Computation of Gross Total Income

SYNOPSIS
Introduction
Salaries
Income from house property
Profit and gain of business or
profession
Capital gain
Income from other sources
Set off of losses
Carry forward of losses
Conclusion
References

Introduction:
Taxable income is computed under the respective heads (para 1.2.4) after
allowing from gross receipts admissible deductions for cost and expenses. The
net income under each of these heads is then aggregated to arrive at the 'Gross
total Income'. Computation of income under individual heads is explained in
paragraphs following.
Salaries:
4.2 Income from salaries is computed in accordance with the provisions of
section 15 to 17 of the Act. 'Salary' means all remuneration paid or due under
the contract of employment. It includes wages, annuity, pension, gratuity, fees,
commission, perquisites, profits in lieu of or in addition to any salary or wages,
any advance of salary, leave salary encashment or any other payment by the
employer for services rendered. The annual accretion to the balance at the credit
of an employee participating in a recognised provident fund in excess of the
prescribed limit is includible in the salary income of the employee. 'Perquisites'
mean the benefits or amenities provided in kind by the employer free of cost or
at a concessional rate. The value of these is regarded as part of salary. Rule 3 of
the Income Tax Rules lays down the methods for determining the value of
certain perquisites. For others the general rule of valuing the perquisites in the
hands of the employee is to take the cost to the employer in providing the
benefit or amenity. It has been clarified that securities allotted to an employee
free of cost or at concessional rate under ESOP or as sweat equity shares will
not be taxable as perquisite.
4.2.1 In order to be taxable under the head 'Salaries', it is necessary that there is
a relationship of employer and employee between the payer and the receiver. It
is for this reason remuneration received as a partner is not taxable as 'salary'.
4.2.2 In computing the salary income for the assessment year 1999-2000, a
standard deduction is allowed as under:-

i. Where salary income is upto Rs. one lakh - 33-1/3% or Rs. 25,000/-
whichever is less.
ii. Where salary income exceeds Rs. one lakh but does not exceed rupees
five lakh - Rs. 20,000/-.
iii. Where salary income exceeds rupees five lakh - NIL

Deduction for profession or employment tax levied by State Government is also

allowed.
Income from house property:
4.3 Income from house property is computed in the hands of the owner in
accordance with the provisions of sections 22 to 27 of the Act. It is determined
with reference to its 'annual value', i.e. the sum for which the property might
reasonably be let from year to year. However, where any property is tenanted
and the annual rent received or receivable by the owner is in excess of the sum
for which the property might reasonably be expected to be let from year to year,
the actual annual rent received or receivable is taken as the annual value of the
property.
4.3.1 From the annual value of a house property in the occupation of a
tenant, taxes levied by any local authority in respect of the property to the extent
such taxes are borne by the owner are deductible on actual payment basis to
arrive at the 'net annual value'.
4.3.2 Where the property consists of a house or a part of a house which is in the
occupation of the owner for his own residence, its annual value is taken as Nil.
But if such a property is let out during any part of the previous year, its annual
value is taken proportionately. Further, where the owner has only one
resedential house and the house cannot be actually occupied by reason of the
fact that owing to his employment, business or profession carried on at any
other place, he has to reside at that other place in a building not belonging to
him, its annual value is taken to be nil provided the house is not actually let out
and no other benefit is derived by the owner from it.
4.3.3 From the net annual value, determined as above deductions on account of
annual repairs and collection expenses (1/4th of the net annual value
irrespective of actual expenditure), insurance charges in respect of property, any
annual charge, interest paid on any money borrowed for the building, ground
rent, land revenue, unrealised rent are allowed. All these deductions are not
allowed in respect of the house property in the occupation of the owner for his
own residence, the annual value of which is taken at Nil. In such a case
deduction is allowed only for interest and that too upto Rs. 1,00,000 only
provided the house was constructed or acquired after 1.4.1999 but before
1.4.2003.
4.3.4 Under the circumstances mentioned in Sec. 27 of the I.T. Act, a person
can be deemed to be the owner of the house property and in such a case the
income .from that property is taxable in the hands of that person.
4.3.5 Where the net result of computation of income from house property is loss
and the assessee has income assessable under any other head of income, he is
entitled to have such loss set off against income under other heads. Any loss
remaining unadjusted can be carried forward to the following assessment year
for set-off against income from house property in that years and in succeeding
seven years.
Profits and gains of business or profession:
4.4 Income from business or profession is computed in accordance with the
provisions of sections 28 to 44D of the Act. The expression 'business or
profession' includes any trade commerce or manufacture or vocation. Apart
from income from any of these activities the income chargeable under this head
includes the following receipts as well:-

i. Compensation received for the termination or for modifications in terms

and conditions of any managing agency agreement.
ii. Income of trade, professional and similar associations from specific
services performed for its members.
iii. Value of any benefit or perquisite arising from any business or
profession.
iv. Profit on sale of a replenishment license, cash assistance or refund of duty
drawback granted to the exporters.
v. Any interest, salary, bonus, commission or remuneration due to or
received by a partner of a firm from such firm.
vi. Any sum received under a keyman insurance policy including bonus on
such policy.

4.4.1 Primarily the business or professional income is computed as per the

accepted business and accounting norms and in accordance with the method of
accounting regularly employed by the tax payer. Thus, whatever constitutes a
legitimate outgoing of revenue nature of a business is allowed as a deduction in
computing the business income. However, certain deductions are allowed in the
Act as per the specific provisions made with regard to those deductions and
certain deductions, though business related, are not allowed because of
specific bar on their allowance under the Act.
4.4.2 Some of the specific provisions made in law for permissible deductions in
computation of business or professional income relate to the following items of
expenditure and outgoings:-

i. rent, rates, taxes, repairs and insurance of premises used for the purpose
of business or profession;
ii. repairs and insurance of machinery, plant and furniture used for the
purpose of business of profession;
iii. depreciation of tangible assets viz., building, machinery, plant and
furniture and intangible assets viz., know how, patents copy rights, trade
marks, licences, franchises or any other business or commercial rights of
similar nature owned by the tax payer and used for the purpose of
business or profession;
iv. Expenditure in respect of scientific research:-
a. On in-house research related to the business of the assessee.
b. Capital expenditure (except expenditure on land) in relation to the
research related to the business.
c. Contribution to an approved University, college, association or
institution for scientific research including research in social
science or statistical research.
d. For payment to a National Laboratory or a University or an Indian
Institute of Technology for scientific research under an approved
programme, a weighted deduction equal to one and one-fourth time
the sum paid is allowable.
v. Expenditure of differed revenue nature which are amortised over a
number of years. These are:-

(a) On acquisition of patent

14 years (up to A.Y.
rights and copy rights (Sec.
1998-99)
35A)
(b) On acquisition of know- 6 years (up to A.Y.
how (Sec.35AB) 1998-99)
(c) Preliminary expenses on
setting up of business (Sec. 5 years
35D)
(d) On prospecting for or
extraction or production of 10 years
mineral deposits (Sec.35E)
(e) Expenditure in the nature
of capital expenditure on Years during which the
obtaining licence to operate licence remains in
telecommunication services force.
(Sec. 35ABB)
 vi. premium in respect of insurance against risk of damage or destruction of
stock and stores used for business or profession;
vii. premium in respect of health insurance of the employees;
viii. bonus and commission to employees;
ix. interest on capital borrowed for the business or profession;
x. contribution to a recognised provident fund, an approved superannuation
fund or an approved gratuity fund;
xi. bad debts; and
xii. payments to notified Rural Development Fund or to National Urban
Poverty Eradication Fund or to approved organisation/institutions
engaged in activities of conservation of natural resources or forestation or
for carrying out eligible projects or schemes approved by the National
Committee.

4.4.3 In addition, there is a residuary provision under which the tax payer can
claim deduction in respect of any expenditure incurred wholly and exclusively
for the purpose of the business or profession.
This omnibus clause is not available for claiming any expenditure for which a
specific provision is made or for expenses of capital or personal nature or
expenditure for any purpose which is an offence or which is prohibited by law.
4.4.4 Expenses, even though business-related, which are not allowed as
deduction are

i. expenditure on advertisement in any souvenir etc. of a political party;

ii. any interest, salary, royalty, fees for technical services or other sum
payable outside India from which due tax has not been deducted at
source;
iii. any tax calculated on the basis of profits or gains of the business or
profession
e.g. income tax;
iv. Wealth tax.

4.4.5 Apart from these; the tax authorities may disallow, or restrict the
deduction to a reasonable level, where the payments are made to any close
relative or a business associate. Claims are also to be disallowed to the extent of
20% where payments in excess of Rs. 10,000/- are not made by a crossed
cheque or a crossed bank draft.
4.4.6 The above stated principles of computation of business income apply
uniformly to all forms of business activities. However, there exist certain
special provisions under the Act which deal exclusively with taxation of
business income from certain specific activities. These provisions make
departure from the normal manner of computing income as explained above and
prescribe for working out the taxable income on presumptive
basis as per the norms laid down. These are:-
(I) Business of civil Profit as declared in the
construction or supply of return or the sum equal to
labour for civil construction 8% of the gross receipts of
where the total receipts do the previous year,
not exceed 40 lakh rupees whichever is higher.
(Sec.44AD)
(ii) Business of plying, Profit as declared in the
hiring or leasing goods return of income or the sum
carriage, where the assessee calculated at Rs. 2,000/- per
does not own more than ten month or part of a month
goods carriages (Sec. for heavy goods vehicle
44AE) and Rs. 1,800/- per month
or part of a month for other
vehicles, whichever is
higher.
(iii) Retail trade in goods or Profit as declared in the
merchandise where the total return of income or the sum
turnover of the previous equal to 5% of total
year does not exceed forty turnover of the previous
lakh rupees. year, whichever is higher.

Further there are special provisions for computing presumptive income in the
case of non-residents engaged in the business of shipping, exploration, etc. of
mineral oils, operation of aircraft and civil construction etc. in certain turnkey
power projects. Such provisions also exist for taxation of income from certain
dividends, interest and units derived by a non-resident or a foreign company and
from royalty or fees for technical services derived by a foreign company. A
detailed discussion about such provisions is made in Chapters VIII and X.
4.4.7 It is obligatory on persons engaged in certain specific professions such as
legal, medical, engineering, architectural, accountancy, technical consultancy,
interior decoration, authorised representatives, film artists etc., to maintain
books of accounts in a manner which may enable the assessing officer to
compute their taxable income. The obligation to maintain such books of
accounts is also on all other professions and business if the income in any of the
preceding three years exceeded rupees 1,20,000 or the turnover/receipts in any
of the preceding three years exceeded rupees ten lakhs. For the business or
profession which is newly set up the obligation arises if the income or
turnover/receipts is likely to exceed these amounts in the previous year. Persons
engaged in activities mentioned in para 4.4.6 are exempted from such
obligation.
4.4.8 Further, every person carrying on business or profession in India must
have his accounts audited by a chartered accountant if his turnover exceeds
Rs. 40 lakhs (Rs. 10 lakhs for professional receipt). A copy of the audited
accounts and auditor's report are required to be furnished by the due date of
filing the retrun of income. Certain other particulars are required to be filed
alongwith the return of Income. The requirement to get
the accounts audited does not apply to persons enaged in activities mentioned in
para 4.4.6.
4.4.9 In case of a partnership firm deducation for certain payments made to its
partners like interest and remuneration is subject to ceiling laid down in sec. 40
(b) introduced by Finance Act 1992.
Capital Gains:
4.5 Sections 45 to 55A deal with the provisions relating to computation of
income from capital gains. Gains arising from the transfer of a capital asset are
either short-term or long-term depending upon the period for which the assets
giving rise to capital gains were held by the tax payer. A gain is short term if the
asset was held for a period up to 36 months. In the case of share of a company,
listed security, unit of Unit Trust of India or of any other specified mutual fund,
this period is 12 months. All other gains i.e. those arising from assets held for
more than this period are called 'Long-term capital gains'.
4.5.1 Capital gain is computed by deducting from the full value of transfer
consideration the following:-

a. the cost of acquisition (or the written down value) of and cost of
improvement in the asset;
b. the amount of expenditure incurred in connection with such transfer.

The resultant amount in case of short term capital gains is taxable in full at the
normal rate of taxation applicable to the tax payer.
4.5.2 In case of the following self-generated assets where there is no cost
incurred by the assessee, the law provides for the cost of acquisition to be taken
as 'NIL' :-

i. Goodwill or a right to manufacture produce or process any article or

thing.
ii. Tenancy rights
iii. Stage carriage permit
iv. Loom hours
4.5.3 In case of slump sale of an undertaking or a division thereof, its net
worth is to be taken as cost of acquisition. This cost of acquisition is not to be
indexed as stated in para 4.5.4.
4.5.4 There are special provisions for computation of long term capital gains. In
such cases, the actual cost of acquisition and the cost of improvement of the
asset is adjusted to take account of inflation in terms of the Cost Inflation Index
which is notified by the Central Government every year. For those assets which
are
acquired prior to 1st April, 1981, the actual cost can be taken to be its fair
market value as on 1st April, 1981 which is than adjusted for inflation in the
same manner. The notified cost inflation index is as under:-

S.No. Financial Year Cost Index

1. 1981-82 100
2. 1982-83 109
3. 1983-84 116
4. 1984-85 125
5. 1985-86 133
6. 1986-87 140
7. 3987-88 150
8. 1988-89 161
9. 1989-90 172
10. 1990-91 182
11. 1991-92 199
12. 1992-93 223
13. 1993-94 244
14. 1994-95 259
15. 1995-96 281
16. 1996-97 305
17. 1997-98 331
18. 1998-99 351
19. 1999-2000 389
4.5.5 Long term capital gains computed after taking into consideration the
indexed cost of acquisition and/or cost of Irnprovement is taxable for and from
the assessment year 1988-89 at the flat rate of 20% irrespective of the
residential status of the assessee. Exceptions are made in the case of certain
categories of non-residents and NRIs (Refer para 7.3.4 and 11.3). In respect of
gains arising from transfer of listed securities or unit tax so computed @.20%
will be limited to 10% of capital gain worked out without indexation benefit.
No indexation benefit is available on bonds and debentures as also in respect of
Global Depository Receipts purchased by a resident employee under ESOP in
foreign currency.
4.5.6 In case of non-residents, protection against loss arising from fluctuation in
rupee value is provided in computation of capital gains if the share or debenture
of an Indian company was acquired by utilising foreign currency. This is done
to ensure that the amount of capital gains chargeable to tax is not influenced by
the exchange rate fluctuation and represents only the accretion in value. The
manner of granting such protection is mentioned in para 7.3.1 of Chapter VII.
4.5.7 Transfer of a capital asset in a scheme of amalgamation or demerger is not
regarded as a transfer for the purpose of capital gains when the amalgamated or
the resulting company is an Indian company. Further, transfer of a capital asset
being shares in Indian companies from one foreign company to another, in a
scheme of amalgamation or demerger would not be regarded as a transfer if
certain conditions are satisfied (para 7.3.2). Exemption from tax is also
provided, subject to fulfillment of certain condition, when assets are transferred
as a result of succession of a sole proprietory concern or a firm by a company.
4.5.8 In case the capital gain arising from transfer of an asset is used for
acquiring similar assets within a specified period, the whole or the proportionate
amount of capital gain is not included in the income depending upon whether
the whole of the capital gains is so used or only part of it is used for acquiring a
new asset. Such cases are gains from residential house, agricultural land and
from transfer of industrial undertaking (For details sections 54, 54B and 54G
may be referred to). Gains from any long term asset if used for purchase or
construction of residential house where the person has only one residential
house is also exempt (Sec. 54F).
4.5.9 Special provisions exist for taxation of capital gains arising to offshore
funds from transfer of units purchased in foreign currency, to non-residents
from transfer of bonds or shares purchased in foreign currency and to Foreign
Institutional Investors from transfer of listed securities purchased in foreign
currency. These provisions are explained at 7.3.4 in Chapter VII.
Income from other sources:
4.6 Sections 56 to 59 deal with the provisions for computation of income under
the head 'income from other sources'. This is a residuary head covering all
incomes which do not specifically fall .under any of the heads mentioned
earliers. Some of the types of income which are assessable under this head are
mentioned belows :-

i. Dividends or income from units of mutual fund.

ii. Interest including 'interest on securities' if it is not taxable under the head
'Profits and gains of business or profession'.
iii. Income such as
a. Ground rent or rent received or sub-letting a property.
b. Winning from lotteries, cross-word puzzles, races including horse
races, card games or from gambling or betting etc.
c. Income from hiring of machinery, plant or furniture unless such a
hiring is the business of the taxpayer.
iv. Family pension.

4.6.1 In computing the taxable income under this head, deduction is allowable
for expenditure (other than capital expenditure) which is incurred by the tax
payer wholly and exclusively for the purpose of earning such income. Besides,
in assessing dividend income, any remuneration or commission paid for
realising such income is allowed as deduction. In assessing income from letting
the machinery, plant or furniture on hire, the depreciation on the value of such
assets calculated in the same manner as in respect of assets used in a business or
profession is allowable as a deduction. No deduction is, however, allowed in
respect of-

i. any personal expenditure of the tax payer;

ii. any salaries or interest payable outside India from which tax is deductible
at source under the Act but has not been deducted.

4.6.2 Further, no deduction in respect of any expenditure or allowance is made

in computing income from winnings referred in (iii) (b) of para 4.6 above. Such
income is taxable at a flat rate of 40 per cent under the provisions of Section
115BB.
4.6.3 A standard deduction equal to 33-1/3% of the pension amount or Rs.
15,000/- whichever is less is allowed in computing income from family pension.
Set off of Losses:
4.7 In case of computation of income under any of the heads of income results
in a loss figure, such loss can be set off against income under any other head
(including capital gains) in the same year. This, however, does not apply to
losses from speculative transactions, losses from owning and maintaining race
horses or to losses under the head 'Capital Gains'. Losses of these excluded
categories can be set off only against income, if any, from activities in the same
category in that year.
Carry Forward of Losses:
4.8 Losses under the head 'Profits and Gains of business or profession' except
those sustained from speculative activities which cannot be set off against
income under any other head within the same year can be carried forward to the
succeeding eight years and set off only against income under the same head in
those years. In case of -

i. amalgamation of company owning industrial undertaking or a ship

with another company;
ii. a demerger of a company;
iii. a reorganisation of business resulting in succession of a firm or a
proprietory concern by a company;

4.8.2 Losses under the head income from house property which could not be set
off against income under any other head can be carried forward for eight
succeeding years for set off against income under this head in those years.
4.8.3 If 51% or more of the voting power changes hands in an unlisted
company, the company will not be able to carry forward losses incurred before
such change.
CONCLUSION:
Thus these are the above steps and information about computation of gross total
income of company.
REFERENCES:

1. "CBDT Notification No.88" (PDF).

2. Jump up^ "ICAI - The Institute of Chartered Accountants of
India". ICAI. Retrieved 2017-01-23.
3. Jump up^ "CBDT Press Release" (PDF).
4. Jump up^ "CBDT Notification No.86" (PDF).