classification, valuation, refund claims

and the tax/duty payable. They are also empowered to grant various permissions under
rules and impose fines, penalties, etc. This is called “departmental adjudication”.
Adjudicate means to hear or try and decide judicially and adjudication means giving a
decision.
UNIT -VIII
Service Tax
Introduction; Meaning and classification of taxable service (Sec.65A);
Charge of service tax (Sec.66 & 66A); valuation of taxable services for the
purpose of charging (Sec.67); payment of service tax (Sec.68); registration
(Sec.69); furnishing of returns (Sec.70) Service Tax to be deposited with the
Central Govt. (Sec.73A); Penalty for failure to pay (Sec.76)(*Taxable service
pertaining to (Definitions in Sec.65) a) Clearing and Forwarding, (b) Courier
Agency, (c) Manpower recruitment or supply agency, (d) Practicing Chartered
Accountant and (e) Security Agency only)(Theory only)
INTRODUCTION:
Chapter V of the Finance Act, 1994
EXTENT, COMMENCEMENT AND APPLICATION
(1) This Chapter extends to the whole of India except the State of Jammu and
Kashmir.
(2) It shall come into force on such date as the Central Government may, by
notification in the Official Gazette, appoint.
(3) It shall apply to taxable services provided on or after the commencement of this
DEFINITIONS
In this Chapter, unless the context otherwise requires, --
1."advertisement" includes any notice, circular, label, wrapper, document, hoarding or any
other audio or visual representation made by means of light, sound, smoke or gas;
2. "Advertising agency" means any person engaged in providing any service connected with
the making, preparation, display or exhibition of advertisement and includes an advertising
consultant
3. Appellate Tribunal" means the Customs, Excise and Gold (Control) Appellate constituted
under section 129 of the Customs Act, 1962 (52 of 1962);
4."Assessee" means a person liable to pay the service tax and includes his agent;
5."clearing and forwarding agent" means any person who is engaged in providing any
service, either directly or indirectly, connected with the clearing and forwarding
operations in any manner to any other person and includes a consignment agent; (25a)
6.“club or association” means any person or body of persons providing services,
facilities or advantages, for a subscription or any other amount, to its members, but does
not include-
(i) Any body established or constituted by or under any law for the time being in force;
or
(ii) any person or body of persons engaged in the activities of trade unions, promotion of
agriculture, horticulture or animal husbandry; or
(iii) any person or body of persons engaged in any activity having objectives which are
in the nature of public service and are of a charitable, religious or political nature; or
(iv) any person or body of persons associated with press or media;
7. “Commercial or industrial construction service” means —
(a) Construction of a new building or a civil structure or a part thereof; or
(b) Construction of pipeline or
(c) completion and finishing services such as glazing, plastering, painting, floor and wall
tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing
and railing, construction of swimming pools, acoustic applications or fittings and other
similar services, in relation to building or civil structure; or
(d) Repair, alteration, renovation or restoration of, or similar services in relation to,
building or civil structure, pipeline or conduit, which is —
(i) Used, or to be used, primarily for; or
(ii) Occupied, or to be occupied, primarily with; or
(iii) Engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include
such services provided in respect of roads, airports, railways, transport terminals,
bridges, tunnels and dams;
8."courier agency" means a any person engaged in the door-to-door transportation of time –
sensitive documents, goods or articles utilising the services of a person, either directly or
indirectly, to carry or accompany such documents, goods or articles;
9."credit rating agency" means any person engaged in the business of credit rating of any
debt obligation or of any project or programme requiring finance, whether in the form of debt
or otherwise, and includes credit rating of any financial obligation, instrument or security,
which has the purpose of providing a potential investor or any other person any information
pertaining to the relative safety of timely payment of interest or principal;
10. ‘Event management’ means any service provided in relation to planning, promotion,
organizing or presentation of any arts, entertainment, business, sports, [marriage]* or any
other event and includes any consultation provided in this regard;
11. ‘goods” has the meaning assigned to it in clause (7) of section 2 of the sale of Goods Act,
1930 (3 of 1930
12. ‘Interior decorator” means any person engaged, whether directly or indirectly, in the
business of providing by way of advice, consulting, technical assistance or in any other
manner, services related to planning, design or beautification of space, whether man-made or
otherwise and includes a landscape designer
13. ‘management or [business]* consultant” means any person who is engaged in
providing any service, either directly or indirectly, in connection with the management
of any organization [or business]* in any manner and includes any person who renders
any advice, consultancy or technical assistance, in relation to financial management,
human resources management, marketing management, production management,
logistics management, procurement and management of information technology
resources or other similar areas of management;
14. ‘Manpower recruitment or supply agency” means any person engaged in
providing any service, directly or indirectly, in any manner for recruitment or supply of
manpower, temporarily or otherwise, to any other person;
15. market research agency” means any person engaged in conducting market
research in any manner, in relation to any product, service or utility, including all types
of customized and syndicated research services;
16. packaging activity” means packaging of goods including pouch filling,

bottling, labeling or imprinting of the package, but does not include any
packaging activity that amounts to ‘manufacture’ within the meaning of
clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944);
17. practising chartered accountant” means a person who is a member of the
Institute of Chartered Accountants of India and is holding a certificate of
practice granted under the provision of the Chartered Accountants Act, 1949
(38 of 1949) and includes any concern engaged in rendering services in the
field of Chartered accountan
18. practicing company secretary” means a person who is a member of the
Institute of company Secretaries of India and is holding a certificate of
practice granted under the provisions of the Company Secretaries Act, 1980
(56 of 1980) and includes any concern engaged in rendering services in the
field of company secretaryship
19.”real estate agent” means a person who is engaged in rendering any service in
relation to sale, purchase, leasing or renting of real estate and includes a real estate
consultant;
20. “Real estate consultant” means a person who renders in any manner, either
directly or indirectly, advice, consultancy or technical assistance, in relation to
evaluation, conception, design. Development, construction, implementation,
supervision, maintenance, marketing, acquisition or management, of real estate;
21. “security agency” means any person engaged in the business of rendering
services relating to the security of any property, whether movable or immovable, or of
any person, in any manner and includes the services of investigation, detection or
verification, of any fact or activity, whether of a personal nature or otherwise,
including the services of providing security personnel;
22. “service tax” means tax leviable under the provisions of this Chapter;
23. “storage and warehousing” includes storage and warehousing services for goods
including liquids and gases but does not include any service provided for storage of
agricultural produce or any service provided by a cold storage;
24. “taxable service” means any service provided or to be provided -
(a) to any person, by a stock-broker in connection with the sale or purchase of

securities listed on a recognized stock exchange;
(b) to a policy holder or any person, by an insurer, including re-insurer carrying on

general insurance business in relation to general insurance businesses;
© to any person, by an advertising agency in relation to advertisement, in any manner;
(d) to any person, by courier agency in relation to door-to-door transportation of time-

sensitive documents, goods or articles;
(e) to any person, by a consulting engineer in relation to advice, consultancy or

technical assistance in any manner in one or more disciplines of engineering including
the discipline of computer hardware engineering.
Explanation.— For the purposes of this sub-clause, it is hereby declared that
services provided by a consulting engineer in relation to advice, consultancy or
technical assistance in the disciplines of both computer hardware engineering and
computer software engineering shall also be classifiable under this sub-clause;
[Clause (g) substituted vide Finance Bill 2008, w.e.f. 16th May, 2008]
(f) to any person, by a custom house agent in relation to the entry or departure of
conveyances or the import or export of goods;
(g) to a shipping line, by a steamer agent in relation to a ship’s husbandry or dispatch

or any administrative work related thereto as well as the booking, advertising or
canvassing of cargo, including container feeder services;
(h) to any person, by a clearing and forwarding agent in relation to clearing and
forwarding operations, in any manner;
(i) to any person, by a manpower recruitment or supply agency in relation to the

recruitment or supply of manpower, temporarily or otherwise, in any manner;
‘Explanation.—For the removal of doubts, it is hereby declared that for the

purposes of this sub-clause, recruitment or supply of manpower includes services
in relation to pre-recruitment screening, verification of the credentials and
antecedents of the candidate and authenticity of documents submitted by the
candidate]*
(j) to any person, by an air travel agent in relation to the booking of passage for travel
by air;
(k) to any person, by a Mandap keeper in elation to the use of Mandap in any manner
including the facilities provided or to be provided to such person in relation to such
use and also the services, if any, provided or to be provided as a caterer;
(l) to any person, by a tour operator in relation to a tour;
(m) to any person, by a rent-a-cab scheme operator in relation to the renting of a cab;
(n) to any person, by an architect in his professional capacity, in any manner;
(o) to any person, by an interior decorator in relation to planning, design or

beautification of spaces, whether manmade or otherwise, in any manner;
(p) to any person by a management or [business]* consultant in connection with the

management of any organization or [business,]* in any manner;
(q) to any person, by a practising chartered accountant in his professional capacity, in
any manner;
® to any person, by a practising cost accountant in his professional capacity, in any

manner;
(s) to any person, by a practising company secretary in his professional capacity, in

any manner;
(t) to any person, by a real estate agent in relation to real estate;
(u) to any person, by a security agency in relation to the security of any property or
person, by providing security personnel or otherwise and includes the provision of
services of investigation, detection or verification of any fact or activity;
(v) to any person, by a credit rating agency in relation to credit rating of any financial
obligation, instrument or security;
(w) to any person, by a market research agency in relation to market research of any
product, service or utility, in any manner;
(x) to any person, by an underwriter in relation to underwriting, in any manner;
(y) to any person, by a scientist or technocrat or any science or technology institution

or organization, in relation to scientific or technical consultancy;
(z) to any person, by a photography studio or agency in relation to photography, in any

manner;,etc
PAYMENT OF SERVICE TAX(68)
(1) Every person providing taxable service to any person shall pay service tax at the
rate specified in section 66 in such manner and within such period as may be
prescribed.
(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable

service notified by the Central Government in the Official Gazette, the service tax
thereon shall be paid by such person and in such manner as may be prescribed at the
rate specified in section 66 and all the provisions of this chapter shall apply to such
person as if he is the person liable for paying the service tax in relation to such service.
REGISTRATION(69)
(1) Every person liable to pay the service tax under this chapter or the rules made
there under shall, within such time and in such manner and in such form as may be
prescribed, make an application for registration to the Superintendent of Central
Excise.
(2) The Central Government may, by notification in the Official Gazette, specify such
other person or class of persons, who shall make an application for registration within
such time and in such manner and in such form as may be prescribed.
Furnishing of returns(section 70)
(1) Every person liable to pay the service tax shall himself assess the tax due on the
services provided by him and shall furnish to the Superintendent of Central Excise, a
return in such form and in such manner and at such frequency [and with such late fee
not exceeding two thousand rupees, for delayed furnishing of return, as may be
prescribed”]
(2) The person or class of persons notified under sub-section (2) of section 69, shall
furnish to the Superintendent of Central Excise, a return in such form and in such
manner and at such frequency as may be prescribed.
scheme for submission of returns through service tax preparers (section 71)
(1) Without prejudice to the provisions of section 70, the Board may, by notification in
the Official Gazette, frame a Scheme for the purposes of enabling any person or class
of persons to prepare and furnish a return under section 70, and authorise a Service
Tax Return Preparer to act as such under the Scheme.
(2) A Service Tax Return Preparer shall assist the person or class of persons to prepare
and furnish the return in such manner as may be specified in the Scheme framed under
this section.
(3) For the purposes of this section,—

(a) “Service Tax Return Preparer” means any individual, who has been authorised
to act as a Service Tax Return Preparer under the Scheme framed under this
section;
(b) “person or class of persons” means such person, as may be specified in the
Scheme, who is required to furnish a return required to be filed under section 70.
(4) The Scheme framed by the Board under this section may provide for the
following, namely:—
(a) the manner in which and the period for which the Service Tax Return Preparer
shall be authorised under sub-section (1);
(b) the educational and other qualifications to be possessed, and the training and
other conditions required to be fulfilled, by a person to act as a Service Tax Return
Preparer;
© the code of conduct for the Service Tax Return Preparer;
(d) the duties and obligations of the Service Tax Return Preparer;
(e) the circumstances under which the authorisation given to a Service Tax Return
Preparer may be withdrawn;
(f) any other matter which is required to be, or may be, specified by the Scheme for
the purposes of this section.
Filing of return by certain customers (section 71A)
Notwithstanding any thing contained in the provisions of Sections 69 and 70, the
provisions there of shall not apply to a person referred to in the proviso to sub-section
(1) of Section 68 for the filing of return in respect of Service Tax for the respective
period and service specified therein and such person shall furnish return to the Central
Excise officer within six months from the day on which the Finance Bill, 2003
receives the assent of the President in the prescribed manner on the basis of the self
assessment of the Service Tax and the provisions of Section 71 shall apply
accordingly. [inserted for the period 16.7.97 to 16.10.98 by Section 158 of Finance
Act,2003 and shall have effect and be deemed always to have had effect from
16.7.97.]
BEST JUDGEMENT ASSESSMENT (SECTION 72)
(a) fails to furnish the return under section 70;
(b) having made a return, fails to assess the tax in accordance with the provisions of
this Chapter or rules made thereunder, the Central Excise Officer, may require the
person to produce such accounts, documents or other evidence as he may deem
necessary and after taking into account all the relevant material which is available or
which he has gathered, shall by an order in writing, after giving the person an
opportunity of being heard, make the assessment of the value of taxable service to the
best of his judgment and determine the sum payable by the assessee or refundable to
the assessee on the basis of such assessment.
73. Recovery of Service tax not levied or paid or short levied or short paid or
erroneously refunded –
(1) Where any service tax has not been levied or paid or has been short-levied or short-
paid or erroneously refunded, the Central Excise Officer may, within one year from
the relevant date, serve notice on the person chargeable with the service tax which has
not been levied or paid or which has been short-levied or short-paid or the person to
whom such tax refund has erroneously been made, requiring him to show cause why
he should not pay the amount specified in the notice :
Provided that where any service tax has not been levied or paid or has been short-
levied or short-paid or erroneously refunded by reason of —
(a) fraud; or
(b) collusion; or
© wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of the rules made there
under with intent to evade payment of service tax, by the person chargeable with the
service tax or his agent, the provisions of this sub-section shall have effect, as if, for
the words “one year”, the words “five years” had been substituted.
Explanation. — Where the service of the notice is stayed by an order of a court, the
period of such stay shall be excluded in computing the aforesaid period of one year or
five years, as the case may be.
(1A) Where any service tax has not been levied or paid or has been short-levied or
shortpaid or erroneously refunded, by reason of fraud, collusion or any wilful mis-
statement or suppression of facts, or contravention of any of the provisions of this
Chapter or the rules made thereunder, with intent to evade payment of service tax, by
such person or his agent, to whom a notice is served under the proviso to sub-section
(1) by the Central Excise Officer, such person or agent may pay service tax in full or
in part as may be accepted by him, and the interest payable thereon under section 75
and penalty equal to twenty-five per cent. of the service tax specified in the notice or
the service tax so accepted by such person within thirty days of the receipt of the
notice.”;
(2) The Central Excise Officer shall, after considering the representation, if any, made
by the person on whom notice is served under sub-section (1), determine the amount
of service tax due from, or erroneously refunded to, such person (not being in excess
of the amount specified in the notice) and thereupon such person shall pay the amount
so determined.
“Provided that where such person has paid the service tax in full together with interest
and penalty under sub-section (1A), the proceedings in respect of such person and
other persons to whom notices are served under sub-section (1) shall be deemed to be
concluded:
Provided further that where such person has paid service tax in part along with interest
and penalty under sub-section (1A), the Central Excise Officer shall determine the
amount of service tax or interest not being in excess of the amount partly due from
such person.”;
(3) Where any service tax has not been levied or paid or has been short-levied or short-
paid or erroneously refunded, the person chargeable with the service tax, or the person
to whom such tax refund has erroneously been made, may pay the amount of such
service tax, chargeable or erroneously refunded, on the basis of his own ascertainment
thereof, or on the basis of tax ascertained by a Central Excise Officer before service of
notice on him under sub-section (1) in respect of such service tax, and inform the
Central Excise Officer of such payment in writing, who, on receipt of such
information shall not serve any notice under sub-section (1) in respect of the amount
so paid :
Provided that the Central Excise Officer may determine the amount of short payment
of service tax or erroneously refunded service tax, if any, which in his opinion has not
been paid by such person and, then, the Central Excise Officer shall proceed to recover
such amount in the manner specified in this section, and the period of “one year”
referred to in sub-section (1) shall be counted from the date of receipt of such
information of payment.
Explanation. — For the removal of doubts, it is hereby declared that the interest
under section 75 shall be payable on the amount paid by the person under this sub-
section and also on the amount of short payment of service tax or erroneously
refunded service tax, if any, as may be determined by the Central Excise Officer, but
for this sub-section.
(4) Nothing contained in sub-section (3) shall apply to a case where any service tax
has not been levied or paid or has been short-levied or short-paid or erroneously
refunded by reason of—
(a) fraud; or
(b) collusion; or
(e) contravention of any of the provisions of this Chapter or of the rules made
thereunder with intent to evade payment of service tax.
(5) The provisions of sub-section (3) shall not apply to any case where the service tax
had become payable or ought to have been paid before the 14th day of May, 2003.
(6) For the purposes of this section, “relevant date” means, —
(i) in the case of taxable service in respect of which service tax has not been levied
or paid or has been short-levied or short-paid —
(a) where under the rules made under this Chapter, a periodical return, showing
particulars of service tax paid during the period to which the said return relates, is
to be filed by an assessee, the date on which such return is so filed;
(b) where no periodical return as aforesaid is filed, the last date on which such
return is to be filed under the said rules;
© in any other case, the date on which the service tax is to be paid under this
Chapter or the rules made thereunder;
(ii) in a case where the service tax is provisionally assessed under this Chapter or
the rules made thereunder, the date of adjustment of the service tax after the final
assessment thereof;
(iii) in a case where any sum, relating to service tax, has erroneously been
refunded, the date of such refund.’;
73A. Service Tax collected from any person to be deposited with Central
Government:-
(1) Any person who is liable to pay service tax under the provisions of this Chapter or
the rules made thereunder, and has collected any amount in excess of the service tax
assessed or determined and paid on any taxable service under the provisions of this
Chapter or the rules made thereunder from the recipient of taxable service in any
manner as representing service tax, shall forthwith pay the amount so collected to the
credit of the Central Government.
(2) Where any person who has collected any amount, which is not required to be
collected, from any other person, in any manner as representing service tax, such
person shall forthwith pay the amount so collected to the credit of the Central
Government.
(3) Where any amount is required to be paid to the credit of the Central Government
under sub-section (1) or sub-section (2) and the same has not been so paid, the
Central Excise Officer shall serve, on the person liable to pay such amount, a
notice requiring him to show cause why the said amount, as specified in the notice,
should not be paid by him to the credit of the Central Government.
(4) The Central Excise Officer shall, after considering the representation, if any, made
by the person on whom the notice is served under sub-section (3), determine the
amount due from such person, not being in excess of the amount specified in the
notice, and thereupon such person shall pay the amount so determined.
(5) The amount paid to the credit of the Central Government under sub-section (1) or
subsection (2) or sub-section (4), shall be adjusted against the service tax payable
by the person on finalisation of assessment or any other proceeding for
determination of service tax relating to the taxable service referred to in sub-section
(1).
(6) Where any surplus amount is left after the adjustment under sub-section (5), such
amount shall either be credited to the Consumer Welfare Fund referred to in
section 12C of the Central Excise Act, 1944 or, as the case may be, refunded to the
person who has borne the incidence of such amount, in accordance with the
provisions of section 11B of the said Act and such person may make an application
under that section in such cases within six months from the date of the public
notice to be issued by the Central Excise Officer for the refund of such surplus
amount.
73B.Interest on amount collected in excess-

Where an amount has been collected in excess of the tax assessed or determined and
paid for any taxable service under this Chapter or the rules made thereunder from the
recipient of such service, the person who is liable to pay such amount as determined
under sub-section (4) of section 73A, shall, in addition to the amount, be liable to pay
interest at such rate not below ten per cent. and not exceeding twenty-four per cent.
per annum, as is for the time being fixed by the Central Government, by notification in
the Official Gazette, from the first day of the month succeeding the month in which
the amount ought to have been paid under this Chapter, but for the provisions
contained in sub-section (4) of section 73A, till the date of payment of such amount:
Provided that in such cases where the amount becomes payable consequent to issue of
an order, instruction or direction by the Board under section 37B of the Central Excise
Act, 1944, and such amount payable is voluntarily paid in full, without reserving any
right to appeal against such payment at any subsequent stage, within forty-five days
from the date of issue of such order, instruction or direction, as the case may be, no
interest shall be payable and in other cases, the interest shall be payable on the whole
amount, including the amount already paid.
Explanation 1.—Where the amount determined under sub-section (4) of section 73A
is reduced by the Commissioner (Appeals), the Appellate Tribunal or, as the case
may be, the court, the interest payable thereon under this section shall be on such
reduced amount.
Explanation 2.—Where the amount determined under sub-section (4) of section 73A
is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case
may be, the court, the interest payable thereon under this section shall be on such
increased amount.
73C. Provisional attachment to protect revenue in certain cases
(1) Where, during the pendency of any proceeding under section 73 or section 73A,
the Central Excise Officer is of the opinion that for the purpose of protecting the
interests of revenue, it is necessary so to do, he may, with the previous approval of the
Commissioner of Central Excise, by order in writing, attach provisionally any property
belonging to the person on whom notice is served under sub-section (1) of section 73
or sub-section (3) of section 73A, as the case may be, in such manner as may be
prescribed.
(2) Every such provisional attachment shall cease to have effect after the expiry of a
period of six months from the date of the order made under sub-section (1):
Provided that the Chief Commissioner of Central Excise may, for reasons to be
recorded in writing, extend the aforesaid period by such further period or periods as
he thinks fit, so, however, that the total period of extension shall not in any case
exceed two years.
73D. Publication of information in respect of persons in certain cases
(1) If the Central Government is of the opinion that it is necessary or expedient in the
public interest to publish the name of any person and any other particulars relating to
any proceedings under this Chapter in respect of such person, it may cause to be
published such names and particulars in such manner as may be prescribed.
(2) No publication under this section shall be made in relation to any penalty imposed
under this Chapter until the time for presenting an appeal to the Commissioner
(Appeals) under section 85 or the Appellate Tribunal under section 86, as the case
may be, has expired without an appeal having been presented or the appeal, if
presented, has been disposed of.
Explanation.—In the case of a firm, company or other association of persons, the

names of the partners of the firm, directors, managing agents, secretaries and
treasurers or managers of the company, or the members of the association, as the
case may be, shall also be published if, in the opinion of the Central Government,
circumstances of the case justify it.”;
74. Rectification of mistake. –
(1) With a view to rectifying any mistake apparent from the record, the Central
Excise Officer who passed any order under the provisions of this Chapter may, within
two years of the date on which such order was passed, amend the order.
(2) Where any matter has been considered and decided in any proceeding by way of
appeal or revision relating to an order referred to in sub-section (1), the Central Excise
Officer passing such order may, notwithstanding anything contained in any law for the
time being in force, amend the order under that sub-section in relation to any matter
other than the matter which has been so considered and decided.
(3) Subject to the other provisions of this section, the Central Excise Officer
concerned
(a) may make an amendment under sub-section (1) of his own motion; or
(b) shall make such amendment if any mistake is brought to his notice by the
assessee or the [Commissioner] of Central Excise or the [Commissioner] of Central
Excise (Appeals).
(4) An amendment, which has the effect of enhancing the liability of the assessee or
reducing a refund , shall not be made under this section unless the Central Excise
Officer concerned has given notice to the assessee of his intention so to do and has
allowed the assessee a reasonable opportunity of being heard.
(5) Where an amendment is made under this section, an order shall be passed in
writing by the Central Excise Officer concerned.
(6) Subject to the other provisions of this Chapter where any such amendment has
the effect of reducing the the liability of the assessee or increasing the refund, the
Central Excise Officer shall make any refund which may be due to such assessee.
(7) Where any such amendment has the effect of enhancing the liability of the
assessee or reducing the refund already made, the Central Excise Officer shall make an
order specifying the sum payable by the assessee and the provisions of this Chapter
shall apply accordingly.
75. Interest on delayed payment of Service Tax –
Every person, liable to pay the tax in accordance with the provisions of section 68 or
rules made thereunder, who fails to credit the tax or any part thereof to the account of
the Central Government within the period prescribed, shall pay simple interest [at such
rate not below ten per cent and not exceeding thirty-six per cent per annum as is for
the time being fixed by the Central Government, by Notification in the Ofiicial
Gezette for the period] by which such crediting of the tax or any part thereof is
delayed.
76. Penalty for failure to pay service tax
Any person, liable to pay service tax in accordance with the provisions of section 68 or
the rules made under this Chapter, who fails to pay such tax, shall pay, in addition to
such tax and the interest on that tax amount in accordance with the provisions of
section 75, a penalty which shall not be less than two hundred rupees for every day
during which such failure continues or at the rate of two per cent. of such tax, per
month, whichever is higher, starting with the first day after the due date till the date of
actual payment of the outstanding amount of service tax:
Provided that the total amount of the penalty payable in terms of this section shall not
exceed the service tax payable.
Illustration
X, an assessee, fails to pay service tax of Rs. 10 lakhs payable by 5th March. X pays
the amount on 15th March. The default has continued for 10 days. The penalty payable
by X is computed as follows:—
2% of the amount of default for 10 days = 2 x 10, 00, 000 x 10/31= Rs. 6,451.61
Penalty calculated @ Rs. 200 per day for 10 days =Rs. 2,000
Penalty liable to be paid is Rs. 6,452.00.”;
77. Penalty for contravention of rules and provisions of Act for which no penalty
is specified elsewhere. —
(1) Any person,—
(a) who is liable to pay service tax, or required to take registration, fails to take
registration in accordance with the provisions of section 69 or rules made under this
Chapter shall be liable to pay a penalty which may extend to five thousand rupees or
two hundred rupees for every day during which such failure continues, whichever is
higher, starting with the first day after the due date, till the date of actual
compliance;
(b) who fails to keep, maintain or retain books of account and other documents as
required in accordance with the provisions of this Chapter or the rules made
thereunder, shall be liable to a penalty which may extend to five thousand rupees;
© who fails to—
(i) furnish information called by an officer in accordance with the provisions of

this Chapter or rules made thereunder; or
(ii) produce documents called for by a Central Excise Officer in accordance with
the provisions of this Chapter or rules made thereunder; or
(iii) appear before the Central Excise Officer, when issued with a summon for
appearance to give evidence or to produce a document in an inquiry, shall be liable
to a penalty which may extend to five thousand rupees or two hundred rupees for
every day during which such failure continues, whichever is higher, starting with
the first day after the due date, till the date of actual compliance;
(d) who is required to pay tax electronically, through internet banking, fails to pay
the tax electronically, shall be liable to a penalty which may extend to five thousand
rupees;
(e) who issues invoice in accordance with the provisions of the Act or rules made
thereunder, with incorrect or incomplete details or fails to account for an invoice in
his books of account, shall be liable to a penalty which may extend to five thousand
rupees.
(2) Any person, who contravenes any of the provisions of this Chapter or any rules
made thereunder for which no penalty is separately provided in this Chapter, shall be
liable to a penalty which may extend to five thousand rupees.”;
[ Section (77) substituted vide Finance Bill 2008, w.e.f. 16th May, 2008 ]
78. Penalty for suppressing value of taxable service. –
Where any service tax has not been levied or paid or has been short-levied or short-
paid or erroneously refunded, by reason of —
(a) fraud; or
(b) collusion; or
(e) contravention of any of the provisions of this Chapter or of the rules made
thereunder with intent to evade payment of service tax, the person, liable to pay such
service tax or erroneous refund, as determined under sub-section (2) of section 73,
shall also be liable to pay a penalty, in addition to such service tax and interest
thereon, if any, payable by him, which shall not be less than, but which shall not
exceed twice, the amount of service tax so not levied or paid or short-levied or short-
paid or erroneously refunded:”;
Provided that where such service tax as determined under sub-section (2) of section
73, and the interest payable thereon under section 75, is paid within thirty days from
the date of communication of order of the Central Excise Officer determining such
service tax, the amount of penalty liable to be paid by such person under this section
shall be twenty-five per cent. of the service tax so determined :
Provided further that the benefit of reduced penalty under the first proviso shall be
available only if the amount of penalty so determined has also been paid within the
period of thirty days referred to in that proviso :
Provided also that where the service tax determined to be payable is reduced or
increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may
be, the court, then, for the purposes of this section, the service tax as reduced or
increased, as the case may be, shall be taken into account :
Provided also that in case where the service tax determined to be payable is increased
by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the
court, then, the benefit of reduced penalty under the first proviso shall be available, if
the amount of service tax so increased, the interest payable thereon and twenty-five
per cent. of the consequential increase of penalty have also been paid within thirty
days of communication of the order by which such increase in service tax takes effect.
Provided also that if the penalty is payable under this section, the provisions of section
76 shall not apply. [ Inserted vide Finance Bill 2008, w.e.f. 16th May, 2008 ]
Explanation. - For the removal of doubts, it is hereby declared that -
(1) the provisions of this section shall also apply to cases in which the order
determining the service tax under sub-section (2) of section 73 relates to notices issued
prior to the day on which the Finance Bill, 2003 receives the assent of the President;
(2) any amount paid to the credit of the Central Government prior to the date of
communication of the order referred to in the first proviso or the fourth proviso shall
be adjusted against the total amount due from such person.”
80. Penalty not to be imposed in certain cases. –
Notwithstanding anything contained in the provisions of section 76, section 77 or

section 78, no penalty shall be imposable on the assessee for any failure referred to in
said provisions, if the assessee proves that there was reasonable cause for the said
failure.
82. Power to search premises –
(1) If the Commissioner of Central Excise has reason to believe that any documents
or book or things which in his opinion will be any useful for or relevant to proceedings
under this Chapter are secreted in any place, he may authorize any Assistant
Commissioner of Central Excise or, as the case may be, Deputy Commissioner of
Central Excise to search for and seize or may himself search for and seize, such
documents or books or things.
(2) The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to
searches, shall, so far as may be, apply or searches under this section as they apply to
searches under that Code.
83A Power of adjudication.
Where under this Chapter or the rules made thereunder any person is liable to a
penalty, such penalty may be adjudged by the Central Excise Officer conferred with
such power as the Central Board of Excise and Customs constituted under the Central
Boards of Revenue Act, 1963 (54 of 1963), may, by notification in the Official
Gazette, specify.
UNIT-10
Value Added Tax:
(Karnataka VAT Act 2003 as amended by Act of 2005)
Introduction- meaning of the terms –Agricultural Produce, Business, Capital Goods,

Dealer, Goods, Prescribed Authority, Taxable Turnover, Total Turnover, Turnover
and Works Contract. (Sec.2), Levy of Tax (Sec.3), Liability to Tax and Rates (Sec.4),
Exemptions (Sec.5), Collection of Tax (Sec.9) Deduction at Source (Sec.9A), Output
Tax, Input Tax, and Net Tax (Sec.10), Input Tax restrictions (Sec.11), Deduction of
Input Tax on Capital Goods (Sec.12), Special Rebates (Sec.14). (Theory only)
Introduction
1. Short title, extent and commencement.-
(1) This Act may be called the Karnataka Value Added Tax Act 2003.
(2) It extends to the whole of the State of Karnataka.
(3) It shall come into force on such date as the Government may, by notification,
appoint and different dates may be appointed for different provisions of the Act.
(4) The tax shall be levied on the sale or purchase of goods made after such date as the
Government may, by notification, appoint and different dates may be appointed for
different class or classes of goods.
Basic Concept of VAT
Generally, any tax is related to selling price of product. In modern production

technology, raw material passes through various stages and processes till it reaches the
ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by
a re-rolling unit, while third manufacturer makes furniture from these plates. Thus,
output of the first manufacturer becomes input for second manufacturer, who carries
out further processing and supply it to third manufacturer. This process continues till a
final product emerges. This product then goes to distributor/wholesaler, who sells it to
retailer and then it reaches the ultimate consumer.
If a tax is based on selling price of a product, the tax burden goes on increasing as raw
material and final product passes from one stage to other. For example, let us assume
that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to
‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He
carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating
his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40
as his conversion charges. While selling product to C, B will charge tax again @ 10%.
Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or
sales continue, each subsequent purchaser has to pay tax again and again on the
material which has already suffered tax. This is called cascading effect.
Cascading effect of conventional system of taxes - A tax purely based on selling

price of a product has cascading effect, which has the following disadvantages - (a)
Computation of exact tax content difficult (b) Varying Tax Burden as tax burden
depends on number of stages through which a product passes (c) Discourages
Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not
possible (f) Exports cannot be made tax free.
VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of
taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on
which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is
that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no
difference whether a product passes through 5 or 10 stages or even 100 stages, as
every person will pay tax only on ‘value added’ by him to the product and not on total
selling price.
Tax credit system - VAT removes these defects by tax credit system. Under this
system, credit is given at each stage of tax paid at earlier stage.
Illustration of tax credit system - In the example we saw above, ‘B’ will purchase
goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to
get credit of duty of Rs. 10, he will not consider this amount for his costing. He will
charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge
10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice
prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10
paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’
will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he
would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs
40, which is the value added by him.
Following example will illustrate the tax credit method of Cenvat.
Example 1:
Transaction without Transaction With VAT

VAT
Details A B A B
Purchases - 110 - 100
Value Added 100 40 100 40
Sub–Total 100 150 100 140
Add Tax 10% 10 15 10 14
Total 110 165 110 154
Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/-
as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice
shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is
paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.
ADVANTAGES OF TAX CREDIT SYSTEM - The ‘Tax Credit Method’ has

following advantages - (a) Audit control is much better, which helps in controlling tax
evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax
rates to different commodities (c) Useful in giving tax benefits on exports or other
preferred end-uses like uses by common man etc. Most of the countries have adopted
‘tax credit’ method for implementation of VAT.
MEANING OF ‘VALUE ADDED’ – In the above illustration, the ‘value’ of inputs is

Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value
addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between
Selling price and the purchase price.
Thus, VAT will replace the present sales tax in India. Under the current single-point
system of tax levy, the manufacturer or importer of goods into a State is liable to sales
tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is
a multi-point levy on each of the entities in the supply chain with the facility of set-off
of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on
purchase of raw materials by a manufacturer. Only the value addition in the hands of
each of the entities is subject to tax.
Example 2:, if a dealer purchases goods for Rs 100 from

another dealer and a tax of Rs 10 has been charged in the bill,
and he sells the goods for Rs 120 on which the dealer will
charge a tax of Rs 12 at 10 per cent, the tax payable by the
dealer will be only Rs 2, being the difference between the tax
collected of Rs 12 and tax already paid on purchases of Rs 10.
Thus, the dealer has paid tax at 10 per cent on Rs 20 being the
value addition in his hands
Purchase price - Rs 100
Tax paid on purchase - Rs 10 (input tax)
Sale price - Rs 120
Tax payable on sale price - Rs 12 (output tax)
Input tax credit - Rs 10
VAT payable - Rs 2
VAT levy will be administered by the Value Added Tax Act

and the rules made there-under.
VAT can be computed by using either of the three methods

detailed below
• The Subtraction method:- The tax rate is applied to the difference between the
value of output and the cost of input.
• The Addition method: The value added is computed by adding all the payments
that is payable to the factors of production (viz., wages, salaries, interest payments
etc).
• Tax credit method: This entails set-off of the tax paid on inputs from tax
collected on sales.
Advantages of VAT
In the advantages part we will first look after the broad coverage of VAT in the
Indian market. Then we will consider the level of security the Indian VAT is
having on our revenues. Obviously the selection of items to be covered by VAT in
India will be given a bullet to think upon and at last we will check out the co-
ordination VAT in India will be having with our existing direct tax system.
1) Coverage
If the tax is carried through the retail level, it offers all the economic advantages
of a tax that includes the entire retail price within its scope, at the same time the
direct payment of the tax is spread out and over a large number of firms instead of
being concentrated on particular groups, such as wholesalers or retailers.
If retailers do evade, tax will be lost only on their margins because customers that
are registered firms gain nothing if their suppliers fail to collect tax, except delay
in payment; they will pay more to the government themselves. Under other forms
of sales tax, both seller and customer gain by evading tax. One particular
advantage is that of the widening of the tax base by bringing all transactions into
the tax net. Specifically, VAT gives the new government the opportunity to bring
back into the tax system all those persons and entities who were given tax
exemptions in one form or another by the previous regime.
2) Revenue security
VAT represents an important instrument against tax evasion and is superior to a
business tax or a sales tax from the point of view of revenue security for three
reasons.
In the first place, under VAT it is only buyers at the final stage who have an
interest in undervaluing their purchases, since the deduction system ensures that
buyers at earlier stages will be refunded the taxes on their purchases. Therefore,
tax losses due to undervaluation should be limited to the value added at the last
stage. Under a retail sales tax, on the other hand, retailer and consumer have a
mutual interest in underdeclaring the actual purchase price.
Secondly, under VAT, if payment of tax is successfully avoided at one stage
nothing will be lost if it is picked up at a later stage; and even if it is not picked up
subsequently, the government will at least have collected the VAT paid at stages
previous to that at which the tax was avoided; while if evasion takes place at the
final stage the state will lose only the tax on the value added at that point.
If evasion takes place under a sales tax, on the other hand, all the taxes due on the
product are lost to the government.
A significant advantage of the value added form in any country is the cross-audit
feature. Tax charged by one firm is reported as a deduction by the firms buying
from it. Only on the final sale to the consumer is there no possibility of cross
audit.
Cross audit is possible with any form of sales tax, but the tax-credit feature
emphasises and simplifies it and is likely to make firms more careful not to evade
because they know of the possibility of cross check.
3) Selectivity
VAT may be selectively applied to specific goods or business entities. We have
already addressed essential goods and small business. In addition the VAT does
not burden capital goods because the consumption-type VAT provides a full credit
for the tax included in purchases of capital goods. The credit does not subsidize
the purchase of capital goods; it simply eliminates the tax that has been imposed
on them.
4) Co-ordination of VAT with direct taxation

Most taxpayers cheat on their sales not to evade VAT but to evade personal and
corporate income taxes. The operation of a VAT resembles that of the income tax
more than that of other taxes, and an effective VAT greatly aids income tax
administration and revenue collection. It is interesting to note that when Trinidad
and Tobago set out to introduce VAT it chose one of its top income tax
administrators as the VAT Commissioner.
It must be stressed once again that if properly implemented VAT can ultimately
lead to a reduction in overall rates of tax.
Revenues will not be sacrificed but would in fact be enhanced as a consequence of

the broadened tax base. This does not seem to be a bad idea at all.
The main disadvantages which have been identified in connection with the Value Added
Tax are:
1) VAT is regressive
It is claimed that the tax is regressive, ie its burden falls disproportionately on the poor
since the poor are likely to spend more of their income than the relatively rich person.
There is merit in this argument, particularly if it attempts to replace direct or indirect
taxes with steep, progressive rates. However, observation from around the world and
even Guyana has shown that steep tax rates lead to evasion, and in the case of income
tax act as a disincentive to effort.
Further, there is now a tendency in most countries to reduce this progressivity of taxes
as has been done in Guyana where a flat rate of income tax has been introduced. In any
case VAT recognises and makes room for progressivity by applying no or low rates of
tax on essential items such as food, clothes and medicine. In addition it allows for steep
rates of tax on luxury items, although this can create problems for administration and
open opportunities for evasion by way of deliberate misclassification, a problem
incidentally not peculiar to VAT, and which takes place extensively in the area of
customs duties.
2) VAT is too difficult to operate from the position of both the administration and
business.
(a) The administration

It is often argued that VAT places a special burden on tax administration. However, it is
worth noting that wherever VAT was introduced one of its effects was the
rationalisation and simplification of the previous indirect tax system and its
administration. Each of the previous indirect taxes such as customs duties, purchase tax
and excise duties replaced by VAT had its own rate structure as well as a different tax
base and separate administrative procedure. The consolidation and incorporation of
numerous indirect taxes into the VAT would simplify the rate structure, tax base, and
administration of the indirect tax system, thereby eliminating the overlapping auditing
practices that had plagued those systems.
In addition, the abolition of a number of alternative indirect taxes releases experienced

personnel to focus on a single tax. It also means reduction in the number of forms used,
legislation to be applied and returns and accounts with which the business person has to
contend.
(b) Business
It is true that the VAT is collected from a larger number of firms than under any form of
income tax or single state sales tax; to the typical smaller firms the complexities of the
tax and the need for more extensive records (for example, to justify deductions) are
likely to prove serious.
However, it is often overlooked that businesses already function with considerable

administrative responsibility for a number of laws including the National Insurance Act
and the Income Tax Act.
Under the Income Tax (Accounts and Records) Regulations of 1980 every person,
without exception is required to maintain detailed and extensive records of all its
transactions. Compliance with this will certainly ensure compliance with VAT
regulations, and since there is an actual benefit to be derived from accounting for VAT
paid on input there is an incentive for proper record-keeping.
As we have noted before, VAT also allows for the exemption of small businesses from
the system.
Under any form of sales taxation, small businesses have to be granted special treatment
because of their inability to cope with the requirements of keeping adequate records
which larger enterprises can handle at a reasonable cost. The intent of the special
treatment is to reduce the administrative burden on small enterprises, but not the taxes
that normally would be charged on the goods and services they supply. The revenue loss
at the final link in the commercial cycle is limited only to the value added at that
stage ,whereas in the case of income tax or sales tax the entire tax is lost. To recover the
loss from exemptions, a flat tax on turnover may be applied.
In the larger businesses with proper staff and computers, the task is really one of double
entry book-keeping and any additional work is hardly ever noticed.
3. VAT is inflationary
Some businessmen seize almost any opportunity to raise prices, and the introduction of
VAT certainly offers such an opportunity. However, temporary price controls, a careful
setting of the rate of VAT and the significance of the taxes they replace should generally
ensure that there is no increase if any in the cost of living. To the extent that they lead to
a reduction in income tax, any price increases may be offset by increases in take-home
pay.
In any case, any price consequence is one time only and prices should stabilise
thereafter.
4. VAT favours the capital intensive firm

It is also argued that VAT places a heavy direct impact of tax on the labour-intensive
firm compared to the capital- intensive competitor, since the ratio of value added to
selling price is greater for the former. This is a real problem for labour-intensive
economies and industries.
Definitions.- In this Act unless the context otherwise requires:-
(1) ‘Agriculture’ with its grammatical variations includes horticulture, the raising of
crops, grass or garden produce and grazing but does not include dairy farming,
poultry farming, stock breeding and mere cutting of wood.
(2) ‘Agriculturist’ means a person who cultivates land

personally.
(3) ‘Agricultural produce or horticultural produce’ shall not be deemed to include

tea, beedi leaves, raw cashew, timber, wood, tamarind and such produce, except coffee
as has been subject to any physical, chemical or other process for being made fit for
consumption, save mere cleaning, grading, sorting or drying.
(4)‘Business’ includes:-
(a) any trade, commerce, manufacture or any adventure or concern in the nature of
trade, commerce or manufacture, whether or not such trade, commerce, manufacture,
adventure or concern is carried on in furtherance of gain or profit and whether or not
any gain or profit accrues therefrom; and
(c) any transaction in connection with, or incidental or ancillary to, such trade,
commerce, manufacture, adventure or concern.
(5) ‘Capital goods’ means plant, including cold storage and similar plant, machinery,
goods vehicles, equipments, moulds, tools and jigs whose total cost is not less than an
amount to be notified by the Government or the Commissioner, and used in the course
of business other than for sale.
(6)‘Dealer’ means any person who carries on the business of buying, selling, supplying
or distributing goods, directly or otherwise, whether for cash or for deferred payment,
or for commission, remuneration or other valuable consideration, and includes-
(a) an industrial, commercial or trading undertaking of the Government, the Central
Government, a State Government of any State other than the State of Karnataka, a
statutory body, a local authority, company, a Hindu undivided family, , a partnership
firm, a society, a club or an association which carries on such business;
(b) a casual trader, a person who has, whether as principal, agent or in any other
capacity, carries on occasional transactions of a business nature involving the buying,
selling, supply or distribution of goods in the State, whether for cash or for deferred
payment, or for commission, remuneration or other valuable consideration;
(c) a commission agent, a broker or del credere agent or an auctioneer or any other
mercantile agent by whatever name called, who carries on the business of buying,
selling , supplying or distributing goods on behalf of any principal;
(d) a non-resident dealer or an agent of a non-resident dealer, a local branch of a firm or
company or association situated outside the State ;
(e) a person who sells goods produced by him by manufacture or otherwise;
(f) a person engaged in the business of transfer otherwise than in pursuance of a contract
of property in any goods for cash deferred payment or other valuable consideration.
(g) a person engaged in the business of transfer of property in goods (whether as goods
or in some other form) involved in the execution of a works contract;
(h) a person engaged in the business of delivery of goods on hire purchase or any
system of payment by installments;
(i) a person engaged in the business of transfer of the right to use any goods for any
purpose (whether or not for a specified period) for cash, deferred payment or other
valuable consideration;
(7)‘Goods’ means all kinds of movable property (other than newspaper, actionable
claims, stocks and shares and securities) and includes livestock, all materials,
commodities and articles (including goods, as goods or in some other form) involved in
the execution of a works contract or those goods to be used in the fitting out,
improvement or
repair of movable property, and all growing crops, grass or things attached to, or
forming part of the land which are agreed to be severed before sale or under the contract
of sale.
(8)‘Input’ means any goods including capital goods purchased by a dealer in the course
of his business for re-sale or for use in the manufacture or processing or packing or
storing of other goods or any other use in business.
(9)‘Input tax’ has the meaning assigned to it in Section 10.
(10)‘Maximum retail price’ or ‘MRP’ shall mean the price marked on the package in
which the goods are contained.
(11) ‘Output tax’ has the meaning assigned to it in Section 10.
(12)‘Prescribed authority’ means an officer of the Commercial Taxes Department,

authorised by the Government or the Commissioner to perform such functions as may
be assigned to him.
(13)‘Taxable turnover’ means the turnover on which a dealer shall be liable to pay tax
as determined after making such deductions from his total turnover and in such manner
as may be prescribed, but shall not include the turnover of purchase or sale in the course
of interstate trade or commerce or in the course of export of the goods out of the
territory of India or in the course of import of the goods into the territory of India and
the value of goods transferred or despatched outside the State otherwise than by way of
sale.
(14) ‘Total turnover’ means the aggregate turnover in all goods of a dealer at all places
of business in the State, whether or not the whole or any portion of such turnover is
liable to tax, including the turnover of purchase or sale in the course of interstate trade
or commerce or in the course of export of the goods out of the territory of India or in the
course of import of the goods into the territory of India and the value of goods
transferred or despatched outside the State otherwise than by way of sale.
(15) ‘Turnover’ means the aggregate amount for which goods are sold or distributed or
delivered or otherwise disposed of in any of the ways referred to in clause (29) by a
dealer, either directly or through another, on his own account or on account of others,
whether for cash or for deferred payment or other valuable consideration, and includes
the aggregate amount for which goods are purchased from a person not registered under
the Act and the value of goods transferred or despatched outside the State otherwise
than by way of sale, and subject to such conditions and restrictions as may be prescribed
the amount for which goods are sold shall include any sums charged for anything done
by the dealer in respect of the goods sold at the time of or before the delivery
thereof.
(16)‘Works contract’ includes any agreement for carrying out for cash, deferred
payment or other valuable consideration, the building, construction, manufacture,
processing, fabrication, erection, installation, fitting out, improvement, modification,
repair or commissioning of any movable or immovable property.
THE INCIDENCE AND LEVY OF TAX
(17) Levy of tax.-

The tax shall be levied on every sale of goods in the State by a registered dealer or a
dealer liable to be registered, in accordance with the provisions of this Act.
The tax shall also be levied, and paid by every registered dealer or a dealer liable to be
registered, on the sale of taxable goods to him, for use in the course of his business,
by a person who is not registered under this Act.
The tax shall also be levied, and paid by every registered dealer or a dealer liable to be
registered, on the sale of taxable goods to him, for use in the course of his business,
by a person who is not registered under this Act.
Liability to tax and rates thereof.-

(1) Every dealer who is or is required to be registered as specified in Sections 22 and
24, shall be liable to pay tax, on his taxable turnover,
(a) in respect of goods mentioned in,-
(i) Second Schedule, at the rate of one per cent,
(ii) Third Schedule, at the rate of four per cent, and
(iii) Fourth Schedule, at the rate of twenty per cent.
(b) in respect of other goods, at the rate of twenty five per cent.
(2) Where goods sold or purchased are contained in containers or are packed in any
packing material liable to tax under this Act, the rate of tax applicable to taxable
turnover of such containers or packing materials shall, whether the price of the
containers or packing materials is charged for separately or not, be the same as the rate
of tax applicable to such goods so contained or packed, and where such goods sold or
purchased are exempt from tax under this Act, the containers or packing
materials shall also be exempt.
(3) The State Government may, by notification, reduce the tax payable under sub-
section (1) in respect of any goods.
5. Exemption of tax.- Goods specified in the First Schedule and any other goods as
may be specified by a notification by the State Government shall be exempt from the
tax payable under this Act.
6. Place of sale of goods.- (1) The sale or purchase of goods, other than in the course of
inter-State trade or commerce or in the course of import or export, shall be deemed, for
the purposes of this Act, to have taken place in the State irrespective of the place where
the contract of sale or purchase is made, if the goods are within the State.-
(a) in the case of specific or ascertained goods, at the time the contract of sale or
purchase is made; and
(b) in the case of unascertained or future goods, at the time of their appropriation to the
contract of sale or purchase by the seller or by the purchaser, whether the assent of the
other party is prior or subsequent to such appropriation.
(2) Where there is a single contract of sale or purchase of goods situated at more places
than one, the provisions of clause (a) shall apply as if there were separate contracts in
respect of goods at each of such places.
(3) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3
of 1930), for the purpose of this Act, the transfer of property of goods (whether as
goods or in some other form) involved in the execution of a works contract shall be
deemed to have taken place in the State, if the goods are within the State at the time of
such transfer, irrespective of the place where the agreement for works contract is made,
whether the assent of the other party is prior or subsequent to such transfer.
(4) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3
of 1930), for the purpose of this Act, the transfer of the right to use any goods for any
purpose (whether or not for a specified period) shall be deemed to have taken place in
the State, if such goods are for use within the State irrespective of the place where the
contract of transfer of the right to use the goods is made.
(18) Output tax, input tax and net tax.-

(1) Output tax in relation to any registered dealer means the tax payable under this Act
in respect of any taxable sale of goods made by that dealer in the course of his business,
and includes tax payable by a commission agent in respect of taxable sales of
goods made on behalf of such dealer subject to issue of a prescribed declaration by such
agent.
(2) Subject to input tax restrictions specified in Sections 11,12,14, 17, 18 and 19, input
tax in relation to any registered dealer means the tax collected or payable under this Act
on the sale to him of any goods for use in the course of his business, and includes the
tax on the sale of goods to his agent who purchases such goods on his behalf subject to
the manner as may be prescribed to claim input tax in such cases.
(3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the
net tax payable by a registered dealer in respect of each tax period shall be the amount
of output tax payable by him in that period less the input tax deductible by him as may
be prescribed in that period and shall be accounted for in accordance with the provisions
of Chapter V.
(4) For the purpose of calculating the amount of net tax to be paid or refunded, no
deduction for input tax shall be made unless a tax invoice, debit note or credit note, in
relation to a sale, has been issued in accordance with Section 29 or Section 30 and is
with the registered dealer taking the deduction at the time any return in respect of the
sale is furnished, except such tax paid under sub-section (2) of Section 3.
Time of sale of goods.-

(1) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act
3 of 1930), for the purpose of this Act, and subject to subsection (2), the sale of goods
shall be deemed to have taken place at the time of transfer of title or possession or
incorporation of the goods in the course of execution of any works contract whether or
not there is receipt of payment:
Provided that where a dealer issues a tax invoice in respect of such sale within fourteen
days from the date of the sale, the sale shall be deemed to have taken place at the time
the invoice is issued.
(2) Where, before the time applicable in sub-section (1), the dealer selling the goods
issues a tax invoice in respect of such sale or receives payment in respect of such sale,
the sale shall, to the extent that it is covered by the invoice or payment, be deemed to
have taken at the time the invoice is issued or the payment is received.
(3) The Commissioner may on an application of any dealer exempt such dealer subject
to such conditions as he may specify, from the time specified in sub- section (1).
Agents liable to pay tax.-

(1) Notwithstanding anything contained in any law for the time being in force including
this Act, every person who, for an agreed commission or brokerage, buys or sells on
behalf of any principal who is a resident of the State shall be liable to tax under this Act
at the rate or rates leviable thereunder in respect of such purchase or sale,
notwithstanding that such principal is not a dealer or that the turnover of purchase or
sale relating to such principal is less than the minimum specified in
sub-sections (1), (2) and (3) of Section 22.
(2) The principal shall not be liable to tax on his turnover in respect of which the agent
is liable to tax under sub-section (1), and the burden of proving that the turnover
has been effected through an agent liable to tax under the said sub-section, shall be on
such principal.
Collection of tax by registered dealers, Governments and statutory authorities.-

(1) Every registered dealer liable to pay tax under the Act shall collect such tax at the
rate or rates at which he is liable to pay tax, and the tax collected shall be accounted for
under the provisions of this Act and rules made thereunder.
(2) The Central Government, a State Government, a statutory body or a local authority
shall, in respect of any taxable sale of goods effected by them, collect by way of tax
any amount which a registered dealer effecting such sale would have collected by way
of tax under this Act, issue a tax invoice, pay the tax so collected into the Government
Treasury or any designated bank and furnish monthly returns, as specified under Section
35, to the prescribed authority.
Input tax restrictions.-

(a) Input tax shall not be deducted in calculating the net tax payable, in respect of:
(1) tax paid on purchases attributable to sale of exempted goods exempted under
Section 5, except when such goods are sold in the course of export
out of the territory of India;
(2) tax paid on purchase of goods that are dispatched outside the State, other than as a
direct result of sale or purchase in the course of inter-State trade or commerce;
(3) tax paid on goods including capital goods as specified in the Fifth Schedule and any
other goods as may be notified by the Government or the Commissioner, purchased or
put to use for purposes other than for re-sale;
(4) tax paid on purchase of capital goods other than those falling under clause (3),
except as provided in Section 12;
(5) tax paid on purchase of goods used as inputs in the manufacture, processing or
packing of other taxable goods despatched to a place outside the State not as a direct
result of sale or purchase in the course of inter-State trade, except as provided in Section
14;
(6) tax paid on purchases attributable to naptha, liquified petroleum gas, furnace oil,
light diesel oil, superior kerosene oil, kerosene and any other petroleum product, when
used as fuel in motor vehicles, but when used as fuel in production of any goods for sale
in the course of export out of the territory of India or taxable goods or captive power,
input tax shall be deducted as provided in Section 14.
(7) tax paid under sub-section (2) of Section 3 on the purchase of fuel;
(8) tax paid under sub-section (2) of Section 3 on the purchase of goods excluding fuel,
until output tax is payable on such goods or other goods in which such goods are put to
use except when the said goods are exported out of the territory of India;
(9) tax paid on goods purchased by a dealer who is required to be registered under the
Act, but has failed to register.
(b) Input tax shall not be deducted by an agent purchasing or selling goods on behalf of
any other person other than a non-resident principal.
Deduction of input tax in respect of Capital goods.-

(1) Deduction of input tax shall be allowed to the registered dealer in respect of the
purchase of capital goods for use in the business of sale of any goods in the course of
export out of the territory of India and in the case of any other dealer in respect of the
purchase of capital goods wholly or partly for use in the business of taxable goods.
(2) Deduction of input tax under this Section shall be allowed only after commencement
of commercial production, or sale of taxable goods or sale of any goods in the course of
export out of the territory of the India by the registered dealer and shall be apportioned
over a specified period, as may be prescribed.
Special rebating scheme.-

Deduction of input tax shall be allowed on the difference between the rate of input tax
charged at a rate higher than four per cent and the rate specified in Third Schedule on
purchases specified in subsection (5) and sub-section (6) of Section 11.

Taxation Laws2

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Taxation Laws2

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COM633 : TAXATION LAWS - II

(The paper is divided in to two parts)

Unit: - 1 Capital Gains: (Individual Assessee,

Unit: - 2 Clubbing of Income: Income of Other

Unit: - 4 Computation of Total Income and Tax Liability: Deduction from

Unit: - 5 Procedure for Assessment:

Self Assessment- Assessment-Best Judgment Assessment- Income escaping

Unit: - 6 Income Tax Authorities:

Unit: - 7 The Central Excise Act:

Introduction; Definitions: Central Excise Officer, Excisable Goods, Manufacture, and

Unit: - 8 Service Tax:

Introduction; Meaning and classification of taxable service (Sec.65A); Charge of

Unit: - 10 Value Added Tax:

(Karnataka VAT Act 2003 as amended by Act of 2005)

Introduction- meaning of the terms –Agricultural Produce, Business, Capital Goods,

c) Agricultural land in India other than the following:

• Land situated in any area within the jurisdiction of muni-cipality, municipal

TYPES OF CAPITAL ASSET

Term Capital Assets. In other words, an asset, which is transferred on or

TYPES OF CAPITAL GAIN

Compulsory acquisition of asset.

i) Sale, exchange or relinquishement of a capital asset

ii) Extinguishment of any rights in a capital asset

This covers every possible transaction which results in destruction, extinction,

iii) Compulsory acquisition of the capital asset under any law

Acquisition of immovable properties under the Land acquisition Act, acquisition of

iv) Conversion of a capital asset into stock-in-trade

v) Part performance of a contract of sale

Normally transfer of an immovable property worth Rs.100/- or more is not complete

The act of giving possession of an immovable property in part performance of a contract

vi) Transfer of rights in immovable properties through the medium of co-operative

All these transactions are regarded as transfer.

vii) Transfer by a person to a firm or other or Body of a person to a Association of

viii) Distribution of capital assets on Dissolution

Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not

ix) Distribution of money or other assets by a Company on liquidation

(ii)Transactions not regarded as Transfer

Distribution of capital assets on the total or partial, partition of a Hindu Undivided

iii) transfer of a capital asset by a company to its subsidiary company, if:

b) the subsidiary company is an Indian company,

c) the capital asset is not transferred as stock-in- trade,

b) the holding company is an Indian Company,

c) the capital asset is not transferred as stock-in-trade,

vi) transfer of shares of an amalgamating company, if:

a) the transfer is made in consideration of the allotment of share or shares in the

b) the amalgamated company is an Indian company.

vii) transfer of shares of an Indian Company by an amalgamating foreign company to

b) transfer of share or shares held in an Indian company by the demerged foreign

c) Transfer or issue of shares, in consideration of demerger of the undertaking by,the

ix) Transfer of bonds or Global Depository Receipts, purchased in foreign currency, by

x) Transfer of agricultural land in India effected before first of March,'70.

certificate in any form, of a company into shares or debentures of that company.

xiii) transfer of membership of a recognised stock exchange made by a person (other

xv) Transfer of a capital asset to a company in the course of corporitisation of a

b) corporitisation is carried out in accordance with a scheme which is approved by

(xvi) Where a firm is succeeded by a company in the business carried on by it as a result

xvii) Where a sole proprietary concern is succeeded by a company in the business

xviii) transfer in a scheme of lending of any securities under an arrangement subject to

Full Value of Consideration

Less: Cost of Acquisition*(COA)

Less: Exemptions U/S 54

Taxable Capital Gains

• To be indexed in case of LTCA