Incomes Exempted from Tax
Q. 6. Discuss any 25 incomes which do not form part of total income.
Ans. In the following cases, income is absolutely exempt from tax, as it does not form part of total income, the burden of proving that a particular item of income falls within this section is on the assessee.
(i) Agricultural income- Agricultural income is exempt from tax if it comes within the definition of “agricultural income” as given in section 2(1A). In some cases, however, agricultural income is taken into consideration to find out tax on non-agricultural income. [Sec. 10(1)]
(ii) Receipts by a member from a Hindu undivided family- Any sum received by an individual as a member of a Hindu undivided family either out of income of the family or out of income of estate belonging to the family is exempt from tax. Such receipts are not chargeable to tax in the hands of an individual member even if tax is not paid or payable by the family on its total income.
The exemption is based upon the principle of avoidance of double taxation. Income of a Hindu undivided family is taxable in its own hand. Section 10(2), therefore, exempts income received by a member from his Hindu undivided family. Only those members of a Hindu undivided family can claim exemption under this clause who are entitled to demand share on partition or are entitled to maintenance under the Hindu law. Some of the receipts from a Hindu undivided family are, however, taxable vide section 64(2). [Sec. 10(2)]
(iii) Share of profit from partnership firm-Share of profit received by partners from a firm (which is assessed as firm) is not taxable in the hand of partners. [Sec. 10(2A)]
(iv) Interest to non-residents-The following interest income is exempt from tax
(a) any income of a non-resident by way of interest on notified Government securities (including premium on redemption of such bond), (b) income from interest on money standing to credit to a non-resident (External) Account in India, in accordance with the Foreign Exchange Regulation Act, 1973 (the exemption is available to “person resident outside India” under section 2(q) of the Foreign Exchange Regulation Act or a person who has been permitted by the Reserve Bank of India to maintain the aforesaid account); (c) in the case of an Indian citizen (or a person of Indian origin) who is a non-resident, the interest from notified saving certificates (i.e., National Saving Certificates, VI and VII Issues) if such certificates are subscribed in convertible foreign exchange remitted from outside through official channels. [Sec. 10(4), (4B)]
(v) Fees for technical services- Income by way of fees for technical services received by notified foreign companies is not chargeable to tax, where such income is received in pursuance of an agreement entered into with the Central Government to provide service in or outside India in projects connected with security of India. [Sec. 10(6C)]
(vi) Income of family members of an employee serving under co- operative technical assistance programmes- Any family member of an employee, mentioned in section 10(8) and 10(8A), 10(8B), accompanying him to India, enjoys tax exemption in respect of foreign income or an income, not deemed to accrue or arise in India, if the family member is required to pay income-tax (including social security tax) to the foreign Government.
(vii) Gratuity- Gratuity is a retirement benefit. It is generally payable at the time of cessation of employment and on the basis of duration of service. [Sec. 10(10)]
In case of Government Employee-Any death cum retirement gratuity received by Government employees (ie. Central Government employee, State Government employee, employee of local authority but not employee of a statutory corporation) is wholly exempt from tax under section 10(10)(i).
In case of Employee Covered by the Payment of Gratuity Act, 1972- Any gratuity received by on employee, covered by the payment of Gratuity Act, 1972 is exempt from tax to the extent of the least of the following:
(a) 15 days’ salary (7 days’ salary in case of employees of a seasonal establishment) based on salary drawn for every completed year of service or part thereof in excess of six months, (b) Rs. 3,50,000 (c) gratuity actually received.
In case of any other Employee Any other gratuity, not covered by the abovementioned, received by an employee on retirement, death, termination, resignation or on his becoming incapacitated prior to retirement, is exempt from tax to the extent of least of the following:
(a) Rs. 3,50,000, (b) half months average salary for each completed year of service, (c) gratuity actually received.
(viii) Pension- Any commuted pension received by a Government employee (ie. an employee of Central Government, State Government, local authority and statutory corporation) is wholly exempt.
Payment in commutation of pension received by a non-government employee:
(i) in case where the employee receives gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and
(ii) in any other case, the commuted value of one half of such pension, is exempt from tax.
Besides any payment received by way of commutation of pension by the individual out of annuity plan of life Insurance Corporation of India from a fund set up by that corporation shall be exempt. [Sec. 10(10AA)]
(ix) Leave Salary- In case of a Central/State Government employee, any amount received as cash equivalent of leave salary in respect of period of carned leave at his credit at the time of his retirement whether on superannuation or otherwise, is exempt from tax.
In case of non-Government employee (including an employee of a local authority or public sector undertaking), leave salary is exempt from tax to the extent of the least of the following:
(a) cash equivalent of the leave salary in respect of the period of earned leave to the credit of employee at the time of his retirement, whether on super- annuation or otherwise. (b) 10 months’ average salary, (c) 300,000, (d) Leave encashment actually received at the time of retirement. [Sec. 10(10AA)]
(x) Retrenchment Compensation-Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the lower of the following:
(a) an amount calculated in accordance with the provisions of section 25F(b) of the Industrial Disputes Act 1947; or (b) Rs. 500,000, (c) the amount actually received. [Sec. 10(10B)]
(xi) Tax on perquisite paid by employer- A new clause (10CC) is inserted in section 10 with effect from the assessment year 2003-04 to exempt the amount of tax actually paid by an employer, at his option, on the income in the nature of a perquisite (not provided for by way of monetary payment) on behalf of an employee, from being included in perquisites. Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under section 40. [Sec. 10(10CC)]
(xii) Sum received from life insurance policy Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, shall not be included in the total income of a person. The exemption is, however, not available in respect of such policy which is specified under section 80DDA(3) or under a Keyman insurance policy [Sec. 10(10D)]
Amendment of Sec. 10(10D)-Any sum received under an insurance policy issued after 31-3-2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the sum assured shall also not be exempt. However, if the sum is received on the death of a person it shall be exempt.
(xiii) Educational scholarship [Sec. 10(16)] Scholarship granted to meet the cost of education is exempt from tax. A few examples are Fullbright grant described as “maintenance allowance” given to tutors/junior/ senior research fellowship awarded by the Department of Atomic Energy. financial assistance to research workers in universities for undertaking research of learned work (te, non-recurring grant up to a maximum of Rs. 5,000), maintenance allowance granted to foreign trainees under the International Association for the Exchange of Students Scheme, research fellowship granted by the University Grants Commission, junior and senior fellowship awarded by the Council of Scientific and Industrial Research etc
(xiv) Daily allowance of Members of Parliament [Sec. 10(17)]- Section 10(17) provides exemption to Members of Parliament and State Legislatures in respect of the following allowances-
(a) daily allowance received by any Member of Parliament or any State Legislature or of any Committee thereof (entire amount is exempt); (b) any allowance received by a Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986 (entire amount is exempt). and (c) all allowances received by the members of a State Legislature or any Committee thereof to the extent of Rs. 2,500 per month in aggregate
(xv) Income from Khadi or Village Industries [Sec. 10(23B)]- Any income of any institution constituted as a trust or society and existing solely for the development of Khadi and Village Industries, and not for the purpose of profit, is exempt from tax. The exemption is, however, granted to the extent such income is attributable to the business of production, sale, or marketing of khadi or produce of village industries and if the following conditions are satisfied-
(a) the institution applies its income or accumulates it for application, solely for the development of khadi or village industries, and (b) the institution is approved by the Khadi and Village Industries Commission.
(xvi) Income of Khadi and Village Industries Boards [Sec. 10(23BB)]- Any income of Khadi and Village Industries Boards set up under a State or Provincial Act for the development of Khadi and village industries in the State, is exempt from tax.
(xvii) Income of statutory bodies for the administration of public charitable trust [Sec. 10(23BBA)]- Any income of bodies or authorities established or constituted or appointed under any enactment for the administration of public, religious or charitable trusts, or endowments (including maths, temples, gurdwaras, wakfs, churches, synagogues, agiaries or other public places of religious worship) or societies for religious or charitable purposes, is exempt from tax. It has, however, been clarified that the exemption will not apply to the income of any such trust, endowment or society.
(xviii) Income of certain national funds, educational institutions and hospitals Sec. 10(23C)] Income for Certain National Fund-Any income received by any person on behalf of the following funds is exempt from tax-
(a) the Prime Minister’s National Relief Fund [Sec. 10(23C)(i)); or (b) the Prime Minister’s Fund (Promotion of Folk Art) [Sec. 10(23C) (ii)], or (c) the Prime Minister’s Aid to Students Fund [Sec 10(23C)(in)); or (d) the National Foundation for Communal Harmony [Sec. 10(23C) (ina)], or (e) any other charitable fund or institution which is notified by the Central Government [Sec. 10(23C)(iv)]; or (f) any trust including any other legal obligation) or institution wholly for public religious purposes or wholly for religious and charitable purposes which is notified by the Central Government [Sec. 10(23C)(v)].
A fund or institution mentioned at (e) or (f) supra will have to satisfy some conditions to claim exemption.
Income of Educational Institutions Income of the following educational institutions is exempt from tax under section 10(23C)-
(a) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government [sec. 10(23C)(imab)]; or (b) any university or other educational institution existing solely for educational purposes and not for purposes for profit if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore [Sec. 10(23C)(iad)]; and (c) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in (a) and (b) supra and which may be approved by the prescribed authority (Le., the Chief Commissioner) [Sec. 10(23C)(vi)]
An educational institution mentioned at (c) supra will have to satisfy some conditions to claim exemption.
Income of Hospital-If the following conditions are satisfied, income of hospital is exempt from tax under section 10(23C)-
(1) Income arises to a hospital or other institution for the reception and treatment of persons-
(a) suffering from illness or mental defectiveness, or (b) during convalescence; or (c) requiring medical attention or rehabilitation.
(2) The hospital or other institution exists solely for philanthropic purposes and not for the purpose of profit.
(3) the hospital or other institution is-
(a) wholly or substantially financed by the Government [Sec 10(23C)(inac)]; or (b) the aggregate annual receipts of such hospital or institution do not exceed Rs. 1 crore [Sec 10(23C)(mae)], or (c) it is approved by the prescribed authority (tc., the Chief Commissioner) [Sec. 10(230)(via)) [one has to satisfy certain conditions for getting approval]
(xix) Income of a mutual fund (Sec. 10(23D) Any income of the following mutual funds (subject to provisions of sections 115R to 115T) is not chargeable to tax-
(a) a mutual fund registered under the Securities and Exchange Board of India Act or regulation made thereunder, (b) a notified mutual fund set up by a public sector bank, or a public financial institution or authorised by RBI
(xx) Income of trade unions [Sec. 10(24)]-Any income, chargeable under the heads “Income from house property” and “Income from other sources”, of a trade union registered under the Indian Trade Unions Act, 1926, formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen, is exempt from tax. Section 10(24) has been modified with effect from the assessment year 1997-98. After the amendment the tax exemption has been extended to an association of trade unions.
(xxi) Income of provident funds [Sec. 10(25)]-The following income is exempt from tax under this clause-
(a) interest on securities held by a statutory provident fund and any capital gains arising from the sale, exchange or transfer of such securities; (b) any income received by the trustees on behalf of a recognised provident fund, and approved superannuation fund, or an approved gratuity fund; and (c) any income received by the Board of Trustees on behalf of Deposit-linked Insurance Fund
(xxii) Income of member of Scheduled Tribe [Sec. 10(26)]- Exemption under section 10(26) is available if the following conditions are satisfied-
(1) The taxpayer is a member of a Scheduled Tribe [article 366(25) of the Constitution).
(2) The taxpayer resides in any area in the State of Nagaland, Manipur. Tripura, Arunachal Pradesh, Mizoram or districts of North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills and Garo Hills or in the Ladakh region of the State of Jammu and Kashmir.
(3) Exemption is available in respect of income which accrues or arises to him from any source in the areas or State specified above. Exemption is available in respect of income by way of dividend/interest on securities even if it arises from a source in the areas not specified above.
(xxiii) Special provision in respect of newly established industrial undertakings in free trade zones, etc. [Sec. 10(A)]. – Sec. 10A of the Income- tax Act provides that any profits and gains derived by an assessee from an industrial undertaking are not to be included in his total income, provided the following conditions are satisfied-
(i) The industrial undertaking manufactures or produces articles or things in any free trade zone, ie the Kandla Free Trade Zone, the Santacruz Electronic Export Processing Zone, Falta Export Processing Zone, Madras Export Processing Zone, Cochin Export Processing Zone and Noida Export Processing Zone, or any other Software Technology Park or special economic zone notified by the Central Government for the purpose of this section (1) Such as undertaking is not formed by the splitting up, or the reconstruction, of a business already in existence. (iii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (iv) There must be repatriation of sale proceeds into India. (v) The ownership or beneficial interest in the undertaking account of deduction must not be transferred
If the aforesaid conditions are satisfied, the assessee can claim deduction w/s 10A from his total income, for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software.
AMOUNT OF DEDUCTION-If the aforesaid conditions are satisfied, the deduction under section 10A from the assessment year 2003-04 may, eb computed as under-
90 per cent of [Profits of the business of the undertaking Export turnover Total turnover of the business carried on by the undertaking)
(xxiv) Special provision in respect of newly established hundred percent export oriented undertakings [Sec. 10B]- Sec. 10B of the Income tax Act (Inserted by the Finance Act, 1988) exempts from tax any profits and gains derived by an assessee from a hundred percent export oriented undertaking. This section applies to any undertaking which fulfils the following conditions-
(1) That it manufactures or produces any article or thing. (11) That it is not formed by the splitting up or the reconstruction, of a business already in existence. (iii) That it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (iv) There must be repatriation of sale proceeds into India. (v) The ownership or beneficial interest in the undertaking account of deduction must not be transferred.
If the aforesaid conditions are satisfied, the assessee can claim deduction u/s 10B from his total income, for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software.
For the purposes of this section, “hundred percent export oriented undertaking” means an undertaking which has been approved as such by the Board appointed in this behalf by the Central government.
AMOUNT OF DEDUCTION-If the aforesaid conditions are satisfied, the deduction under section 10A from the assessment year 2003-04 may, eb computed as under-
90 per cent of [Profits of the business of the undertaking × Export turnover ÷ Total turnover of the business carried on by the undertaking]
(xxv) Compensation received by victims of Bhopal gas leak disaster- Payment received by victims of Bhopal gas leak disaster, in accordance with the provisions of the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 (and any scheme framed thereunder) is not chargeable to tax. However, compensation received by an assessee in respect of an expenditure which has been incurred and allowed as a deduction from taxable income, is not exempt from income-tax. [Sec. 10(10BB)]
Income from Salary
Q. 7. Discuss the meaning and scope of salary. What is the basis of charge of salary income?
Ans. Salary– Under Section 17(1) salary is defined to include the following:
(a) wages,
(b) any annuity or pension;
(c) any gratuity;
(d) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages:
(e) any advance of salary.
(f) any payment received by an employee in respect of any period of leave not availed by him:
(g) the portion of the annual accretion in any previous years to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable; and
(h) transferred balance in a recognised provident fund to the extent it is taxable.[Sec. 17(1)]
Remuneration payable to M. D. expended for the purchase of deferred annuity policy is taxable as salary.
Meaning and Scope of Salary- Following points should be considered to understand the meaning and scope of salary:
Relationship between payer and payee- The relationship between payer and payee should be of employer and employee. In other words, the amount received by an individual may be treated as salary only if the relationship between payer and payee is of an employer and employee or master and servant.
A Member of Parliament or of State Legislature is not treated as an employee of the Government. Salary and allowances received by him are therefore not chargeable to tax under the head ‘salaries’ but are chargeable to tax under section 56 under the head “Income from other sources”-Board’s circular letter [F. No. 40/29/67-IT (A-1)) dated May 22, 1967.
Salary and wages-Conceptually there is no difference between salary and wages. Both are compensation for work done or services rendered, though ordinarily salary is paid in connection with services of non-manual type of work, while wages is paid in connection with manual service [Gestetner Duplicators (P.) Ltd vs. CIT (1979) 1 Taxman 1/117 ITR 1 (SC)]. Therefore, remuneration received by an individual is taxable under the head “Salaries” whether the remuneration is termed as salary or wages.
Salary from more than one source-If an individual receives salary from more than one employer during the same previous year (may be due to change of employment or due to employment with more than one employer simultaneously), salary from each source is taxable under the head “Salaries”. For instance, if a clerk works with two employers on part-time basis, salary from both the employers will be chargeable to tax under the head “Salaries”.
Salary from former employer, present employer or prospective employer-Remuneration received (or due) during the previous year is chargeable to tax under the head “Salaries” irrespective of the fact whether it is received from a former, present or prospective employer.
Salary income must be real and not fictitious-Amount taxable under the head “Salaries” should be a real salary and not fictitious salary. There should be an intention to pay and receive salary: Where, for example, there was merely in order to comply with the requirement of the Board of Education Rades, an agreement between the assessee (a school teacher) and the governing body of the school granting a certain salary to the assessee and simultaneously there was another agreement by which an identical sum was to be returned by the assessee to the governing body as donation, it was held that there was in reality no agreement to pay and receive salary [Reade vs Brearley (1933) 17 TC 687) II, therefore, it is proved that there is no intention to pay or receive salary and that the employment agreement does not represent the real intention of the parties, the recipient of such salary, under the agreement, will not be taxable. Likewise, if there is no intention to render any service and agreement is made to make payment on paper in order to claim the same as business deduction, the amount received by the so-called employee is not chargeable as salary.
Foregoing of salary- Section 15 taxes salary on “due” basis even if it is not received. If, therefore, an employee foregoes his salary, it does not mean that salary so foregone is not taxable. Once salary has accrued to an employee its subsequent waiver does not make it exempt from tax liability. Such voluntary waiver or foregoing by an employee of salary due to him is merely an application of income and is nonetheless chargeable to tax.
Surrender of salary-If an employee opts to surrender his salary to the Central Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be excluded while computing his taxable income. Benefit of tax exemption in respect of salary so surrendered is available to all employees whether they are employed in private sector or public sector.
Salary paid tax-free-If salary is paid tax-free by the employee, the employee has to include in his taxable income not only salary received but also amount of tax paid by the employer. It does not make any difference whether tax is paid under terms of contract by the employer or voluntarily.
Voluntary payments-Salary, perquisite or allowance may be given as a gift to an employee, yet it would be taxable. The Act does not make any distinction between gratuitous payment and contractual payment.
Previous year of salary income-From the assessment year 1989-90 onwards, previous year of salary income will end on March 31 immediately preceding the assessment year.
Basis of charge of salary income-The basis of charge is explained in the following paras-
Basis of charge as per section 15-As per section 15, salary consists of:
(a) any salary due from an employer (or a former employer) to an assessee in the previous year, whether actually paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer for a former employer), though not due or before it became due, and
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer (or a former employer), if not charged to income- tax for any earlier previous year.
To put it differently, the following are taxable during the previous year 2002-03-
1. Salary which becomes “due” during 2002-03, although it is received in a subsequent year.
2. Salary which is received during 2002-03 but which will become due in a subsequent year.
3. Any arrears of salary received during 2002-03, although it pertains to one of the earlier years (and the same were not taxed earlier on due basis).
Salary is taxable on “due” or “receipt” basis whichever is earlier- Basis of charge in respect of salary income is fixed by section 15. Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever matures earlier. For instance, if salary of 2003-04 is received in advance in 2002-03, it is included in the total income of the previous year 2002-03 on “receipt” basis (as tax incidence matures earlier on “receipt” basis, “due” basis is not relevant in the case, therefore, salary will not be included in total income of the previous year 2003-04). On the other hand, if salary which has become due in 2001-02 and received in 2002-03, is included in total income of the previous year 2001-02 on “due” basis (as incidence of tax matures earlier on “due” basis, “receipt” basis is inapplicable; salary will, therefore, not be included in total income of the previous year 2002-03).
Accounting method of the employee not relevant-It is worthwhile to mention that salary is chargeable to tax on “due” or “receipt” basis (whichever matures earlier) regardless of the fact whether books of account, in respect of salary income, are maintained by the assessee on mercantile basis or cash basis. Method of accounting cannot, therefore, vary the basis of charge fixed by section 15.
Q. 8. Describe the deductions permissible in computing the income from salary.
Ans. PERMISSIBLE DEDUCTIONS FROM SALARY INCOME- The income chargeable under the head ‘salaries’ is computed after making the following deductions.
Standard Deduction- Standard deduction is allowed to an employee irrespective of his designation and regardless of the fact whether or not any expenditure incidental to employment has actually been incurred by him. Following points should be considered in this regard:
(a) Taxable value of salary, allowances and perquisites is eligible for standard deduction. Standard deduction is available even in respect of gratuity.
(b) Even if salary is received during the previous year from more than one employer, the amount of standard deduction cannot exceed the monetary ceiling specified above.
(c) Standard deduction at the aforesaid rate is available even from pension income which is income under the head “salaries Family pension is however taxable under the head “Income from other sources” and qualified for standard deduction under section 57[Sec. 1603]
From the Assessment Year 2004-05, the standard deduction shall be allowed as under:
Where income from salary, before allowing standard deduction
(i) does not exceed Rs. 5,00,000-40% of salary or Rs. 30.000. whichever is less.
(ii) exceeds Rs 5,00,000-Rs. 20,000.
Entertainment Allowance – Entertainment allowance is first included in salary and thereafter a deduction is allowed in accordance with the rule mentioned below:
(a) In case of a government employee (ie a Central Government or a State Government employee), the least of the following is deductible
1. Rs 5000;
2. 20 percent of basic salary, or
3. Amount of entertainment allowance deductible from salary, the following points need consideration:
For this purpose salary excludes any allowance, benefit or other perquisites.
Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.
(b) In the case of non-government employee (including employees of statutory corporations and local authority) entertainment allowance is not deductible from the assessment year 2002-03 onwards.[Sec. 16(i))
Professional Tax or Tax on Employment Professional tax or tax on employment levied by a State under Article 276 of the Constitution is allowed as deduction.
The following points should be considered:
1. Deduction is available only in one year in which professional tax is paid.
2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a perquisite (since it is an obligation of the employee discharged by the employer, it is taxable whether the employee is a specified employee or not) and then the same amount is allowed as deduction on account of professional tax from gross salary. [Sec. 16(3)
Q. 9. What do you understand by allowances? Describe any ten allowances. How these are taxed ?
Ans. Allowance- Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the service rendered by the employee or as compensation for unusual conditions of that service (Mutual Acceptance Co. vs FCT (1944) 69 CLR 389]. It is fixed. predetermined and given irrespective of actual expenditure Under the Act, it is taxable under section 15 on “due” or “receipt” basis, irrespective of the fact that it is paid in addition to or in lieu of salary.
Different types of allowances and their tax treatment is as given below :
1. City compensatory allowance-It is taxable irrespective of the fact whether it is allowed to meet personal expenses necessitated by special circum- stances in which the employee has to perform his duty or to compensate extra expenditure which he has to bear by reason of his posting at a particular place.
2. House rent allowance-Exemption in respect of house rent allowance is regulated by rule 2A. The least of the following is exempt from tax.
(a) an amount equal to 50 per cent of salary, where residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40 per cent of salary where residential house is situated at any other place,
(b) house rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year; or
(c) the excess of rent paid over 10 per cent of salary.
Exemption is denied where an employee lives in his own house or in a house for which he does not pay any rent or pays rent which does not exceed 10 percent of the salary. [Sec. 10(13A) and rule 2A)
3. Travelling allowance/transfer allowance-Any allowance (by whatever name called) granted to meet the cost of travel on tour or on transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer).
4. Conveyance allowance-Conveyance allowance granted to meet the expenditure on conveyance in performance mance of duties of an office (it may be noted that an expenditure for covering the journey between office and residence is not treated as expenditure in performance of duties of the office consequently, such expenditure is not exempt from tax)
5. Daily allowance-Any allowance whether granted on tour or for the period of journey in commection with transfer, to meet the ordinary daily charge incurred by an employee on account of absence from his normal place of duty.
6. Helper allowance Any allowance (by whatever name called) to meet the expenditure on a helper where such helper is engaged for the performance of official duties.
7. Research allowance-Any allowance (by whatever name called) granted for encouraging the academic research and other professional pursuits.
8. Uniform allowaner-Any allowance (by whatever name called) to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of duties of an office.
The allowances given above from 3 to 8 are exempt under section 10(14) to the extent of the amount utilised for the specified purpose for which the allowance is received and the rest is taxable
9. Special Compensatory (Hill Areas) allowance-It includes any special compensatory allowance in the nature of special compensatory (hilly areas) allowance or high altitude allowance or uncongenial climate allowance or snow bound area allowance or avalanche allowance. Amount exempt from tax varies from Rs. 300 per month to Rs. 7,000 per month.
10. Border area allowance-It includes any special compensatory allowance in the nature of border area allowance or remote locality allowance or difficult area allowance or disturbed area allowance. The amount of exemption varies from Rs. 200 per month to Rs. 1,300 per month.
The allowances given above at point 9 and 10 are exempt to the extent of amount specified in Rule 2BB.
Q. 10. Define perquisite. What perquisites are not taxable under the provisions of Income Tax Act, 1961.
Ans. “Perquisites” as defined in the Act-Under the Act, the term “perquisites” is defined by section 17(2) as including the following items :
(a) the value of rent-free accommodation provided to the assessee by his employer, [Sec. 17(2)(3)
(b) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer, [Sec. 17(2)(ii)]
(c) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
(1) by a company to an employee who is a director thereof:
(ii) by a company to an employee, being a person who has substantial interest in the company.
(iii) by any employer (including a company) to an employee to whom provisions of (1) and (ii) above do not apply and whose income under the head “Salaries” exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000; [See 17(2)(iii)]
(d) any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee, (Sec. 17(2)(iv))
(e) any sum payable by the employer, whether directly or through a fund other than a recognised provident fund, to effect an assurance on the life of the assesser or to effect a contract for an annuity and [Sec. 17(2)(v)]
(f) the value of any other fringe benefits of amenity as may be prescribed. [Sec. 17(2)(vi))
Non charging of interest on debit balance of Directors of company is not perquisite.
Perquisites not taxable The following perquisites are not taxable either under the executive instructions of the Central Board of Direct Taxes or by virtue of specific provision in the Act/Rules:
1. The provision of medical facilities.
2. Refreshment provided by an employer to all employees during working hours in office premises.
3 Free meal provided by the employer during working/business hours or through paid non-transferable (usable only at cating joints) vouchers if value thereof in either case does not exceed Rs. 50 per meal.
4. Free meals provided during working hours in a remote area or an offshore installation.
5. Amount spent on training of employees or fees paid for refresher management course.
6. Goods (manufactured by the employer) sold by the employer to his employees at concessional rates.
7. Perquisites allowed outside India by the Government to a citizen of India for rendering service outside India.
8. Employer’s contribution to staff group insurance scheme
9. Leave travel concession.
10. Free telephone(s) including mobile phone(s).
11. Payment of annual premium by employer on personal accident policy effected by him on his employee.
12. Re-imbursement of expenses in respect of car (which is owned by employee and used for personal and official purpose) (amount not taxable is up to Rs. 1,200 per month for car having engine capacity of not more than 1600cc, Rs. 1,600 per month for car of above 1600 and Rs. 600 per month for driver)
13. Free educational facility provided in an institute owned / maintained by employer to children of employee provided cost / value does not exceed Rs. 1,000 per month per child (no limit on children).
14. Interest-free/concessional loan of an amount not exceeding Rs. 20,000
15. Gift-in kind up to Rs. 5,000 in a year.
16. Computer/laptop given (not transferred) to an employee for official/ personal use (which is owned or hired by employer).
17. Transfer without consideration to an employee of a movable asset (other than computer, electronic items, car) by the employer after using it for a period of 10 years or more.
18. Accommodation provided in a ‘remote area’ to an employce working at a mining site or an onshore ore oil oil exploration site or a project execution site or an accommodation provided in an offshore site of similar nature.
19. Accommodation provided on transfer of an employee in a hotel for not exceeding 15 days in aggregate.
20. Interest-free loan for medical treatment of the nature given in Rule 3A.
21. Initial fees paid by employer for acquiring corporate membership of a club.
22. Use of health club, sports or similar facility provided uniformly to all employees by the employer.
23. Periodicals and journals required for discharge of work.
24. Rent-free official residence provided to a Judge of a High Court or of the Supreme Court.
25. Rent-free furnished residence (including maintenance thereof) provided to an official of Parliament. a Union Minister or a Leader of Opposition in Parliament.
26. Conveyance facility provided to High Court Judges under section 22B of the High Court Judges (Conditions of Service) Act, 1956 and Supreme Court Judges under section 23A of the Supreme Court Judges (Conditions of Service) Act, 1958.
27. Conveyance facility provided to an employee to cover the journey between office and residence.
28. The value of any benefit provided free of cost or at a concessional rate by a company to its employees by way of allotment of shares, debentures or warrants (directly or indirectly) under the Employees Stock Plan or Scheme in accordance with guidelines issued by the Central Government.
29. Tax on perquisite-in-kind paid by the employer (applicable from the assessment year 2003-04).
Income from House Property
Q. 11. What are the conditions of chargeability under section 22 of Income Tax Act? Discuss. Or
What is the basis of charge on ‘Income from House Property’? Discuss.
Ans. Basis of charge-Under the Act, annual value of a property. consisting of any buildings or lands appurtenant thereto, of which the assessee is owner, is chargeable to tax under the head “Income from house property”. If, however, a house property is occupied by the assessee for the purpose of his business or profession, carried on by him, the profits of which are chargeable to income-tax, annual value of such property is not chargeable to tax under the head “Income from house property”. [Sec. 22]
Tax levied under S. 22 in tax on income and not on property.
Three conditions-Rental income is taxable under the head “Income from house property” if the following three conditions are satisfied:
(a) the property should consist of any buildings or lands appurtenant thereto;
(b) the assessee should be owner of the property, and
(c) the property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax.
Unless, therefore, all the aforesaid conditions are satisfied, the property income cannot be charged to tax under the head “Income from house property”.
In other words, if all the aforesaid conditions are satisfied, property income is taxable under section 22 under the head “Income from house property”. It makes no difference if the assessee is a company which has been incorporated with the object of buying and developing landed properties.
Property consisting of any building or lands appurtenant thereto- The term “property” is very wide, though under section 22 it is used for a limited purpose, viz., the property consisting of any buildings or lands appurtenant thereto. All other types of properties are, thus, excluded from the scope of section 22. Rental income of a vacant plot (not appurtenant to building) is not chargeable to tax under the head “Income from house property, but is taxable either under the head “Profits and gains of business or profession or under the head “Income from other sources”, as the case may be.
“Building defined-The word “building” is not defined under the Act. Many courts have given judicial interpretation of the word “building” Some of which are summarised as under:
Building is an enclosure of the brick or stone work covered by roof Moir va Williams (1892) QBD 264]
Building is an enclosure which may even consist of mud walls [Jrain va Chidambaram Chettiar AIR 1953 Mad 650]
An incomplete house or a house which is in ruins without a roof and without doors cannot be called a building (Baladin vs Lakhan Singh AIR 1927 All 214]
The existence of roof is not always necessary for a structure to be regarded as a building. Residential buildings ordinarily have roofs but there can be a non-residential building for which a roof is not necessary. A large stadium or an open air swimming pool constructed at a considerable expense would be buildings as it is a permanent structure and designed for a useful purpose [Ghanshiam Dass vs Debi Prasad AIR 1966 SC 1998]
Assessee should be owner of the property– Incidence of tax under section 22 is attracted only if assessee is owner of house property. The word “owner” includes a legal owner as well as deemed owner. For the purpose of section 22, owner may be an individual, firm, company, co-operative society or association of persons. Annual value of property is assessed to tax under section 22 in the hands of owner even if he is not in receipt of income
It is not necessary that ownership should extend to the site on which building stands as well as the superstructure.
Income from Subletting is not Taxable under Section 22-Income from subletting is not taxable as income from house property. For instance, X owns a house property. He lets it out to Y (rent being Rs. 10,000 per month). Y sublets it to Z on monthly rent of Rs. 40,000. Rental income of X is taxable under the head “Income from house property”. Since Y is not the owner of the house, his income is not taxable as under the head “Income from house property”, but is taxable as business income under section 28 or as income from other sources under section 56.
Any person who is allowed to retain possession of any building in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act or by virtue of such transactions as are referred to in clause (f) of section 269UA”, is treated as deemed owner of such property.
Property should not be occupied by the owner for his own business or profession-Annual value of property, occupied by the owner for the parpose of his own business or profession, is not assessable under section 22, provided profit of soch business or profession is capable of being assessed. In other words, when a person carries on business or profession in his own house property, annual value thereof is not taxable under section 22, if profit of such business or profession is chargeable to tax. This rule is applicable even if in a particular year income from business or profession is nil or there is loss. The reason of this exclusion seems to be that notional rent of property is not allowable as a permissible deduction while computing business income. if a person carries on business or profession in his own house property.
Where letting out is subservient and incidental to the main business- If an assessee constructs residential quarters and lets them out to his employees and letting out of residential quarters is subservient and incidental to the main business, the residential quarters will be treated as house property used by the assessee for the purpose of his business and, accordingly, annual value thereof is not chargeable under section 22 (CIT vs Delhi Cloth & General Mills Lad (1966) 59 ITR 152 (Punj.)] Rent, if any, charged by the assessee, in such case, is taxable under the head “Profits and gains of business or profession”. If the assessee makes available to the Government its accommodation for locating a branch of nationalised bank, post office, police station, central excise office and railway staff quarters for carrying on its business efficiently and smoothly, rent collected, being incidental to the assessee’s business, is not chargeable under the head “Income from house property” but is assessable as business income under section 28 [CIT vs National Newsprint & Paper Mills (1978) 114 ITR 388 (MP)].
Q. 12. What do you understand by the term ‘Gross annual Value’ of house property? How is it determined? What is Reasonable expected Rent?
Ans. Gross annual value- Though the tax under the head “Income from house property” is a tax on income, yet it is not a tax upon rents but upon inherent capacity of a building to yield income. The standard selected as a measure of the income to be taxed is annual value. [Sec. 23(1)]
Gross annual value is determined as follows-
Step 1-Reasonable expected rent of a property is taken [sec 23(1)(a)]. If step 2 and 3 are not applicable, then it becomes gross annual value.
Step 2-If rent actually received or receivable is more than expected rent determined under Step 1, then rent actually received or receivable is taken as gross annual value [sec. 23(1(b)).
Step 3-If the property remains vacant and because of vacancy, the rent actually received or receivable is less than the expected rent determined under Step 1, then rent actually received receivable is taken as gross annual value [sec. 23(1)(c)]
What is Reasonable expected Rent-Reasonable expected rent is deemed to be the sum for which the property might reasonable be expected to be let out from year to year. [Sec. 23(1)(a)]
In determining reasonable rent, several factors have to be taken into consideration, such as, location of the property, annual ratable value of the property fixed by municipalities, rents of similar properties in neighbourhood, rent which the property is likely to fetch having regard to demand and supply, cost of construction of the property and nature and history of the property. These factors play a vital role in determining expected rent of a house property. In majority of cases, however, expected rent can be determined by taking into consideration the following factors-
(a) Municipal valuation of a property; or
(b) fair rent of the property.
The higher of (a) or (b) is generally taken as expected rent.
If, however, a property is covered by a Rent Control Act, then the amount so computed cannot exceed the standard rent determinable under the Rent Control Act.
(a) Municipal Valuation-For collecting municipal taxes, the local authority makes a periodical survey of all buildings in its jurisdiction. Such valuation may be taken as a strong evidence representing the earning capacity of a building [C. J. George vs CIT (1973) 92 ITR 137 (Ker.)). It cannot, however, be considered to be conclusive evidence [Jamnadas Prabhudas vs CIT (1951) 20 ITR 160 (Bom.)). Moreover, in some big cities (like Delhi. Bombay, Madras and Calcutta) municipal authorities determine net ratable value after deducting 10 per cent of the gross ratable value, on account of repairs, and an allowance for service taxes (such as sewerage tax and water tax). The net municipal valuation, therefore, requires adjustment for determining annual value for income-tax purposes.
(b) Fair Rent of the Property Fair rent of the property can be determined on the basis of a rent fetched by a similar property in the same or similar locality. Though two properties cannot be alike in every respect, it has been observed in Stocks vs Sulley 4 TC 98 that the evidence afforded by transactions of other parties in the matter of other properties in the neighbourhood, more or less comparable with the property in question, is very relevant in arriving at expected rent.
(c) Standard Rent under the Rent Control Acts-The Supreme Courts has observed in the cases of Shiela Kaushish vs CIT (1981) 7 Taxman 1 and Amolak Ram Khosla vs CIT (1981) 7 Taxman 51 that the landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent under the Rent Control Act and this would be equally applicable to a tenant who has lost his right to apply for fixation of the standard rent or to the owner himself. These judgments make it clear that if a property is covered under the Rent Control Act, its expected rent, under section 23(1). cannot exceed the standard rent (fixed or determinable) under the Rent Control Act.
As mentioned earlier, expected rent under Step I will be computed on the basis of three factors, namely-
(a) municipal valuation.
(b) fair rent of the property, and
(c) standard rent of the property.
The higher of (a) and (b), subject to maximum of (c), is expected rent under Step 1.
Q. 13. How is income from House Property taxed? What incomes are not taxable under the head income from House Property?
Ans. Income from let out House Property-Income from let out house property is determined as under:
(a) Gross Annual Value-Though the tax under the head “Income from house property” is a tax on income, yet it is not a tax upon rents but upon inherent capacity of a building to yield income. The gross annual value of house property may be reasonable expected rent of property or the rent actually received or receivable, as the case may be.
Annual value of club house is outside the purview of income-tax.
(b) Deduct Municipal Taxes-From the gross annual value, deduct municipal taxes (including service taxes) levied by any local authority in respect of the house property. Municipal taxes are deductible only if, these taxes are borne by the owner and are actually paid by him during the previous year. The remaining value is called net annual value.
(c) Deduction under Section 24-The following two deductions are available from the net annual value:
(i) Standard deduction-30% of the net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
(ii) Interest on borrowed Capital-The interest on borrowed capital is allowable as deduction on accrual basis, if the capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.
Self Occupied Property– If can be divided into three categories:
(a) A house property fully utilised throughout the previous year for self residential purpose- Where the property consists of one house in the occupation of the owner for his own residence, the annual value of such house shall be taken to be nil, under section 23(2)(a), if the following conditions are satisfied;
(i) the property (or part thereof) is not actually let during whole (or any part) of the previous year, and
(ii) no other benefit is derived therefrom. [Sec: 23(2)(a))
(b) A house property which is not actually occupied by the owner owing to employment or business profession carried on at any other place- Section 23(2)(b) is applicable if the following conditions are satisfied ;
(i) the tax payer owns a house property, which can not actually be occupied by hini by reason of the fact that owing to his employment, business or profession, carried on at any other place:
(ii) he has to reside at that other place in a building not owned by him:
(iii) the property mentioned at (1) (or part thereof) is not actually let out during whole (or any part of the previous year), and
(iv) no other benefit is derived from the above property by the owner .
If the above conditions are satisfied, the annual value of such house property shall be taken to be nil.[Sec. 23(2)(b)]
(c) A house is self occupied for a part of the year and let out for remaining part of the year- In this case, the benefit of section 23(2)(a) is not available and income will be computed as if the property is let out.
Property Income Not chargeable to Income Tax:
Exemption From Tax- In the following cases rental income is not charged to tax
(a) income from farm house [sec. 2(1A)(c) read with sec. 10(1)].
(b) annual value of any one palace of an ex-ruler [sec. 10(19A)];
(c) property income of a local authority [sec. 10(20)];
(d) property income of an authority constituted for the purpose of planning, development or improvement of cities, towns and villages [sec10(20A));
(e) property income of an approved scientific research association [sec10(21 )];
(f) property income of a games association [sec. 10(23)];
(g) property income of an educational institution and hospital [sec10(23C)]:
(h) property income of a trade union [sec. 10(24));
(f) property income in the case of a person resident of Ladakh [sec.10(26A)];
(j) any income derived from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the time being in force for the marketing of commodities (sec. 10(29)];
(k) house property held for charitable purposes [sec. 111;
(l) property income of a political party [sec. 13A];
(m) property used for own business or profession [sec. 22]; and
(n) one self-occupied property [sec. 23(2)].
Profit and Gains of Business and Profession
Q. 14. Explain the term Business and Profession. Mention the incomes chargeable to tax under the head ‘Profit and gains from business and profession’. What business income are not taxable under the head ‘Profit and gains from business and profession’?
Ans. Meaning of business-In view of section 2(13) business includes any (a) trade, (b) commerce, (c) manufacture, or (d) any adventure or concern in the nature of trade commerce or manufacture. Though the definition is not exhaustive, it covers every facet of an occupation carried on by a person with a view to earning profit. Production of goods from raw material, buying and selling of goods to make prófits and providing services to others are different forms of “business”, profits arising therefrom are, therefore, chargeable to tax under the head “Profits and gains of business or profession”. The term “business” is a word of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense.
Significance of profit motive-The word “business” connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose [Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC)]. The word “business” is not of large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit.
Business and rendering services to others-It is not necessary that business should always consist of activities to trade, commerce or manufacture. Even activities of rendering services to others fall within the four corners of the expression “business”.
Business cannot be carried on with oneself Business arises out of commercial transactions between two or more persons. Chagla, CJ. observed in CIT vs Mazagaon Dock Ltd. (1955) 28 ITR 35 (Bom.): “Business is not a unilateral act. Business is brought about by a transaction between two or more persons, and if there is an activity which is a business activity and that activity is carried on between two persons, then each is carrying on business with the other and not only one party to that activity is carrying on business with the other”. One cannot enter into a business transaction with oneself.
Meaning of profession or vocation-As per section 2(36), profession includes vocation. The definition which is inclusive does not give any idea about the meaning of the word “profession”. The word “profession” implies professed attainments in special knowledge as distinguished from mere skill; “special knowledge” which is “to be acquired only after patient study and application” [United States vs Laws (1896) 163 US 258]. Many vocations may fall within the ordinary and accepted use of the word “profession”, for instance, as those of tax experts, financial accountants, cost accountants, management accountants, architects, engineers, journalists, and so forth. However, whether a person, in any given case, carried on a profession, is a question of degree and always of facts (Robbins Herbal Institute vs Federal Taxation Commissioner (1923) 32 CLR 457]. Moreover, the word “profession” is one which is not right or static in its signification; it is undoubtedly progressive with the general progress of the community [Bradfield vs Federal Taxation Commissioner (1924) 34 CLR 1].
In the absence of any definition of the word “vocation” in the Income- tax Act, it implies natural ability of a person for some particular work. The word “vocation” is analogous to “earning”, meaning the way in which a man passes his life [Partridge vs Mallandaine (1886) 18 QBD 276].
Income chargeable under the head ‘Profits and gains from Business and Profession- Under section 28, the following income is chargeable to tax under the head “Profits and gains of business and profession”:
a. profits and gains of any business or profession;
b. any compensation or other payments due to or received by any person specified in section 28(ii);
c. income derived by a trade, professional or similar association from specific service performed for its members;
d. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
e. export incentive available to exporters;
f. any interest, salary bonus, commission or remuneration received by a partner from firm;
g. any sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, etc.
h. any sum received under a Keyman insurance policy including bonus;
i. profits and gains of managing agency; and
j. income from speculative transaction.[Sec. 28]
Income from the aforesaid activities is computed in accordance with the provisions laid down in section 29 to 44D.
Excess realisation over and above authorised price on sale of sugar constitute trading receipt and liable to be taxed.¹
Business income not taxable under the head “Profits and gains of business or profession” In the following cases, income from trading or business is not taxable under section 28, under the head “Profits and gains of business or profession”:
1. Rent of house property is taxable under section 22 under the head “Income from house property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent [Salisbury House Estate Lid. vs Fry (1930) AC 432 (HL)].
2. Dividend on shares are taxable under section 56(2)(i), under the head “Income from other sources”, even if they are derived from shares held as stock-in-trade or the recipient of dividends is dealer in shares.
3. Winnings from lotteries, races, etc., are taxable under the head “Income from other sources” (even if derived as a regular business activity).
Profits derived from the aforesaid business activities are not taxable under section 28, under the head “Profits and gains of business or profession”. Profits and gains of any other business are taxable under section 28, unless such profits are exempt under section 10, 10A, 10B, 11 or 13A.
Q. 15. Describe the expenses expressly allowed against profit and gains from business and profession.
Ans. Expenses Expressly Allowed- Sections 30 to 37 cover expenses which are expressly allowed as deduction while computing business income, section 40, 40A and 43B cover expenses which are not deductible. The following expenses are expressly allowed as deductions against profits and gains of business or profession:
Rent, rates, taxes, repairs and insurance for building- Under section 30, the following deductions are allowed in respect ect of rent, rates, taxes, repairs and insurance for premises used for the purpose of business or profession:
a. the rent of premises, if the assessee has occupied the premises as tenant and the amount of repairs, if he has undertaken to bear the cost of repairs:
b. the amount of current repairs, if the assessee has occupied the premises otherwise than as a tenant;
c. any sum on account of land revenue, local rates or municipal taxes;and
d. amount of any premium in respect of insurance against risk of damage or destruction of the premises.[Sec. 30]
Application of section 43B-Land revenue, local rates or municipal taxes are deductible subject to the conditions as specified by section 43B.
Some Cases on the Subject-The following judicial ruling one should keep in view-
1. If an assessee takes premises on lease for carrying on a business or profession and agrees to pay arrears of rent of previous tenant, such arrears of rent cannot be deducted, whether arrears of rent are paid under legal obligation or voluntarily [CIT vs Maharajadhiraja Kameshwar Singh of Darbhanga (1933) 1 ITR 94 (PC)].
2. A fluctuating item like a share in profit cannot be treated as rent [Gopinath Vir Bhan vs CIT (1938) 6 ITR 243 (Lahore)].
3. Painting the outside of a house is repair [Derdge vs. Conway (1901 2 KB 42).
Repairs and insurance of machinery, plant and furniture The expenditure incurred on current repairs and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction under this section. [Sec. 31]
The following points one should keep in view-
The expression “current repairs” connotes repairs which are attended to when the need for them arises from the assessee’s point of view and which are not allowed to be accumulated. The simple test is whether as a result of expenditure which is claimed as an expenditure for current repairs, what is really being done is to preserve and maintain an already existing asset. The object of expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. For replacement of an old diesel engine of car by a new diesel engine is “current repairs” [Nathmal Bankatlal Parikh & Co. vs CIT (1980) 122 ITR 168 (AP)].
From the Assessment year 2004-05, capital expenditure incurred on repairs/current repairs shall not be allowed as a deduction.
Depreciation allowance– Depreciation shall be determined according to the provisions of section 32.
In order to avail the depreciation, one should satisfy the following conditions:
(a) Asset must be owned by the assessee:
(b) It must be used for the purpose of business or profession;
(c) It should be used during the relevant previous year; and
(d) Depreciation is available on tangible as well as intangible asset.
(a) Asset should be owned by the Assessee-The asset should be owned by the assessee or the assessee should be the co-owner of the asset.
Registered ownership is not necessary It is not necessary that the assessee should be the registered owner of the asset. Exclusive possession right, to exclude others from enjoyment of the assets, full control over the assets, right to retain possession and defend the same are some of the charac- teristics of the ownership which would entitle a person to claim the benefit of the depreciation allowance under section 32 (if such an asset is used for the purpose of carrying on a business/profession)-Mysore Minerals Ltd. vs CIT (1999) 106 Taxman 166 (SC).
In other words, if a person acquires a building by satisfying conditions of section 53A of the Transfer of Property Act [ie., under a Power of Attor- ney Transaction; for section 53A] then depreciation is available even if he is not the registered owner of the building (if the building is used for the pur- pose of carrying on a business/profession).
Capital expenditure in a building taken on lease-Where an assessee carries on a business of profession in a building not owned by him but in respect of which he holds a lease or right of occupancy, he is entitled to depreciation, in respect of capital expenditure incurred by him on construc- tion of any structure or any work in relation to the building by way of im- provement, renovation or extension [Explanation 1 to section 32(1)(ii)].
Depreciation in the case of any other lease-Except the case noted above, depreciation is available to the lessor (not to lessee), as the asset is owned by the lessor.
The new accounting standard (AS 19) on ‘Leases’ issued by the Insti- tute of Chartered Accountants of India requires capitalization of the asset by the lessees in a financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act [Circular No. 2 of 2001, dated February 9, 2001].
(b) Asset must be used for the purpose of Business or Profession- The asset, in respect of which depreciation is claimed, must have been used for the purpose of business or profession. The following points should also be kept in view:
Passive versus active user-The user of the asset should be understood in a wide sense so as to embrace passive as well as active user. If a machine is kept ready for use at any moment in a particular factory, the machinery can be said to be “used” for the purpose of the business which earned profits, al- though in fact it had not worked during the year.
Assets used partly for business purposes-Under section 38(2) where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the deduction under section 32(1) shall be restricted to a fair proportionate part thereof which the Assessing Officer may determine, having regard to egard to the user of such building, machinery, plant of furniture for the purposes of the business or profession.
Residential quarters-When occupation of residential quarters by the assessee’s employees is subservient to and necessary for the business, the property is considered as occupied by owner for the purpose of his business. Depreciation is, therefore, allowable on such buildings. Similarly, fans, air- conditioners, refrigerators, furniture, etc., provided by the assessee-employer at the quarters of employees is considered to have been used wholly for the purpose of employer’s business and depreciation is admissible.
(c) User of the Asset in the previous year-The asset, in respect of which depreciation is claimed, must have been used for the purpose of busi- ness. Normal depreciation (i.e., full year’s depreciation) is available if an asset is put to use at least for some-time during the previous year. However, depreciation allowance is limited to 50 per cent of normal depreciation, if the following two conditions are satisfied-
a. Where an asset is acquired during the previous year; and
b. it is put to use for the purpose of business or profession for less than 180 days during that year.